Filed pursuant to Rule 497(E)
(LOGO)
THE PREFERRED GROUP
OF MUTUAL FUNDS(R)
PROSPECTUS
NOVEMBER 1, 1996,
AS REVISED MAY 15, 1997
THE PREFERRED GROUP OF MUTUAL FUNDS
100 N.E. Adams Street
Peoria, Illinois 61629
- --------------------------------------------------------------------------------
The Preferred Group of Mutual Funds ("The Preferred Group") is an open-end,
diversified series investment company offering nine portfolios ("Funds")
with different investment objectives and strategies. Shares of the Funds are
offered without a sales charge at net asset value.
PREFERRED GROWTH FUND seeks long-term capital appreciation. The Fund will invest
primarily in equity securities believed to offer the potential for capital
appreciation, including stocks of companies that are experiencing rapid
earnings growth.
PREFERRED VALUE FUND seeks capital appreciation and current income. The Fund
will invest primarily in equity securities that are believed to be undervalued
and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND seeks long-term capital appreciation by investing
its assets primarily in equity securities traded principally on markets outside
the United States.
PREFERRED SMALL CAP FUND seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
PREFERRED ASSET ALLOCATION FUND seeks both capital appreciation and current
income by allocating its assets among stocks, bonds and high quality money
market instruments.
PREFERRED BALANCED FUND seeks total return through a combination of capital
appreciation and current income. The Fund allocates its assets among stocks,
bonds and money market instruments.
PREFERRED FIXED INCOME FUND seeks a high level of current income consistent with
investment in a diversified portfolio of high quality debt securities.
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND seeks high current income,
consistent with preservation of capital, primarily through investment in U.S.
Government Securities.
PREFERRED MONEY MARKET FUND seeks the maximum current income believed to be
consistent with preser vation of capital and maintenance of liquidity by
investing in a portfolio of short-term, fixed-income instruments.
AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus concisely describes the information which investors should know
before investing. Please read this Prospectus carefully and keep it for future
reference.
A Statement of Additional Information dated November 1, 1996, as supplemented
from time to time, is available free of charge by writing to The Preferred
Group, P.O. Box 8320, Boston, MA 02266-8320 or by telephoning 1-800-662-4769.
The Statement, which contains more detailed information about The Preferred
Group, has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference in this Prospectus.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR MORE INFORMATION ABOUT THE PREFERRED GROUP CALL
1-800-662-GROW.
<PAGE>
TABLE OF CONTENTS
Page
----------
Schedule of Fund Expenses......................... 1
Financial Highlights.............................. 3
Investment Objectives and Policies................ 7
Preferred Growth Fund............................. 7
Preferred Value Fund.............................. 8
Preferred International Fund...................... 8
Preferred Small Cap Fund.......................... 9
Preferred Asset Allocation Fund................... 9
Preferred Balanced Fund...,...................... 11
Preferred Fixed Income Fund...................... 13
Preferred Short-Term
Government Securities Fund....................... 14
Preferred Money Market Fund...................... 15
General Policies and Risk Considerations......... 16
Performance Information.......................... 21
Page
----------
OPENING YOUR ACCOUNT............................. 22
How to Buy Shares................................ 22
Exchanging and Redeeming Shares.................. 23
Important Information About
Your Account..................................... 25
Additional Shareholder Services.................. 26
Determination of Net Asset
Value and Pricing................................ 27
Other Information................................ 28
Distributions.................................... 28
Choosing a Distribution Option................... 28
Taxes ........................................... 29
Statements and Reports........................... 30
Management of The Preferred Group................ 30
Description of The Preferred Group............... 33
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)
ASSET
GROWTH VALUE INTERNATIONAL SMALL CAP ALLOCATION
------ ----- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees....... 0.75% 0.75% 0.95% 0.75% 0.70%
Other Expenses ...... 0.11% 0.10% 0.36% 0.48% 0.34%
Total Fund Operating
Expenses................ 0.86% 0.85% 1.31% 1.23% 1.04%
<CAPTION>
SHORT-TERM
FIXED GOVERNMENT
BALANCED INCOME SECURITIES MONEY MARKET
--------- ------- ------------- --------------
<S> <C> <C> <C> <C>
Management Fees *..... 0% 0.50% 0.35% 0.30%
Other Expenses *...... 1.15% 0.28% 0.31% 0.24%
Total Fund Operating
Expenses*............ 1.15% 0.78% 0.66% 0.54%
* After expense limitation, in the case of the Balanced Fund.
</TABLE>
<PAGE>
The purpose of this table is to assist in understanding the various costs and
expenses of The Preferred Group that are borne by shareholders. Operating
Expenses for the Small Cap Fund are based upon estimates for the Fund's first
full fiscal year. Management Fees for the Small Cap Fund reflect the termination
of a voluntary undertaking by Caterpillar Investment Management Ltd. ("CIML") to
waive a portion of its Management Fees for such Fund. Actual Management Fees and
Total Fund Operating Expenses for the Small Cap Fund for the period ended June
30, 1996 were 0.40% and 0.88% of average net assets, respectively. Management
Fees for the Money Market Fund reflect the termination of a voluntary
undertaking by CIML to waive fees in excess of 0.15% of average net assets.
Actual Management Fees and Total Fund Operating Expenses for the Money Market
Fund for the year ended June 30, 1996 were 0.25% and 0.49% of average net
assets, respectively. Management Fees and "Other Expenses" for the Balanced Fund
reflect a voluntary undertaking by CIML to bear expenses in excess of 1.15% of
average assets. In the absence of the undertaking and the limits imposed on
investment company expenses by jurisdictions in which shares of the fund are
qualified for offer and sale (described in the Statement of Additional
Information), Management Fees, "Other Expenses" and "Total Fund Operating
Expenses" for the Balanced Fund would have been 0.75%, 3.62% and 4.37% of
average net assets, respectively, for the year ended June 30, 1996. Management
Fees shown for the Fixed Income Fund have been restated to reflect a new
management contract with respect to that Fund. For the year ended June 30, 1996,
actual Management Fees and Total Fund Operating Expenses for the Fixed Income
Fund were .65% and .93% of average net assets, respectively.
EXAMPLE: Your investment of $1,000 would incur the following expenses assuming
5% annual return and redemption at the end of each
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth $9 27 48 106
Value 9 27 47 105
International 13 42 72 158
Small Cap 13 39 68 149
Asset Allocation 11 33 57 127
Balanced 12 37 63 140
Fixed Income 8 25 43 97
Short-Term Government Securities 7 21 37 82
Money Market 6 17 30 68
NOTE: THE FIGURES SHOWN IN THE EXAMPLE ARE ENTIRELY HYPOTHETICAL. THEY ARE NOT
REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES; ACTUAL PERFORMANCE
AND/OR EXPENSES MAY BE GREATER OR LESS THAN SHOWN.
