<PAGE> 1
THE IAA TRUST MUTUAL FUNDS
808 IAA DRIVE BLOOMINGTON, ILLINOIS 61702
(309) 557-3222
IAA TRUST GROWTH FUND, INC.
IAA TRUST ASSET ALLOCATION FUND, INC.
IAA TRUST TAX EXEMPT BOND FUND, INC.
IAA TRUST TAXABLE FIXED INCOME SERIES FUND, INC.
PROSPECTUS OCTOBER 28, 1997
- --------------------------------------------------------------------------------
The IAA Trust Mutual Funds represent four separate Funds, with one Fund
containing three separate Series (referred to herein as "Funds" or "Series").
Each of the Funds and Series has distinct investment objectives and policies.
Information concerning the Funds has been combined into this one Prospectus to
aid investors in understanding the similarities and differences among the Funds.
The four Funds are as follows:
IAA TRUST GROWTH FUND, INC.
IAA TRUST ASSET ALLOCATION FUND, INC.
IAA TRUST TAX EXEMPT BOND FUND, INC.
IAA TRUST TAXABLE FIXED INCOME SERIES FUND, INC.
MONEY MARKET SERIES
SHORT-TERM GOVERNMENT BOND SERIES
LONG-TERM BOND SERIES
IAA TRUST MONEY MARKET SERIES IS A MONEY MARKET FUND WHICH SEEKS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF A MONEY MARKET FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE
THAT THIS SERIES WILL BE SUCCESSFUL IN MEETING ITS INVESTMENT OBJECTIVE OR IN
MAINTAINING A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE.
The Funds' principal Underwriter is FPS Broker Services, Inc., 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, PA 19406-0903.
For information about how to invest in the IAA Trust Mutual Funds, contact FPS
Broker Services, Inc., or a local Country Capital Management Company
salesperson, or call toll-free 1 (800) 245-2100. In Bloomington/Normal, call
557-3222. Country Capital Management Company has a selling agreement with FPS
Broker Services, Inc. Shares of the Funds are sold only in states where the
Funds are registered.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUNDS THAT A
PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ AND RETAIN THIS
PROSPECTUS FOR FUTURE REFERENCE.
A Statement of Additional Information combining information about each of the
Funds has been filed with the Securities and Exchange Commission. This Statement
of Additional Information is incorporated by reference in its entirety in this
Prospectus. Copies of the Statement of Additional Information dated October 28,
1997 are available upon request and without charge by contacting FPS Broker
Services, Inc., at the address or telephone numbers listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SYNOPSIS.................................. 2
OPERATING EXPENSES TABLES................. 4
FINANCIAL HIGHLIGHTS...................... 5
PERFORMANCE CALCULATIONS.................. 10
INVESTMENT OBJECTIVES AND POLICIES........ 10
INVESTMENT STRATEGIES AND RISK
CONSIDERATIONS.......................... 15
MANAGEMENT OF THE FUNDS................... 18
MANAGEMENT'S DISCUSSION OF THE FUNDS'
PERFORMANCE............................. 20
DISTRIBUTION OF THE FUNDS' SHARES......... 25
DISTRIBUTION PLANS........................ 25
CAPITAL STOCK............................. 25
INCOME DIVIDENDS, CAPITAL GAINS
DISTRIBUTIONS, AND TAXES................ 26
PURCHASE OF SHARES........................ 28
SPECIAL PLANS AND OTHER PURCHASE
INFORMATION............................. 30
VALUATION OF SHARES....................... 31
REDEMPTION OF SHARES...................... 31
</TABLE>
<PAGE> 2
SYNOPSIS
THE FUNDS
The securities offered by this Prospectus consist of shares of four separate
Funds, one of which contains three separate Series. Each Fund and Series has
distinct investment objectives and policies. The Funds are open-end, diversified
management investment companies incorporated under the laws of the State of
Maryland. Investors should be aware that by combining the Prospectus of each
Fund into this one document, there is a remote possibility that one Fund may
become liable for any misstatements in the Prospectus about another Fund. To the
extent that a Fund incurs such liability, a shareholder's investment in such
Fund could be adversely affected.
The four Funds are identified herein as follows: IAA Trust Growth Fund, Inc.
("GROWTH FUND"); IAA Trust Asset Allocation Fund, Inc. ("ASSET ALLOCATION
FUND"); IAA Trust Tax Exempt Bond Fund, Inc. ("TAX EXEMPT BOND FUND"), and IAA
Trust Taxable Fixed Income Series Fund, Inc. ("TAXABLE FIXED INCOME SERIES
FUND"). The Taxable Fixed Income Series Fund currently consists of three
separate investment Series: IAA Trust Money Market Series ("MONEY MARKET
SERIES"); IAA Trust Short-Term Government Bond Series ("SHORT-TERM GOVERNMENT
BOND SERIES"); and IAA Trust Long-Term Bond Series ( "LONG-TERM BOND SERIES").
The value of each Fund's and Series' shares (with the exception of MONEY MARKET
SERIES) fluctuate because the value of the securities in which each Fund/Series
invests fluctuate. The Funds and Series will earn dividend or interest income to
the extent that they receive dividends or interest from their investments. An
investment in any Fund or Series is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that any Fund's or Series' investment
objective will be achieved.
INVESTMENT DEFINITIONS
OPEN-END -- The term "open-end" means that a Fund continually offers new shares
for sale to the public and is legally obligated to buy back such shares held by
an investor and pay the investor the next determined net asset value of the
shares. This open-end type of investment company is commonly called a mutual
fund.
DIVERSIFIED -- The Funds and Series are "diversified" because each invests in
securities of different companies and industries in an attempt to spread and
reduce the risks inherent in all investing. Each Fund and Series has adopted a
policy prohibiting it from investing more than 5% of its total assets in the
securities of any one issuer (other than securities issued by the United States
Government or its agencies or instrumentalities). This restriction applies to
75% of the total asset of each Fund and Series, except for GROWTH FUND AND MONEY
MARKET SERIES where this restriction applies to 100% of total assets.
INVESTMENT OBJECTIVES
The GROWTH FUND has an investment objective of capital growth. This Fund seeks
to achieve its investment objective by investing principally in common stocks or
securities with equity characteristics.
The ASSET ALLOCATION FUND seeks growth of capital and current income as
near-equal objectives, primarily through equity securities. In general, this
Fund may hold a mix of assets consisting of common stocks (both dividend and
non-dividend paying), preferred and convertible preferred stocks, fixed income
securities including bonds, bonds convertible into common stocks, and short-term
interest bearing obligations.
The TAX EXEMPT BOND FUND has an investment objective of seeking as high a level
of current interest income exempt from Federal income taxes as is available from
municipal bonds. This Fund seeks to achieve its objective by investing in a
diversified portfolio of municipal bonds, the interest from which is exempt from
Federal income tax in the opinion of bond counsel to the issuers.
The TAXABLE FIXED INCOME SERIES FUND currently consists of the following three
separate investment Series, each of which has a separate and distinct investment
objective:
The MONEY MARKET SERIES has an investment objective of earning a high level of
current income, consistent
2
<PAGE> 3
with maintaining liquidity and stability of principal. This Series attempts to
maintain the value of its shares at a constant $1.00, although there can be no
assurance that the Series will be able to maintain a stable net asset value of
$1.00 per share. This Series seeks to achieve its investment objective by
investing in high-quality money market instruments maturing in one year or less,
including securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, certificates of deposit issued by domestic banks, bankers
acceptances, commercial paper and other corporate debt, and repurchase
agreements. An investment in the Series is neither insured nor guaranteed by the
U.S. Government.
The SHORT-TERM GOVERNMENT BOND SERIES seeks maximum total return consistent with
the preservation of capital. The Series seeks to achieve its investment
objective by investing primarily in securities of the U.S. Government and its
agencies and maintain a dollar-weighted average maturity of less than 3 years.
The LONG-TERM BOND SERIES seeks to provide as high a level of current income as
possible, consistent with the preservation of capital and the maintenance of
liquidity. The Series seeks to achieve its investment objective by investing in
bonds and other debt obligations and maintain a dollar-weighted average maturity
of more than 10 years.
PURCHASE AND REDEMPTION OF SHARES
The minimum initial single purchase for all the Funds is $1,000. The minimum
additional investment for all the Funds is $100. Purchases and redemptions by
wire are subject to a minimum of $1,000. The public offering price of shares of
a Fund or Series is the net asset value per share next determined after receipt
and acceptance of the purchase order at the Transfer Agent in proper form with
accompanying check or other bank wire arrangements satisfactory to the Funds.
See "PURCHASE OF SHARES."
Shares may be redeemed at the net asset value per share of a Fund or Series next
determined after receipt by the Transfer Agent of a redemption request in proper
form. Signature guarantees may be required in some cases. See "REDEMPTION OF
SHARES."
DIVIDENDS AND REINVESTMENT
The GROWTH FUND intends to pay semi-annual dividends from its net investment
income and may pay short-term capital gains, if earned and as declared by the
Board of Directors. The ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND, SHORT-TERM
GOVERNMENT BOND SERIES and LONG-TERM BOND SERIES pay monthly dividends from
their respective net investment income on the last business day of the month to
shareholders of record on the preceding business day. The MONEY MARKET SERIES
declares and distributes dividends of all its daily net investment income on
each day the Series' net asset value per share is determined. Each shareholder
receives a monthly payment and summary of such amounts.
Any dividend and distribution payments will be reinvested at net asset value, in
additional full and fractional shares of the particular Fund unless and until
the shareholder notifies the Transfer Agent in writing requesting payments in
cash. Provisions of the Tax Reform Act of 1986 may result in additional net
investment income and/or capital gain distributions at the end of the calendar
year. Distributions of net capital gains, if any, will be paid annually. See
"INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES."
INVESTMENT MANAGEMENT, UNDERWRITER,
AND SERVICING AGENTS
The IAA Trust Company, 808 IAA Drive, Bloomington, Illinois 61702 is the
Investment Adviser and Custodian for the Funds. FPS Broker Services, Inc., 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903 serves as the
Funds' Underwriter. FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King
of Prussia, PA 19406-0903 serves as the Funds' Administrator, Accounting/Pricing
Agent, and Transfer Agent.
3
<PAGE> 4
OPERATING EXPENSES TABLE
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
<TABLE>
<CAPTION>
WAIVER OF TOTAL FUND
MANAGEMENT MANAGEMENT 12B-1 OTHER OPERATING
FEES FEES FEES EXPENSES EXPENSES(1)
---------- ---------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
GROWTH FUND........................ 0.75% 0.00% 0.25% 0.16% 1.16% (2)
ASSET ALLOCATION FUND.............. 0.75% 0.00% 0.25% 0.46% 1.46% (2)
TAX EXEMPT BOND FUND............... 0.50% 0.00% 0.25% 0.39% 1.14% (2)
MONEY MARKET SERIES................ 0.50% 0.00% none 0.44% 0.94% (2)
SHORT-TERM GOVERNMENT BOND
SERIES........................... 0.50% 0.50% 0.25% 0.60% 0.85% (3)
LONG-TERM BOND SERIES.............. 0.75% 0.75% 0.25% 0.60% 0.85% (3)
</TABLE>
(1) From time to time, the Investment Adviser may voluntarily waive receipt of
its fees and/or assume reimbursement of certain expenses of the Funds which
would have the effect of lowering the total expense ratio and increasing the
yield to investors.
(2) The "total fund operating expenses" shown for these Funds and Series were
incurred for the fiscal year ended June 30, 1997.
(3) The expense ratios for these Series have been re-stated to reflect voluntary
expense limitations set by the Adviser which will be in effect at least from
November 1, 1997 through October 31, 1998. Absent any fee waivers and/or
expense reimbursements, "management fees," "12b-1 fees," estimated "other
expenses" and "total fund operating expenses" would be 0.50%, 0.25%, 3.13%,
and 3.88%, respectively, for the SHORT-TERM GOVERNMENT BOND SERIES and
0.75%, 0.25%, 2.82%, and 3.82%, respectively, for the LONG-TERM BOND SERIES.
- --------------------------------------------------------------------------------
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GROWTH FUND.............................................. $ 12 $37 $64 $141
ASSET ALLOCATION FUND.................................... $ 15 $46 $80 $175
TAX EXEMPT BOND FUND..................................... $ 12 $36 $63 $139
MONEY MARKET SERIES...................................... $ 10 $30 $52 $115
SHORT-TERM GOVERNMENT BOND SERIES........................ $ 9 $27 $47 $105
LONG-TERM BOND SERIES.................................... $ 9 $27 $47 $105
</TABLE>
- --------------------------------------------------------------------------------
The purpose of these tables are to assist the investor in understanding the
various costs and expenses that an investor in the Funds will bear directly and
indirectly. The information contained in the tables should not be considered a
representation of future expenses. Actual expenses may be greater than or less
than those stated.
4
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following information provides financial highlights for a share of each Fund
outstanding during the periods stated. The information for each of the most
recent five years ended presented below has been audited by Coopers & Lybrand
L.L.P., independent accountants, whose report appears in the Funds' 1997 Annual
Report to Shareholders. This information should be read in conjunction with the
financial statements and accompanying notes appearing in the 1997 Annual Report
to Shareholders, which is incorporated by reference into the Statement of
Additional Information.
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
IAA TRUST GROWTH FUND, INC.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year.............. $ 18.88 $ 17.23 $ 15.16 $ 17.55 $ 17.23 $ 17.35 $ 17.42 $ 16.83 $ 15.06 $ 19.43
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income.......... 0.15 0.23 0.22 0.27 0.25 0.35 0.41 0.61 0.52 0.43
Net gains or
losses on
securities (both
realized and
unrealized)... 4.81 3.23 3.45 (0.63) 1.67 0.40 0.44 1.93 2.32 (1.62)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations... 4.96 3.46 3.67 (0.36) 1.92 0.75 0.85 2.54 2.84 (1.19)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income.......... (0.20) (0.25) (0.17) (0.22) (0.29) (0.38) (0.51) (0.65) (0.42) (0.54)
Distributions from
capital gains... (1.13) (1.56) (1.43) (1.81) (1.31) (0.49) (0.41) (1.30) (0.65) (2.64)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... (1.33) (1.81) (1.60) (2.03) (1.60) (0.87) (0.92) (1.95) (1.07) (3.18)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year........... $ 22.51 $ 18.88 $ 17.23 $ 15.16 $ 17.55 $ 17.23 $ 17.35 $ 17.42 $ 16.83 $ 15.06
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN........ 28.54% 21.51% 26.68% (2.42%) 11.71% 4.2% 5.37% 16.09% 20.06% (6.68%)
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (in
000's).......... $140,786 $84,800 $70,577 $59,448 $70,785 $76,147 $81,974 $81,511 $74,327 $68,436
Ratio of expenses
to average net
assets.......... 1.16% 1.12% 1.14% 1.24% 1.18% 0.85% 0.82% 0.84% 0.93% 0.96%
Ratio of net
investment
income to
average net
assets.......... 0.84% 1.30% 1.41% 1.03% 1.36% 1.91% 2.58% 3.58% 3.29% 2.69%
Portfolio
turnover........ 30.74% 32.95% 31.84% 49.12% 55.36% 45.50% 26.00% 18.10% 42.60% 51.20%
Average commission
rate paid*...... $ 0.0595 $0.0645 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------
* Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period for which there was a
commission. The disclosure is required by the SEC beginning in 1996.
5
<PAGE> 6
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
IAA TRUST ASSET ALLOCATION FUND, INC.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year....................... $ 13.39 $ 12.29 $11.08 $11.60 $11.20 $10.74 $10.56 $10.80 $10.51 $10.84
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... 0.35 0.37 0.36 0.34 0.57 0.68 0.73 0.78 0.75 0.73
Net gains or losses on
securities
(both realized and
unrealized).............. 2.11 1.41 1.38 (0.25) 0.47 0.55 0.24 (0.11) 0.29 (0.08)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations......... 2.46 1.78 1.74 0.09 1.04 1.23 0.97 0.67 1.04 0.65
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income........ (0.34) (0.37) (0.34) (0.34) (0.57) (0.68) (0.76) (0.77) (0.75) (0.72)
Distributions from capital
gains.................... (0.87) (0.31) (0.18) (0.27) (0.07) (0.09) (0.03) (0.14) 0.00 (0.26)
Distributions from return
of capital............... 0.00 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions...... (1.21) (0.68) (0.53) (0.61) (0.64) (0.77) (0.79) (0.91) (0.75) (0.98)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
year....................... $ 14.64 $ 13.39 $12.29 $11.08 $11.60 $11.20 $10.74 $10.56 $10.80 $10.51
======= ======= ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN................. 19.95% 14.74% 16.29% 0.71% 9.58% 11.84% 9.47% 6.50% 10.40% 6.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in
000's)................... $14,272 $10,083 $9,540 $8,653 $6,663 $6,233 $5,768 $5,714 $5,812 $5,966
Ratio of expenses
to average net assets.... 1.46% 1.44% 1.46% 1.78% 1.71% 1.51% 1.33% 1.39% 1.34% 1.17%
Ratio of net investment
income
to average net assets.... 2.57% 2.81% 3.18% 2.98% 4.97% 6.20% 6.83% 7.31% 7.12% 6.92%
Portfolio turnover......... 19.25% 33.77% 21.03% 17.39% 36.70% 14.10% 20.60% 6.50% 45.20% 11.70%
Average commission rate
paid*.................... $0.0732 $0.0861 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------
* Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period for which there was a
commission. The disclosure is required by the SEC beginning in 1996.
6
<PAGE> 7
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
IAA TRUST TAX EXEMPT BOND FUND, INC.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year............... $ 8.41 $ 8.36 $ 8.19 $ 9.11 $ 8.78 $ 8.44 $ 8.32 $ 8.41 $ 8.15 $ 8.09
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........... 0.36 0.37 0.39 0.39 0.46 0.49 0.52 0.52 0.54 0.54
Net gains or losses
on securities
(both realized
and
unrealized)...... 0.31 0.07 0.20 (0.54) 0.33 0.34 0.13 (0.09) 0.26 0.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations... 0.67 0.44 0.59 (0.15) 0.79 0.83 0.65 0.43 0.80 0.60
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income........... (0.36) (0.37) (0.39) (0.39) (0.46) (0.49) (0.53) (0.52) (0.54) (0.54)
Distributions from
capital gains.... (0.02) (0.02) (0.03) (0.38) 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... (0.38) (0.39) (0.42) (0.77) (0.46) (0.49) (0.53) (0.52) (0.54) (0.54)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year............ $ 8.70 $ 8.41 $ 8.36 $ 8.19 $ 9.11 $ 8.78 $ 8.44 $ 8.32 $ 8.41 $ 8.15
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN......... 8.15% 5.30% 7.51% (1.86%) 9.19% 10.05% 8.05% 5.24% 10.15% 7.69%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (in
000's)........... $18,008 $17,744 $18,833 $19,095 $20,026 $17,872 $16,035 $14,957 $14,307 $12,906
Ratio of expenses
to average net
assets........... 1.14% 1.08% 1.06% 1.15% 1.03% 0.95% 0.83% 0.90% 0.91% 0.89%
Ratio of net
investment income
to average net
assets........... 4.23% 4.30% 4.79% 4.47% 5.11% 5.65% 6.17% 6.22% 6.51% 6.66%
Portfolio
turnover......... 11.35% 14.75% 24.89% 41.94% 39.60% 20.30% 6.30% 23.50% 12.70% 16.40%
</TABLE>
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of the MONEY MARKET SERIES
outstanding throughout each period presented.
IAA TRUST TAXABLE FIXED INCOME SERIES FUND, INC.
<TABLE>
<CAPTION>
MONEY MARKET SERIES
YEARS ENDED JUNE 30,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........... 0.05 0.05 0.05 0.03 0.02 0.03 0.06 0.07 0.08 0.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations... 0.05 0.05 0.05 0.03 0.02 0.03 0.06 0.07 0.08 0.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income........... (0.05) (0.05) (0.05) (0.03) (0.02) (0.03) (0.06) (0.07) (0.08) (0.06)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... (0.05) (0.05) (0.05) (0.03) (0.02) (0.03) (0.06) (0.07) (0.08) (0.06)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN......... 4.63% 4.82% 4.85% 2.86% 2.41% 3.49% 6.40% 7.74% 7.90% 5.90%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year
(in 000's)....... $60,674 $33,664 $36,415 $38,699 $33,302 $10,191 $19,839 $21,920 $17,421 $14,211
Ratio of expenses
to average net
assets+.......... 0.94% 0.90% 0.73% 0.56% 0.58% 1.32% 1.03% 1.05% 1.28% 1.28%
Ratio of net
investment income
to average
net assets....... 4.55% 4.74% 4.80% 2.83% 2.67% 3.60% 6.26% 7.49% 7.58% 5.74%
</TABLE>
- ---------------
+ After voluntary waiver of advisory fees. Before voluntary waiver of advisory
fees, the ratio of expenses to average net assets was 0.97%, 1.06% and 1.02%
for the years ended June 30, 1995, June 30, 1994 and June 30, 1993,
respectively.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for a share of capital stock
outstanding of the SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND
SERIES during the period of January 2, 1997 (commencement of operations) through
June 30, 1997.
IAA TRUST TAXABLE FIXED INCOME SERIES FUND, INC.
