As filed with the Securities and Exchange Commission on October 28, 1997
Registration No. 33-46479
File No. 811-06602
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
---
Pre-Effective Amendment No.
Post-Effective Amendment No. 13 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
---
Amendment No. 16 X
THE PREFERRED GROUP OF MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
411 Hamilton Boulevard
Peoria, Illinois 61602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (309) 675-4999
Name and Address of Agent for Service:
Ronald R. Rossmann
THE PREFERRED GROUP OF MUTUAL FUNDS
100 N.E. Adams Street
Peoria, Illinois 61629-5330
Copy to:
J.B. Kittredge, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b),
X On November 1, 1997 pursuant to paragraph (b),
60 days after filing pursuant to paragraph (a)(1),
On _______________ pursuant to paragraph (a)(1),
75 days after filing pursuant to paragraph (a)(2), or
On _______________ pursuant to paragraph (a)(2), of Rule 485.
If appropriate, check the following box:
__ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
-1-
<PAGE>
<TABLE>
<CAPTION>
THE PREFERRED GROUP OF MUTUAL FUNDS
CROSS-REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
<S> <C> <C>
1. Cover Page COVER PAGE
2. Synopsis SCHEDULE OF FEES; SHAREHOLDER
TRANSACTION EXPENSES
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description INVESTMENT OBJECTIVES
of Registrant AND POLICIES; GENERAL POLICIES
AND RISK CONSIDERATIONS;
DESCRIPTION OF THE PREFERRED
GROUP
5. Management of the Fund EXPENSES SUMMARY; INVESTMENT
OBJECTIVES AND POLICIES;
MANAGEMENT OF THE PREFERRED
GROUP; BACK COVER
5A. Management's Discussion (CONTAINED IN REGISTRANT'S
of Fund Performance ANNUAL REPORT)
6. Capital Stock and Other DISTRIBUTIONS; HOW
Securities TO BUY SHARES; EXCHANGING
AND REDEEMING SHARES; TAXES;
DESCRIPTION OF THE PREFERRED
GROUP
7. Purchase of Securities OPENING YOUR ACCOUNT; HOW TO
Being Offered BUY SHARES; EXCHANGING
AND REDEEMING SHARES;
IMPORTANT INFORMATION ABOUT
YOUR ACCOUNT; ADDITIONAL
SHAREHOLDER SERVICES;
DETERMINATION OF NET ASSET
VALUE AND PRICING; BACK COVER
8. Redemption or EXCHANGING AND
Repurchase REDEEMING SHARES
9. Pending Legal NOT APPLICABLE
Proceedings
-2-
<PAGE>
<CAPTION>
PART B
STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION
<S> <C> <C>
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information NOT APPLICABLE
and History
13. Investment Objectives INVESTMENT RESTRICTIONS;
and Policies OPTIONS AND FUTURES
TRANSACTIONS; MISCELLANEOUS
INVESTMENT PRACTICES;
PORTFOLIO TRANSACTIONS
14. Management of the Fund MANAGEMENT OF THE TRUST
15. Control Persons and MANAGEMENT OF THE TRUST
Principal Holders
of Securities
16. Investment Advisory and MANAGEMENT OF THE PREFERRED
Other Services GROUP (PART A); MANAGEMENT OF
THE TRUST; OTHER SERVICES
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
and Other Practices
18. Capital Stock and Other ORGANIZATION AND
Securities CAPITALIZATION OF THE
TRUST
19. Purchase, Redemption EXCHANGE PRIVILEGE;
and Pricing of HOW TO REDEEM; HOW NET
Securities Being ASSET VALUE IS DETERMINED
Offered
20. Tax Status TAXES
21. Underwriters OTHER SERVICES
22. Calculation of CALCULATION OF YIELD AND
Performance Data TOTAL RETURN; PERFORMANCE
COMPARISONS; PERFORMANCE
DATA
23. Financial Statements FINANCIAL STATEMENTS
-3-
</TABLE>
<PAGE>
PROSPECTUS
NOVEMBER 1, 1997
THE PREFERRED GROUP OF MUTUAL FUNDS
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, Illinois 61602-1104
- -------------------------------------------------------------------------------
The Preferred Group of Mutual Funds ("The Preferred Group") is an open-end,
diversified series investment company offering eight 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 above-average
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 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, 1997, 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 Fixed Income Fund.................. 11
Preferred Short-Term
Government Securities Fund................ 12
Preferred Money Market Fund.................. 13
General Policies and Risk Considerations.......... 14
Performance Information........................... 19
Page
----------
OPENING YOUR ACCOUNT.............................. 21
How to Buy Shares................................. 21
Exchanging and Redeeming Shares................... 22
Important Information About
Your Account................................. 24
Additional Shareholder Services................... 25
Determination of Net Asset
Value and Pricing............................ 26
Other Information................................. 27
Distributions..................................... 27
Choosing a Distribution Option.................... 28
Taxes .......................................... 28
Statements and Reports............................ 29
Management of The Preferred Group................. 30
Description of The Preferred Group................ 32
Appendix A........................................ 34
Appendix B........................................ 36
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
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GROWTH VALUE INTERNATIONAL SMALL CAP
------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Management Fees.................................................. 0.75% 0.75% 0.95% 0.75%
Other Expenses................................................... 0.09% 0.10% 0.30% 0.23%
Total Fund Operating Expenses ................................... 0.84% 0.85% 1.25% 0.98%
<CAPTION>
SHORT-TERM
ASSET FIXED GOVERNMENT
ALLOCATION INCOME SECURITIES MONEY MARKET
--------- ------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fees................................................ 0.70% 0.50% 0.35% 0.30%
Other Expenses................................................. 0.29% 0.19% 0.28% 0.18%
Total Fund Operating Expenses.................................. 0.99% 0.69% 0.63% 0.48%
</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. 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, 1997 were 0.65%
and 0.88% of average net assets, respectively. 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, 1997, actual Management Fees
and Total Fund Operating Expenses for the Fixed Income Fund were 0.55% and 0.74%
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:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- ------ ------- ------- -------
Growth $9 27 47 104
Value 9 27 47 105
International 13 40 69 151
Small Cap 10 31 54 120
Asset Allocation 10 32 55 121
Fixed Income 7 22 38 86
Short-Term Government Securities 6 20 35 79
Money Market 5 15 27 60
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.
<PAGE>
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.
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD)
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
------------------------------------------------------- -------------------------------------------------
NET TOTAL NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET NET REALIZED INCOME DISTRIBUTIONS IN EXCESS FROM NET
VALUE, INVESTMENT AND (LOSS) FROM FROM NET OF NET REALIZED
BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT INVESTMENT GAINS ON
OF YEAR (LOSS) GAIN (LOSS) OPERATIONS INCOME INCOME INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
GROWTH
YEAR ENDED JUNE 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $0.01 $2.42 $2.43 $(0.01) $ - $ -
1994 12.42 0.01 0.03 0.04 - - -
1995 12.46 0.01 4.24 4.25 (0.02) - (0.06)
1996 16.63 0.00 2.44 2.44 (0.01) - (0.54)
1997 18.52 0.00 4.76 4.76 - - (2.86)
VALUE
YEAR ENDED JUNE 30,
1993 10.00 0.19 1.44 1.63 (0.11) - -
1994 11.52 0.19 (0.12) 0.07 (0.16) - (0.10)
1995 11.33 0.21 2.62 2.83 (0.20) - (0.14)
1996 13.82 0.20 3.13 3.33 (0.21) - (0.29)
1997 16.65 0.19 5.10 5.29 (0.20) - (0.58)
INTERNATIONAL
YEAR ENDED JUNE 30,
1993 10.00 0.15 (0.53) (0.38) (0.03) - -
1994 9.59 0.08 2.47 2.55 (0.07) - (0.05)
1995 12.02 0.18 0.60 0.78 (0.13) - (0.26)
1996 12.24 0.19 1.47 1.66 (0.17) - (0.01)
1997 13.72 0.33 2.67 3.00 (0.35) - (0.25)
<CAPTION>
DISTRIBUTIONS
------------------------------
DISTRIBUTIONS NET ASSET TOTAL NET
IN EXCESS VALUE, RETURN AT ASSETS,
OF REALIZED TOTAL END OF NET ASSET END OF
GAINS DISTRIBUTIONS YEAR VALUE* YEAR
- ----------------------------------------------------------------------------------------------------------------
GROWTH
YEAR ENDED JUNE 30,
<S> <C> <C> <C> <C> <C>
1993 $ - $(0.01) $12.42 24.25% $117,706,665
1994 - - 12.46 0.34% 171,467,064
1995 - (0.08) 16.63 34.21% 374,592,700
1996 - (0.55) 18.52 14.96% 411,688,146
1997 - (2.86) 20.42 28.57% 455,021,877
VALUE
YEAR ENDED JUNE 30,
1993 - (0.11) 11.52 16.37% 121,511,090
1994 - (0.26) 11.33 0.60% 121,088,130
1995 - (0.34) 13.82 25.72% 212,678,363
1996 - (0.50) 16.65 24.49% 267,581,693
1997 (0.02) (0.80) 21.14 32.62% 373,673,368
INTERNATIONAL
YEAR ENDED JUNE 30,
1993 - (0.03) 9.59 (3.77%) 39,126,841
1994 - (0.12) 12.02 26.66% 94,933,414
1995 (0.17) (0.56) 12.24 6.70% 118,216,038
1996 - (0.18) 13.72 13.70% 157,627,409
1997 - (0.60) 16.12 22.50% 265,292,395
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------------
OPERATING
EXPENSES NET
BEFORE INVESTMENT PORTFOLIO AVERAGE
OPERATING VOLUNTARY INCOME TURNOVER BROKERAGE
EXPENSES WAIVER (LOSS) RATE COMMISSIONS+
- --------------------------------------------------------------------------------------------------------------------
GROWTH
YEAR ENDED JUNE 30,
<C> <C> <C> <C> <C> <C>
1993 1.00% - 0.07% 58.12%
1994 0.91% - 0.13% 51.56%
1995 0.87% - 0.13% 55.32%
1996 0.86% - (0.16%) 75.24% N/A
1997 0.84% - (0.13%) 58.31% $0.060
VALUE
YEAR ENDED JUNE 30,
1993 0.96% - 1.79% 17.77%
1994 0.93% - 1.64% 11.95%
1995 0.89% - 1.95% 29.02%
1996 0.85% - 1.23% 17.04% N/A
1997 0.85% - 1.06% 7.23% 0.058
INTERNATIONAL
YEAR ENDED JUNE 30,
1993 1.60% - 1.83% 16.21%
1994 1.38% - 1.37% 27.78%
1995 1.32% - 1.65% 29.47%
1996 1.31% - 1.64% 19.61% N/A
1997 1.25% - 2.66% 13.16% 0.030
<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>
<CAPTION>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD)
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
-------------------------------------------------------- ------------------------------------------------
NET TOTAL NET DISTRIBUTIONS DISTRIBUTIONS
NET ASSET NET REALIZED INCOME DISTRIBUTIONS IN EXCESS FROM NET
VALUE, INVESTMENT AND (LOSS) FROM FROM NET OF NET REALIZED
BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT INVESTMENT GAINS ON
OF YEAR (LOSS) GAIN (LOSS) OPERATIONS INCOME INCOME INVESTMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
SMALL CAP
PERIOD ENDED JUNE 30, (COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 1, 1995)
<S> <C> <C> <C> <C> <C> <C> <C>
1996+ $10.00 $0.05 $1.22 $1.27 $(0.02) - $ -
1997 11.25 0.06 3.18 3.24 (0.03) - (0.16)
ASSET ALLOCATION
YEAR ENDED JUNE 30,
1993 10.00 0.34 0.99 1.33 (0.34) - (0.09)
1994 10.90 0.30 (0.42) (0.12) (0.30) - (0.21)
1995 10.27 0.38 1.79 2.17 (0.38) - (0.09)
1996 11.97 0.40 1.72 2.12 (0.40) - (0.81)
1997 12.88 0.44 2.17 2.61 (0.44) - (0.53)
FIXED INCOME
YEAR ENDED JUNE 30,
1993 10.00 0.51 0.71 1.22 (0.51) - (0.11)
1994 10.60 0.47 (0.50) (0.03) (0.47) - (0.14)
1995 9.80 0.58 0.50 1.08 (0.58) - -
1996 10.30 0.58 (0.16) 0.42 (0.58) - (0.05)
1997 10.09 0.64 0.19 0.83 (0.64) - (0.04)
SHORT-TERM GOVERNMENT SECURITIES
YEAR ENDED JUNE 30,
1993 10.00 0.39 0.23 0.62 (0.39) - (0.15)
1994 10.08 0.37 (0.29) 0.08 (0.37) - -
1995 9.77 0.51 0.03 0.54 (0.51) - -
1996 9.80 0.53 (0.04) 0.49 (0.53) - -
1997 9.76 0.53 0.02 0.55 (0.53) - -
MONEY MARKET
YEAR ENDED JUNE 30,
1993 1.00 0.03 - 0.03 (0.03) - -
1994 1.00 0.03 - 0.03 (0.03) - -
1995 1.00 0.05 - 0.05 (0.05) - -
1996 1.00 0.05 - 0.05 (0.05) - -
1997 1.00 0.05 - 0.05 (0.05) - -
<CAPTION>
DISTRIBUTIONS
--------------------------------
DISTRIBUTIONS NET ASSET TOTAL NET
IN EXCESS VALUE, RETURN AT ASSETS,
BOF REALIZED TOTAL END OF NET ASSET END OF
GAINS DISTRIBUTIONS YEAR VALUE*** YEAR
- ----------------------------------------------------------------------------------------------------------------------
SMALL CAP
PERIOD ENDED JUNE 30, (COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 1, 1995
<S> <C> <C> <C> <C> <C>
1996+ $ - $(0.02) $11.25 12.67%*+++ $45,692,712
1997 - (0.19) 14.30 29.00%* 84,877,805
ASSET ALLOCATI
YEAR ENDED JUNE 30,
1993 - (0.43) 10.90 13.57% 48,420,381
1994 - (0.51) 10.27 (1.28%) 58,961,139
1995 - (0.47) 11.97 21.70% 77,745,018
1996 - (1.21) 12.88 18.23% 96,889,348
1997 - (0.97) 14.52 21.01% 128,884,756
FIXED INCOME
YEAR ENDED JUNE 30,
1993 - (0.62) 10.60 12.59% 35,889,454
1994 (0.16) (0.77) 9.80 (0.46%) 45,872,668
1995 - (0.58) 10.30 11.48% 57,911,899
1996 - (0.63) 10.09 4.12% 111,184,492
1997 - (0.68) 10.24 8.39% 140,158,482
SHORT-TERM GOV
YEAR ENDED JUNE 30,
1993 - (0.54) 10.08 6.32% 27,027,485
1994 (0.02) (0.39) 9.77 0.86% 30,271,535
1995 - (0.51) 9.80 5.71% 32,121,171
1996 - (0.53) 9.76 5.10% 51,755,317
1997 - (0.53) 9.78 5.81% 54,807,409
MONEY MARKET
YEAR ENDED JUNE 30,
1993 - (0.03) 1.00 2.71%* 18,146,496
1994 - (0.03) 1.00 2.91%* 45,605,598
1995 - (0.05) 1.00 5.27%* 79,585,753
1996 - (0.05) 1.00 5.32%* 90,482,435
1997 - (0.05) 1.00 5.14% 109,682,146
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
------------------------------------------
OPERATING
EXPENSES NET
BEFORE INVESTMENT PORTFOLIO AVERAGE
OPERATING VOLUNTARY INCOME TURNOVER BROKERAGE
EXPENSES WAIVER (LOSS) RATE COMMISSIONS+
- --------------------------------------------------------------------------------------------------------------------
SMALL CAP
PERIOD ENDED JUNE 30, (COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 1, 1995
<C> <C> <C> <C> <C> <C>
1996 0.88%** 1.23%** 0.75%** 65.70% $0.047
1997 0.88% 0.98% 0.66% 104.45% 0.048
ASSET ALLOCATION
YEAR ENDED JUNE 30,
1993 1.27% - 3.25% 34.10%
1994 1.25% - 2.76% 24.71%
1995 1.11% - 3.52% 18.27%
1996 1.04% - 3.21% 38.25% N/A
1997 0.99% - 3.29% 27.73% 0.032
FIXED INCOME
YEAR ENDED JUNE 30,
1993 1.05% - 4.91% 316.06%
1994 0.97% - 4.53% 254.92%
1995 0.95% - 5.94% 330.55%
1996 0.93% - 5.65% 313.51% N/A
1997 0.74% - 6.32% 105.98% N/A
SHORT-TERM GOVERNMENT SECURITIES
YEAR ENDED JUNE 30,
1993 0.78% - 3.87% 268.36%
1994 0.74% - 3.75% 134.34%
1995 0.71% - 5.27% 256.44%
1996 0.66% - 5.37% 79.04% N/A
1997 0.63% - 5.49% 183.73% N/A
MONEY MARKET
YEAR ENDED JUNE 30,
1993 0.80% 0.87% 2.67% N/A
1994 0.53% 0.68% 2.97% N/A
1995 0.39% 0.54% 5.24% N/A
1996 0.49% 0.54% 5.25% N/A N/A
1997 0.48% - 5.03% N/A N/A
<FN>
*TOTAL RETURN FOR THE 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>
REFERRED 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. 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: Chief Investment Officer, 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.