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
(Selected data for a share of beneficial interest
outstanding throughout the period)
Income (Loss) From Investment Operations
Net Total
Net Asset Net Realized Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Period (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
Growth
Year Ended June 30,
1993 $10.00 $0.01 $2.42 $2.43
1994 12.42 0.01 0.03 0.04
1995 12.46 0.01 4.24 4.25
1996 16.63 0.00 2.44 2.44
<CAPTION>
Value
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.19 1.44 1.63
1994 11.52 0.19 (0.12) 0.07
1995 11.33 0.21 2.62 2.83
1996 13.82 0.20 3.13 3.33
<CAPTION>
International
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38)
1994 9.59 0.08 2.47 2.55
1995 12.02 0.18 0.60 0.78
1996 12.24 0.19 1.47 1.66
<PAGE>
<CAPTION>
Distributions
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized
Income Income Investments Gains
<S> <C> <C> <C> <C>
Growth
Year Ended June 30,
1993 $(0.01) - $ - $ -
1994 - - - -
1995 (0.02) - (0.06) -
1996 (0.01) - (0.54) -
<CAPTION>
Value
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.11) - - -
1994 (0.16) - (0.10) -
1995 (0.20) - (0.14) -
1996 (0.21) - (0.29) -
<CAPTION>
International
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - -
1994 (0.07) - (0.05) -
1995 (0.13) - (0.26) (0.17)
1996 (0.17) - (0.01) -
<PAGE>
<CAPTION>
Distributions
Net Asset Total Net
Value, Return at Assets,
Total End of Net Asset End of
Distributions Period Value* Period
<S> <C> <C> <C> <C>
Growth
Year Ended June 30,
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
<CAPTION>
Value
<S> <C> <C> <C> <C>
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
<CAPTION>
International
<S> <C> <C> <C> <C>
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 (0.56) 12.24 6.70% 118,216,038
1996 (0.18) 13.72 13.70% 157,627,409
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions+
<S> <C> <C> <C>
Growth
Year Ended June 30,
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
<CAPTION>
Value
<S> <C> <C> <C>
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
<CAPTION>
International
<S> <C> <C> <C>
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
<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
Net Total
Net Asset Net Realized Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Period (Loss) Gain (Loss) Operations
Small Cap+
Period Ended
June 30, 1996
(Commenced
investment
operations on
November 1, 1995)
<S> <C> <C> <C> <C>
$10.00 $0.05 $1.22 $1.27
Asset Allocation
Year Ended
June 30,
1993 10.00 0.34 0.99 1.33
1994 10.90 0.30 (0.42) (0.12)
1995 10.27 0.38 1.79 2.17
1996 11.97 0.40 1.72 2.12
<CAPTION>
Balanced
<S> <C> <C> <C> <C>
Year Ended
June 30,
1996 10.00 0.41 0.78 1.19
<CAPTION>
Fixed Income
Year Ended
June 30,
1993 10.00 0.51 0.71 1.22
1994 10.60 0.47 (0.50) (0.03)
1995 9.80 0.58 0.50 1.08
1996 10.30 0.58 (0.16) 0.42
<CAPTION>
Short-Term
Government
Securities
<S> <C> <C> <C> <C>
Year Ended
June 30,
1993 10.00 0.39 0.23 0.62
1994 10.08 0.37 (0.29) 0.08
1995 9.77 0.51 0.03 0.54
1996 9.80 0.53 (0.04) 0.49
<CAPTION>
Money Market
<S> <C> <C> <C> <C>
Year Ended
June 30,
1993 1.00 0.03 - 0.03
1994 1.00 0.03 - 0.03
1995 1.00 0.05 - 0.05
1996 $1.00 $0.05 $ - $0.05
<PAGE>
<CAPTION>
Distributions
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized
Income Income Investments Gains
<S> <C> <C> <C> <C>
Small Cap+
Period Ended
June 30, 1996
(Commenced
investment
operations on
November 1, 1995)
<S> <C> <C> <C> <C>
$(0.02) - $ - $ -
Asset Allocation
Year Ended
June 30,
1993 (0.34) - (0.09) -
1994 (0.30) - (0.21) -
1995 (0.38) - (0.09) -
1996 (0.40) - (0.81) -
<CAPTION>
Balanced
<S> <C> <C> <C> <C>
Year Ended
June 30,
1996 (0.28) (0.13) (0.09) -
<CAPTION>
Fixed Income
Year Ended
June 30,
1993 (0.51) - (0.11) -
1994 (0.47) - (0.14) (0.16)
1995 (0.58) - - -
1996 (0.58) - (0.05) -
<CAPTION>
Short-Term
Government
Securities
<S> <C> <C> <C> <C>
Year Ended
June 30,
1993 (0.39) - (0.15) -
1994 (0.37) - - (0.02)
1995 (0.51) - - -
1996 (0.53) - - -
<CAPTION>
Money Market
<S> <C> <C> <C> <C>
Year Ended
June 30,
1993 (0.03) - - -
1994 (0.03) - - -
1995 (0.05) - - -
1996 $(0.05) - $ - $ -
<PAGE>
<CAPTION>
Net Asset Total Net
Value, Return at Assets,
Total End of Net Asset End of
Distributions Period Value*** Period
<S> <C> <C> <C> <C>
Small Cap+
Period Ended
June 30, 1996
(Commenced
investment
operations on
November 1, 1995)
<S> <C> <C> <C> <C>
$(0.02) $11.25 12.67%*+++ $45,692,712
Asset Allocation
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
<CAPTION>
Balanced
<S> <C> <C> <C> <C>
Year Ended
June 30,
1996 (0.50) 10.69 12.11%* 4,005,993
<CAPTION>
Fixed Income
Year Ended
June 30,
1993 (0.62) 10.60 12.59% 35,889,454
1994 (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
<CAPTION>
Short-Term
Government
Securities
<S> <C> <C> <C> <C>
Year Ended
June 30,
1993 (0.54) 10.08 6.32% 27,027,485
1994 (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
<CAPTION>
Money Market
<S> <C> <C> <C> <C>
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
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions++
<S> <C> <C> <C> <C> <C>
Small Cap+
Period Ended
June 30, 1996
(Commenced
investment
operations on
November 1, 1995)
<S> <C> <C> <C> <C> <C>
0.88%** 1.23%** 0.75%** 65.70%+++ $0.047
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
<CAPTION>
Balanced
<S> <C> <C> <C> <C> <C>
Year Ended
June 30,
1996 1.15% 4.37% 2.77% 48.03% N/A
<CAPTION>
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
<CAPTION>
Short-Term
Government
Securities
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
Money Market
<S> <C> <C> <C> <C> <C>
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
<FN>
*Total return for the Balanced, Small Cap and Money Market Funds would have been
lower if a portion of the fees had not been capped or waived by the manager.
**Annualized.
***Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
+ Eight-month period ended June 30, 1996.
++ For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged.
Small Cap is the only Fund required to disclose this information for the
fiscal year ended June 30, 1996.
+++ Not annualized.
</FN>
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are stated below. There is no
assurance that any Fund will achieve its objective. Each Fund (other than the
Short Term Government Securities and Money Market Funds) may engage in a variety
of transactions involving options and futures contracts and each Fund (other
than the Short-Term Government Securities and Money Market Funds) may invest in
securities traded principally in securities markets outside the United States.
For more information about these and other investment strategies employed by the
Funds, see "General Policies and Risk Considerations." Appendix A contains a
description of the ratings of the bonds in which the Funds may invest. Each Fund
is managed by Caterpillar Investment Management Ltd. ("CIML"). CIML is
responsible for, among other things, providing a continuing investment program
for the Funds in accordance with the investment objectives and policies of each
Fund. In order to assist it in carrying out its responsibility, CIML has
retained various subadvisers to render advisory services to the Funds under the
supervision of CIML and The Preferred Group's Board of Trustees. For further
information about CIML and the various subadvisers, see "Management of The
Preferred Group."
PREFERRED GROWTH FUND
Subadviser: Jennison Associates Capital Corp. ("Jennison")
Portfolio Manager: Lulu C. Wang, CFA
Title: Director, Executive Vice President, Jennison
Last Five Years Experience: Portfolio Manager at Jennison. Lulu has managed
the Growth Fund since its inception on July 1, 1992.
Education: B.A. - Wellesley College; MBA - Columbia University; Chartered
Financial Analyst
The investment objective of the Growth Fund is long-term capital appreciation.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities believed by Jennison to offer the potential for
capital appreciation, including stocks of companies that are experiencing
above-average earnings growth. When selecting securities for the Fund's
portfolio, Jennison will consider a variety of factors, including a company's
earnings, historical and expected sales growth, return on assets and equity,
financial condition, strength and experience of its management group, research
and development practices and marketing strength and capability. The Fund may
also invest in other securities, including obligations issued or guaranteed by
the U.S. Government or its agencies, authorities or instrumentalities, corporate
bonds or short-term debt obligations.
A portion of the Fund's assets may be invested in securities of companies with
relatively low equity market capitalizations. These may include securities
traded over-the-counter and securities of companies with limited operating
histories. Such companies may have more restricted product lines or more
limited financial resources than larger, more established companies.
For these and other reasons, they may be more severely affected by economic
downturns or other adverse developments than are larger, more established
companies. Securities of such companies often trade less frequently and in more
limited volume, and may be subject to more upside or downside risk, than
securities of larger, more established companies.
<PAGE>
PREFERRED VALUE FUND
Subadviser: Oppenheimer Capital ("Oppenheimer")
Portfolio Manager: John G. Lindenthal
Title: Managing Director, Oppenheimer
Last Five Years Experience: Portfolio Manager at Oppenheimer. John has managed
the Value Fund since its inception on July 1, 1992.
