THE PREFERRED GROUP OF MUTUAL FUNDS PROSPECTUS
100 N.E. Adams Street NOVEMBER 1, 1996
Peoria, Illinois 61629
- ------------------------------------------------------------------------------
The Preferred Group of Mutual Funds ("The Preferred Group") is an
open-end, diversified series investment company offering nine portfolios
("Funds") with different investment objectives and strategies. Shares of the
Funds are offered without a sales charge at net asset value.
PREFERRED GROWTH FUND seeks long-term capital appreciation. The Fund will
invest primarily in equity securities believed to offer the potential for
capital appreciation, including stocks of companies that are experiencing
rapid earnings growth.
PREFERRED VALUE FUND seeks capital appreciation and current income. The
Fund will invest primarily in equity securities that are believed to be
undervalued and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND seeks long-term capital appreciation by
investing its assets primarily in equity securities traded principally on
markets outside the United States.
PREFERRED SMALL CAP FUND seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
PREFERRED ASSET ALLOCATION FUND seeks both capital appreciation and current
income by allocating its assets among stocks, bonds and high quality money
market instruments.
PREFERRED BALANCED FUND seeks total return through a combination of
capital appreciation and current income. The Fund allocates its assets among
stocks, bonds and money market instruments.
PREFERRED FIXED INCOME FUND seeks a high level of current income consistent
with investment in a diversified portfolio of high quality debt securities.
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND seeks high current income,
consistent with preservation of capital, primarily through investment in U.S.
Government Securities.
PREFERRED MONEY MARKET FUND seeks the maximum current income believed to
be consistent with preser vation of capital and maintenance of liquidity by
investing in a portfolio of short-term, fixed-income instruments.
AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus concisely describes the information which investors
should know before investing. Please read this Prospectus
carefully and keep it for future reference.
A Statement of Additional Information dated November 1, 1996, as
supplemented from time to time, is available free of charge by writing to The
Preferred Group, P.O. Box 8320, Boston, MA 02266-8320 or by telephoning
1-800-662-4769. The Statement, which contains more detailed information about
The Preferred Group, has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference in this Prospectus.
- ------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED ON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR MORE INFORMATION ABOUT THE PREFERRED GROUP CALL
1-800-662-GROW.
<PAGE>
TABLE OF CONTENTS
Page
----------
Schedule of Fund Expenses......................... 1
Financial Highlights.............................. 3
Investment Objectives and Policies................ 7
Preferred Growth Fund........................ 7
Preferred Value Fund......................... 8
Preferred International Fund................. 8
Preferred Small Cap Fund..................... 9
Preferred Asset Allocation Fund.............. 9
Preferred Balanced Fund...................... 11
Preferred Fixed Income Fund.................. 13
Preferred Short-Term
Government Securities Fund................ 14
Preferred Money Market Fund.................. 15
General Policies and Risk Considerations.......... 16
Performance Information........................... 21
Page
----------
OPENING YOUR ACCOUNT.............................. 22
How to Buy Shares................................. 22
Exchanging and Redeeming Shares................... 23
Important Information About
Your Account................................. 25
Additional Shareholder Services................... 26
Determination of Net Asset
Value and Pricing............................ 27
Other Information................................. 28
Distributions..................................... 28
Choosing a Distribution Option.................... 28
Taxes .......................................... 29
Statements and Reports............................ 30
Management of The Preferred Group................. 30
Description of The Preferred Group................ 32
Appendix A........................................ 33
Appendix B........................................ 35
SCHEDULE OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(ALL FUNDS)
Maximum sales load imposed on purchases............................... NONE
Maximum sales load imposed on reinvested dividends.................... NONE
Exchange fees......................................................... NONE
Maximum contingent deferred sales charge.............................. NONE
Redemption fees....................................................... NONE
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
ASSET
GROWTH VALUE INTERNATIONAL SMALL CAP ALLOCATION
------- ----- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Management Fees........................ 0.75% 0.75% 0.95% 0.75% 0.70%
Other Expenses......................... 0.11% 0.10% 0.36% 0.48% 0.34%
Total Fund Operating Expenses ......... 0.86% 0.85% 1.31% 1.23% 1.04%
<CAPTION>
SHORT-TERM
FIXED GOVERNMENT
BALANCED INCOME SECURITIES MONEY MARKET
--------- ------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fees *......................... 0% 0.50% 0.35% 0.30%
Other Expenses *.......................... 1.15% 0.28% 0.31% 0.24%
Total Fund Operating Expenses* ........... 1.15% 0.78% 0.66% 0.54%
<FN>
* After expense limitation, in the case of the Balanced Fund.
</FN>
</TABLE>
<PAGE>
The purpose of this table is to assist in understanding the various costs and
expenses of The Preferred Group that are borne by shareholders. Operating
Expenses for the Small Cap Fund are based upon estimates for the Fund's first
full fiscal year. Management Fees for the Small Cap Fund reflect the
termination of a voluntary undertaking by Caterpillar Investment Management
Ltd. ("CIML") to waive a portion of its Management Fees for such Fund. Actual
Management Fees and Total Fund Operating Expenses for the Small Cap Fund for
the period ended June 30, 1996 were 0.40% and 0.88% of average net assets,
respectively. Management Fees for the Money Market Fund reflect the
termination of a voluntary undertaking by CIML to waive fees in excess of
0.15% of average net assets. Actual Management Fees and Total Fund Operating
Expenses for the Money Market Fund for the year ended June 30, 1996 were 0.25%
and 0.49% of average net assets, respectively. Management Fees and "Other
Expenses" for the Balanced Fund reflect a voluntary undertaking by CIML to
bear expenses in excess of 1.15% of average assets. In the absence of the
undertaking and the limits imposed on investment company expenses by
jurisdictions in which shares of the fund are qualified for offer and sale
(described in the Statement of Additional Information), Management Fees,
"Other Expenses" and "Total Fund Operating Expenses" for the Balanced Fund
would have been 0.75%, 3.62% and 4.37% of average net assets, respectively,
for the year ended June 30, 1996. Management Fees shown for the Fixed Income
Fund have been restated to reflect a new management contract with respect to
that Fund. For the year ended June 30, 1996, actual Management Fees and Total
Fund Operating Expenses for the Fixed Income Fund were .65% and .93% of
average net assets, respectively.
EXAMPLE: Your investment of $1,000 would incur the following expenses
assuming 5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
Growth $9 27 48 106
Value 9 27 47 105
International 13 42 72 158
Small Cap 13 39 68 149
Asset Allocation 11 33 57 127
Balanced 12 37 63 140
Fixed Income 8 25 43 97
Short-Term Government Securities 7 21 37 82
Money Market 6 17 30 68
NOTE: THE FIGURES SHOWN IN THE EXAMPLE ARE ENTIRELY HYPOTHETICAL. THEY
ARE NOT REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES; ACTUAL
PERFORMANCE AND/OR EXPENSES MAY BE GREATER OR LESS THAN SHOWN.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
The table on the following pages presents financial highlights for The
Preferred Group, including certain performance information. This information
has been audited and reported on by The Preferred Group's independent
accountants, Price Waterhouse LLP, whose report appears in The Preferred
Group's Annual Report, which is incorporated by reference in the Statement of
Additional Information. The Preferred Group's Annual Report, which contains
additional unaudited performance information, is available without charge upon
request.
<CAPTION>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD)
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Total
NET ASSET Net Realized Income
VALUE, Investment and (Loss) from
BEGINNING Income Unrealized Investment
OF PERIOD (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
GROWTH
Year Ended June 30,
1993 $10.00 $0.01 $2.42 $2.43
1994 12.42 0.01 0.03 0.04
1995 12.46 0.01 4.24 4.25
1996 16.63 0.00 2.44 2.44
<CAPTION>
VALUE
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.19 1.44 1.63
1994 11.52 0.19 (0.12) 0.07
1995 11.33 0.21 2.62 2.83
1996 13.82 0.20 3.13 3.33
<CAPTION>
INTERNATIONAL
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38)
1994 9.59 0.08 2.47 2.55
1995 12.02 0.18 0.60 0.78
1996 12.24 0.19 1.47 1.66
<PAGE>
<CAPTION>
DISTRIBUTIONS DISTRIBUTIONS
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized Total
Income Income Investments Gains Distributions
<S> <C> <C> <C> <C> <C>
GROWTH
Year Ended June 30,
1993 $(0.01) - $ - $ - $(0.01)
1994 - - - - -
1995 (0.02) - (0.06) - (0.08)
1996 (0.01) - (0.54) - (0.55)
<CAPTION>
VALUE
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.11) - - - (0.11)
1994 (0.16) - (0.10) - (0.26)
1995 (0.20) - (0.14) - (0.34)
1996 (0.21) - (0.29) - (0.50)
<CAPTION>
INTERNATIONAL
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - - (0.03)
1994 (0.07) - (0.05) - (0.12)
1995 (0.13) - (0.26) (0.17) (0.56)
1996 (0.17) - (0.01) - (0.18)
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
NET ASSET TOTAL Net Expenses Net
VALUE, RETURN AT Assets, Before Investment Portfolio Average
END OF NET ASSET End of Operating Voluntary Income Turnover Brokerage
PERIOD VALUE* Period Expenses Waiver (Loss) Rate Commissions+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH
Year Ended June 30,
1993 $12.42 24.25% $117,706,665 1.00% - 0.07% 58.12%
1994 12.46 0.34% 171,467,064 0.91% - 0.13% 51.56%
1995 16.63 34.21% 374,592,700 0.87% - 0.13% 55.32%
1996 18.52 14.96% 411,688,146 0.86% - (0.16%) 75.24% N/A
<CAPTION>
VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 11.52 16.37% 121,511,090 0.96% - 1.79% 17.77%
1994 11.33 0.60% 121,088,130 0.93% - 1.64% 11.95%
1995 13.82 25.72% 212,678,363 0.89% - 1.95% 29.02%
1996 16.65 24.49% 267,581,693 0.85% - 1.23% 17.04% N/A
<CAPTION>
INTERNATIONAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 9.59 (3.77%) 39,126,841 1.60% - 1.83% 16.21%
1994 12.02 26.66% 94,933,414 1.38% - 1.37% 27.78%
1995 12.24 6.70% 118,216,038 1.32% - 1.65% 29.47%
1996 13.72 13.70% 157,627,409 1.31% - 1.64% 19.61% N/A
<FN>
*Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
+ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap is the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
</FN>
</TABLE>
<PAGE>
<TABLE>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Total
NET ASSET Net Realized Income
VALUE, Investment and (Loss) from
BEGINNING Income Unrealized Investment
OF PERIOD (Loss) Gain (Loss) Operations
SMALL CAP+
<S> <C> <C> <C> <C>
Period Ended June 30, 1996 (Commenced investment operations on November 1,
1995)
$10.00 $0.05 $1.22 $1.27
ASSET ALLOCATION
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.34 0.99 1.33
1994 10.90 0.30 (0.42) (0.12)
1995 10.27 0.38 1.79 2.17
1996 11.97 0.40 1.72 2.12
<CAPTION>
BALANCED
<S> <C> <C> <C> <C>
Year Ended June 30,
1996 10.00 0.41 0.78 1.19
<CAPTION>
FIXED
INCOME
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.51 0.71 1.22
1994 10.60 0.47 (0.50) (0.03)
1995 9.80 0.58 0.50 1.08
1996 10.30 0.58 (0.16) 0.42
<CAPTION>
SHORT-TERM GOVERNMENT SECURITIES
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.39 0.23 0.62
1994 10.08 0.37 (0.29) 0.08
1995 9.77 0.51 0.03 0.54
1996 9.80 0.53 (0.04) 0.49
<CAPTION>
MONEY MARKET
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 1.00 0.03 - 0.03
1994 1.00 0.03 - 0.03
1995 1.00 0.05 - 0.05
1996 $1.00 $0.05 $ - $0.05
<PAGE>
<CAPTION>
DISTRIBUTIONS DISTRIBUTIONS
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized Total
Income Income Investments Gains Distributions
SMALL CAP+
<S> <C> <C> <C> <C> <C>
Period Ended June 30, 1996 (Commenced investment operations on November 1,
1995)
$(0.02) - $ - $ - $(0.02)
ASSET ALLOCATION
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.34) - (0.09) - (0.43)
1994 (0.30) - (0.21) - (0.51)
1995 (0.38) - (0.09) - (0.47)
1996 (0.40) - (0.81) - (1.21)
<CAPTION>
BALANCED
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1996 (0.28) (0.13) (0.09) - (0.50)
<CAPTION>
FIXED INCOME
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.51) - (0.11) - (0.62)
1994 (0.47) - (0.14) (0.16) (0.77)
1995 (0.58) - - - (0.58)
1996 (0.58) - (0.05) - (0.63)
<CAPTION>
SHORT-TERM GOVERNMENT SECURITIES
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.39) - (0.15) - (0.54)
1994 (0.37) - - (0.02) (0.39)
1995 (0.51) - - - (0.51)
1996 (0.53) - - - (0.53)
<CAPTION>
MONEY MARKET
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - - (0.03)
1994 (0.03) - - - (0.03)
1995 (0.05) - - - (0.05)
1996 $(0.05) - $ - $ - $(0.05)
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
NET ASSET TOTAL Net Expenses Net
VALUE, RETURN AT Assets, Before Investment Portfolio Average
END OF NET ASSET End of Operating Voluntary Income Turnover Brokerage
PERIOD VALUE*** Period Expenses Waiver (Loss) Rate Commissions++
SMALL CAP+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended June 30, 1996 (Commenced investment operations on November 1,
1995)
$11.25 12.67%*+++ $45,692,712 0.88%** 1.23%** 0.75%** 65.70%+++ $0.047
ASSET ALLOCATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.90 13.57% 48,420,381 1.27% - 3.25% 34.10%
1994 10.27 (1.28%) 58,961,139 1.25% - 2.76% 24.71%
1995 11.97 21.70% 77,745,018 1.11% - 3.52% 18.27%
1996 12.88 18.23% 96,889,348 1.04% - 3.21% 38.25% N/A
<CAPTION>
BALANCED
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1996 10.69 12.11%* 4,005,993 1.15% 4.37% 2.77% 48.03% N/A
<CAPTION>
FIXED INCOME
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.60 12.59% 35,889,454 1.05% - 4.91% 316.06%
1994 9.80 (0.46%) 45,872,668 0.97% - 4.53% 254.92%
1995 10.30 11.48% 57,911,899 0.95% - 5.94% 330.55%
1996 10.09 4.12% 111,184,492 0.93% - 5.65% 313.51% N/A
<CAPTION>
SHORT-TERM GOVERNMENT SECURITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.08 6.32% 27,027,485 0.78% - 3.87% 268.36%
1994 9.77 0.86% 30,271,535 0.74% - 3.75% 134.34%
1995 9.80 5.71% 32,121,171 0.71% - 5.27% 256.44%
1996 9.76 5.10% 51,755,317 0.66% - 5.37% 79.04% N/A
<CAPTION>
MONEY MARKET
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 1.00 2.71%* 18,146,496 0.80% 0.87% 2.67% N/A
1994 1.00 2.91%* 45,605,598 0.53% 0.68% 2.97% N/A
1995 1.00 5.27%* 79,585,753 0.39% 0.54% 5.24% N/A
1996 $1.00 5.32%* $90,482,435 0.49% 0.54% 5.25% N/A N/A
<FN>
*Total return for the Balanced, Small Cap and Money Market Funds would
have been lower if a portion of the fees had not been capped or waived by the
manager.