<TABLE>
<CAPTION>
SHORT-TERM LONG-TERM
GOVERNMENT BOND SERIES BOND SERIES
FOR THE PERIOD FOR THE PERIOD
01/02/97* 01/02/97*
THROUGH 06/30/97 THROUGH 06/30/97
---------------------- ---------------------
<S> <C> <C>
Net asset value, beginning of
period............................. $ 10.00 $ 10.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. 0.20 0.20
Net gains on securities
(both realized and unrealized)..... 0.01 0.04
------ ------
Total from investment
operations.................... 0.21 0.24
------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income.......................... (0.20) (0.20)
------ ------
Total distributions............. (0.20) (0.20)
------ ------
Net asset value, end of period....... $ 10.01 $ 10.04
------ ------
TOTAL RETURN......................... 2.10% 2.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
000's).......................... $ 24,285 $32,932
Ratio of expenses to average net
assets+......................... 0.76%** 0.78%**
Ratio of net investment income to
average net assets+............. 4.90%** 5.15%**
Portfolio turnover................. 0.00% 41.77%
</TABLE>
- ---------------
* Commencement of operations.
** Annualized.
+ After expense reimbursements and voluntary waivers. Before voluntary waiver
and reimbursement of expenses, the ratio of expenses to average net assets
was 3.88% and 3.82% for Short-Term Government Bond Series and Long-Term Bond
Series, respectively. The ratio of net investment income to average net
assets would have been 1.78% and 2.11% for Short-Term Government Bond Series
and Long-Term Bond Series, respectively.
9
<PAGE> 10
PERFORMANCE CALCULATIONS
From time to time, the Funds may advertise performance measures such as total
percentage increase, total return, and yield. Whenever total percentage increase
or yield is advertised, total return will be advertised as well. The following
is a brief explanation of how these figures are obtained.
YIELDS
With respect to the ASSET ALLOCATION FUND, the TAX EXEMPT BOND FUND, the
SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND SERIES, yield is a
measure of the total current income for the 30-day period ended on the given
date, stated as a percentage of the original investment. With respect to the
MONEY MARKET SERIES, yield is a measure of the total current income for the
7-day period ended on the given date. This percent is annualized and compounded,
which means that the income is assumed to be earned and reinvested over a
one-year period. Effective yield is computed in the same manner, except that
income is assumed to have been reinvested over a one-year period. Yield differs
from total percentage increase and total return since it only considers current
income and does not take into account gains or losses on securities held by a
Fund or Series.
With respect to the TAX EXEMPT BOND FUND, tax-equivalent yield is the yield
which would be required from a fund whose income is subject to Federal income
tax in order to equal the amount of after-tax income received by a shareholder
based on the tax-exempt yield of this Fund. The rate simplifies the comparison
of yields of tax exempt funds with yields of taxable funds.
TOTAL PERCENTAGE INCREASE
Total percentage increase is calculated for the specified periods of time by
assuming a hypothetical investment of $1,000 in a Fund's shares. Each dividend
or other distribution is treated as having been reinvested at net asset value on
the reinvestment date. The percentage increases stated are the percent that an
original investment would have increased during the applicable period.
TOTAL RETURN
Total return is calculated in the same way as the total percentage increase
except that it is stated in terms of a level one-year compound rate of return
(all earnings reinvested on an annual basis) over the investment period.
Advertisement of the Funds' performance may also include the ending value of the
illustrated investment for the period stated. This is the amount that would be
received by a shareholder who sold all shares at the end of the stated period.
Advertised performance is based on historical earnings and is not intended to
indicate future performance.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund and Series is fundamental and may not be
changed without a vote of the holders of the majority of the voting securities
of the Fund/Series. Unless otherwise stated in this Prospectus or the Statement
of Additional Information, each Fund's and Series' investment policy is not
fundamental and may be changed without shareowner approval. While a
non-fundamental policy or restriction may be changed by the Directors of that
Fund without shareowner approval, the Funds intend to notify shareowners before
making any change in such policy or restriction. Fundamental policies may not be
changed without shareowner approval. The Funds and Series strive to attain their
investment objectives, but there can, of course, be no assurance that they will
do so.
GROWTH FUND:
The investment objective of the GROWTH FUND is capital growth. Current income
through the receipt of interest or dividends from investments will be secondary
to this Fund's goal of capital growth. Thus, the Fund is not intended for
investors whose principal objective is dividend income. Achievement of the
Fund's objective cannot be assured, but through professional management, the
Fund will seek to obtain results which are in keeping with its objective.
Although the portfolio of the Fund may be restructured at times for temporary
defensive purposes, it is the intention of the Board of Directors
10
<PAGE> 11
that no material change of a permanent nature will be made in the Fund's
investment objective without the approval of the holders of at least a majority
of the Fund's outstanding capital stock.
In seeking capital growth, the GROWTH FUND will constantly search for the best
values and will make investment decisions based primarily upon fundamental
valuation of securities. The Fund will dispose of securities held whenever, in
the judgment of its management, such securities do not represent the best values
for the purpose of achieving the Fund's objective. This can occur for a variety
of reasons, such as an increase in the market value of a particular security to
what is believed to be an unreasonably high level, a change in trend of growth
which was used as a basis of purchase, what is believed to be a vulnerable
general level of security prices, and other such circumstances bearing on the
desirability of continuing a given investment.
The GROWTH FUND'S investment policy is to invest principally in common stocks
and securities with equity characteristics, such as convertible preferred stocks
and convertible bonds; however, it may invest fully in common stocks or
securities with equity characteristics. To a lesser extent, the Fund may also
invest in bonds and preferred stocks when deemed prudent. The Fund may adopt a
temporary defensive position when it deems advisable due to a change in economic
conditions. This may be done by establishing and maintaining a reserve in: cash;
short-term U.S. Government bonds, bills or notes; prime commercial paper of
major companies; and certificates of deposit issued by major banks, for the
purpose of providing working capital, funds for possible redemption of shares,
or to enable the Fund to take advantage of buying opportunities. The adoption of
any such temporary defensive position will be on a temporary basis and will not
be utilized to change the long-term investment objective and policies of the
Fund. The word "temporary" as used in the preceding sentence should not be read
as having a fixed meaning in the sense that it designates any fixed period of
time.
When investing in fixed income securities, the GROWTH FUND'S management intends
to invest in those securities which are rated at the time of purchase within the
four highest grades assigned by Moody's Investors Service, Inc. ("Moody's")
("Aaa", "Aa", "A", or "Baa") or Standard & Poor's Corporation ("S&P") ("AAA",
"AA", "A", or "BBB"); or in those securities, although not rated as a matter of
policy by either of the above two ratings services, which are considered by
management to have investment quality comparable to securities that fall within
the four highest grades assigned by the above two rating services. In the event
a fixed income security held by the Fund is downgraded below a "Baa" or "BBB"
rating, the Investment Adviser (IAA Trust Company) shall promptly reassess the
risks involved and take such actions as it determines are in the best interests
of the Fund and its shareholders. See the Appendix to the Statement of
Additional Information for explanations on applicable ratings.
ASSET ALLOCATION FUND:
The primary investment objective of the ASSET ALLOCATION FUND is growth of
capital with current income. The Fund seeks to achieve its objective by
following an asset allocation strategy utilizing a wide range of equity, debt,
and money market securities. Asset classes and securities strategies selected
will be those that the Investment Adviser believes offer the greatest potential
for maximizing total return.
Income and capital appreciation will be derived from the ASSET ALLOCATION FUND'S
investment in common stocks and fixed income securities consisting of bonds,
preferred stocks, and short-term obligations. Short-term obligations are
instruments maturing in one year or less (measured from the time of investment)
and include: obligations of or guaranteed by the U.S. Government, its agencies
or instrumentalities; certificates of deposit of domestic banks; commercial
paper rated in the top two grades -- "Prime-1" or "Prime-2" by Moody's or "A-1"
or "A-2" by S&P; non-convertible corporate debt securities such as bonds, notes
and debentures which are rated in the top two grades -- "Aaa" or "Aa" by Moody's
or "AAA" or "AA" by S&P; negotiable certificates of deposit of savings and loan
associations; and repurchase agreements. Fixed income securities may have equity
conversion privileges or other equity features, including attached warrants or
rights.
When investing in fixed income securities, the Asset Allocation Fund's
management intends to invest in those securities which are rated at the time of
purchase within
11
<PAGE> 12
the four highest grades assigned by Moody's ("Aaa", "Aa", "A", or "Baa") or S&P
("AAA", "AA", "A", or "BBB"); or in those securities, although not rated as a
matter of policy by either of the above two rating services, which are
considered by management to have investment quality comparable to securities
that fall within the four highest grades assigned by the above two rating
services. In the event a fixed income security held by the Fund is downgraded
below a "Baa" or "BBB" rating, the Investment Adviser shall promptly reassess
the risks involved and take such actions as it determines to be in the best
interest of the Fund and its shareholders. See the Appendix to the Statement of
Additional Information for explanations on applicable ratings.
Although it is not the intent of the ASSET ALLOCATION FUND'S management to trade
for short-term profits, purchases and sales of securities will be made whenever
management deems it would contribute to the achievement of the Fund's objective.
The Fund will be invested in securities representing a number of different
industry classifications and does not intend to concentrate its investments in a
particular industry. In addition to domestic securities, the Fund may invest in
Canadian and other foreign securities, both corporate and government, which are
payable in United States dollars. To the extent that the Fund does invest in
foreign securities, such investments may be subject to special risks, such as
changes in the administration or economic and monetary policies of foreign
governments. However, the Fund will not invest more than 5% of its total assets
in foreign securities.
TAX EXEMPT BOND FUND:
The investment objective of the TAX EXEMPT BOND FUND is to seek as high a level
of current interest income exempt from Federal income taxes as is available from
municipal bonds, consistent with the conservation of capital. The Fund's
investments (and thus the value of shares held by shareholders) will be subject
to the market fluctuations and risks inherent in all securities, and there can
be no assurance that the Fund's stated objective will be realized.
The TAX EXEMPT BOND FUND will seek to achieve its objective by investing
substantially all of its assets in a diversified portfolio of debt obligations
issued by or on behalf of states, territories or possessions of the United
States and the District of Columbia or their political subdivisions, agencies
and instrumentalities, or multi-state agencies or authorities, the interest from
which is exempt from Federal income taxes in the opinion of bond counsel to the
issuers. Under normal market conditions, the Fund will maintain at least 80% of
its net assets in tax-exempt municipal bonds (not including assets invested in
temporary investments for defensive purposes -- see following paragraph). This
80% limitation is considered a fundamental policy. The Fund's assets will
consist of: (1) municipal bonds which are rated at the time of purchase within
the four highest grades assigned by Moody's ("Aaa", "Aa", "A", or "Baa") or S&P
("AAA", "AA", "A", or "BBB"), or in those municipal bonds, although not rated as
a matter of policy by either of the above two rating services, which are
considered by management to have investment quality comparable to municipal
bonds that fall within the four highest grades assigned by the above two rating
services (municipal bonds rated "Baa" or "BBB" have speculative
characteristics); (2) temporary investments as described below; and (3) cash.
While ratings at the time of purchase will determine which securities may be
acquired, a subsequent reduction in rating will not require the Fund to dispose
of the securities.
See the Appendix to the Statement of Additional Information for explanations on
applicable ratings. No limitations are imposed as to the percentage of the
Fund's assets which may be invested among Moody's or S&P's highest four ratings;
however, the Fund will not invest more than 20% of its net assets (measured at
the time of investment) in municipal bonds which are not rated, or in taxable
investments, or in investments subject to the alternative minimum tax.
Pending investment of proceeds from the sale of the TAX EXEMPT BOND FUND'S
shares, the changing of portfolio composition, and from time to time when deemed
appropriate by the Investment Adviser for defensive purposes, the Fund may
invest in temporary investment securities. Temporary investment securities
consist of: (1) notes issued by or on behalf of municipal issuers backed by the
Federal Government; (2) notes of issuers having, at the time of purchase, an
outstanding issue of municipal bonds rated within the four highest grades of
Moody's or S&P; (3) municipal notes rated at the time
12
<PAGE> 13
of purchase within the two highest grades assigned by Moody's ("MIG-1" and
"MIG-2"); (4) obligations of the United States Government, its agencies or
instrumentalities; (5) bonds, notes and certificates rated within the four
highest grades of Moody's or S&P; (6) commercial paper rated within the two
highest grades assigned by Moody's ("P- 1" or "P-2") or by S&P ("A-1 or "A-2");
and (7) debt securities (including repurchase agreements) issued or guaranteed
by domestic banks having investment quality, in management's opinion, comparable
to debt securities of the type described in category (5) above. The income from
the securities described in categories (4) through (7) above, is subject to
Federal income taxes. Consequently, interest income from temporary investments
may be taxable to shareholders as ordinary income.
TAXABLE FIXED INCOME SERIES FUND
Each Series of the TAXABLE FIXED INCOME SERIES FUND will invest at least 65% of
its total assets in taxable, fixed income securities, also known as "debt
securities". Examples of debt securities are commercial paper, bills, notes and
bonds, each representing a promise by the issuer to re-pay a debt which is
generally secured by the assets of such issuer. Also in this investment category
are debentures, which are bonds or promissory notes that are backed by the
general credit of the issuer, but not secured by specific assets of such issuer.
The types of debt securities in which each Series may invest have been
determined by the investment objective of the Series.
MONEY MARKET SERIES:
The investment objective of the MONEY MARKET SERIES is to earn as high a level
of current income as possible, consistent with maintaining liquidity and
stability of principal. In pursuing its objective, the Series may not always
purchase securities offering the highest yield. The Series will only invest in
high-quality rated securities or unrated securities determined by the Board of
Directors to be of high-quality and present minimum credit risk. There can be no
assurance that the Series' stated objective will be realized. The MONEY MARKET
SERIES seeks to achieve its objective by investing in the following types of
money market instruments, which are maturing in one year or less, measured from
the time of investment:
- - Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
- - Certificates of deposit of domestic banks in amounts (currently $100,000) that
are fully insured by The Federal Deposit Insurance Corporation ("The FDIC")
and, for larger amounts, bank certificates of deposit or bankers acceptances
of domestic banks having total assets in excess of $1 billion and which are
members of The FDIC. The Series may purchase both negotiable and
non-negotiable certificates of deposit. Non-negotiable certificates of deposit
are not purchased or sold in a secondary trading market and must be held to
maturity unless, at the request of the Series, the issuer agrees to redeem
them earlier, possibly at less than par. Accordingly, the Series will not
invest more than 10% of its net assets in non-negotiable certificates of
deposit or in other illiquid, restricted securities so that this potential
liquidity risk will be minimal. Banks are subject to extensive but different
government regulations which may limit the amount and types of their loans and
the interest rates that may be charged. In addition, the profitability of the
banking industry is largely dependent upon the availability and cost of funds
to finance lending operations and the quality of underlying bank assets.
- - Commercial paper rated in the top grade by two nationally recognized
statistical rating organizations (NRSROs) one of which must be either Moody's
Investors Service, Inc., or Standard & Poor's Corporation.
- - Non-convertible corporate debt securities such as bonds, notes and debentures
which are rated in the top grade -- "Aaa" by Moody's or "AAA" by S&P.
- - Negotiable certificates of deposit of savings and loan associations in amounts
(currently $100,000) that are fully insured by The FDIC.
- - Repurchase agreements of obligations which are suitable for investment under
the categories set forth above and issued by a member bank or certain
broker/dealers who have been approved by the Board of Directors and are
participating in the Federal Reserve
13
<PAGE> 14
System. The Series will only invest in repurchase agreements maturing in seven
days or less.
SHORT-TERM GOVERNMENT BOND SERIES:
The investment objective of the SHORT-TERM GOVERNMENT BOND SERIES is to provide
maximum total return, consistent with preservation of capital and prudent
investment management. Total return consists of interest, and dividends from
underlying securities and capital appreciation realized from the purchase and
sale of securities. Under normal conditions, the Series seeks to achieve its
objective by investing at least 65% of the value of its total assets in
short-term government bonds. Short-term government bonds include U.S. Government
securities, such as bonds, notes, and bills which are (a) direct obligations of
the U.S. Treasury, and (b) securities issued or guaranteed by U.S. Government
agencies. The estimated portfolio turnover rate for the Series is less than
100%.
Government securities may be backed by (i) the full faith and credit of the
United States; (ii) the particular Government agency's ability to borrow
directly from the Treasury; (iii) some other type of United States support; or
(iv) the credit of the issuing agency, only. The government guarantee of the
U.S. Government securities in the Series' portfolio, however, does not guarantee
the net asset value of the shares of the Series. There are market risks inherent
in all investments in securities, and the value of an investment in the Series
will fluctuate over time. Normally, the value of the Series' investments varies
inversely with changes in interest rates. For example, as interest rates rise,
the value of the Series' investments will tend to decline, and as rates fall,
investment values tend to increase.
The Series expects to maintain a dollar-weighted average maturity of less than
three years. Because the manager seeks to minimize interest rate risk by
managing effective duration, the Series may invest in securities of any
maturity.
The Series is designed primarily for investors who seek higher yields than money
market funds generally offer and are willing to accept nominal fluctuation in
the value of the shares but who are not willing to accept the greater
fluctuations that long-term bond funds might entail. This Series is not an
appropriate investment for investors whose primary investment objective is
absolute principal stability. Because the values of the securities in which this
Series invests generally change with interest rates, the value of its shares
will fluctuate, unlike the value of the shares of a money market fund, seeking
to maintain a stable net asset value per share of $1.00. Consequently, this
Series seeks to reduce such fluctuations by managing the effective duration, and
thus the interest rate risk, of its portfolio.
The Series also may invest up to 35% of its total assets in cash, commercial
paper and high-grade liquid debt securities, including corporate debt
instruments and privately issued mortgage-related and asset-backed securities
rated within the three highest grades assigned by S&P ("AAA", "AA", "A" or
"A-1") or Moody's ("Aaa", "Aa", "A" or "P-1") or in unrated securities such as
certificates of deposit issued by banks, bankers' acceptances, and repurchase
agreements deemed by the manager to be of comparable quality. Further, the
Series may invest in long-term fixed rate bonds that allow the Series to tender
(or "put") bonds to the issuer at specified intervals and receive face value for
them. In addition, the Series may invest in other investment companies investing
primarily in U.S. Government securities for the appropriate duration.
LONG-TERM BOND SERIES:
The investment objective of the LONG-TERM BOND SERIES is to provide the maximum
amount of current income and capital appreciation to the extent consistent with
the preservation of capital and the maintenance of liquidity. The Series invests
principally in debt obligations of corporations, the U.S. Government and its
agencies and instrumentalities, and major U.S. banking institutions and may also
purchase obligations of international agencies and U.S. dollar denominated
foreign debt securities. The estimated portfolio turnover rate for the Series is
less than 100%.
At least 80% of the value of the Series' net assets will consist of obligations
of corporations which, at the time of purchase by the Series are rated at least
"A-" by S&P or "A3" by Moody's, and of securities issued or guaranteed as to
principal and interest by the U.S. Government or its agencies or
instrumentalities. The Series may also invest in securities which, while not
rated, are deter-
14
<PAGE> 15
mined by the investment manager to be of comparable quality to those rated
securities in which the Series may invest; for purposes of the 80% requirement
described in this paragraph, such unrated securities shall be deemed to have the
ratings so determined. See the Appendix to the Statement of Additional
Information for explanations on applicable ratings. At least 65% of the value of
the Series' total assets (except when maintaining a temporary defensive
position) will be invested in bonds. Such instruments include U.S. Government
and corporate bonds, notes, and convertible issues.
On occasion, up to 20% of the Series' net assets may consist of commercial paper
of U.S. issuers rated "A-1" or "A-2" by S&P or "P-1" or "P-2" by Moody's,
certificates of deposit, time deposits and bankers' acceptances, and corporate
bonds which are rated in any category lower than "A-" by S&P and "A3" by
Moody's. When deemed necessary for temporary defensive purposes, the Series'
investment in commercial paper, certificates of deposit, time deposits and
bankers' acceptances may exceed 20% of its net assets, although the Series
currently does not intend to invest more than 5% of its assets in any one of
these types of instruments. Commercial paper and certificates of deposit could
be over 5%. Under no circumstances will the Series invest more than 20% of its
net assets in corporate bonds which are rated lower than "A-" by S&P and "A3" by
Moody's or are unrated. Obligations rated "BBB" by S&P and "Baa" by Moody's are
considered investment-grade obligations which lack outstanding investment
characteristics and may have speculative characteristics as well. See the
Appendix to the Statement of Additional Information for explanations on
applicable ratings. The Series may invest up to 10% of its assets in securities
of foreign issuers.
INVESTMENT STRATEGIES AND RISK CONSIDERATIONS
Shareowners should understand that all investments involve risk and there can be
no guarantee against loss resulting from an investment in the Funds. Unless
otherwise indicated, all percentage limitations governing the investments of the
Funds apply only at the time of transaction.
SECURITIES OF OTHER INVESTMENT COMPANIES
ALL FUNDS may purchase or acquire securities of other investment companies on
the open market if immediately after such purchase or acquisition the Fund would
not own in the aggregate: (1) more than 3% of the total outstanding voting stock
of such other investment company; (2) securities issued by such other investment
company having an aggregate value in excess of 5% of the value of the Fund's
total assets; or (3) securities issued by such other investment company and all
other investment companies having an aggregate value in excess of 10% of the
value of the Fund's total assets. By investing in another registered investment
company, there may be a duplication in fees and expenses.