Education: B.S., MBA - University of Santa Clara
The Value Fund seeks capital appreciation and current income.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities that Oppenheimer believes are undervalued and that
offer above-average potential for capital appreciation. Equity securities
include common stocks, preferred stocks and securities convertible into common
stocks ("convertible securities"). In selecting securities, Oppenheimer analyzes
companies that have high return on equity and assets, large undedicated cash
flows, significant prospects for dividend growth and reasonable prices in
relation to book value. The key considerations in evaluating a security are
financial strength of the balance sheet, industrial position, current and future
profitability, effectiveness of management and attractive valuation. The Fund
may also invest in other securities, including obligations issued or guaranteed
by the U.S. Government or its agencies, authorities or instrumentalities,
corporate bonds or short-term debt obligations.
PREFERRED INTERNATIONAL FUND
Subadviser: Mercator Asset Management, L.P.
Portfolio Manager: Peter F. Spano, CFA
Title: President, PXS Corp.
General Partner
Last Five Years Experience: Portfolio Manager at Mercator. Pete has managed the
International Fund since its inception on July 1, 1992.
Education: BBA - St. John's University; MBA - Baruch College (City University
of New York); Chartered Financial Analyst
The investment objective of the International Fund is long-term capital
appreciation.
The International Fund will invest primarily in equity securities traded
principally on markets outside the United States, including emerging markets,
that Mercator believes are undervalued and offer above-average potential for
capital appreciation. Under normal market conditions, at least 65% of the
International Fund's total assets will be invested in at least three different
countries, not including the United States. The Fund may also purchase corporate
bonds and government bonds, including any such securities traded principally in
domestic markets. The International Fund may also invest in bankers' acceptances
or negotiable bank certificates of deposit issued by United States or foreign
banks having outstanding debt rated at least A by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's ("S&P") or, if not so rated, of equivalent
quality as determined by Mercator; prime commercial paper issued by companies
having an outstanding debt issue rated at least A by Moody's or S&P or rated at
least Prime-2 or better by Moody's or A-2 or better by S&P or, if not rated, of
comparable quality as determined by Mercator; and high-grade short-term
corporate obligations rated at least A by Moody's or S&P.
<PAGE>
The securities markets of many nations can be expected to move relatively
independently of one another, because business cycles and other economic or
political events that influence one country's securities markets may have little
effect on the securities markets of other countries. By investing in a foreign
portfolio, the International Fund seeks to reduce the risks associated with
investing in the economy of only one country. However, investments in foreign
securities involve certain risks. See "General Policies and Risk Considerations
- -- Risk Factors of Foreign Investments."
PREFERRED SMALL CAP FUND
Portfolio Manager: Todd M. Sheridan, CFA
Title: Portfolio Manager, CIML
Last Five Years Experience: Portfolio Manager at CIML since October, 1992. Prior
to that time, he held various positions within the Corporate Treasury Department
of Caterpillar Inc. Todd has been involved in the management of the Small Cap
Fund since its inception on November 1, 1995.
Education: B.S. - University of Illinois; Chartered Financial Analyst
The Small Cap Fund seeks long-term capital appreciation through investments in
companies with small equity capitalizations.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in common stock and other equity securities of small-capitalization
issuers (generally defined as companies with equity capitalizations of less than
$1 billion). In selecting securities for the Fund, CIML seeks out small-
capitalization companies according to a variety of factors, including a
company's earnings, price/cash flow ratio, market price to book value,
earnings/price ratio and various technical analyses. The Fund may also invest in
other securities, including equity securities of large-capitalization issuers,
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities, and corporate bonds or short-term debt
obligations rated at the time of purchase at least A or Prime-2, respectively,
by Moody's or A or A-2, respectively, by S&P or, if not so rated, of equivalent
quality as determined by CIML.
Securities of small-capitalization companies may
include securities traded over-the-counter and securities of companies with
limited operating histories. Such companies may have more restricted product
lines or more limited financial resources than larger, more established
companies. For these and other reasons, they may be more severely affected by
economic downturns or other adverse developments than are larger, more
established companies. Securities of small-capitalization companies often trade
less frequently and in more limited volume, and may be subject to greater
volatility, than securities of larger, more established companies.
PREFERRED ASSET ALLOCATION FUND
Subadvisers: Mellon Capital Management Corporation ("Mellon") and PanAgora
Asset Management, Inc. ("PanAgora")
Portfolio Manager: Thomas B. Hazuka
Title: Executive Vice President, Mellon
Last Five Years Experience: Portfolio Manager at Mellon. Tom has been involved
in the management of the Asset Allocation Fund since its inception on
July 1, 1992.
<PAGE>
Education: B.S. - Stevens Institute of Technology; MBA - University of
Connecticut; PHD - Stanford University
Portfolio Manager: Edgar E. Peters
Title: Director of Asset Allocation and Chief Investment Strategist, PanAgora
Last Five Years Experience: Portfolio Manager at PanAgora. Ed has been involved
in the management of the Asset Allocation Fund since its inception on
July 1, 1992.
Education: B.S. - Montclair State College; MBA - Rutgers University
The Asset Allocation Fund seeks both capital appreciation and current income.
The Fund allocates its assets among stocks, bonds and money market instruments.
At the date of this Prospectus, Mellon and PanAgora each manage approximately
one-half of the Fund's assets (although these proportions may change due to
differential performance) and it is currently expected that all amounts received
by the Fund for sales of its shares and all amounts paid by the Fund for
redemptions of Fund shares will be split evenly between Mellon and PanAgora. The
portion of the Fund's assets invested in stocks, bonds and money market
instruments will vary from time to time in light of changes in interest rates
and other economic factors. The Fund expects, however, that in the near term it
will invest a substantial portion of its assets in each asset class, although
the Fund may invest without limit in each asset class.
HOW MELLON MANAGES THE FUND.
Mellon allocates the Fund's assets among stocks, bonds and money market
instruments based on the expected returns on each of these three asset classes,
the risks of each of the asset classes and the correlations among the asset
classes. The common stocks in which the Fund may invest are those that from time
to time comprise the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500"). The bonds in which the Fund may invest will be limited to long-term U.S.
Treasury Bonds. The money market instruments in which the Fund may invest will
be limited to short-term investments (i) rated at the time of purchase Prime-1
as determined by Moody's or A-1 as determined by S&P, (ii) unrated securities
that Mellon determines to be of comparable quality, and (iii) repurchase
agreements with respect to U.S. Government securities. Mellon may also achieve a
substantial portion of the Fund's exposure to the stock and bond markets through
the use of financial futures and related options. For instance, Mellon may
increase the Fund's exposure to stocks by taking long positions in Standard &
Poor's 500 Stock Index futures contracts. Similarly, Mellon may increase the
Fund's exposure to bonds by taking long positions in futures contracts on U.S.
Treasury bonds. The Fund may also engage in a variety of strategies, including
the use of futures contracts and related options and investments in asset-backed
securities. See "General Policies and Risk Considerations" for more information
about these strategies.
HOW PANAGORA MANAGES THE FUND.
PanAgora uses a proprietary asset allocation discipline that provides percentage
guidelines (the "Guidelines") indicating the mix of holdings among stocks, bonds
and money market instruments that may be appropriate at any given time. The
Guidelines are established by comparing the expected performance with the
current performance for each investment class. The expected performance for
each investment class is the performance that PanAgora would ordinarily expect
to obtain over a ten-year period from investments in that class, based upon its
empirical analysis of the long-term performance of stocks, bonds and money
market instruments. The current performance for each investment class is the
actual performance for that class during a current period with reference to the
following: stocks -- the S&P 500; bonds -- the Shearson Lehman Long Treasury
Index; and money market instruments -- the 3-month and 1-year Treasury bills.
Leading economic and capital market indicators are also integrated into the
process of establishing Guidelines. PanAgora may achieve
<PAGE>
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.
In selecting stocks for the Fund, PanAgora will generally purchase a substantial
percentage of the stocks comprising the S&P 500 and gives important
consideration to diversification and trading liquidity. PanAgora attempts to
select stocks which, as a portfolio, have similar investment characteristics,
such as industry representation, dividend yield and capitalization, and which
have investment performance similar to the stocks comprising the S&P 500. In
selecting stocks, PanAgora also gives consideration to the value and growth
potential of individual stocks.
With respect to bonds, the Fund invests in highly liquid investment-grade
securities issued by the U.S. Government and its agencies, instrumentalities or
authorities and by major U.S. corporations. All such securities are included in
the Lehman Brothers Government/Corporate Bond Index (the "Lehman Index"), a
composite of all government, Federal agency and publicly traded investment-grade
corporate debt securities with a maturity of one year or longer.