Education: B.S. - Stevens Institute of Technology; MBA - University of
Connecticut; Ph.D. - Stanford University
<PAGE>
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 securities issued by
the U.S. Government. All such securities are included in the Lehman Brothers
Long Treasury Bond Index. 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 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 securiti es 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:
<PAGE>
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.
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
Subadviser: J.P. Morgan Investment Management Inc. ("Morgan")
Portfolio Manager: Richard W. Oswald, CPA
Title: Vice President, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Richard joined J.P.
Morgan in October, 1996, after eight years with CBS, Inc., where he was
corporate treasurer and president of CBS's investment subsidiary.
Education: B.A. - University of Toronto; MBA - Rochester Institute of
Technology; Certified Public Accountant
The investment objective of the Short-Term Government Securities Fund is high
current income, consistent with preservation of capital.
<PAGE>
As of the date of this Prospectus, it is expected that a new subadvisory
agreement between CIML and Morgan will be submitted for approval of the
shareholders of the Short-Term Government Securities Fund. If the new
subadvisory agreement is not approved by shareholders, CIML will continue to
manage the Fund without any subadviser. Todd M. Sheridan, who previously had
primary responsibility for the day-to-day management of the Fund from January 1,
1993, through June 28, 1995, will serve as portfolio manager of the Fund, and
this Prospectus will be supplemented.
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.
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
<PAGE>
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.
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 are shown in the section
"Financial Highlights."
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;
<PAGE>
(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 dividend
accruals and portfolio allocation purposes and not for speculation, as follows:
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 and Asset Allocation 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 Fund 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 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.
<PAGE>
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 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% 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.
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 a return 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.
<PAGE>
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The
Short-Term Government Securities Fund 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 a similar, but not identical,
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.
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.
<PAGE>
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.
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
<PAGE>
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;*
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. Except as otherwise noted, all percentage investment
limitations will be measured at the time a security is purchased and will not be
considered violated unless an excess or deficiency exists immediately after and
as a result of such purchase. If there is a change in a Fund's investment
objective, shareholders shouldconsider 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, three and five-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, 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
<PAGE>
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 IBC'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>
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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.
FOR ALL CHOICES BELOW, PLEASE CALL 1-800-662-GROW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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."
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
</TABLE>
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
<PAGE>
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.
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;
<PAGE>
(5) send proceeds to an address other than the account address; and (6) pay the
proceeds to a corporation, partnership, trust or fiduciary.
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 701/2
years of age can contribute up to $2,000 per tax year. This $2,000
contribution limit is phased out if the wage earner (or the wage earner's
spouse) actively participates in an employer-sponsored qualified retirement
plan. For married individuals, the annual contribution limit is $2,000 for
each spouse, but the couple's aggregate deductible contributions may not
exceed the combined compensation of both spouses (reduced by any
contributions made to other forms of IRAs -- such as "Roth IRAs").
ROTH IRAS. Single wage earners with an adjusted gross income of less than
$95,000 (and married wage earners who file jointly and have an aggregate
adjusted gross income of less than $150,000) can make non-deductible
contributions to Roth IRAs of up to $2,000 per year less amounts
contributed on behalf of such individuals to other IRAs. The $2,000
contribution limit is phased out for wage earners with adjusted gross
incomes that exceed the above amounts. Qualifying distributions from a Roth
IRA are tax-free, provided the Roth IRA has been in existence for at least
five years.
EDUCATION IRAS. Additionally, individuals can make non-deductible
contributions to Education IRAs of up to $500 per year. Distributions from
an Education IRA will be tax-free provided that all contributions to the
IRA are made before the beneficiary turns 18 years old and the
distributions are used for qualified higher education expenses. The same
adjusted gross income limitations that apply for Roth IRAs apply to
contributors to Education IRAs, and the annual $500 contribution limit is
imposed per beneficiary.
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.
<PAGE>
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.
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, Fixed Income and Short-Term Government Securities Funds, 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. In each case the indicated entity owned of record more than 25%
of the relevant Fund's outstanding securities as of September 30, 1997.
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 Fund. 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 Short-Term
Government Fund currently has 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.
<PAGE>
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.
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 be
subject to 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 (that is, distributions
derived from net gains from securities held for not more than a year) of the
Funds are taxable to the shareholder as ordinary income.
Distributions designated as deriving from net gains on securities held for more
than one year but not more that 18 months and from net gains on securities held
for more than 18 months 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 on December
31 of the preceding year if the dividend was declared and payable to
shareholders of record on a date in October, November or December of 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.
<PAGE>
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 may 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. Only shareholders who hold Fund shares (without protection
from risk of loss) on the ex-dividend date and for at least 15 other days during
the 30-day period surrounding the ex-dividend date will be entitled to claim a
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.
Shareholders who are not U.S. citizens or which are foreign corporations may be
subject to substantially different tax treatment on distributions.
The Internal Revenue Code of 1986, as amended (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, as is any retained amount from the prior year. It is each
Fund's intention to make distributions sufficient to avoid this 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 have received 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
<PAGE>
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.
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 1200 First Financial Plaza, 411 Hamilton Boulevard, Peoria,
Illinois 61602-1104. 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 and the Short-Term Government Securities Funds)
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 and the Short-Term Government Securities Funds). (The Fund Assets
together with such
<PAGE>
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 and the Short-Term Government Securities Funds), 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 each of the
Money Market and the Short-Term Government Securities Funds is based solely on
the average net assets of the relevant 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 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, 1997,
Oppenheimer was paid at an effective annual rate of 0.28% of the Value Fund's
average net assets.
Oppenheimer is a registered investment adviser with approximately $60.9 billion
in assets under management as of September 30, 1997. Oppenheimer Financial Corp.
("Opfin") holds a one-third managing general partner interest in Oppenheimer,
and Oppenheimer Capital, L.P., a Delaware limited partnership whose units are
traded on the New York Stock Exchange and of which Opfin is the sole 1.0%
general partner, owns the remaining two-thirds interest in Oppenheimer.
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $125 billion in assets under management
through various subsidiaries, entered into an Amended and Restated Merger
Agreement with Oppenheimer Group, Inc. ("OGI") and its subsidiary Opfin pursuant
to which PIMCO Advisors and its affiliate, Thompson Advisory Group, Inc. and
its successor ("TAG"), will acquire Opfin's one-third managing general partner
interest in Oppenheimer, and Opfin's 1.0% general partnership interest in
Oppenheimer Capital, L.P. The proposed transaction is subject to certain
conditions being satisfied prior to closing, including the consummation of the
sale by OGI and Oppenheimer Equities, Inc. of all of the stock of Oppenheimer
Holdings, Inc. and Oppenheimer &Co., Oppenheimer Capital's broker-dealer
affiliate, to CIBC Wood Gundy Securities Corp. (the "CIBCSale"), consents from
certain lenders, approvals from regulatory authorities, and consents of certain
clients of Oppenheimer, including the Fund. Under the terms of the Amended and
Restated Merger Agreement, the proposed transaction can take place only if the
CIBC sale takes place first. It is currently contemplated that the proposed
transaction will be concluded in November 1997.
If the proposed transaction is consummated, it will involve a change in control
of Oppenheimer, which will constitute an assignment of, and result in the
termination of, the subadvisory agreement between Oppenheimer and Caterpillar
Investment Management Ltd. with respect to the Value Fund. The Trustees,
including all of the Trustees who are not "interested persons" of the Value
Fund, Oppenheimer or PIMCO Advisors, approved and determined to submit to
shareholders for approval a new subadvisory agreement identical to the existing
subadvisory agreement except as to dates, to take effect upon consummation of
the proposed transaction. Holders of a majority of the outstanding voting
securities of the Fund have executed a consent approving the new subadvisory
agreement.
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, 1997, Jennison was paid
at an effective annual rate of 0.25% of the Growth 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 $64.9 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, 1997, 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, 1997, 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 30, 1997, Mercator was paid at an
effective annual rate of 0.55% 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, 1997, Morgan was paid at an effective annual rate of 0.18% 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, 1997, Morgan was paid at an effective annual
rate of 0.14% of the Money Market Fund's average net assets, reflecting a waiver
of less than 0.01%. It is expected that, subject to shareholder approval, Morgan
will assume primary responsibility for the day-to-day management of the
Short-Term Government Securities Fund on or about November 3, 1997, for which
Morgan will receive a subadvisory fee from CIML at the annual rate of 0.20%.
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 eight 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
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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
<PAGE>
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.
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 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 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 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
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
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.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
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 MUTUAL FUNDS(R)
PROSPECTUS
NOVEMBER 1, 1997
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1997
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated November 1, 1997, 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.
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TABLE OF CONTENTS
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DEFINITIONS...............................................................1
INVESTMENT RESTRICTIONS...................................................2
OPTIONS AND FUTURES TRANSACTIONS..........................................8
MISCELLANEOUS INVESTMENT PRACTICES.......................................21
AMORTIZED COST VALUATION AND DAILY DIVIDENDS.............................26
EXCHANGE PRIVILEGE.......................................................28
HOW TO BUY...............................................................28
HOW TO REDEEM............................................................29
HOW NET ASSET VALUE IS DETERMINED........................................29
CALCULATION OF YIELD AND TOTAL RETURN....................................31
PERFORMANCE COMPARISONS..................................................33
PERFORMANCE DATA.........................................................35
TAXES ................................................................37
MANAGEMENT OF THE TRUST..................................................41
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.........................52
OTHER SERVICES...........................................................52
PORTFOLIO TRANSACTIONS...................................................54
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
"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,
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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<PAGE>
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 and Asset Allocation 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 Fund 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 segregates cash, Treasury bills or other high grade
obligations with a value equal to the exercise price with its custodian, or
else holds on a share-for-share basis a
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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 premium paid to
purchase the option. Because increases in the
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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. In that event, the Fund's return
will be the premium received
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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, respectively, at settlement date are
not determined until at or
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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
settlement date of the futures contract, the position may be
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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 segregate 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. Futures contracts will not be used
to leverage the Fund. For example, in the case of the Asset Allocation Fund, if
the Fund purchases futures contracts relating to equity securities (e.g., S&P
500 index futures), the face amount of the futures contracts plus the value of
the Fund's equity securities will not exceed the Fund's net assets. Similarly,
if the Fund purchases interest rate futures contracts, the face amount of the
futures contracts plus the value of the Fund's fixed income securities will not
exceed the Fund's net assets. In the case of transactions in futures contracts
for hedging purposes, the Funds may sell such futures contracts in anticipation
of a decline in the value of its investments. The risk of such a decline can be
reduced without employing futures as a hedge by selling portfolio securities and
either reinvesting the proceeds in securities subject to lesser risk or by
holding assets in cash. This strategy, however, entails increased transaction
costs in the form of brokerage commissions and dealer spreads and will typically
reduce a Fund's total return or, with respect to futures on fixed income
securities, yield. The sale of futures contracts provides an alternative means
of hedging a
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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 futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the
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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 description of
methods of providing cover that the Funds currently expect to employ, subject to
applicable exchange and
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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.
STOCK INDEX FUTURES. The Growth, Value, International,
Small Cap and Asset Allocation Funds may also purchase and sell
United States and foreign stock index futures contracts and
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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, the face amount of the contracts plus the Fund's equity (or fixed
income) securities would exceed the Fund's net assets.
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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 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
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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 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
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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.
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
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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 Fixed Income Fund may invest up to 5% of
its total assets in lower-rated fixed-income securities (commonly known as "junk
bonds"), provided that the dollar-weighted average credit quality of its debt
portfolio (excluding short-term investments) is at least A by either Moody's
Investors Service, Inc. or Standard & Poor's. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market for securities held by it, the Fund may be unable at times to
establish the fair value of such securities. The rating assigned to a security
by Moody's Investors Service, Inc. or Standard & Poor's (or by any other
nationally recognized securities rating organization) does not reflect an
assessment of the volatility of the security's market value or the liquidity of
an investment in the security. See Appendix A to this Statement for a
description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Fund's debt securities. Conversely, during periods of rising interest rates,
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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 CIML or the relevant Subadviser
will monitor the investment to determine whether its retention will assist in
meeting the Fund's investment objective.
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. 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. 1996 and 1997, the portfolio turnover rates for the
Fixed Income Fund were 313.51% and 105.98%, respectively. J.P. Morgan Investment
Management, Inc. has informed the Trust that the lower portfolio turnover rate
was attributable to reduced volatility in Finanacial markets during fiscal
1997.
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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) segregates, and maintains until the settlement date, 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 and Asset
Allocation 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 to either
(i) segregate and maintain with the Fund's custodian 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) 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, Rev. Dr. Martin Luther King, Jr. 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
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price, or, if no sales are reported, the last reported bid price.
Over-the-counter options are valued at fair value, as determined in good faith
by the Trustees or by persons acting at their direction, based on prices
supplied by a broker, usually the option counterparty. Obligations having
remaining maturities of 60 days or less and securities held in the Money Market
Fund portfolio 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.
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<PAGE>
YIELDS OF THE ASSET ALLOCATION, 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
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<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, 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.
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<PAGE>
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.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX. The Index contains primarily all
U.S. Treasury Notes and Bonds with remaining maturities of one to three years.
90-DAY TREASURY BILL INDEX. The index is calculated using a one-bill
portfolio containing the most recently auctioned 90-day Treasury bill.
RUSSELL 2000 INDEX. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.
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
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<PAGE>
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.
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, 1997, (ii) for the five-year period ended
June 30, 1997 and (iii) since the commencement of operations (July 1, 1992 for
all Funds other than the Small Cap Fund, and November 1, 1995 for the Small Cap
Fund) through June 30, 1997.
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<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE DATA
Average
Annual Average
Total Annual
Average Return Total
Annual for the Return
Total Return Five- from the
for the Year Commencement
Current SEC One-Year Period Period of Operations
Yield ended ended through
FUND AT 6/30/97+ 6/30/97 6/30/97 6/30/97
---- ----------- ------- ------- -------
<S> <C> <C> <C> <C>
Growth N/A 28.57% 19.85% 19.85%
Value N/A 32.62% 19.43% 19.43%
International N/A 22.50% 12.62% 12.62%
Small Cap N/A 29.00%* N/A 25.15%*
Asset Allocation N/A 21.01% 14.31% 14.31%
Fixed Income 6.63% 8.39% 7.11% 7.11%
Short-Term 5.95% 5.81% 4.74% 4.74%
Government
Securities
Money Market 4.92% 5.14%** 4.26%** 4.26%**
<FN>
*Performance for the Small Cap 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 28.88% and 24.94% for the one-year period and
the period since commencement of operations (November 1, 1995), respectively.
**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 4.18% for the five-year period and the period since
commencement of operations (July 1, 1992).
+The yield shown for the Fixed Income and Short-Term Government Securities Funds
is the 30-day current yield as of 6/30/97. The yield shown for the Money Market
Fund is a seven-day current yield as of 6/30/97, 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, 1997 was 5.04%.