REPURCHASE AGREEMENTS
ALL FUNDS may enter into repurchase agreements which are transactions in which
the Funds purchase a security (usually a U.S. Government obligation) and
simultaneously obtain the commitment of the seller to repurchase the security at
an agreed upon price on an agreed upon date, usually not more than seven days
from the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. Such transactions afford an opportunity for
a Fund to earn a return on cash which is only temporarily available. The Fund's
risk is limited to the ability of the seller to pay the agreed upon sum upon the
delivery date, but the seller's obligation is in effect secured by the value of
the underlying security. The Funds will only invest in repurchase agreements of
domestic banks maturing in seven days or less and will not invest in repurchase
agreements of broker-dealers.
Still, there are certain risks involved with the use of certain repurchase
agreements. For example, if the seller should default on its obligation to
repurchase the securities, a Fund may experience delays or difficulties in
exercising its rights upon the securities held as collateral and might incur a
loss if the value of the securities should decline. A Fund also might incur
disposition costs in connection with liquidating the securities. While the Funds
acknowledge these risks, it is expected that they can be controlled through
careful monitoring procedures offered by the Investment Adviser.
15
<PAGE> 16
MUNICIPAL BONDS
The TAX EXEMPT BOND FUND may purchase municipal bonds which are generally debt
obligations issued by states, territories and possessions of the United States
and the District of Columbia and their political subdivisions, agencies and
instrumentalities. They are issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as:
airports, bridges, highways, hospitals, housing, mass transportation, schools,
streets, and water and sewer works. Other public purposes for which municipal
bonds may be issued include obtaining funds for general operating expenses and
obtaining funds to lend to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide: privately-operated
housing facilities, airports, mass transit, industrial port or parking
facilities, air or water pollution control facilities and certain facilities for
water supply, gas, electricity or sewage or solid waste disposal. Other types of
facilities and certain industrial development bonds, the proceeds of which are
used for the acquisition, construction, reconstruction or improvement of or to
provide equipment for privately-operated industrial or commercial facilities,
may qualify as municipal bonds, although current Federal tax laws place
substantial limitations on the size of such funds. Moreover, when an industrial
development bond is backed only by the assets and revenue of the
non-governmental user, then such non-governmental user is deemed to be the
issuer.
The two principal classifications of municipal bonds are "general obligation
bonds" and "revenue bonds" General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. The taxes or special assessments that can be levied for the payment of
debt service may be limited or unlimited as to rate or amount. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Tax exempt
industrial development bonds are in most cases revenue bonds and do not
generally carry the pledge of the credit of the insurer of such bonds. There are
variations in the security of municipal bonds, both within a particular
classification and between classifications. The Fund's portfolio may consist of
any combination of general obligation bonds, revenue bonds, and industrial
revenue bonds, and it can be expected that the ratios of such bonds will vary
from time to time.
Yields on municipal bonds are dependent on, among other things, general money
market conditions, conditions of the municipal bond market, size of a particular
offering, maturity of the obligation, the financial condition of the issuer, and
the rating of the issue. Additionally, the imposition of the Fund's management
fee, as well as other operating expenses, will have the effect of reducing the
yield to investors. Proposals have been introduced periodically before Congress
to restrict or eliminate the Federal income tax exemption for interest on
municipal bonds. Similar proposals may be introduced in the future. If such a
proposal was enacted, the availability of municipal bonds for investment by the
Fund and the value of the Fund's portfolio would be affected. In such event, the
Fund would reevaluate its objective and policies and consider recommending to
its shareholders changes in the structure of the Fund.
GOVERNMENT SECURITIES
The SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND SERIES may invest in
certain securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities which includes U.S. Treasury securities, which differ in
their interest rates, maturities and times of issuance. Treasury Bills have
initial maturities of one year or less; Treasury Notes have initial maturities
of one to ten years; and Treasury Bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of
16
<PAGE> 17
interest. Principal and interest may fluctuate based on generally recognized
reference rates or the relationship of rates. While the U.S. Government provides
financial support to such U.S. Government sponsored agencies or
instrumentalities, no assurance can be given that it will always do so since it
is not so obligated by law. The Series will invest in such securities only when
it is satisfied that the credit risk with respect to the issuer is minimal.
ZERO COUPON SECURITIES
The LONG-TERM BOND SERIES may invest in zero coupon U.S. Government securities,
which are U.S. Government obligations that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The Series
also may invest in zero coupon securities issued by corporations and financial
institutions and by foreign governments where such securities are denominated in
U.S. dollars. A zero coupon security pays no interest to its holder during its
life and is sold at a discount to its face value at maturity. The amount of the
discount fluctuates with the market price of the security. The market prices of
zero coupon securities generally are more volatile than the market price of
securities that pay interest periodically and are likely to respond to a greater
degree to changes in interest rates than non-zero coupon securities having
similar maturities and credit qualities.
MORTGAGE-RELATED SECURITIES
The SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND SERIES may invest in
mortgage-related securities which are collateralized by pools of mortgage loans
assembled for sale to investors by various governmental agencies, such as
Government National Mortgage Association and government-related organizations
such as Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation, as well as by private issuers such as commercial banks, savings and
loan institutions, mortgage banks and private mortgage insurance companies, and
similar foreign entities. Mortgage-related securities are a form of derivative
securities. The mortgage-related securities in which the Series may invest
include those with fixed, floating and variable interest rates and those with
interest rates that change based on multiples of changes in interest rates.
Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may
fluctuate, is not so secured. If a mortgage-related security is purchased at a
premium, all or part of the premium may be lost if there is a decline in the
market value of the security, whether resulting from changes in interest rates
or prepayments in the underlying mortgage collateral. As with other
interest-bearing securities, the prices of certain mortgage-backed securities
are inversely affected by changes in interest rates. However, although the value
of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true, since in periods of declining interest rates
the mortgage underlying the security are more likely to be prepaid. For this and
other reasons, a mortgage-related security's stated maturity may be shortened by
unscheduled prepayments on the underlying mortgage and, therefore, it is not
possible to predict accurately the security's return to the Series. The Series
also may invest in collateralized mortgage obligations structures on pools of
mortgage pass-through certificates or mortgage loans. The issuers of
collateralized mortgage obligations typically do not have assets other than
those pledged to secure separately the obligations. Holders of these obligations
must rely principally on distributions on the underlying mortgage related
securities and other collateral securing the obligations for payments of
principal and interest on the obligations. If the collateral securing the
obligations is insufficient to make payments on the obligations, a holder could
sustain a loss. Collateralized mortgage obligations will be purchased only if
rated in one of the two highest rating categories by an NRSRO such as Moody's or
S&P.
FIXED-INCOME SECURITIES
ALL FUNDS may invest in fixed-income securities. Even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The values of
fixed-income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities. Once the rating of a portfolio
security has been changed, the Fund
17
<PAGE> 18
will consider all circumstances deemed relevant in determining whether to
continue to hold the security. The GROWTH FUND, the ASSET ALLOCATION FUND, and
the TAX EXEMPT BOND FUND may purchase fixed-income securities rated "Baa" by
Moody's and "BBB" by S&P. Such securities may be subject to the aforementioned
risk with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated fixed-income securities. Obligations which
are rated "Baa" are considered medium grade obligations; they are neither highly
protected nor poorly secured, and are considered by Moody's to have speculative
characteristics. Bonds rated "BBB" by S&P are regarded as having adequate
capacity to pay interest and repay principal, and while such bonds ordinarily
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than in higher rated categories.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
The LONG-TERM BOND SERIES may purchase securities on a forward commitment or
when-issued basis, which means that the price is fixed at the time of
commitment, but delivery and payment ordinarily take place a number of days
after the commitment to purchase. The Series will make commitments to purchase
such securities only with the intention of actually acquiring the securities,
but the Series may sell these securities before the settlement date if it is
deemed advisable. The Series will not accrue income in respect of a forward
commitment or when-issued security prior to its stated delivery date.
Securities purchased on a forward commitment or when-issued basis and the
securities held in the LONG-TERM BOND SERIES portfolio are subject to changes in
value (both generally changing in the same way, i.e., appreciating when interest
rates decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a forward
commitment or when-issued basis may expose the Series to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing
securities on a forward commitment or when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself. A
segregated account of the Series, consisting of cash, cash equivalents or U.S.
Government securities or other high quality liquid debt securities at least
equal at all times to the amount of the forward commitment or when-issued
securities, will be established and maintained at the Series' custodian bank.
Purchasing securities on a forward commitment or when-issued basis when the
Series is fully or almost fully invested may result in greater potential
fluctuation in the value of the Series' net assets and its net asset value per
share.
FOREIGN SECURITIES
Since up to 10% of the portfolios of the GROWTH FUND and LONG-TERM BOND SERIES
and up to 5% of ASSET ALLOCATION FUND'S portfolio may consist of securities of
foreign issuers, they may be subject to investment risks that are greater in
some respects than those incurred by a portfolio which invests only in
securities of U.S. domestic issuers. Such risks include future political and
economic developments, the possible imposition of foreign withholding taxes on
interest income payable on the securities, the possible establishment of
exchange controls, the possible seizure or nationalization of foreign deposits,
or the adoption of other foreign governmental restrictions which might adversely
affect the payment of principal and interest on such securities.
MANAGEMENT OF THE FUNDS
The operations of each Fund are under the direction of a Board of Directors who
have been elected by the shareholders of each Fund. The Board meets regularly to
review the activities of the Officers, who are responsible for day to day
operations of the Funds. To assist the Directors and Officers in carrying out
their duties and responsibilities, the Funds have employed IAA Trust Company
("IAATC"), 808 IAA Drive, Bloomington, Illinois 61702, as their Investment
Adviser under written Agreements with each Fund which are renewable annually by
the Board of Directors or by votes of a majority of each Fund's outstanding
voting securities. Any such renewals must also be approved by the votes of a
majority of each Fund's Directors, who are not parties to the Agreement or
interested persons of any such party,
18
<PAGE> 19
cast in person at a meeting called for the purpose of voting on such approvals.
The Agreements may be terminated without penalty at any time by the Board of
Directors of a Fund, by votes of the shareholders or by IAATC upon sixty days
written notice, and they terminate automatically in the event of their
assignment. IAATC was organized on December 30, 1970 and has no investment
company clients other than the IAA Trust Mutual Funds discussed herein. Illinois
Agricultural Holding Co. owns all of the outstanding voting securities of IAATC.
Approximately 98% of the issued and outstanding voting stock of the Illinois
Agricultural Holding Co. is owned by the Illinois Agricultural Association
("IAA"). IAA is an Illinois not-for-profit membership corporation organized to
promote the interest of agriculture.
IAATC, subject to the authority of the Board of each Fund, is generally
responsible for the overall management of each Fund's business. For these
services performed and expenses assumed, the GROWTH FUND, the ASSET ALLOCATION
FUND and the LONG-TERM BOND SERIES each pay IAATC an annual fee of approximately
0.75% of their respective average daily net assets. (These fees are considered
higher than the advisory fees paid by most other mutual funds) however, these
fees are comparable with those of other mutual funds with similar investment
objectives. The TAX EXEMPT BOND FUND, the MONEY MARKET SERIES and the SHORT-TERM
GOVERNMENT BOND SERIES each pay IAATC an annual fee of approximately 0.50% of
their respective average daily net assets. All of these fees are computed on a
daily basis and are paid monthly. Neither IAATC nor any company affiliated with
it receives any brokerage commissions from the Fund, as such business is
transacted with non-affiliated broker-dealers.
The following persons who are Officers and/or Directors of the Funds also hold
positions with IAATC as indicated: Ronald R. Warfield, Director and President;
Bruce D. Finks, Vice President--Investments; Gary E. Mede, Executive Vice
President; Richard M. Miller, Senior Vice President and Senior Trust Officer;
Rollie D. Moore, Director and Vice President; Paul M. Harmon, Secretary; Robert
W. Weldon, Vice President--Finance and Treasurer; Richard F. Day, Controller.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION OF THE FUNDS' PERFORMANCE
GROWTH FUND VS. STANDARD & POOR'S 500 INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) GROWTH S&P'S 500
<S> <C> <C>
1987 10000 10000
1988 9332 9310
1989 11204 11221
1990 13007 13062
1991 13705 14029
1992 14285 15915
1993 15958 18027
1994 15592 18281
1995 19726 23047
1996 23969 29039
1997 30810 39116
</TABLE>
Note 1: Fund returns are net of all fees and transaction costs, while the Index
returns are based solely on market returns without deduction for fees or
transaction costs for rebalancing. The Index is un-managed.
Note 2: As of October 28, 1996, a front-end sales load was no longer imposed on
share purchases. For fiscal years prior to that date, a front-end sales
load on share purchases would have affected the performance of the Fund.
The net asset value of the GROWTH FUND closed the fiscal year on June 30, 1997
at $22.51 per share. The figures below show historical compound annual returns
of Fund shares, as of June 30,1997 and assume all dividends and capital gains
distributions were reinvested.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Average Annual Total Returns.................................................... 28.54% 16.61% 11.91%
</TABLE>
These annual returns are for prior years' performance. Returns in future periods
cannot be guaranteed, and the value of Fund shares can fluctuate either above or
below their original cost.
<TABLE>
<S> <C>
Michael E. Marks has been managing the GROWTH FUND since January 1, 1997 and the
equity portion of the ASSET ALLOCATION FUND since June 1, 1994. He also manages
numerous trust, pension and investment management accounts. Michael is responsible
for equity research in financial services, healthcare and basic materials. He is a
Chartered Financial Analyst. Michael joined the IAA Trust Company after receiving
his M.B.A. from Indiana University in 1993. He received his B.S. in Business
Administration at Washington University (St. Louis).
</TABLE>
The GROWTH FUND returned 28.54% over the past year. This was significantly
better than the 23.96% return of the Lipper average growth mutual fund, yet well
behind the 34.7% return of the S&P 500 Index. The impressive performance of the
S&P 500 Index masked the lesser performance of most U.S. stocks. The majority of
stocks were unable to keep up due to the tremendous performance by the Index's
largest capitalization stocks.
20
<PAGE> 21
ASSET ALLOCATION FUND VS. MERRILL LYNCH CORPORATE AND GOVERNMENT
BOND MASTER INDEX & LIPPER-BALANCED FUNDS INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) ASSET ALLOCATION MERRILL LYNCH LIPPER-BALANCED
<S> <C> <C> <C>
1987 10000 10000 10000
1988 10647 10728 9431
1989 11754 12078 10841
1990 12518 12910 11940
1991 13704 14246 12934
1992 15326 16265 14721
1993 16795 18397 16798
1994 16914 18366 19320
1995 19669 20686 22409
1996 22568 21711 25887
1997 27071 23487 30911
</TABLE>
Note 1: Fund returns are net of all fees and transaction costs, while the Index
returns are based solely on market returns without deduction for fees or
transaction costs for rebalancing. Each Index is un-managed.
Note 2: As of October 28, 1996, a front-end sales load was no longer imposed on
share purchases. For fiscal years prior to that date, a front-end sales
load on share purchases would have affected the performance of the Fund.
The net asset value of the ASSET ALLOCATION FUND closed the fiscal year on June
30, 1997 at $14.64 per share. The figures below show historical compound annual
returns of Fund shares as of June 30,1997, and assume all dividends and capital
gains distributions were reinvested.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Average Annual Total Returns.................................................... 19.95% 12.05% 10.48%
</TABLE>
These annual returns are for prior years' performance. Returns in future periods
cannot be guaranteed, and the value of Fund shares can fluctuate either above or
below their original cost.
<TABLE>
<S> <C>
John Jacobs, Investment Officer for ASSET ALLOCATION FUND, SHORT-TERM GOVERNMENT
BOND SERIES and LONG-TERM BOND SERIES, earned a B.S. in Business and Finance at
Illinois Wesleyan University in Bloomington. Mr. Jacobs is also a Chartered
Financial Analyst and has served as a member of IAA Trust Company's Investment
Committee. Prior to joining the Company in 1975, he was an account executive for
one of the leading national brokerage firms. Mr. Jacobs has been managing the
fixed- income portion of the ASSET ALLOCATION FUND since December, 1978, and the
SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND SERIES since January 2,
1997.
</TABLE>
Over the past year, the ASSET ALLOCATION FUND had a return of 19.95%, comparing
favorably to the Lipper Flexible Fund Index which returned 18.48% and the Lipper
Balanced Fund Index which returned 19.41%. Bond returns were respectable but
paled in comparison to the remarkable year the stock market had. During the year
the Fund reduced its short-term reserves with stock and bond purchases.
21
<PAGE> 22
TAX EXEMPT BOND FUND VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) TAX EXEMPT LEHMAN
<S> <C> <C>
1987 10000 10000
1988 10769 10742
1989 11862 11966
1990 12484 12780
1991 13489 13932
1992 14844 15572
1993 16208 17434
1994 15907 17464
1995 17101 19004
1996 18008 20081
1997 19475 21738
</TABLE>
Note 1: The TAX EXEMPT BOND FUND'S portfolio does not mirror the Lehman Index.
Note 2: Fund returns are net of all fees and transaction costs, while the Index
returns are based solely on market returns without deduction for fees or
transaction costs for rebalancing. The Index is un-managed.
Note 3: As of October 28, 1996, a front-end sales load was no longer imposed on
share purchases. For fiscal years prior to that date, a front-end sales
load on share purchases would have affected the performance of the Fund.
The net asset value of the TAX EXEMPT BOND FUND closed the fiscal year on June
30, 1997 at $$8.70 per share. The figures below show historical compound annual
returns of Fund shares, as of June 30, 1997, and assume all dividends and
capital gains distributions were reinvested.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Average Annual Total Returns.................................................... 8.15% 5.58% 6.89%
</TABLE>
These annual returns are for prior years' performance. Returns in future periods
cannot be guaranteed, and the value of Fund shares can fluctuate either above or
below their original cost.
Although the Fund's income is generally exempt from Federal income taxes, it
may, under certain circumstances, be subject to state income taxation. See
"INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES."
<TABLE>
<S> <C>
Mary S. Guinane, Investment Officer for the TAX EXEMPT BOND FUND, earned an M.B.A.
at Illinois State University and a B.A. in Psychology and Sociology at St. Ambrose
College. Ms. Guinane has been with IAA Trust Company since 1981 and has managed the
Fund since October 1, 1986.
</TABLE>
For the year ended June 30, 1997, the TAX EXEMPT BOND FUND had a total return of
8.15%. Over the same period the Lehman Brothers Municipal Bond Index had a total
return of 8.25%. It is important to note that the Lehman Index return does not
reflect investments in cash, the impact of any servicing, investment management,
or administrative expenses that a mutual fund incurs.
22
<PAGE> 23
MONEY MARKET SERIES:
<TABLE>
<S> <C>
Robert L. Sammer, B.S., manages the MONEY MARKET SERIES. Mr. Sammer received his
Bachelor of Science degree in Finance from Illinois State University in 1988 and
earned his M.B.A. in 1996. After joining IAA Trust Company in 1991, he served as
client services coordinator, corporate retirement and agency accounts coordinator
and, now as investment analyst.
</TABLE>
SHORT-TERM GOVERNMENT BOND SERIES VS. MERRILL LYNCH BOND INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) SHORT-TERM MERRILL LYNCH
<S> <C> <C>
1-2-97 10000 10000
1-31-97 10037 10028
2-28-97 10057 10046
3-31-97 10054 9945
4-30-97 10113 10096
5-31-97 10156 10186
6-30-97 10210 10308
</TABLE>
Note 1: Fund returns are net of all fees and transaction costs, while the Index
returns are based solely on market returns without deduction for fees or
transaction costs for rebalancing. The Index is unmanaged.
The net asset value of the SHORT-TERM GOVERNMENT BOND SERIES closed the fiscal
year on June 30, 1997 at $10.01 per share. The figure below shows compound
annual returns of Series shares, as of June 30, 1997, and assumes all dividends
and capital gains distributions were reinvested.
<TABLE>
<CAPTION>
SINCE INCEPTION,
JANUARY 2, 1997
----------------
<S> <C>
Total Return................................................................................ 2.10%
</TABLE>
The above return represents the performance of the Series for its first six
months of operations. Returns in future periods cannot be guaranteed, and the
value of Fund shares can fluctuate either above or below their original cost.
The SHORT-TERM GOVERNMENT BOND SERIES had a return of 2.10% for the six months
ended June 30, 1997. This is a new Series and is currently being structured to
have a duration comparable to that of the three year Treasury note. Mortgage-
backed and asset-backed bonds are being utilized to increase the income of the
Series.
23
<PAGE> 24
LONG-TERM BOND SERIES VS. MERRILL LYNCH BOND INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) LONG-TERM MERRILL LYNCH
<S> <C> <C>
1-2-97 10000 10000
1-31-97 10036 10028
2-28-97 10046 10046
3-31-97 9971 9945
4-30-97 10081 10096
5-31-97 10147 10186
6-30-97 10244 10308
</TABLE>
Note 1: Fund returns are net of all fees and transaction costs, while the Index
returns are based solely on market returns without deduction for fees or
transaction costs for rebalancing. The Index is un-managed.
The net asset value of the LONG-TERM BOND SERIES closed the fiscal year on June
30, 1997 at $10.04 per share. The figure below shows compound annual returns of
Series shares, as of June 30, 1997, and assume all dividends and capital gains
distributions were reinvested.
<TABLE>
<CAPTION>
SINCE INCEPTION,
JANUARY 2, 1997
----------------
<S> <C>
Total Return................................................................................ 2.44%
</TABLE>
The above return represents the performance of the Series for its first six
months of operations. Returns in future periods cannot be guaranteed, and the
value of Fund shares can fluctuate either above or below their original cost.