Investment-grade fixed income securities are securities rated Baa or higher by
Moody's or BBB or higher by S&P, and unrated securities that are of equivalent
quality in the opinion of PanAgora. Securities rated Baa by Moody's or BBB by
S&P have speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments on such obligations than in the case of
higher-rated securities. In the event that the rating of any security held by
the Fund falls below Baa by Moody's and/or BBB by S&P, the Fund will not be
obligated to dispose of such security, and may continue to hold the obligation
if, in the opinion of PanAgora, such investment is considered appropriate in
the circumstance. PanAgora generally selects fixed income securities for the
Fund to match the Lehman Index in maturity, quality, sector and coupon
characteristics. Typically, the average maturity of fixed income securities
selected is approximately 10 years, although the Fund may invest in longer or
shorter maturities when, in the opinion of PanAgora, investment opportunities
warrant.
With respect to money market instruments, the Fund invests in U.S. Government
obligations, bank certificates of deposit and time deposits, bankers'
acceptances, prime commercial paper, high-grade, short-term corporate
obligations and repurchase agreements with respect to these instruments.
PREFERRED BALANCED FUND
Subadviser: Jennison Associates Capital Corp.
Portfolio Manager: Bradley L. Goldberg, CFA
Title: Director, Executive Vice President, Jennison
Last Five Years Experience: Equity and balanced portfolio manager and chairman
of the Asset Allocation Committee at Jennison. Brad has managed the Balanced
Fund since its inception on July 1, 1995.
Education: B.S. - University of Illinois; MBA - New York University; Chartered
Financial Analyst
Associate Portfolio Manager: Peter Reinemann
Title: Director, Senior Vice President, Jennison
Last Five Years Experience: Equity and balanced associate portfolio
manager at Jennison since 1992. Prior to that time, he served as a Vice
President at Paribas Asset Management, Inc. Peter has been involved in the
management of the Balanced Fund since its inception on July 1, 1995.
Education: B.A. - Boston University
<PAGE>
The Balanced Fund seeks total return through a combination of capital
appreciation and current income. The Fund allocates its assets among stocks,
bonds and money market instruments.
At the date of this Prospectus, Jennison intends to allocate the assets of the
Fund according to the following ranges: (i) 40-70% of the assets of the Fund
will be invested in common stocks, preferred stocks and securities convertible
into common stocks; (ii) 25-55% of the assets of the Fund will be invested in
debt securities (i.e., fixed income securities with maturities of one to thirty
years); and (iii) 5-35% of the assets of the Fund will be invested in
short-term fixed income securities (i.e., money market instruments). From time
to time, Jennison may vary the allocations of the Fund's assets from those
ranges described above. In determining the Fund's allocation among the various
asset classes, Jennison focuses on the relative valuation of each asset class,
utilizing a wide range of macroeconomic, fundamental, quantitative and
technical methods. The Fund's assets are actively shifted among the three asset
classes in an attempt to capitalize on intermediate term (i.e., twelve to
eighteen months) valuation opportunities and to maximize the Fund's total
investment return. The Fund will at all times hold at least 25% of its assets
in senior fixed income securities (including, for these purposes, that portion
of the value of securities convertible into common stock which is attributable
to the fixed income characteristics of those securities).
The equity component of the Fund will consist of common stocks, preferred stocks
and securities convertible into common stocks of companies that Jennison
believes offer the potential for above-average capital appreciation. The primary
factor in selecting equity securities for the Fund is earnings growth at a
reasonable price. In evaluating earnings growth prospects for individual
companies, Jennison considers a variety of characteristics including a
company's historic record, management skills and financial strength. Jennison
utilizes its staff of research analysts as an important part of this equity
selection process. Jennison combines this focus on earnings growth with
valuation discipline. A number of both fundamental and technical measures are
utilized in determining whether individual securities are attractively priced.
The overall objective is to capture corporate earnings growth at a reasonable
price.
The debt securities component of the Fund will consist primarily of high quality
fixed income securities, such as U.S. Government and agency obligations.
The Fund may also invest in U.S. corporate debt securities, foreign government
and corporate obligations, and mortgage-backed and asset-backed securities.
See "General Policies and Risk Considerations" for more information about
these strategies. The minimum average dollar-weighted credit quality of the
Fund's debt portfolio (excluding short-term investments) will be A by either
Moody's or S&P. For purposes of this average credit rating requirement,
instruments that are not rated will be assigned a rating by Jennison. The Fund
may, subject to the average credit rating requirement, invest up to 5% of its
net assets in securities rated below Baa by Moody's or BBB by S&P (commonly
known as "junk bonds") and in unrated securities that are of equivalent quality
in the opinion of Jennison. Securities rated lower than A by either Moody's or
S&P have speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments on such obligations than in the case of
higher-rated securities. In the event that the rating of any security held by
the Fund falls below its rating at the time of purchase, the Fund will not be
obligated to dispose of such security and may continue to hold the security if,
in the opinion of Jennison, such investment is considered appropriate in the
circumstances. The values of debt securities generally vary inversely with
interest rates. Investments in lower-rated fixed income securities generally
provide greater income than investments in higher-rated securities, but are
subject to greater market fluctuations and risks of loss of income and
principal than higher-rated securities. Fluctuations in the value of portfolio
securities will not affect interest income on existing portfolio securities but
will be reflected in the Fund's net asset value.
<PAGE>
With respect to short-term fixed income securities, the Fund may invest in U.S.
Government obligations, bank certificates of deposit and time deposits, banker's
acceptances, prime commercial paper, high-grade short-term corporate obligations
and repurchase agreements with respect to these instruments.
PREFERRED FIXED INCOME FUND
Subadviser: J.P. Morgan Investment Management Inc. ("Morgan")
Portfolio Manager: Paul L. Zemsky, CFA
Title: Managing Director, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Paul has been involved
in the management of the Fixed Income Fund since January 1, 1994.
Education: B.S.E.E. - University of Pennsylvania
The investment objective of the Fixed Income Fund is a high level of current
income consistent with investment in a diversified portfolio of debt securities.
Morgan will pursue the Fund's objective by investing the Fund's assets primarily
in publicly traded domestic debt securities (e.g., U.S. Treasury and agency
obligations, mortgage-backed securities and corporate debt securities), as
supplemented by investment in other fixed income markets (e.g., corporate
private placements, directly-placed mortgage obligations and foreign currency
denominated bonds) to increase the potential for higher returns with reduced
volatility. Morgan does not seek to achieve the Fund's objective in each
portfolio security, but endeavors to manage the portfolio as a whole in such a
way as to achieve its objective. Under normal market conditions, at least 65%
of the Fund's total assets will be invested in fixed income securities. Pending
investment and reinvestment in debt securities and for temporary defensive
purposes, Morgan may invest the Fund's assets in money market instruments.
Allocations are made among a wide array of market sectors, such as U.S.
Treasury and agency obligations, corporate securities, mortgages and
mortgage-backed securities, private placement securities and non-U.S. dollar
denominated securities, based on the relative attractiveness of such sectors.
Following these sector allocations, Morgan will purchase those securities
deemed attractively valued in the desired sectors. The Fund may invest in any
fixed income security, including preferred stocks.
Under normal market conditions, Morgan will manage the Fund's portfolio subject
to the following investment guidelines:
1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments): A by either Moody's or S&P. For purposes of
calculating this average credit requirement, instruments that are not rated
will be assigned a rating by Morgan.
2. Minimum credit quality for short-term investments at the time of purchase:
Prime-1 by Moody's or A-1 by S&P.
It is expected that the Fund's portfolio will generally have a duration of no
less than three years and no more than seven years (excluding short-term
investments). The duration of a fixed income security is the weighted average
maturity, expressed in years, of the present value of all future cash flows,
including coupon payments and principal repayments.
The Fund may invest in any security which is rated, at the time of purchase, at
least Baa as determined by Moody's or BBB as determined by S&P, or in any
<PAGE>
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
Portfolio Manager: J. Steven Orr, CFA
Title: Portfolio Manager, CIML
Last Five Years Experience: Portfolio Manager at CIML since June, 1993. Prior to
that time, he held fixed income trading and portfolio management positions with
United Services Advisors, L&N Investment Co., and MBank Austin. Steven has had
primary responsibility for the Short-Term Government Securities Fund since June
28, 1995.