</FN>
</TABLE>
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<PAGE>
TAXES
The tax status of the Trust and the distributions which it may make are
summarized in the Prospectus under the heading "Taxes."
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(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) 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 (c) diversify its
holdings so that, at the end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by cash and 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. In addition, until the start of each
Fund's first tax year beginning after August 5, 1997, the
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<PAGE>
Fund must 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. Under this
30% of gross income test, 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 certain 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, constructive 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, or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. A Fund engaging in such transactions will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Fund.
Certain of a Fund's hedging activities (including its transactions in
foreign currencies) are likely to produce a difference between its book income
and its taxable income. If a Fund's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Fund's remaining earnings and profits, and thereafter as a return of
capital or as gain from the sale or
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<PAGE>
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 nonequity 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
nonequity listed options thereon generally will constitute long-term capital
gains or losses and the balance will be short-term gains or losses.
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
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<PAGE>
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.
Taxation of Shareholders. For federal income tax purposes,
distributions paid from net investment income and from any net realized
short-term capital gain (that is, net gains on securities held for not more than
a year), 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. Distributions designated by a Fund as deriving from net gains
on securities held for more than one year but not more than 18 months and from
net gains on securities held for more than 18 months will be taxable to
shareholders as such, regardless of how long a shareholder has held his or her
shares.
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 or her 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 six months or less 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.
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 or she is not subject to such withholding).
In addition, the Trust will be required to withhold and remit to the U.S.
Treasury 31% of the amount of the proceeds of any redemption of shares of a
shareholder account for which an incorrect or no taxpayer identification number
has been provided.
The foregoing relates to federal income taxation. Distributions from
investment income and capital gains may also be subject to state and local
taxes. The Trust is organized as a Massachusetts business trust. Under current
law, so long as each Fund qualifies for the federal income tax treatment
described above, it is believed that neither the Trust nor any Fund will be
liable for any income or franchise tax imposed by Massachusetts.
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<PAGE>
<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>
F. Lynn McPheeters, 55, Trustee and Chairman Treasurer, Caterpillar, Inc.,
100 N.E. Adams Street 1996 to present; Executive
Peoria, IL 61629-5330 Vice President, Caterpillar
Financial Services, Inc., 1990
to 1996
Ronald R. Rossmann, 48 President President and Director,
411 Hamilton Boulevard Caterpillar Investment
Peoria, IL 61602 Management Ltd.; President and
Director, Caterpillar
Securities Inc.
Gary Michael Anna, 44, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, Bradley University
Peoria, IL 61625
William F. Bahl, 46, Trustee Chairman of the Board, Bahl &
212 E. Third Street Gaynor, Inc. (a registered
Suite 200 investment adviser)
Cincinnati, OH 45202
James F. Masterson*, 60, 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, 49, Trustee Dean, College of Business,
Illinois State University Illinois State University
15 Williams Hall
Normal, IL 61790-5500
Carol K. Burns, 52, Vice President and Assistant Manager of Marketing,
411 Hamilton Boulevard Clerk Caterpillar Investment
Peoria, IL 61602 Management Ltd.; Director,
Caterpillar Securities Inc.
Fred L. Kaufman, 50, Vice President and Treasurer Treasurer, Caterpillar
411 Hamilton Boulevard Investment Management Ltd.;
Peoria, IL 61602 Treasurer and Director,
Caterpillar Securities Inc.
Richard P. Konrath, 35, 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. McPheeters 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>
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<PAGE>
The mailing address of each of the officers and Trustees is c/o the
Trust, 411 Hamilton Boulevard, Suite 1200, Peoria, Illinois 61602.
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. The table below shows the compensation paid to the Trust's Trustees
and officers for the year ended June 30, 1997.
<TABLE>
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>
F. Lynn $0 $0 $0 $0
McPheeters,
Trustee and
Chairman
Gary Michael $16,000 $0 $0 $16,000
Anna, Trustee
William F. Bahl, $16,000 $0 $0 $16,000
Trustee
James F. $0 $0 $0 $0
Masterson,
Trustee
Dixie Louise $16,000 $0 $0 $16,000
Mills, Trustee
Ronald R. Rossmann $0 $0 $0 $0
President
Carol K. Burns $0 $0 $0 $0
Vice President
and Assistant
Clerk
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<PAGE>
Fred L. Kaufman $0 $0 $0 $0
Vice President
and Treasurer
</TABLE>
At the date of this Statement, the Trust believes that the officers and
Trustees as a group own less than 1% of the outstanding shares of any Fund. As
of September 30, 1997, 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, 1997
----------------------------------------------------------------------
Caterpillar
Inc. Supp-
lemental
Unemploy-
ment and
Benefits
Group
Insurance
Trust A Caterpillar
and Insurance Preferred
Caterpillar Caterpillar Company Stable
Investment Group Ltd. Principal
Trust Insurance Insurance Collective
401(K) PLAN TRUST B RESERVES(1) TRUST
FUND % TOTAL % TOTAL % TOTAL % TOTAL
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Growth 51.57% 9.48% 8.13%
Value 60.25% 12.96% 9.46%
International 37.78% 39.88%
Small Cap 35.74% 48.87% 10.33%
Asset Allocation 41.81% 31.99%
Fixed Income 15.14% 27.60% 44.81%
Short-Term Government
Securities 25.19% 32.25%
Money Market 70.53% 12.10%
<FN>
1 Does not include 38.50% 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. Trust Company.
</FN>
</TABLE>
To the extent either Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits
-43-
<PAGE>
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 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, 1997, the Trust believes that no other person, other than
Marshall & Ilsley Trust Company, which owns of record 5.73% of the outstanding
shares of the Value Fund and 10.11% of the outstanding shares of the Asset
Allocation 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 Small Cap Fund.
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. $7.25 billion pension fund. The Manager currently manages more
than $658 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
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<PAGE>
Manager manages more than $271 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. 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.
Each Fund pays the Manager a monthly Management Fee based on the
average net assets of the Fund at the following annual rates:
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE OF
FUND AVERAGE NET ASSETS
<S> <C>
Growth................................................................. .75%
Value.................................................................. .75
International.......................................................... .95
Small Cap.............................................................. .75
Asset Allocation....................................................... .70
Fixed Income........................................................... .50*
Short-Term Government Securities....................................... .35
Money Market........................................................... .30
<FN>
* CIML's fee with respect to the Fixed Income Fund is paid at 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
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<PAGE>
have existed under the advisory and subadvisory fee schedules in effect with
respect to the Fixed Income Fund prior to November 1, 1996.
</FN>
</TABLE>
For the fiscal years ended June 30, 1997, 1996 and 1995, 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:
<TABLE>
<CAPTION>
Fund Management Fees
Fiscal Year Ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Growth............................... $2,983,971 $3,095,694 $1,916,870
Value................................ 2,331,391 1,799,524 1,205,912
International........................ 2,020,096 1,305,859 1,046,409
Small Cap(1)......................... 507,435 176,148 N/A
Asset Allocation ................... 773,756 613,440 450,971
Fixed Income......................... 724,846 466,424 325,238
Short-Term
Government
Securities......................... 187,517 134,564 105,672
Money Market(2)...................... 301,906 236,873 181,534
- ---------------------------
<FN>
1 The Manager waived $69,005 and $82,203 in management fees during the fiscal
years ended June 30, 1997 and 1996, respectively. No shares of the Small Cap
Fund were outstanding during the fiscal year ended June 30, 1995.
2 The Manager waived $38,738 and $90,767 in management fees during the fiscal
years ended June 30, 1996 and 1995, 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.
-46-
<PAGE>
In performing their duties under the Subadviser Agreements, each Subadviser
is subject to the control of the Trustees, the policies determined by the
Trustees, the provisions of the Trust's Agreement and Declaration of Trust and
By-laws and any applicable investment objectives, policies and restrictions in
effect from time to time.
The Management Contracts for all of the Funds and the Subadviser Agreements
were approved by the Trustees of the Trust (including all of the Trustees who
are not "interested persons" of the Manager or the relevant Subadvisers). The
Management Contracts and the Subadviser Agreements continue in force with
respect to the relevant Fund for two years from their respective dates, and from
year to year thereafter, but only so long as their continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority of those Trustees who are not "interested persons" of the Trust,
the Manager or the relevant Subadviser, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of that Fund. Each of the Management Contracts and the Subadviser Agreements
automatically terminates on assignment, and each is terminable upon notice by
the Trust. In addition, the Management Contracts may be terminated on not more
than 60 days' notice by the Manager to the Trust, and the Subadviser Agreements
may be terminated upon 60 days' notice by the Manager or 90 days' notice by the
Subadviser.
As described in the Prospectus under the caption "Management of the Trust,"
the Trust pays, in addition to the Management Fees described above, all expenses
not assumed by the Manager, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of the Manager or the Trust, interest
charges, taxes, brokerage commissions, expenses of issue or redemption of
shares, fees and expenses of registering and qualifying the Trust and shares of
the respective Funds for distribution under federal and state laws and
regulations, charges of custodians, auditing and legal expenses, expenses of
determining the net asset value of the Trust's shares, reports to 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
-47-
<PAGE>
in which the Trust may be a party, and other expenses as determined by
the Trustees. The Trust may have an obligation to indemnify its officers and
Trustees with respect to such litigation.
Each Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
THE SUBADVISERS. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The fee
paid to the Subadvisers (other than Morgan, with respect to the Short-Term
Government and Money Market Funds) 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, at the time the Subadviser Agreement was
entered into or as agreed by CIML and the Subadviser relating to Caterpillar
Inc. or any of its affiliates (other than the Short-Term Government and Money
Market Funds). (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 Short-Term
Government and Money Market Funds), 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 cost of the Short-Term Government and Money
Market Funds is based solely on the average net assets of the relevant 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,
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<PAGE>
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, 1997, 1996 and 1995,
Oppenheimer earned $875,258, $679,488 and $471,392, respectively, in subadvisory
fees.
Jennison Associates Capital Corp. ("Jennison") provides investment advice
to mutual funds, institutional accounts and other entities. Its principal place
of business is 466 Lexington Avenue, New York, New York 10017. Jennison is a
wholly-owned subsidiary of The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Jennison
for its subadvisory services with respect to the Growth Fund 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, 1997, 1996, 1995 and 1994 Jennison earned $994,791,
$1,038,575, $676,200 and $400,334, respectively, in subadvisory fees with
respect to the Growth 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 $64.9 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, 1997, 1996 and 1995, Mellon earned $169,192, $136,133 and $95,500,
respectively, in subadvisory fees.
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<PAGE>
PanAgora Asset Management, Inc.'s ("PanAgora") principal place of business
is 260 Franklin Street, Boston, Massachusetts 02110. Fifty percent of the
outstanding voting stock of PanAgora is owned by each of Nippon Life Insurance
Company, a mutual life insurance company, and Lehman Brothers Inc., a brokerage
and investment advisory firm. PanAgora currently provides asset allocation,
indexing and related investment advisory services to a variety of endowment
funds, pension accounts, other institutions and investment companies, with total
assets under management in excess of $14 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, 1997, 1996 and 1995 PanAgora earned $77,664, $64,517 and
$47,906, 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, 1997, 1996 and 1995, Mercator Asset Management L.P. and 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
$1,165,898, $778,254 and $677,479, respectively, in subadvisory fees.
Morgan provides investment advice to mutual funds and other entities.
Its principal place of business is 522 Fifth Avenue,
-50-
<PAGE>
New York, New York 10036. Morgan is a wholly-owned subsidiary of J.P. Morgan &
Co. Incorporated, an international financial services corporation. The Manager
pays Morgan for its subadvisory services with respect to the Money Market Fund a
fee computed and paid quarterly at the annual rate of 0.15% of the average
quarterly net assets, as of the last business day of each month in the calendar
quarter, of the Money Market Fund. The Manager pays Morgan for its subadvisory
services with respect to the Fixed Income Fund a fee computed and paid quarterly
at the annual rate of 0.25% 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, 1997, 1996 and 1995, pursuant to the
subadvisory agreement described above and 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 $240,532, $198,111 and $145,585, 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, 1997, 1996 and
1995, Morgan earned $143,165, $104,334 and $92,481, 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.
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<PAGE>
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, 1997, filed electronically on September 5,
1997 (File No. 811-06602) are incorporated by reference into this Statement of
Additional Information.
OTHER SERVICES
CUSTODIAL ARRANGEMENTS. State Street Bank and Trust Company ("State
Street"), P.O. Box 1713, Boston, MA 02101, is the custodian for all Funds of the
Trust. As such, State Street holds in safekeeping certificated securities and
cash belonging to the Trust and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Trust. Upon instruction, State
Street receives and delivers cash and securities of the Trust in connection with
Fund transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. State Street also maintains certain
accounts and records of the Trust. In addition, State Street has contracted with
various foreign banks and depositories to hold portfolio securities outside of
the United States on behalf of certain of the Funds. State Street also
calculates the total net asset value, total net income and net asset value per
share of each Fund on a daily basis (and as otherwise may be required by the
1940 Act) and performs certain accounting services for all Funds of the Trust.
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 Fund were outstanding during the fiscal year ended
June 30, 1995):
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<PAGE>
<TABLE>
<CAPTION>
Custodian
Year ended June 30
--------------------------------------------------------------------
FUND 1997 1996 1995
----
<S> <C> <C> <C>
Growth $117,000 $119,000 $ 94,000
Value $ 78,000 $ 77,000 $ 69,000
International $434,000 $300,000 $270,000
Small Cap $ 75,000 $ 36,000 N/A
Asset
Allocation $180,000 $172,000 $155,000
Fixed Income $102,000 $ 72,000 $ 58,000
Short-Term
Government
Securities $ 44,000 $ 39,000 $ 35,000
Money Market $ 58,000 $ 60,000 $ 50,000
</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 Fund were outstanding
during the fiscal year ended June 30, 1995):
<TABLE>
<CAPTION>
Transfer Agent
Year ended June 30
--------------------------------------------------------------------
FUND 1997 1996 1995
----
<S> <C> <C> <C>
Growth $ 93,000 $ 86,000 $ 44,000
Value $ 79,000 $ 66,000 $ 34,000
International $ 73,000 $ 65,000 $ 41,000
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<PAGE>
Small Cap $ 22,000 8,000 N/A
Asset
Allocation $ 56,000 $ 48,000 $ 28,000
Fixed Income $ 56,000 $ 48,000 $ 28,000
Short-Term
Government
Securities $ 26,000 $ 23,500 $ 20,000
Money Market $ 48,000 $ 42,000 $ 26,000
</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 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.
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<PAGE>
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 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.
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<PAGE>
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, 1997, 1996 and 1995 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, 1997:
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 $465,218 $174,031,891 $244,172
Value 67,421 9,384,874 13,200
International 326,670 0 0
Small Cap 322,594 0 0
Asset Allocation 4,457 0 0
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
<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
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
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<PAGE>
<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
Fixed Income 0 0 0
Short-Term
Gov't 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, 1997, the Growth Fund placed orders
for the purchase and sale of securities with J.P. Morgan Securities, Inc., an
affiliate of Morgan, Lehman Bros., an affiliate of PanAgora and Oppenheimer &
Co., Inc., a affiliate of Oppenheimer, the Value Fund placed orders for the
purchase and sale of securities with Oppenheimer & Co., and the International
Fund placed orders for the purchase and sale of securities with
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J.P. Morgan. These brokerage transactions are set forth below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997
% 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>
Growth Fund J.P. Morgan $ 5,835 1.25% 0.97%
Securities, Inc.
Lehman $31,054 6.68% 5.89%
Brothers
Oppenheimer $ 3,906 0.84% 0.79%
& Co., Inc.
Value Fund Oppenheimer $12,316 18.27% 18.92%
& Co., Inc.
International
Fund J.P. Morgan $ 322 0.10% 0.10%
Securities, Inc.
During the fiscal year ended June 30, 1996, the Value and
Growth Funds placed orders for the purchase or sale of securities with
Oppenheimer & Co. and with Lehman Brothers Inc. Also, during the fiscal year
ended June 30, 1996, the Growth Fund placed orders for the purchase or sale of
securities with J.P. 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:
<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
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<PAGE>
Securities, Inc. $4,115 0.75% 1.99%
Oppenheimer & Co., Inc. $584 0.11% 0.05%
Lehman Bros. $49,378 9.03% 5.01%
During the fiscal year ended June 30, 1995, the Value Fund placed
orders for the purchase or sale of securities with Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, Lehman Brothers, Inc., an affiliate of PanAgora, and
Prudential Securities Incorporated, an affiliate of Jennison and Mercator, and
the Growth Fund placed orders for the purchase or sale of securities with J.P.
