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THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
April 15, 1996, as revised July 1, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated November 1, 1995, as
supplemented by the Supplement dated April 15, 1996 and as further supplemented
from time to time, and should be read in conjunction therewith. A copy of the
Prospectus may be obtained from The Preferred Group of Mutual Funds, P.O. Box
8320, Boston, MA 02266-8320 or by calling 1-800-662-4769.
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TABLE OF CONTENTS
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DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . 2
OPTIONS AND FUTURES TRANSACTIONS . . . . . . . . . . . . . 8
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . 22
AMORTIZED COST VALUATION AND DAILY DIVIDENDS . . . . . . . 28
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . 29
HOW TO BUY . . . . . . . . . . . . . . . . . . . . . . . . 30
HOW TO REDEEM . . . . . . . . . . . . . . . . . . . . . . 30
HOW NET ASSET VALUE IS DETERMINED . . . . . . . . . . . . 31
CALCULATION OF YIELD AND TOTAL RETURN . . . . . . . . . . 33
PERFORMANCE COMPARISONS . . . . . . . . . . . . . . . . . 35
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . 37
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 39
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . 43
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . 54
OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . 54
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . 55
APPENDIX A
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APPENDIX B
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DEFINITIONS
"Asset Allocation Fund" - Preferred Asset Allocation Fund
"Balanced Fund" - Preferred Balanced Fund
"Distributor" - Caterpillar Securities Inc.
"Fixed Income Fund" - Preferred Fixed Income Fund
"Fund" - any of the portfolios offered by The
Preferred Group of
Mutual Funds
"Growth Fund" - Preferred Growth Fund
"International Fund" - Preferred International Fund
"Manager" - Caterpillar Investment Management Ltd.
"Money Market Fund" - Preferred Money Market Fund
"1940 Act" - Investment Company Act of 1940
"Short-Term Government - Preferred Short-Term
Securities Fund" Government Securities Fund
"Small Cap Fund" - Preferred Small Cap Fund
"Subadviser" - any subadviser of any of the Funds
"Trust" - The Preferred Group of Mutual Funds
"Value Fund" - Preferred Value Fund
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INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
a Fund, the Trust will not take any of the following actions with respect to
such Fund:
(1) Issue senior securities or borrow money in excess of 10%
of the value (taken at the lower of cost or current value) of the
Fund's total assets (not including the amount borrowed) at the time
the borrowing is made, and then only from banks as a temporary measure
to facilitate the meeting of redemption requests (not for leverage)
which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased. For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed delivery basis, the purchase
and sale of futures contracts, the entry into forward contracts and
short sales and collateral arrangements with respect to any of the
foregoing, to the extent consistent with pronouncements of the
Securities and Exchange Commission, are not deemed to be the issuance
of a senior security.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of the Fund's total assets (taken at cost) in
connection with borrowings permitted by Restriction 1 above.
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales
of securities. (For this purpose, the deposit or payment by a Fund of
initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a
security on margin.)
(4) Make short sales of securities or maintain a short
position for the account of a Fund unless at all times when a short
position is open such Fund owns an equal amount of such securities or
owns securities
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which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in
amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(6) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, including securities
of real estate investment trusts, and may purchase securities which
are secured by interests in real estate.
(7) Purchase or sell commodities or commodity contracts
except that the Growth, Value, International, Small Cap, Asset
Allocation, Balanced, Fixed Income, and Short-Term Government
Securities Funds may purchase and sell futures contracts and related
options.
(8) Make loans, except by purchase of debt obligations or by
entering into repurchase agreements or through the lending of the
Fund's portfolio securities with respect to not more than 33 1/3% of
its total assets.
(9) Invest in securities of any issuer if, to the knowledge
of the Trust, any officers and Trustees of the Trust and officers and
directors of the Manager who individually own beneficially more than
1/2 of 1% of the securities of that issuer, own beneficially in the
aggregate more than 5%.
(10) With respect to 75% of the total assets of each of the
Funds, invest in securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Fund (taken at
current value) would be invested in the securities of such issuer;
provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the U.S. government or its
agencies or
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instrumentalities or repurchase agreements relating thereto.
(11) Acquire more than 10% of the voting securities of any
issuer, both with respect to any Fund and to the Trust in the
aggregate.
(12) Concentrate more than 25% of the value of its total
assets in any one industry; except that the Money Market Fund reserves
freedom of action to invest up to 100% of its assets in certificates
of deposit and bankers' acceptances issued by domestic banks (for the
purposes of this restriction, obligations of a foreign government and
its agencies or instrumentalities constitute a separate "industry"
from those of another foreign country; issuers of U.S. Government
Securities and repurchase agreements relating thereto do not
constitute an "industry"; and the term "domestic banks" includes
foreign branches of domestic banks only if, in the determination of
the Manager or the relevant Subadviser, the investment risk associated
with investing in instruments issued by the foreign branch of a
domestic bank is the same as that of investing in instruments issued
by the domestic parent, in that the domestic parent would be
unconditionally liable in the event that the foreign branch failed to
pay on its instruments for any reason).
(13) Invest in securities of other registered investment
companies, except by purchase in the open market involving only
customary brokers' commissions. For purposes of this restriction,
foreign banks or their agents or subsidiaries are not considered
investment companies.
In addition, without the approval of a majority of the outstanding
voting securities of the relevant Fund, no Fund will purchase securities the
disposition of which is restricted under federal securities laws if, as a
result, such investments would exceed 15% of the value of the net assets of
such Fund, excluding restricted securities that have been determined by the
Trustees of the Trust (or the person designated by them to make such
determinations) to be readily marketable.
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In determining whether to invest in certificates of deposit or
bankers' acceptances, the Money Market Fund will consider a variety of factors
such as interest rates and the credit quality of the issuer.
It is contrary to the Trust's present policy with respect to any Fund
created under the Trust, which may be changed by the Trustees without
shareholder approval, to:
(1) Invest in warrants or rights excluding options (other
than warrants or rights acquired by the Fund as a part of a unit or
attached to securities at the time of purchase) if as a result such
investments (valued at the lower of cost or market) would exceed 5% of
the value of a Fund's net assets; provided that not more than 2% of
the Fund's net assets may be invested in warrants not listed on the
New York or American Stock Exchanges.
(2) Invest in securities of an issuer, which, together with
any predecessors or controlling persons, has been in operation for
less than three consecutive years and in equity securities for which
market quotations are not readily available (excluding restricted
securities) if, as a result, the aggregate of such investments would
exceed 5% of the value of a Fund's net assets; provided, however, that
this restriction shall not apply to any obligation of the U.S.
Government or its instrumentalities or agencies, repurchase agreements
relating thereto, CMOs or asset-backed securities. (Debt securities
having equity features are not considered "equity securities" for
purposes of this restriction.)
(3) Write (sell) or purchase options except that each Fund
other than the Money Market Fund may (a) with respect to all or any
part of its portfolio securities, write covered call options or
covered put options and enter into closing purchase transactions with
respect to such options, and (b) in combination therewith, or
separately, purchase put and call options; provided that the premiums
paid by each Fund on all outstanding options it has purchased do not
exceed 5% of its total
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assets. Each Fund may enter into closing sale
transactions with respect to options it has purchased.
(4) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(5) Make investments for the purpose of gaining control of a
company's management.
(6) Invest in certificates of deposit of any bank if,
immediately after such investment, more than 5% of the total assets of
the Fund (taken at current value) would be invested in the securities
(including certificates of deposit) of that bank, except that (i) the
Money Market Fund may, to the extent permitted by Rule 2a-7 under the
1940 Act, invest more than 5% of its total assets in the securities
(including certificates of deposit) of any bank and (ii) each other
Fund may invest up to 25% of its total assets without regard to this
restriction.
(7) Make any additional investment if, immediately after
such investment, the Fund's outstanding borrowings of money would
exceed 5% of the current value of the Fund's total assets.
(8) Purchase or sell real property (including real estate
limited partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily marketable
securities of companies which invest in real estate).
(9) With respect to the Money Market Fund, invest in
securities of any issuer if, immediately after such investment, more
than 5% of the total assets of the Fund (taken at current value) would
be invested in the securities of such issuer, except that the Fund
may, to the extent permitted by Rule 2a-7 under the 1940 Act, invest
more than 5% of its total assets in the securities (including
certificates of deposit) of any bank. (Provided that this limitation
does not apply to obligations issued or guaranteed as to interest and
principal by the U.S.
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government or its agencies or instrumentalities or repurchase
agreements relating thereto.)
(10) WITH RESPECT TO THE SMALL CAP FUND, INVEST MORE THAN 25%
OF ITS ASSETS IN ANY COMBINATION OF MORTGAGE-BACKED SECURITIES,
ASSET-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS.
(11) WITH RESPECT TO THE SMALL CAP FUND, SELL SHORT
SECURITIES VALUED, AT THE TIME OF PURCHASE, GREATER THAN 10% OF ITS
ASSETS (EXCLUDING "COVERED" SHORT SALES, I.E. SHORT SALES OF
SECURITIES HELD BY THE FUND).
All percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
IN ADDITION, EACH OF THE FUNDS HAS AGREED THAT, (1) FOR SO LONG AS
SHARES OF THE FUND ARE REGISTERED FOR OFFER AND SALE IN THE STATE OF ARKANSAS
AND SUCH UNDERTAKING IS REQUIRED AS A CONDITION OF SUCH REGISTRATION, IT WILL
NOT PURCHASE SECURITIES THE DISPOSITION OF WHICH IS RESTRICTED UNDER THE
FEDERAL SECURITIES LAWS IF, AS A RESULT, SUCH INVESTMENTS WOULD EXCEED 10% OF
THE FUND'S TOTAL ASSETS (EXCLUDING RULE 144A SECURITIES AND COMMERCIAL PAPER)
AND (2) FOR SO LONG AS SHARES OF EACH OF THE FUNDS ARE REGISTERED FOR OFFER AND
SALE TO THE PUBLIC IN THE STATE OF OHIO AND SUCH UNDERTAKING IS REQUIRED AS A
CONDITION OF SUCH REGISTRATION, THAT EACH OF THE FUNDS WILL NOT INVEST MORE
THAN 15% OF ITS TOTAL ASSETS IN SECURITIES WHICH ARE ILLIQUID. FOR PURPOSES OF
UNDERTAKING (2), AN ILLIQUID SECURITY SHALL BE CONSIDERED TO BE A SECURITY THAT
CANNOT BE DISPOSED OF IN THE ORDINARY COURSE OF BUSINESS WITHIN SEVEN DAYS AT
APPROXIMATELY THE AMOUNT AT WHICH THE FUND VALUES THE SECURITY. AN ILLIQUID
SECURITY SHALL NOT INCLUDE:
(a) SECURITIES ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT OF 1933 THAT HAVE BEEN DETERMINED TO BE LIQUID BY THE FUND'S
TRUSTEES; AND
(b) COMMERCIAL PAPER THAT IS SOLD UNDER SECTION 4(2) OF THE SECURITIES
ACT OF 1933 WHICH: (i) IS NOT TRADED FLAT OR IN
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DEFAULT AS TO INTEREST OR PRINCIPAL; AND (II) IS RATED IN ONE OF THE TWO
HIGHEST CATEGORIES BY AT LEAST TWO NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS AND THE FUND'S TRUSTEES HAVE DETERMINED THE COMMERCIAL PAPER TO
BE LIQUID; OR (III) IS RATED IN ONE OF THE TWO HIGHEST CATEGORIES BY ONE
NATIONALLY RECOGNIZED STATISTICAL RATING AGENCY AND THE FUND'S TRUSTEES HAVE
DETERMINED THAT THE COMMERCIAL PAPER IS OF EQUIVALENT QUALITY AND IS LIQUID.
THE SMALL CAP FUND HAS AGREED THAT, SO LONG AS SHARES OF THE FUND ARE
REGISTERED FOR OFFER AND SALE IN THE STATE OF ARKANSAS AND SUCH UNDERTAKING IS
REQUIRED AS A CONDITION OF SUCH REGISTRATION, IT WILL NOT INVEST IN COMMODITIES
FUTURES CONTRACTS, ALTHOUGH IT MAY INVEST IN FINANCIAL FUTURES CONTRACTS.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the relevant Fund or the Trust, as the case may be, or
(2) 67% or more of the shares of the relevant Fund or the Trust, as the case
may be, present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
Note on Shareholder Approval
Unless otherwise indicated, the investment policies and objectives of
the Funds may be changed without shareholder approval.