The LONG-TERM BOND SERIES had a return of 2.44% for the six months ended June
30, 1997. This is a new Series and is being structured with a minimum average
maturity of ten years. Currently, the Series has a high percentage invested in
Treasury securities because corporate spreads are historically very tight.
Mortgage-backed bonds comprise the second largest sector in the Series.
24
<PAGE> 25
FPS SERVICES, INC.
FPS Services, Inc. ("FPS"), 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
Pennsylvania 19406-0903, is the Funds' Transfer and Dividend Disbursing Agent
and as such performs all shareholder services for the Funds. The Funds have also
entered into Agreements with FPS under which FPS provides accounting and
administration services.
Administration services include all administrative services except those
relating to the investment portfolios of the Funds, the distribution of the
Funds, and the maintenance of the Funds' financial records. The fees for
administrative services are based on a declining percentage of each Fund's
average net assets, beginning at .0015% of the first $50,000,000 of average net
assets. However, the ASSET ALLOCATION FUND, the TAX EXEMPT BOND FUND, the MONEY
MARKET SERIES, the SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND
SERIES are each required to pay a minimum annual fee of $10,000 and the Growth
Fund is required to pay a minimum annual fee of $50,000 for such services.
The Funds each pay a minimum accounting fee of $25,000 and pay additional
accounting fees, based on declining percentages of their respective average net
assets in excess of $10,000,000. There are no direct or indirect relationships
between FPS Services, Inc. and the Funds or IAA Trust Company.
DISTRIBUTION OF THE FUNDS' SHARES
FPS Broker Services, Inc. ("FPSB") serves as the Distributor for the Funds on a
best efforts basis, pursuant to various Underwriting Agreements. The Distributor
is an affiliated company of FPS Services, Inc. ("FPS"), the Funds' servicing
agent, inasmuch as both the Distributor and FPS are under common ownership.
DISTRIBUTION PLANS
The shareholders of the GROWTH FUND, the ASSET ALLOCATION FUND, the TAX EXEMPT
BOND FUND, the SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND SERIES
have each adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940. The Money Market Series does not
participate in any plan pursuant to this Rule. The Plan permits the
participating Funds to pay certain expenses associated with the distribution of
their shares. The Plan provides that the participating Funds will reimburse the
Distributor for actual distribution and shareholder servicing expenses incurred
by the Distributor not exceeding, on an annual basis, 0.25% of each
participating Fund's or Series' average daily net assets. Amounts expended by
the Distributor, but not reimbursed by each participating Fund's or Series'
Plan, will not be a continuing liability of such Fund/Series in subsequent
years. Because the Funds reimburse the Distributor only for actual expenditures,
the Distributor realizes no profit from the 12b-1 Plan. The Plan may be
terminated at any time and the Funds shall have no liability for expenses that
were not reimbursed as of the date of termination.
All such payments made pursuant to the Plan shall be made for the purpose of
promoting the sale of shares or other such distribution-related expenses,
including any distribution or service fees paid to securities dealers,
investment advisers, financial planners, and others, who have executed a
distribution agreement with the Distributor. The maximum amount which will be
paid to such parties by the Distributor is 0.25% (on an annual basis) of a
participating Fund's or Series' average net assets, owned by client of that
party. Management may choose to pay a lesser amount.
CAPITAL STOCK
There are no conversion or preemptive rights in connection with any shares of
the Funds, nor are there cumulative voting rights with respect to the shares of
any of the Funds. Each of the Fund's shares has equal voting rights. Each issued
and outstanding share of each Fund is entitled to participate equally in
dividends and distributions declared by such Fund and in net assets of such Fund
upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
All issued and outstanding shares of each Fund will be fully paid and
nonassessable and will be redeemable at the net asset value per share. The
interests of shareholders in the Funds will not, unless specifically requested
in
25
<PAGE> 26
writing by a shareholder, be evidenced by a certificate or certificates
representing shares of a Fund.
The authorized capitalizations of the GROWTH FUND, the ASSET ALLOCATION FUND,
and the TAX EXEMPT BOND FUND consist of 10,000,000 shares for each of these
Funds, each Fund having a par value of $1.00 per share.
The authorized capitalization of the TAXABLE FIXED INCOME SERIES FUND consists
of 250,000,000 shares with a par value of $0.10 per share. 100,000,000 of this
Fund's shares are designated as MONEY MARKET SERIES, 50,000,000 of its shares
are designated as SHORT-TERM GOVERNMENT BOND SERIES, and 25,000,000 of its
shares are designated as LONG-TERM BOND SERIES. The remaining 75,000,000 shares
are undesignated.
COUNTRY LIFE INSURANCE COMPANY
As of October 1, 1997, 442,950 shares or 6.59% of the issued and outstanding
capital stock of the GROWTH FUND were owned by Country Life Insurance Company
("Country Life"), Bloomington, Illinois. Country Life's capital stock enables it
to influence the outcome of shareholder votes. Country Life is organized in
Illinois. Substantially all issued and outstanding stock of Country Life is
owned by Illinois Agricultural Holding Co. As of October 1, 1997, 96,228 shares
or 9.48% of the issued and outstanding capital stock of the ASSET ALLOCATION
FUND were owned by Country Life Insurance Company ("Country Life"), Bloomington,
Illinois. Country Life's capital stock enables it to strongly influence the
outcome of shareholder votes. Country Life is organized in Illinois.
Substantially all issued and outstanding stock of Country Life is owned by
Illinois Agricultural Holding Co.
IAA TRUST COMPANY
As of October 1, 1997, IAA Trust Company owned of record 3,733,239 shares or
55.56% of the issued and outstanding capital stock of GROWTH FUND, 772,982
shares or 76.14% of the issued and outstanding capital stock of the ASSET
ALLOCATION FUND, 232,558 shares or 11.42% of the issued and outstanding capital
stock of the TAX EXEMPT BOND FUND, 51,149,870 shares or 87.71% of the issued and
outstanding capital stock of the MONEY MARKET SERIES, 2,480,894 shares or 94.95%
of the issued and outstanding capital stock of the SHORT-TERM GOVERNMENT BOND
SERIES, and 3,481,184 shares or 96.45% of the issued and outstanding capital
stock of the LONG-TERM BOND SERIES.
Illinois Agricultural Holding Co. owns 100% of the outstanding voting securities
of the Trust Company. For additional information on the ownership of Illinois
Agricultural Holding Co. See "MANAGEMENT OF THE FUNDS."
Shareholder inquiries should be directed to FPS Services, Inc., 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903, or call
toll-free 1 (800) 245-2100.
INCOME DIVIDENDS,
CAPITAL GAINS DISTRIBUTIONS,
AND TAXES
DIVIDENDS -- IN GENERAL
Dividends and capital gains distributions may be automatically reinvested in
additional shares of a particular Fund/Series at net asset value, or paid in
cash, at the choice of the investor. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, such shareholder's distribution option will automatically be converted
to having all dividends and other distributions reinvested in additional shares.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks. The cash option is not available under the Systematic
Withdrawal Plan or Retirement Plans.
Each shareholder will receive a summary of the dividends paid or reinvested as
they are declared. If the entire amount in an account is redeemed at any time
during a month, dividends credited to that account from the beginning of the
month through the day of redemption will be paid together with the proceeds of
the redemption.
GROWTH FUND:
It is the policy of the GROWTH FUND to distribute semi-annually, all of its net
investment income and, if any, all of its net realized capital gains according
to tax regula-
26
<PAGE> 27
tions. Currently, these distributions are made at the end of the Fund's fiscal
year and at calendar year-end.
ASSET ALLOCATION FUND, SHORT-TERM GOVERNMENT BOND SERIES AND LONG-TERM BOND
SERIES:
It is the policy of each of the ASSET ALLOCATION FUND,the SHORT-TERM GOVERNMENT
BOND SERIES, and the LONG-TERM BOND SERIES to pay monthly dividends from its net
investment income and to distribute net capital gains, if any, according to tax
regulations at the end of its fiscal and calendar years.
TAX EXEMPT BOND FUND:
It is the policy of the TAX EXEMPT BOND FUND to pay monthly dividends from its
net investment income.
The Fund intends to qualify each fiscal year (under the Internal Revenue Code of
1986 and any amendments thereto) to pay "exempt-interest dividends" to their
shareholders. Exempt-interest dividends which are derived from net income earned
by the Fund on tax-exempt bonds will be excludable from gross income of the
shareholders for Federal income tax purposes. That part of monthly net
investment income which may be earned by the Fund from certain taxable temporary
investments, together with any annual distributions attributable to capital
gains, are taxable to investors whether received in cash or reinvested in
shares. The percentage of each monthly dividend designated by the Fund as
tax-exempt will be the same percentage as the actual tax-exempt income earned
during the period covered by the distribution bears to total income earned by
the Fund during the period. Shareholders will be notified of such designations
monthly and information regarding the tax status of any other distributions will
be mailed annually. The percentage of the monthly dividend which is tax-exempt
may vary from distribution to distribution.
Shareholders of the Fund should recognize that should they redeem shares between
dividend dates, a portion of the per share redemption price may represent
interest accrued on municipal bonds and said portion may be taxed at capital
gains rates and not as a tax-exempt dividend excludable from gross income.
Interest on indebtedness incurred by shareholders to purchase or carry shares of
the Fund will not be deductible for Federal income tax purposes. The exemption
of interest income for Federal income tax purposes does not necessarily result
in exemption under the income or other tax laws of any state or local authority.
Thus, shareholders may be subject to state and local taxes on distributions of
tax-exempt interest income from the Fund.
MONEY MARKET SERIES:
The MONEY MARKET SERIES declares and distributes dividends of all of its daily
net investment income on each day that its net asset value is determined.
Dividends are paid to shareholders on a monthly basis.
Net investment income, for dividend purposes of this Series, consists of: (1)
accrued interest income plus or minus amortized purchase discount or premium;
(2) plus or minus all short-term realized gains and losses and unrealized
appreciation and depreciation on portfolio assets; and (3) minus all accrued
expenses of such Series, which are accrued each day. Net income will be
calculated immediately prior to the determination of the net asset value per
share of the Series. Since the net income of the Series (including realized
gains and losses and unrealized appreciation and depreciation on the portfolio
securities) is declared as a dividend each time the net income of the Series is
determined, the net asset value per share of the Series normally remains at
$1.00 per share immediately after each such determination and dividend
declaration. Any increase in the value of a shareholder's investment in the
Series representing the reinvestment of dividend income is reflected by an
increase in the number of shares of the Series in the account. Normally, the
Series will have a positive net income at the time of each determination
thereof. Net income may be negative if an unexpected liability must be accrued,
a loss realized, or unrealized depreciation occurs. If the net income of the
Series determined at any time is a negative amount, the net asset value per
share will be reduced below $1.00. The Series may endeavor to restore the net
asset value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share will increase to the extent of positive net income which is not declared.
27
<PAGE> 28
ALL FUNDS AND SERIES:
The Board of Directors may revise the above dividend policies, or postpone the
payment of dividends, if a Fund or Series should have or anticipate any large
presently unexpected expense, loss, or fluctuation in net assets which in the
opinion of the Board might have a significant adverse effect on shareholders.
TAXES -- IN GENERAL
Any dividend or distribution received shortly after the purchase of shares
reduces the net asset value of the shares by the amount of the dividend or
distribution and, although in effect a return of capital, is subject to income
taxes. The Funds are required to withhold and remit to the U.S. Treasury a
portion (31%) of dividend income, capital gains distributions, and redemption
proceeds for any account which provides an incorrect taxpayer identification
number, no number at all, or no certified number for a new account.
All of the Funds and Series comply with Subchapter M of the Internal Revenue
Code available to investment companies and therefore, maintain exemption from
Federal income tax.
In order to avoid an excise tax on undistributed amounts, each Fund and Series
must declare by the end of the calendar year a dividend representing 98% of its
ordinary income for the calendar year and 98% of its net capital gains for the
period of November 1 of the previous year through October 31 of the current
year. Such dividends will be paid on the last business day of the calendar year
to shareholders of record at the close of business on the preceding business
day.
The dividends-received deduction for corporations may be applicable to the
GROWTH FUND and the ASSET ALLOCATION FUND.
THE TAXPAYERS RELIEF ACT
The Taxpayers Relief Act, which was signed into law on August 5, 1997, is the
most wide-ranging tax legislation since 1986. Several provisions therein will
impact the taxation of capital gains.
Change in Rates:
The Taxpayers Relief Act has lowered the tax rate for long-term capital gains
from 28% to 20%, but increases the holding period of the assets from more than
one year to more than eighteen months. For persons in the 15% income tax
bracket, the new rate is 10%.
Realized gains from capital assets held more than one year, but eighteen months
or less, will be taxed at a 28% rate. Such gains will be termed "mid-term"
capital gains.
Also, capital gains in property held for more than five years will be eligible
for an 18% tax rate, but this only applies to assets acquired after December 31,
2000; therefore, a shareholder will not benefit from this provision until the
year 2006.
Effective Dates:
The rates which applied under prior law are effective for capital gains realized
before May 7, 1997.
Capital gains realized on or after May 7, 1997, but before July 29, 1997, will
be subject to a 20% tax rate for assets held more than one year.
These new tax rates, including the new mid-term category, apply for gains
realized on or after July 29, 1997.
Statements as to the tax status of distributions to shareholders will be mailed
annually. If shareholders are not subject to Federal income taxes on their
income, then they are not required to pay Federal tax on amounts distributed to
them. This section is not intended to be a complete discussion of all aspects of
the Federal income tax law and its effect on shareholders. For other tax
information, you may wish to consult your tax adviser.
PURCHASE OF SHARES
You may open an account by contacting FPS Broker Services, Inc., 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903, 1 (800) 245-
2100, your local Country Capital Management Company sales representative, or any
other registered broker-dealer. Purchases of Fund shares may be made in two
ways: by mail or by wire transfer, as discussed further below. The minimum
initial investment is $1,000 for all Funds except for IRAs and MSAs where the
minimum is $100. The minimum subsequent investment amount is $100 for all Funds.
After an account has been opened, you may purchase additional shares through a
sales
28
<PAGE> 29
representative or you may send your order directly to IAA Trust Company c/o FPS
Broker Services Inc. ("FPSB"), 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, Pennsylvania 19406-0903. Each check should be made payable to a
specific Fund or Series. All orders are subject to acceptance by FPSB and
without in any way limiting the foregoing, the Funds (through FPSB) reserve the
right to refuse any purchase which would result in ownership by any shareholder
of 5% or more of a Fund's outstanding shares at that time. The Funds will
automatically redeem shares if a purchase check is returned for non-sufficient
funds (NSF). This procedure places the risk for loss on the shareholder. The
Funds reserve the right to automatically redeem shares if the share balance of
an account falls below $1,000
PURCHASE PRICE
Shares of all Funds and Series are sold at the net asset value (without a sales
charge) next determined after receipt of the order by FPSB.
PURCHASES BY MAIL
To open an account and purchase shares by mail, complete an application and
mail your check payable to "IAA Trust_______________ Fund, Inc.", or IAA
Trust ____________ Series", whichever is appropriate, c/o FPS Broker Services,
Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania
19406-0903. Applications may be obtained by calling toll-free, 1 (800)
245-2100. The Funds reserve the right to reject any purchases of shares by
individuals using third party checks (those that are made out to someone other
than the Fund or Series and are endorsed over to the Fund or Series) greater
than $5,000 in amount. However, third party checks issued by IAA Trust Company,
Illinois Farm Bureau, Country Companies or any of their affiliates will be
accepted regardless of their amount.
The application need not be signed by a sales representative if you prefer to
purchase directly with Country Capital Management Company or FPSB. If you deal
with a sales representative, he or she will assist you in completing the
application, answer any of your questions, and mail the application for you.
Although no commission is paid, the sales representative may, at times, receive
additional compensation.
Shares begin earning income dividends on the day the purchase order is
effective. A Fund will automatically redeem shares if the purchase check is
returned for non-sufficient funds (NSF).
PURCHASES BY WIRE TRANSFER
To open an account and become a shareholder on the same day, first you (or our
sales representative) must telephone FPSB toll-free at 1 (800) 245-2100, by
12:00 Noon Eastern Time. An account number will be assigned to you for use in
identifying your wire transfer of money. Purchase made by wire are subject to a
minimum of $1,000.
Second, you must request your bank to transmit immediately available funds
(Federal Funds) by wire to:
UMB BANK, NA
ABA #10-10-00695
For: FPS Services, Inc.
Account #98-7037-071-9
IAA TRUST ______ FUND (or SERIES)
Account of (exact name(s) of Account Registration)
Shareholder Account # ___________
In order to obtain same-day investment, your wire must be received by the above
bank by 12:00 Noon Eastern Time. The bank that wires your money may charge a fee
for this service.
Third, you or our sales representative must mail a completed application to
FPSB, as noted above.
SUBSEQUENT INVESTMENTS
Once your account has been established, additional investments in any Fund or
Series may be made at any time by mailing a check or by wiring money as
described above. When you wire money for either the initial or additional
investments, always call FPSB on the same day to notify them of the investment.
The minimum subsequent investments are $100 by mail and $1,000 by wire transfer.
29
<PAGE> 30
SPECIAL PLANS AND OTHER PURCHASE INFORMATION
The Funds have available the following special Plans and purchase options.
Further information with respect to these plans is contained in the Funds'
Statement of Additional Information. Further information on these Plans may also
be obtained by contacting FPSB or Country Capital Management Company.
AUTOMATIC INVESTING
A shareholder may authorize Systematic Investing through automatic withdrawals
from his/her bank account(s).
EXCHANGE PRIVILEGES
Shareholders in any Fund or Series may exchange shares of their respective Fund
or Series for shares of the other Funds or Series on the basis of the relative
net asset values per share at the time of the exchange. If the exchange is made
by telephone, the new shares will be registered in the same manner as the shares
for which they were exchanged. A capital gain or loss for Federal income tax
purposes will be realized upon the exchange depending upon the cost or other
basis of the shares redeemed. Sixty days written notice will be given to
shareholders before any modifications to this privilege are implemented.
RETIREMENT PLANS
IAA Trust Company ("IAATC") sponsors a prototype Defined Contribution Plan which
has been approved by the Internal Revenue Service and which meets the
requirements of the Tax Reform Act of 1986, as amended. This Plan can invest in
shares of the GROWTH FUND, the ASSET ALLOCATION FUND, and each Series of the
TAXABLE FIXED INCOME SERIES FUND. The minimum initial investment for each Fund
is $100, with no minimum for subsequent investments.
For individuals eligible to establish an Individual Retirement Account ("IRA"),
IAATC sponsors a prototype "traditional" IRA which has been approved by the
Internal Revenue Service. For individuals eligible to establish a Medical
Savings Account ("MSA"), IAATC sponsors a prototype MSA Plan which has been
approved by the Internal Revenue Service.
The Taxpayers Relief Act which was signed into law on August 5, 1997, impacts
the traditional IRA and creates two additional types of IRAs.
Traditional (deductible) IRAs:
The Taxpayers Relief Act will gradually increase the adjusted gross income
phaseouts for deductible IRAs over the next ten years. Married individuals may
make deductible contributions even if spouses are active participants in an
employer-sponsored plan. The 10% early withdrawal tax will not apply for up to
$10,000 for first-time home purchases or education expenses.
Roth IRAs:
The Taxpayers Relief Act has created the new Roth IRA. While contributions to a
Roth IRA are not currently deductible, the amounts within the accounts
accumulate tax-free and qualified distributions will not be included in a
shareholder's taxable income. The contribution limit is $2,000 annually ($4,000
for joint returns) in aggregate with contributions to Traditional IRAs. Certain
income phaseouts apply.
Education IRAs:
The Taxpayers Relief Act has also created the new Education IRA. Like the Roth
IRA, contributions are non-deductible, but the investment earnings accumulate
tax-free, and distributions used for higher education expenses are not taxable.
Contributions limits are $500 per account and certain income phaseouts apply.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who purchase or already own $5,000 or more of a Fund's or Series'
shares, valued at the current public offering price, and who wish to receive
periodic payments may establish a Systematic Withdrawal Plan. Such plan holders
will receive monthly, quarterly or annual checks in the amount they designate.
INTEGRATED VOICE RESPONSE ("IVR") SYSTEM
Shareholders in any Funds or Series can obtain toll-free access to account
information, as well as some transactions, by calling 1 (800) 245-2100. The IVR
System provides total return, share price, price change and yield quotations for
all the Funds and Series; gives account balances and history (i.e., last
transaction, latest dividend distribution, redemptions by check during the last
30
<PAGE> 31
three months), and allows sales or exchanges of shares. Security is controlled
through the use of a personal identification number ("PIN" number) unique to
each shareholder. This number is initially assigned by FPS and can subsequently
be changed at will by the shareholder. When using the IVR System, a shareholder
bears the risk of any loss due to his or her error, unless the Fund or Transfer
Agent fails to use established safeguards, which may include taped records of
phone calls and written confirmations of transactions.
VALUATION OF SHARES
The Funds will be open for business and will price their respective shares on
each day the New York Stock Exchange is open for trading. The Funds' share
prices will be determined at the close of regular trading hours of the New York
Stock Exchange, normally 4:00 p.m. Eastern Time. The Money Market Series
reserves the right to calculate its net asset value more frequently than once a
day if deemed desirable.