Education: B.A. - University of Texas; MBA - Southwest Texas State
University; JD - St. Mary's School of Law; Chartered Financial Analyst
The investment objective of the Short-Term Government Securities Fund is high
current income, consistent with preservation of capital.
The Fund will invest primarily in securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Certain of these "U.S. Government Securities," such as U.S.
Treasury bills, notes and bonds, mortgage participation certificates guaranteed
by Ginnie Mae and Federal Housing Administration debentures, are supported by
the full faith and credit of the United States. Other U.S. Government
Securities are supported by the discretionary authority of the U.S. Government
to purchase the issuer's obligations or by the right of the issuer to borrow
from the U.S. Treasury. The U.S. Treasury is under no legal obligation,
however, to purchase securities or to make loans. Still other U.S. Government
Securities are supported only by the credit of the agency, authority or
instrumentality itself. Agencies or instrumentalities whose obligations are not
backed by the full faith and credit of the U.S. Government include, among
others, the Federal National Mortgage Association ("Fannie Mae"), Federal Home
Loan Banks, the Tennessee Valley Authority, the Bank for Cooperatives and the
Federal Home Loan Mortgage Corporation. A significant portion of the Fund's
portfolio may consist of Ginnie Mae mortgage-backed certificates
<PAGE>
("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
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
<PAGE>
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 (other than the Small Cap and
Balanced Funds) are shown in the section "Financial Highlights." Portfolio
turnover rates in excess of 100% are generally considered to be high. While it
is impossible to predict a Fund's portfolio turnover rate, such rates are not
generally expected to exceed 200% and 150% for the Small Cap and Balanced Funds,
respectively.
MONEY MARKET INSTRUMENTS. The money market instruments in which the Money
Market Fund may invest include:
(1) short-term U.S. Government Securities;
(2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two
major rating agencies, or, if rated by only one major agency, in such
agency's two highest grades, or unrated but determined to be comparable by
the subadviser to the Fund pursuant to procedures approved by The
Preferred Group's Trustees. Bank obligations must be those of a bank that
has deposits in excess of $2 billion or that is a member of the Federal
Deposit Insurance Corporation. The Fund may invest in obligations of U.S.
branches or subsidiaries of foreign banks ("Yankeedollar obligations") or
foreign branches of U.S. banks ("Eurodollar obligations");
(3) commercial paper rated in the two highest rating categories by at
least two major rating agencies, or, if rated by only one major agency, in
such agency's two highest grades, or if not rated, of comparable quality
as determined by the subadviser to the Fund pursuant to procedures
approved by The Preferred Group's Trustees;
(4) corporate obligations with an initial maturity in excess of 397
days but a remaining maturity of 397 days or less whose issuers have
outstanding short-term debt obligations rated in the highest rating
category by at least two major rating agencies, or, if rated by only one
major agency, in such agency's highest grade; and
(5) repurchase agreements with domestic commercial banks or
registered broker-dealers. See "Repurchase Agreements."
For temporary defensive purposes, each of the other Funds may also invest all
or a portion of its assets in the foregoing kinds of money market instruments,
although determinations of the quality of unrated securities may be made by
each Fund's subadviser.
Federal law limits the percentage of the Money Market Fund's assets that may be
invested in instruments that are not rated in the highest rating category
(or that are unrated but determined to be of comparable quality).
OPTIONS AND FUTURES TRANSACTIONS; FOREIGN CURRENCY TRANSACTIONS. Each Fund
(except the Short-Term Government Securities Fund and the Money Market Fund)
may engage in a variety of transactions involving options and futures contracts,
which are commonly known as "derivative securities," for hedging, for divided
accruals and portfolio allocation purposes and not for speculation, as follows:
<PAGE>
To increase current return, the Fixed Income Fund may write covered call and
covered put options on any security that they are eligible to purchase.
For hedging purposes, it may (1) purchase call options on securities it expects
to acquire, and put options on securities it holds, and (2) purchase and sell
futures contracts on U.S. Government Securities and purchase and write options
on such futures contracts.
The Growth, Value, International, Small Cap, Asset Allocation and Balanced Funds
may each: (1) purchase call and put options, and purchase warrants, on
securities that they are eligible to purchase; (2) write covered call and
covered put options on such securities; and (3) buy and sell stock index
options, stock index futures contracts and options on stock index futures
contracts. In addition, the Asset Allocation and Balanced Funds may purchase and
sell futures contracts on U.S. Government Securities and purchase and write
options on such futures contracts.
In order to hedge against possible variations in foreign exchange rates pending
the settlement of securities transactions, each of the Funds (other than the
Short-Term Government Securities and Money Market Funds) may buy or sell foreign
currencies or may deal in forward foreign currency contracts; that is, agree to
buy or sell a specified currency at a specified price and future date. These
Funds may also invest in currency futures contracts and related options. If a
fall in exchange rates for a particular currency is anticipated, a Fund may sell
a currency futures contract or a call option thereon or purchase a put option on
such futures contract as a hedge. If it is anticipated that exchange rates for a
particular currency will rise, a Fund may purchase a currency futures contract
or a call option thereon or sell (write) a put option to protect against an
increase in the price of securities denominated in that currency the Fund
intends to purchase. These futures contracts and related options will be used
only as a hedge against anticipated currency rate changes, and all options on
currency futures written by the Funds will be covered. These practices, however,
may present risks different from or in addition to the risks associated with
investments in foreign currencies. Each of the Growth, Value, Small Cap, Asset
Allocation, Balanced and Fixed Income Funds will invest no more than 5% of its
assets in foreign currencies, foreign currency forward contracts or foreign
currency futures contracts and options on such futures contracts.
Although hedging strategies are intended to reduce fluctuations in a Fund's net
asset value, each Fund (other than the Money Market Fund) nonetheless
anticipates that its net asset value will fluctuate to some degree. No Fund
will engage in options and futures transactions for leveraging purposes.
Appendix B and the Statement of Additional Information contain more
information about options and futures contracts and related risks.
RISK FACTORS OF FOREIGN INVESTMENTS. The Money Market Fund may invest all or
any portion of its assets in Yankeedollar and Eurodollar obligations and in
dollar-denominated commercial paper of foreign issuers. The Growth, Value,
Small Cap, Asset Allocation, Balanced and Fixed Income Funds each may invest
without limit in securities of foreign issuers which are traded in domestic
securities markets and may invest up to 10% (20% with respect to the Balanced
Fund) of their respective total assets in securities traded principally in
securities markets outside the United States. (Eurodollar certificates of
deposit are excluded for purposes of these limitations.)
These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded overseas, may
involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets, imposition of withholding taxes on dividend or interest payments,
<PAGE>
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 returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to qualify as a "regulated
investment company" for federal tax purposes.
LOANS OF PORTFOLIO SECURITIES. Each Fund (except the Money Market Fund) may
lend its portfolio securities to broker-dealers under contracts calling for
collateral in cash, U.S. Government Securities or other high-quality debt
securities equal to at least the market value of the securities loaned. Each
Fund will continue to benefit from interest on the securities loaned and will
also receive either interest, through investment of cash collateral by the Fund
in permissible investments, or a fee, if the collateral is U.S. Government
Securities. Securities lending involves the risk of loss of rights in the
collateral or delay in recovery of the collateral should the borrower fail
financially.
SHORT SALES. Each Fund (except the Money Market Fund) may from time to time
make short sales involving securities held in the Fund's portfolio or which the
Fund has the right to acquire without the payment of further consideration.
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Balanced
and Short-Term Government Securities Funds may purchase U.S. Government
Securities on a when-issued basis, and may purchase or sell such securities for
delayed delivery. All Funds except the Money Market Fund may make contracts to
purchase securities for a fixed price at a future date beyond normal settlement
time ("forward commitments"). Each of these Funds may also enter into forward
commitments to sell securities. Each Fund may simultaneously be obligated with
respect to forward commitment purchase and sale contracts and may sell a
portfolio security or enter into a forward commitment sale contract (a
"dollar-roll transaction") that is coupled with an agreement by the Fund
(including a forward commitment) to repurchase the security at a later date.