OPTIONS AND FUTURES TRANSACTIONS (All Funds except the Money Market Fund)
As disclosed in the Prospectus, the Fixed Income and Short-Term
Government Securities Funds, to increase current return, may write covered call
and covered put options on any security that it is eligible to purchase. For
hedging purposes, they may (1) purchase call options on securities they expect
to acquire, and put options on securities they hold, and (2) purchase and sell
futures contracts on U.S. Government Securities and purchase and write options
on such futures contracts.
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The Growth, Value, International, Small Cap, Asset Allocation and
Balanced Funds may each: (1) purchase call and put options, and purchase
warrants, on securities that they are eligible to purchase; (2) write covered
call and covered put options on such securities; (3) buy and sell stock index
options, stock index futures contracts, options on stock index futures
contracts, currency futures contracts and options on currency futures
contracts; and (4) write covered call and put options on stock indices. In
addition, the Asset Allocation and Balanced Funds may purchase and sell futures
contracts on U.S. Government Securities and purchase and write options on such
futures contracts.
Options Transactions
No Fund will write options that are not "covered." A call option is
"covered" if the Fund owns the underlying security covered by the call or has
an absolute and immediate right to acquire that security without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities held
in its portfolio. A call option is also covered if the Fund holds on a
share-for-share basis a call on the same security as the call written where
the exercise price of the call held is equal to or less than the exercise price
of the call written or greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, Treasury bills or other high
grade short-term obligations in a segregated account with its custodian. A put
option is "covered" if the Fund maintains cash, Treasury bills or other high
grade obligations with a value equal to the exercise price in a segregated
account with its custodian, or else holds on a share-for-share basis a put on
the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written. The premium
paid by the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand and
interest rates.
If the writer of an option wishes to terminate his obligation, he may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the
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option previously written. The effect of the purchase is that the writer's
position will be cancelled by the clearing corporation. However, a writer may
not effect a closing purchase transaction after he has been notified of the
exercise of an option. Likewise, an investor who is the holder of an option
may liquidate his position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that a Fund will be able to effect a closing
purchase or a closing sale transaction at any particular time.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option
to the extent that the exercise price thereof is secured by depositing cash or
high grade obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option,
it will effect a closing transaction prior to or concurrent with the sale of
the security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
The Funds which may write options may do so in connection with
buy-and-write transactions; that is, the Fund will purchase a security and then
write a call option against that security. The exercise price of the call the
Fund determines to write will depend upon the expected price movement of the
underlying
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security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of-the-money") the current value of
the underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's
return will be the premium received from the put option minus the cost of
closing the position or, if it chooses to take delivery of the security, the
premium received from the put option minus the amount by which the market price
of the security is below the exercise price.
No Fund may invest more than 5% of its assets in the purchase of put
and call options.
The extent to which each Fund will be able to write and purchase call
and put options will also be restricted by the
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Trust's intention to qualify each Fund as a regulated investment company under
the federal income tax law. See "Taxes."
OTC Options. The staff of the Securities and Exchange Commission has
taken the position that options purchased on the over-the-counter market ("OTC
Options") and the assets used as "cover" for written OTC Options should
generally be treated as illiquid securities. However, if a dealer recognized
by the Federal Reserve Bank as a "primary dealer" in U.S. Government Securities
is the other party to an option contract written by a Fund, and that Fund has
the absolute right to repurchase the option from the dealer at a formula price
established in a contract with the dealer, the Securities and Exchange
Commission staff has agreed that that Fund only needs to treat as illiquid that
amount of the "cover" assets equal to the amount by which (i) the formula price
exceeds (ii) any amount by which the market value of the security subject to
the option exceeds the exercise price of the option (the amount by which the
option is "in-the-money"). Although the Trust does not believe that OTC
Options are generally illiquid, it has agreed that pending resolution of this
issue, the Funds will conduct their operations in conformity with the views of
the Securities and Exchange Commission staff.
Futures Transactions
Futures Contracts. A futures contract sale creates an obligation by
the seller to deliver the type of financial instrument called for in the
contract in a specified delivery month for a stated price. A futures contract
purchase creates an obligation by the purchaser to take delivery of the
underlying financial instrument in a specified delivery month at a stated
price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until at or near that date. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. A stock index futures contract is
similar except that the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract is originally struck. Futures contracts are
traded only on commodity exchanges -- known as "contract markets" -- approved
for such trading by the Commodity Futures Trading Commission (the
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"CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out a
futures contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase
exceeds the price of the initial sale, the Fund realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the purchaser
entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the purchaser realizes a gain, and if the purchase price
exceeds the offsetting sale price, he realizes a loss.
The purchase (that is, assuming a long position in) or sale (that is,
assuming a short position in) of a futures contract differs from the purchase
or sale of a security, in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Treasury bills generally not exceeding 5% of
the contract amount must be deposited with the broker. This amount is known as
initial margin. Subsequent payments to and from the broker, known as variation
margin, are made on a daily basis as the price of the underlying futures
contract fluctuates making the long and short positions in the futures contract
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the futures contract, the position may be
closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. A commission is ALSO paid on each
completed purchase and sale transaction. IN ADDITION, A FUND THAT PURCHASES A
FUTURES CONTRACT WILL ESTABLISH A SEGREGATED ACCOUNT WITH CASH, U.S. GOVERNMENT
SECURITIES OR OTHER APPROPRIATE HIGH-GRADE DEBT OBLIGATIONS IN AN AMOUNT EQUAL
TO THE PURCHASE PRICE UNDER THE FUTURES CONTRACT (LESS ANY MARGIN ON
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DEPOSIT). ALTERNATIVELY, A FUND THAT PURCHASES A FUTURES CONTRACT MAY COVER
THE POSITION BY PURCHASING A PUT OPTION ON THE SAME CONTRACT WITH A STRIKE
PRICE AS HIGH OR HIGHER THAN THE PURCHASE PRICE OF THE FUTURES CONTRACT IT
COVERS.
The Funds may engage in transactions in futures contracts and related
options for purposes of reallocating a Fund's exposure to the equity or fixed
income markets and also for the purpose of hedging against changes in the
values of securities they own or intend to acquire. In the case of
transactions entered into for purposes of reallocating a Fund's exposure to the
equity or fixed income markets, the futures contracts may be used to expose a
substantial portion of the Fund to equities and/or fixed income instruments to
facilitate trading and/or to minimize transaction costs. Future contracts will
not be used to leverage the Fund. For example, in the case of the Asset
Allocation Fund, if the Fund purchases futures contracts relating to equity
securities (e.g., S&P 500 index futures), the face amount of the futures
contracts plus the value of the Fund's equity securities will not exceed the
Fund's net assets. Similarly, if the Fund purchases interest rate futures
contracts, the face amount of the futures contracts plus the value of the
Fund's fixed income securities will not exceed the Fund's net assets. In the
case of transactions in futures contracts for hedging purposes, the Funds may
sell such futures contracts in anticipation of a decline in the value of its
investments. The risk of such a decline can be reduced without employing
futures as a hedge by selling portfolio securities and either reinvesting the
proceeds in securities subject to lesser risk or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
brokerage commissions and dealer spreads and will typically reduce a Fund's
total return or, with respect to futures on fixed income securities, yield.
The sale of futures contracts provides an alternative means of hedging a Fund
against a decline in the value of its investments. As such values decline, the
value of a Fund's position in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of a Fund's
securities which are being hedged. While the Fund will incur commission
expenses in establishing and closing out futures positions, commissions on
futures transactions may be significantly lower than transaction costs incurred
in the purchase and sale of securities. Employing futures as a hedge may also
permit a Fund
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to assume a defensive posture without reducing its total return or yield.
Call Options on Futures Contracts. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
underlying securities, it may or may not be less risky than ownership of the
futures contract or underlying securities. As with the purchase of a futures
contract, a Fund may purchase a call option on a futures contract to hedge
against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of put options on a
futures contract is similar in some respects to the purchase of put options on
portfolio securities. Each Fund may purchase put options on futures contracts
to hedge the Fund's portfolio against the risk of rising interest rates or
declining stock market prices.
A Fund may write a put option on a futures contract as a partial hedge
against increasing prices of the assets which are deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any increase in the price
of assets that the Fund intends to purchase.
Currency Futures and Related Options. As described in the Prospectus,
each Fund (other than the Short-Term Government Securities and Money Market
Funds) may invest in currency futures contracts and related options thereon to
hedge its portfolio investments and to protect itself against changes in
foreign
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exchange rates. A currency futures contract sale creates an obligation by the
Fund, as seller, to deliver the amount of currency called for in the contract
at a specified future time for a specified price. A currency futures contract
purchase creates an obligation by the Fund, as purchaser, to take delivery of
an amount of currency at a specified future time at a specified price.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase
or sale transaction.
Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to enter into the contract, the premium
paid for the option is lost. Since the value of the option is fixed at the
point of sale, there are no daily payments of cash in the nature of "variation"
or "maintenance" margin payments to reflect the change in the value of the
underlying contract as there are by a purchaser or seller of a currency futures
contract. The value of the option does not change and is reflected in the net
asset value of the Fund.
The Funds will write only covered put and call options on currency
futures. This means that each such Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. Set forth below is a description of
methods of providing cover that the Funds currently expect to employ, subject
to applicable exchange and regulatory requirements. If other methods of
providing appropriate cover are developed, the Funds reserve the right to
employ them to the extent consistent with applicable regulatory and exchange
requirements.
A Fund will, so long as it is obligated as the writer of a call option
on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the
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difference, if any, between the market value of the call written and the market
value of the call or long currency futures purchased maintained by the Fund in
cash, Treasury bills, or other high-grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the call purchased by the Fund falls below 100% of the
market value of the call written by the Fund, the Fund will so segregate an
amount of cash, Treasury bills or other high grade short-term obligations equal
in value to the difference. Alternatively, the Fund may cover the call option
through segregating with the custodian an amount of the particular foreign
currency equal to the amount of foreign currency per futures contract option
times the number of options written by the Fund.
In the case of put options on currency futures written by a Fund, the
Fund will hold the aggregate exercise price in cash, Treasury bills, or other
high grade short-term obligations in a segregated account with its custodian,
or own put options on currency futures or short currency futures, with the
difference, if any, between the market value of the put written and the market
value of the puts purchased or the currency futures sold maintained by the Fund
in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures sold by
the Fund falls below 100% of the market value of the put options written by the
Fund, the Fund will so segregate an amount of cash, Treasury bills or other
high grade short-term obligations equal in value to the difference.
Stock Index Futures. The Growth, Value, International, Small Cap,
Asset Allocation and Balanced Funds may also purchase and sell United States
and foreign stock index futures contracts and options thereon in order to
reallocate their equity market exposure or to hedge themselves against changes
in market conditions. A stock index assigns relative values to the common
stocks comprising the index. A stock index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at
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which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
As indicated above, the Funds may engage in transactions in stock
index futures contracts and related options for the purpose of reallocating a
Fund's exposure to the equity markets and also for the purpose of hedging
against changes resulting from market conditions in the values of securities
held in the Fund's portfolio or which the Fund intends to purchase. If a
transaction involves the purchase of stock index futures contracts (for
example, in a transaction designed to increase a Fund's equity market
exposure), the Fund will deposit an amount of cash and cash equivalents, equal
to the market value of the futures contracts, in a segregated account with its
custodian and/or in a margin account with a broker. Each Fund will cover any
options it writes on stock index futures in the manner described above with
respect to currency futures.
Limitations on the Use of Options and Futures Portfolio Strategies
No Fund will "over-hedge," that is, no Fund will maintain open short
positions in futures contracts if, in the aggregate, the value of its open
positions (marked to market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on such open positions,
adjusted for the historical volatility relationship between the portfolio and
futures contracts. A Fund will not use futures contracts for leveraging
purposes. Thus, when a Fund uses futures contracts to reallocate the Fund's
exposure to equity (or fixed income) markets, that Fund will not maintain open
long positions in stock index (or interest rate) futures contracts if, in the
aggregate, the face amount of the contracts plus the Fund's equity (or fixed
income) securities would exceed the Fund's net assets.
A Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in certain options and futures are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes set forth above.
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Furthermore, a Fund's ability to engage in options and futures transactions may
be limited by tax considerations and CFTC rules.
No Fund may enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the market
value of the Fund's total assets.
Risk Factors in Options and Futures Transactions
Options Transactions. The option writer has no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may, in the case of a covered call option, be offset by
a decline in the market value of the underlying security during the option
period. If a call option is exercised, the writer realizes a gain or loss from
the sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security.
An exchange-traded option may be closed out only on a national
securities exchange (an "Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing sale transaction with respect to a particular
option with the result that the Fund would have to exercise the option in order
to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an Exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; (iii) trading
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<PAGE> 23
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum
number of options which may be written by an investor or group of investors
acting in concert. It is possible that the Trust and other clients of the
Manager and Subadvisers may be considered to be such a group. These position
limits may restrict the Funds' ability to purchase or sell options on a
particular security.
Futures Transactions. Investment by a Fund in futures contracts
involves risk. In the case of hedging transactions, some of that risk may be
caused by an imperfect correlation between movements in the price of the
futures contract and the price of the security or other investment being
hedged. The hedge will not be fully effective where there is such imperfect
correlation. For example, if the price of the futures contract moves more than
the price of the hedged security, a Fund would experience either a loss or gain
on the future which is not completely offset by movements in the price of the
hedged securities. To compensate for imperfect correlations, a Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, a Fund may purchase
or sell fewer contracts if the volatility of the price of the hedged securities
is historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.
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As noted above, a Fund may purchase futures contracts to hedge against
a possible increase in the price of securities which the Fund anticipates
purchasing, or options thereon. In such instances, it is possible that the
market may instead decline. If the Fund does not then invest in such
securities because of concern as to possible further market decline or for
other reasons, the Fund may realize a loss on the futures contract that is not
offset by a reduction in the price of the securities purchased. In the case of
futures contracts purchased to increase a Fund's exposure to the equity (or
fixed income) markets, the Fund could suffer a loss on the futures contracts
similar to the loss which the Fund would have suffered if, instead, it had
actually purchased equity or fixed income securities.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also
depends on the ability of the Manager or relevant Subadviser to forecast
correctly the direction and extent of market and interest rate movements within
a given time frame. In the case of hedging transactions, to the extent market
prices or interest rates remain stable during the period in which a futures
contract or related option is held by a Fund or such prices or rates move in a
direction opposite to that anticipated, a Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, a Fund's total return for such
period
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<PAGE> 25
may be less than if it had not engaged in the hedging transaction.
MISCELLANEOUS INVESTMENT PRACTICES
Lower-rated Securities. The Balanced Fund may invest up to 5% of its
total assets in lower-rated fixed-income securities (commonly known as "junk
bonds"), provided that the dollar-weighted average credit quality of its debt
portfolio (excluding short-term investments) is at least A by either Moody's
Investors Service, Inc. or Standard & Poor's. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Fund may be unable at times to
establish the fair value of such securities. The rating assigned to a security
by Moody's Investors Service, Inc. or Standard & Poor's (or by any other
nationally recognized securities rating organization) does not reflect an
assessment of the volatility of the security's market value or the liquidity of
an investment in the security. See Appendix A to this Statement for a
description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a
decrease in interest rates will generally result in an increase in the value of
the Balanced Fund's debt securities. Conversely, during periods of rising
interest rates, the value of the Fund's debt securities will generally decline.
In addition, the values of fixed income securities are also affected by changes
in general economic conditions and business conditions affecting the specific
industries of their issuers. Changes by recognized rating services in their
ratings of any fixed income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. Changes in the
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<PAGE> 26
value of portfolio securities generally will not affect cash income derived
from such securities, but will affect the Fund's net asset value. The Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Jennison Associates Capital Corp. will
monitor the investment to determine whether its retention will assist in
meeting the Fund's investment objective.
At times, a substantial portion of the Balanced Fund's assets may be
invested in securities as to which the Fund, by itself or together with other
funds and accounts managed by Jennison Associates Capital Corp., holds a major
portion or all of such securities. Although Jennison Associates Capital Corp.
generally considers such securities to be liquid because of the availability of
an institutional market for such securities, it is possible that, under adverse
market or economic conditions or in the event of adverse changes in the
financial condition of the issuer, the Fund could find it more difficult to
sell such securities when Jennison Associates Capital Corp. believes it
advisable to do so or may be able to sell such securities only at prices lower
than if such securities were more widely held. Under such circumstances, it
may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value. In order to enforce its
rights in the event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the issuer's
obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the Fund's net asset value. In addition, the
Fund's intention to qualify as a "regulated investment company" under the
Internal Revenue Code may limit the extent to which the Fund may exercise its
rights by taking possession of such assets. To the extent the Fund invests in
fixed income securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on Jennison Associates Capital Corp.'s
investment analysis than would be the case if the Fund were investing in fixed
income securities in the higher rating categories.
Portfolio Turnover. A change in securities held by a Fund is known as
"portfolio turnover" and almost always involves the payment by the Fund of
brokerage commissions or dealer markup and other transaction costs on the sale
of securities as well as on the reinvestment of the proceeds in other
securities. THESE
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TRANSACTIONS MAY ALSO RESULT IN THE REALIZATION OF TAXABLE CAPITAL GAINS. As a
result of the investment policies of the Funds, under certain market conditions
their portfolio turnover may be higher than those of many other investment
companies. It is, however, impossible to predict portfolio turnover in future
years. The overall portfolio turnover rate for the Preferred Balanced Fund
will not generally exceed 150%. The rate of portfolio turnover for the equity
portfolio of the Balanced Fund will not generally exceed 75% and the rate of
portfolio turnover for the fixed income portfolio of the Balanced Fund will not
generally exceed 150%. The portfolio turnover rate for the Small Cap Fund will
not generally exceed 150%. Portfolio turnover rates in excess of 100% are
generally considered to be high. For purposes of reporting portfolio turnover
rates, all securities the maturities of which at the time of purchase are one
year or less are excluded, so that it is expected that the policies of the
Money Market Fund will result in a reported portfolio turnover rate of zero for
that Fund, although it is anticipated that, like other funds with similar
portfolios, it will change the securities in its portfolio frequently. During
the Trust's fiscal years ended June 30, 1993 and 1994, the portfolio turnover
rate for the Short-Term Government Securities Fund was 268.36% and 134.34%,
respectively. This variation in portfolio turnover was primarily attributable
to a decrease in holdings by the Fund during fiscal 1994 of securities with
maturities of less than one year. Such securities are not included in the
calculation of portfolio turnover in accordance with Securities and Exchange
Commission guidelines.
Forward Commitments. As described in the Prospectus following the
caption "General Policies and Risk Considerations--Forward Commitments,
When-Issued and Delayed Delivery Transactions," all of the Funds except the
Money Market Fund may make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments"), if
the Fund either (i) holds, and maintains until the settlement date in a
segregated account, cash or high grade debt obligations in an amount sufficient
to meet the purchase price or (ii) enters into an offsetting contract for the
forward sale of securities of equal value that it owns. Each Fund may
simultaneously be obligated with respect to forward commitment purchase and
sale contracts. However, each Fund will generally not sell a portfolio
security or enter into a forward commitment
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sale contract if that sale or forward commitment is coupled with an agreement
by the Fund, including a forward commitment, to repurchase the security at a
later date. Forward commitments may be considered securities in themselves.
They involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. A Fund may dispose of a
commitment prior to settlement and may realize short-term profits or losses
upon such disposition.
Repurchase Agreements. A repurchase agreement is a contract under
which a Fund would acquire a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to resell such security at a fixed time and price (representing
the Fund's cost plus interest). The value of the underlying securities (or
collateral) will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. The Fund bears a risk of
loss in the event that the other party to a repurchase agreement defaults on
its obligations and the Fund is delayed or prevented from exercising its rights
to dispose of the collateral securities. The Manager (in the case of the Small
Cap and Short-Term Government Securities Funds) and the Subadvisers (in the
case of the other Funds), as appropriate, will monitor the creditworthiness of
the counterparties.
Securities Loans. Each Fund (other than the Money Market Fund) may
make secured loans of its portfolio securities amounting to no more than 33
1/3% of its total assets. The risks in lending portfolio securities, as with
other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. However, such loans will be made only to broker-dealers that
are believed by the Manager (in the case of the Small Cap and Short-Term
Government Securities Funds) and the Subadvisers (in the case of the other
Funds) to be of relatively high credit standing. Securities loans are made to
broker-dealers pursuant to agreements requiring that the loans be continuously
secured by collateral in cash or U.S. Government Securities at least equal at
all times to the market value of the securities lent. The borrower pays to the
lending Fund an amount equal to any dividends or interest received on the
securities
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lent. The Fund may invest the cash collateral received in interest-bearing,
short-term securities or receive a fee from the borrower. Although voting
rights or rights to consent with respect to the loaned securities pass to the
borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. A Fund may also call such
loans in order to sell the securities involved.
Warrants. Each of the Growth, Value, International, Small Cap, Asset
Allocation and Balanced Funds may invest up to 5% of its total assets in
warrants which entitle the holder to buy equity securities at a specific price
for a specified period of time, provided that no more than 2% of its assets are
invested in warrants not listed on the New York or American Stock Exchanges.
Foreign Currency Transactions. Each of the Funds (other than the
Short-Term Government Securities and the Money Market Funds) may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. Since investment in
foreign companies will usually involve currencies of foreign countries, and
since a Fund may temporarily hold funds in bank deposits in foreign currencies
during the course of investment programs, the value of the assets of a Fund as
measured in United States dollars may be affected by changes in foreign
currency exchange rates and exchange control regulations, and the Fund may
incur costs in connection with conversion between various currencies.
A Fund may enter into forward contracts only under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the investment is purchased or sold and
the date on which payment is made or received.
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Second, when the Subadviser of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio investments denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those investments between the date the forward
contract is entered into and the date it matures.
The Funds generally will not enter into a forward contract with a term
of greater than one year. The Funds' ability to engage in forward contracts
may be limited by tax considerations. The Funds may also engage in currency
futures contracts and related options. See "Options and Futures Transactions -
Currency Futures and Related Options."
When-Issued and Delayed Delivery Transactions. As described in the
text of the Prospectus following the caption "General Policies and Risk
Considerations--Forward Commitments, When-Issued and Delayed Delivery
Transactions," the Short-Term Government Securities Fund may enter into
agreements with banks or broker-dealers for the purchase or sale of securities
at an agreed-upon price on a specified future date. Such agreements might be
entered into, for example, when the Fund anticipates a decline in interest
rates and is able to obtain a more advantageous yield by committing currently
to purchase securities to be issued later. When the Fund purchases securities
on a when-issued or delayed delivery basis, it is required either (i) to create
a segregated account with the Fund's custodian and to maintain in that account
cash, U.S. Government securities or other high grade debt obligations in an
amount equal on a daily basis to the amount of the Fund's when-issued or
delayed delivery commitments or (ii) to enter into an offsetting forward sale
of securities it owns equal in value to those purchased. The Fund will only
make commitments to purchase securities on a when-issued or delayed-delivery
basis with the intention of actually acquiring the securities. However, the
Fund may sell these securities before the settlement date if it is deemed
advisable as a matter of investment strategy. When the time comes to pay
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for when-issued or delayed-delivery securities, the Fund will meet its
obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the
when-issued or delayed delivery securities themselves (which may have a value
greater or less than the Fund's payment obligation).