The net asset value per share is determined as follows. Securities listed or
admitted to trading privileges on any national securities exchange will be
valued at the last sales price on that day before the time for valuation, or, if
there is no sale before that time that day, the last bid price on such exchange
before that time that day. Equity securities which are traded in the
over-the-counter market only and which are included in the NASDAQ National
Market System will be valued at the last sales price preceding the time for
valuation. Equity securities which are traded in the over-the-counter market
only, but which are not included in the NASDAQ National Market System will be
valued at the mean between the last preceding bid and asked price. Valuations
may also be obtained from pricing services when such prices are believed to
reflect the fair market value. Securities with a remaining maturity of sixty
days or less are valued at amortized cost, which approximates market value.
Short-term notes are valued at cost. Corporate bonds, municipal bonds,
receivables and portfolio securities not currently quoted as indicated above,
and other assets will be valued at fair value as determined in good faith by the
Board of Directors.
From the gross value of the assets so determined, there will be deducted all
liabilities, including accrued expenses and taxes, and any necessary reserves.
The remainder will be the net asset value of a Fund or Series, which will be
divided by the number of shares of capital stock outstanding in order to
determine the Fund's or Series' net asset value per share. (The net asset value
per share of the MONEY MARKET SERIES is ordinarily $1.00.) On any day when
depreciation in the value of portfolio securities exceeds income after expenses,
a Fund's or Series' net asset value per share may decline.
The market values of debt securities usually reflect yields generally available
on securities of similar quality. When yields decline, the market value of a
portfolio holding higher-yielding securities increases; and when yields
increase, the market value of the portfolio invested at lower yields can be
expected to decline. In addition, if a Fund or Series has net redemptions at a
time when interest rates have increased, such Fund or Series may have to sell
portfolio securities prior to maturity at a price below the Fund's or Series'
carrying value. Also, because at least a portion of the portfolio may be valued
at amortized cost rather than market, any yield quoted may be different if the
entire portfolio were valued at market, since amortized cost does not take
market fluctuation into consideration.
With respect to the MONEY MARKET SERIES, the value of all of its securities is
determined by using the amortized cost method of valuation, pursuant to Rule
2a-7 under the Investment Company Act. The amortized cost method of valuation
involves valuing a security at its cost at the time of purchase and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
such security. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Series would receive if it sold the instrument. The
purpose of this method of calculation is to attempt to maintain a constant net
asset value per share of $1.00, which may or may not result.
REDEMPTION OF SHARES
Each Fund or Series will redeem any part or all of your shares whenever you
request. The price you receive will be the net asset value per share as next
computed after
31
<PAGE> 32
your request is received by FPS Services, Inc. ("FPS"), as Transfer Agent, in
proper form. Accounts in the MONEY MARKET SERIES will earn daily dividends up to
the day before the date of redemption. Your redemption proceeds may be delayed
if you purchased the shares to be redeemed by check (including certified or
cashier checks) until such check has cleared and the Fund has collected good
funds for your purchase. Such collection may take 15 days or more.
You can redeem shares from an account -- by mail or by telephone, and with
respect to the MONEY MARKET SERIES ONLY, by writing a check.
REDEMPTIONS BY MAIL
To redeem by mail, simply send a letter to:
IAA Trust Mutual Funds
c/o FPS Services, Inc.
P.O. Box 61503
King of Prussia, PA 19406
Your letter must specify the name of the Fund or Series, your account number and
either the number of shares or the dollar amount to be redeemed. Your request
must be signed exactly as your account is registered. If your account is owned
jointly, both owners must sign. If a stock certificate has been issued, it must
be forwarded back (blank and unsigned) with your written request.
The Funds reserve the right to require additional documentation, or signature
guarantees on any redemptions in amounts over $25,000 in value or for the
redemption of corporate, partnership or fiduciary accounts, or for certain types
of transfer requests or account registration adjustments. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies, and savings associations.
A broker-dealer guaranteeing signatures must be a member of a clearing
corporation or maintain net capital of at least $100,000. Credit unions must be
authorized to issue signature guarantees. Signature guarantees will be accepted
from any eligible guarantor institution which participates in a signature
guarantee program.
REDEMPTIONS BY TELEPHONE
If you completed the portion of the application so as to authorize redemptions
by telephone, you may redeem in this manner by calling toll-free 1 (800)
245-2100 before the close of business on any business day. Telephone redemptions
are not available if a joint owner is under age 14. When one of the joint
tenants is age 14 to 17, the adult tenant must authorize telephone redemptions.
All telephone conversations with FPS will be recorded. The proceeds will be sent
only to the financial institution designated or to the address of record of the
account. The proceeds will normally be sent the next business day by mail or, if
you prefer and pay the expense, they will be wire transferred (minimum $1,000).
If wire transferred, the Fund or Series cannot be responsible for any delays
which may occur after a Fund or Series has entered the proceeds in the Federal
wire systems. The financial institution you designate must be a bank, savings
and loan or credit union which is insured under The FDIC, as only these
institutions can send or receive Federal wire transfers. These instructions will
remain in effect until you cancel or change them by written request. No stock
certificates will be issued to or may be held by shareholders electing this
privilege. The Funds reserve the right to terminate or modify this privilege at
any time upon thirty days notice to shareholders. Shareholders recently
purchasing shares by check may not use the telephone redemption privilege under
certain circumstances.
Neither the Funds nor any of their service contractors will be liable for any
loss or expense in acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Funds will use such procedures that are considered reasonable,
including requesting a shareholder to correctly state his or her Fund or Series
account number, the name in which his or her account is registered, his or her
social security number, banking institution, bank account number, and the name
in which his or her bank account is registered. To the extent that a Fund fails
to use reasonable procedures to verify the genuineness of telephone
instructions, it and/or its service contractors may be liable for any such
instructions that prove to be fraudulent or unauthorized.
32
<PAGE> 33
REDEMPTIONS BY WRITING A CHECK
If you so request on the application, the MONEY MARKET SERIES ONLY will provide
you with an initial supply of checks, which you should receive within two or
three weeks. These checks may be written in any amount not less than $100 nor
more than $100,000, and can be made payable to you or anyone you desire.
Redemption procedures will enable you to continue to earn daily income dividends
until your redemption check has cleared. Payment of all redemption checks is
subject to approval by the Series, and if there are not sufficient shares in
your account, the check will be returned marked "Insufficient Funds." The Series
reserves the right to terminate or modify this privilege at any time upon thirty
days notice to shareholders. Shareholders purchasing shares by check may not use
the check redemption privilege under certain circumstances.
CHECK-WRITING PRIVILEGE TERMS: Persons electing check-writing automatically
authorize the bank to honor checks drawn by them on the bank and appoint FPS,
the Fund's Transfer Agent, as their agent to redeem a sufficient number of MONEY
MARKET SERIES shares to pay such checks. They also automatically agree: (1) The
owner or owners who signs the check will sign their name exactly as it appears
in Item 2 on the application or the check will not be honored; (2) This
privilege is subject to the Series and the bank's rules and regulations and
applicable Government regulations as amended from time to time; (3) The bank may
refuse to honor checks and the Series may refuse to effect redemptions to pay
checks whenever the right of redemption has been suspended or postponed; (4) To
examine confirmations and to notify the Series, within thirty days after mailing
to the owner(s), of any error in the confirmations and that failure to do so
shall preclude any claim against the Series, the Distributor, the bank, FPS, and
each of their representatives and agents by reason of such failure; (5) This
privilege may be modified or terminated by any owner by serving written notice
to the Series, and the Series may modify or terminate it by serving written
notice to the owner(s) thirty days in advance thereof. This feature is not
available if a part owner is under age 14. When one of its joint tenants is age
14 to 17, both tenants must sign drafts.
REDEMPTION PAYMENTS TO SHAREHOLDERS
If a partial redemption is being made and the shareholder is using "specific
identification" accounting in determining his/her gain or loss for tax purposes,
it is important that he/she indicate which shares are to be redeemed, giving the
date acquired and number of shares. If several purchases are involved and the
shareholder desires a check for a stated amount, the order in which shares are
to be redeemed should also be specified. If no such instructions are given, the
shareholder will be required to compute his/her tax on a "first in -- first out"
basis. No designation of purchase dates is necessary in connection with a
redemption of all shares. The sale date and proceeds of redemptions (unless
exempt) will be reported by the Funds or Series to the Internal Revenue Service
at the end of each year, as required by law.
Redemption of shares may be made from any available assets of each Fund or
Series, and if a Fund or Series does not have sufficient cash on hand, such Fund
or Series will normally sell portfolio securities to effect such redemption.
Payment to shareholders for shares surrendered for redemption is made in cash as
soon as practicable after surrender, within seven days, except: (1) for any
period (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closing, or (b) during which trading on the New
York Stock Exchange is restricted; (2) for any period during which an emergency
exists as determined by the Securities and Exchange Commission as a result of
which (a) disposal by a Fund of securities owned by it is not reasonably
practicable, or (b) it is not reasonably practicable for a Fund/Series to
determine the value of its net assets; or (3) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
security holders of the Funds. In such event, the day will not be regarded as a
business day, the Funds' share prices will not be calculated, and all orders
will be held for execution on the following business day. The Funds, however,
will not mail redemption proceeds until they have assured themselves that checks
received for the purchase of any shares being redeemed have, or will be,
cleared.
33
<PAGE> 34
Accordingly, redemption checks may not be mailed until the shares being redeemed
have been on a Fund's books for at least fifteen business days measured from the
date shown on the purchase confirmation, although the effective date of the
redemption will be the date the redemption request is received by the particular
Fund/Series. Payment for redeemed shares may be made in whole or in part in
portfolio securities of a Fund/Series, at the portfolio value on the day the
proper redemption request is received, if the Board of Directors determines that
the liquidation of securities is impracticable or that payment in cash would
prejudice the best interests of the remaining shareholders.
The Funds have elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, pursuant to which the Funds are obligated to redeem shares solely
in cash, up to the lesser of $250,000 or one percent of the net asset value of
the particular Fund or Series during any 90-day period for any one shareholder.
The one percent net asset value of each Fund or Series shall be computed at the
beginning of such 90-day period. In the event of a redemption in kind, it should
be noted that a shareholder would incur brokerage costs if he sold the
securities received.
The value of the shares on redemption may be more or less than the shareholder's
cost, depending upon the market value of the portfolio securities at the time of
redemption. Shares redeemed will be canceled. Each Fund has the right to
establish a withdrawal charge on redemption of its shares, but the Funds do not
make any such charge and have no present intention of making such a charge, and
in the event such a withdrawal charge is established, at least thirty days prior
notice will be given to shareholders.
34
<PAGE> 35
IAA TRUST FUNDS APPLICATION
<TABLE>
<S> <C>
1. AMOUNT INVESTED ($1,000 minimum initial purchase) [ ] IAA Trust Growth Fund
FORM OF PAYMENT -- INITIAL INVESTMENT [ ] IAA Trust Asset Allocation Fund
[ ] Check for $ ________ enclosed -- payable to FUND(s)/SERIES of your choice [ ] IAA Trust Tax Exempt Bond Fund
[ ] NAV Purchase [ ] Farm Bureau Member -- Membership No. ________________
[ ] Customer of IAA Trust Company IAA Trust Taxable Fixed Income Series Fund:
[ ] Employee of IAA or affiliate [ ] Money Market Series
[ ] Broker/Dealer [ ] Short-Term Government Bond Series
[ ] My Dealer purchased_________________ of the FUND/SERIES on ___________________ [ ] Long-Term Bond Series
Shares Date
<CAPTION>
<S> <C>
2. REGISTRATION (PLEASE PRINT)
INDIVIDUAL *(Joint ownership with rights of survivorship unless otherwise
noted)
--------------------------------------------------------------------------------------------------------------
First Name Middle Initial Last Name Social Security #
--------------------------------------------------------------------------------------------------------------
Jt. Owner First Name Middle Initial Last Name Social Security #
GIFT TO MINORS
--------------------------------------------------------------------------------------------------------------
Name of Custodian (name one only) As Custodian For (name one only)
Under the ___________________________________Uniform Gift to Minors Act ______________________________
State Minor's Social Security #
CORPORATIONS, PARTNERSHIPS, TRUSTS AND OTHERS (complete Corporate Resolution)
--------------------------------------------------------------------------------------------------------------
Name of Corporation, Partnership, Trust or Other
--------------------------------------------------------------------------------------------------------------
Tax I.D. # Name of Trustee(s) Date of Trust
Citizen of: [ ] United States [ ] Other (Please Indicate)________________________________________
3. MAILING ADDRESS OF RECORD AND TELEPHONE NUMBER(S)
--------------------------------------------------------------------------------------------------------------
Street Address & Apt. # City State Zip
( ) ( )
------------------------------------------- ---------------------------------
Residence Number Business Number
4. DISTRIBUTION OPTIONS (Please indicate one -- Distributions will be reinvested
if no option is checked)
[ ] Automatic Compounding (dividends & capital gains in additional shares)
[ ] Cash Dividends (dividends in cash, capital gains in additional shares)
[ ] All Cash (dividends & capital gains in cash)
5. SYSTEMATIC WITHDRAWAL PLAN (MINIMUM INVESTMENT $5,000)
A check will be sent each [ ] month or [ ] quarter in the amount of
$ __________ to you at your address of record unless otherwise noted.
Monthly minimum amount is $25.00.
</TABLE>
<PAGE> 36
<TABLE>
<S><C>
6. TELEPHONE EXCHANGE AND REDEMPTION OPTION
[ ] Permits exchanges between accounts with identical registrations.
[ ] I (we) authorize FPS Services to honor telephone instructions for my
(our) account. Neither the Fund nor FPS Services will be liable for
properly acting upon telephone instructions believed to be genuine.
PLEASE ATTACH A VOIDED CHECK ON THE TRANSFER ACCOUNT OR COMPLETE BELOW.
--------------------------------------------------------------------------------------
Name of Bank City State
--------------------------------------------------------------------------------------
Account Number [ ] Checking [ ] Savings Bank Routing Number (nine digits)
7. SIGNATURE AND CERTIFICATION, and Back-up withholding certification
Under the penalties of perjury, I (we) certify the following:
1. I (We) certify that the number shown on this form is my (our) correct
tax identification number.
2. I (We) am not (are not) subject to backup withholding as a result of
failure to report all interest and dividends, or the Internal Revenue
Service has notified me (us) that I (we) am (are) no longer subject to
backup withholding.
Citizen of: [ ] United States [ ] Other (Please Indicate)_______________________________
"The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to avoid
backup withholding".
----------------------------------------------------- -----------------------------
Signature [ ] Owner [ ] Custodian [ ] Trustee Date
----------------------------------------------------- ------------------------------
Signature of Joint Owner (if applicable) Date
[ ] Check box if you have been notified by the IRS that you are subject to
backup withholding.
8. INVESTMENT DEALER INFORMATION
-------------------------------------------------------------------------------------------------------------
Firm Name Rep. Name & Number Authorized Signature
--------------------------------------------------------------------------------------------------------------
Street Address City State Zip
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
AUTOMATIC INVESTMENT PLAN APPLICATION
<S><C> <C>
1. PLEASE TELL US ABOUT YOURSELF
--------------------------------------------------------------------------------
First Name Middle Initial Last Name Social Security #
--------------------------------------------------------------------------------
Jt. Owner First Name Middle Initial Last Name Social Security #
--------------------------------------------------------------------------------
Street Address & Apt. # City State Zip
( ) ( )
--------------------------------- ----------------------------------------
Residence Number Business Number
2. PLEASE TELL US HOW TO SET UP YOUR AUTOMATIC INVESTMENT PLAN
To: FPS Services, Inc.
Please start an Automatic Investment Plan for me and invest $ __________ ($100
or more) on the
[ ] 10th [ ] 15th [ ] 20th of each month in shares of the: [ ] IAA Trust Growth Fund
[ ] IAA Trust Asset Allocation Fund
[ ] IAA Trust Tax Exempt Bond Fund
IAA Trust Taxable Fixed Income Series Fund:
[ ] Money Market Series
[ ] Short-Term Government Bond Series
[ ] Long-Term Bond Series
Check One: [ ] I am in the process of establishing an account.
[ ] My account number is______________________________________
I understand that my ACH debit will be dated on the day of each month as
indicated above. I agree that if such debit is not honored upon presentation,
FPS Services, Inc. may discontinue this service and any share purchase made upon
deposit of such debit may be canceled. I further agree that if the net asset
value of the shares purchased with such debit is less when said purchase is
canceled than when the purchase was made, FPS Services, Inc. shall be authorized
to liquidate other share or fractions thereof held in my account to make up the
deficiency. This Automatic Investment Plan may be discontinued by FPS Services,
Inc. upon 30 days written notice or at any time by the investor by written
notice to FPS Services, Inc. which is received no later than five (5) business
days prior to the above designated investment date.
- --------------------------------------------------- ----------------------------
Signature of Owner Date
- --------------------------------------------------- ----------------------------
Signature of Joint Owner (if applicable) Date
</TABLE>
<PAGE> 38
3. PLEASE AUTHORIZE THE AUTOMATIC INVESTMENT PLAN (A VOIDED CHECK SHOULD BE
ATTACHED)
-----------------------------------------------------------------------------
Account Number
-----------------------------------------------------------------------------
Address or Branch where account is maintained
-----------------------------------------------------------------------------
City State Zip
-----------------------------------------------------------------------------
As a convenience to me, please honor ACH debits on my account drawn by FPS
Services, Inc. and payable to the Fund designated below:
IAA TRUST ____________ FUND/SERIES
I agree that your rights with respect to each debit shall be the same as if it
were a check drawn upon you and signed personally by me. This authority shall
remain in effect until you receive written notice from me changing its terms or
revoking it, and until you actually receive such notice, I agree that you shall
be fully protected in honoring any such debit.
I further agree that if any debit be dishonored, whether with or without cause
or whether intentionally or inadvertently, you shall be under no liability
whatsoever.
Depositor's Signature NOTE: Your bank must be able to
accept ACH transactions and/or be a
member of an ACH association in
order for you to use this service.
To: The Bank named above:
So that you may comply with your Depositor's request and authorization, IAA
TRUST ________ FUND/SERIES agrees as follows:
1. To indemnify and hold you harmless from any loss you may suffer arising or in
connection with a payment by you, of a debit drawn by FPS Services, Inc. to
the order of such Fund or Series designated on the account of your
depositor(s) executing the authorization including any costs or expenses
reasonably incurred in connection with such loss. Such Fund or Series will
not however, indemnify you against any loss due to your payment of any debit
generated against insufficient funds.
2. To refund to you any amount erroneously paid by you to FPS Services, Inc. on
any such debit if claim for the amount of such erroneous payment is made by
you within 3 months of the date of such debit on which erroneous payment was
made.
<PAGE> 39
<TABLE>
<S> <C>
IAA TRUST MUTUAL FUNDS:
IAA Trust Growth Fund, Inc.
IAA Trust Asset Allocation Fund, Inc.
IAA Trust Tax Exempt Bond Fund, Inc.
IAA Trust Taxable Fixed Income Series Fund, Inc.
IAA Trust Money Market Series
IAA Trust Short-Term Government Bond Series
IAA Trust Long-Term Bond Series
PROSPECTUS
BOARD OF DIRECTORS:
Ronald R. Warfield
Herbert G. Allen IAA Trust Company
Charlot R. Cole Mutual Funds
Nancy J. Erickson
William E. Klein, Sr. October 28, 1997
Ailene Miller
Rollie D. Moore
OFFICERS:
Ronald R. Warfield, President [PHOTOGRAPH]
Bruce D. Finks, Vice President
Gary E. Mede, Vice President
Richard M. Miller, Vice President
Rollie D. Moore, Vice President A PLACE TO GROW
Paul M. Harmon, Secretary
Robert W. Weldon, Treasurer IAA Trust Growth Fund, Inc.
Richard F. Day, Controller IAA Trust Asset Allocation Fund, Inc.
IAA Trust Tax Exempt Bond Fund, Inc.
INVESTMENT ADVISER: IAA Trust Taxable Fixed Income Series Fund, Inc.
IAA Trust Company Money Market Series
Bloomington, Illinois Short-Term Government Bond Series
Long-Term Bond Series
DISTRIBUTOR:
FPS Broker Services, Inc.
King of Prussia, Pennsylvania
TRANSFER AGENT:
FPS Services, Inc.
King of Prussia, Pennsylvania
CUSTODIAN:
IAA Trust Company
Bloomington, Illinois
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
GENERAL COUNSEL:
Paul M. Harmon, Esq.
Office of the General Counsel
Bloomington, Illinois
F30-117-05
</TABLE>
<PAGE> 40
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 28, 1997
IAA TRUST GROWTH FUND, INC.
IAA TRUST ASSET ALLOCATION FUND, INC.
IAA TRUST TAX EXEMPT BOND FUND, INC.
IAA TRUST TAXABLE FIXED INCOME SERIES FUND, INC.
808 IAA DRIVE, BLOOMINGTON, ILLINOIS 61702, PHONE (309) 557-3222
The IAA Trust Mutual Funds consist of four separate funds (collectively, the
"Funds"): IAA Trust Growth Fund, Inc. ("GROWTH FUND"); IAA Trust Asset
Allocation Fund, Inc. ("ASSET ALLOCATION FUND"); IAA Trust Tax Exempt Bond Fund,
Inc. ("TAX EXEMPT BOND FUND"); and IAA Trust Taxable Fixed Income Series Fund,
Inc.* ("TAXABLE FIXED INCOME SERIES FUND") which currently consists of three
Series: IAA Trust Money Market Series ("MONEY MARKET SERIES"); IAA Trust
Short-Term Government Bond Series ("SHORT-TERM GOVERNMENT BOND SERIES"); and IAA
Trust Long-Term Bond Series ("LONG-TERM BOND SERIES"). This Statement of
Additional Information is not a prospectus, but should be read in conjunction
with the Funds' Prospectus dated October 28, 1997.