**Annualized.
***Total return at net asset value assumes reinvestment of dividends and
capital gains distributions. + Eight-month period ended June 30, 1996.
++ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap is the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
+++ Not annualized.
</FN>
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are stated below. There is
no assurance that any Fund will achieve its objective. Each Fund (other than
the Short Term Government Securities and Money Market Funds) may engage in a
variety of transactions involving options and futures contracts and each Fund
(other than the Short-Term Government Securities and Money Market Funds) may
invest in securities traded principally in securities markets outside the
United States. For more information about these and other investment
strategies employed by the Funds, see "General Policies and Risk
Considerations." Appendix A contains a description of the ratings of the bonds
in which the Funds may invest. Each Fund is managed by Caterpillar Investment
Management Ltd. ("CIML"). CIML is responsible for, among other things,
providing a continuing investment program for the Funds in accordance with the
investment objectives and policies of each Fund. In order to assist it in
carrying out its responsibility, CIML has retained various subadvisers to
render advisory services to the Funds under the supervision of CIML and The
Preferred Group's Board of Trustees. For further information about CIML and
the various subadvisers, see "Management of The Preferred Group."
PREFERRED GROWTH FUND
Subadviser: Jennison Associates Capital Corp. ("Jennison")
Portfolio Manager: Lulu C. Wang, CFA
Title: Director, Executive Vice President, Jennison
Last Five Years Experience: Portfolio Manager at Jennison. Lulu has managed
the Growth Fund since its inception on July 1, 1992.
Education: B.A. - Wellesley College; MBA - Columbia University; Chartered
Financial Analyst The investment objective of the Growth Fund is long-term
capital appreciation.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities believed by Jennison to offer the potential for
capital appreciation, including stocks of companies that are experiencing
above-average earnings growth. When selecting securities for the Fund's
portfolio, Jennison will consider a variety of factors, including a company's
earnings, historical and expected sales growth, return on assets and equity,
financial condition, strength and experience of its management group, research
and development practices and marketing strength and capability. The Fund may
also invest in other securities, including obligations issued or guaranteed by
the U.S. Government or its agencies, authorities or instrumentalities,
corporate bonds or short-term debt obligations.
A portion of the Fund's assets may be invested in securities of companies
with relatively low equity market capitalizations. These may include
securities traded over-the-counter and securities of companies with limited
operating histories. Such companies may have more restricted product lines or
more limited financial resources than larger, more established companies. For
these and other reasons, they may be more severely affected by economic
downturns or other adverse developments than are larger, more established
companies. Securities of such companies often trade less frequently and in
more limited volume, and may be subject to more upside or downside risk, than
securities of larger, more established companies.
<PAGE>
PREFERRED VALUE FUND
Subadviser: Oppenheimer Capital ("Oppenheimer")
Portfolio Manager: John G. Lindenthal
Title: Managing Director, Oppenheimer
Last Five Years Experience: Portfolio Manager at Oppenheimer. John has
managed the Value Fund since its inception on July 1, 1992.
Education: B.S., MBA - University of Santa Clara
The Value Fund seeks capital appreciation and current income.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in equity securities that Oppenheimer believes are undervalued
and that offer above-average potential for capital appreciation. Equity
securities include common stocks, preferred stocks and securities convertible
into common stocks ("convertible securities"). In selecting securities,
Oppenheimer analyzes companies that have high return on equity and assets,
large undedicated cash flows, significant prospects for dividend growth and
reasonable prices in relation to book value. The key considerations in
evaluating a security are financial strength of the balance sheet, industrial
position, current and future profitability, effectiveness of management and
attractive valuation. The Fund may also invest in other securities, including
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities, corporate bonds or short-term debt
obligations.
PREFERRED INTERNATIONAL FUND
Subadviser: Mercator Asset Management, L.P.
Portfolio Manager: Peter F. Spano, CFA
Title: President, PXS Corp.
General Partner
Last Five Years Experience: Portfolio Manager at Mercator. Pete has
managed the International Fund since its inception on July 1, 1992.
Education: BBA - St. John's University; MBA - Baruch College (City
University of New York); Chartered Financial Analyst
The investment objective of the International Fund is long-term capital
appreciation.
The International Fund will invest primarily in equity securities traded
principally on markets outside the United States, including emerging markets,
that Mercator believes are undervalued and offer above-average potential for
capital appreciation. Under normal market conditions, at least 65% of the
International Fund's total assets will be invested in at least three different
countries, not including the United States. The Fund may also purchase
corporate bonds and government bonds, including any such securities traded
principally in domestic markets. The International Fund may also invest in
bankers' acceptances or negotiable bank certificates of deposit issued by
United States or foreign banks having outstanding debt rated at least A by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's ("S&P") or,
if not so rated, of equivalent quality as determined by Mercator; prime
commercial paper issued by companies having an outstanding debt issue rated at
least A by Moody's or S&P or rated at least Prime-2 or better by Moody's or
A-2 or better by S&P or, if not rated, of comparable quality as determined by
Mercator; and high-grade short-term corporate obligations rated at least A by
Moody's or S&P.
<PAGE>
The securities markets of many nations can be expected to move relatively
independently of one another, because business cycles and other economic or
political events that influence one country's securities markets may have
little effect on the securities markets of other countries. By investing in a
foreign portfolio, the International Fund seeks to reduce the risks associated
with investing in the economy of only one country. However, investments in
foreign securities involve certain risks. See "General Policies and Risk
Considerations -- Risk Factors of Foreign Investments."
PREFERRED SMALL CAP FUND
Portfolio Manager: Todd M. Sheridan, CFA
Title: Portfolio Manager, CIML
Last Five Years Experience: Portfolio Manager at CIML since October, 1992.
Prior to that time, he held various positions within the Corporate Treasury
Department of Caterpillar Inc. Todd has been involved in the management of the
Small Cap Fund since its inception on November 1, 1995.
Education: B.S. - University of Illinois; Chartered Financial Analyst
The Small Cap Fund seeks long-term capital appreciation through
investments in companies with small equity capitalizations. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
common stock and other equity securities of small-capitalization issuers
(generally defined as companies with equity capitalizations of less than $1
billion). In selecting securities for the Fund, CIML seeks out small-
capitalization companies according to a variety of factors, including a
company's earnings, price/cash flow ratio, market price to book value,
earnings/price ratio and various technical analyses. The Fund may also invest
in other securities, including equity securities of large-capitalization
issuers, obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities, and corporate bonds or short-term
debt obligations rated at the time of purchase at least A or Prime-2,
respectively, by Moody's or A or A-2, respectively, by S&P or, if not so
rated, of equivalent quality as determined by CIML.
Securities of small-capitalization companies may include securities
traded over-the-counter and securities of companies with limited operating
histories. Such companies may have more restricted product lines or more
limited financial resources than larger, more established companies. For these
and other reasons, they may be more severely affected by economic downturns or
other adverse developments than are larger, more established companies.
Securities of small-capitalization companies often trade less frequently and
in more limited volume, and may be subject to greater volatility, than
securities of larger, more established companies.
PREFERRED ASSET ALLOCATION FUND
Subadvisers: Mellon Capital Management Corporation ("Mellon") and PanAgora
Asset Management, Inc. ("PanAgora")
Portfolio Manager: Thomas B. Hazuka
Title: Executive Vice President, Mellon
Last Five Years Experience: Portfolio Manager at Mellon. Tom has been
involved in the management of the Asset Allocation Fund since its inception
on July 1, 1992.
<PAGE>
Education: B.S. - Stevens Institute of Technology; MBA - University of
Connecticut; PHD - Stanford University
Portfolio Manager: Edgar E. Peters
Title: Director of Asset Allocation and Chief Investment Strategist, PanAgora
Last Five Years Experience: Portfolio Manager at PanAgora. Ed has been
involved in the management of the Asset Allocation Fund since its inception
on July 1, 1992.
Education: B.S. - Montclair State College; MBA - Rutgers University
The Asset Allocation Fund seeks both capital appreciation and current income.
The Fund allocates its assets among stocks, bonds and money market
instruments. At the date of this Prospectus, Mellon and PanAgora each manage
approximately one-half of the Fund's assets (although these proportions may
change due to differential performance) and it is currently expected that all
amounts received by the Fund for sales of its shares and all amounts paid by
the Fund for redemptions of Fund shares will be split evenly between Mellon
and PanAgora. The portion of the Fund's assets invested in stocks, bonds and
money market instruments will vary from time to time in light of changes in
interest rates and other economic factors. The Fund expects, however, that in
the near term it will invest a substantial portion of its assets in each asset
class, although the Fund may invest without limit in each asset class.
HOW MELLON MANAGES THE FUND. Mellon allocates the Fund's assets among stocks,
bonds and money market instruments based on the expected returns on each of
these three asset classes, the risks of each of the asset classes and the
correlations among the asset classes. The common stocks in which the Fund may
invest are those that from time to time comprise the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500"). The bonds in which the Fund may
invest will be limited to long-term U.S. Treasury Bonds. The money market
instruments in which the Fund may invest will be limited to short-term
investments (i) rated at the time of purchase Prime-1 as determined by Moody's
or A-1 as determined by S&P, (ii) unrated securities that Mellon determines to
be of comparable quality, and (iii) repurchase agreements with respect to U.S.
Government securities. Mellon may also achieve a substantial portion of the
Fund's exposure to the stock and bond markets through the use of financial
futures and related options. For instance, Mellon may increase the Fund's
exposure to stocks by taking long positions in Standard & Poor's 500 Stock
Index futures contracts. Similarly, Mellon may increase the Fund's exposure to
bonds by taking long positions in futures contracts on U.S. Treasury bonds.
The Fund may also engage in a variety of strategies, including the use of
futures contracts and related options and investments in asset-backed
securities. See "General Policies and Risk Considerations" for more
information about these strategies.
HOW PANAGORA MANAGES THE FUND. PanAgora uses a proprietary asset
allocation discipline that provides percentage guidelines (the "Guidelines")
indicating the mix of holdings among stocks, bonds and money market
instruments that may be appropriate at any given time. The Guidelines are
established by comparing the expected performance with the current performance
for each investment class. The expected performance for each investment class
is the performance that PanAgora would ordinarily expect to obtain over a
ten-year period from investments in that class, based upon its empirical
analysis of the long-term performance of stocks, bonds and money market
instruments. The current performance for each investment class is the actual
performance for that class during a current period with reference to the
following: stocks -- the S&P 500; bonds -- the Shearson Lehman Long Treasury
Index; and money market instruments -- the 3-month and 1-year Treasury bills.
Leading economic and capital market indicators are also integrated into the
process of establishing Guidelines. PanAgora may achieve a substantial portion
of the Fund's exposure to the stock and bond markets through the use of
financial futures and related options, as described in the preceding
paragraph.
<PAGE>
In selecting stocks for the Fund, PanAgora will generally purchase
a substantial percentage of the stocks comprising the S&P 500 and gives
important consideration to diversification and trading liquidity. PanAgora
attempts to select stocks which, as a portfolio, have similar investment
characteristics, such as industry representation, dividend yield and
capitalization, and which have investment performance similar to the stocks
comprising the S&P 500. In selecting stocks, PanAgora also gives consideration
to the value and growth potential of individual stocks.
With respect to bonds, the Fund invests in highly liquid investment-grade
securities issued by the U.S. Government and its agencies, instrumentalities
or authorities and by major U.S. corporations. All such securities are
included in the Lehman Brothers Government/Corporate Bond Index (the "Lehman
Index"), a composite of all government, Federal agency and publicly traded
investment-grade corporate debt securities with a maturity of one year or
longer. Investment-grade fixed income securities are securities rated Baa or
higher by Moody's or BBB or higher by S&P, and unrated securities that are of
equivalent quality in the opinion of PanAgora. Securities rated Baa by Moody's
or BBB by S&P have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such obligations than in
the case of higher-rated securities. In the event that the rating of any
security held by the Fund falls below Baa by Moody's and/or BBB by S&P, the
Fund will not be obligated to dispose of such security, and may continue to
hold the obligation if, in the opinion of PanAgora, such investment is
considered appropriate in the circumstance. PanAgora generally selects fixed
income securities for the Fund to match the Lehman Index in maturity, quality,
sector and coupon characteristics. Typically, the average maturity of fixed
income securities selected is approximately 10 years, although the Fund may
invest in longer or shorter maturities when, in the opinion of PanAgora,
investment opportunities warrant.