When-issued transactions, delayed delivery purchases and forward commitments
involve a risk of loss if the value of the securities declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Fund's other assets. No income accrues to the purchaser of such
securities prior to delivery.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase agreements
with banks and broker-dealers, which are agreements by which a Fund acquires a
security (usually an obligation of the U.S. Government) for cash and obtains a
<PAGE>
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. Commercial mortgage-related
securities have been issued in public or private transactions by a variety of
public and private issuers. The commercial mortgage loans that underlie
commercial mortgage-related securities have certain distinct risk
characteristics. Commercial mortgage loans generally lack standardized terms,
which may complicate their structure. Commercial properties themselves tend to
be unique and are more difficult to value than single family residential
properties. Commercial mortgage loans also tend to have shorter maturities than
residential mortgage loans, and may not be fully amortizing, meaning that they
may have a significant principal balance, or "balloon" payment, due on maturity.
Assets underlying commercial mortgage-related securities may relate only to a
few properties or a single property. The risk involved in single property
financings is highly concentrated.
<PAGE>
Asset-backed securities are structured like mortgage-backed securities, but
instead of mortgage loans or interests in mortgage loans, the underlying assets
may include motor vehicle installment sales or installment loan contracts,
leases of various types of real and personal property and receivables from
credit card agreements. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying assets may be limited, and
asset-backed securities are subject to prepayment risks similar to those
described above for mortgage-backed securities.
The Fixed Income and Short-Term Government Securities Funds may also invest in
"zero-coupon" U.S. Government Securities (which are issued at a significant
discount from face value and pay interest only at maturity rather than at
intervals during the life of the security) or in certificates representing
undivided interests in "stripped" U.S. Government Securities and coupons
("IO/PO Strips"). See "Taxes" for a discussion of the tax consequences
of zero-coupon securities. IO/PO Strips are usually structured with two classes
that receive different portions of the interest and principal distributions on a
pool of mortgage assets. Zero-coupon securities and IO/PO Strips tend to be more
volatile than other types of U.S. Government Securities. Mortgage-backed IO
Strips involve the additional risk of loss of the entire value of the investment
if the underlying mortgages are prepaid. IO/PO Strips that are U.S. Government
Securities backed by fixed-rate mortgages may be considered liquid securities if
so determined by the relevant subadviser pursuant to procedures approved by The
Preferred Group's Trustees. All other IO/PO Strips will be considered illiquid.
To the extent either Fund invests in IO/PO Strips that are "stripped" by private
entities, such securities will not be considered to be U.S. Government
Securities.
Zero-coupon securities may be issued by the U.S. Treasury or by a
U.S. Government agency, authority or instrumentality (such as the Student Loan
Marketing Association or the Resolution Funding Corporation). A Fund is required
to accrue and distribute income from zero-coupon securities on a current basis,
even though it does not receive that income currently in cash. Thus the Fund may
have to sell other investments to obtain cash needed to make income
distributions.
ILLIQUID SECURITIES. Each Fund (other than the Money Market Fund)
may purchase "illiquid securities," which include securities whose disposition
is restricted by the securities laws, so long as no more than a fixed percentage
of that Fund's net assets (determined by the SEC to be 15% as of the date of
this Prospectus) would be invested in such illiquid securities after giving
effect to the purchase. Because there may be relatively few potential purchasers
for such securities, especially under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the issuer, a Fund
could find it more difficult to sell such securities when CIML or the relevant
subadviser believes it advisable to do so or may be able to sell such securities
only at prices lower than if such securities were not subject to restrictions on
disposition. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing a Fund's net asset value. The Money
Market Fund may not invest more than 10% of its net assets in illiquid
securities. Illiquid securities at present are considered to include repurchase
agreements maturing in more than seven days, certain IO/PO Strips,
over-the-counter options and assets used to "cover" over-the-counter options
written by a Fund (to the extent described under "Options and Futures
Transactions -- OTC Options" in the Statement of Additional Information).
LIMITING INVESTMENT RISK. Specific investment restrictions help the Funds limit
investment risks for their shareholders. These restrictions prohibit:
o each Fund from investing more than 5% of its total assets in the
securities of any one issuer (other than U.S. Government Securities and
repurchase agreements relating thereto), although up to 25% of the total
assets of each Fund may be invested without regard to this restriction;*
<PAGE>
o each Fund from investing 25% or more of its total assets in the
securities of any one industry, except that the Money Market Fund may
invest up to 100% of its assets in certificates of deposit and bankers'
acceptances issued by domestic banks (obligations of a foreign
government and its agencies or instrumentalities constitute a separate
"industry" from those of another foreign country; issuers of U.S.
Government Securities and repurchase agreements relating thereto do not
constitute an "industry");* and
o each Fund from investing more than 5% of its total assets in securities
of any issuers if the issuers (or the parties responsible for payment in
the case of debt securities), together with any predecessors, have been
in operation for less than three years (except CMOs, asset-backed securities,
U.S. Government Securities and repurchase agreements relating thereto).
"FUNDAMENTAL" POLICIES. Restrictions marked with an asterisk (*) above are
summaries of fundamental policies and therefore may only be changed with the
approval of shareholders. See the Statement of Additional Information for the
full text of these policies and the Funds' other fundamental policies. Except
for any policy explicitly identified as "fundamental," the investment objective
and policies of each Fund described in this Prospectus may be changed without
shareholder approval. If there is a change in a Fund's investment objective,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs.
PERFORMANCE INFORMATION From time to time The Preferred Group may make
available certain information about the performance of some or all of the Funds.
Information about a Fund's performance is based on that Fund's record to a
recent date and is not intended to indicate future performance.
All Funds may include Total Return data in advertisements or other written
material. Total Return for the one and three-year periods and for the life of a
Fund, each through the most recent calendar quarter, represents the average
annual compounded rate of return on an investment of $1,000 in the Fund.
Each of the Asset Allocation, Balanced, Fixed Income and Short-Term Government
Securities Funds may advertise its Yield, accompanied by its Total Return. A
Fund's Yield will be computed by dividing the net investment income per share
earned during a recent one-month period by the net asset value per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period.
The Money Market Fund may advertise its Yield and Effective Yield. The Money
Market Fund's Yield is based upon the income earned by the Fund over a
seven-day period and then annualized (i.e., the income earned in the period is
assumed to be earned every seven days over a 52-week period and stated as a
percentage of the investment). Effective Yield is calculated similarly but,
when annualized, the income earned by the investment is assumed to be reinvested
in Fund shares and thus compounded over the course of a 52-week period. Methods
used to calculate advertised yields are standardized for money market funds.
The Preferred Group may also include in its advertising and sales materials
editorial comments and performance rankings published by
1) recognized mutual fund statistical services, such as Lipper Analytical
Services, Inc., Morningstar, Inc. or Donoghue's Money Fund Report, and 2)
publications of general interest, such as Money, Forbes or Business Week
magazines. Performance information may be quoted numerically or may be presented
in a graph, table or other illustration. The Preferred Group may also compare
the performance of a Fund to that of well-known market indicators.
<PAGE>
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OPENING YOUR ACCOUNT
- -------------------------------------------------------------------------------
To open a new account, simply complete and return the New Account Registration
Form included with this Prospectus and mail with your check or money order. We
must have your correct social security or corporate tax identification number
and your signature. In order to open an account, you must meet the minimum
investment requirements described below.
A completed and signed application is required for each new account you open.
Redemptions will not be permitted until your completed application is on file.
Purchase orders received by The Preferred Group by 4:00 p.m. (Eastern time) on
any regular business day will be processed at that day's net asset value. (See
"Determination of Net Asset Value and Pricing.") There are no sales commissions
or 12b-1 fees.
All shareholders will receive individual confirmations of each purchase,
redemption, dividend reinvestment, exchange or transfer of shares, including
the total number of shares owned as of the confirmation date.
If you have questions about the Funds, or require additional assistance with the
New Account Registration Form, please call Investor Services at 1-800-662-GROW
(1-800-662-4769).
HOW TO BUY SHARES
You can purchase shares of any Fund by using one of the four methods described
below.
- -------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -------------------------------------------------------------------------------
BY MAIL $1,000--Regular Account $50 for All Accounts
$ 250--IRAs & Uniform
Gifts/ Transfers to Minors
Accounts
$ 150--Quarterly Systematic Savings
Plan
$ 50--Monthly Systematic
Savings Plan
For new accounts, please mail us your New Account Registration Form and check in
the return envelope provided. For additional investments, please mail us your
check, write your account number on your check, use the remittance form attached
to your confirmation statement, and mail in the return envelope provided. All
checks should be made payable to "The Preferred Group (name of Fund)." Third
party checks will not be accepted. All purchase requests should be mailed to one
of the following addresses:
Regular Mail: Registered, Express or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
Shares of each Fund of The Preferred Group are continuously offered to the
public each day the New York Stock Exchange is open.