A copy of the Funds' Prospectus may be obtained from a local Country Capital
Management Company salesperson who is also a Country Companies agent, a licensed
salesperson at IAA Trust Company, 808 IAA Drive, Bloomington, Illinois 61702, or
by writing the Funds' principal Underwriter, FPS Broker Services, Inc., 3200
Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania 19406-0903.
TABLE OF CONTENTS
=================
SUBJECT PAGE
------- ----
INVESTMENT OBJECTIVES AND POLICIES......................................
POLICIES AND INVESTMENT RESTRICTIONS AIMED AT PROTECTING INVESTORS......
Fundamental Investment Restrictions................................
Non-Fundamental Investment Restrictions............................
Investment Company Act Restrictions................................
DIRECTORS AND OFFICERS OF THE FUNDS.....................................
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.....................
Country Life Insurance Company.....................................
IAA Trust Company..................................................
Officers and Directors.............................................
INVESTMENT ADVISORY AND OTHER SERVICES..................................
The Investment Adviser.............................................
The Distributor....................................................
12b-1 Plans........................................................
The Transfer Agent.................................................
Accounting Services................................................
Administrative Services............................................
The Custodian......................................................
Independent Accountants............................................
BROKERAGE...............................................................
PURCHASES, REDEMPTIONS, AND PRICING OF FUND SECURITIES..................
Exchange Privileges................................................
Retirement Plans...................................................
Automatic Investing................................................
Systematic Withdrawal Plan.........................................
Integrated Voice Response (IVR) System.............................
UNDERWRITER COMPENSATION................................................
INVESTMENT PERFORMANCE INFORMATION......................................
REPORTS TO SHAREHOLDERS AND FINANCIAL STATEMENTS........................
APPENDIX "A": Descriptions of Securities Ratings
----------------------------------
<PAGE> 41
INVESTMENT OBJECTIVES AND POLICIES
==================================
For information with respect to each Fund's and Series' individual investment
objectives and policies, see "INVESTMENT OBJECTIVES AND POLICIES" in the Funds'
Prospectus, and "POLICIES AND INVESTMENT RESTRICTIONS AIMED AT PROTECTING
INVESTORS" in this Statement of Additional Information.
For the fiscal years ended June 30, 1996 and 1997, GROWTH FUND'S portfolio
turnover rate was 32.95% and 30.74%, respectively. This Fund does not expect
that its turnover rate as of June 30, 1998 will vary significantly from that at
June 30, 1997.
For the fiscal years ended June 30, 1996 and 1997, ASSET ALLOCATION FUND'S
portfolio turnover rate was 33.77% and 19.25%, respectively. This Fund does not
expect that its turnover rate as of June 30, 1998 will vary significantly from
that at June 30, 1997.
For the fiscal years ended June 30, 1996 and 1997, TAX EXEMPT BOND FUND'S
portfolio turnover rate was 14.75% and 11.35%, respectively. This Fund does not
expect that its turnover rate as of June 30, 1998 will vary significantly from
that at June 30, 1997.
For the period beginning January 2, 1997 (commencement of operations) through
June 30, 1997, the portfolio turnover rates for the SHORT-TERM GOVERNMENT BOND
SERIES and the LONG-TERM BOND SERIES were 0.00% and 41.77%, respectively.
POLICIES AND INVESTMENT RESTRICTIONS AIMED AT PROTECTING INVESTORS
==================================================================
FUNDAMENTAL INVESTMENT RESTRICTIONS
- -----------------------------------
The following investment restrictions are considered fundamental policies and
may be changed only by the vote of a majority of a Fund's or Series' outstanding
shares, which as used herein and in the Prospectus means the lesser of (1) 67%
of such Fund's or Series' outstanding shares present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy, or
(2) more than 50% of such Fund's or Series outstanding shares.
RESTRICTIONS APPLICABLE TO ALL FUNDS AND SERIES:
- - No Fund will authorize or issue any class of senior securities.
- - The GROWTH FUND, the ASSET ALLOCATION FUND, the TAX EXEMPT BOND FUND, the
SHORT-TERM GOVERNMENT BOND SERIES and the LONG-TERM BOND SERIES each will
not borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only from a bank in an amount not to exceed 10%
of the value of the Fund's or Series' total assets, nor 5% of the value of
such Fund's or Series' total assets if such debt matures more than sixty
days after issuance.
The MONEY MARKET SERIES will not borrow money, except as a temporary measure
for extraordinary or emergency purposes, and then only from a bank in an
amount not to exceed 10% of the value of the Series' total assets and will
not purchase securities at any time a loan to such Series is outstanding
(investments in repurchase agreements are not subject to these
restrictions).
- - No Fund or Series will underwrite or participate in the underwriting of
securities of other issuers.
- - No Fund or Series will purchase or sell real estate, commodities, or
commodity contracts.
- - No Fund or Series will make loans, except through the purchase of publicly
distributed debt securities in accordance with each Fund's or Series'
investment policies. Investments in repurchase agreements shall not be
considered a loan for purposes of this restriction. (See the Appendix for
risk disclosure statement on repurchase agreements).
3
<PAGE> 42
RESTRICTIONS APPLICABLE TO CERTAIN FUNDS AND SERIES:
The GROWTH FUND will not:
- - Invest more than 5% of its assets in the securities of any one issuer.
- - Purchase or hold as much as 10% of any class of outstanding equity securities
or as much as 10% of the outstanding voting securities of any one issuer.
- - Concentrate the investments of more than 25% of the total value of its assets
in any single industry.
The ASSET ALLOCATION FUND, the SHORT-TERM GOVERNMENT BOND SERIES and the
LONG-TERM BOND SERIES each will not:
- - With respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer.
- - Purchase or hold as much as 10% of any class of outstanding equity securities
or as much as 10% of the outstanding voting securities of any one issuer.
- - Concentrate the investments of more than 25% of the total value of its assets
in any single industry.
The TAX EXEMPT BOND FUND will not:
- - With respect to 75% of its assets, invest more than 5% of its assets in the
securities of any one issuer. The term "issuer" as used by this Fund will
mean any one state municipality, agency, authority, instrumentality or other
entity which is directly responsible for the payment of debt service on its
outstanding obligations.
- - With respect to non-municipal bond investments, will not concentrate
investments of more than 25% of the total value of its assets in any single
industry, except that there is no limitation with regard to investments in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
The MONEY MARKET SERIES will not:
- - Invest more than 10% of its total assets in repurchase agreements maturing in
more than seven days or in non-negotiable certificates of deposit (See the
Appendix for risk disclosure statement on repurchase agreements).
- - Invest more than 5% of its total assets in the securities of any one issuer.
- - Concentrate the investments of more than 25% of the total value of its assets
in any single industry, other than banks.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions are imposed by the management of the Funds, and may
be modified by the Board of Directors of the Funds without shareholder approval.
EACH FUND AND SERIES WILL NOT:
- - Invest in companies for purposes of exercising control or management.
- - Buy from or sell portfolio securities to any of its Officers, Directors,
employees, Investment Adviser or Underwriter as principals except as
otherwise approved by the Board of Directors and in accordance with Section
17 of the Investment Company Act of 1940.
4
<PAGE> 43
- - Purchase securities on margin, effect a short sale of any security, purchase
or sell puts, calls, straddles or spreads, or participate in any joint or
joint and several trading accounts.
- - Purchase or retain securities of any company if persons affiliated with such
Fund or Series or its Investment Adviser, as a group, beneficially own more
than 1% of the securities of such a company.
- - In any case, borrow money in an amount which exceeds 5% of the value of its
total assets and will not purchase securities at any time a loan to such Fund
or Series is outstanding (investment in repurchase agreements will not be
considered to be loans for purposes of this restriction).
INVESTMENT COMPANY ACT RESTRICTIONS
- -----------------------------------
The following restrictions are imposed by the Investment Company Act of 1940.
EACH FUND AND SERIES WILL NOT:
- - Purchase or acquire securities of another investment company except by
purchase on the open market at regular brokerage rates (other than when such
purchase or acquisition is part of a plan of merger or consolidation) if
immediately after such purchase or acquisition, such Fund or Series would
own in the aggregate: (1) more than 3% of the total outstanding voting stock
of such other investment company; (2) securities issued by such other
investment company having an aggregate value in excess of 5% of the value of
such Fund's or Series' total assets; or (3) securities issued by such other
investment company and all other investment companies having an aggregate
value in excess of 10% of the value of such Fund's or Series' total assets.
Any investment policy or restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities and
results therefrom.
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS OF THE FUNDS
- -------------------------------------------------------------------------------------------------------------
NAME AND POSITION(S) AGGREGATE TOTAL PRINCIPAL OCCUPATION(S)
AGE HELD WITH COMPENSATION COMPENSATION DURING PAST FIVE YEARS
FUND(S) FROM FUNDS FOR FROM FUNDS &
FISCAL YEAR FUND COMPLEX
ENDED 6/30/97 PAID TO
DIRECTORS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald R. Director 0 0 Director and President: Illinois
Warfield(2) since 1994, Agricultural Association,
(53) Agricultural Holding Co., CC
Services, Inc.(4), Country Capital
President Management Company, Country
since 1994 Casualty Insurance Company, Country
Investors Life Assurance Company,
Country Life Insurance Company,
Country Mutual Member of GROWMARK,
Inc. Insurance Company, and Country
Preferred Insurance Company, 1993
to date; Director: and Chairman,
AgriVisor Services, Inc., and IAA
Trust Company, 1993 to date;
Coordinating Committee Board of
Trustees, IAA Foundation(2), 1993
to date; Director and President:
IAA Trust Growth Fund, Inc., IAA
Trust Asset Allocation Fund, Inc.,
IAA Trust Tax Exempt Bond Fund,
Inc., IAA Trust Taxable Fixed
Income Series Fund, Inc.(1),
Illinois Agricultural Service
Company, 1994 to date; Country
Medical Plans, Inc., 1996 to date;
President: AgriVisor Services,
Inc., and IAA Trust Company, 1994
to date; Chairman of the Board:
Country Capital Management Company,
1994 to date; Director: American
Farm Bureau Federation and certain
of its affiliated companies, 1995
to date. Farmer.
- -------------------------------------------------------------------------------------------------------
Herbert G. Director $1,699 $1,699 Director: IAA Trust Growth Fund, Inc.,
Allen since 1987 IAA Trust Asset Allocation Fund, Inc.,
(67) IAA Trust Tax Exempt Bond Fund, Inc.,
and IAA Trust Taxable Fixed Income Series
Fund, Inc.(1 ), 1987 to date. Farmer.
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 44
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Charlot R. Director $1,238 $1,238 Property Developer, 1979 to date;
Cole since 1996 Member Macoupin-Greene County
(56) Cooperation Extension Council
(formerly Macoupin County
Cooperative Extension Council),
1992 to date and President 1995 to
date; Secretary/Treasurer; Cole
Farms, Inc., 1993 to date;
Director: IAA Growth Fund, Inc.,
IAA Trust Asset Allocation Fund,
Inc., IAA Trust Taxable Fixed
Income Series Fund, Inc.(1), and
IAA Trust Tax Exempt Bond Fund,
Inc., 1996 to date. Farmer.
- ---------------------------------------------------------------------------------------------------
Nancy J. Director $1,650 $1,650 President of McHatton Farm
Erickson since 1995 Management, Inc., 1981 to date;
(40) Director: IAA Growth Fund, Inc.,
IAA Trust Asset Allocation Fund,
Inc., IAA Trust Taxable Fixed
Income Series Fund, Inc.(1), and
IAA Trust Tax Exempt Bond Fund,
Inc., 1995 to date. Farmer.
- -------------------------------------------------------------------------------------------------
William E. Director $1,841 $1,841 Director: Illinois Agricultural
Klein, Sr. (2) since 1993 Association, Illinois Agricultural
(69) Holding Co., CC Services, Inc.(4),
Country Casualty Insurance Company,
Country Investors Life Assurance
Company, Country Life Insurance
Company, Country Mutual Insurance
Company, and Country Preferred
Insurance Company, 1988 to date;
Director: Country Capital
Management Company, 1992 to date;
Director: IAA Trust Growth Fund,
Inc., IAA Trust Asset Allocation
Fund, Inc., IAA Trust Tax Exempt
Bond Fund Inc., and IAA Trust
Taxable Fixed Income Series Fund,
Inc. (1), 1993 to date. Farmer.
- ---------------------------------------------------------------------------------------------------
Ailene Director $1,539 $1,539 McLean County (Illinois) Board
Miller since 1991 Member: 1986 to date; Member: IAA
(71) Foundation(2), Trustee- Emeritus,
1988 to date; Director: IAA Trust
Growth Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust
Tax Exempt Bond Fund, Inc., and IAA
Trust Taxable Fixed Income Series
Fund, Inc.(1), 1991 to date.
- -----------------------------------------------------------------------------------------------------
Rollie D. Director $1,180 $1,180 Director and Vice President:
Moore (2) since 1996, Illinois Agricultural Association,
(48) Illinois Agricultural Holding Co.,
CC Services, Inc.(4), Country
Capital Management Company, Country
Vice Casualty Insurance Company, Country
President Investors Life Assurance Company,
since 1994 Country Life Insurance Company,
Country Mutual Insurance Company,
and Country Preferred Insurance
Company, 1993 to date; Director:
IAA Trust Company, 1993 to date;
Vice Chairman, Board of Trustees,
IAA Foundation(2), 1993 to date;
Vice President: IAA Trust Growth
Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust
Tax Exempt Bond Fund, Inc., and IAA
Trust Taxable Fixed Income Series
Fund, Inc.(1), 1994 to date; Vice
President and Director: IAA Trust
Company, 1994 to date and Country
Medical Plans, Inc., 1996 to date;
Director: AgriVisor Services, Inc.
and Illinois Agricultural Service
Company, 1994 to date; Coordinating
Committee Member of GROWMARK, Inc.,
1994 to date. Previously served as
Director: Illinois Agricultural
Association, Illinois Agricultural
Holding Co., CC Services, Inc.(4),
Country Casualty Insurance Company,
Country Investors Life Assurance
Company, Country Life Insurance
Company, Country Mutual Insurance
Company, and Country Preferred
Insurance Company, 1984 to 1992;
Country Capital Management Company,
1989 to 1992; IAA Trust Growth
Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust
Taxable Fixed Income Series Fund,
Inc.(1), and IAA Trust Tax Exempt
Bond Fund, Inc., 1989 to 1993;
AgriVisor Services, Inc., 1991 to
1992. Farmer.
- --------------------------------------------------------------------------------------------------
Bruce D. Vice 0 0 Vice President -- Investments: IAA
Finks President Trust Company, 1996 to date; Vice
(44) since 1996 President: IAA Trust Growth Fund,
Inc., IAA Trust Asset Allocation
Fund, Inc. IAA Trust Tax Exempt
Bond Fund, Inc., and IAA Trust
Taxable Fixed Income Series Fund,
Inc.(1), 1996 to date.
- ---------------------------------------------------------------------------------------------------
Gary E. Vice 0 0 Executive Vice President: IAA Trust
Mede President Company, 1977 to date; Vice
(60) since 1978 President--Investments: Country
Capital Management Company, 1977 to
date; Vice President: IAA Trust
Growth Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., and IAA
Trust Tax Exempt Bond Fund, Inc.,
1978 to date; IAA Trust Taxable
Fixed Income Series Fund, Inc.(1),
1981 to date.
- ----------------------------------------------------------------------------------------------------
Richard M. Vice 0 0 Senior Vice President and Senior
Miller President Trust Officer: IAA Trust Company,
(59) since 1992 1991 to date (prior thereto Senior
Vice President and Trust Officer);
Vice President: IAA Trust Growth
Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust
Tax Exempt Bond Fund, Inc., and IAA
Trust Taxable Fixed Income Series
Fund, Inc.(1), 1992 to date.
- ----------------------------------------------------------------------------------------------------
Paul M. Secretary 0 0 General Counsel: Illinois
Harmon since 1995, Agricultural Association and
(55) General Affiliated Companies, 1996 to date.
Counsel Deputy General Counsel: Illinois
since 1996 Agricultural Association and
Affiliated Companies, 1991 to date.
Secretary: Country Capital
Management Company, IAA Trust
Growth Fund, Inc., IAA Trust Asset
Allocation Fund, Inc., IAA Trust
Taxable Fixed Income Series Fund,
Inc.(1), IAA General Counsel: each
of the Companies and IAA Trust
Company, 1996 to date; prior
thereto Trust Tax Exempt Bond Fund,
Inc., 1995 to date; and IAA Trust
Company, 1995 to date. Deputy
General Counsel.
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 45
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Robert W. Treasurer 0 0 Vice President--Finance and
Weldon since 1975 Treasurer: IAA Trust Company,
(63) Illinois Agricultural Association,
Country Life Insurance Company,
Country Mutual Insurance Company,
Country Casualty Insurance Company,
Country Preferred Insurance
Company, and Country Capital
Management Company, 1974 to date;
Director and Treasurer: Illinois
Agricultural Service Company, 1974
to date; Vice President--Finance
and Treasurer: CC Services,
Inc.(4), 1975 to date; Country
Investors Life Assurance Company,
1981 to date; Treasurer: Illinois
Agricultural Holding Co., 1974 to
date; Illinois Agricultural
Auditing Association, 1975 to date;
IAA Trust Growth Fund, Inc., 1975
to date; IAA Trust Asset Allocation
Fund, Inc. and IAA Trust Tax Exempt
Bond Fund, Inc., 1978 to date; IAA
Trust Taxable Fixed Income Series
Fund, Inc.(1), 1981 to date;
AgriVisor Services, Inc., 1984 to
date.
- -------------------------------------------------------------------------------------------------------
Richard F. Controller 0 0 Controller: IAA Trust Company, 1974
Day since 1992 to date; IAA Trust Growth Fund,
(57) Inc., IAA Trust Asset Allocation
Fund, Inc., IAA Trust Tax Exempt
Bond Fund, Inc., and IAA Trust
Taxable Fixed Income Series Fund,
Inc.(1), 1992 to date.
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) IAA Trust Taxable Fixed Income Series Fund, Inc. was formerly IAA Trust
Money Market Fund, Inc.
(2) Interested Directors: all Directors classified by the Funds as Interested
Directors also serve as Directors of Illinois Agricultural Association
("IAA"), Illinois Agricultural Holding Co. ("IAHC"), Country Life Insurance
Company ("CLIC"), and Country Mutual Insurance Company ("CMIC"). IAHC owns
99.9% of the outstanding stock of CLIC and 100% of the outstanding stock of
IAA Trust Company ("IAATC"). Ronald R. Warfield and Rollie D. Moore also
serve as Directors of IAATC and as President and Vice President,
respectively, of CLIC, IAATC, IAHC and IAA.
(3) The mailing address for all the Funds' officers and directors is in care of
the IAA Trust Funds, 808 IAA Drive, Bloomington, Illinois 61702.
(4) CC Services, Inc. was organized to provide insurance brokerage,
administrative, marketing and other services to the insurance companies
affiliated with the Illinois Agricultural Association.
Directors of the Funds are entitled to payment ($200 for GROWTH FUND, $50
for each of ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND and TAXABLE FIXED INCOME
SERIES FUND) for each day or a portion thereof spent in a meeting or meetings of
the Board of Directors or while engaged in special work authorized by the
President or the Board of Directors and to reimbursement of expenses for each
directors' meeting attended while engaged in special work authorized by the
President or by the Board of Directors, but no fees are paid to any Director if
such Director is also a director, officer or employee of the Investment Adviser
of the Funds. Directors and Officers receive no other compensation from the
Funds for their services. During the fiscal year ended June 30, 1997, the
aggregate amount of fees and expenses paid to directors and officers was
$10,656.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
===================================================
COUNTRY LIFE INSURANCE COMPANY
------------------------------
As of October 1, 1997, Country Life Insurance Company ("Country Life") owned
442,950 shares or 6.59% of the outstanding shares of GROWTH FUND, and 96,228
shares or 9.48 of the outstanding shares of ASSET ALLOCATION FUND.
Substantially all of the issued and outstanding voting securities of Country
Life are owned by Illinois Agricultural Holding Co. and approximately 98% of
the outstanding voting securities of this latter company are owned by
Illinois Agricultural Association. Each of these companies is incorporated in
Illinois. Country Life's home office is at 1711 G.E. Road, Bloomington,
Illinois. The home office address for both Illinois Agricultural Holding
Company and Illinois Agricultural Association is 1701 Towanda Avenue,
Bloomington, Illinois. For the effect of Country Life's stock ownership in
the Funds on other Fund shareholders, see the section titled "CAPITAL STOCK"
in the Funds' Prospectus.