With respect to money market instruments, the Fund invests in U.S.
Government obligations, bank certificates of deposit and time deposits,
bankers' acceptances, prime commercial paper, high-grade, short-term corporate
obligations and repurchase agreements with respect to these instruments.
PREFERRED BALANCED FUND
Subadviser: Jennison Associates Capital Corp.
Portfolio Manager: Bradley L. Goldberg, CFA
Title: Director, Executive Vice President, Jennison
Last Five Years Experience: Equity and balanced portfolio manager and chairman
of the Asset Allocation Committee at Jennison. Brad has managed the Balanced
Fund since its inception on July 1, 1995.
Education: B.S. - University of Illinois; MBA - New York University;
Chartered Financial Analyst Associate
Portfolio Manager: Peter Reinemann
Title: Director, Senior Vice President, Jennison
Last Five Years Experience: Equity and balanced associate portfolio
manager at Jennison since 1992. Prior to that time, he served as a Vice
President at Paribas Asset Management, Inc. Peter has been involved in the
management of the Balanced Fund since its inception on July 1, 1995.
Education: B.A. - Boston University
<PAGE>
The Balanced Fund seeks total return through a combination of capital
appreciation and current income. The Fund allocates its assets among stocks,
bonds and money market instruments.
At the date of this Prospectus, Jennison intends to allocate the assets
of the Fund according to the following ranges: (i) 40-70% of the assets of the
Fund will be invested in common stocks, preferred stocks and securities
convertible into common stocks; (ii) 25-55% of the assets of the Fund will be
invested in debt securities (i.e., fixed income securities with maturities of
one to thirty years); and (iii) 5-35% of the assets of the Fund will be
invested in short-term fixed income securities (i.e., money market
instruments). From time to time, Jennison may vary the allocations of the
Fund's assets from those ranges described above. In determining the Fund's
allocation among the various asset classes, Jennison focuses on the relative
valuation of each asset class, utilizing a wide range of macroeconomic,
fundamental, quantitative and technical methods. The Fund's assets are
actively shifted among the three asset classes in an attempt to capitalize on
intermediate term (i.e., twelve to eighteen months) valuation opportunities
and to maximize the Fund's total investment return. The Fund will at all times
hold at least 25% of its assets in senior fixed income securities (including,
for these purposes, that portion of the value of securities convertible into
common stock which is attributable to the fixed income characteristics of
those securities).
The equity component of the Fund will consist of common stocks, preferred
stocks and securities convertible into common stocks of companies that
Jennison believes offer the potential for above-average capital appreciation.
The primary factor in selecting equity securities for the Fund is earnings
growth at a reasonable price. In evaluating earnings growth prospects for
individual companies, Jennison considers a variety of characteristics
including a company's historic record, management skills and financial
strength. Jennison utilizes its staff of research analysts as an important
part of this equity selection process. Jennison combines this focus on
earnings growth with valuation discipline. A number of both fundamental and
technical measures are utilized in determining whether individual securities
are attractively priced. The overall objective is to capture corporate
earnings growth at a reasonable price.
The debt securities component of the Fund will consist primarily of high
quality fixed income securities, such as U.S. Government and agency
obligations. The Fund may also invest in U.S. corporate debt securities,
foreign government and corporate obligations, and mortgage-backed and
asset-backed securities. See "General Policies and Risk Considerations" for
more information about these strategies. The minimum average dollar-weighted
credit quality of the Fund's debt portfolio (excluding short-term investments)
will be A by either Moody's or S&P. For purposes of this average credit rating
requirement, instruments that are not rated will be assigned a rating by
Jennison. The Fund may, subject to the average credit rating requirement,
invest up to 5% of its net assets in securities rated below Baa by Moody's or
BBB by S&P (commonly known as "junk bonds") and in unrated securities that are
of equivalent quality in the opinion of Jennison. Securities rated lower than
A by either Moody's or S&P have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments on such obligations
than in the case of higher-rated securities. In the event that the rating of
any security held by the Fund falls below its rating at the time of purchase,
the Fund will not be obligated to dispose of such security and may continue to
hold the security if, in the opinion of Jennison, such investment is
considered appropriate in the circumstances. The values of debt securities
generally vary inversely with interest rates. Investments in lower-rated fixed
income securities generally provide greater income than investments in
higher-rated securities, but are subject to greater market fluctuations and
risks of loss of income and principal than higher-rated securities.
Fluctuations in the value of portfolio securities will not affect interest
income on existing portfolio securities but will be reflected in the Fund's
net asset value.
With respect to short-term fixed income securities, the Fund may invest
in U.S. Government obligations, bank certificates of deposit and time
deposits, banker's acceptances, prime commercial paper, high-grade short-term
corporate obligations and repurchase agreements with respect to these
instruments.
<PAGE>
PREFERRED FIXED INCOME FUND
Subadviser: J.P. Morgan Investment Management Inc. ("Morgan")
Portfolio Manager: Paul L. Zemsky, CFA
Title: Managing Director, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Paul has been
involved in the management of the Fixed Income Fund since January 1, 1994.
Education: B.S.E.E. - University of Pennsylvania
The investment objective of the Fixed Income Fund is a high level of
current income consistent with investment in a diversified portfolio of debt
securities.
Morgan will pursue the Fund's objective by investing the Fund's assets
primarily in publicly traded domestic debt securities (e.g., U.S. Treasury and
agency obligations, mortgage-backed securities and corporate debt securities),
as supplemented by investment in other fixed income markets (e.g., corporate
private placements, directly-placed mortgage obligations and foreign currency
denominated bonds) to increase the potential for higher returns with reduced
volatility. Morgan does not seek to achieve the Fund's objective in each
portfolio security, but endeavors to manage the portfolio as a whole in such a
way as to achieve its objective. Under normal market conditions, at least 65%
of the Fund's total assets will be invested in fixed income securities.
Pending investment and reinvestment in debt securities and for temporary
defensive purposes, Morgan may invest the Fund's assets in money market
instruments. Allocations are made among a wide array of market sectors, such
as U.S. Treasury and agency obligations, corporate securities, mortgages and
mortgage-backed securities, private placement securities and non-U.S. dollar
denominated securities, based on the relative attractiveness of such sectors.
Following these sector allocations, Morgan will purchase those securities
deemed attractively valued in the desired sectors. The Fund may invest in any
fixed income security, including preferred stocks.
Under normal market conditions, Morgan will manage the Fund's portfolio
subject to the following investment guidelines:
1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments): A by either Moody's or S&P. For purposes of
calculating this average credit requirement, instruments that are not rated
will be assigned a rating by Morgan.
2. Minimum credit quality for short-term investments at the time of
purchase: Prime-1 by Moody's or A-1 by S&P.
It is expected that the Fund's portfolio will generally have a duration of no
less than three years and no more than seven years (excluding short-term
investments). The duration of a fixed income security is the weighted average
maturity, expressed in years, of the present value of all future cash flows,
including coupon payments and principal repayments.
The Fund may invest in any security which is rated, at the time of
purchase, at least Baa as determined by Moody's or BBB as determined by S&P,
or in any unrated security that Morgan determines to be of comparable quality
and, in addition, may invest up to 5% of its total assets in any security
which is rated, at the time of purchase, below Baa as determined by Moody's or
BBB as determined by S&P, or in any unrated security that Morgan determines to
be of comparable quality. Securities rated lower than A by either Moody's or
S&P have speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments on such obligations than in the case of
higher-rated securities. In the event that the rating of any security held by
the Fund falls below its rating at the time of purchase, the Fund will not be
obligated to dispose of such security, and may continue to hold the obligation
if, in the opinion of Morgan, such investment is considered appropriate in the
circumstance. The values of debt securities change as interest rates
fluctuate. Investments in lower-quality fixed income securities generally
provide greater income than investments in higher-rated securities, but are
subject to greater market fluctuations and risks of loss of income and
principal than higher-rated securities. Fluctuations in the value of portfolio
securities will not affect interest income on existing portfolio securities
but will be reflected in the Fund's net asset value.
<PAGE>
The Fund's debt securities may include corporate or U.S. Government
zero-coupon securities of any maturity, securities such as Government
National Mortgage Association ("Ginnie Mae") certificates which
represent ownership interests in mortgage pools and securities backed by
commercial mortgages, including mortgages on a single property. For additional
information about these securities, see "General Policies and Risk
Considerations -- Mortgage-Backed Securities, Asset-Backed Securities and
Zero-Coupon Securities."
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
Portfolio Manager: J. Steven Orr, CFA
Title: Portfolio Manager, CIML
Last Five Years Experience: Portfolio Manager at CIML since June, 1993. Prior
to that time, he held fixed income trading and portfolio management positions
with United Services Advisors, L&N Investment Co., and MBank Austin. Steven
has had primary responsibility for the Short-Term Government Securities Fund
since June 28, 1995.
Education: B.A. - University of Texas; MBA - Southwest Texas State
University; JD - St. Mary's School of Law; Chartered Financial
Analyst
The investment objective of the Short-Term Government Securities Fund
is high current income, consistent with preservation of capital.
The Fund will invest primarily in securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Certain of these "U.S. Government Securities," such as U.S.
Treasury bills, notes and bonds, mortgage participation certificates
guaranteed by Ginnie Mae and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States. Other U.S.
Government Securities are supported by the discretionary authority of the U.S.
Government to purchase the issuer's obligations or by the right of the issuer
to borrow from the U.S. Treasury. The U.S. Treasury is under no legal
obligation, however, to purchase securities or to make loans. Still other U.S.
Government Securities are supported only by the credit of the agency,
authority or instrumentality itself. Agencies or instrumentalities whose
obligations are not backed by the full faith and credit of the U.S. Government
include, among others, the Federal National Mortgage Association ("Fannie
Mae"), Federal Home Loan Banks, the Tennessee Valley Authority, the Bank for
Cooperatives and the Federal Home Loan Mortgage Corporation. A significant
portion of the Fund's portfolio may consist of Ginnie Mae mortgage-backed
certificates ("Ginnie Mae Certificates") and other U.S. Government Securities
representing ownership interests in mortgage pools. Under normal market
conditions, not less than 65% of the Fund's total assets will be invested in
U.S. Government Securities and related repurchase agreements. In order to
reduce risk, the Fund will maintain an average dollar-weighted portfolio
maturity of not more than three years and will typically purchase securities
with remaining maturities of less than five years.
<PAGE>
U.S. Government Securities do not involve the credit risks associated with
investments in other types of fixed income securities, although, as a result,
the yields available from U.S. Government Securities are generally lower than
the yields available from otherwise comparable corporate fixed income
securities. Like other fixed income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will not affect interest income on existing
portfolio securities but will be reflected in the Fund's net asset value.
The Fund's debt securities may include U.S. Government zero-coupon
securities of any maturity and securities such as Ginnie Mae Certificates
which represent ownership interests in mortgage pools. For additional
information about these securities, see "General Policies and Risk
Considerations -- Mortgage-Backed Securities, Asset-Backed Securities and
Zero-Coupon Securities."
PREFERRED MONEY MARKET FUND
Subadviser: J.P. Morgan Investment Management Inc.
Portfolio Manager: Robert (Skip) R. Johnson
Title: Vice President, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Skip has been
involved with the management of the Money Market Fund since its inception on
July 1, 1992.
Education: B.A. - Dartmouth College
The Money Market Fund seeks the maximum current income believed to be
consistent with preservation of capital and maintenance of liquidity by
investing in a portfolio of U.S. dollar-denominated short-term, fixed income
instruments which include:
o short-term U.S. Government Securities;
o certificates of deposit and bankers' acceptances;
o prime commercial paper;
o high-quality, short-term corporate obligations; and
o repurchase agreements with respect to U.S. Government Securities.
All of the Fund's investments will, at the time of investment, have remaining
maturities of 397 days or less. The average dollar-weighted maturity of the
Fund's portfolio will be 90 days or less. The Fund's investments are limited
to those which, in accordance with standards established by The Preferred
Group's Trustees, are believed to present minimal credit risk.
The Money Market Fund may invest up to 100% of its total assets in bank
obligations.
For more information about the securities in which the Fund may invest, see
"General Policies and Risk Considerations -- Money Market Instruments."
Because of the high quality and short maturity of the Fund's investments, the
Fund's yield may be lower than that of funds that invest in lower-rated
securities and securities of longer maturities. Unlike investments which pay a
fixed yield for a stated period of time, money market fund yields fluctuate.
<PAGE>
GENERAL POLICIES AND RISK CONSIDERATIONS
PORTFOLIO TURNOVER. Portfolio turnover is not a limiting factor with respect
to investment decisions. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs on the sale of
securities and reinvestment in other securities, which will be borne directly
by the Funds. These transactions may also result in the realization of taxable
capital gains. Portfolio turnover rates for the life of the Funds (other than
the Small Cap and Balanced Funds) are shown in the section "Financial
Highlights." Portfolio turnover rates in excess of 100% are generally
considered to be high. While it is impossible to predict a Fund's portfolio
turnover rate, such rates are not generally expected to exceed 200% and 150%
for the Small Cap and Balanced Funds, respectively. MONEY MARKET INSTRUMENTS.