Morgan Securities, Inc., an affiliate of Morgan, Oppenheimer & Co., Inc., an
affiliate of Oppenheimer, and Lehman Brothers, an affiliate of PanAgora. These
brokerage transactions are set forth below.
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<PAGE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1995
% 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 3,918 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>
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
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shareholders of such Funds affected shall be entitled to vote thereon. There
will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. In addition, Trustees
may be removed from office by a written consent signed by the holders of
two-thirds of the outstanding shares of the Trust and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares of
the Trust at a meeting duly called for the purpose, which meeting shall be held
upon the written request of the holders of not less than 10% of the outstanding
shares. Upon written request by ten or more shareholders, who have been such for
at least six months, and who hold shares constituting 1% of the outstanding
shares, stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Trust has undertaken to provide a
list of shareholders or to disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Fund's property for all loss and expense of any
shareholder of that Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund of which
he is or was a shareholder would be unable to meet its obligations.
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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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THE PREFERRED GROUP OF MUTUAL FUNDS
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Statements of assets and liabilities -- June 30, 1997 (a).
Statements of operations -- year ended June 30, 1997 (a).
Statements of changes in net assets -- year ended June 30,
1997 (a).
Financial Highlights (a)(b).
Notes to financial statements (a).
SUPPORTING SCHEDULES:
Schedule I -- Portfolio of investments owned -- June
30, 1997(a).
Schedules II through IX omitted because the required
matter is not present.
- --------------------
(a) Incorporated by reference into Parts
A and B.
(b) Included in Part A.
(b) Exhibits:
1(a). Agreement and Declaration of Trust --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
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1(b). Amendment No. 1 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
1(c). Amendment No. 2 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
1(d). Amendment No. 3 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
1(e). Amendment No. 4 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
2. By-laws -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
3. None.
4. Portions of the Registrant's Agreement
and Declaration of Trust and By-laws
pertaining to shareholder's rights --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
5(a). Form of Management Contract between The
Preferred Group of Mutual Funds (the
"Trust") and Caterpillar Investment
Management Ltd. (the "Manager" or "CIML")
with respect to the Preferred Growth Fund
-- incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
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5(b). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Value Fund -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(c). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred International Fund --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
5(d). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Small Cap Fund -- incorporated
by reference to Post-Effective Amendment
No. 11 to the Registrant's Registration
Statement.
5(e). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Asset Allocation Fund --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
5(f). Form of Management Contract between the
Trust and the Manager with respect to
the Preferred Fixed Income Fund.
5(g). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Short-Term Government
Securities Fund -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(h). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Money Market Fund --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
5(i). Form of Subadviser Agreement between the
Manager and Jennison Associates Capital
Corp. ("Jennison") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(j). Form of Subadviser Agreement between the
Manager and Oppenheimer Capital
("Oppenheimer") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(k). Form of Subadviser Agreement between the
Manager and Mercator Asset Management,
L.P. ("Mercator") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(l). Form of Subadviser Agreement between the
Manager and Mellon Capital Management
Corporation ("Mellon") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(m). Form of Subadviser Agreement between the
Manager and PanAgora Asset Management,
Inc. ("PanAgora") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(n). Form of Subadviser Agreement between the
Manager and J.P. Morgan Investment
Management Inc. ("Morgan") with respect
to the Preferred Fixed Income Fund.
5(o). Form of Subadviser Agreement between the Manager
and Morgan with respect to the Short-Term
Government Securities Fund.
5(p). Form of Subadviser Agreement between the
Manager and Morgan with respect to the
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<PAGE>
Preferred Money Market Fund --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
6. Form of Distributor's Contract between
the Trust and Caterpillar Securities Inc.
-- incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement
7. None.
8. Form of Custodian Contract between the
Trust and State Street Bank and Trust
Company ("State Street") -- incorporated
by reference to Post-Effective Amendment
No. 11 to the Registrant's Registration
Statement.
9. Form of Transfer Agency and Service
Agreement between the Trust and State
Street -- incorporated by reference
to Post-Effective Amendment No. 11 to
the Registrant's Registration
Statement.
10. Opinion and Consent of Ropes & Gray --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
11. Consent of Price Waterhouse.
12. None.
13. Form of Initial Capital Agreement --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
14. None.
15. None.
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<PAGE>
16. Calculation of Performance Information
and Yield -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
17(a). Financial Data Schedule for the Preferred
Growth Fund.
17(b). Financial Data Schedule for the Preferred
Value Fund.
17(c). Financial Data Schedule for the Preferred
International Fund.
17(d). Financial Data Schedule for the Preferred
Small Cap Fund.
17(e). Financial Data Schedule for the Preferred
Asset Allocation Fund.
17(f). Financial Data Schedule for the Preferred
Fixed Income Fund.
17(g). Financial Data Schedule for the Preferred
Short-Term Government Securities Fund.
17(h). Financial Data Schedule for the Preferred
Money Market Fund.
18. None.
19. Powers of Attorney.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
The Registrant may be deemed to be controlled by Caterpillar Inc.,
which owns 100% of the outstanding voting securities of CIML and Caterpillar
Insurance Company Ltd., each of which may be deemed to control one or more
series of the Registrant, and for the benefit of the employees of which
Caterpillar Investment Trust 401(k) Plan, Caterpillar Inc. Supplemental
Unemployment and Benefits Group Insurance Trust A and Caterpillar Group
Insurance Trust B, which may be deemed to control one or more series of the
Registrant, were established. To the extent any of these
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<PAGE>
entities may be deemed to control the Registrant, the various entities
listed in Exhibit 21 to the most recent Annual Report on Form 10-K under the
Securities Exchange Act of 1934 of Caterpillar Inc. (File No. 33-46194) may be
deemed to be under common control with the Registrant.
Item 26. NUMBER OF HOLDERS OF SECURITIES
(As of October 17, 1997)
(1) (2)
Number of
NAME OF FUND RECORDHOLDERS
------------ -------------
Growth Fund 3670
Value Fund 3511
International Fund 2877
Small Cap Fund 350
Asset Allocation Fund 2108
Fixed Income Fund 1910
Short-Term Government
Securities Fund 422
Money Market Fund 1734
Item 27. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:
SECTION 1. TRUSTEES, OFFICERS, ETC. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
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<PAGE>
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
SECTION 2. COMPROMISE PAYMENT. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
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<PAGE>
involved in the conduct of his or her office. Any approval pursuant to this
Section shall not prevent the recovery from any Covered Person of any amount
paid to such Covered Person in accordance with this Section as indemnification
if such Covered Person is subsequently adjudicated by a court of competent
jurisdiction to have been liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
SECTION 3. INDEMNIFICATION NOT EXCLUSIVE. The right of indemnification
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an "interested person" of
the Trust as defined in Section 2(a)(19) of the 1940 Act (or who has been
exempted from being an "interested person" by any rule, regulation or order of
the Commission), and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Trust shall
not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation the 1940 Act.
* * *
The Trust, at its expense, provides liability insurance for the benefit
of its Trustees and officers.
* * *
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Trust pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable. In the
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<PAGE>
event that a claim for indemnification against such liabilities (other than the
payment by the Trust of expenses incurred or paid by a Trustee, officer or
controlling person of the Trust in the successful defense of any action, suit or
proceeding) is asserted against the Trust by such Trustee, officer or
controlling person in connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The Manager is the investment adviser to the Trust and its business
is summarized under the caption "Management of The Preferred Group" in the
Prospectus constituting Part A of this Registration Statement, which summary is
incorporated herein by reference.
The directors and officers of the Manager have been engaged during the
last two fiscal years in no business, vocation or employment of a substantial
nature other than as directors or officers of the Manager or certain of its
corporate affiliates. Certain officers of the investment adviser serve as
officers of the Trust. The address of the Manager, its corporate affiliates and
the Trust is 100 N.E. Adams Street, Peoria, Illinois 61629.
NAME AND POSITION
WITH MANAGER
Ronald R. Rossmann
President, Director
Robert C. Frantz
Vice President, Director
Richard P. Konrath
Clerk
Fred L. Kaufman
Treasurer
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<PAGE>
(b) Jennison is the subadviser to the Preferred Growth Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Jennison is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH JENNISON OTHER CONNECTIONS
Blair A. Boyer None
Senior Vice President,
Director
Cecilia M. Brancato None
Senior Vice President,
Director
Erik Brown None
Vice President
Kevin B. Cantor Assistant Vice President of
Vice President JACC Services Corp. ("JACC
Services")
David Chan None
Senior Vice President
Robert B. Corman None
Senior Vice President,
Director
Michael A. Del Balso None
Senior Vice President,
Director of Internal
Research, Director
Thomas F. Doyle None
Executive Vice President,
Director
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<PAGE>
John Feingold None
Senior Vice President,
Director
Joseph P. Ferrugio Director of JACC Services
Senior Vice President,
Director
Annlois Freedman None
Senior Vice President
Bradley L. Goldberg Director of JACC Services
Executive Vice President,
Director
Jonathan Green President of Investment
Director Management of Prudential
Investments
Kathleen P. Hausner Assistant Vice President of
Vice President JACC Services
John H. Hobbs President of JACC Services;
Chief Executive Officer, President of Institutional
Chairman of the Board of Asset Management of Prudential
Directors Investments
Caroline R. Hovey None
Vice President
Mirry M. Hwang None
Assistant Secretary
James N. Kannry Senior Vice President,
Senior Vice President, Treasurer and Director of JACC
Treasurer, Director Services
Richard A. Klemmer None
Vice President
Karen E. Kohler Senior Vice President,
Senior Vice President, Secretary, Assistant Treasurer
Secretary, Director and Chief Compliance Officer
of JACC Services
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<PAGE>
Jonathan R. Longley None
Executive Vice President,
Director
Phillip H.B. Moss None
Executive Vice President,
Director
Mindy Newman Assistant Vice President of
Vice President JACC Services
Eric S. Philo None
Senior Vice President
David Poiesz None
Senior Vice President,
Director
Michael H. Porreca None
Senior Vice President,
Director
Peter H. Reinemann None
Senior Vice President,
Director
Stephen L. Rentschler None
Assistant Vice President
Charles Ringhel None
Senior Vice President
Nicholas Rubinstein
Assistant Vice President None
Rosemary Sammarco Vice President of JACC
Senior Vice President Services
Spiros Segalas Director of JACC Services
President, Chief Investment
Officer, Director
Kerry A. Shanley None
Vice President
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<PAGE>
G. Todd Silva None
Senior Vice President
Leya Strauss None
Assistant Treasurer
Andrew M. Tucker None
Assistant Vice President
Chris Vatis None
Vice President
Lulu C. Wang None
Executive Vice President,
Director
Michael Wilburn None
Vice President
Stephanie D. Willis None
Vice President
Catherine D. Wood None
Senior Vice President,
Director
The principal business address of JACC Services is 466 Lexington
Avenue, New York, New York 10017.
The principal business address of Prudential Investments is 751 Broad
Street, Prudential Plaza, Newark, New Jersey 07102.
(c) Oppenheimer is the subadviser to the Preferred Value Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Oppenheimer is or has been, at any
time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee is as follows:
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<PAGE>
NAME AND POSITION BUSINESS AND
WITH OPPENHEIMER OTHER CONNECTIONS
Robert J. Bluestone None
Managing Director
Charles H. Brunie None
Chairman Emeritus
Thomas E. Duggan Assistant Secretary of
Secretary, General Oppenheimer Financial Corp.
Counsel
Linda S. Ferrante None
Managing Director
Herbert S. Fitz Gibbon, II None
Managing Director
Richard J. Glasebrook, II None
Managing Director
Colin J. Glinsman None
Senior Vice President
Jonathan K. Greenberg None
Senior Vice President
Matthew Greenwald None
Senior Vice President
Alan Gutman None
Senior Vice President
Joseph M. LaMotta None
Chairman Emeritus
Frank A. Lecates, Jr. Managing Director,
Managing Director, Director Institutional Equity Division,
of Research Donaldson, Lufkin & Jenrette
prior to September 1995
John G. Lindenthal None
Managing Director
-14-
<PAGE>
George A. Long None
Chairman, Chief Investment
Officer
William P. McDaniel None
Managing Director
Kenneth H. Mortenson None
Managing Director
Julius A. Nicolai None
Managing Director
John Rowley None
Vice President
Philip T. Rodilosso None
Managing Director
Eileen P. Rominger None
Managing Director
Joseph M. Rusbarsky Vice President, Capital
Managing Director Guardian prior to October 1996
David G. Santry None
Senior Vice President
Thomas Scerbo Senior Vice President, Lazard
Senior Vice President Freres prior to August 1996
Sheldon M. Siegel None
Chief Financial Officer,
Treasurer
Jeffrey Tarnoff None
Senior Vice President
George H. Tilghman, Jr. None
Senior Vice President
Eugene B. Vesell None
Managing Director
-15-
<PAGE>
Jeffrey Whittington None
Senior Vice President
The principal business address of Oppenheimer Financial Corp. is
Oppenheimer Tower, One World Financial Center, New York, New York 10281.
(d) Mercator is the subadviser to the Preferred International Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mercator is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH MERCATOR OTHER CONNECTIONS
John G. Thompson None
President, JZT Corp.,
General Partner
Peter F. Spano None
President, PXS Corp.,
General Partner
Michael A. Williams None
President, MXW Corp.,
General Partner
(e) Mellon is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mellon is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
-16-
<PAGE>
NAME AND POSITION BUSINESS AND
WITH MELLON OTHER CONNECTIONS
Bernedette L. Bolger None
Senior Vice President, Chief
Counsel
Christine M. Carr Officer of Mellon Bank, N.A.
Vice President, Director
of Compliance and Risk
Management
Christopher M. Condron President and CEO of The Dreyfus
Director Corporation; Director of Certus
Asset Advisors Corporation;
Trustee of Laurel Capital
Advisors; Vice Chairman of Mellon
Bank Corporation; Vice Chairman
of Mellon Bank, N.A.; Trustee of
Mellon Bond Associates; Director
of Mellon Capital Management
Corporation; Trustee of Mellon
Equity Associates; Director of
Franklin Portfolio Holdings,
Inc.; Director and President of
Boston Safe Advisors, Inc.;
Director and Vice Chairman of The
Boston Company, Inc.; Director
and President of The Boston
Company Financial Strategies,
Inc.,; President, Chairman,
Director, and prior to April 1997
Chief Executive Officer of The
Boston Company Asset Management,
Inc.; Partner Representative of
Pareto Partners prior to May
1997; Trustee of Franklin
Portfolio Associates Trust prior
to January 1997; Director of
Access Capital Strategies Corp.
prior to January 1997; President
and
-17-
<PAGE>
Director of The Boston Company
Financial Strategies Group, Inc.
prior to January 1997; Director
of Mellon Preferred Capital
Corporation prior to November
1996; President and Director of
Reco, Inc. prior to November
1996; Director and prior to June
1996 President of Boston Safe
Deposit and Trust Company;
President and Director of The
Boston Company Financial
Services, Inc. prior to August
1996; Chief Executive Officer and
Director of The Boston Company of
Southern California prior to
April 1996; President and
Director of MY, Inc. prior to
March 1996; Chairman, Chief
Executive Officer and Director of
Boston Safe Deposit and Trust
Company of California prior to
February 1996; Director prior to
February 1996 and Chairman prior
to February 1995 of Boston Safe
Deposit and Trust Company of New
York; President and Director of
The Boston Finance Company prior
to October 1995
Barbara W. Daugherty Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Client Services
and Marketing Communications
Douglas F. Dooley Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Systems
Susan M. Ellison Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Equity Portfolio
Management
-18-
<PAGE>
Richard J. Forster Officer of Mellon Bank, N.A.
Senior Vice President,
Senior Client Service
Officer
William L. Fouse Officer of Mellon Bank, N.A.