AMORTIZED COST VALUATION AND DAILY DIVIDENDS
The valuation of the Money Market Fund's portfolio instruments at
amortized cost is permitted in accordance with Securities and Exchange
Commission Rule 2a-7 and certain procedures adopted by the Trustees. The
amortized cost of an instrument is determined by valuing it at cost originally
and thereafter amortizing any discount or premium from its face value at a
constant rate until maturity, regardless of the effect of fluctuating interest
rates on the market value of the instrument. Although the amortized cost
method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market
value of portfolio instruments during periods of rising or falling interest
rates will not normally be reflected either in the computation of net asset
value of the Fund's portfolio or in the daily computation of net income. Under
the procedures adopted by the Trustees, the Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less and invest in
securities determined by the Trustees to be of high quality with minimal credit
risks. The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purpose of distribution, redemption and repurchase at $1.00. These procedures
include review of the Fund's portfolio holdings to determine whether the Fund's
net asset value calculated by using readily available market quotations
deviates from $1.00 per share, and, if so, whether such deviation may result in
material dilution or is otherwise unfair to existing shareholders. In the
event the Trustees determine that such a deviation exists, or in any event if
the deviation exceeds .5%, they will take such corrective action as they regard
as necessary and appropriate, including the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average portfolio
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<PAGE> 32
maturity; withholding dividends; redemption of shares in kind; or establishing
a net asset value per share by using readily available market quotations.
Since the net income of the Money Market Fund is declared as a
dividend each time it is determined, the net asset value per share of the Fund
remains at $1.00 per share immediately after such determination and dividend
declaration. Any increase in the value of a shareholder's investment in the
Fund representing the reinvestment of dividend income is reflected by an
increase in the number of shares of the Fund in the shareholder's account at
the end of each month. It is expected that the Fund's net income will be
positive each time it is determined. However, if because of realized losses on
sales of portfolio investments, a sudden rise in interest rates, or for any
other reason the net income of the Fund determined at any time is a negative
amount, the Fund will offset such amount allocable to each then shareholder's
account from dividends accrued during the month with respect to such account.
If at the time of payment of a dividend (either at the regular monthly dividend
payment date, or, in the case of a shareholder who is withdrawing all or
substantially all of the shares in an account, at the time of withdrawal), such
negative amount exceeds a shareholder's accrued dividends, the Fund will reduce
the number of outstanding shares by treating the shareholder as having
contributed to the capital of the Fund that number of full and fractional
shares which represent the amount of the excess. Each shareholder is deemed to
have agreed to such contribution in these circumstances by his or her
investment in the Fund.
EXCHANGE PRIVILEGE
As described in the Prospectus under the caption "Exchanging and
Redeeming Shares," a shareholder may exchange shares of any Fund for shares of
any other Fund on the basis of their respective net asset values beginning 10
days after their purchase on any day the New York Stock Exchange is open.
Orders for exchanges accepted by the Distributor prior to 4:00 p.m. (Eastern
Time) on any day the Trust is open for business will be executed at the
respective net asset values determined as of the close of business that day.
Orders for exchanges received after 4:00 p.m. (Eastern Time) on any business
day will be executed at
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the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to restrict exchanges to one purchase and redemption of shares in the
same Fund during any 120-day period.
The Trust reserves the right to modify or discontinue the exchange
privilege at any time. Except as otherwise permitted by SEC regulations, the
Trust will give 60 days' advance written notice to shareholders of any
termination or material modification of the exchange privilege.
HOW TO BUY
THE PROCEDURES FOR PURCHASE OF TRUST SHARES ARE SUMMARIZED IN THE TEXT
OF THE PROSPECTUS UNDER THE CAPTION "HOW TO BUY SHARES."
IN ADDITION TO THE METHODS DESCRIBED THEREIN, SHARES MAY BE PURCHASED
THROUGH REGULAR PAYROLL DEDUCTIONS, PROVIDED THAT SUCH DEDUCTIONS ARE AVAILABLE
THROUGH THE RELEVANT EMPLOYER. THE MINIMUM INITIAL INVESTMENT AND MINIMUM
ADDITIONAL INVESTMENT THROUGH REGULAR PAYROLL DEDUCTION IS $50. FOR MORE
INFORMATION ABOUT PURCHASING TRUST SHARES THROUGH REGULAR PAYROLL DEDUCTIONS,
PLEASE CALL INVESTOR SERVICES AT 1-800-662-GROW (1-800-662-4769).
HOW TO REDEEM
The procedures for redemption of Trust shares are summarized in the
text of the Prospectus UNDER the caption "Exchanging and Redeeming Shares."
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<PAGE> 34
The Trust may suspend the right of redemption and may postpone payment
only when the New York Stock Exchange is closed for other than customary
weekends and holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted
or during any emergency which makes it impracticable for the Trust to dispose
of its securities or to determine fairly the value of its net assets, or during
any other period permitted by order of the Securities and Exchange Commission.
The Trust reserves the right to redeem shares and mail the proceeds to
the shareholder if at any time the net asset value of the shares in the
shareholder's account in any Fund falls below a specified level due to
redemptions, currently set at $1,000. Shareholders will be notified and will
have 60 days to bring the account up to the required level before any
redemption action will be taken by the Trust. The Trust also reserves the
right to redeem shares in a shareholder's account in excess of an amount set
from time to time by the Trustees. No such limit is presently in effect, but
such a limit could be established at any time and could be applicable to
existing as well as future shareholders.
HOW NET ASSET VALUE IS DETERMINED
As described in the text of the Prospectus following the caption
"Determination of Net Asset Value and Pricing," the net asset value of shares
of each Fund of the Trust will be determined once on each day on which the New
York Stock Exchange is open, as of the close of regular trading on the
Exchange. The Trust expects that the days, other than weekend days, that the
Exchange will not be open are New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities, options, futures and options on futures for which market
quotations are readily available are valued at market value, which is
determined by using the last reported sale price, or, if no sales are reported,
the last reported bid price. Over-the-counter options are valued at fair
value, as determined in good faith by the Trustees or by persons acting at
their direction, based on prices supplied by a broker, usually the option
counterparty. Obligations having remaining maturities of 60 days or less and
securities held in the Money Market Fund portfolio
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<PAGE> 35
are valued at amortized cost. The amortized cost value of a security is
determined by valuing it at cost originally and thereafter amortizing any
discount or premium from its face value at a constant rate until maturity,
regardless of the effect of fluctuating interest rates on the market value of
the instrument. Although the amortized cost method provides certainty in
valuation, it may result at times in determinations of value that are higher or
lower than the price the Fund would receive if the instruments were sold.
Consequently, changes in the market value of portfolio instruments during
periods of rising or falling interest rates will not be reflected either in the
computation of the net asset value of the Fund's portfolio or, in the case of
the Money Market Fund, in the daily computation of net income.
As described in the Prospectus, certain securities and assets of the
Funds are valued at fair value as determined in good faith by the Trustees or
by persons acting at their direction. The fair value of any securities from
time to time held by any Fund of the Trust for which no ready market exists is
determined in accordance with procedures approved by the Trustees. The
Trustees, however, are ultimately responsible for such determinations. The
fair value of such securities is generally determined as the amount which the
Trust could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied
in any specific instance are likely to vary from case to case, and may include
receiving a quote from a broker and the use of a pricing service.
Consideration may also be given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any
registration expenses that might be borne by the Trust in connection with such
disposition). In addition, such specific factors may also be considered as the
cost of the investment, the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Generally, trading in foreign securities, as well as corporate bonds,
U.S. Government Securities and money market instruments is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in determining the net asset value of a Fund's
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<PAGE> 36
shares are computed as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of a Fund's
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.
CALCULATION OF YIELD AND TOTAL RETURN
Yield of the Money Market Fund. As summarized in the Prospectus under
the heading "Performance Information," the "Yield" of the Money Market Fund for
a seven-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. Yield may also be
calculated on a compound basis (the "Effective Yield") which assumes that net
income is reinvested in Fund shares at the same rate as net income is earned by
the Fund for the base period.
The Money Market Fund's Yield and Effective Yield will vary in
response to fluctuations in interest rates. For comparative purposes the
current and Effective Yields should be compared to current and effective yields
offered by competing money market funds for that base period only and
calculated by the methods described above.
Yields of the Asset Allocation, Balanced, Fixed Income and Short-Term
Government Securities Funds. As summarized in the Prospectus under the heading
"Performance Information," Yields of these Funds will be computed by analyzing
net investment income
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<PAGE> 37
for a recent 30-day period and dividing that amount by the maximum offering
price (reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last trading day of that period. Net investment income will
reflect amortization of any market value premium or discount of fixed income
securities (except for obligations backed by mortgages or other assets) and may
include recognition of a pro rata portion of the stated dividend rate of
dividend paying portfolio securities. The Funds' Yields will vary from time to
time depending upon market conditions, the composition of the Funds' portfolios
and operating expenses of the Trust allocated to each Fund. These factors, and
possible differences in the methods used in calculating yield, should be
considered when comparing a Fund's Yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Funds' shares and to the
relative risks associated with the investment objectives and policies of the
Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
Investors in these Funds are specifically advised that the net asset
value per share of each Fund will vary just as Yields for each Fund will vary.
An investor's focus on the Yield to the exclusion of the consideration of the
value of shares of that Fund may result in the investor's misunderstanding the
Total Return he or she may derive from that Fund.
Calculation of Total Return. As summarized in the Prospectus under
the heading "Performance Information," Total Return with respect to a Fund is a
measure of the change in value of an investment in such Fund over the period
covered, which assumes any dividends or capital gains distributions are
reinvested immediately rather than paid to the investor in cash. The formula
for Total Return used herein includes four steps: (1) adding to the total
number of shares purchased by a hypothetical $1,000 investment in the Fund all
additional shares which would have been purchased if all dividends and
distributions paid or distributed during the period had been immediately
reinvested; (2) calculating the value of the hypothetical initial investment of
$1,000 as of the end of the
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<PAGE> 38
period by multiplying the total number of shares owned at the end of the period
by the net asset value per share on the last trading day of the period; (3)
assuming redemption at the end of the period; and (4) dividing this account
value for the hypothetical investor by the initial $1,000 investment.
PERFORMANCE COMPARISONS
Yield and Total Return. Each Fund may from time to time include the
Total Return of its shares in advertisements or in information furnished to
present or prospective shareholders. Each of the Asset Allocation, Balanced,
Fixed Income and Short-Term Government Securities Funds may from time to time
include the Yield and/or Total Return of its shares in advertisements or
information furnished to present or prospective shareholders. The Money Market
Fund may from time to time include its Yield and Effective Yield in
advertisements or information furnished to present or prospective shareholders.
Each Fund may from time to time include in advertisements or information
furnished to present or prospective shareholders (i) the ranking of performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services, Inc. as having the same investment objectives,(ii)
the rating assigned to the Fund by Morningstar, Inc. based on the Fund's
risk-adjusted performance relative to other mutual funds in its broad
investment class, and/or (iii) the ranking of performance figures relative to
such figures for mutual funds in its general investment category as determined
by CDA/Weisenberger's Management Results.
Performance information may also be used to compare the performance of
the Fund against certain widely acknowledged standards or indices for stock and
bond market performance.
EAFE Index. The Europe, Australia & Far East Index contains over 1000
stocks from 20 different countries with Japan (approximately 50%), United
Kingdom, France and Germany being the most heavily weighted.
55% S&P 500 INDEX/35% LEHMAN GOVERNMENT/CORPORATE BOND INDEX/
10% 90-DAY TREASURY BILLS. THE 55% S&P 500 INDEX/35%
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<PAGE> 39
LEHMAN GOVERNMENT/CORPORATE BOND INDEX/10% 90-DAY TREASURY BILLS IS A BENCHMARK
REPRESENTING A HYPOTHETICAL PORTFOLIO 55% OF WHICH IS INVESTED IN THE S&P 500,
35% OF WHICH IS INVESTED IN THE LEHMAN GOVERNMENT/CORPORATE BOND INDEX, AND 10%
OF WHICH IS INVESTED IN 90-DAY TREASURY BILLS
IBC's MONEY FUND REPORT AVERAGE -- TAXABLE (COMMONLY KNOWN AS
DONOGHUE'S TAXABLE MONEY MARKET FUND AVERAGE). AN AVERAGE OF APPROXIMATELY 750
TAXABLE MONEY MARKET FUNDS PUBLISHED BY IBC/DONOGHUE, INC.
Lehman Brothers Government/Corporate Bond Index. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged list of publicly issued U.S.
Treasury obligations, debt obligations of the U. S. Government and its agencies
(excluding mortgage-backed securities), fixed-rate, non-convertible,
investment-grade corporate debt securities and U.S. dollar-denominated,
SEC-registered non-convertible debt issued by foreign governmental entities or
international agencies used as a general measure of the performance of fixed
income securities.