The money market instruments in which the Money Market Fund may invest
include:
(1) short-term U.S. Government Securities;
(2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two
major rating agencies, or, if rated by only one major agency, in such
agency's two highest grades, or unrated but determined to be comparable
by the subadviser to the Fund pursuant to procedures approved by The
Preferred Group's Trustees. Bank obligations must be those of a bank
that has deposits in excess of $2 billion or that is a member of the
Federal Deposit Insurance Corporation. The Fund may invest in
obligations of U.S. branches or subsidiaries of foreign banks
("Yankeedollar obligations") or foreign branches of U.S. banks
("Eurodollar obligations");
(3) commercial paper rated in the two highest rating categories by
at least two major rating agencies, or, if rated by only one major
agency, in such agency's two highest grades, or if not rated, of
comparable quality as determined by the subadviser to the Fund pursuant
to procedures approved by The Preferred Group's Trustees;
(4) corporate obligations with an initial maturity in excess of 397
days but a remaining maturity of 397 days or less whose issuers have
outstanding short-term debt obligations rated in the highest rating
category by at least two major rating agencies, or, if rated by only one
major agency, in such agency's highest grade; and
(5) repurchase agreements with domestic commercial banks or
registered broker-dealers. See "Repurchase Agreements."
For temporary defensive purposes, each of the other Funds may also invest
all or a portion of its assets in the foregoing kinds of money market
instruments, although determinations of the quality of unrated securities may
be made by each Fund's subadviser.
Federal law limits the percentage of the Money Market Fund's
assets that may be invested in instruments that are not rated in the highest
rating category (or that are unrated but determined to be of comparable
quality).
OPTIONS AND FUTURES TRANSACTIONS; FOREIGN CURRENCY TRANSACTIONS.
Each Fund (except the Short-Term Government Securities Fund and the Money
Market Fund) may engage in a variety of transactions involving options and
futures contracts, which are commonly known as "derivative securities," for
hedging, for divided accruals and portfolio allocation purposes and not for
speculation, as follows:
<PAGE>
To increase current return, the Fixed Income Fund may write covered call
and covered put options on any security that they are eligible to purchase.
For hedging purposes, it may (1) purchase call options on securities it
expects to acquire, and put options on securities it holds, and (2) purchase
and sell futures contracts on U.S. Government Securities and purchase and
write options on such futures contracts.
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; and (3) buy and sell stock
index options, stock index futures contracts and options on stock index
futures contracts. 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.
In order to hedge against possible variations in foreign exchange rates
pending the settlement of securities transactions, each of the Funds (other
than the Short-Term Government Securities and Money Market Funds) may buy or
sell foreign currencies or may deal in forward foreign currency contracts;
that is, agree to buy or sell a specified currency at a specified price and
future date. These Funds may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, a Fund may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates for a particular currency will rise, a Fund
may purchase a currency futures contract or a call option thereon or sell
(write) a put option to protect against an increase in the price of securities
denominated in that currency the Fund intends to purchase. These futures
contracts and related options will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the
Funds will be covered. These practices, however, may present risks different
from or in addition to the risks associated with investments in foreign
currencies. Each of the Growth, Value, Small Cap, Asset Allocation, Balanced
and Fixed Income Funds will invest no more than 5% of its assets in foreign
currencies, foreign currency forward contracts or foreign currency futures
contracts and options on such futures contracts.
Although hedging strategies are intended to reduce fluctuations in a
Fund's net asset value, each Fund (other than the Money Market Fund)
nonetheless anticipates that its net asset value will fluctuate to some
degree. No Fund will engage in options and futures transactions for leveraging
purposes.
Appendix B and the Statement of Additional Information contain more
information about options and futures contracts and related risks.
RISK FACTORS OF FOREIGN INVESTMENTS. The Money Market Fund may invest all
or any portion of its assets in Yankeedollar and Eurodollar obligations and in
dollar-denominated commercial paper of foreign issuers. The Growth, Value,
Small Cap, Asset Allocation, Balanced and Fixed Income Funds each may invest
without limit in securities of foreign issuers which are traded in domestic
securities markets and may invest up to 10% (20% with respect to the Balanced
Fund) of their respective total assets in securities traded principally in
securities markets outside the United States. (Eurodollar certificates of
deposit are excluded for purposes of these limitations.)
These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded overseas, may
involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage),
expropriation of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing
judgments against foreign entities. Furthermore, issuers of foreign securities
are subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The securities of some foreign
companies and foreign securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets, and certain foreign securities markets may be subject to less
governmental supervision than in the United States. Foreign brokerage
commissions and other fees are also generally higher than in the United
States. There are also special tax considerations which apply to securities of
foreign issuers and securities principally traded overseas.
<PAGE>
The International Fund may also invest in countries whose economies or
securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular commodities
or on international aid or development assistance, currency transfer
restrictions, a limited number of potential buyers for such securities and
delays and disruptions in securities settlement procedures.
A Fund's investments in foreign currency-denominated debt obligations and
hedging activities will likely produce a difference between its book income
and its taxable income. This difference may cause a portion of the Fund's
income distributions to constitute returns of capital for tax purposes or
require the Fund to make distributions exceeding book income to qualify as a
"regulated investment company" for federal tax purposes.
LOANS OF PORTFOLIO SECURITIES. Each Fund (except the Money Market Fund)
may lend its portfolio securities to broker-dealers under contracts calling
for collateral in cash, U.S. Government Securities or other high-quality debt
securities equal to at least the market value of the securities loaned. Each
Fund will continue to benefit from interest on the securities loaned and will
also receive either interest, through investment of cash collateral by the
Fund in permissible investments, or a fee, if the collateral is U.S.
Government Securities. Securities lending involves the risk of loss of rights
in the collateral or delay in recovery of the collateral should the borrower
fail financially.
SHORT SALES. Each Fund (except the Money Market Fund) may from time to
time make short sales involving securities held in the Fund's portfolio or
which the Fund has the right to acquire without the payment of further
consideration.
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The
Balanced and Short-Term Government Securities Funds may purchase U.S.
Government Securities on a when-issued basis, and may purchase or sell such
securities for delayed delivery. All Funds except the Money Market Fund may
make contracts to purchase securities for a fixed price at a future date
beyond normal settlement time ("forward commitments"). Each of these Funds may
also enter into forward commitments to sell securities. Each Fund may
simultaneously be obligated with respect to forward commitment purchase and
sale contracts and may sell a portfolio security or enter into a forward
commitment sale contract (a "dollar-roll transaction") that is coupled with an
agreement by the Fund (including a forward commitment) to repurchase the
security at a later date. When-issued transactions, delayed delivery purchases
and forward commitments involve a risk of loss if the value of the securities
declines prior to the settlement date, which risk is in addition to the risk
of decline in the value of the Fund's other assets. No income accrues to the
purchaser of such securities prior to delivery.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements with banks and broker-dealers, which are agreements by which a Fund
acquires a security (usually an obligation of the U.S. Government) for cash
and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-upon price and date. The resale price is in excess of
the acquisition 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 there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
Fund to expenses, delays and risks of loss.
<PAGE>
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND ZERO-COUPON
SECURITIES. Each of the Funds may invest in mortgage-backed securities,
collateralized mortgage obligations ("CMOs") and asset-backed securities.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed security. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayments are
important because of their effect on the yield and price of the securities.
During periods of declining interest rates, such prepayments can be expected
to accelerate and a Fund would be required to reinvest the proceeds at the
lower interest rates then available. In addition, prepayments of mortgages
which underlie securities purchased at a premium could result in capital
losses because the premium may not have been fully amortized at the time the
obligation is prepaid. As a result of these principal prepayment features,
mortgage-backed securities that are U.S. Government Securities are generally
more volatile investments than other U.S. Government Securities. Also,
although the values of mortgage-backed securities generally fall when interest
rates rise, their potential for capital appreciation in periods of falling
interest rates is limited because of the prepayment feature.
CMOs, which are commonly known as "derivatives," are securities backed by
a portfolio of mortgages or mortgage-backed securities held under an
indenture. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued with a number of classes or series which have
different maturities and which may represent interests in some or all of the
interest or principal on the underlying collateral or a combination thereof.
CMOs of different classes are generally retired in sequence as the underlying
mortgage loans in the mortgage pool are repaid. In the event of sufficient
early prepayments on such mortgages, the class or series of CMOs first to
mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of a CMO held by a Fund would have
the same effect as the prepayment of mortgages underlying a mortgage-backed
pass-through security.
Commercial mortgage-related securities are generally structured similarly to
pass-through securities or to CMOs, although other structures are possible.
They may pay fixed or adjustable rates of interest. Commercial
mortgage-related securities have been issued in public or private transactions
by a variety of public and private issuers. The commercial mortgage loans that
underlie commercial mortgage-related securities have certain distinct risk
characteristics. Commercial mortgage loans generally lack standardized terms,
which may complicate their structure. Commercial properties themselves tend to
be unique and are more difficult to value than single family residential
properties. Commercial mortgage loans also tend to have shorter maturities
than residential mortgage loans, and may not be fully amortizing, meaning that
they may have a significant principal balance, or "balloon" payment, due on
maturity. Assets underlying commercial mortgage-related securities may relate
only to a few properties or a single property. The risk involved in single
property financings is highly concentrated.
<PAGE>
Asset-backed securities are structured like mortgage-backed securities,
but instead of mortgage loans or interests in mortgage loans, the underlying
assets may include motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property and
receivables from credit card agreements. The ability of an issuer of
asset-backed securities to enforce its security interest in the underlying
assets may be limited, and asset-backed securities are subject to prepayment
risks similar to those described above for mortgage-backed securities.
The Fixed Income and Short-Term Government Securities Funds may also
invest in "zero-coupon" U.S. Government Securities (which are issued at a
significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security) or in certificates
representing undivided interests in "stripped" U.S. Government Securities and
coupons ("IO/PO Strips"). See "Taxes" for a discussion of the tax consequences
of zero-coupon securities. IO/PO Strips are usually structured with two
classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets. Zero-coupon securities and IO/PO
Strips tend to be more volatile than other types of U.S. Government
Securities. Mortgage-backed IO Strips involve the additional risk of loss of
the entire value of the investment if the underlying mortgages are prepaid.
IO/PO Strips that are U.S. Government Securities backed by fixed-rate
mortgages may be considered liquid securities if so determined by the relevant
subadviser pursuant to procedures approved by The Preferred Group's Trustees.
All other IO/PO Strips will be considered illiquid. To the extent either Fund
invests in IO/PO Strips that are "stripped" by private entities, such
securities will not be considered to be U.S. Government Securities.
Zero-coupon securities may be issued by the U.S. Treasury or by a U.S.
Government agency, authority or instrumentality (such as the Student Loan
Marketing Association or the Resolution Funding Corporation). A Fund is
required to accrue and distribute income from zero-coupon securities on a
current basis, even though it does not receive that income currently in cash.
Thus the Fund may have to sell other investments to obtain cash needed to make
income distributions.
ILLIQUID SECURITIES. Each Fund (other than the Money Market Fund) may
purchase "illiquid securities," which include securities whose disposition is
restricted by the securities laws, so long as no more than a fixed percentage
of that Fund's net assets (determined by the SEC to be 15% as of the date of
this Prospectus) would be invested in such illiquid securities after giving
effect to the purchase. Because there may be relatively few potential
purchasers for such securities, especially under adverse market or economic
conditions or in the event of adverse changes in the financial condition of
the issuer, a Fund could find it more difficult to sell such securities when
CIML or the relevant subadviser believes it advisable to do so or may be able
to sell such securities only at prices lower than if such securities were not
subject to restrictions on disposition. At times, it may also be more
difficult to determine the fair value of such securities for purposes of
computing a Fund's net asset value. The Money Market Fund may not invest more
than 10% of its net assets in illiquid securities. Illiquid securities at
present are considered to include repurchase agreements maturing in more than
seven days, certain IO/PO Strips, over-the-counter options and assets used to
"cover" over-the-counter options written by a Fund (to the extent described
under "Options and Futures Transactions -- OTC Options" in the Statement of
Additional Information).
LIMITING INVESTMENT RISK. Specific investment restrictions help the Funds
limit investment risks for their shareholders. These restrictions prohibit:
o each Fund from investing more than 5% of its total assets in the
securities of any one issuer (other than U.S. Government Securities
and repurchase agreements relating thereto), although up to 25% of the
total assets of each Fund may be invested without regard to this
restriction;*
<PAGE>
o each Fund from investing 25% or more of its total assets in the
securities of any one industry, except that the Money Market Fund may
invest up to 100% of its assets in certificates of deposit and
bankers' acceptances issued by domestic banks (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
o each Fund from investing more than 5% of its total assets in
securities of any issuers if the issuers (or the parties responsible
for payment in the case of debt securities), together with any
predecessors, have been in operation for less than three years (except
CMOs, asset-backed securities, U.S. Government Securities and
repurchase agreements relating thereto).
"FUNDAMENTAL" POLICIES. Restrictions marked with an asterisk (*) above
are summaries of fundamental policies and therefore may only be changed with
the approval of shareholders. See the Statement of Additional Information for
the full text of these policies and the Funds' other fundamental policies.
Except for any policy explicitly identified as "fundamental," the investment
objective and policies of each Fund described in this Prospectus may be
changed without shareholder approval. If there is a change in a Fund's
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
PERFORMANCE INFORMATION
From time to time The Preferred Group may make available certain information
about the performance of some or all of the Funds. Information about a Fund's
performance is based on that Fund's record to a recent date and is not
intended to indicate future performance.
All Funds may include Total Return data in advertisements or other
written material. Total Return for the one and three-year periods and for the
life of a Fund, each through the most recent calendar quarter, represents the
average annual compounded rate of return on an investment of $1,000 in the
Fund.