<PAGE>
FOR ALL CHOICES BELOW, PLEASE CALL 1-800-662-GROW
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METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -------------------------------------------------------------------------------
BY EXCHANGE $1,000 $50
(from another Fund)
The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."
- -------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -------------------------------------------------------------------------------
BY WIRE $1,000 $1,000
Federal funds should be wired to: State Street Bank & Trust Company, Custody and
Shareholder Services Division, Boston, MA 02110, ABA No. 011000028,
DDA: 9904-636-9, The Preferred Group, your name and your Fund/Account Number.
- -------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -------------------------------------------------------------------------------
BY MONEY Not Available $50
EXPRESS
(Electronic Funds
Transfer Option)
You must authorize this service on your account application. The maximum
transfer amount is $50,000.
EXCHANGING AND REDEEMING SHARES
Shares may be exchanged or redeemed on the basis of their respective net asset
values beginning 10 days after purchase on any day the New York Stock Exchange
is open. There are currently no exchange or redemption fees or charges. You may
redeem all or a portion of your shares. Please note that an exchange is treated
as a redemption and a subsequent purchase. Therefore, you could realize a
taxable gain or loss on your transaction. The Preferred Group reserves the right
to modify or terminate the exchange privilege at any time. Except as otherwise
permitted by SEC regulations, The Preferred Group will give 60 days' advance
written notice to shareholders of any termination or material modification of
the exchange privilege. The Preferred Group's exchange service is not intended
to encourage shareholder speculation on short-term movements in the market. Each
Fund reserves the right to restrict exchanges to one purchase and redemption of
shares in the same Fund during any 120-day period. The exchange privilege may
not be exercised for shares of any Fund which are not qualified or exempt under
the securities laws of the state in which the shareholder resides.
HOW TO REDEEM OR EXCHANGE SHARES
- -------------------------------------------------------------------------------
METHOD INSTRUCTIONS
- -------------------------------------------------------------------------------
BY MAIL To redeem or exchange shares in writing, send an instruction letter
signed by all registered owners, including fiduciary titles,
specifying the name on the account and the account number, the
Fund name and the number of shares or dollar amount you want to
exchange or redeem. For exchanges, mail to the attention of the
Fund you are exchanging from and specify the Fund you are
exchanging to. We require the signature of all owners exactly as
registered. For redemptions over $50,000 we require a signature
guarantee.
<PAGE>
Regular Mail Address: Express, Registered or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS. The letter of instruction must be
accompanied by a resolution. The letter must be signed by at least one
individual authorized by resolution to act on the account. The resolution
must include a signature guarantee.
TRUSTS. The letter of instruction must be signed by the Trustee(s) with a
signature guarantee.
NOTE: If you want to keep your account open, please maintain a balance of at
least $1,000. If you have questions, please call Investor Services at
1-800-662-GROW.
- -------------------------------------------------------------------------------
FOR ALL OPTIONS BELOW, CALL INVESTOR SERVICES AT 1-800-662-GROW
- -------------------------------------------------------------------------------
BY PHONE If you have authorized Preferred Tele-Services on your account
application, exchanges or redemptions can be made between 8:00 a.m.
(Eastern time) and the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. (Eastern time)).
Redemption proceeds can be mailed, wired to your bank or sent
by electronic funds transfer. The Preferred Group's bank
charges a $10.00 fee for wire redemptions, minimum $100,
subject to change without notice. Your bank may also charge
you for receiving wires.
- -------------------------------------------------------------------------------
BY CHECK If you have authorized the check writing feature on your account
application, you may redeem shares in your account provided that the
appropriate signatures are on your check. The minimum check amount
is $250. There is no charge for this service, and you may write an
unlimited number of checks, provided the account minimum of $1,000 per
Fund is maintained. Check writing privileges apply to the Money Market
and the Short-Term Government Securities Funds ONLY.
- -------------------------------------------------------------------------------
BY MONEY If you have authorized the Preferred Money Express feature on your
EXPRESS account application, you may redeem by electronic funds transfer. The
maximum redemption amount is $50,000.
- -------------------------------------------------------------------------------
BY WIRE If you have authorized the Wire Transfer feature on your account
application, you may have your redemption proceeds wired to your bank
on the next business day after the redemption is processed. The
Preferred Group's bank charges a $10.00 fee for wire redemptions,
minimum $100, subject to change without notice. Your bank may also
charge you for receiving wires.
- -------------------------------------------------------------------------------
The redemption of shares will be suspended during any period in which the New
York Stock Exchange is closed for other than weekends or holidays or, if
permitted by the rules of the SEC, when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Funds to dispose of
their securities or to determine fairly the value of their net assets, or during
any other period permitted by the SEC for the protection of investors.
Redemption proceeds are normally paid in cash. However, if you redeem more than
$250,000, or 1% of a Fund's net assets, in any 90-day period, the Fund may, at
its discretion, pay the difference between the redemption amount and the lesser
of those two figures with securities of the Fund. In the event that redemptions
<PAGE>
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; (5) send
<PAGE>
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 70
1/2 years of age can contribute up to $2,000 per tax year. Contributions
of up to $250 per year may be made in the name of your spouse if your
spouse has no earned income. Contributions of up to $2,000 may be made in
the name of your spouse for taxable years beginning after December 31, 1996.
ROLLOVER IRAS. When a participant of a tax-favored retirement plan
receives an eligible rollover distribution of assets, the assets may be
"directly transferred" or "directly rolled over" into an IRA. Eligible
rollover distributions that are not "directly transferred" to an IRA or
other tax-favored retirement plan are subject to tax withholding at a 20%
rate. Rollovers can also occur from an existing IRA into a Preferred Group
IRA.
SEP-IRAS. Simplified Employee Pension Plans are arrangements under
which employers may contribute directly to an employee's IRA.
In addition, The Preferred Group may be an appropriate investment for 403(b)
Plans, 401(k) Plans and Keogh or corporate Profit-Sharing Plans.
DETERMINATION OF NET ASSET VALUE AND PRICING
NET ASSET VALUE PER SHARE (NAV), or share price, for each Fund is normally
determined on each day the New York Stock Exchange is open as of the close of
regular trading on the Exchange (generally 4:00 p.m. (Eastern time)). Fund share
prices (other than the Money Market Fund) can be found daily in most major
newspapers' mutual fund listings under the heading "Preferred Group."
PURCHASE SHARE PRICE. If your request is received on a regular business day
before 4:00 p.m. (Eastern time) in good order, your shares will be priced at
that day's net asset value. Requests received after 4:00 p.m. (Eastern time)
will be priced at the next day's net asset value. Requests to purchase shares
on other than a regular business day will be priced at the net asset value
determined on the next succeeding regular business day. The Preferred Group
reserves the right to accept or reject any order for the purchase of Fund
shares.
REDEMPTION SHARE PRICE. If your redemption request is received prior to
4:00 p.m. (Eastern time) in good order on a regular business day, your shares
will be priced at that day's net asset value. Redemption proceeds will normally
be sent on the following business day. Redemption requests received after
4:00 p.m. (Eastern time) will be processed on the business day following
receipt.
EXCHANGE SHARE PRICE. Exchanges are priced in the same manner as purchases and
redemptions.
DETERMINATION OF NAV. Each Fund's share price is calculated by dividing the
total value of each Fund's assets, minus liabilities, by the total number of
shares outstanding. Portfolio securities, options and futures contracts for
which market quotations are readily available are valued at market value.
Short-term obligations having remaining maturities of 60 days or less are valued
at amortized cost, which approximates market value. The portfolio investments of
the Money Market Fund are valued using the amortized cost method of valuation,
in accordance with Rule 2a-7 under the Investment Company Act of 1940. All other
securities and assets are valued at their fair value as determined in good faith
following procedures approved by the Trustees.
<PAGE>
GENERAL. Please note that The Preferred Group does not accept requests which
specify a particular date for purchases or redemptions, or which specify any
special conditions. We will notify you if your request cannot be accepted and
provide additional instructions.