LEHMAN BROTHERS LONG-TERM TREASURY INDEX. THE LEHMAN BROTHERS
LONG-TERM TREASURY INDEX IS A MARKET WEIGHTED INDEX OF ALL PUBLICLY HELD
TREASURY ISSUES WITH MATURITIES GREATER THAN 10 YEARS.
Lipper Balanced Fund Index. The Lipper Balanced Fund Index is a
non-weighted index of the 30 largest "balanced" funds. The index is calculated
daily and reflects the reinvestment of all income dividends and capital gains
distributions.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX. THE INDEX CONTAINS PRIMARILY
ALL U.S. TREASURY NOTES AND BONDS WITH REMAINING MATURITIES OF ONE TO THREE
YEARS.
90-DAY TREASURY BILL INDEX. THE INDEX IS CALCULATED USING A ONE-BILL
PORTFOLIO CONTAINING THE MOST RECENTLY AUCTIONED 90-DAY TREASURY BILL.
RUSSELL 2000 INDEX. THE INDEX CONTAINS THE 2000 SMALLEST OF THE 3000
LARGEST U.S.-DOMICILED CORPORATIONS, RANKED BY MARKET CAPITALIZATION.
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<PAGE> 40
S&P 500 INDEX. THE S&P 500 IS THE MOST COMMON INDEX FOR THE OVERALL
U.S. STOCK MARKET. IT IS COMPRISED OF 500 OF THE LARGEST U.S. COMPANIES
REPRESENTING ALL MAJOR INDUSTRIES.
Salomon Brothers Broad Investment Grade Index. The Index contains 5000
U.S. Treasury, Agency, Mortgage and Corporate Bonds. Credit quality must be
investment grade (AAA-BBB by Standard & Poor's).
65% S&P INDEX/30% LEHMAN BROTHERS LONG-TERM TREASURY INDEX/5% 90-DAY
TREASURY BILLS. THE 65% S&P 500 INDEX/30% LEHMAN BROTHERS LONG-TERM TREASURY
INDEX/5% 90-DAY TREASURY BILLS is a benchmark representing a hypothetical
portfolio 65% of which is invested in the S&P 500, 30% of which is invested in
the Lehman BROTHERS LONG-TERM TREASURY Index, and 5% of which is invested in
90-day TREASURY BILLS.
From time to time, articles about the Funds regarding performance,
rankings and other characteristics of the Funds may appear in national
publications including, but not limited to, the Wall Street Journal, Forbes,
Fortune, CDA Investment Technologies and Money Magazine. In particular, some
or all of these publications may publish their own rankings or performance
reviews of mutual funds, including the Funds. References to or reprints of
such articles may be used in the Funds' promotional literature. References to
articles regarding personnel of the Manager or the Subadvisers who have
portfolio management responsibility may also be used in the Funds' promotional
literature.
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<PAGE> 41
PERFORMANCE DATA
The manner in which Total Return and Yield of the Funds will be
calculated for public use is described above. The following table summarizes
the calculation of Total Return and Yield for the Funds, where applicable, (i)
for the one-year period ended DECEMBER 31, 1995, (ii) for the three-year period
ended DECEMBER 31, 1995 and (iii) since the commencement of operations (July 1,
1992 FOR ALL FUNDS OTHER THAN THE SMALL CAP AND BALANCED FUNDS, NOVEMBER 1,
1995 FOR THE SMALL CAP FUND, AND JULY 3, 1995 FOR THE BALANCED FUND) THROUGH
DECEMBER 31, 1995.
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<PAGE> 42
PERFORMANCE DATA
<TABLE>
<CAPTION>
Average
Annual Average
Total Annual
Average Return Total
Annual for the Return
Total Return Three- FROM the
for the Year Commencement
Current SEC One-Year Period Period of Operations
Yield ended ended __ through __
FUND at 12/31/95 12/31/95 12/31/95 12/31/95
----- ------------ -------------- -------- -------------
<S> <C> <C> <C> <C>
Growth N/A 28.37% 13.79% 17.42%
Value N/A 37.71% 14.61% 15.42%
International N/A 9.93% 17.12% 9.00%
SMALL CAP* N/A N/A N/A 5.06%
Asset Allocation N/A 32.79% 12.69% 13.02%
BALANCED** N/A N/A N/A 7.44%
Fixed Income 5.37% 17.65% 8.20% 8.40%
Short-Term Government Securities 4.99% 9.08% 4.57% 4.67%
Money Market*** 5.21% 5.77% 4.10% 3.91%
</TABLE>
*REFLECTS CUMULATIVE, RATHER THAN AVERAGE ANNUAL, TOTAL RETURN. PERFORMANCE
FOR THE SMALL CAP FUND WOULD HAVE BEEN LOWER IF A PORTION OF THE MANAGEMENT FEE
HAD NOT BEEN WAIVED BY THE MANAGER. IN THE ABSENCE OF THIS FEE WAIVER, ACTUAL
PERFORMANCE WOULD HAVE BEEN 5.00% FOR THE PERIOD SINCE COMMENCEMENT OF
OPERATIONS (NOVEMBER 1, 1995).
**REFLECTS CUMULATIVE, RATHER THAN AVERAGE ANNUAL, TOTAL RETURN. PERFORMANCE
FOR THE BALANCED FUND WOULD HAVE BEEN LOWER IF AN EXPENSE LIMITATION HAD NOT
BEEN IN EFFECT. IN THE ABSENCE OF THIS EXPENSE LIMITATION, ACTUAL PERFORMANCE
WOULD HAVE BEEN 6.11% FOR THE PERIOD SINCE COMMENCEMENT OF OPERATIONS (JULY 3,
1995).
***Performance for the Money Market Fund would have been lower if a portion of
the management fee had not been waived by the Manager. In the absence of this
LIMITATION, actual performance would have been 5.65%, 3.96% and 3.79% for the
one-year period, the three-year period and the period SINCE commencement of
operations (July 1, 1992), respectively.
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<PAGE> 43
TAXES
The tax status of the Trust and the distributions which it may make
are summarized in the Prospectus under the heading "Taxes." All dividends and
distributions of a Fund, whether received in shares or cash, are taxable for
U.S. federal income tax purposes to the shareholder who receives them and must
be reported by such shareholder on his federal income tax return. A dividend
or capital gains distribution received after the purchase of a Fund's shares
reduces the net asset value of the shares by the amount of the dividend or
distribution and will be subject to federal income taxes. A subsequent loss on
the sale of shares held for less than six months will be treated as a long-term
capital loss for Federal income tax purposes to the extent of any long-term
capital gain distribution made with respect to such shares.
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code (the "Code"). In
order so to qualify, each Fund must, among other things, (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
certain securities loans, and gains from the sale of stock, securities and
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income from gains from the sale or other disposition of certain
assets held for less than three months; (c) each year distribute at least 90%
of its dividend, interest (including tax-exempt interest), certain other income
and the excess, if any, of its net short-term capital gains over its net
long-term capital losses; and (d) diversify its holdings so that, at the end of
each fiscal quarter (i) at least 50% of the market value of the Fund's assets
is represented by cash items, U.S. Government securities, securities of other
regulated investment companies, and other securities, limited in respect of any
one issuer to a value not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities
(other than those of the U.S. Government or other regulated investment
companies) of any one issuer or of two or more issuers which the Fund controls
and which are engaged in the same,
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<PAGE> 44
similar or related trades or businesses. Under the 30% of gross income test
described above, the Fund will be restricted from selling certain assets held
(or considered under Code rules to have been held) for less than three months,
and in engaging in certain hedging transactions (including hedging transactions
in futures and options) that in some circumstances could cause certain Fund
assets to be treated as held for less than three months. By so qualifying,
each Fund will not be subject to federal income taxes to the extent that its
net investment income, net realized short- term capital gains and net realized
long-term capital gains are distributed to shareholders.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part as a return of capital. A
return of capital is not taxable to a shareholder and has the effect of
reducing the shareholder's basis in the shares. To the extent such
distributions exceed a shareholder's basis in the shares the distributions will
be taxed to the shareholder as capital gain.
Hedging Transactions. If a Fund engages in transactions, including
hedging transactions, in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, and convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. A Fund engaging in such transactions will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Fund.
Certain of a Fund's hedging activities (including its transactions in
foreign currencies) are likely to produce a difference between its book income
and its taxable income. If a Fund's book income exceeds its taxable income,
the distribution (if any) of such excess will be treated as a dividend to the
extent of the Fund's remaining earnings and profits, and thereafter as a return
of capital or as gain from the sale or exchange of a capital asset, as the case
may be. If the Fund's book income is less than its taxable income, the Fund
could be
-41-
<PAGE> 45
required to make distributions exceeding book income to qualify as a regulated
investment company that is accorded special tax treatment.
Foreign Currency-Denominated Securities and Related Hedging
Transactions. A Fund's transactions in foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts may give rise to ordinary income or loss to the extent such income or
loss results from fluctuations in the value of the foreign currency concerned.
Distributions from Net Realized Capital Gains. As described in the
Prospectus, the Trust's policy is to distribute substantially all of the net
realized capital gain, if any, of each Fund, after giving effect to any
available capital loss carryover. Net realized capital gain for any Fund is
the excess of net realized long-term capital gain over net realized short-term
capital loss. Each Fund of the Trust is treated as a separate entity for
federal income tax purposes and accordingly its net realized gains or losses
will be determined separately, and capital loss carryovers will be determined
and applied on a separate Fund basis. Each of the Funds distributes its net
realized capital gains annually, although the Money Market Fund may distribute
any net realized long-term capital gains more frequently if necessary in order
to maintain a net asset value of $1.00 per share for the shares of that Fund.
Sixty percent of any gain or loss realized by any Fund (i) from net
premiums, from expired listed options and from closing purchase transactions,
(ii) with respect to listed options upon the exercise thereof, and (iii) from
transactions in futures contracts and listed options thereon generally will
constitute long-term capital gains or losses and the balance will be short-term
gains or losses. Distributions of long-term capital gains, if designated as
such by the Trust, are taxable to shareholders as long-term capital gain,
regardless of how long a shareholder has held his shares.
Since Funds which invest in zero-coupon securities will not receive
cash interest payments thereon, to the extent shareholders of these Funds elect
to take their distributions in cash, the relevant Fund may have to generate the
required cash
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<PAGE> 46
from the disposition of non-zero-coupon securities, or possibly from the
disposition of some of its zero-coupon securities.
General. For federal income tax purposes, distributions paid from net
investment income and from any net realized short-term capital gain (including
premiums from expired options and gains from any closing purchase transactions
with respect to options written by the Trust for any Fund) are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares.
Annually, shareholders will receive information as to the tax status
of distributions made by the Trust in each calendar year.
The Trust is required to withhold and remit to the U.S. Treasury 31%
of all dividend income earned by any shareholder account for which an incorrect
or no taxpayer identification number has been provided or where the Trust is
notified that the shareholder has under-reported income in the past (or the
shareholder fails to certify that he is not subject to such withholding). In
addition, the Trust will be required to withhold and remit to the U.S. Treasury
31% of the amount of the proceeds of any redemption of shares of a shareholder
account for which an incorrect or no taxpayer identification number has been
provided.
The foregoing relates to federal income taxation. Distributions from
investment income and capital gains may also be subject to state and local
taxes. The Trust is organized as a Massachusetts business trust. Under
current law, so long as each Fund qualifies for the federal income tax
treatment described above, it is believed that neither the Trust nor any Fund
will be liable for any income or franchise tax imposed by Massachusetts.
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<PAGE> 47
MANAGEMENT OF THE TRUST
Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
<TABLE>
<CAPTION>
==========================================================================================================
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING
PAST 5 YEARS
==========================================================================================================
<S> <C> <C>
P. Michael Pond*, 42, Trustee, Chairman and President President and Director,
100 N.E. Adams Street Caterpillar Investment
Peoria, IL 61629-5330 Management Ltd.; President and
Director, Caterpillar
Securities Inc.