Chairman, Chief Officer,
Executive Committee Member,
Director
Joan A. Greene Treasurer of Mellon Bond
Treasurer Associates; Treasurer of
Mellon Capital Management
Corporation; Treasurer of Mellon
Equity Associates; Assistant
Treasurer of Mellon Securities
Trust Company
Thomas B. Hazuka Officer of Mellon Bank, N.A.
Executive Vice President and
Chief Investment Officer
Alexander C. Huberts Officer of Mellon Bank, N.A.
Senior Vice President and
Director of Investment
Research
Charles J. Jacklin Officer of Mellon Bank, N.A.
Senior Vice President and
Director of Asset Allocation
Strategies
David C. Kwan Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Fixed Income
Management and Trading
Thomas F. Loeb Officer of Mellon Bank, N.A.
Chairman, Chief Executive
Officer, Executive Committee
Member, Director
-19-
<PAGE>
Brenda J. Oakley Officer of Mellon Bank, N.A.
Executive Vice President,
Chief Administrative Officer
Philip R. Roberts Director of MGIC-UK Ltd.;
Director Director of Mellon Asia Limited;
Executive Vice President of
Mellon Bank, N.A.; Director,
Chairman, President and Chief
Executive Officer of
Mellon-France Corporation;
Partner Representative of
CCF-Mellon Partners; Partner
Representative of Pareto
Partners; Executive Vice
President of The Boston Company,
Inc.; Executive Vice President of
Boston Safe Deposit and Trust
Company; Director, Chairman,
President and Chief Executive
Officer of Mellon Global
Investing Corp. prior to May
1997; Trustee of Laurel Capital
Advisors prior to March 1997;
Director of Certus Asset Advisors
Corporation prior to February
1997; Trustee and Chairman of
Mellon Bond Associates prior to
February 1997; Director of Mellon
Capital Management Corporation
prior to February 1997; Trustee
and Chairman of Mellon Equity
Associates prior to February
1997; Trustee of Franklin
Portfolio Associates Trust prior
to February 1997; Director of
Access Capital Strategies Corp.
prior to January 1997; Director
of The Boston Company Asset
Management, Inc. prior to January
1996
-20-
<PAGE>
Mary C. Shouse Officer of Mellon Bank, N.A.
Executive Vice President
W. Keith Smith Director, Chairman and Chief
Director Executive Officer of Boston Group
Holdings, Inc.; Trustee of Laurel
Capital Advisors; Director of
MGIC-UK Ltd.; Director of Mellon
Accounting Services, Inc.;
Director and Vice Chairman of
Mellon Bank Corporation; Director
and Vice Chairman of Mellon Bank,
N.A.; Trustee of Mellon Bond
Associates; Director of Mellon
Capital Management Corporation;
Trustee of Mellon Equity
Associates; Director and Chairman
of Mellon Financial Company;
Director and Chairman of Mellon
Financial Services Corporation
#17; Director of Mellon Global
Investing Corp.; Chairman and
Director of The Dreyfus
Corporation; Vice Chairman of The
Dreyfus Corporation prior to
August 1996; Director of The
Boston Company Asset Management,
Inc.; President and Director of
Mellon Preferred Capital
Corporation; Director of Franklin
Portfolio Holdings, Inc.;
Director of Boston Safe Advisors,
Inc.; Chairman of the Board,
Director and Chief Executive
Officer of The Boston Company,
Inc.; President and Director of
The Bridgewater Land Co., Inc.;
President and Director of
Wellington-Medford II Properties,
Inc.; Chairman of the Board,
Director and Chief Executive
Officer of Boston
-21-
<PAGE>
Safe Deposit and Trust Company;
President and Director of TBC
Securities Co., Inc.; Trustee of
Franklin Portfolio Associates
Trust prior to January 1997;
Director of Access Capital
Strategies Corp. prior to January
1997; Partner Representative of
Pareto Partners prior to June
1996; President of The Boston
Company Overseas Banking Corp.
prior to December 1995; Director
of The Boston Company Advisors,
Inc. prior to November 1995;
President and Director of First
Boylston Corporation prior to
October 1995
Roger A. Wharton Senior Vice President of
Senior Vice President Mellon Bank, N.A.
Michele Boxberger Assistant Secretary of AP
Secretary Colorado, Inc.; Assistant
Secretary of AP Colorado, Inc.
#2; Assistant Secretary of AP
Colorado, Inc. #3; Assistant
Secretary of AP Rural Land, Inc.;
Assistant Secretary of AP
Properties Minnesota, Inc.;
Assistant Secretary of AP Wheels,
Inc.; Assistant Secretary of APD
Chimney Lakes, Inc.; Assistant
Secretary of APD Cross Creek,
Inc.; Assistant Secretary of APD
Crossings, Inc.; Assistant
Secretary of APD Cypress Springs,
Inc.; Assistant Secretary of APT
Holdings Corporation; Assistant
Secretary of APU Chimney Lakes,
Inc.; Assistant
-22-
<PAGE>
Secretary of APU Cross Creek,
Inc.; Assistant Secretary of APU
Cypress Springs, Inc.; Assistant
Secretary of Allomon Corporation;
Assistant Secretary of Baltimore
Realty Corporation; Assistant
Secretary of Beaver Valley
Leasing Corporation; Secretary of
Boston Group Holdings, Inc.;
Assistant Secretary of Cacalaba,
Inc.; Assistant Secretary of
Central Valley Management Co.,
Inc.; Secretary of Certus Asset
Advisors Corporation; Secretary
of Dreyfus Financial Services
Corporation; Secretary of Dreyfus
Investment Services Corporation;
Assistant Secretary of FSFC,
Inc.; Assistant Secretary of
Festival, Inc.; Assistant
Secretary of Holiday Properties,
Inc.; Assistant Secretary of
Katrena Corporation; Assistant
Secretary of Laplace Land
Company, Inc.; Secretary of
Laurel Capital Advisors;
Assistant Secretary of Lucien
Land Company, Inc.; Assistant
Secretary of MFS Leasing Corp.;
Secretary of Mellon Accounting
Services, Inc.; Secretary of
Mellon Bond Associates; Secretary
of Mellon Capital Management
Corporation; Secretary of Mellon
Equity Associates; Secretary of
Mellon Financial Company;
Secretary of Mellon Financial
Corporation(MD); Assistant
Secretary of Mellon
-23-
<PAGE>
Financial Services Corporation
#4; Assistant Secretary of Mellon
Financial Services Corporation
#13; Secretary of Mellon
Financial Services Corporation
#17; Assistant Secretary of
Mellon Global Investing Corp.;
Assistant Secretary of Mellon
International Investment
Corporation; Assistant Secretary
of Mellon International Leasing
Company; Assistant Secretary of
Mellon Leasing Corporation;
Assistant Secretary of Mellon
Mortgage Company; Assistant
Secretary of Mellon Overseas
Investment Corporation; Assistant
Secretary of Mellon Securities
Limited; Assistant Secretary of
Mellon Ventures, Inc.; Assistant
Secretary of Mellon-France
Corporation; Assistant Secretary
of Melnamor Corporation;
Assistant Secretary of Meritor
Mortgage Corporation - East;
Assistant Secretary of Pontus,
Inc.; Assistant Secretary of
Promenade, Inc.; Assistant
Secretary of RECR, Inc.;
Assistant Secretary of SKAP#7,
Inc.; Assistant Secretary of
Texas AP, Inc.; Assistant
Secretary of Trilem, Inc.;
Assistant Secretary of Vacation
Properties, Inc.
The principal business address of Mellon Bank, N.A. is One Mellon Bank
Center, Suite 4700, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Capital Management Corporation
is 595 Market Street, Suite 3000, San Francisco, California 94105.
-24-
<PAGE>
The principal business address of Mellon Equity Associates is One
Mellon Bank Center, Suite 3715, Pittsburgh, Pennsylvania 15258.
The principal business address of The Dreyfus Corporation is 200 Park
Avenue, New York, New York 10166.
The principal business address of Certus Asset Advisors Corporation is
One Bush Street, Suite 450, San Francisco, California 94104.
The principal business address of Boston Safe Advisors, Inc. is One
Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Bond Associates is One Mellon
Bank Center, Suite 4135, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company Asset Management,
Inc. is One Boston Place, Boston, Massachusetts 02106.
The principal business address of Mellon Bank Corporation is One Mellon
Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company, Inc. is One
Boston Place, Boston, Massachusetts 02106.
The principal business address of Laurel Capital Advisors is One Mellon
Bank Center, Suite 3935, Pittsburgh, Pennsylvania 15258.
-25-
<PAGE>
The principal business address of Franklin Portfolio Holdings, Inc. is
Two International Place, 22d Floor, Boston, Massachusetts 02110.
The principal business address of The Boston Company Financial
Strategies Group, Inc. is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Asia Limited is Plaza Business
Center, 35/F Harbor Road, Central Plaza, Hong Kong.
The principal business address of CCF-Mellon Partners is One Mellon
Bank Center, Suite 4150, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon-France Corporation is One
Mellon Bank Center, Suite 4000, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Global Investing Corp. is One
Mellon Bank Center, Suite 1935, Pittsburgh, Pennsylvania 15258.
The principal business address of Pareto Partners is One Mellon Bank
Center, Suite 4040, Pittsburgh, Pennsylvania 15258.
-26-
<PAGE>
The principal business address of Wellington-Medford II Properties,
Inc. is One Boston Place, Boston, Massachusetts 02106.
The principal business address of TBC Securities Co., Inc. is One
Boston Place, Boston, Massachusetts 02106.
The principal business address of Boston Safe Deposit and Trust Company
is One Boston Place, Boston, Massachusetts 02106.
The principal business address of Boston Group Holdings,
Inc. is One Mellon Bank Center, Suite 1820, Pittsburgh,
Pennsylvania 15258.
The principal business address of Mellon Financial Services Corporation
#17 is One Executive Drive, Fort Lee, New Jersey 07024.
-27-
<PAGE>
The principal business address of Mellon Accounting Services, Inc. is
Three Mellon Bank Center, Suite 3102, Pittsburgh, Pennsylvania 15259.
The principal business address of MGIC-UK Ltd. is 6 Devonshire Square,
London EC2M 4LR, England.
The principal business address of Mellon Financial Company is One
Mellon Bank Center, Suite 747, Pittsburgh, Pennsylvania 15258.
The principal business address of APT Holdings Corporation is Pike
Creek Operations Center, 4500 New Linden Hill Road, Wilmington, Delaware 19808.
The principal business address of Allomon Corporation is Suite 329, Two
Mellon Bank Center, Pittsburgh, Pennsylvania 15259.
The principal business address of Beaver Valley Leasing Corporation is
Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Katrena Corporation is 4500 New
Linden Hill road, Suite 210, Wilmington, Delaware 19808.
The principal business address of MFS Leasing Corp. is Suite 4444, One
Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
-28-
<PAGE>
The principal business address of Mellon Financial Services Corporation
4 and 13 is Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania
15258-0001.
The principal business address of Mellon Leasing Corporation is Suite
4444, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001
The principal business address of Mellon International Leasing Company
is 4500 New Linden Hill Road, Suite 210, Wilmington, Delaware 19808.
The principal business address of Mellon Overseas Investment
Corporation is 10th and Market Street, Second Floor, Wilmington, Delaware 19801.
The principal business address of Mellon Securities Limited is Suite
400, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001.
The principal business address of Mellon Securities Trust Company is
120 Broadway, New York, New York 10271.
The principal business address of Mellon Ventures, Inc. is Suite 3200,
One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Pontus, Inc. is Suite 4444, One
Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001.
The principal business address of RECR, Inc. is Mellon Bank Center, 8th
Floor, Legal Affairs, 1735 Market Street, Philadelphia, Pennsylvania 19103.
-29-
<PAGE>
The principal business address of Bridgewater Land Company, Inc. is One
Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Preferred Capital Corporation
is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of AP Colorado, Inc., AP Colorado,
Inc. #2, AP Colorado, Inc. #3, AP Rural Land, Inc., AP Properties Minnesota,
Inc., AP Wheels, Inc., ADP Chimney Lakes, Inc., ADP Cross Creek, Inc., ADP
Crossings, Inc., ADP Cypress Springs, Inc., APU Chimney Lakes, Inc., APU Cross
Creek, Inc., APU Cypress Springs, Inc., Cacalaba, Inc., FSFC. Inc., Festival,
Inc., Holiday Properties Inc., Laplace Land Company, Inc., Lucien Land Company,
Inc., Melnamor Corporation, Promenade, Inc., SKAP #7, Inc., Texas AP, Inc.,
Trilem, Inc. and Vacation Properties Inc. is Suite 4850, One Mellon Bank
Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Baltimore Realty Corporation is Suite
325, One Mellon Bank Center, Pittsburgh, Pennsylvania 15228.
The principal business address of Central Valley Management Co., Inc.,
and Mellon Mortgage Company is 3100 Travis St., Houston, Texas 77006.
The principal business address of Dreyfus Financial Services
Corporation is 200 Park Avenue, 8th Floor West, New York, New York 10166.
The principal business address of Dreyfus Investment Services
Corporation is Suite 0179, Two Mellon Bank Center, Pittsburgh, Pennsylvania
15257.
The principal business address of Mellon Financial Corporation (MD) is
1901 Research Boulevard, Montgomery County, Rockville, Maryland 20580.
The principal business address of Meritor Mortgage Corporation - East
is Mellon Bank Center, 8th, Floor, Legal Affairs, 1735 Market Street,
Philadelphia Pennsylvania 19103.
The principal business address of Mellon International Investment
Corporation is Caladonian Bank & Trust, Ltd., Caladonian House, P.O. Box 1043,
Cayman Islands BWI.
(f) PanAgora is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of PanAgora is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH PANAGORA OTHER CONNECTIONS
Bruce E. Clarke Chief Executive Officer and
President, Chief Executive Director of PanAgora Asset
Officer, Director Management Limited; Vice
President of Boston Safe
Deposit and Trust Co. prior to
July 1995
Haruaki Deguchi General Manager of Nippon Life
Director Insurance Company; Director,
PanAgora Asset Management Limited
-30-
<PAGE>
Richard S. Fuld, Jr. Chairman and Chief Executive
Director Officer of Lehman Brothers
Holdings, Inc.; Director,
PanAgora Asset Management Limited
Bruce R. Lakefield Chairman, Chief Executive
Director, Chairman Officer -- Europe of Lehman
Brothers International; Director
of PanAgora Asset Management
Limited
Toru Morishige Director of PanAgora Asset
Managing Director, Director, Management Limited
Vice Chairman
Edgar E. Peters Vice President of Boston Safe
Director of Asset Deposit and Trust Co. prior to
Allocation, Director July, 1995
Randolph S. Petralia First Vice President of Lehman
Director Brothers, Inc., Equity
Division; Director of PanAgora
Asset Management Limited
Paul R. Samuelson None
Director of Equity and Fixed
Income Investments, Director
Hideichiro Kobayashi Director and General Manager
Director for the Americas of Nippon
Life Insurance Company
Masahiro Yamada Managing Director of Nippon
Director Life Insurance Company;
Director, PanAgora Asset
Management Limited
Michael H. Turpin None
Treasurer, Director of
Administration, Controller
-31-
<PAGE>
The principal business address of Lehman Brothers Holdings,
Inc. is American Express Tower, World Financial Center, New York,
New York 10285.
The principal business address of Lehman Brothers, Inc. is 3 World
Financial Center, New York, New York 10285-1000.
The principal business address of PanAgora Asset Management Limited is
3 Finsbury Avenue, London, England EC2M 2PA.
The principal business address of Nippon Life Insurance Company and
NLI International, Inc. Life Insurance Company is 5-12, Imbashi, 3-Chome,
Chuo-Ku, Osaka, Japan.
The principal business address of Lehman Brothers International is One
Broadgate, London EC2M 7HA, England.