Each of the Asset Allocation, Balanced, Fixed Income and Short-Term
Government Securities Funds may advertise its Yield, accompanied by its Total
Return. A Fund's Yield will be computed by dividing the net investment income
per share earned during a recent one-month period by the net asset value per
share (reduced by any undeclared earned income expected to be paid shortly as
a dividend) on the last day of the period.
The Money Market Fund may advertise its Yield and Effective Yield. The
Money Market Fund's Yield is based upon the income earned by the Fund over a
seven-day period and then annualized (i.e., the income earned in the period is
assumed to be earned every seven days over a 52-week period and stated as a
percentage of the investment). Effective Yield is calculated similarly but,
when annualized, the income earned by the investment is assumed to be
reinvested in Fund shares and thus compounded over the course of a 52-week
period. Methods used to calculate advertised yields are standardized for money
market funds.
The Preferred Group may also include in its advertising and sales
materials editorial comments and performance rankings published by 1)
recognized mutual fund statistical services, such as Lipper Analytical
Services, Inc., Morningstar, Inc. or Donoghue's Money Fund Report, and 2)
publications of general interest, such as Money, Forbes or Business Week
magazines. Performance information may be quoted numerically or may be
presented in a graph, table or other illustration. The Preferred Group may
also compare the performance of a Fund to that of well-known market
indicators.
<PAGE>
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OPENING YOUR ACCOUNT
- ------------------------------------------------------------------------------
To open a new account, simply complete and return the New Account Registration
Form included with this Prospectus and mail with your check or money order. We
must have your correct social security or corporate tax identification number
and your signature. In order to open an account, you must meet the minimum
investment requirements described below. A completed and signed application is
required for each new account you open. Redemptions will not be permitted
until your completed application is on file. Purchase orders received by The
Preferred Group by 4:00 p.m. (Eastern time) on any regular business day will
be processed at that day's net asset value. (See "Determination of Net Asset
Value and Pricing.") There are no sales commissions or 12b-1 fees. All
shareholders will receive individual confirmations of each purchase,
redemption, dividend reinvestment, exchange or transfer of shares, including
the total number of shares owned as of the confirmation date. If you have
questions about the Funds, or require additional assistance with the New
Account Registration Form, please call Investor Services at 1-800-662-GROW
(1-800-662-4769). HOW TO BUY SHARES You can purchase shares of any Fund by
using one of the four methods described below.
- ------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------
BY MAIL $1,000--Regular Account $50 for All Accounts
$ 250--IRAs & Uniform
Gifts/ Transfers to Minors
Accounts
$ 150--Quarterly Systematic
Savings Plan
$ 50--Monthly Systematic
Savings Plan
For new accounts, please mail us your New Account Registration Form and check
in the return envelope provided. For additional investments, please mail us
your check, write your account number on your check, use the remittance form
attached to your confirmation statement, and mail in the return envelope
provided. All checks should be made payable to "The Preferred Group (name of
Fund)." Third party checks will not be accepted. All purchase requests should
be mailed to one of the following addresses:
Regular Mail: Registered, Express or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
Shares of each Fund of The Preferred Group are continuously offered to the
public each day the New York Stock Exchange is open.
<PAGE>
FOR ALL CHOICES BELOW, PLEASE CALL 1-800-662-GROW
- ------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------
BY EXCHANGE $1,000 $50
(from another Fund)
The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."
- ------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------
BY WIRE $1,000 $1,000
Federal funds should be wired to: State Street Bank & Trust Company,
Custody and Shareholder Services Division, Boston, MA 02110, ABA No.
011000028, DDA: 9904-636-9, The Preferred Group, your name and your
Fund/Account Number.
- ------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------
BY MONEY Not Available $50
EXPRESS
(Electronic Funds
Transfer Option)
You must authorize this service on your account application. The maximum
transfer amount is $50,000.
EXCHANGING AND REDEEMING SHARES
Shares may be exchanged or redeemed on the basis of their respective net asset
values beginning 10 days after purchase on any day the New York Stock Exchange
is open. There are currently no exchange or redemption fees or charges. You
may redeem all or a portion of your shares. Please note that an exchange is
treated as a redemption and a subsequent purchase. Therefore, you could
realize a taxable gain or loss on your transaction. The Preferred Group
reserves the right to modify or terminate the exchange privilege at any time.
Except as otherwise permitted by SEC regulations, The Preferred Group will
give 60 days' advance written notice to shareholders of any termination or
material modification of the exchange privilege. The Preferred Group's
exchange service is not intended to encourage shareholder speculation on
short-term movements in the market. Each Fund reserves the right to restrict
exchanges to one purchase and redemption of shares in the same Fund during any
120-day period. The exchange privilege may not be exercised for shares of any
Fund which are not qualified or exempt under the securities laws of the state
in which the shareholder resides.
HOW TO REDEEM OR EXCHANGE SHARES
- ------------------------------------------------------------------------------
METHOD INSTRUCTIONS
- ------------------------------------------------------------------------------
BY MAIL To redeem or exchange shares in writing, send an
instruction letter signed by all registered owners,
including fiduciary titles, specifying the name on the
account and the account number, the Fund name and the number
of shares or dollar amount you want to exchange or redeem.
For exchanges, mail to the attention of the Fund you are
exchanging from and specify the Fund you are exchanging to.
We require the signature of all owners exactly as
registered. For redemptions over $50,000 we require a
signature guarantee.
<PAGE>
Regular Mail Address: Express, Registered or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS. The letter of
instruction must be accompanied by a resolution. The letter
must be signed by at least one individual authorized by
resolution to act on the account. The resolution must
include a signature guarantee. TRUSTS. The letter of
instruction must be signed by the Trustee(s) with a
signature guarantee.
NOTE: If you want to keep your account open, please
maintain a balance of at least $1,000. If you have
questions, please call Investor Services at 1-800-662-GROW.
- ------------------------------------------------------------------------------
FOR ALL OPTIONS BELOW, CALL INVESTOR SERVICES AT 1-800-662-GROW
- ------------------------------------------------------------------------------
BY PHONE If you have authorized Preferred Tele-Services on your
account application, exchanges or redemptions can be made
between 8:00 a.m. (Eastern time) and the close of regular
trading on the New York Stock Exchange (generally 4:00
p.m. (Eastern time)).
Redemption proceeds can be mailed, wired to your bank or
sent by electronic funds transfer. The Preferred Group's
bank charges a $10.00 fee for wire redemptions, minimum
$100, subject to change without notice. Your bank may also
charge you for receiving wires.
- ------------------------------------------------------------------------------
BY CHECK If you have authorized the check writing feature on your
account application, you may redeem shares in your account
provided that the appropriate signatures are on your check.
The minimum check amount is $250. There is no charge for
this service, and you may write an unlimited number of
checks, provided the account minimum of $1,000 per Fund is
maintained. Check writing privileges apply to the Money
Market and the Short-Term Government Securities Funds ONLY.
- ------------------------------------------------------------------------------
BY MONEY If you have authorized the Preferred Money Express feature
on your account application, EXPRESS you may redeem by
electronic funds transfer. The maximum redemption amount is
$50,000.
- ------------------------------------------------------------------------------
BY WIRE If you have authorized the Wire Transfer feature on your
account application, you may have your redemption proceeds
wired to your bank on the next business day after the
redemption is processed. The Preferred Group's bank charges
a $10.00 fee for wire redemptions, minimum $100, subject to
change without notice. Your bank may also charge you for
receiving wires.
- ------------------------------------------------------------------------------
The redemption of shares will be suspended during any period in which the New
York Stock Exchange is closed for other than weekends or holidays or, if
permitted by the rules of the SEC, when trading on the Exchange is restricted
or during an emergency which makes it impracticable for the Funds to dispose
of their securities or to determine fairly the value of their net assets, or
during any other period permitted by the SEC for the protection of investors.
Redemption proceeds are normally paid in cash. However, if you redeem more
than $250,000, or 1% of a Fund's net assets, in any 90-day period, the Fund
may, at its discretion, pay the difference between the redemption amount and
the lesser of those two figures with securities of the Fund. In the event that
redemptions are made in securities rather than cash, such securities will be
valued using the procedures described under "Determination of Net Asset Value
and Pricing." Although The Preferred Group will normally send you payment for
your shares the following business day after your request is received in
proper form by the Transfer Agent, the transmission of your proceeds may be
delayed for up to seven days after your request is received. The mailing of
proceeds on redemption requests involving any shares purchased by personal,
corporate or government check, or bank-fund transfers is generally subject to
a 10-day delay to allow the check or transfer to clear. The clearing period
does not apply to purchases made by wire, Systematic Savings Plan, or
cashier's, treasurer's or certified checks. Redemption or transfer requests
will not be honored until all required documents in the proper form have been
received by the Transfer Agent.
<PAGE>
IMPORTANT INFORMATION ABOUT YOUR ACCOUNT
ACCOUNT BALANCES. The Preferred Group reserves the right to redeem shares in
any account which drops below the minimum initial investment amount of $1,000
due to shareholder redemptions. You will be allowed 60 days to make an
additional investment before the account is liquidated. The minimum does not
apply to IRAs or other retirement accounts, Uniform Gifts/Transfers to Minors
Act accounts, or Systematic Savings Accounts.
BROKER-DEALERS. If you purchase Preferred Group shares through a
registered broker-dealer, a bank or other institution, those entities may
charge a service fee.
DISTRIBUTION OPTIONS. You can select the distribution option that best
suits your needs. See "Choosing a Distribution Option."
NON-U.S. BANK CHECKS. All deposit checks must be drawn on U.S. chartered
banks. Checks drawn on foreign banks must be converted to U.S. dollars; in
the case of smaller investments, the fee for conversion may be
disproportionately high in relation to the value of the investment.
PURCHASES BY CHECK. Purchases are accepted subject to collection
of checks at full value and conversion into federal funds. Payment by a check
drawn on any member of the Federal Reserve System can normally be converted
into federal funds within two business days after receipt of the check. Checks
drawn on a nonmember bank may take up to 10 days to convert into federal
funds. In all cases, the purchase price is based on the net asset value next
determined after the purchase order and check are accepted, even though the
check may not yet have been converted into federal funds. Third party checks
will not be accepted.
SHARE CERTIFICATES. When you open your account, you will receive a
confirmation indicating your name and account number which will be
evidence that you have opened a Preferred Group account. No share certificates
will normally be issued.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature and is sometimes required for our mutual protection. When a
signature guarantee is required, you should have "Signature Guaranteed"
stamped under your signature and guaranteed at a commercial bank
(FDIC member), trust company, firm that is a member of a domestic stock
exchange, foreign branches of any of the above and certain other financial
institutions.
You will need a signature guarantee to: (1) authorize or change
certain services after your account is opened; (2) transfer shares to another
owner; (3) redeem over $50,000 by written request; (4) redeem or exchange
shares when someone who is not a registered owner of the account will receive
the proceeds; (5) send proceeds to an address other than the account address;
and (6) pay the proceeds to a corporation, partnership, trust or fiduciary.
<PAGE>
TELEPHONE EXCHANGE AND REDEMPTION. The Preferred Group may accept telephone
redemption or exchange instructions from any person with respect to accounts
of shareholders who elect this service. The Preferred Group will employ
reasonable procedures in order to verify that telephone requests for
redemptions and exchanges are genuine, including, among others, requiring a
form of personal identification prior to acting on telephone instructions,
recording telephone instructions and sending written confirmations of the
resulting transactions to shareholders. If the Preferred Group did not employ
such procedures, it could be liable for losses arising from unauthorized or
fraudulent telephone instructions. The Preferred Group reserves the right to
terminate or modify the telephone exchange or telephone redemption service at
any time. Except as otherwise permitted by SEC regulations, The Preferred
Group will give 60 days' advance written notice to shareholders of any
termination or material modification of the telephone exchange or telephone
redemption service. During times of severe disruption in the securities
markets, the volume of calls may make it difficult to exchange or redeem by
telephone, in which case a shareholder may wish to send a written request for
exchange or redemption as described under "Exchanging and Redeeming Shares --
By Mail."
ADDITIONAL SHAREHOLDER SERVICES
CHECK-WRITING SERVICES (MONEY MARKET AND SHORT-TERM GOVERNMENT SECURITIES
FUNDS ONLY). The minimum check amount is $250. This service is FREE and you
may write an unlimited number of checks. You must maintain a minimum $1,000
account balance after your withdrawal. (Remember that redeeming shares from
the Short-Term Government Securities Fund will be treated as a capital gain or
loss transaction for tax purposes.)
PREFERRED MONEY EXPRESS (ELECTRONIC FUNDS TRANSFER OPTION). This plan allows
you to buy or sell shares by transferring money between your Fund account and
your account at a bank, savings and loan association or a credit union that is
a member of the ACH (Automated Clearing House) system. Preferred Money Express
eliminates the expense of wiring funds and the delay of mailing a check. You
will need to sign up for Preferred Money Express on your account application.
PREFERRED TELE-SERVICES LINE. You may reach The Preferred Group by calling
Preferred Tele-Services at 1-800-662-GROW, 24 hours a day. Between the hours
of 8:00 a.m. and 6:00 p.m. (Eastern time) you will reach an Investor Services
Representative. If you are calling after 6:00 p.m. (Eastern Time) on a
Touch-Tone phone, you will receive instructions on how you can (1) listen to
price and yield information and (2) obtain your share balance and account
value. If you are calling on a rotary dial phone during normal business hours,
you will be connected with an Investor Services Representative. The Preferred
Group will record telephone transactions to verify data concerning these
transactions.