Gary Michael Anna, 42, Trustee Vice President, Business Affairs,
1501 W. Bradley Avenue Bradley University
Peoria, IL 61625
William F. Bahl, 45, Trustee Chairman of the Board, Bahl &
212 E. Third Street Gaynor, Inc. (a registered
Suite 200 investment adviser)
Cincinnati, OH 45202
James F. Masterson*, 58, Trustee DIRECTOR, INVESTOR RELATIONS,
100 N.E. ADAMS STREET Caterpillar Inc.;
PEORIA, IL 61629- 5330 MANAGER, TREASURY/ORDERS,
CATERPILLAR INC., SEPTEMBER
1988 TO JANUARY 1995
Dixie Louise Mills, 48, Trustee Professor of Finance, Illinois
Illinois State University State University
15 Williams Hall
Normal, IL 61790-5500
Carol K. Burns, 50, Vice President and Assistant Clerk Manager of Marketing,
100 N.E. Adams Street Clerk Caterpillar Investment
Peoria, IL 61629-5330 Management Ltd.; Director,
Caterpillar Securities Inc.;
Marketing Consultant,
Caterpillar Financial Services
Corp., April 1987 to October
1991
Fred L. Kaufman, 48, Vice President and Treasurer Treasurer, Caterpillar
100 N.E. Adams Street Investment Management Ltd.;
Peoria, IL 61629-5330 Treasurer and Director,
Caterpillar Securities Inc.;
Corporate Auditor, Caterpillar
Inc., June 1988 to November
1991
Richard P. Konrath, 34, Clerk Securities Counsel, Caterpillar
100 N.E. Adams Street Inc.; Special Counsel and Staff Attorney,
Peoria, IL 61629-5330 Securities and Exchange
Commission, May 1987 to May
1993
</TABLE>
* Messrs. Pond and Masterson are each "interested PERSONS" (as defined
in the 1940 Act) of the Trust, the Manager and the Distributor and,
therefore, may benefit from the management fees paid to the Manager.
-44-
<PAGE> 48
The mailing address of each of the officers and Trustees is c/o the
Trust, 100 N.E. Adams Street, Peoria, Illinois 61629.
The Trust's Agreement and Declaration of Trust provides that the Trust
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner
specified in the Agreement and Declaration of Trust that they have not acted in
good faith in the reasonable belief that their actions were in the best
interests of the Trust or that such indemnification would relieve any officer
or Trustee of any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of his
or her duties. The Trust, at its expense, will provide liability insurance for
the benefit of its Trustees and officers.
Trustees other than those who are interested persons of the Manager
receive an annual fee of $6,000 plus $1,000 for each Trustees' meeting
attended. The table below shows the compensation paid to the Trust's Trustees
and officers for the year ended June 30, 1995.
<TABLE>
<CAPTION>
=============================================================================================================
NAME OF PERSON, AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION
POSITION COMPENSATION FROM RETIREMENT BENEFITS UPON COMPENSATION FROM
THE TRUST BENEFITS ACCRUED RETIREMENT THE TRUST AND
AS PART OF FUND FUND COMPLEX PAID
EXPENSES TO TRUSTEES
=============================================================================================================
<S> <C> <C> <C> <C>
P. Michael Pond, $0 $0 $0 $0
Trustee, Chairman
and President
Gary Michael Anna, $10,000 $0 $0 $10,000
Trustee
William F. Bahl, $10,000 $0 $0 $10,000
Trustee
James F. Masterson, $0 $0 $0 $0
Trustee
Dixie Louise Mills, $10,000 $0 $0 $10,000
Trustee
Carol K. Burns $0 $0 $0 $0
Vice President and
Assistant Clerk
</TABLE>
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<PAGE> 49
<TABLE>
<S> <C> <C> <C> <C>
Fred L. Kaufman $0 $0 $0 $0
Vice President and Treasurer
</TABLE>
At the date of this Statement, the Trust believes that the officers
and Trustees as a group own less than 1% of the outstanding shares of any Fund.
As of March 31, 1996, the following entities WERE the recordholders of the
following percentages of outstanding securities of the following Funds:
<TABLE>
<CAPTION> Percentage Ownership
as of March 31, 1996
----------------------------------------------------------------------
Caterpillar
Inc. SUPP-
LEMENTAL
UNEMPLOY-
MENt and
Caterpillar Benefits
Investment Group CATERPILLAR
Trust Insurance Caterpillar INVESTMENT
401(k) Trust A Insurance MANAGEMENT
Plan and Trust B Company Ltd. LIMITED
------ ----------- ---------- -------
FUND % TOTAL % TOTAL % TOTAL % TOTAL
- ---- ------- ------- -------- -------
<S> <C> <C> <C> <C>
GROWTH 40.88 7.82 8.17 --
VALUE 59.58 14.23 14.21 --
INTERNATIONAL 49.31 30.96 6.49 --
SMALL CAP 22.50 76.50 -- --
ASSET ALLOCATION 44.03 35.96 -- --
BALANCED -- -- -- 81.77
FIXED INCOME 26.14 33.36 --
Short-Term 89.63 52.48 -- --
Government
Securities
Money Market 89.95 -- -- --
</TABLE>
TO THE EXTENT EITHER CATERPILLAR INVESTMENT TRUST 401(K) PLAN OR
CATERPILLAR INC. SUPPLEMENTAL UNEMPLOYMENT AND BENEFITS GROUP INSURANCE TRUSTS
A OR B, EACH A TRUST FORMED UNDER THE LAWS OF ILLINOIS FOR THE BENEFIT OF
EMPLOYEES OF CATERPILLAR INC., BENEFICIALLY OWNS MORE THAN 25% OF A FUND, IT
MAY BE DEEMED TO "CONTROL" SUCH FUND. AS A RESULT, IT MAY NOT BE POSSIBLE FOR
MATTERS SUBJECT TO A VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SECURITIES OF
A FUND TO BE APPROVED WITHOUT THE AFFIRMATIVE VOTE OF SUCH SHAREHOLDERS, AND IT
MAY BE POSSIBLE FOR SUCH MATTERS TO BE APPROVED BY SUCH SHAREHOLDERS WITHOUT
THE AFFIRMATIVE VOTE OF
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<PAGE> 50
ANY OTHER SHAREHOLDERS.
The address of each of the recordholders listed above is 100 N.E.
Adams Street, Peoria, Illinois 61629, EXCEPT FOR CATERPILLAR INSURANCE COMPANY
LTD., THE ADDRESS OF WHICH IS 3322 WEST END AVENUE, NASHVILLE, TENNESSEE
37203-1031. AS OF MARCH 31, 1996, the trust believes that no person, other
THAN SRL MOTOR CARS INC., 1 COMAC LOOP, RONKONKOMA, NEW YORK 11779-6816, which
beneficially owns 6.17% of the outstanding shares of the Growth Fund, owns
beneficially more than 5% of the outstanding shares of any Fund.
The Manager and the Subadvisers
Under written Management Contracts between the Trust and the Manager
with respect to each Fund, subject to such policies as the Trustees of the
Trust may determine, the Manager, at its expense, will furnish continuously an
investment program for the Trust and will make investment decisions on behalf
of the Funds and place all orders for the purchase and sale of portfolio
securities subject always to applicable investment objectives, policies and
restrictions provided. In order to assist it in carrying out its
responsibilities, the Manager has retained Subadvisers to render advisory
services to each Fund other than the Short-Term Government Securities and Small
Cap Funds.
The Manager has advised the Funds since inception, and the Manager and
its subsidiaries have provided investment advisory services to other entities
since 1989. The Manager and the Subadvisers have managed assets for the
Caterpillar Inc. $4.6 billion pension fund. The Manager currently manages more
than $420 million of assets in various stock and bond portfolios for the
Caterpillar Inc. pension fund and Caterpillar Insurance Company Ltd. In
addition, the Manager manages more than $120 million in pension plan assets in
its pension group trust created in 1990 to serve the pension investment needs
of Caterpillar Inc. dealers AND suppliers. Other corporations, such as General
Electric Company, AMR Corporation AND Owens-Corning Fiberglass Corporation also
have investment subsidiaries that have sponsored mutual funds.
Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business
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<PAGE> 51
of the Trust, furnishes office space and equipment, provides bookkeeping and
certain clerical services and pays all salaries, fees and expenses of officers
and Trustees of the Trust who are affiliated with the Manager. As indicated
under "Portfolio Transactions -- Brokerage and Research Services," the Trust's
portfolio transactions may be placed with broker-dealers which furnish the
Manager or the Subadvisers, without cost, certain research, statistical and
quotation services of value to them or their respective affiliates in advising
the Trust or their other clients. In so doing, a Fund may incur greater
brokerage commissions than it might otherwise pay.
The Manager's compensation under the Management Contract with respect
to a Fund is subject to reduction to the extent that in any year the expenses
of such Fund exceed the limits on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of such
Fund are qualified for offer and sale. The term "expenses" is subject to
interpretation by each of such jurisdictions, and, generally speaking, excludes
brokerage commissions, taxes, interest, distribution-related expenses and
extraordinary expenses. The most restrictive of such limitations as of the
date of this Statement is believed to be 2 1/2% of the first $30 million of net
assets, 2% of the next $70 million, and 1 1/2% of any excess over $100 million.
In order to limit expenses, the Manager has agreed (1) to bear
expenses (exclusive of brokerage, interest, taxes and deferred organizational
and extraordinary expenses, but including the management fee (0.75%)) of the
Balanced Fund in excess of 1.15% of average net assets, and (2) to waive a
portion (0.35%) of its management fees with respect to the Small Cap Fund. For
the purposes of determining the portion, if any, of the expenses of the
Balanced Fund to be borne by the Manager, expenses of the Balanced Fund shall
not reflect the application of commissions or cash management credits that may
reduce designated Fund expenses. This expense limitation and/or this waiver of
management fees may be terminated by the Manager at any time, in which event
shareholders of the relevant Fund would be notified and this Statement of
Additional Information would be revised.
Each Fund pays the Manager a monthly Management Fee based on the
average net assets of the Fund at the following annual rates
-48-
<PAGE> 52
(after giving effect to fee WAIVER currently in effect with respect to the
Small Cap FUND of .35% of average net assets, as disclosed in the Prospectus):
-49-
<PAGE> 53
<TABLE>
<CAPTION>
Annual Percentage of
Fund Average Net Assets
---- ---------------------
<S> <C>
Growth . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Value . . . . . . . . . . . . . . . . . . . . . . . . . . .75
International . . . . . . . . . . . . . . . . . . . . . . .95
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . .40
Asset Allocation . . . . . . . . . . . . . . . . . . . . . .70
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . .75
Fixed Income . . . . . . . . . . . . . . . . . . . . . . . .65
Short-Term Government Securities . . . . . . . . . . . . . .35
Money Market . . . . . . . . . . . . . . . . . . . . . . . .30
For the fiscal years ended June 30, 1995, 1994 and 1993, the Funds
paid to the Manager the following amounts as Management Fees pursuant to the
relevant Management Contracts (no fees were paid with respect to the Small Cap
or Balanced Funds during such periods):
Fund Management Fees
----------------------------------------
Fiscal Year Ended June 30,
1995 1994 1993
--------- ---------- -----------
<S> <C> <C> <C>
Growth . . . . . . . . . . . . . . $ 1,916,870 $1,121,122 $ 738,835
Value . . . . . . . . . . . . . . 1,205,912 928,481 834,232
International . . . . . . . . . . 1,046,409 675,436 294,420
Asset Allocation . . . . . . . 450,971 388,646 298,994
Fixed Income . . . . . . . . . . . 325,238 273,104 207,004
Short-Term
Government . . . . . . . . . . .
Securities . . . . . . . . . . . 105,672 103,056 90,737
Money Market(1) . . . . . . . . . 90,767 40,263 36,691
=======
</TABLE>
___________________________
(1) The Manager waived $90,767, $40,263 and $11,901 in MANAGEMENT FEES during
the fiscal years ended June 30, 1995, 1994 and 1993, respectively.
Under the Subadviser Agreement for each Fund between the Manager and the
Subadviser for such Fund (the "Subadviser Agreements"), subject always to the
control of the Trustees of the Trust, each Subadviser's obligation is to
furnish
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<PAGE> 54
continuously an investment program for the Fund, to make investment decisions
on behalf of the Fund and to place all orders for the purchase and sale of
portfolio securities and all other investments for the Fund.