(g) Morgan is the subadviser to the Preferred Fixed Income Fund and the
Preferred Money Market Fund and its business is summarized under the caption
"Management of The Preferred Group" in the Prospectus constituting Part A of
this Registration Statement, which summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Morgan is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH MORGAN OTHER CONNECTIONS
Kenneth W. Anderson Managing Director, Morgan
Managing Director, Guaranty Trust Company of New
Director York
George E. Austin Managing Director, Morgan
Managing Director Guaranty Trust Company of New
York
Robert A. Anselmi Managing Director, Assistant
Managing Director, Secretary, Morgan Guaranty
Director, General Counsel, Trust Company of New York
Secretary
-32-
<PAGE>
Jean Louis Pierre Brunel Managing Director, Morgan
Director Guaranty Trust Company of New
York
William L. Cobb, Jr. Managing Director, Morgan
Vice Chairman, Managing Guaranty Trust Company of New
Director, Director York
Louis George Gardella Managing Director, Morgan
Managing Director Guaranty Trust Company of New
York
Michael R. Granito Managing Director, Morgan
Managing Director, Guaranty Trust Company of New
Director York
Keith M. Schappert Managing Director, Morgan
President, Managing Guaranty Trust Company of New
Director, Director York
John R. Thomas President, Managing Director,
Director Director, J.P. Morgan Trust
Bank Ltd.
Thomas M. Luddy Managing Director, Morgan
Managing Director, Guaranty Trust Company of New
Director York
C. Nicholas Potter Managing Director, Morgan
Chairman of the Board, Guaranty Trust Company of New
Retired Director York
Milan S. Soltis Managing Director, Morgan
Managing Director, Guaranty Trust Company of New
Chief Administrative York
and Financial Officer,
Director
Michael E. Patterson Vice Chairman and Director,
Director J.P. Morgan & Co. Incorporated
and Morgan Guaranty Trust
Company of New York
-33-
<PAGE>
The principal business address of Morgan Guaranty Trust Company of
New York and of J.P. Morgan & Co. Incorporated is 60 Wall Street, New York,
New York 10260-0060.
The principal business address of J.P. Morgan Trust Bank Ltd. is
Akasaka Park Building, 2-20 Akasaka, 5-Chrome Minato-ku, Tokyo, Japan 107.
Item 29. PRINCIPAL UNDERWRITER
(a) Caterpillar Securities Inc., the Registrant's Principal
Underwriter, does not serve as underwriter for any other investment companies.
(b) Information with respect to directors and officers of
the Principal Underwriter is as follows:
Positions and Offices Positions and
Names and Principal with Principal Offices with
Business Addresses Underwriter Registrant
- ------------------ ----------- ----------
Ronald R. Rossmann President, Director President
Caterpillar
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
Frederick L. Kaufman Treasurer, Director Vice President,
Caterpillar Treasurer
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
Carol K. Burns Director Vice President,
Caterpillar Assistant Clerk
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
(c) The Registrant has no principal underwriter that is not an
affiliated person of the Registrant or an affiliated person of such an
affiliated person.
-34-
<PAGE>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include Registrant's Clerk,
Richard P. Konrath; Registrant's investment adviser, CIML; Registrant's
Custodian, State Street; Registrant's Transfer Agent and Shareholder Servicing
Agent, State Street; and each of the Registrant's subadvisers. The address of
the Clerk is 100 N.E. Adams Street, Peoria, Illinois 61629; the address of CIML
is 411 Hamilton Boulevard, Suite 1200, Peoria, IL 61602; the address of the
Custodian, Transfer Agent and Shareholder Servicing Agent is P.O. Box 1713,
Boston, Massachusetts 02110; and the addresses of the Registrant's subadvisers
are as follows: Oppenheimer, Oppenheimer Tower, One World Financial Center, New
York, New York 10281; Jennison, 466 Lexington Avenue, New York, New York 10017;
Mellon, 595 Market Street, Suite 3000, San Francisco, California 94105;
PanAgora, 260 Franklin Street, Boston, Massachusetts 02110; Mercator, 2400 East
Commercial Boulevard, Suite 810, Fort Lauderdale, Florida 33308; and Morgan, 522
Fifth Avenue, New York, New York 10036.
Item 31. MANAGEMENT SERVICES
None.
Item 32. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a Trustee or Trustees
when requested in writing to do so by the holders of at least 10% of the
Registrant's outstanding voting securities and in confirmation with the
provisions of Section 16(c) of the Investment Company Act of 1940 relating to
shareholder communications.
(b) The undersigned Registrant hereby undertakes to provide to each
person to whom a Prospectus is delivered a copy of its Annual Report without
charge upon request.
NOTICE
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of State of The Commonwealth
-35-
<PAGE>
of Massachusetts and notice is hereby given that this instrument is executed on
behalf of the Trust by an officer of the Trust as an officer and not
individually and the obligations of or arising out of this instrument are not
binding upon any of the Trustees or shareholders individually but are binding
only upon the assets and property of each of the respective constituent series
of the Trust.
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Peoria and the State of Illinois on the
23rd day of October, 1997.
THE PREFERRED GROUP OF MUTUAL FUNDS
BY:* RONALD R. ROSSMANN*
Title: President
Pursuant to the Securities Act of 1933, this Amendment has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
RONALD R. ROSSMANN* President October 23, 1997
Ronald R. Rossmann (Principal Executive Officer)
GARY M. ANNA* Trustee October 23, 1997
Gary M. Anna
WILLIAM F. BAHL* Trustee October 23, 1997
William F. Bahl
JAMES F. MASTERSON* Trustee October 23, 1997
James F. Masterson
F. LYNN MCPHEETERS* Trustee October 23, 1997
F. Lynn McPheeters
DIXIE L. MILLS* Trustee October 23, 1997
Dixie L. Mills
FRED L. KAUFMAN* Treasurer and Vice October 23, 1997
Fred L. Kaufman President (Principal
Financial and Principal
Accounting Officer)
*BY: Fred L. Kaufman
Fred L. Kaufman
Attorney-in-Fact Pursuant to
Powers of Attorney Filed
Herewith and for Himself
</TABLE>
-37-
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
Index to Exhibits
EXHIBIT NO. DESCRIPTION
5(f) Form of Management Contract
between the Trust and the
Manager with respect to the
Fixed Income Fund.
5(n) Form of Subadviser Agreement
between the Manager and
Morgan with respect to the
Fixed Income Fund.
5(o) Form of Subadviser Agreement
between the Manager and
Morgan with respect to the
Short-Term Government Securities
Fund.
11 Consent of Price
Waterhouse.
17(a). Financial Data
Schedule for the
Preferred Growth
Fund.
17(b). Financial Data
Schedule for the
Preferred Value
Fund.
17(c). Financial Data
Schedule for the
Preferred
International Fund.
17(d). Financial Data
Schedule for the
Preferred Small Cap
Fund.
17(e). Financial Data
Schedule for the
Preferred Asset
Allocation Fund.
17(f). Financial Data
Schedule for the
Preferred Fixed
Income Fund.
17(g). Financial Data
Schedule for the
Preferred Short-
Term Government
Securities Fund.
-38-
<PAGE>
17(h). Financial Data
Schedule for the
Preferred Money
Market Fund.
18. Powers of Attorney.
-39-
THE PREFERRED GROUP OF MUTUAL FUNDS
MANAGEMENT CONTRACT
Management Contract executed as of November 1, 1996, between THE
PREFERRED GROUP OF MUTUAL FUNDS, a Massachusetts business trust (the "Trust"),
on behalf of the Preferred Fixed Income Fund (the "Fund"), and CATERPILLAR
INVESTMENT MANAGEMENT LTD., a Delaware corporation (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the trustees of the Trust (the
"Trustees") and to such policies as the Trustees may determine, the Manager
will, at its expense, (i) furnish continuously an investment program for the
Fund and will make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of its portfolio securities and (ii) furnish
all necessary office space and equipment, provide bookkeeping and clerical
services required to perform its duties hereunder and pay all salaries, fees and
expenses of the Trustees and officers of the Trust who are affiliated persons of
the Manager. In the performance of its duties, the Manager will comply with the
provisions of the Agreement and Declaration of Trust and By-laws of the Trust
and the Fund's stated investment objectives, policies and restrictions.
(b) In the selection of brokers, dealers or futures commissions
merchants (collectively, "brokers") and the placing of orders for the purchase
and sale of portfolio investments for the Fund, the Manager shall seek to obtain
the most favorable price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions for brokerage and research
services as described below. In using its best efforts to obtain for the Fund
the most favorable price and execution available, the Manager, bearing in mind
the Fund's best interests
-1-
<PAGE>
at all times, shall consider all factors it deems relevant, including, by way of
illustration, the price, the size of the transaction, the nature of the market
for the security, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker involved and the quality of service rendered
by the broker in other transactions. Subject to such policies as the Trustees
may determine, the Manager shall not be deemed to have acted unlawfully or to
have breached any duty created by this Contract or otherwise solely by reason of
its having caused the Trust to pay, on behalf of the Fund, a broker that
provides brokerage and research services to the Manager or any affiliated person
of the Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction, if the Manager determines in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Fund and to other clients of the Manager and any affiliated
person of the Manager as to which the Manager or any affiliated person of the
Manager exercises investment discretion. The Trust hereby agrees with the
Manager and with any Subadviser (as defined in Section 1(c) below) that any
entity or person associated with the Manager or Subadviser (or with any
affiliated person of the Manager or Subadviser) which is a member of a national
securities exchange is authorized to effect any transaction on such exchange for
the account of the Fund which is permitted by Section 11(a) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of compensation for
such transactions in accordance with Rule 11a2-2(T)(2)(iv).
(c) Subject to the provisions of the Agreement and Declaration of Trust
of the Trust and the Investment Company Act of 1940, as amended (the "1940
Act"), the Manager, at its expense, may select and contract with one or more
investment advisers (the "Subadviser") for the Fund to perform some or all of
the services for which it is responsible pursuant to paragraph (a) of this
Section 1. The Manager will compensate any Subadviser of the Fund for its
services to the Fund. The Manager may terminate the services of any Subadviser
at any time in its
-2-
<PAGE>
sole discretion, and shall at such time assume the responsibilities of such
Subadviser unless and until a successor Subadviser is selected. To the extent
that more than one Subadviser is selected, the Manager shall, in its sole
discretion, determine the amount of the Fund's assets allocated to each such
Subadviser.
(d) The Manager shall not be obligated to pay any expenses of or for
the Trust or of or for the Fund not expressly assumed by the Manager pursuant to
this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a shareholder, partner, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlling, controlled by or under common control with the Manager, and that
the Manager and any person controlling, controlled by or under common control
with the Manager may have an interest in the Trust. It is also understood that
the Manager and persons controlling, controlled by or under common control with
the manager have and may have advisory, management service, distribution or
other contracts with other organizations and persons, and may have other
interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's
services rendered, for the facilities furnished and for the expenses borne by
the Manager pursuant to Section 1, a fee, computed and paid monthly at the
annual rate (based on the number of days elapsed through the end of the month)
equal to the lesser of (i) .50% of the Fund's net asset value as of the last
business day of the month 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 any
subadviser with respect to the Fixed Income Fund 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 (copies of which
are attached as Exhibits A and B hereto). Such fee shall be
-3-
<PAGE>
payable for each month within five (5) business days after the end of such
month.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Trust
are qualified for offer and sale, the compensation due the Manager for such
fiscal year shall be reduced by the amount of such excess by a reduction or
refund thereof. In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the compensation due the
Manager shall be reduced, and, if necessary, the Manager shall bear the Fund's
expenses to the extent required by such expense limitation.
If the Manager shall serve for less than the whole of a month, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS
CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved by the affirmative vote of a majority of the
outstanding shares of the Fund, and by the vote, cast in person at a meeting
called for the purpose of voting on such approval, of a majority of the Trustees
who are not interested persons of the Trust or of the Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this
Contract by not more than sixty days' written notice delivered or
-4-
<PAGE>
mailed by registered mail, postage prepaid, to the other party,
or
(b) If (i) the Trustees or the shareholders of the Trust by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Trustees who are not interested persons of the Trust or of the
Manager, by vote cast in person at a meeting called for the purpose of voting on
such approval, do not specifically approve at least annually the continuance of
this Contract, then this Contract shall automatically terminate at the close of
business on the second anniversary of its execution, or upon the expiration of
one year from the effective date of the last such continuance, whichever is
later; provided, however, that if the continuance of this Contract is submitted
to the shareholders of the Fund for their approval and such shareholders fail to
approve such continuance of this Contract as provided herein, the Manager may
continue to serve hereunder in a manner consistent with the 1940 Act and the
rules and regulations thereunder.
Action by the Trust under paragraph (a) of this Section 5 may be taken
either (i) by vote of a majority of the Trustees, or (ii) by the affirmative
vote of a majority of the outstanding shares of the Fund.
6. CERTAIN DEFINITIONS
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act and the rules and regulations thereunder,
subject, however, to such exemptions as may be granted by the Securities and
Exchange
-5-
<PAGE>
Commission under said Act; the term "specifically approve at least annually"
shall be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder; and the term "brokerage and research services" shall
have the meaning given in the 1934 Act and the rules and regulations thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, to
the Fund or to any shareholder, officer, director or Trustee thereof, for any
act or omission in the course of, or connected with, rendering services
hereunder.
8. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, THE PREFERRED GROUP OF MUTUAL FUNDS and CATERPILLAR
INVESTMENT MANAGEMENT LTD. have each caused this instrument to be signed in
duplicate on its behalf by its duly authorized representative, all as of the day
and year first above written.
THE PREFERRED GROUP OF MUTUAL FUNDS
By:__________________________________
Title:
CATERPILLAR INVESTMENT MANAGEMENT LTD.
By__________________________________
Title:
-6-
PREFERRED FIXED INCOME FUND
SUBADVISER AGREEMENT
Subadviser Agreement executed as of November 1, 1996 between
CATERPILLAR INVESTMENT MANAGEMENT LTD., a Delaware corporation (the "Manager"),
and J. P. MORGAN INVESTMENT MANAGEMENT INC., a Delaware corporation (the
"Subadviser").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SUBADVISER TO THE TRUST.
(a) Subject always to the control of the trustees of The Preferred
Group of Mutual Funds (the "Trustees"), a Massachusetts business trust (the
"Trust"), the Subadviser, at its expense, will furnish continuously an
investment program for the Preferred Fixed Income Fund series of the Trust (the
"Fund") and will make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of portfolio securities and all other
investments. In the performance of its duties, the Subadviser (i) will comply
with the provisions of the Trust's Agreement and Declaration of Trust and
By-laws, including any amendments thereto (upon receipt of such amendments by
the Subadviser), and the investment objectives, policies and restrictions of the
Fund as set forth in its current Prospectus and Statement of Additional
Information (copies of which will be supplied to the Subadviser upon filing with
the Securities and Exchange Commission), (ii) will use its best efforts to
safeguard and promote the welfare of the Fund, (iii) will comply with other
policies which the Trustees or the Manager, as the case may be, may from time to
time determine as promptly as practicable after such policies have been
communicated to the Subadviser in writing, and (iv) shall exercise the same care
and diligence expected of the Trustees. The Subadviser and the Manager shall
each make its officers and employees available to the other from time to time at
reasonable times to review investment policies of the Fund and to consult with
each other regarding the investment affairs of the Fund.
(b) The Subadviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of personnel, required
for it to execute its duties hereunder faithfully and (ii) administrative
facilities, including bookkeeping, clerical personnel and equipment necessary
for the efficient conduct of the investment affairs of the Fund, including
oversight of the pricing of the Fund's portfolio and assistance in obtaining
prices for
-1-
<PAGE>
portfolio securities (but excluding determination of net asset value,
shareholder accounting services and fund accounting services).
(c) In the selection of brokers, dealers or futures commissions
merchants (collectively, "brokers") and the placing of orders for the purchase
and sale of portfolio investments for the Fund, the Subadviser shall seek to
obtain for the Fund the most favorable price and execution available, except to
the extent it may be permitted to pay higher brokerage commissions for brokerage
and research services as described below. In using its best efforts to obtain
for the Fund the most favorable price and execution available, the Subadviser,
bearing in mind the Fund's best interests at all times, shall consider all
factors it deems relevant, including, by way of illustration, the price, the
size of the transaction, the nature of the market for the security, the amount
of the commission, the timing of the transaction taking into account market
prices and trends, the reputation, experience and financial stability of the
broker involved and the quality of service rendered by the broker in other
transactions. Subject to such policies as the Trustees may determine and
communicate to the Subadviser in writing, the Subadviser shall not be deemed to
have acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker that
provides brokerage and research services to the Subadviser or any affiliated
person of the Subadviser an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another broker
would have charged for effecting that transaction, if the Subadviser determines
in good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the Subadviser's overall
responsibilities with respect to the Fund and to other clients of the Subadviser
and any affiliated person of the Subadviser as to which the Subadviser or any
affiliated person of the Subadviser exercises investment discretion. The Trust
agrees that any entity or person associated with the Subadviser or any
affiliated person of the Subadviser which is a member of a national securities
exchange is authorized to effect any transaction on such exchange for the
account of the Fund which is permitted by Section 11(a) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of compensation for
such transactions in accordance with Rule 11a2-2(T)(2)(iv).