7
<PAGE> 46
IAA TRUST COMPANY
-----------------
As of October 1, 1997, IAA Trust Company owned of record 3,733,239 shares or
55.56% of the issued and outstanding capital stock of GROWTH FUND, 772,982
shares or 76.14% of the issued and outstanding capital stock of ASSET
ALLOCATION FUND, 232,558 shares or 11.42% of the issued and outstanding
capital stock of TAX EXEMPT BOND FUND, 1,149,870 shares or 87.71% of the
issued and outstanding capital stock of MONEY MARKET SERIES, 2,480,894 shares
or 94.95% of the issued and outstanding capital stock of SHORT-TERM
GOVERNMENT BOND SERIES, and 3,481,184 shares or 96.45% of the issued and
outstanding capital stock of LONG-TERM BOND SERIES.
IAA Trust Company's address is 808 IAA Drive, Bloomington, Illinois.
Illinois Agricultural Holding Co. owns 100% of the outstanding voting
securities of the Trust Company.
OFFICERS AND DIRECTORS
----------------------
As of October 1, 1997, the Officers and Directors of the Funds as a group
beneficially owned, directly or indirectly, less than 1% of the issued and
outstanding capital stock of any Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
======================================
CONTROLLING SHAREHOLDERS
------------------------
For the names of all controlling persons of IAA Trust Company, see section
titled "MANAGEMENT OF THE FUNDS" in the Funds' Prospectus.
FUND OFFICERS AFFILIATED WITH ADVISER
-------------------------------------
Fund Officers and Directors who are also officers or directors of IAA Trust
Company are set forth in the section titled "MANAGEMENT OF THE FUNDS" in the
Funds' Prospectus.
THE INVESTMENT ADVISER
----------------------
IAA Trust Company, as Investment Adviser to the Funds, advises each Fund as
to: investing its capital; continually reviews its investment portfolio and
recommends changes that appear desirable; furnishes statistical and research
information, office space, facilities, and equipment required for each Fund;
and pays the compensation of Directors, Officers, and employees of the Funds
who are also directors, officers, and employees of IAA Trust Company. For
these services performed and expenses assumed, each Fund or Series pays IAA
Trust Company the annual fees as shown below. Such fees are computed on a
daily basis and are paid monthly.
GROWTH FUND pays approximately .75% in any fiscal year of its average net
assets. For the fiscal years ended June 30, 1995, 1996 and 1997, IAA Trust
Company received $476,164, $580,601 and $709,406, respectively, for its
services as Investment Adviser to the Fund. Neither IAA Trust Company nor any
Company affiliated with it receives any brokerage commissions from the Fund,
as such business is transacted with non-affiliated broker-dealers.
ASSET ALLOCATION FUND pays approximately .75% in any fiscal year of its
average net assets. For the fiscal years ended June 30, 1995, 1996 and 1997,
IAA Trust Company received $67,275, $78,490, and $85,470, respectively, for
its services as Investment Adviser to the Fund. Neither IAA Trust Company nor
any Company affiliated with it receives any brokerage commissions from the
Fund, as such business is transacted with non-affiliated broker-dealers.
8
<PAGE> 47
TAX EXEMPT BOND FUND pays approximately .50% in any fiscal year of its
average net assets. For the fiscal years ended June 30, 1995, 1996 and 1997,
IAA Trust Company received $93,589, $93,863, and $89,246, respectively, for
its services as Investment Adviser to the Fund. Neither IAA Trust Company nor
any Company affiliated with it receives any brokerage commissions from the
Fund, as such business is transacted with non-affiliated broker-dealers.
MONEY MARKET SERIES pays approximately .50% in any fiscal year of its average
net assets. For the fiscal year ended June 30, 1995, IAA Trust Company earned
$178,518 for investment advisory services and voluntarily agreed to waive
fees totaling $86,900. For the fiscal years ended June 30, 1996 and 1997, IAA
Trust Company received $201,429 and $193,648, respectively, for investment
advisory services. The Adviser is currently not waiving any of its investment
advisory fees. Neither IAA Trust Company nor any Company affiliated with it
receives any brokerage commissions from the Fund, as such business is
transacted with non-affiliated broker-dealers.
SHORT-TERM GOVERNMENT BOND SERIES pays approximately .50% in any fiscal year
of its average net assets. Neither IAA Trust Company nor any Company
affiliated with it receives any brokerage commissions from the Fund, as such
business is transacted with non-affiliated broker-dealers. For the period of
January 2, 1997 (commencement of operations) to June 30, 1997, IAA Trust
Company earned $6,982 for investment advisory services and voluntarily agreed
to waive such fees and reimburse expenses totaling $32,422.
LONG-TERM BOND SERIES pays approximately .75% in any fiscal year of its
average net assets. Neither IAA Trust Company nor any Company affiliated with
it receives any brokerage commissions from the Fund, as such business is
transacted with non-affiliated broker-dealers. For the period of January 2,
1997 (commencement of operations) to June 30, 1997, IAA Trust Company earned
$11,550 for investment advisory services and voluntarily agreed to waive such
fees and reimburse expenses totaling $35,805.
THE DISTRIBUTOR
---------------
FPS Broker Services, Inc. ("FPSB") is the primary and exclusive Distributor
of the Funds' shares, pursuant to Underwriting Agreements with each Fund. As
Distributor, FPSB will use its best efforts to effect such distributions, but
it is required to take and pay for only such securities as it sells to the
public. Commissions for the sale of shares received by FPSB do not represent
compensation paid by the Funds to FPSB and are not expenses of the Funds.
12B-1 PLANS
-----------
The shareholders of GROWTH FUND, ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND,
SHORT-TERM GOVERNMENT BOND SERIES, and LONG-TERM BOND SERIES have adopted
respective Plans of Distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940.
FPSB was reimbursed $30,086 by the GROWTH FUND during the fiscal year ended
June 30, 1997, pursuant to its Plan. The following costs are associated with
this reimbursement: compensation to dealers $20,304, compensation to
Underwriter $4,795, printing costs $4,446 and advertising $541.
FPSB was reimbursed $7,376 by the ASSET ALLOCATION FUND during the fiscal
year ended June 30, 1997, pursuant to its Plan. The following costs are
associated with this reimbursement: compensation to dealers $1,550,
compensation to Underwriter $2,334, printing costs $2,951 and advertising
$541.
FPSB was reimbursed $14,891 by the TAX EXEMPT BOND FUND during the fiscal
year ended June 30, 1997, pursuant to its Plan. The following costs are
associated with this reimbursement: compensation to dealers $8,591,
compensation to Underwriter $2,662, printing costs $3,097 and advertising
$542. See "DISTRIBUTION PLANS" in the Funds' Prospectus.
9
<PAGE> 48
THE TRANSFER AGENT
------------------
FPS Services, Inc. ("FPS"), 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, Pennsylvania 19406-0903 is the Funds' Transfer and Dividend
Disbursing Agent and as such performs all shareholder services for the Funds.
As part of these services, FPS will maintain records pertaining to the sale,
redemption, and transfer of Fund shares and will distribute each Fund's cash
dividends to shareholders. For such services, each Fund and Series will pay
FPS fees which management believes are comparable to fees charged by others
who perform such transfer agency services.
GROWTH FUND paid FPS, for the fiscal years ended June 30, 1995, 1996, and
1997, $68,022, $67,980, and $74,484, respectively. These fees were for
transfer and dividend disbursing agent services.
ASSET ALLOCATION FUND paid FPS, for the fiscal years ended June 30, 1995,
1996, and 1997, $11,101, $7,695, and $9,043, respectively. These fees were
for transfer and dividend disbursing agent services.
TAX EXEMPT BOND FUND paid FPS for the fiscal years ended June 30, 1995, 1996,
and 1997, $21,475, $14,263, and $13,220, respectively. These fees were for
transfer and dividend disbursing agent services.
MONEY MARKET SERIES paid FPS for the fiscal years ended June 30, 1995, 1996
and 1997, $41,216, $39,872, and $42,866, respectively. These fees were for
transfer and dividend disbursing agent services.
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $12,056 for transfer and dividend disbursing agent services
for SHORT-TERM GOVERNMENT BOND SERIES and voluntarily agreed to waive fees
totaling $4,500.
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $12,058 for transfer and dividend disbursing agent services
for LONG-TERM BOND SERIES and voluntarily agreed to waive fees totaling
$4,500.
ACCOUNTING SERVICES
-------------------
The Funds have entered into Accounting Services Agreements with FPS. These
Agreements require FPS to calculate each Fund's and Series' net asset value
in accordance with the provisions of the Funds' current Prospectus and to
prepare for Fund approval and use various government reports, tax returns,
and proxy materials. Each Fund will pay a minimum fee of $25,000 for these
services and additional fees based on declining percentages of their
respective average net assets in excess of $10,000,000. Management believes
the fees for these services are comparable to those charged by others who
perform such accounting services.
GROWTH FUND paid FPS for the fiscal years ended June 30, 1995, 1996, and
1997, $44,673, $48,794, and $53,396, respectively.
ASSET ALLOCATION FUND paid FPS for the fiscal years ended June 30, 1995,
1996, and 1997, $25,883, $28,996, and $29,320, respectively.
TAX EXEMPT BOND FUND paid FPS for the fiscal years ended June 30, 1995, 1996,
and 1997, $30,271, $35,352, and $33,041, respectively.
MONEY MARKET SERIES paid FPS for the fiscal years ended June 30, 1995, 1996,
and 1997, $35,458, $37,196, and $35,760, respectively.
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $12,500 for accounting services for SHORT-TERM GOVERNMENT
BOND SERIES and voluntarily agreed to waive fees totaling $4,688.
10
<PAGE> 49
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $12,500 for accounting services for LONG-TERM BOND SERIES
and voluntarily agreed to waive fees totaling $4,688.
ADMINISTRATIVE SERVICES
-----------------------
The Funds have entered into Administration Agreements with FPS. These
Agreements provide that the Administrator shall provide all administrative
services to each Fund other than those relating to the investment portfolio
of the Funds, the distribution of the Funds and the maintenance of each
Fund's financial records. The fees for these services are based on declining
percentages of each Fund's average net assets beginning at .0015% of the
first $50,000,000 of average net assets, .0010% on the next $50,000,000 of
average net assets, and .0005% over $100,000,000 of average net assets. The
Funds are, however, required to pay minimum annual administrative fees. The
minimum annual fee for GROWTH FUND is $50,000. The minimum annual
administrative fee for each of ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND,
MONEY MARKET SERIES, SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND
SERIES is $10,000.
For the fiscal year ended June 30, 1997, GROWTH FUND paid $96,959 to FPS for
administrative services.
For the fiscal year ended June 30,1997, ASSET ALLOCATION FUND paid $11,307 to
FPS for administrative services.
For the fiscal year ended June 30,1997, TAX EXEMPT BOND FUND paid $18,383 to
FPS for administrative services.
For the fiscal year ended June 30,1997, MONEY MARKET SERIES paid $39,154 to
FPS for administrative services.
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $10,951 for administrative services for SHORT-TERM
GOVERNMENT BOND SERIES and voluntarily agreed to waive fees totaling $1,875.
For the period of January 2, 1997 (commencement of operations) to June 30,
1997, FPS earned $10,951 for administrative services for LONG-TERM BOND
SERIES and voluntarily agreed to waive fees totaling $1,875.
THE CUSTODIAN
-------------
IAA Trust Company, 808 IAA Drive, Bloomington, Illinois 61702, serves as
Custodian for the Funds and all securities and cash of each Fund will be held
by it. None of the Directors, Officers or other employees of the Funds ever
have personal possession of any Fund's investments. The Custodian attends to
the collection of principal and income, pays and collects all monies for
securities bought and sold by each Fund, and performs certain other
ministerial duties. These services do not include any managerial or policy
making functions of the Funds. The Funds have agreed to pay the Custodian
such compensation as may be agreed upon from time to time, but currently the
Custodian is voluntarily waiving the receipt of any fees for custodial
services.
INDEPENDENT ACCOUNTANTS
-----------------------
The accounting firm of Coopers & Lybrand L.L.P., 2400 Eleven Penn Center,
Philadelphia, Pennsylvania, has been designated as Auditors for each Fund.
Coopers & Lybrand L.L.P. performs annual audits of each Fund and is
periodically called upon to provide accounting and tax advice.
11
<PAGE> 50
BROKERAGE
=========
GROWTH FUND and ASSET ALLOCATION FUND:
These Funds always seek to effect their respective transactions in buying and
selling portfolio securities, acting through a broker as agent or with a
dealer as principal so that they can obtain reasonable execution at the most
favorable prices. Accordingly, each Fund, through IAA Trust Company, the
Investment Adviser, negotiates commission rates in accordance with the
reliability and quality of a broker's or dealer's services, the financial
condition of the firm and the value and expected contribution of the
broker-dealer to the performance of the Fund on a continuing basis. Thus,
what a Fund determines to be the most favorable commission price may be
higher than the lowest available price. In evaluating the overall
reasonableness of brokerage commissions paid, each Fund through its
Investment Adviser, maintains an awareness of general practices with regard
to commission levels and rates charged by reputable brokerage firms.
A Fund may, subject to the primary brokerage allocation criterion that a Fund
obtain reasonable execution at the most favorable prices, place orders for
the purchase or sale of portfolio securities with brokers or dealers who have
provided research, statistical, or other financial information to the Fund or
its Investment Adviser. Brokerage house research generally provides economic
and financial market analysis as well as industry studies and investment
analysis of individual companies or entities.
The primary brokerage allocation criterion of the Funds is that each Fund
obtain reasonable execution at the most favorable prices. If two or more
brokers or dealers meet this criterion, a Fund may, although there is no
undertaking or agreement with any broker or dealer to do so or any specific
internal allocation procedure, place orders for the purchase or sale of
portfolio securities with brokers or dealers who have provided research,
statistical or other financial information to the Fund or its Investment
Adviser. Research information obtained from brokers and dealers while
servicing the Fund may be used by IAA Trust Company in servicing all of its
accounts and, conversely, research information obtained from brokers and
dealers while servicing other accounts may be used by IAA Trust Company in
servicing the Fund. Further, not all research information obtained from
brokers and dealers while serving the Fund may be used by the Fund.
Over-the-counter transactions are usually placed with a principal market
maker unless a better net security price is obtainable elsewhere.
During the fiscal years ended June 30, 1995, 1996 and 1997, brokerage
commissions paid by GROWTH FUND totaled $64,267, $58,079, and $80,557,
respectively. No brokerage transactions were allocated to brokers or dealers
for the sale of the Fund's shares; such sales are made by FPS Broker
Services, Inc. and Country Capital Management Company through their own
representatives.
During the fiscal years ended June 30, 1995, 1996 and 1997, brokerage
commissions paid by ASSET ALLOCATION FUND totaled $6,980, $5,540, and $6,667,
respectively. No brokerage transactions were allocated to brokers or dealers
for the sale of the Fund's shares; such sales are made by FPS Broker
Services, Inc. and Country Capital Management Company through their own
representatives.
There may be occasions when portfolio transactions for these Funds are
executed as part of concurrent authorizations to purchase or sell the same
security for other Funds served by IAA Trust Company. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to a Fund, they are effected only when a Fund, acting on the
advice of IAA Trust Company, believes that to do so is in the interest of
such Fund. When such concurrent authorizations occur, the executions will be
allocated in an equitable manner.
12
<PAGE> 51
TAX EXEMPT BOND FUND, SHORT-TERM GOVERNMENT BOND SERIES,
and LONG-TERM BOND SERIES:
TAX EXEMPT BOND FUND, SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND
SERIES seek to effect their transactions in buying and selling portfolio
securities, acting through a broker as agent or with a dealer as principal,
so that they can obtain reasonable execution at the most favorable prices.
Accordingly, a Fund or Series, through IAA Trust Company, its Investment
Adviser, negotiates commission rates in accordance with the reliability and
quality of a broker's or dealer's services, the financial condition of the
firm and the value and expected contribution of the broker-dealer to the
performance of the Fund or Series on a continuing basis. Thus, what a Fund or
Series determines to be the most favorable commission price may be higher
than the lowest available price. In evaluating the overall reasonableness of
brokerage commissions paid, a Fund or Series maintains through its Investment
Adviser an awareness of general practices with regard to commission levels
and rates charged by reputable brokerage firms.
The primary brokerage allocation criterion of TAX EXEMPT BOND FUND,
SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND SERIES is that the Fund
or Series obtain reasonable execution at the most favorable prices. If two or
more brokers or dealers meet this criterion, a Fund or Series may place
orders for the purchase or sale of portfolio securities with brokers or
dealers who have provided research, statistical or other financial
information to the Investment Adviser of the Fund or Series. Brokerage house
research generally provides economic and financial market analysis as well as
industry studies and investment analysis of individual companies or entities.
It is the opinion of the Investment Adviser that the furnishing of research,
statistical, and other financial information to a Fund or Series, or the
Fund's or Series' Investment Adviser, by brokers and dealers will not
materially reduce the cost to the Investment Adviser of fulfilling the terms
of its advisory contract with the Fund or Series because the Investment
Adviser must review and analyze such information along with all other
information available to it. Research information obtained from brokers and
dealers while servicing a Fund or Series may be used by IAA Trust Company in
servicing all of its accounts and, conversely, research information obtained
from brokers and dealers while servicing other accounts may be used by IAA
Trust Company in servicing each Fund and Series. Further, not all research
information obtained from brokers and dealers while serving the Funds and
Series may be used by a Fund or Series.
During the fiscal years ended 1995, 1996 and 1997, all transactions for TAX
EXEMPT BOND FUND were placed with a principal market dealer. For the period
of January 2, 1997 (commencement of operations) to June 30, 1997, all
transactions for both the SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM
BOND SERIES were placed with a principal market dealer. No commissions are
paid on transactions with the principal market dealer as the asked price on
such transactions usually includes an allowance for such compensation.
No brokerage transactions are allocated to brokers or dealers for the sale of
a Fund's or Series' shares; such sales are made by FPS Broker Services, Inc.
and Country Capital Management Company through their own representatives.
There may be occasions when portfolio transactions for the Funds and Series
are executed as part of concurrent authorizations to purchase or sell the
same security for other funds served by IAA Trust Company. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to a Fund or Series, they are effected only when a Fund or
Series, acting on the advice of IAA Trust Company, believes that to do so is
in the interest of such Fund or Series. When such concurrent authorizations
occur, the executions will be allocated in an equitable manner.
13
<PAGE> 52
MONEY MARKET SERIES:
MONEY MARKET SERIES, acting on recommendations received from its Investment
Adviser, IAA Trust Company, expects that purchases and sales of portfolio
securities usually will be principal transactions. Portfolio securities will
normally be purchased directly from the issuer or from an underwriter or a
market maker for the securities. Usually, no brokerage commissions will be
paid on such purchases. Purchases from underwriters of portfolio securities
will include a concession paid by the issuer to the underwriter and the
purchase price paid to market makers for money market instruments may include
the spread between the bid and asked price.
The primary consideration in the allocation of portfolio transactions will be
prompt and effective execution of orders at the most favorable price. If two
or more brokers or dealers meet this criterion, the Series may, although
there is no undertaking or agreement with any broker or dealer to do so or
any specific internal allocation procedure, place orders for the purchase or
sale of portfolio securities with brokers or dealers who have provided
research, statistical, or other financial information to the Series or its
Investment Adviser. Brokerage house research generally provides economic and
financial market analysis as well as industry studies and investment analysis
of individual companies or entities. Such information is of the kind
generally supplied by broker-dealers to their customers without obligation.
This information may be used by IAA Trust Company to supplement its own
research and analysis. Although it is not possible to place a dollar value on
this information, it is the opinion of IAA Trust Company that the receipt and
study of such information does not reduce its expenses. Research information
obtained from brokers and dealers while servicing the Series may be used by
IAA Trust Company in servicing all of its accounts and, conversely, research
information obtained from brokers and dealers while servicing other accounts
may be used by IAA Trust Company in servicing the Series. Further, not all
research information obtained from brokers and dealers while servicing the
Series may be used by the Series.
During the fiscal years ended June 30, 1995, 1996 and 1997, the MONEY MARKET
SERIES incurred no brokerage commissions.
There may be occasions when portfolio transactions for this Series are
executed as part of concurrent authorizations to purchase or sell the same
security for other Funds or Series served by IAA Trust Company. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to a Series, they are effected only when a Series, acting on
the advice of IAA Trust Company, believes that to do so is in the interest of
such Series. When such concurrent authorizations occur, the executions will
be allocated in an equitable manner.
ALL FUNDS:
IAA Trust Company has an arrangement with Lipper Analytical Securities
Corporation whereby IAA Trust Company receives specific research products
known as Lipper-Mutual Fund Performance Analysis (Weekly) in exchange for
placing an agreed-upon amount of trades on behalf of privately managed
accounts and the Funds. If IAA Trust Company does not place all of the
agreed-upon amount of trades, any remaining amounts will be carried forward
to future years. During the period of July 1, 1996 through June 30, 1997, the
following transactions were placed with Pershing Company, a division of
Donaldson, Lufkin & Jenrette, the executing broker-dealer for Lipper
Analytical Securities Corporation during that period. The IAA TRUST GROWTH
FUND placed two trades for shares totaling $1,353,500.00 (43,000 shares) with
a commission rate of $0.06 for a total commission of $2,580.00 with Pershing
Company. The IAA TRUST ASSET ALLOCATION FUND placed one trade for shares
totaling $38,400.00 (1,200 shares) with a commission rate of $0.06 for a
total commission of $72.00 with Pershing Company.