In performing their duties under the Subadviser Agreements, each Subadviser
is subject to the control of the Trustees, the policies determined by the
Trustees, the provisions of the Trust's Agreement and Declaration of Trust and
By-laws and any applicable investment objectives, policies and restrictions in
effect from time to time.
The Management Contracts for all of the Funds and the Subadviser Agreements
were approved by the Trustees of the Trust (including all of the Trustees who
are not "interested persons" of the Manager or the relevant Subadvisers). The
Management Contracts and the Subadviser Agreements continue in force with
respect to the relevant Fund for two years from their respective dates, and
from year to year thereafter, but only so long as their continuance is approved
at least annually by (i) vote, cast in person at a meeting called for that
purpose, of a majority of those Trustees who are not "interested persons" of
the Trust, the Manager or the relevant Subadviser, and by (ii) the majority
vote of either the full Board of Trustees or the vote of a majority of the
outstanding shares of that Fund. Each of the Management Contracts and the
Subadviser Agreements automatically terminates on assignment, and each is
terminable upon notice by the Trust. In addition, the Management Contracts may
be terminated on not more than 60 days' notice by the Manager to the Trust, and
the Subadviser Agreements may be terminated upon 60 days' notice by the Manager
or 90 days' notice by the Subadviser.
As described in the Prospectus under the caption "Management of the Trust,"
the Trust pays, in addition to the Management Fees described above, all
expenses not assumed by the Manager, including, without limitation, fees and
expenses of Trustees who are not "interested persons" of the Manager or the
Trust, interest charges, taxes, brokerage commissions, expenses of issue or
redemption of shares, fees and expenses of registering and qualifying the Trust
and shares of the respective Funds for distribution under federal and state
laws and regulations, charges of custodians, auditing and legal expenses,
expenses of determining the net asset value of the Trust's shares, reports to
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<PAGE> 55
shareholders, expenses of meetings of shareholders, expenses of printing and
mailing prospectuses, proxy statements and proxies to existing shareholders,
and insurance premiums and professional association dues or assessments. The
Trust is also responsible for such nonrecurring expenses as may arise,
including litigation in which the Trust may be a party, and other expenses as
determined by the Trustees. The Trust may have an obligation to indemnify its
officers and Trustees with respect to such litigation.
Each Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Subadvisers. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The
fee paid to the Subadvisers (other than J.P. Morgan Investment Management Inc.
("Morgan")) is based on the Fund assets managed or advised by such Subadviser
(the "Fund Assets") together with any other assets managed or advised by the
Subadviser relating to Caterpillar Inc. or any of its affiliates. (The Fund
Assets together with such other assets are collectively referred to as the
"Combined Assets.") The subadvisory fee is calculated by applying the average
quarterly net asset value, as of the last business day of each month in the
calendar quarter, of the Combined Assets to the annual rates for each
Subadviser (other than Morgan), as set forth below. This amount is then
adjusted based upon the ratio of Fund Assets to Combined Assets. The
subadvisory fee paid to Morgan with respect to the Fixed Income and Money
Market Funds is based solely on the average net assets of the respective Funds.
Oppenheimer Capital ("Oppenheimer") is a Delaware general partnership
formed on July 1, 1987. Its address is Oppenheimer Tower, World Financial
Center, New York, New York 10281. Oppenheimer & Co., L.P. ("OpCo"), a New
York limited partnership, through various subsidiaries, owns 32.3% of
Oppenheimer. OpCo is owned by executive officers and other key employees of
both Oppenheimer and its affiliated broker/dealer, Oppenheimer & Co.,
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<PAGE> 56
Inc. Oppenheimer Capital, L.P., a publicly-owned master limited partnership,
owns the remaining 67.7% of Oppenheimer. Oppenheimer provides investment
advice to individuals, state and local government agencies, pension and profit
sharing plans, trusts, estates, businesses and other organizations. The
Manager pays Oppenheimer for its subadvisory services with respect to the Value
Fund a fee, calculated as described above, at the annual rate of 0.50% of the
first $50 million of Combined Assets, 0.375% of the next $50 million of
Combined Assets and 0.25% of Combined Assets in excess of $100 million. The
Manager has informed the Trust that for the fiscal years ended June 30, 1995,
1994 and 1993 Oppenheimer earned $471,392, $358,332 and $326,789, respectively,
in subadvisory fees.
Jennison Associates Capital Corp. ("Jennison") provides investment advice
to mutual funds, institutional accounts and other entities. Its principal
place of business is 466 Lexington Avenue, New York, New York 10017. Jennison
is a wholly-owned subsidiary of The Prudential Insurance Company of America, a
mutual insurance company and a registered investment adviser. The Manager pays
Jennison for its subadvisory services with respect to the Growth and Balanced
Funds a fee, calculated as described above, at the annual rate of 0.75% of the
first $10 million of Combined Assets, 0.50% of the next $30 million of Combined
Assets, 0.35% of the next $25 million of Combined Assets, 0.25% of the next
$335 million of Combined Assets, 0.22% of the next $600 million of Combined
Assets and 0.20% of Combined Assets in excess of $1 billion. The Manager has
informed the Trust that for the fiscal years ended June 30, 1995, 1994 and 1993
Jennison earned $676,200, $400,334, and $268,559, respectively, in subadvisory
fees (no fees were paid with respect to the Balanced Fund during these
periods).
Mellon Capital Management Corporation ("Mellon"), a Delaware corporation,
is located at 595 Market Street, Suite 3000, San Francisco, California 94105.
Mellon was founded in 1983 and presently manages over $36 billion in funds.
Mellon is a wholly-owned, indirect subsidiary of Mellon Bank Corporation,
Pittsburgh, Pennsylvania, a bank holding company which engages in the
businesses of retail banking, wholesale banking, and service products. Mellon
serves as an investment adviser and manager for institutional clients. The
Manager pays Mellon for its subadvisory services with respect to the Asset
Allocation Fund a
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<PAGE> 57
fee, calculated as described above, at the annual rate of 0.50% of the first
$200 million of Combined Assets and 0.20% of Combined Assets in excess of $200
million. The Manager has informed the Trust that for the fiscal years ended
June 30, 1995, 1994 and 1993 Mellon earned $95,500, $81,001 and $61,278,
respectively, in subadvisory fees.
PanAgora Asset Management, Inc.'s ("PanAgora") principal place of business
is 260 Franklin Street, Boston, Massachusetts 02110. Fifty percent of the
outstanding voting stock of PanAgora is owned by each of Nippon Life Insurance
Company, a mutual life insurance company, and Lehman Brothers Inc., a brokerage
and investment advisory firm. PanAgora currently provides asset allocation,
indexing and related investment advisory services to a variety of endowment
funds, pension accounts, other institutions and investment companies, with
total assets under management in excess of $11 billion. The Manager pays
PanAgora for its subadvisory services with respect to the Asset Allocation Fund
a fee, calculated as described above, at the annual rate of 0.50% of the first
$10 million of Combined Assets, 0.40% of the next $40 million of Combined
Assets, 0.20% of the next $50 million of Combined Assets and 0.10% of Combined
Assets in excess of $100 million. The Manager has informed the Trust that for
the fiscal years ended June 30, 1995, 1994 and 1993 PanAgora earned $47,906,
$41,645 and $33,266, respectively, in subadvisory fees.
Mercator Asset Management, L.P. provides investment advice to mutual funds
and other entities. Its principal place of business is 2400 East Commercial
Blvd., Ft. Lauderdale, Florida 33308. Mercator ASSET MANAGEMENT, L.P. IS
LIMITED PARTNERSHIP A PORTION OF THE LIMITED PARTNERSHIP INTERESTS IN WHICH IS
OWNED BY The Prudential Insurance Company of America, a mutual insurance
company and a registered investment adviser. The Manager pays Mercator ASSET
MANAGEMENT, L.P. for its subadvisory services with respect to the International
Fund a fee, calculated as described above, at the annual rate of 0.75% of the
first $50 million of Combined Assets, 0.60% OF THE NEXT $250 MILLION OF
COMBINED ASSETS, AND 0.45% OF Combined Assets in excess of $300 million. The
Manager has informed the Trust that for the fiscal years ended June 30, 1995,
1994 and 1993, MERCATOR ASSET MANAGEMENT, INC., AN AFFILIATE OF MERCATOR ASSET
MANAGEMENT, L.P.
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<PAGE> 58
THAT SERVED AS SUBADVISER TO THE INTERNATIONAL FUND PRIOR TO NOVEMBER 30, 1995,
earned $677,479, $460,355 and $199,712, respectively, in subadvisory fees.
Morgan provides investment advice to mutual funds and other entities. Its
principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation. The Manager pays Morgan for its
subadvisory services with respect to the Money Market Fund a fee computed and
paid quarterly at the annual rate of 0.15% of the average quarterly net assets,
as of the last business day of each month in the calendar quarter, of the Money
Market Fund. The Manager pays Morgan for its subadvisory services with respect
to the Fixed Income Fund a fee computed and paid quarterly at the annual rate
of 0.30% of the average quarterly net assets, as of the last business day of
each month in the calendar quarter, of the first $75 million of such assets,
0.25% of the next $75 million of such assets, 0.22% of the next $150 million of
such assets, and 0.15% of such assets in excess of $300 million. The Manager
has informed the Trust that for the fiscal years ended June 30, 1995, 1994 and
1993 Morgan earned $92,481, $41,402 and $23,713, respectively, in subadvisory
fees with respect to the Money Market Fund and $145,585, $122,469 and $97,775,
respectively, with respect to the Fixed Income Fund.
Each of the Subadvisers also serves as investment adviser to certain
separate accounts with minimum balances ranging from $10 million to $50
million. Jennison has informed the Trust that its separate account minimum
balance is typically $30 million.
The Subadvisers are registered as investment advisers with the Securities
and Exchange Commission. This registration does not involve supervision of
management or investment policy by any federal agency.
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<PAGE> 59
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.
The Trust's independent accountants are Price Waterhouse LLP, 160 Federal
Street, Boston, MA 02110. Price Waterhouse LLP conducts an annual audit of
the Trust, assists in the preparation of each Fund's federal and state income
tax returns and consults with the Trust as to matters of accounting and federal
and state income taxation. The unaudited financial statements included in the
Trust's Semi-Annual Report for the period ended December 31, 1995, filed
electronically on March 8, 1996 (File No. 811-06602) are incorporated by
reference into this Statement of Additional Information.
OTHER SERVICES
Custodial Arrangements. State Street Bank and Trust Company ("State
Street"), P.O. Box 1713, Boston, MA 02101, is the custodian for all Funds of
the Trust. As such, State Street holds in safekeeping certificated securities
and cash belonging to the Trust and, in such capacity, is the registered owner
of securities in book-entry form belonging to the Trust. Upon instruction,
State Street receives and delivers cash and securities of the Trust in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street
also maintains certain accounts and records of the Trust. In addition, State
Street has contracted with various foreign banks and depositories to hold
portfolio securities outside of the United States on behalf of certain of the
Funds. State Street also calculates the total net asset value, total net
income and net asset value per share of each Fund on a daily basis (and as
otherwise may be required by the 1940 Act) and performs certain accounting
services for all Funds of the Trust.
Transfer Agent. State Street also acts as the Trust's transfer agent and
dividend disbursing agent.
As compensation for its services as custodian and transfer agent, the Funds
accrued expenses in the following amounts to be paid to State Street for the
periods indicated (no shares of the Small Cap or Balanced Funds were
outstanding during the periods shown):
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<PAGE> 60
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
===================
Fund 1995 1994 1993
==== ==== ==== ====
<S> <C> <C> <C>
GROWTH $138,000 $102,000 $ 89,000
VALUE $103,000 $ 80,000 $ 73,000
INTERNATIONAL $311,000 $231,000 $113,500
ASSET ALLOCATION $183,000 $200,000 $150,000
FIXED INCOME $ 86,000 $ 64,000 $ 46,500
SHORT-TERM $ 55,000 $ 47,000 $ 35,500
GOVERNMENT SECURITIES
MONEY MARKET $ 76,000 $ 50,000 $ 32,500
</TABLE>
Distributor. Caterpillar Securities Inc. ("CSI"), A WHOLLY-OWNED
SUBSIDIARY of CIML, is the Trust's principal underwriter. CSI is not obligated
to sell any specific amount of shares of the Trust and will purchase shares for
resale only against orders therefor.