SYSTEMATIC SAVINGS PLAN. This option allows you to make monthly or
quarterly investments automati cally by authorizing us to move $50 or more on
the same day each month (or $150 per quarter) from your checking account to
any Fund. You will be sent a confirmation statement for each transaction, and
a debit will appear on your checking account statement. To change the amount
of your systematic savings or to terminate this service, please call Investor
Services or write to the address printed on your account statement. Be sure to
include your account number.
SYSTEMATIC WITHDRAWAL PLAN. This plan automatically redeems enough shares
each month or quarter to provide you with a check, wire or electronic funds
transfer to your checking account for a minimum amount of $50 monthly or $150
quarterly. You must maintain a $1,000 minimum account balance after your
withdrawal.
<PAGE>
TAX-QUALIFIED RETIREMENT PLANS. Tax-deferred individual retirement
plans are available. Please call Investor Services for details and the
appropriate forms for:
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). Any wage earner between 18 and 70
1/2 years of age can contribute up to $2,000 per tax year. Contributions
of up to $250 per year may be made in the name of your spouse if your
spouse has no earned income. Contributions of up to $2,000 may be made
in the name of your spouse for taxable years beginning after December
31, 1996.
ROLLOVER IRAS. When a participant of a tax-favored retirement
plan receives an eligible rollover distribution of assets, the assets
may be "directly transferred" or "directly rolled over" into an IRA.
Eligible rollover distributions that are not "directly transferred" to
an IRA or other tax-favored retirement plan are subject to tax
withholding at a 20% rate. Rollovers can also occur from an existing IRA
into a Preferred Group IRA.
SEP-IRAS. Simplified Employee Pension Plans are arrangements under
which employers may contribute directly to an employee's IRA.
In addition, The Preferred Group may be an appropriate investment for
403(b) Plans, 401(k) Plans and Keogh or corporate Profit-Sharing Plans.
DETERMINATION OF NET ASSET VALUE AND PRICING
NET ASSET VALUE PER SHARE (NAV), or share price, for each Fund is normally
determined on each day the New York Stock Exchange is open as of the close of
regular trading on the Exchange (generally 4:00 p.m. (Eastern time)). Fund
share prices (other than the Money Market Fund) can be found daily in most
major newspapers' mutual fund listings under the heading "Preferred Group."
PURCHASE SHARE PRICE. If your request is received on a regular business day
before 4:00 p.m. (Eastern time) in good order, your shares will be priced at
that day's net asset value. Requests received after 4:00 p.m. (Eastern time)
will be priced at the next day's net asset value. Requests to purchase shares
on other than a regular business day will be priced at the net asset value
determined on the next succeeding regular business day. The Preferred Group
reserves the right to accept or reject any order for the purchase of Fund
shares.
REDEMPTION SHARE PRICE. If your redemption request is received prior
to 4:00 p.m. (Eastern time) in good order on a regular business day, your
shares will be priced at that day's net asset value. Redemption proceeds will
normally be sent on the following business day. Redemption requests received
after 4:00 p.m. (Eastern time) will be processed on the business day following
receipt.
EXCHANGE SHARE PRICE. Exchanges are priced in the same manner as
purchases and redemptions.
DETERMINATION OF NAV. Each Fund's share price is calculated by dividing
the total value of each Fund's assets, minus liabilities, by the total number
of shares outstanding. Portfolio securities, options and futures contracts for
which market quotations are readily available are valued at market value.
Short-term obligations having remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. The portfolio
investments of the Money Market Fund are valued using the amortized cost
method of valuation, in accordance with Rule 2a-7 under the Investment Company
Act of 1940. All other securities and assets are valued at their fair value as
determined in good faith following procedures approved by the Trustees.
<PAGE>
GENERAL. Please note that The Preferred Group does not accept requests which
specify a particular date for purchases or redemptions, or which specify any
special conditions. We will notify you if your request cannot be accepted and
provide additional instructions.
OTHER INFORMATION The Trust may pay brokerage commissions to brokers that
are affiliated with the advisor or subadvisors. Caterpillar Investment Trust
401(k) Plan may be deemed to "control" the Growth, Value, International, Small
Cap, Asset Allocation, Short-Term Government Securities and Money Market
Funds, Caterpillar Inc. Supplemental Unemployment Benefits Group Insurance
Trust A and Caterpillar Group Insurance Trust B may be deemed to "control" the
International, Small Cap, Asset Allocation, Balanced Fixed-Income and
Short-Term Government Securities Funds, and Preferred Stable Principal
Collective Trust and American Banker's Insurance Co. may be deemed to
"control" the Fixed Income and Short-Term Government Securities Funds,
respectively, because in each case the indicated entity owned of record more
than 25% of the relevant Fund's outstanding securities as of September 30,
1996.
DISTRIBUTIONS
GENERAL. Dividends will be declared daily and paid monthly for the Fixed
Income, Short-Term Government Securities and Money Market Funds. Dividends
will be declared and paid quarterly for the Asset Allocation and Balanced
Funds. The Growth, Value, International and Small Cap Funds will declare and
pay dividends at least annually. Each Fund pays out as dividends substantially
all of its net investment income (which comes from dividends and interest it
receives from its investments) and net realized short-term capital gains. For
these purposes and for federal income tax purposes, a portion of the premiums
from certain expired call or put options written by a Fund, net gains from
closing purchase and sale transactions with respect to such options, and net
gains from futures transactions are treated as short-term capital gains. Each
Fund distributes substantially all of its net realized capital gains, if any,
at least annually after giving effect to any available capital loss
carry-over. The Growth and International Funds currently have available
capital loss carry-overs. Subject to applicable law, dividends and capital
gains distributions may be declared more or less frequently in the discretion
of the Trustees.
BUYING A DIVIDEND.
On the record date for a distribution, the Fund's share value will be reduced
by the amount of the distribution. If you purchase shares just before the
record date ("buying a dividend"), you will pay the full price for the shares
and then receive a portion of the purchase price back as a taxable
distribution.
CHOOSING A DISTRIBUTION OPTION
When you fill out your account application, you may select any one of the
following distribution options. If you do not specify an option, all of your
distributions will be reinvested in additional shares of the relevant Fund. If
you choose to change your distribution election, you must notify Investor
Services in writing. The address for Investor Services is The Preferred Group,
P.O. Box 8320, Boston, MA 02266-8320.
REINVEST OPTION. All dividends and capital gain distributions are reinvested
in additional shares. All distributions will be reinvested as of the record
date for the distribution and will be paid on the payment date.
<PAGE>
CASH DIVIDEND OPTION. All dividends are paid in cash (by check). All capital
gains distributions are reinvested in additional Fund shares as of the record
date for the distribution and will be paid on the payment date.
ALL CASH OPTION. All dividends and capital gain distributions are paid in
cash (by check).
In addition, an option to invest your cash dividends and/or capital gains
distributions of a Preferred Group Fund in another Preferred Group Fund is
available. Please call Investor Services (1-800-662-GROW) for more
information. If it is determined that the U.S. Postal Service cannot properly
deliver Fund mailings to you, The Preferred Group will terminate your election
to receive dividends and other distributions in cash, and will invest the
undeliverable distributions in shares of the relevant Fund. Thereafter, your
subsequent dividends and other distributions will be automati cally reinvested
in additional shares of the relevant Fund until you notify The Preferred Group
in writing of your correct address and request in writing that the election to
receive dividends and other distributions in cash be reinstated.
TAXES
Each Fund will be treated as a separate taxable entity for federal income
tax purposes. Each Fund plans to distribute substantially all of its net
investment income and net realized short-term capital gains, if any, to its
shareholders. So long as it does so and otherwise satisfies the requirements
for being taxed as a regulated investment company, the Fund itself will not
pay federal income tax on the amounts distributed. Shareholders will receive
an annual statement detailing federal tax information about dividends and
distributions paid to shareholders during or with respect to the preceding
calendar year.
Dividends and any short-term capital gains distributions of the
Funds are taxable to the shareholder as ordinary income. Distributions
designated as long-term capital gains are taxable to shareholders as such,
regardless of how long a shareholder may have owned shares in the Fund.
Distributions will be taxable as described above whether received in cash or
in shares through the reinvestment of distributions. A dividend paid to a
shareholder by a Fund in January of a year generally is deemed to have been
paid by the Fund by December 31 of that preceding year if the dividend was
declared and payable to shareholders of record on a date in the preceding
year.
Dividends derived from interest on certain U.S. Government Securities
may be exempt from state and local taxes, although interest on mortgage-backed
U.S. Government Securities (which may constitute a substantial portion of the
Short-Term Government Securities Fund's assets) may not be so exempt.
Shareholders should consult their tax advisers as to the possible application
of state and local income tax laws to a Fund's dividends and capital gains
distributions.
The International Fund generally intends to make an election which allows
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax returns. As a
result, the amounts of foreign income taxes paid by the International Fund
would be treated as additional income to International Fund shareholders from
non-U.S. sources and as foreign taxes paid by International Fund shareholders
for purposes of the foreign tax credit. Investors should consult their tax
advisers for further information relating to the foreign tax credit and
deduction, which are subject to certain restrictions and limitations.
International Fund shareholders who are not U.S. citizens or which are foreign
corporations may be subject to substantially different tax treatment on
distributions by the International Fund.
<PAGE>
The Internal Revenue Code of 1986 (the "Code") imposes a 4% excise tax on the
undistributed ordinary income of any Fund that fails to distribute prior to
calendar year end virtually all of its ordinary income on a calendar year
basis. Capital gain net income realized by each Fund in the one-year period
ending October 31 and not distributed during the calendar year is also subject
to the 4% excise tax. It is each Fund's intention to make distributions
sufficient to avoid the excise tax.
Current federal tax law requires the holder of a Treasury or other fixed
income zero-coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives
no interest payment in cash on the security during the year. In addition,
so-called payment-in-kind securities will give rise to income which is
required to be distributed and is taxable even though the Fund holding the
security receives no interest payments in cash on the security during the
year. Accordingly, each Fund that holds the foregoing kinds of securities may
be required to pay out as an income distribution each year an amount which is
greater than the total amount of cash interest the Fund actually received.
Such distributions may be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. The Fund may realize gains
or losses from such liquidations. In the event a Fund realizes net capital
gains from such transactions, its shareholders may receive a larger capital
gain distribution, if any, than they would in the absence of such
transactions.
STATEMENTS AND REPORTS
You will receive a confirmation statement after every transaction that
affects the share balance in any of your accounts.
By January 31 of each year, The Preferred Group will send you the
following reports which may be utilized in completing your U.S. income tax
return:
Form 1099 - DIV Reports taxable distributions during the preceding
calendar year.
Form 1099 - B Reports redemption proceeds during the preceding
calendar year.
Form 1099 - R Reports distributions from IRAs and 403(b) plans during
the preceding calendar year.
Each year by the end of February, The Preferred Group will send you a
semiannual report that includes unaudited financial statements for the six
months ending the preceding December 31, as well as a list of portfolio
holdings as of that date.
Each year by the end of August, The Preferred Group will send you an
annual report that includes audited financial statements for the fiscal year
ending the preceding June 30, as well as a list of portfolio holdings as of
that date.
MANAGEMENT OF THE PREFERRED GROUP
GENERAL. The Preferred Group is managed by Caterpillar Investment
Management Ltd. (the "Manager"), which provides investment advisory and
portfolio management services for The Preferred Group. The Manager also
provides executive and other personnel for management of The Preferred Group.
Pursuant to The Preferred Group's Agreement and Declaration of Trust, the
Trustees supervise the affairs of The Preferred Group as conducted by the
Manager.
<PAGE>
Prior to November 1, 1996, CIML was paid for its services as manager of
the Fixed Income Fund at the annual rate of .65% of such Fund's average net
assets. Effective November 1, 1996, CIML's fee with respect to the Fixed
Income Fund was reduced to an annual rate equal to the lesser of (i) .50% of
the average net assets of the Fixed Income Fund and (ii) the rate at which (A)
the excess of (I) the fee paid by the Fixed Income Fund to CIML over (II) the
fee paid by CIML to Morgan with respect to the Fixed Income Fund (see below)
equals (B) the excess that would have existed under the advisory and
subadvisory fee schedules in effect with respect to the Fixed Income Fund
prior to November 1, 1996. For more information regarding the fees paid to
CIML by the Fixed Income Fund, see the Statement of Additional Information.
The Preferred Group pays 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 Preferred Group, interest charges,
taxes, brokerage commissions, expenses of issuing or redeeming shares, fees
and expenses of registering and qualifying The Preferred Group 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 net asset value, reports to 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.
CIML is a Delaware corporation formed on December 18, 1991. Its principal
place of business is 100 N.E. Adams Street, Peoria, Illinois 61629-5330. CIML
is a wholly-owned subsidiary of Caterpillar Inc., an international
manufacturer of machinery and engines and provider of financial products. In
addition to managing the Funds, CIML serves as an investment adviser to the
Caterpillar Investment Management Ltd. Tax Exempt Group Trust (the "Group
Trust"). CIML has advised the Funds since inception and has experience
managing portfolios of the Group Trust that are similar to certain of the
Funds.
THE SUBADVISERS. In order to assist it in carrying out its
responsibilities, CIML has retained various sub advisers to render advisory
services to the Funds, under the supervision of CIML and The Preferred Group's
Trustees. CIML pays the fees of each of the subadvisers. The fee paid to the
subadvisers (other than with respect to the Money Market Fund) 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 (other than the Money Market Fund).
(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 with respect to the Money Market Fund), 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 Money
Market Fund is based solely on the average net assets of that Fund.
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., 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. For the fiscal year ended June 30, 1996,
Oppenheimer was paid at an effective annual rate of 0.28% of the Value Fund's
average net assets.
<PAGE>
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. For the fiscal year ended June 30, 1996,
Jennison was paid at an effective annual rate of 0.25% of the Growth Fund's
average net assets and 0.25% of the Balanced Fund's average net assets.