(d) The Subadviser shall not be obligated to pay any expenses of or for
the Trust or of or for the Fund not expressly assumed by the Subadviser pursuant
to this Section 1.
-2-
<PAGE>
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a shareholder, partner, director, officer or
employee of, or be otherwise interested in, the Subadviser, and in any person
controlling, controlled by or under common control with the Subadviser, and that
the Subadviser and any person controlling, controlled by or under common control
with the Subadviser may have an interest in the Trust. It is also understood
that the Subadviser and persons controlling, controlled by or under common
control with the Subadviser have and may have advisory, management service,
distribution or other contracts with other organizations and persons, and may
have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE MANAGER TO THE SUBADVISER.
The Manager will pay to the Subadviser as compensation for the
Subadviser's services rendered, for the facilities furnished and for the
expenses borne by the Subadviser pursuant to Section 1, a fee in accordance with
Schedule A of this Agreement.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment or in the event that the Management
Contract dated as of November __, 1996 between the Manager and the Trust, with
respect to the Fund, shall have terminated for any reason, and the Manager shall
provide notice of any such termination of the Management Contract to the
Subadviser; and this Agreement shall not be amended unless such amendment be
approved by the affirmative vote of a majority of the outstanding shares of the
Fund, and by the vote, cast in person at a meeting called for the purpose of
voting on such approval, of a majority of the Trustees who are not interested
persons of the Trust or of the Manager or of the Subadviser.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) The Trust may at any time terminate this Agreement by written
notice delivered or mailed by registered mail, postage prepaid, to the Manager
and the Subadviser, or
(b) If (i) the Trustees or the shareholders of the Trust by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Trustees who are not interested persons of the Trust or of the
Manager or of the Subadviser, by vote cast in person
-3-
<PAGE>
at a meeting called for the purpose of voting on such approval, do not
specifically approve at least annually the continuance of this Agreement, then
this Agreement shall automatically terminate at the close of business on the
second anniversary of its execution, or upon the expiration of one year from the
effective date of the last such continuance, whichever is later; provided,
however, that if the continuance of this Agreement is submitted to the
shareholders of the Fund for their approval and such shareholders fail to
approve such continuance of this Agreement as provided herein, the Subadviser
may continue to serve hereunder in a manner consistent with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, or
(c) The Manager may at any time terminate this Agreement by not less
than 60 days' written notice delivered or mailed by registered mail, postage
prepaid, to the Subadviser, and the Subadviser may at any time terminate this
Agreement by not less than 90 days' written notice delivered or mailed by
registered mail, postage prepaid, to the Manager.
Action by the Trust under paragraph (a) above may be taken either (i)
by vote of a majority of the Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN INFORMATION.
The Subadviser shall promptly notify the Manager in writing of the
occurrence of any of the following events: (a) the Subadviser shall fail to be
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended from time to time, and under the laws of any jurisdiction in which
the Subadviser is required to be registered as an investment adviser in order to
perform its obligations under this Agreement or any other agreement concerning
the provision of investment advisory services to the Trust, (b) the Subadviser
shall have been served or otherwise have notice of any action, suit, proceeding,
inquiry or investigation, at law or in equity, before or by any court, public
board or body, involving the affairs of the Trust, (c) there is a change in
control of the Subadviser or any parent of the Subadviser within the meaning of
the 1940 Act or (d) there is a material adverse change in the business or
financial position of the Subadviser.
-4-
<PAGE>
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" means the affirmative vote, at a duly called and held
meeting of shareholders, (a) of the holders of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at such meeting, if
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting are present in person or by proxy, or (b) of the holders of
more than 50% of the outstanding shares of the Fund entitled to vote at such
meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person,"
"control," "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act and the rules and regulations thereunder,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act; the term "specifically approve at least
annually" shall be construed in a manner consistent with the 1940 Act and the
rules and regulations thereunder; and the term "brokerage and research services"
shall have the meaning given in the 1934 Act and the rules and regulations
thereunder.
8. NONLIABILITY OF SUBADVISER.
Except as specifically provided in the Indemnification Agreement among
the Trust, the Manager and the Subadviser, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Subadviser, or
reckless disregard of its obligations and duties hereunder, the Subadviser shall
not be subject to any liability to the Manager, to the Trust, to the Fund, or to
any shareholder, officer, director or Trustee thereof, for any act or omission
in the course of, or connected with, rendering services hereunder.
9. EXERCISE OF VOTING RIGHTS.
Except with the agreement or on the specific instructions of the
Trustees or the Manager, the Subadviser shall exercise or procure the exercise
of any voting right attaching to investments of the Fund.
10. NOTICES.
All notices, requests and consents shall be in writing and shall be
personally delivered or mailed by registered mail, postage prepaid, to the other
party at such address as may be furnished in writing by such party.
-5-
<PAGE>
IN WITNESS WHEREOF, CATERPILLAR INVESTMENT MANAGEMENT LTD.
and J. P. MORGAN INVESTMENT MANAGEMENT INC. have each caused this instrument
to be signed in duplicate on its behalf by its duly authorized representative,
as of the day and year first above written.
CATERPILLAR INVESTMENT MANAGEMENT LTD.
By:___________________________________
Title:
J. P. MORGAN INVESTMENT MANAGEMENT INC.
By:____________________________________
Title
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees, officers or
shareholders of the Trust but are binding only upon the assets of the Fund.
THE PREFERRED GROUP OF MUTUAL FUNDS
By:________________________________
-6-
<PAGE>
SCHEDULE A
1. For purposes of calculating the fee to be paid to the Subadviser
under this Agreement:
"Fund Assets" shall mean the net assets of the Fund;
"Plan Assets" shall mean the net assets of the portion of
assets managed by the Subadviser, excluding the Fund and the Preferred
Money Market Fund, (i) of any constituent fund of the Caterpillar
Investment Management Ltd. Tax Exempt Group Trust, (ii) of any assets
managed or advised by the Manager for which the Subadviser has been
appointed Subadviser by the Manager, (iii) of Caterpillar Inc. or any
of its subsidiaries or (iv) of any employee benefit plan sponsored by
Caterpillar Inc. or any of its subsidiaries;
"Combined Assets" shall mean the sum of Fund Assets and Plan
Assets; and
"Average Quarterly Net Assets" shall mean the average of net
asset value of the Fund Assets, Plan Assets or Combined Assets, as the
case may be, as of the last business day of each month in the calendar
quarter.
2. The Subadviser fee shall be paid in arrears (within 10 days of
receipt by the Manager of an invoice from the Subadviser) based upon the Average
Quarterly Net Assets of the Combined Assets during the preceding calendar
quarter. The fee payable for the calendar quarter shall be calculated by
applying the annual rate, as set forth in the fee schedule below, to the Average
Quarterly Net Assets of the Combined Assets, and dividing by four. The portion
of the quarterly fee to be paid by the Manager shall be prorated based upon the
Average Quarterly Net Assets of the Fund Assets as compared to the Average
Quarterly Net Assets of the Combined Assets. For a calendar quarter in which
this Agreement becomes effective or terminates, the portion of the Subadviser
fee due hereunder shall be prorated on the basis of the number of days that the
Agreement is in effect during the calendar quarter.
3. The following fee schedule shall be used to calculate the fee to be
paid to the Subadviser under this Agreement:
FIRST NEXT NEXT NEXT OVER
$75 MILLION $75 MILLION $150 MILLION $100 MILLION $400 MILLION
0.25% 0.225% 0.175% 0.125% 0.10%
-7-
<PAGE>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
SUBADVISER AGREEMENT
Subadviser Agreement executed as of ___________, 1997 between
CATERPILLAR INVESTMENT MANAGEMENT LTD., a Delaware corporation (the "Manager"),
and J. P. MORGAN INVESTMENT MANAGEMENT, INC., a Delaware general partnership
(the "Subadviser").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY SUBADVISER TO THE TRUST.
a. Subject always to the control of the trustees of The Preferred
Group of Mutual Funds (the "Trustees"), a Massachusetts
business trust (the "Trust"), the Subadviser, at its expense,
will furnish continuously an investment program for the
Preferred Short-Term Government Securities Fund series of the
Trust (the "Fund") and will make investment decisions on
behalf of the Fund and place all orders for the purchase and
sale of portfolio securities and all other investments. In the
performance of its duties, the Subadviser (i) will comply with
the provisions of the Trust's Agreement and Declaration of
Trust and By-laws, including any amendments thereto (upon
receipt of such amendments by the Subadviser), and the
investment objectives, policies and restrictions of the Fund
as set forth in its current Prospectus and Statement of
Additional Information (copies of which will be supplied to
the Subadviser upon filing with the Securities and Exchange
Commission), (ii) will use its best efforts to safeguard and
promote the welfare of the Fund, (iii) will comply with other
policies which the Trustees or the Manager, as the case may
be, may from time to time determine as promptly as practicable
after such policies have been communicated to the Subadviser
in writing, and (iv) shall exercise the same care and
diligence expected of the Trustees. The Subadviser and the
Manager shall each make its officers and employees available
to the other from time to time at reasonable times to review
investment policies of the Fund and to consult with each other
regarding the investment affairs of the Fund.
A-1
<PAGE>
b. The Subadviser, at its expense, will furnish (i) all necessary
investment and management facilities, including salaries of
personnel, required for it to execute its duties hereunder
faithfully and (ii) administrative facilities, including
bookkeeping, clerical personnel and equipment necessary for
the efficient conduct of the investment affairs of the Fund,
including oversight of the pricing of the Fund's portfolio and
assistance in obtaining prices for portfolio securities (but
excluding determination of net asset value, shareholder
accounting services and fund accounting services).
c. In the selection of brokers, dealers or futures commissions
merchants (collectively, "brokers") and the placing of orders
for the purchase and sale of portfolio investments for the
Fund, the Subadviser shall seek to obtain for the Fund the
most favorable price and execution available, except to the
extent it may be permitted to pay higher brokerage commissions
for brokerage and research services as described below. In
using its best efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser,
bearing in mind the Fund's best interests at all times, shall
consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature
of the market for the security, the amount of the commission,
the timing of the transaction taking into account market
prices and trends, the reputation, experience and financial
stability of the broker involved and the quality of service
rendered by the broker in other transactions. Subject to such
policies as the Trustees may determine and communicate to the
Subadviser in writing, the Subadviser shall not be deemed to
have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having
caused the Fund to pay a broker that provides brokerage and
research services to the Subadviser or any affiliated person
of the Subadviser an amount of commission for effecting a
portfolio investment transaction in excess of the amount of
commission another broker would have charged for effecting
that transaction, if the Subadviser determines in good faith
that such amount of commission was reasonable in relation to
the value of the brokerage and research services provided by
such broker, viewed in terms of either that particular
transaction or the Subadviser's overall responsibilities with
respect to the Fund and to other clients of the Subadviser and
any affiliated person of the Subadviser as to which the
Subadviser or any affiliated person of the Subadviser
exercises investment discretion. The Trust agrees that any
entity or person associated with the Subadviser or any
affiliated person of the Subadviser which is a member of a
national securities exchange is authorized to effect any
transaction on such exchange for the account of the Fund which
is permitted by Section 11(a) of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and Rule 11a2-2(T)
thereunder, and the Trust hereby consents to the retention of
compensation for such transactions in accordance with Rule
11a2-2(T)(2)(iv).
A-2
<PAGE>
d. The Subadviser shall not be obligated to pay any expenses of
or for the Trust or of or for the Fund not expressly assumed
by the Subadviser pursuant to this Section 1.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a shareholder, partner, director, officer or
employee of, or be otherwise interested in, the Subadviser, and in any person
controlling, controlled by or under common control with the Subadviser, and that
the Subadviser and any person controlling, controlled by or under common control
with the Subadviser may have an interest in the Trust. It is also understood
that the Subadviser and persons controlling, controlled by or under common
control with the Subadviser have and may have advisory, management service,
distribution or other contracts with other organizations and persons, and may
have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE MANAGER TO THE SUBADVISER.
The Manager will pay to the Subadviser as compensation for the
Subadviser's services rendered, for the facilities furnished and for the
expenses borne by the Subadviser pursuant to Section 1, a fee in accordance with
Schedule A of this Agreement.
4. ASSIGNMENT TERMINATES THIS AGREEMENT; AMENDMENTS OF THIS
AGREEMENT.
This Agreement shall automatically terminate, without the payment of
any penalty, in the event of its assignment or in the event that the Management
Contract dated as of June __, 1992 between the Manager and the Trust, with
respect to the Fund, shall have terminated for any reason, and the Manager shall
provide notice of any such termination of the Management Contract to the
Subadviser; and this Agreement shall not be amended unless such amendment be
approved by the affirmative vote of a majority of the outstanding shares of the
Fund, and by the vote, cast in person at a meeting called for the purpose of
voting on such approval, of a majority of the Trustees who are not interested
persons of the Trust or of the Manager or of the Subadviser.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
A-3
<PAGE>
a. The Trust may at any time terminate this Agreement by written
notice delivered or mailed by registered mail, postage
prepaid, to the Manager and the Subadviser, or
b. If (i) the Trustees or the shareholders of the Trust by the
affirmative vote of a majority of the outstanding shares of
the Fund, and (ii) a majority of the Trustees who are not
interested persons of the Trust or of the Manager or of the
Subadviser, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically
approve at least annually the continuance of this Agreement,
then this Agreement shall automatically terminate at the close
of business on the second anniversary of its execution, or
upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however,
that if the continuance of this Agreement is submitted to the
shareholders of the Fund for their approval and such
shareholders fail to approve such continuance of this
Agreement as provided herein, the Subadviser may continue to
serve hereunder in a manner consistent with the Investment
Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations thereunder, or
c. The Manager may at any time terminate this Agreement by not
less than 60 days' written notice delivered or mailed by
registered mail, postage prepaid, to the Subadviser, and the
Subadviser may at any time terminate this Agreement by not
less than 90 days' written notice delivered or mailed by
registered mail, postage prepaid, to the Manager.
Action by the Trust under paragraph (a) above may be taken either (i)
by vote of a majority of the Trustees, or (ii) by the affirmative vote of a
majority of the outstanding shares of the Fund.
Termination of this Agreement pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN INFORMATION.
The Subadviser shall promptly notify the Manager in writing of the
occurrence of any of the following events: (a) the Subadviser shall fail to be
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended from time to time, and under the laws of any jurisdiction in which
the Subadviser is required to be registered as an investment adviser in order to
perform its obligations under this Agreement or any other agreement concerning
the provision of investment advisory services to the Trust, (b) the Subadviser
shall have been served or otherwise have notice of any action, suit, proceeding,
inquiry or investigation, at law or in equity, before or by any court, public
board or body, involving the affairs of the Trust, (c) there is a change in
control of the Subadviser or any parent of the
A-4
<PAGE>
Subadviser within the meaning of the 1940 Act or (d) there is a material adverse
change in the business or financial position of the Subadviser.
7. CERTAIN DEFINITIONS.
For the purposes of this Agreement, the "affirmative vote of a majority
of the outstanding shares" means the affirmative vote, at a duly called and held
meeting of shareholders, (a) of the holders of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at such meeting, if
the holders of more than 50% of the outstanding shares of the Fund entitled to
vote at such meeting are present in person or by proxy, or (b) of the holders of
more than 50% of the outstanding shares of the Fund entitled to vote at such
meeting, whichever is less.
For the purposes of this Agreement, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act and the rules and regulations thereunder,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under the 1940 Act; the term "specifically approve at least
annually" shall be construed in a manner consistent with the 1940 Act and the
rules and regulations thereunder; and the term "brokerage and research services"
shall have the meaning given in the 1934 Act and the rules and regulations
thereunder.