PORTFOLIO TRANSACTIONS
Investment Decisions. Investment decisions for the Trust and for the other
investment advisory clients of the Manager and the Subadvisers are made with a
view to achieving their respective investment objectives. The Manager and the
Subadvisers operate independently in providing services to their respective
clients. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, for example, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more
other clients are selling the security. In some instances, one client may sell
a particular security to another client. It also
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<PAGE> 61
happens that two or more clients may simultaneously buy or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a
manner which in the opinion of the Manager or the relevant Subadviser is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other
clients.
Brokerage and Research Services. Transactions on stock exchanges and other
agency transactions involve the payment by the Trust of brokerage commissions.
In the United States and certain foreign countries, such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction. There
is generally no stated commission in the case of securities, such as U.S.
Government securities, traded in the over-the-counter markets, but the price
paid by the Trust usually includes an undisclosed dealer commission or mark-up.
It is anticipated that most purchases and sales of portfolio securities for the
Money Market Fund will be with the issuer or with major dealers in money market
instruments acting as principals. Accordingly, it is not anticipated that the
Short-Term Government Securities or Money Market Funds will pay significant
brokerage commissions. In underwritten offerings, the price paid includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Securities firms may receive brokerage commissions on transactions involving
options, futures and options on futures and the purchase and sale of underlying
securities upon exercise of options. The brokerage commissions associated with
buying and selling options may be proportionately higher than those associated
with general securities transactions.
When the Manager or a Subadviser places orders for the purchase and sale of
portfolio securities for a particular Fund and buys and sells securities for
such Fund it is anticipated that such transactions will be effected through a
number of brokers and dealers. In so doing, the Manager or the relevant
Subadviser, as the case may be, intends to use its best efforts to obtain for
each Fund the most favorable price and execution available, except to the
extent that it may be permitted to pay
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<PAGE> 62
higher brokerage commissions as described below. In seeking the most favorable
price and execution, the Manager or the relevant Subadviser, as the case may
be, considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical and quotation services from broker-dealers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Manager and the Subadvisers may receive
research, statistical and quotation services from many broker-dealers with
which the Trust's portfolio transactions are placed. These services, which in
some instances could also be purchased for cash, include such matters as
general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Manager or the
Subadvisers in advising various of its clients (including the Trust), although
not all of these services are necessarily useful and of value in managing the
Trust or any particular Fund. The fees paid to the Manager and the Subadvisers
are not reduced because they receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Management Contracts and the Subadviser Agreements, the Manager and the
Subadvisers may cause a Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in the Securities Exchange Act of 1934) to
the Manager or the Subadvisers an amount of disclosed commission for effecting
a securities transaction for a Fund on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The authority of the Manager and the Subadvisers to cause the
Funds to pay any such greater commissions is subject to such policies as the
Trustees may adopt from time to time.
The aggregate brokerage commissions paid by the Funds during
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<PAGE> 63
the fiscal years ended June 30, 1995, 1994 and 1993 and the amounts of
brokerage commissions allocated to persons or firms supplying research,
statistical and quotation services during such fiscal years are set forth below
(no brokerage commissions were paid by the Small Cap or Balanced Funds during
such periods):
Fiscal year ended June 30, 1995:
<TABLE>
<CAPTION>
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
---- --------------------- -------------- ------------------
<S> <C> <C> <C>
Growth $ 464,696 $125,565,541 $ 232,620
Value 168,461 53,634,091 88,191
International 227,812 0 0
Asset Allocation 5,379 0 0
Fixed Income 0 0 0
Short-Term
Gov't Securities 0 0 0
Money Market 0 0 0
</TABLE>
Fiscal year ended June 30, 1994:
<TABLE>
<CAPTION>
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
---- --------------------- -------------- ------------------
<S> <C> <C> <C>
Growth $196,151 $63,046,000 $ 94,854
Value 32,847 13,694,815 18,533
International 128,337 0 0
Asset Allocation 10,984 0 1,795
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
</TABLE>
Fiscal year ended June 30, 1993:
<TABLE>
<S> <C> <C> <C>
Growth $220,361 $69,507,725 $106,673
Value 178,454 43,605,000 80,800
International 147,529 0 0
Asset Allocation 19,797 12,357,924 8,560
Fixed Income 0 0 0
</TABLE>
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<PAGE> 64
<TABLE>
<S> <C> <C> <C>
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
</TABLE>
The Funds may from time to time place orders for the purchase or sale
of securities with brokers that may be affiliated with the Manager or a
Subadviser. In such instances, the placement of orders with such brokers would
be consistent with the Funds' objective of obtaining the best execution and
could not be dependent upon the fact that such brokers are affiliates of the
Manager or a Subadviser. With respect to orders placed with affiliated brokers
for execution on a national securities exchange, commissions received must
conform to Section 17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which
permit an affiliated person of a registered investment company (such as the
Trust), or any affiliated person of such person, to receive a brokerage
commission from such registered investment company provided that such
commission is reasonable and fair compared to the commissions received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time.
During the fiscal year ended June 30, 1995, the Value Fund placed
orders for the purchase or sale of securities with Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, Lehman Brothers, Inc., an affiliate of PanAgora, and
Prudential Securities Incorporated, an affiliate of Jennison and Mercator, and
the Growth Fund placed orders for the purchase or sale of securities with J.P.
Morgan Securities, Inc., an affiliate of Morgan, Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, and Lehman Brothers, an affiliate of PanAgora. These
brokerage transactions are set forth below.
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<PAGE> 65
Fiscal year ended June 30, 1995
<TABLE>
<CAPTION>
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
- ---- ---------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Value Fund Oppenheimer $15,036 8.93% .13%
& Co.
Lehman 1,500 .89% .08%
Brothers,
Inc.
Prudential 3,918 2.33% .08%
Securities
Incorporated
Growth Fund J.P. Morgan 4,688 .98% .22%
Securities,
Inc.
Oppenheimer 767 .17% .21%
& Co.
Lehman 12,063 2.58% .21%
Brothers,
Inc.
</TABLE>
During the fiscal year ended June 30, 1994, the Value Fund placed orders
for the purchase and sale of securities with Oppenheimer & Co. and Prudential
Securities, an affiliate of Mercator, and the Growth Fund placed orders for the
purchase and sale of securities with J.P. Morgan, Lehman Brothers Inc. and
Oppenheimer & Co. These brokerage transactions are set forth below.
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<PAGE> 66
Fiscal year ended June 30, 1994
<TABLE>
<CAPTION>
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
- ---- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Value Fund Prudential $ 750 2.3% 1.2%
Securities
Oppenheimer $ 300 0.9% 2.2%
& Co.
Growth Fund J.P. Morgan $ 3,503 1.79% 1.24%
Lehman $15,400 7.85% 7.17%
Brothers Inc.
Oppenheimer $ 2,745 1.4% 1.10%
& Co.
</TABLE>
Fiscal year ended June 30, 1993
<TABLE>
<S> <C> <C> <C> <C>
Value Fund Lehman $24,046 12.7% 11.6%
Brothers Inc.
Oppenheimer $ 8,364 4.5% 6.0%
& Co.
</TABLE>
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The Trust was established as a Massachusetts business trust under the
laws of Massachusetts by an Agreement and Declaration of Trust dated November
19, 1991. A copy of the Agreement and Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Trust's fiscal
year ends on June 30.
As described in the Prospectus following the caption "Description of
The Preferred Group," shares of the Trust are each entitled to one vote per
share (with proportional voting for fractional shares) on such matters as
shareholders are entitled to vote. Shareholders vote by individual Fund on all
matters except (i) when required by the law, shares shall be voted as a
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<PAGE> 67
single class, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
Funds affected shall be entitled to vote thereon. There will normally be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees have been elected by the
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. In addition, Trustees may
be removed from office by a written consent signed by the holders of two-thirds
of the outstanding shares of the Trust and filed with the Trust's custodian or
by a vote of the holders of two-thirds of the outstanding shares of the Trust
at a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders, who have been such for at
least six months, and who hold shares constituting 1% of the outstanding
shares, stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Trust has undertaken to provide a
list of shareholders or to disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Shareholder Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Trust or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Fund's property for all loss and expense of any
shareholder of that Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
of which he is or was a shareholder would be unable to meet its obligations.
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<PAGE> 68
APPENDIX A
TAX EXEMPT BOND, CORPORATE BOND AND COMMERCIAL PAPER RATINGS
Tax Exempt and Corporate Bond Ratings
Description of Moody's Investors Service, Inc.'s Corporate Bond Ratings:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment 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.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's Corporate Bond Ratings:
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's 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.
<PAGE> 69
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.
BB-B-CCC-CC-C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
D -- Bonds rated D are in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
Ratings of Commercial Paper
Description of Moody's Investors Service, Inc.'s Commercial Paper Ratings:
Moody's Investors Service, Inc. evaluates the salient features that affect
a Commercial Paper issuer's financial and competitive position. Its appraisal
includes, but is not limited to, the review of such factors as: quality of
management, industry strengths and risks, vulnerability to business cycles,
competitive position, liquidity measurements, debt structure, operating trends
and access to capital markets. Differing degrees of weight are applied to
these factors as deemed appropriate for individual situations. Commercial
Paper issuers rated "Prime-1" are judged to be of the best quality. Their
short-term debt obligations carry the smallest degree of investment risk.
Margins of support for current indebtedness are large or stable with cash flow
and asset protection well assured. Current liquidity provides ample coverage of
near-term liabilities and unused alternative financing arrangements are
generally available. While protective elements may change over the
intermediate or longer term, such changes are most unlikely to impair the
fundamentally strong position of short-term obligations. Issuers in the
Commercial Paper market rated "Prime-2" are of high quality. Protection for
short-term note holders is assured with liquidity and value of current assets
as well as cash generation in sound relationship to current indebtedness. They
are rated lower than the best commercial paper issuers because margins of
protection may not be as large or because fluctuations of protective elements
over the near or intermediate term may be of greater amplitude. Temporary
increases in relative short and overall debt load may occur. Alternate means
of financing remain assured. Issuers rated Prime-1 and Prime-2 categories are
judged to be investment grade.
Description of Standard & Poor's Commercial Paper Ratings:
Standard & Poor's describes its highest ("A") rating for commercial paper
as follows, with numbers 1, 2 and 3 being used to denote relative strength
within the "A" classification: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt rating should be "A" or better; in some
instances "BBB" credits may be allowed if other factors outweigh the "BBB".
The issuer should be well-
<PAGE> 70
established and the issuer should have a strong position within its industry.
The reliability and quality of management should be unquestioned.
<PAGE> 71
APPENDIX B
DESCRIPTION OF MONEY MARKET FUND INVESTMENTS
Obligations Backed by Full Faith and Credit of the U.S. Government --
are bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the
U.S. Government. Such obligations include, but are not limited to, obligations
issued by the Government National Mortgage Association, Farmers' Home
Administration and the Small Business Administration.
Other U.S. Government Obligations -- are bills, certificates of
indebtedness, notes, and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government which are supported by the right of
the issuer to borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but are not
limited to, obligations issued by the Tennessee Valley Authority, the Bank for
Cooperatives, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks and the Federal National Mortgage Association.
Repurchase Agreements -- are agreements by which a Fund purchases a
U.S. Treasury or agency obligation and obtains a simultaneous commitment from
the seller (a domestic commercial bank or, to the extent permitted by the 1940
Act, a recognized securities dealer) to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Fund to
earn a return on temporarily available cash at no market risk, although the
Fund may be subject to various delays and risks of loss if the seller is unable
to meet its obligation to repurchase.
Certificates of Deposit -- are certificates issued against funds
deposited in a bank, are for a definite period of time, earn a specified rate
of return, and are normally negotiable.
Bankers' Acceptances -- are short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are term
"accepted" when a bank guarantees their payment at maturity.
Eurodollar Obligations -- obligations of foreign branches of U.S.
banks.
Yankeedollar Obligations -- obligations of domestic branches of
foreign banks.
Commercial Paper -- refers to promissory notes issued by corporations
in order to finance their short-term credit needs.
Corporate Obligations -- include bonds and notes issued by corporations
in order to finance longer term credit needs.