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 $46 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. For the fiscal year ended June 30, 1996,
Mellon was paid at an effective annual rate of 0.30% of the Asset Allocation
Fund's average net assets.
PanAgora's 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 allocations 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 $14 billion. For the fiscal year ended June 30, 1996, PanAgora was
paid at an effective annual rate of 0.15% of the Asset Allocation Fund's
average net assets.
Mercator 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 a Delaware general
partnership owned by its executive officers and The Prudential Insurance, a
20% limited partner. For the fiscal year ended June 10, 1996, Mercator was
paid at an effective annual rate of 0.57% of the International Fund's average
net assets.
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. Prior to November 1, 1996, CIML
paid Morgan for its subadvisory services with respect to the Fixed Income Fund
on the basis of the average net assets of that Fund only, rather than on
Combined Assets. In addition, effective November 1, 1996, the subadvisory fee
for the Fixed Income Fund was reduced. For more information regarding the fees
paid to Morgan, see the Statement of Additional Information. For the fiscal
year ended June 30, 1996, Morgan was paid at an effective annual rate of 0.27%
of the Fixed Income Fund's average net assets. CIML 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. For the fiscal year ended June 30, 1996, Morgan was
paid at an effective annual rate of 0.15% of the Money Market Fund's average
net assets.
<PAGE>
DESCRIPTION OF THE PREFERRED GROUP
The Preferred Group was established in 1991 as a business trust under
Massachusetts law. The Preferred Group has an unlimited authorized number of
shares of beneficial interest which may, without shareholder approval, be
divided into an unlimited number of series of such shares which, in turn, may
be subdivided into an unlimited number of classes of shares. The Preferred
Group currently consists of nine series of shares, each series of which
represents interests in a separate Fund. Each Fund is an open-end, diversified
management investment company. The Funds' shares are not currently divided
into classes. Matters submitted to shareholder vote must be approved by each
Fund separately except that (i) when required by law, shares shall be voted
together and (ii) when the Trustees have determined that the matter does not
affect all Funds, only shareholders of the Fund or Funds affected shall be
entitled to vote on the matter. Shares of a Fund are freely transferable, are
entitled to dividends as declared by the Trustees and, in liquidation of such
Fund or The Preferred Group, are entitled to receive the net assets of such
Fund, but not of the other Funds. The Preferred Group does not generally hold
annual meetings of shareholders and will do so only when required by law.
Shareholders may remove Trustees from office by votes cast in person or by
proxy at a meeting of shareholders or by written consent. Such a meeting will
be called at the written request of the holders of 10% of The Preferred
Group's outstanding shares.
APPENDIX A
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
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.
<PAGE>
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.
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.
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-established and the issuer should have a
strong position within its industry. The reliability and quality of management
should be unquestioned.
Additional information concerning securities in the lower rating
categories is included in the Trust's Statement of Additional Information.
<PAGE>
APPENDIX B
OPTIONS AND FUTURES PORTFOLIO STRATEGIES
WRITING COVERED OPTIONS
Each of the Funds (other than the Short-Term Government Securities Funds and
the Money Market Fund) may write covered call and covered put options on
securities. Call options written by a Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price; put
options give the holder the right to sell the underlying security to the Fund.
These options are covered by the Fund because, in the case of call options, it
will own the underlying securities as long as the option is outstanding or
because, in the case of put options, it will maintain a segregated account of
cash, U.S. Government Securities or other high quality debt securities which
can be liquidated promptly to satisfy any obligation of the Fund to purchase
the underlying securities. The Funds may also write straddles (combinations of
puts and calls on the same underlying security).
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option and the remaining term of the option. By writing
a call option, the Fund limits its opportunity to profit from any increase in
the market value of the underlying security above the exercise price of the
option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then current market value, resulting in a potential capital loss unless
the security subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. It is
possible, however, that illiquidity in the options markets may make it
difficult from time to time for a Fund to close out its written option
positions. Also, the securities exchanges have established limitations on the
number of options which may be written by an investor or group of investors
acting in concert. It is possible that the Funds, together with CIML and the
various subadvisers and their other clients, might be considered to be such a
group.
PURCHASING OPTIONS
Each Fund (except the Short-Term Government Securities Fund and the Money
Market Fund) may purchase put options to hedge against a decline in the value
of its portfolio. By using put options in this manner, a Fund will reduce any
profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
Each Fund (except the Short-Term Government Securities Fund and the Money
Market Fund) may purchase call options to hedge against an increase in the
value of securities that the Fund wants to buy sometime in the future. The
premium paid for the call option and any transaction costs will increase the
cost of the securities acquired upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
OVER-THE-COUNTER OPTIONS
Each of the Funds (except the Short-Term Government Securities Fund and the
Money Market Fund) may purchase and write either exchange-traded or
over-the-counter options on securities. A Fund's ability to terminate options
positions established in the over-the-counter market may be more limited than
in the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
<PAGE>
PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If CIML or the relevant subadviser, as the case may be, wants to hedge
the Asset Allocation Fund's, the Balanced Fund's or the Fixed Income Fund's
respective investments in debt securities against an increase in interest
rates, it might sell futures contracts with respect to U.S. Government
Securities. If interest rates rise and the value of the securities declines,
the value of the futures contracts should increase. Likewise, if the Asset
Allocation, Balanced or Fixed Income Funds hold cash reserves and short-term
investments and CIML or the relevant subadviser, as the case may be, expects
interest rates to fall, the relevant Fund might purchase futures contracts.
If, as expected, the market value both of long-term debt securities and
futures contracts with respect thereto increased, the Fund would benefit from
a rise in the value of long-term securities without actually buying them until
the market had stabilized. The Growth, Value, International, Small Cap and
Asset Allocation Funds may similarly buy or sell futures contracts on stock
indices in anticipation of broad movements in equity market prices. The Asset
Allocation Fund may also buy and sell futures contracts in order to reallocate
its exposure to the equity or fixed income markets and for dividend accruals.
The successful use of futures and related options depends on CIML's or the
relevant subadviser's ability to forecast correctly movements in interest
rates or equity markets generally.
The correlation between price movements of futures contracts and of the
securities which are the subject of the hedge is usually imperfect. The
correlation is higher between price movements of futures contracts and the
underlying securities. The correlation is lower when futures are used to hedge
securities other than the securities underlying such futures. For example, a
Fund that invests in equity securities will generally not own all the
securities included in a particular stock index, so the value of the Fund's
holdings of equities may change to a different extent than does the value of a
futures contract on that index.
Options on futures contracts may also be used for hedging. For example, if the
value of the Fixed Income Fund's portfolio securities is expected to decline
as a result of an increase in interest rates, the Fund might purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, to hedge against an anticipated increase in the price of
long-term debt securities, the Asset Allocation, Balanced or Fixed Income
Funds may purchase call options or write put options as a substitute for the
purchase of futures contracts. The Growth, Value, International, Small Cap and
Asset Allocation Funds may engage in similar transactions in options on stock
index futures contracts, and the Asset Allocation Fund may purchase and sell
options on futures contracts in order to reallocate the Fund's exposure to the
equity or fixed income markets.
When a Fund enters into a futures contract, it is required to deposit with the
broker as "initial margin" an amount of cash or short-term U.S. Government
Securities equal to approximately 5% of the contract amount. That amount is
adjusted by payments to or from the broker ("variation margin") as the value
of the contract changes. No Fund will purchase or sell futures contracts or
related options for non-hedging purposes if as a result such Fund's initial
margin deposits on existing futures contracts plus premiums paid for
outstanding options on future contracts would be greater than 5% of the Fund's
assets. Positions in long futures contracts may be closed out only by entering
into a futures contract sale on the exchange where the futures are traded. The
liquidity of the futures markets could be adversely affected by "daily price
fluctuation limits" established by the exchange which limit the amount of
fluctuations in the price of futures contracts during a single trading day. In
such events, it may not be possible for the Fund to close out its futures
contract positions and, in the event of adverse price movements, the Fund
would continue to be exposed to the relevant market and be required to make
daily variation margin payments.
<PAGE>
OFFICERS AND TRUSTEES
P. Michael Pond President and
Trustee
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
Dixie L. Mills Trustee
Carol K. Burns Vice President and
Assistant Clerk
Fred L. Kaufman Vice President and
Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
100 N.E. Adams Street
Peoria, IL 61629-5330
DISTRIBUTOR
Caterpillar Securities Inc.
100 N.E. Adams Street
Peoria, IL 61629-5330
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
<PAGE>
LOGO
THE PREFERRED GROUP
OF MUTUTAL FUNDS
PROSPECTUS
NOVEMBER 1, 1996
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated November 1, 1996, as
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.
-1-
<PAGE>
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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
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ORGANIZATION AND CAPITALIZATION OF THE TRUST............................61
APPENDIX A..............................................................63
APPENDIX B..............................................................67
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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;
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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
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
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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.
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 Short-Term Government Securities Fund and 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
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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 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
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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. 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.
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.
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OPTIONS AND FUTURES TRANSACTIONS (All Funds except the Short-Term
Government Securities Fund and the Money Market Fund)
As disclosed in the Prospectus, the Fixed Income Fund, to increase
current return, may write covered call and covered put options on any security
that it is eligible to purchase. For hedging purposes, it may (1) purchase
call options on securities it expects to acquire, and put options on
securities it holds, and (2) purchase and sell futures contracts on U.S.
Government Securities and purchase and write options on such futures
contracts.
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
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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 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
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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 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.
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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
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,
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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 "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
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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 liquid assets in an amount
at least equal to the purchase price under the futures contract (less any
margin on 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
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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 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
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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 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
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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 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.
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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 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,
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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. 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
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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 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
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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.
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.
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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 may be less than if it had not engaged in the hedging transaction.
MISCELLANEOUS INVESTMENT PRACTICES
Lower-rated Securities. The Balanced Fund and the Fixed Income Fund
each 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.
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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 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
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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 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, 1995 and 1996, the portfolio turnover rate for the Short-Term
Government Securities Fund was 256.44% and 79.04%, respectively. This
variation in portfolio turnover was primarily attributable to a decrease in
holdings by the Fund during fiscal 1996 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.
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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, liquid assets 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 and
may sell a portfolio security or enter into a forward commitment sale
contract (a "dollar-roll transaction") 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
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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 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
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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.
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
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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 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
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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 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
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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 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).
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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."
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
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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 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.
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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
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.
-32-
<PAGE>
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 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
-33-
<PAGE>
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 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.
-34-
<PAGE>
55% S&P 500 Index/35% Lehman Government/Corporate Bond Index/10%
90-day Treasury Bills. The 55% S&P 500 Index/35% 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.
-35-
<PAGE>
Russell 2000 Index. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.
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.
-36-
<PAGE>
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 June 30, 1996, (ii) for the three-year period
ended June 30, 1996 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 1, 1995 for the Balanced Fund) through
June 30, 1996.
-37-
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE DATA
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 6/30/96+ 6/30/96 6/30/96 6/30/96
<S> <C> <C> <C> <C>
Growth N/A 14.96% 15.68% 17.77%
Value N/A 24.49% 16.33% 16.34%
International N/A 13.70% 15.40% 10.27%
Small Cap N/A N/A N/A 12.67%*
Asset Allocation N/A 18.23% 12.41% 12.70%
Balanced N/A 12.11%** N/A 12.11%**
Fixed Income 6.07% 4.12% 4.94% 6.80%
Short-Term 5.51% 5.10% 3.87% 4.47%
Government
Securities
Money Market 4.85% 5.32%*** 4.49%*** 4.06%***
<FN>
*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 12.44% for the period since commencement of
operations (November 1, 1995).
**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 8.89% for both the one-year period and the
period since commencement of operations (July 1, 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 during the period
January 1, 1993 to October 31, 1995. In the absence of this limitation, actual
performance would have been 5.27%, 4.37% and 3.95% for the one-year period,
the three-year period and the period since commencement of operations (July 1,
1992), respectively.
+The yield shown for the Fixed Income and Short-Term Government Securities
</FN>
</TABLE>
-38-
<PAGE>
Funds is the 30-day current yield as of 6/30/96. The yield shown for the Money
Market Fund is a seven-day current yield as of 6/30/96, in accordance with
Securities and Exchange Commission rules for reporting yields of money market
funds. The Money Market Fund's seven-day effective yield as of June 30, 1996
was 4.97%. Prior to 11/1/95, the manager was temporarily waiving a portion of
its management fees (0.15%) for the Money Market Fund. As the manager was not
waiving a portion of its management fees as of 6/30/96, there is no impact to
the reported seven-day current yield or the seven-day effective yield as of
6/30/96.
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
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<PAGE>
(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, 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.
-40-
<PAGE>
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 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 nonequity options upon the exercise thereof, and
(iii) from transactions in regulated 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.
-41-
<PAGE>
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 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.
-42-
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OF THE TRUST
Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
Name, Address and Age Position(s) Held with the Principal Occupation(s) During
Trust Past 5 Years
<S> <C> <C>
P. Michael Pond*, 43, Trustee, Chairman and President and Director,
100 N.E. Adams Street President Caterpillar Investment
Peoria, IL 61629-5330 Management Ltd.; President and
Director, Caterpillar
Securities Inc.
Gary Michael Anna, 43, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, 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*, 59, Trustee Director, Investor Relations,
100 N.E. Adams Street Caterpillar Inc.; Manager,
Peoria, IL 61629-5330 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, 51, Vice President and Assistant Manager of Marketing,
100 N.E. Adams Street Clerk Caterpillar Investment
Peoria, IL 61629-5330 Management Ltd.; Director,
Caterpillar Securities Inc.