14
<PAGE> 53
PURCHASES, REDEMPTIONS, AND PRICING OF FUND SECURITIES
======================================================
For the method followed by the Funds in determining the total offering price
at which each Fund's securities are offered to the public and the method used
to value each Fund's assets, see sections titled "PURCHASE OF SHARES,"
"SPECIAL PLANS AND OTHER PURCHASE INFORMATION," "VALUATION OF SHARES," and
"REDEMPTION OF SHARES" in the Funds' Prospectus. See the following sections
for additional information on various special Plans the Funds offer to
investors.
EXCHANGE PRIVILEGES
-------------------
A shareholder may exchange his or her shares of one IAA Trust Fund or Series
for shares of another IAA Trust Fund or Series on the basis of the relative
net asset values per share of each Fund or Series at the time of the
exchange. When shares of one Fund or Series are exchanged for shares of
another Fund or Series, the minimum investment requirement of such other Fund
or Series must be met. The two ways to exchange shares, by mail and by
telephone, are discussed below.
BY MAIL: The exchange can be made by forwarding a written request signed by
the registered shareholder(s) and returning any outstanding certificates
needed to effect the exchange to FPS Broker Services, Inc. ("FPSB"),
3200 Horizon Drive, P.O. Box 61503, King of Prussia, Pennsylvania
19406-0903.
BY TELEPHONE: You may make the exchange by telephone provided that: (1) you
have elected the Telephone Exchange option on the initial application or have
authorized this option after your initial purchase; (2) the registration of
the accounts will be identical; and (3) the shares to be exchanged are not in
certificate form. You can call toll-free 1 (800) 245-2100 on any business
day. All telephone conversations with FPSB will be recorded. Neither the
Funds, Country Capital Management Company, or FPSB will be responsible for
the authenticity of the exchange instructions received by telephone.
An exchange is effected by redemption of shares of one Fund or Series and the
issuance of shares of the other Fund or Series selected, and only after
delivery of the current Prospectus. With respect to an exchange among GROWTH
FUND, ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND, SHORT-TERM GOVERNMENT BOND
SERIES and LONG-TERM BOND SERIES, a capital gain or loss for Federal income
tax purposes will be realized upon the exchange, depending upon the cost or
other basis of the shares redeemed. With respect to the MONEY MARKET SERIES,
assuming such Series maintains its share value at $1.00 per share, an
exchange of this Series' shares for shares of another IAA Trust Fund or
Series should not create a Federal income tax incident, except for the
establishment of a new holding period.
RETIREMENT PLANS
----------------
IAA Trust Company sponsors a prototype Defined Contribution Plan which has
been approved by the Internal Revenue Service and which meets the requirement
of the Tax Reform Act of 1986, as amended. This Plan can invest in shares of
GROWTH FUND, ASSET ALLOCATION FUND, MONEY MARKET SERIES, SHORT-TERM
GOVERNMENT BOND SERIES or LONG-TERM BOND SERIES.
For individuals eligible to establish an Individual Retirement Account
("IRA"), IAA Trust Company sponsors a prototype "traditional" IRA which has
been approved by the Internal Revenue Service. An individual may be able to
deduct contributions made to such a Plan. The deductibility of contributions
to an IRA by taxpayers who are participants in an employer's retirement plan
is determined by the amount of taxpayer's adjusted gross income.
15
<PAGE> 54
"Rollover contributions" from certain other tax-qualified plans may also be
made to this Plan. Possible penalties may be imposed for excess IRA
contributions, premature withdrawals or insufficient distributions after age
70 1/2.
An investor considering either the Defined Contribution Plan or the
"traditional" IRA , along with the two new types of IRAs which were created
by the Taxpayers Relief Act of 1997 as described in the Prospectus, should
consult with his or her attorney or tax advisor with respect to Plan
requirements and tax implications. Other information relating to eligibility
and service fees may be obtained by reading the prototype Plans and, in the
case of IRAs, by reading the disclosure statement(s) which the IRS requires
to be furnished to individuals who are considering the adoption of an IRA.
For more information, contact IAA Trust Company, 808 IAA Drive, Bloomington,
Illinois 61702 or call toll-free 1 (800) 422-8261.
AUTOMATIC INVESTING
-------------------
A shareholder may authorize Systematic Investing through automatic
withdrawals from his/her bank accounts.
SYSTEMATIC WITHDRAWAL PLAN
--------------------------
Shareholders who purchase or already own $5,000 or more of any Fund's shares,
valued at the current public offering price, and who wish to receive periodic
payments from their account(s) may establish a Systematic Withdrawal Plan by
completing an application provided by FPSB for this purpose. Such planholders
will receive monthly, quarterly or annual checks in the amount they
designate. While no particular withdrawal amount is necessarily recommended,
the minimum is $25. The amount of payment may be changed at any time.
Dividends and capital gains distributions on a Fund's shares in the Plan are
automatically reinvested in additional shares at net asset value . All
certificates for shares deposited under this Plan must be surrendered and no
certificates will be issued unless the Plan is terminated. Payments are made
from the proceeds derived from the redemption of Fund shares owned by the
planholder. With respect to GROWTH FUND, ASSET ALLOCATION FUND, TAX EXEMPT
BOND FUND, SHORT-TERM GOVERNMENT BOND SERIES and LONG-TERM BOND SERIES, each
redemption of shares may result in a gain or loss which is reportable by the
investor on his income tax return.
Redemptions required for payments may reduce or use up the planholder's
investment, depending upon the size and frequency of withdrawal payments and
market fluctuations. Accordingly, Plan payments cannot be considered as yield
or income on the investment. Additional purchases may be made under the
Systematic Withdrawal Plan in amounts of $5,000 or more.
"FPS" as agent for the shareholder, may charge for services rendered beyond
those normally assumed by the Funds. No such charge is currently assessed,
but such a charge may be instituted by FPS upon notice in writing to
shareholders. This Plan may be terminated at any time without penalty upon
written notice by the shareholder, by the Funds, or by FPS.
INTEGRATED VOICE RESPONSE (IVR) SYSTEM
--------------------------------------
Shareholders in the Funds or Series can obtain toll-free access to account
information, as well as certain transactions, by calling 1 (800) 245-2100.
IVR provides total return, share price, price change, and yield quotations
for all the Funds and Series; gives account balances and history (i.e., last
transaction, latest dividend distribution, redemptions by check during the
last three months); and allows sales or exchanges of shares.
16
<PAGE> 55
UNDERWRITER COMPENSATION
========================
Shares of the Funds are continuously offered to the public through FPS
Broker Services, Inc. ("FPSB").
Currently, out of commissions to be received, FPSB has agreed to pay all
expenses incident to the distribution of shares. If commissions are not
sufficient to pay these expenses, FPSB will look to the Funds' Investment
Adviser for reimbursement. For the fiscal year ended June 30, 1997 , FPSB
received no underwriting fees.
For additional information, see "DISTRIBUTION OF THE FUNDS' SHARES" in the
Funds' Prospectus.
INVESTMENT PERFORMANCE INFORMATION
==================================
From time to time, the Funds advertise their various respective performance
measures, such as: 7- or 30-day yield; tax-equivalent yield; total percentage
increase; and total return. Performance will vary and the results shown
herein and in the Funds' Prospectus are historical information and will not
be representative of future results. Factors affecting the Funds' performance
include general market conditions, operating expenses, and portfolio
management. No adjustment has been made for taxes payable on dividends and
distributions.
TOTAL PERCENTAGE INCREASE
-------------------------
Total percentage increase is calculated for the specified periods of time by
assuming a hypothetical investment of $1,000 in a Fund's shares. Each
dividend or other distribution is treated as having been reinvested at net
asset value on the reinvestment date. The percentage increases stated are the
percent that an original investment would have increased during the
applicable period.
TOTAL RETURN CALCULATIONS
-------------------------
With respect to GROWTH FUND, ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND,
LONG-TERM GOVERNMENT BOND SERIES and SHORT-TERM BOND SERIES, the Funds and
Series that compute their average annual total returns do so by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested to the ending redeemable value of such
investment. This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
Average Annual Total Return = ERV 1n - 1
---
P
Where: ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
17
<PAGE> 56
The Funds and Series that compute their aggregate total returns over a
specified period do so by determining the aggregate compounded rate of return
during such specified period that likewise equates over a specified period
the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
Aggregate Total Return = ERV - 1
---
P
Where: ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on
the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all
nonrecurring charges at the end of the period covered by the computations.
Such calculations are not necessarily indicative of future results and do not
take into account Federal, state and local taxes that shareholders must pay
on a current basis.
Since performance will fluctuate, performance data for the Funds and Series
should not be used to compare an investment in a Fund's or Series' shares
with bank deposits, savings accounts and similar investment alternatives
which often provide an agreed or guaranteed fixed yield for a stated period
of time. Shareholders should remember that performance is generally a
function of the kind and quality of the instruments held in a portfolio,
portfolio maturity, operating expenses and market conditions.
30-DAY YIELD CALCULATIONS
-------------------------
With respect to ASSET ALLOCATION FUND, TAX EXEMPT BOND FUND, LONG-TERM
GOVERNMENT BOND SERIES and SHORT-TERM BOND SERIES, the yield of each of these
Funds or Series is calculated by dividing the net investment income per share
(as described below) earned by the Fund or Series during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. A Fund's or Series' net investment
income per share earned during the period is based on the average daily
number of shares outstanding during the period entitled to receive dividends
and includes dividends and interest earned during the period minus expenses
accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
YIELD = 2 [ ( a - b + 1) - 1 ]
-------
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the last day
of the period.
18
<PAGE> 57
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund or Series is recognized by accruing 1/360 of the stated dividend rate of
the security each day that the security is in the Fund or Series. Except as
noted below, interest earned on any debt obligations held by a Fund or Series
is calculated by computing the yield to maturity of each obligation held by
that Fund or Series based on the market value of the obligation (including
actual accrued interest) at the close of business on the last business day of
the month, the purchase price (plus actual accrued interest) and dividing the
result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that
the obligation is held by that Fund or Series. For purposes of this
calculation, it is assumed that each month contains thirty days. The date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount
premium. The amortization schedule will be adjusted monthly to reflect
changes in the market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by a Fund or Series to all shareholder accounts in
proportion to the length of the base period and the Fund's or Series' mean
(or median) account size. Undeclared earned income will be subtracted from
the offering price per capital share (variable "d" in the formula).
With respect to TAX EXEMPT BOND FUND, interest earned on tax-exempt
obligations that are issued without original issue discount and have a
current market discount is calculated by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations that
are issued with original issue discount but which have discounts based on
current market value that exceed the then-remaining portion of the original
discount (market discount), the yield to maturity is the imputed rate based
on the original issue discount calculation. On the other hand, in the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that are less than the
then-remaining portion of the original discount (market premium), the yield
to maturity is based on the market value.
With regard to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest
("pay-downs"): (i) gain or loss attributable to actual monthly pay-downs are
accounted for as an increase or decrease to interest income during the
period; and (ii) a Fund may elect either (a) to amortize the discount and
premium on the remaining security, based on the cost of the security, to the
weighted average maturity date, if such information is available, or to the
remaining term of the security, if any, if the weighted average date is not
available or (b) not to amortize discount or premium on the remaining
security.
TAX-EQUIVALENT YIELD CALCULATIONS
---------------------------------
With respect to TAX EXEMPT BOND FUND, the "tax-equivalent yield" of this Fund
is computed by (a) dividing the portion of the yield (calculated as above)
that is exempt from Federal income tax by one minus a stated Federal income
tax rate and (b) adding to that figure to that portion, if any, of the yield
that is not exempt from Federal income tax.
The tax equivalent yield reflects the taxable yield that an investor at the
highest marginal Federal income tax rate would have to receive to equal the
primarily tax-exempt yield from the Fund. Before investing in a tax-exempt
fund, you may want to determine which investment -- tax-free or taxable --
will result in a higher after-tax yield. To do this, divide the yield on the
tax-free investment by the decimal determined by subtracting from 1 the
highest Federal tax rate you pay. For example, if the tax-free yield is 5%
and your maximum tax bracket is 39.6%, the computation is:
19
<PAGE> 58
5% Tax-Free Yield - (1/.396 Tax Rate) = 5%/.604% = 8.2781% Tax
Equivalent Yield
In this example, your after-tax return would be higher from the 5% tax-free
investment if available taxable yields are below 8.2781%. Conversely, the
taxable investment would provide a higher yield when taxable yields exceed
8.2781%.
7-DAY YIELD CALCULATIONS
------------------------
MONEY MARKET SERIES' standard yield quotations as they appear in reports and
other material distributed by the Series or by Country Capital Management
Company are calculated by a standard method prescribed by rules of the
Securities and Exchange Commission. The yield of this Series for a 7-day
period (the "base period") will be computed by determining the net change in
value (calculated as set forth below) of a hypothetical account having a
balance of one share at the beginning of the period, dividing the net change
in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period
return by 365/7 with the resulting yield figure carried to the nearest
hundredth of one percent.
Net changes in value of a hypothetical account will include the value of
additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments.
The effective yield is computed by compounding the unannualized base period
return by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7, and subtracting one from the result, according to
the following formula:
Effective Yield = [(base period return + 1) 365/7 ]-1
GROWTH FUND:
This Fund's net asset value and return will fluctuate. Please note the
differences and similarities between the investments which the Fund may
purchase for its portfolio and the investments measured by the index which is
described in the Prospectus. Please refer to the Prospectus for specific
information.
ASSET ALLOCATION FUND:
This Fund's net asset value, return, and yield will fluctuate. The Fund's
yield for the thirty days ended June 30, 1997 was 2.45%. Yield differs from
total return in that it only considers current income and does not take into
account gains or losses on securities held by the Fund. Please refer to the
Prospectus for specific information.
TAX EXEMPT BOND FUND:
This Fund's net asset value, return, and yield will fluctuate. The Fund's
yield for the thirty days ended June 30, 1997 was 4.05%. Yield differs from
total return in that it only considers current income and does not take into
account gains or losses on securities held by the Fund. Please refer to the
Prospectus for specific information.
The above yield results in a tax-equivalent yield of 6.71% for the thirty
days ended June 30, 1997.
20
<PAGE> 59
MONEY MARKET SERIES:
The yield and effective yield of this Series will vary in response to
fluctuations in interest rates and in the expenses of the Fund. For the seven
days ended June 30,1997 the Fund's annualized standard (cash) yield was 4.81%
and its annualized effective (compound) yield was 4.93%. For comparative
purposes, the current and effective yields should be compared to current and
effective yields offered by competing financial institutions for the same
base period and calculated by the methods described above.
SHORT-TERM GOVERNMENT BOND SERIES:
This Series' net asset value, return, and yield will fluctuate. The Series'
yield for the thirty days ended June 30, 1997 was 4.65%. Yield differs from
total return in that it only considers current income and does not take into
account gains or losses on securities held by the Fund. Please refer to the
Prospectus for specific information.
LONG-TERM BOND SERIES:
This Series' net asset value, return, and yield will fluctuate. The Series'
yield for the thirty days ended June 30, 1997 was 5.13%. Yield differs from
total return in that it only considers current income and does not take into
account gains or losses on securities held by the Fund. Please refer to the
Prospectus for specific information.
REPORTS TO SHAREHOLDERS AND FINANCIAL STATEMENTS
================================================
REPORTS TO SHAREHOLDERS
-----------------------
Shareholders will receive unaudited semi-annual reports describing the Funds'
investment operations and annual financial statements audited by independent
certified public accountants.
FINANCIAL STATEMENTS
--------------------
The audited financial statements and notes thereto for each Fund and Series,
contained in the Annual Report to Shareholders dated June 30, 1997, are
incorporated by reference into this Statement of Additional Information and
have been audited by Coopers & Lybrand L.L.P., whose report also appears in
the Annual Report and is also incorporated by reference herein. No other
parts of the Annual Report are incorporated by reference herein. Such
financial statements and notes thereto have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in auditing and accounting.
21
<PAGE> 60
APPENDIX "A" -- DESCRIPTIONS OF SECURITIES RATINGS
==================================================
COMMERCIAL PAPER RATINGS
------------------------
MOODY'S INVESTORS SERVICE, INC.: "PRIME-1" and "PRIME-2" are Moody's two highest
commercial paper rating categories. Moody's evaluates the salient features that
affect a commercial paper issuer's financial and competitive position. The
appraisal includes, but is not limited to the review of such factors as:
1. Quality of management.
2. Industry strengths and risks.
3. Vulnerability to business cycles.
4. Competitive position.
5. Liquidity measurements.
6. Debt structures.
7. Operating trends and access to capital markets.
Differing degrees of weight are applied to the above factors as deemed
appropriate for individual situations.
STANDARD & POOR'S CORPORATION: "A-1" and "A-2" are S&P's two highest commercial
paper rating categories and issuers rated in these categories have the following
characteristics:
1. Liquidity ratios are adequate to meet cash requirements. 2.
Long-term senior debt is rated "A" or better. 3. The issuer has access
to at least two additional channels of borrowing. 4. Basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances. 5. Typically, the issuer is in a strong position in a
well-established industry or industries. 6. The reliability and
quality of management is unquestioned.
Relative strength or weakness of the above characteristics determine whether an
issuer's paper is rated "A-1" or "A-2". Additionally, within the "A-1"
designation, those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) rating category.
BOND RATINGS
- ------------
STANDARD AND POOR'S CORPORATION: An S&P bond rating is a current assessment of
the creditworthiness of an obligor with respect to a specific debt obligation.
This assessment may take into consideration obligors such as guarantors,
insurers or lessees.
The bond ratings are not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform any audit
in connection with any ratings and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
<PAGE> 61
The four highest bond ratings of S&P and their meanings are:
"AAA" Bonds rated "AAA" have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is
extremely strong.
"AA" Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in
small degree.
"A" Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
"BBB" Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings The letter "P" indicates that the rating is provisional.
A provisional ratings assumes the successful completion of the project being
financed by the bonds being rated and indicate that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgement with respect to such likelihood
and risk.
Under present commercial bank regulations issued by the Comptroller of the
Currency, bonds rated in the top four categories ("AAA", "AA", "A", and
"BBB", commonly known as "investment-grade" ratings) are generally regarded
as eligible for bank investment.
MOODY'S INVESTORS SERVICE, INC.: The four highest ratings of Moody's and
their meanings are:
"AAA" Bonds which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
"AA" Bonds which are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high-grade bonds. They are rated lower
then the best bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
"A" Bonds which are rated "A" possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"BAA" Bonds which are rated "Baa" are considered as medium-grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
<PAGE> 62
DESCRIPTIONS OF SHORT-TERM INSTRUMENTS
--------------------------------------
OBLIGATIONS OF THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES:
Securities issued or guaranteed by the U.S. Government include a
variety of Treasury securities, which differ only in their interest
rate, maturity and date of issuance. Treasury bills have a maturity of
one year or less. Treasury notes have a maturity of one to ten years
and Treasury bonds generally have maturities of greater than ten years
at the date of issuance. Some obligations of U.S. Government agencies
and instrumentalities such as Treasury bills and Government National
Mortgage Association pass-through certificates, are supported by the
full faith and credit of the U.S. Treasury; others, such as securities
of Federal Loan Banks, have the right of the issuer to borrow from the
Treasury; and still others, such as bonds issued by Federal National
Mortgage Association, a private corporation, are supported only by the
credit of the instrumentalities. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government
instrumentalities as it is not obligated to do so by law.
CERTIFICATES OF DEPOSIT:
In essence, a certificate of deposit is a negotiable receipt issued by
a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate.
BANKERS' ACCEPTANCES:
A bankers' acceptance generally arises from a short-term credit
arrangement designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated
amount of funds to pay for specific merchandise. The draft is then
"accepted" by the bank that, in effect, unconditionally guarantees to
pay the face value of the instrument on its maturity date.
COMMERCIAL PAPER:
Commercial paper is generally defined as unsecured short-term notes
issued in bearer form by large, well-known corporations and finance
companies. Maturities on commercial paper range from a few days to
nine months.
REPURCHASE AGREEMENTS:
Repurchase agreements are transactions in which a Fund purchases a
security (usually a U.S. Government obligation) and simultaneously
obtains the commitment of the seller (a member bank of the Federal
Reserve System) to repurchase the security at an agreed upon price on
an agreed upon date usually not more than seven days from the date of
purchase. The resale price reflects the purchase price plus an agreed
upon market rate of interest which is unrelated to the coupon rate or
maturity of the purchased security. Such transactions afford an
opportunity for a Fund to earn a return on cash which is only
temporarily available. The Fund's risk is limited to the ability of
the seller to pay the agreed upon sum upon the delivery date, but the
seller's obligation is in effect secured by the value of the
underlying security. With respect to MONEY MARKET SERIES, repurchase
agreements of over seven day's duration will not be more than 10% of
the assets of such Fund.
FOREIGN SECURITIES RISKS
------------------------
Foreign securities involve investment risk in addition to those of
domestic obligations of domestic issuers, including the possibility that:
liquidity can be impaired because of future political and economic
developments; the obligations may be less marketable than comparable
domestic obligations of domestic issuers; a foreign jurisdiction might
impose withholding taxes or interest income payable on these obligations;
deposits may be seized or nationalized; foreign governmental restrictions
such as exchange controls may be adopted which might adversely affect the
payment of principal and interest on those obligations; the selection of
foreign bank obligations might be more difficult because there may be less
publicly available information concerning foreign banks; there may be
difficulties in obtaining or enforcing a judgement against a foreign bank;
or the accounting, auditing and financial reporting standards, practices
and requirements applicable to foreign banks may differ from those
applicable to U.S. banks. Foreign banks are not subject to examination by
any U.S. Government agency or instrumentality.