8. NONLIABILITY OF SUBADVISER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Subadviser, or reckless disregard of its obligations and duties
hereunder, the Subadviser shall not be subject to any liability to the Manager,
to the Trust, to the Fund, or to any shareholder, officer, director or Trustee
thereof, for any act or omission in the course of, or connected with, rendering
services hereunder.
9. EXERCISE OF VOTING RIGHTS.
Except with the agreement or on the specific instructions of the
Trustees or the Manager, the Subadviser shall exercise or procure the exercise
of any voting right attaching to investments of the Fund.
10. NOTICES.
All notices, requests and consents shall be in writing and shall be
personally delivered or mailed by registered mail, postage prepaid, to the other
party at such address as may be furnished in writing by such party.
A-5
<PAGE>
IN WITNESS WHEREOF, CATERPILLAR INVESTMENT MANAGEMENT LTD.
and J. P. MORGAN INVESTMENT MANAGEMENT, INC. have each caused this
instrument to be signed in duplicate on its behalf by its duly authorized
representative, all as of the day and year first above written.
CATERPILLAR INVESTMENT MANAGEMENT LTD.
By: _______________________________
Title:
J. P. MORGAN INVESTMENT MANAGEMENT, INC.
By: _______________________________
Title:
The foregoing is accepted by:
THE PREFERRED GROUP OF MUTUAL FUNDS
By:________________________________
Title:
A-6
<PAGE>
SCHEDULE A
1. For purposes of calculating the fee to be paid to the Subadviser
under this Agreement:
"Fund Assets" shall mean the net assets of the Fund;
"Average Quarterly Net Assets" shall mean the average of the
net asset value of the Fund Assets, as the case may be, as of the last
business day of each month in the calendar quarter.
2. The Subadviser fee shall be paid in arrears (within 10 days of
receipt by the Manager of an invoice from the Subadviser) based upon the Average
Quarterly Net Assets during the preceding calendar quarter. The fee payable for
the calendar quarter shall be calculated by applying the annual rate of 0.20% to
the Average Quarterly Net Assets and dividing by four. For a calendar quarter in
which this Agreement becomes effective or terminates, the portion of the
Subadviser fee due hereunder shall be prorated on the basis of the number of
days that the Agreement is in effect during the calendar quarter.
A-1
EX. - 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
and Statement of Additional Information constituting parts of this
Post-Effective Amendment No. 13 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated August 15, 1997, relating to the
financial statements and financial highlights appearing in the June 30, 1997
Annual Report to Shareholders of The Preferred Group of Mutual Funds, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Independent Accountants and Financial
Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Boston, Massachusetts
October 24, 1997
-1-
<PAGE>
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<NAME> PREFERRED GROWTH FUND
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<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<INVESTMENTS-AT-VALUE> 459,176,679
<RECEIVABLES> 5,022,739
<ASSETS-OTHER> 1,339
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 464,200,757
<PAYABLE-FOR-SECURITIES> 6,326,207
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,852,673
<TOTAL-LIABILITIES> 9,178,880
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 265,903,957
<SHARES-COMMON-STOCK> 22,284,278
<SHARES-COMMON-PRIOR> 22,231,801
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45,338,436
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 143,779,484
<NET-ASSETS> 455,021,877
<DIVIDEND-INCOME> 2,730,618
<INTEREST-INCOME> 166,772
<OTHER-INCOME> 0
<EXPENSES-NET> 3,422,041
<NET-INVESTMENT-INCOME> (524,651)
<REALIZED-GAINS-CURRENT> 65,171,565
<APPREC-INCREASE-CURRENT> 36,641,616
<NET-CHANGE-FROM-OPS> 101,288,530
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 54,170,251
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,970,365
<NUMBER-OF-SHARES-REDEEMED> 9,014,649
<SHARES-REINVESTED> 3,096,761
<NET-CHANGE-IN-ASSETS> 43,333,731
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 34,337,122
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,983,971
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,422,041
<AVERAGE-NET-ASSETS> 399,482,532
<PER-SHARE-NAV-BEGIN> 18.52
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 4.76
<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 20.42
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 204,517,345
<INVESTMENTS-AT-VALUE> 372,284,752
<RECEIVABLES> 1,688,587
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 373,973,379
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 300,011
<TOTAL-LIABILITIES> 300,011
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 204,590,644
<SHARES-COMMON-STOCK> 17,679,128
<SHARES-COMMON-PRIOR> 16,068,137
<ACCUMULATED-NII-CURRENT> 1,663,903
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (348,586)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 167,767,407
<NET-ASSETS> 373,673,368
<DIVIDEND-INCOME> 4,405,054
<INTEREST-INCOME> 1,535,458
<OTHER-INCOME> 0
<EXPENSES-NET> 2,640,078
<NET-INVESTMENT-INCOME> 3,300,434
<REALIZED-GAINS-CURRENT> 1,849,729
<APPREC-INCREASE-CURRENT> 83,847,734
<NET-CHANGE-FROM-OPS> 88,997,897
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,256,687
<DISTRIBUTIONS-OF-GAINS> 9,329,095
<DISTRIBUTIONS-OTHER> 368,409
<NUMBER-OF-SHARES-SOLD> 6,922,277
<NUMBER-OF-SHARES-REDEEMED> 6,019,884
<SHARES-REINVESTED> 708,598
<NET-CHANGE-IN-ASSETS> 106,091,675
<ACCUMULATED-NII-PRIOR> 1,639,979
<ACCUMULATED-GAINS-PRIOR> 7,479,366
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,331,391
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,640,078
<AVERAGE-NET-ASSETS> 310,838,234
<PER-SHARE-NAV-BEGIN> 16.65
<PER-SHARE-NII> .19
<PER-SHARE-GAIN-APPREC> 5.10
<PER-SHARE-DIVIDEND> .20
<PER-SHARE-DISTRIBUTIONS> .58
<RETURNS-OF-CAPITAL> .02
<PER-SHARE-NAV-END> 21.14
<EXPENSE-RATIO> .85
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<AVG-DEBT-PER-SHARE> 0
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<NAME> THE PREFERRED GROUP OF MUTUAL FUNDS
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<NAME> PREFERRED INTERNATIONAL FUND
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUL-01-1997
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<INVESTMENTS-AT-VALUE> 263,462,656
<RECEIVABLES> 2,774,513
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<TOTAL-ASSETS> 267,828,546
<PAYABLE-FOR-SECURITIES> 720,971
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,815,180
<TOTAL-LIABILITIES> 2,536,151
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 198,195,074
<SHARES-COMMON-STOCK> 16,461,492
<SHARES-COMMON-PRIOR> 11,488,707
<ACCUMULATED-NII-CURRENT> 2,113,109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,486,648
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,497,564
<NET-ASSETS> 265,292,395
<DIVIDEND-INCOME> 8,429,222
<INTEREST-INCOME> 761,551
<OTHER-INCOME> 0
<EXPENSES-NET> 3,559,678
<NET-INVESTMENT-INCOME> 5,631,095
<REALIZED-GAINS-CURRENT> 4,490,156
<APPREC-INCREASE-CURRENT> 38,162,097
<NET-CHANGE-FROM-OPS> 48,283,348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,001,023
<DISTRIBUTIONS-OF-GAINS> 3,628,376
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,319,513
<NUMBER-OF-SHARES-REDEEMED> 4,965,744
<SHARES-REINVESTED> 619,016
<NET-CHANGE-IN-ASSETS> 107,664,986
<ACCUMULATED-NII-PRIOR> 1,729,622
<ACCUMULATED-GAINS-PRIOR> 2,378,251
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,020,096
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<GROSS-EXPENSE> 3,559,678
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<PER-SHARE-NII> .33
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<PER-SHARE-DIVIDEND> .35
<PER-SHARE-DISTRIBUTIONS> .25
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<AVG-DEBT-PER-SHARE> 0
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<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 83,667
<TOTAL-LIABILITIES> 83,667
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,794,771
<SHARES-COMMON-STOCK> 5,937,231
<SHARES-COMMON-PRIOR> 4,062,376
<ACCUMULATED-NII-CURRENT> 425,399
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,588,134
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,069,501
<NET-ASSETS> 84,877,805
<DIVIDEND-INCOME> 952,524
<INTEREST-INCOME> 80,730
<OTHER-INCOME> 0
<EXPENSES-NET> 589,430
<NET-INVESTMENT-INCOME> 443,824
<REALIZED-GAINS-CURRENT> 2,582,310
<APPREC-INCREASE-CURRENT> 16,470,111
<NET-CHANGE-FROM-OPS> 19,496,245
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 138,649
<DISTRIBUTIONS-OF-GAINS> 872,803
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<NUMBER-OF-SHARES-SOLD> 3,056,514
<NUMBER-OF-SHARES-REDEEMED> 1,263,669
<SHARES-REINVESTED> 82,010
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<ACCUMULATED-GAINS-PRIOR> 872,024
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 658,435
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<PER-SHARE-NII> .06
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<NAME> PREFERRED ASSET ALLOCATION FUND
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
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<TOTAL-LIABILITIES> 248,982
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98,987,004
<SHARES-COMMON-STOCK> 8,874,193
<SHARES-COMMON-PRIOR> 7,520,167
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,943,169
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,954,583
<NET-ASSETS> 128,884,756
<DIVIDEND-INCOME> 1,012,838
<INTEREST-INCOME> 3,726,405
<OTHER-INCOME> 0
<EXPENSES-NET> 1,097,362
<NET-INVESTMENT-INCOME> 3,641,881
<REALIZED-GAINS-CURRENT> 6,832,537
<APPREC-INCREASE-CURRENT> 10,721,688
<NET-CHANGE-FROM-OPS> 21,196,106
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,641,881
<DISTRIBUTIONS-OF-GAINS> 4,019,339
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,188,945
<NUMBER-OF-SHARES-REDEEMED> 1,394,051
<SHARES-REINVESTED> 559,132
<NET-CHANGE-IN-ASSETS> 31,995,408
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,130,641
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 773,756
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,097,362
<AVERAGE-NET-ASSETS> 110,083,504
<PER-SHARE-NAV-BEGIN> 12.88
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> 2.17
<PER-SHARE-DIVIDEND> .44
<PER-SHARE-DISTRIBUTIONS> .53
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<PER-SHARE-NAV-END> 14.52
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<CIK> 0000885414
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<SERIES>
<NUMBER> 4
<NAME> PREFERRED FIXED INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 137,503,815
<INVESTMENTS-AT-VALUE> 138,617,276
<RECEIVABLES> 1,650,855
<ASSETS-OTHER> 1,870
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 140,270,001
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 111,519
<TOTAL-LIABILITIES> 111,519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,480,527
<SHARES-COMMON-STOCK> 13,692,130
<SHARES-COMMON-PRIOR> 11,021,259
<ACCUMULATED-NII-CURRENT> 89,002
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 463,565
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,125,388
<NET-ASSETS> 140,158,482
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,231,314
<OTHER-INCOME> 0
<EXPENSES-NET> 969,846
<NET-INVESTMENT-INCOME> 8,261,468
<REALIZED-GAINS-CURRENT> 915,793
<APPREC-INCREASE-CURRENT> 1,648,694
<NET-CHANGE-FROM-OPS> 10,825,955
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,266,883
<DISTRIBUTIONS-OF-GAINS> 463,056
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,646,778
<NUMBER-OF-SHARES-REDEEMED> 1,832,384
<SHARES-REINVESTED> 856,477
<NET-CHANGE-IN-ASSETS> 28,973,990
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 105,245
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 724,846
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 969,846
<AVERAGE-NET-ASSETS> 131,441,770
<PER-SHARE-NAV-BEGIN> 10.09
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .19
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> .04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> .74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000885414
<NAME> THE PREFERRED GROUP OF MUTUAL FUNDS
<SERIES>
<NUMBER> 6
<NAME> PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 54,340,689
<INVESTMENTS-AT-VALUE> 54,316,461
<RECEIVABLES> 1,929,746
<ASSETS-OTHER> 679
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 56,246,886
<PAYABLE-FOR-SECURITIES> 1,394,792
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,685
<TOTAL-LIABILITIES> 1,439,477
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,674,086
<SHARES-COMMON-STOCK> 5,604,004
<SHARES-COMMON-PRIOR> 5,304,037
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (842,449)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (24,228)
<NET-ASSETS> 54,807,409
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,259,026
<OTHER-INCOME> 0
<EXPENSES-NET> 334,517
<NET-INVESTMENT-INCOME> 2,924,509
<REALIZED-GAINS-CURRENT> (121,577)
<APPREC-INCREASE-CURRENT> 246,617
<NET-CHANGE-FROM-OPS> 3,049,549
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,924,573
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 567,913
<NUMBER-OF-SHARES-REDEEMED> 567,113
<SHARES-REINVESTED> 299,167
<NET-CHANGE-IN-ASSETS> 3,052,092
<ACCUMULATED-NII-PRIOR> 64
<ACCUMULATED-GAINS-PRIOR> (720,872)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 187,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 334,517
<AVERAGE-NET-ASSETS> 53,438,361
<PER-SHARE-NAV-BEGIN> 9.76
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> .53
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.78
<EXPENSE-RATIO> .63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000885414
<NAME> THE PREFERRED GROUP OF MUTUAL FUNDS
<SERIES>
<NUMBER> 7
<NAME> PREFERRED MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 104,370,142
<INVESTMENTS-AT-VALUE> 104,370,142
<RECEIVABLES> 5,438,778
<ASSETS-OTHER> 13,272
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109,822,192
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 140,046
<TOTAL-LIABILITIES> 140,046
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 109,682,146
<SHARES-COMMON-STOCK> 109,682,146
<SHARES-COMMON-PRIOR> 90,482,435
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 109,682,146
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,514,501
<OTHER-INCOME> 0
<EXPENSES-NET> 481,906
<NET-INVESTMENT-INCOME> 5,032,595
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,032,595
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,032,595
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,156,175
<NUMBER-OF-SHARES-REDEEMED> 178,963,236
<SHARES-REINVESTED> 5,006,772
<NET-CHANGE-IN-ASSETS> 19,199,711
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 481,906
<AVERAGE-NET-ASSETS> 99,833,956
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
POWER OF ATTORNEY
We, the undersigned Trustees of The Preferred Group of Mutual Funds
(the "Trust"), hereby severally constitute and appoint Ronald R. Rossmann and
Fred L. Kaufman, and each of them singly, our true and lawful attorneys, with
full power to them and each of them, to sign for us, and in our name and in the
capacities indicated below, the Registration Statement on Form N-1A of the Trust
and any and all amendments (including post-effective amendments) to said
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
with the securities commissioner of any state, or with other regulatory
authorities, granting unto them, and each of them acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he or she
might or could do in person, and hereby ratify and confirm all that said
attorneys or any of them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
Signature Title Date
WILLIAM F. BAHL Trustee October 23, 1997
William F. Bahl
JAMES F. MASTERSON Trustee October 23, 1997
James F. Masterson
F. LYNN MCPHEETERS Trustee October 23, 1997
F. Lynn McPheeters
GARY M. ANNA Trustee October 23, 1997
Gary M. Anna
DIXIE L. MILLS Trustee October 23, 1997
Dixie L. Mills
-1-
<PAGE>
POWER OF ATTORNEY
We, the undersigned officers of The Preferred Group of Mutual Funds
(the "Trust"), hereby severally constitute and appoint Ronald R. Rossmann and
Fred L. Kaufman, and each of them singly, our true and lawful attorneys, with
full power to them and each of them, to sign for us, and in our name and in the
capacities indicated below, the Registration Statement on Form N-1A of the Trust
and any and all amendments (including post-effective amendments) to said
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
with the securities commissioner of any state, or with other regulatory
authorities, granting unto them, and each of them acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratify and confirm all that said attorneys or any
of them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
SIGNATURE TITLE DATE
RONALD R. ROSSMANN President October 24, 1997
Ronald R. Rossmann (Principal Executive Officer)
FRED L. KAUFMAN Treasurer and Vice President October 24, 1997
Fred L. Kaufman (Principal Financial and
Principal Accounting Officer)
-1-