Fred L. Kaufman, 49, Vice President and Treasurer Treasurer, Caterpillar
100 N.E. Adams Street Investment Management Ltd.;
Peoria, IL 61629-5330 Treasurer and Director,
Caterpillar Securities Inc.
Richard P. Konrath, 34, Clerk Securities Counsel,
100 N.E. Adams Street Caterpillar Inc.; Special
Peoria, IL 61629-5330 Counsel and Staff Attorney,
Securities and Exchange
Commission, May 1987 to May
1993
<FN>
* 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.
</FN>
</TABLE>
The mailing address of each of the officers and Trustees is
c/o the Trust, 100 N.E. Adams Street, Peoria, Illinois 61629.
-43-
<PAGE>
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 $10,000 plus $1,500 for each Trustees' meeting
attended. Prior to July 1, 1996, such Trustees received 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, 1996.
<TABLE>
<CAPTION>
Name of Person, Aggregate Pension or Estimated Annual Total
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 $10,000 $0 $0 $10,000
Anna, Trustee
William F. Bahl, $10,000 $0 $0 $10,000
Trustee
James F. $0 $0 $0 $0
Masterson,
Trustee
Dixie Louise $9,000 $0 $0 $9,000
Mills, Trustee
Carol K. Burns $0 $0 $0 $0
Vice President
and Assistant
Clerk
Fred L. Kaufman $0 $0 $0 $0
Vice President
and Treasurer
</TABLE>
-44-
<PAGE>
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 September 30, 1996, the following entities were the recordholders
of the following percentages of outstanding securities of the following Funds:
<TABLE>
<CAPTION>
Percentage Ownership
as of September 30,1996
----------------------------------------------------------------
Caterpillar
Inc. Supp-
lemental
Unemploy-
ment and
Benefits
Group
Insurance
Trust A Caterpillar
and Insurance Preferred
Caterpillar Caterpillar Company Caterpillar Stable
Investment Group Ltd. Investment Principal
Trust Insurance Insurance Management Collective
401(k) Plan Trust B Reserves1 Limited Trust
<S> <C> <C> <C> <C> <C>
FUND % TOTAL % TOTAL % TOTAL % TOTAL % Total
Growth 46.70% 8.94% 9.09%
Value 60.17% 14.30% 12.17%
International 39.83% 44.27%
Small Cap 25.34% 60.06% 13.01%
Asset Allocation 42.83% 36.43%
Balanced 90.40% 7.53%
Fixed Income 17.14% 29.14% 43.26%
Short-Term Government
Securities 25.94% 33.37%
Money Market 86.85% 5.47%
<FN>
1 Does not include 36.27% of the outstanding shares of the Short-Term
Government Securities Fund held of record by American Bankers' Insurance Co.
for the benefit of Caterpillar Insurance Company Ltd.
</FN>
</TABLE>
To the extent either Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance Trust
A or Caterpillar Group Insurance Trust 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
-45-
<PAGE>
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 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 September 30, 1996, the Trust believes that no person, other
than American Bankers' Insurance Co., which owns of record 36.27% of the
outstanding shares of the Short-Term Government Securities 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 $448 million of assets in various stock and bond portfolios for the
Caterpillar Inc. pension fund, Caterpillar Insurance Company Ltd., Caterpillar
Inc. Supplemental Unemployment and Benefits Group Insurance Trust A and
Caterpillar Group Insurance Trust B, and other Caterpillar Inc. subsidiaries.
In addition, the Manager manages more than $110 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
-46-
<PAGE>
Corporation and Owens-Corning Fiberglass Corporation also have investment
subsidiaries that have sponsored mutual funds. The Manager is a wholly-owned
subsidiary of Caterpillar, Inc. Certain entities listed in Exhibit 21 to the
most recent Annual Report or Form 10-K under the Securities Exchange Act of
1934 of Caterpillar Inc. (File No. 33-46194) may be deemed to be affiliates of
both the Manager and the Trust.
Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business 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.
Each Fund pays the Manager a monthly Management Fee based on the
average net assets of the Fund at the following annual rates:
Annual Percentage of
Fund Average Net Assets
Growth................................................. .75
Value.................................................. .75
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<PAGE>
International................................................ .95
Small Cap.................................................... .75
Asset Allocation............................................. .70
Balanced . . . . . . . . . . . . . . ........................ .75
Fixed Income................................................. .50*
Short-Term Government Securities............................. .35
Money Market................................................. .30
* Pursuant to a new management contract dated as of November 1, 1996, the
subadvisory fee paid to Morgan was reduced as noted below, with a
corresponding decrease in the amount paid to the Manager. Effective November
1, 1996, CIML's fee with respect to the Fixed Income Fund was reduced to an
annual rate equal to the lesser of (i) .50% of the average net assets of the
Fixed Income Fund and (ii) the rate at which (A) the excess of (I) the fee
paid by the Fixed Income Fund to CIML over (II) the fee paid by CIML to Morgan
with respect to the Fixed Income Fund (see below) equals (B) the excess that
would have existed under the advisory and subadvisory fee schedules in effect
with respect to the Fixed Income Fund prior to November 1, 1996.
For the fiscal years ended June 30, 1996, 1995 and 1994, the Funds
paid to the Manager the following amounts as Management Fees pursuant to the
relevant Management Contracts and, with respect to the Fixed Income Fund, a
management contract in effect prior to November 1, 1996, under which the
Manager was paid at the annual rate of .65% of average net assets:
-48-
<PAGE>
<TABLE>
<CAPTION>
Fund Management Fees
Fiscal Year Ended June 30,
<S> <C> <C> <C>
1996 1995 1994
Growth............................... $3,095,694 $ 1,916,870 $1,121,122
Value................................ 1,799,524 1,205,912 928,481
International........................ 1,305,859 1,046,409 675,436
Small Cap1........................... 176,148 N/A N/A
Asset Allocation ................... 613,440 450,971 388,646
Balanced2............................ 26,763 N/A N/A
Fixed Income......................... 466,424 325,238 273,104
Short-Term
Government
Securities......................... 134,564 105,672 103,056
Money Market3........................ 236,873 90,767 40,263
- ---------------------------
<FN>
1 The Manager waived $82,203 in management fees during the fiscal year ended
June 30, 1996. No shares of the Small Cap Fund were outstanding during the
fiscal years ended June 30, 1995 and June 30, 1994.
2 The Manager waived $26,763 in management fees during the fiscal year
ended June 30, 1996. No shares of the Balanced Fund were outstanding
during the fiscal years ended June 30, 1995 and June 30, 1994.
3 The Manager waived 38,738, $90,767 and $40,263 in management fees during
the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
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 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"
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<PAGE>
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 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.
-50-
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 Morgan, with respect to the Money
Market Fund) 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 (other than
the Money Market Fund). (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, with respect to the
Money Market Fund), 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 Money Market Fund is based solely on the average
net assets of that Fund.
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., 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, 1996, 1995 and
1994 Oppenheimer earned $679,488, $471,392 and $358,332, respectively, in
subadvisory fees.
Jennison Associates Capital Corp. ("Jennison") provides
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<PAGE>
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, 1996, 1995 and 1994 Jennison earned $1,038,575, $676,200 and
$400,334, respectively, in subadvisory fees with respect to the Growth Fund,
and for the fiscal year ended June 30, 1996, Jennison earned $9,049 in
subadvisory fees with respect to the Balanced Fund.
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 $46 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 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, 1996, 1995 and 1994 Mellon earned $136,133,
$95,500 and $81,001, 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
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<PAGE>
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, 1996, 1995 and
1994 PanAgora earned $64,517, $47,906 and $41,645, 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 a limited partnership a minority portion of the limited partnership
interest 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, 1996, 1995 and 1994, Mercator Asset Management, Inc., the
predecessor of Mercator Asset Management, L.P. that served as Subadviser to
the International Fund prior to November 30, 1995, earned $778,254, $677,479
and $460,355, 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
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<PAGE>
annual rate of 0.25% of the first $75 million of Combined Assets, 0.225% of
the next $75 million of Combined Assets, 0.175% of the next $150 million of
Combined Assets, 0.125% of the next $100 million of Combined Assets, and 0.10%
of Combined Assets in excess of $400 million. The Manager has informed the
Trust that for the fiscal years ended June 30, 1996, 1995 and 1994, pursuant
to a subadvisory agreement in effect prior to November 1, 1996, under which
Morgan was paid quarterly at the annual rate of 0.30% of the average quarterly
net assets of the Fixed Income Fund, 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, Morgan earned $198,111,
$145,585 and $122,469, respectively, in subadvisory fees with respect to the
Fixed Income Fund. In addition, the Manager has informed the Trust that for
the fiscal years ended June 30, 1996, 1995 and 1994, Morgan earned $104,334,
$92,481, and $41,402 respectively, in subadvisory fees with respect to the
Money Market 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.
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 financial statements included in the Trust's
Annual Report for the period ended June 30, 1996, filed electronically on
September 4, 1996 (File No. 811-06602) are incorporated by reference into this
Statement of Additional Information.
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<PAGE>
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.
As compensation for its services as custodian, 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
fiscal years ended June 30, 1995 and June 30, 1994):
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<PAGE>
<TABLE>
<CAPTION>
Custodian
Year ended June 30
--------------------------------------------------------------------
Fund 1996 1995 1994
<S> <C> <C> <C>
Growth $119,000 $ 94,000 $ 76,000
Value $ 77,000 $ 69,000 $ 58,000
International $300,000 $270,000 $210,000
Small Cap $ 36,000 N/A N/A
Asset
Allocation $172,000 $155,000 $175,000
Balanced $ 28,000 N/A N/A
Fixed Income $ 72,000 $ 58,000 $ 43,000
Short-Term
Government
Securities $ 39,000 $ 35,000 $ 29,000
Money Market $ 60,000 $ 50,000 $ 32,000
</TABLE>
Transfer Agent. Boston Financial Data Services, Inc., The BFDS Building,
Two Heritage Drive, Quincy, MA 02171, acts as the Trust's transfer agent and
dividend disbursing agent.
As compensation for its services as transfer agent, the Funds accrued
expenses in the following amounts to be paid to Boston Financial Data
Services, Inc. for the periods indicated (no shares of the Small Cap or
Balanced Funds were outstanding during the fiscal years ended June 30, 1995
and June 30, 1994):
<TABLE>
<CAPTION>
Transfer Agent
Year ended June 30
--------------------------------------------------------------------
Fund 1996 1995 1994
<S> <C> <C> <C>
Growth $ 86,000 $ 44,000 $ 26,000
Value $ 66,000 $ 34,000 $ 22,000
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<PAGE>
<S> <C> <C> <C>
International $ 65,000 $ 41,000 $ 21,000
Small Cap $ 8,000 N/A N/A
Asset
Allocation $ 48,000 $ 28,000 $ 25,000
Balanced $ 10,000 N/A N/A
Fixed Income $ 48,000 $ 28,000 $ 21,000
Short-Term
Government
Securities $ 23,500 $ 20,000 $ 18,000
Money Market $ 42,000 $ 26,000 $ 18,000
</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 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
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<PAGE>
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 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
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<PAGE>
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 the fiscal
years ended June 30, 1996, 1995 and 1994 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 :
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<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1996:
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 $546,681 $173,654,639 $250,056
Value 139,551 31,580,857 53,339
International 202,476 0 0
Small Cap 181,028 0 0
Asset Allocation 7,089 0 0
Balanced 5,092 2,010,972 2,821
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1995:
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
Small Cap 0 0 0
Asset Allocation 5,379 0 0
Balanced 0 0 0
Fixed Income 0 0 0
Short-Term
Gov't Securities 0 0 0
Money Market 0 0 0
-60-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1994:
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
Small Cap 0 0 0
Asset Allocation 10,984 0 1,795
Balanced 0 0 0
Fixed Income 0 0 0
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, 1996, the Value, Growth, and
Balanced Funds placed orders for the purchase or sale of securities with
Oppenheimer & Co., Inc., an affiliate of Oppenheimer, and with Lehman Bros.,
an affiliate of PanAgora. Also, during the fiscal year ended June 30, 1996,
the Growth and Balanced Funds placed orders for the purchase or sale of
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<PAGE>
<PAGE>
securities with J.P. Morgan Securities, Inc., an affiliate of Morgan and the
Value Fund placed orders for the purchase or sale of securities with
Prudential Securities, Inc., an affiliate of Jennison. These brokerage
transactions are set forth below:
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1996
% 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 Oppenheimer & Co, Inc. $5,650 4.05% 3.42%
Lehman Bros. $6,072 4.35% 4.00%
Prudential
Securities, Inc. $6,600 4.73% 19.55%
Growth J.P. Morgan
Securities, Inc. $4,115 0.75% 1.99%
Oppenheimer & Co., Inc. $584 0.11% 0.05%
Lehman Bros. $49,378 9.03% 5.01%
Balanced J.P. Morgan
Securities, Inc. $86 1.69% 0.83%
Oppenheimer & Co., Inc. $52 1.02% 0.56%
Lehman Bros. $165 3.24% 3.78%
</TABLE>
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.
Fiscal year ended June 30, 1995
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<PAGE>
<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% 8.11%
& Co.
Lehman 1,500 .89% 1.24%
Brothers,
Inc.
Prudential 6,418 3.81% 4.23%
Securities,
Incorporated
Growth Fund J.P. Morgan 4,688 1.01% .73%
Securities,
Inc.
Oppenheimer 767 .17% .39%
& Co.
Lehman 12,063 2.60% 2.63%
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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<TABLE>
<CAPTION>
Fiscal year ended June 30, 1994
% 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>
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 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
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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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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
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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.
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.
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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
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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-established and the issuer should have a
strong position within its industry. The reliability and quality of management
should be unquestioned.
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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
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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.
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