OTHER INFORMATION
The Trust may pay brokerage commissions to brokers that are affiliated with the
advisor or subadvisors. Caterpillar Investment Trust 401(k) Plan may be deemed
to "control" the Growth, Value, International, Small Cap, Asset Allocation,
Short-Term Government Securities and Money Market Funds, Caterpillar Inc.
Supplemental Unemployment Benefits Group Insurance Trust A and Caterpillar Group
Insurance Trust B may be deemed to "control" the International, Small Cap, Asset
Allocation, Balanced Fixed-Income and Short-Term Government Securities Funds,
and Preferred Stable Principal Collective Trust and American Banker's
Insurance Co. may be deemed to "control" the Fixed Income and Short-Term
Government Securities Funds, respectively, because in each case the indicated
entity owned of record more than 25% of the relevant Fund's outstanding
securities as of September 30, 1996.
DISTRIBUTIONS
GENERAL. Dividends will be declared daily and paid monthly for the
Fixed Income, Short-Term Government Securities and Money Market Funds. Dividends
will be declared and paid quarterly for the Asset Allocation and Balanced Funds.
The Growth, Value, International and Small Cap Funds will declare and pay
dividends at least annually. Each Fund pays out as dividends substantially all
of its net investment income (which comes from dividends and interest it
receives from its investments) and net realized short-term capital gains. For
these purposes and for federal income tax purposes, a portion of the premiums
from certain expired call or put options written by a Fund, net gains from
closing purchase and sale transactions with respect to such options, and net
gains from futures transactions are treated as short-term capital gains. Each
Fund distributes substantially all of its net realized capital gains, if any, at
least annually after giving effect to any available capital loss carry-over. The
Growth and International Funds currently have available capital loss
carry-overs. Subject to applicable law, dividends and capital gains
distributions may be declared more or less frequently in the discretion of the
Trustees.
BUYING A DIVIDEND. On the record date for a distribution, the Fund's
share value will be reduced by the amount of the distribution. If you purchase
shares just before the record date ("buying a dividend"), you will pay the full
price for the shares and then receive a portion of the purchase price back as a
taxable distribution.
CHOOSING A DISTRIBUTION OPTION
When you fill out your account application,
you may select any one of the following distribution options. If you do not
specify an option, all of your distributions will be reinvested in additional
shares of the relevant Fund. If you choose to change your distribution
election, you must notify Investor Services in writing. The address for
Investor Services is The Preferred Group, P.O. Box 8320, Boston, MA
02266-8320.
REINVEST OPTION. All dividends and capital gain distributions are
reinvested in additional shares. All distributions will be reinvested as of the
record date for the distribution and will be paid on the payment date.
<PAGE>
CASH DIVIDEND OPTION. All dividends are paid in cash (by check). All capital
gains distributions are reinvested in additional Fund shares as of the record
date for the distribution and will be paid on the payment date.
ALL CASH OPTION. All dividends and capital gain distributions are paid in cash
(by check).
In addition, an option to invest your cash dividends and/or capital gains
distributions of a Preferred Group Fund in another Preferred Group Fund is
available. Please call Investor Services (1-800-662-GROW) for more information.
If it is determined that the U.S. Postal Service cannot properly deliver Fund
mailings to you, The Preferred Group will terminate your election to receive
dividends and other distributions in cash, and will invest the undeliverable
distributions in shares of the relevant Fund. Thereafter, your subsequent
dividends and other distributions will be automati cally reinvested in
additional shares of the relevant Fund until you notify The Preferred Group in
writing of your correct address and request in writing that the election to
receive dividends and other distributions in cash be reinstated.
TAXES
Each Fund will be treated as a separate taxable entity for federal income tax
purposes. Each Fund plans to distribute substantially all of its net investment
income and net realized short-term capital gains, if any, to its shareholders.
So long as it does so and otherwise satisfies the requirements for being taxed
as a regulated investment company, the Fund itself will not pay federal income
tax on the amounts distributed. Shareholders will receive an annual statement
detailing federal tax information about dividends and distributions paid to
shareholders during or with respect to the preceding calendar year.
Dividends and any short-term capital gains distributions of the Funds are
taxable to the shareholder as ordinary income. Distributions designated as
long-term capital gains are taxable to shareholders as such, regardless of how
long a shareholder may have owned shares in the Fund.
Distributions will be taxable as described above whether received in cash or in
shares through the reinvestment of distributions. A dividend paid to a
shareholder by a Fund in January of a year generally is deemed to have been
paid by the Fund by December 31 of that preceding year if the dividend was
declared and payable to shareholders of record on a date in the preceding year.
Dividends derived from interest on certain U.S. Government Securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government Securities (which may constitute a substantial portion of the
Short-Term Government Securities Fund's assets) may not be so exempt.
Shareholders should consult their tax advisers as to the possible application
of state and local income tax laws to a Fund's dividends and capital gains
distributions.
The International Fund generally intends to make an election which allows
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax returns. As a
result, the amounts of foreign income taxes paid by the International Fund
would be treated as additional income to International Fund shareholders
from non-U.S. sources and as foreign taxes paid by International Fund
shareholders for purposes of the foreign tax credit. Investors should consult
their tax advisers for further information relating to the foreign tax credit
and deduction, which are subject to certain restrictions and limitations.
International Fund shareholders who are not U.S. citizens or which are foreign
corporations may be subject to substantially different tax treatment on
distributions by the International Fund.
<PAGE>
The Internal Revenue Code of 1986 (the "Code") imposes a 4% excise tax on the
undistributed ordinary income of any Fund that fails to distribute prior to
calendar year end virtually all of its ordinary income on a calendar year basis.
Capital gain net income realized by each Fund in the one-year period ending
October 31 and not distributed during the calendar year is also subject to the
4% excise tax. It is each Fund's intention to make distributions sufficient to
avoid the excise tax.
Current federal tax law requires the holder of a Treasury or other fixed income
zero-coupon security to accrue as income each year a portion of the discount at
which the security was purchased, even though the holder receives no interest
payment in cash on the security during the year. In addition, so-called
payment-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Fund holding the security receives
no interest payments in cash on the security during the year. Accordingly, each
Fund that holds the foregoing kinds of securities may be
required to pay out as an income distribution each year an amount which is
greater than the total amount of cash interest the Fund actually received. Such
distributions may be made from the cash assets of the Fund or by liquidation of
portfolio securities, if necessary. The Fund may realize gains or losses from
such liquidations. In the event a Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution,
if any, than they would in the absence of such transactions.
STATEMENTS AND REPORTS
You will receive a confirmation statement after every transaction that
affects the share balance in any of your accounts.
By January 31 of each year, The Preferred Group will send you the following
reports which may be utilized in completing your U.S. income tax return:
Form 1099 - DIV Reports taxable distributions during the preceding
calendar year.
Form 1099 - B Reports redemption proceeds during the preceding calendar
year.
Form 1099 - R Reports distributions from IRAs and 403(b) plans during
the preceding calendar year.
Each year by the end of February, The Preferred Group will send you a semiannual
report that includes unaudited financial statements for the six months ending
the preceding December 31, as well as a list of portfolio holdings as of that
date.
Each year by the end of August, The Preferred Group will send you an
annual report that includes audited financial statements for the fiscal year
ending the preceding June 30, as well as a list of portfolio holdings as of that
date.
MANAGEMENT OF THE PREFERRED GROUP
GENERAL. The Preferred Group is managed by Caterpillar Investment Management
Ltd. (the "Manager"), which provides investment advisory and portfolio
management services for The Preferred Group. The Manager also provides
executive and other personnel for management of The Preferred Group. Pursuant
to The Preferred Group's Agreement and Declaration of Trust, the Trustees
supervise the affairs of The Preferred Group as conducted by the Manager.
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
<PAGE>
was reduced to an annual rate equal to the lesser of (i) .50% of the average
net assets of the Fixed Income Fund and (ii) the rate at which
(A) the excess of (I) the fee paid by the Fixed Income Fund to CIML over (II)
the fee paid by CIML to Morgan with respect to the Fixed Income Fund (see below)
equals (B) the excess that would have existed under the advisory and subadvisory
fee schedules in effect with respect to the Fixed Income Fund prior to November
1, 1996. For more information regarding the fees paid to CIML by the Fixed
Income Fund, see the Statement of Additional Information.
The Preferred Group pays all expenses not assumed by the Manager, including,
without limitation, fees and expenses of Trustees who are not "interested
persons" of the Manager or The Preferred Group, interest charges, taxes,
brokerage commissions, expenses of issuing or redeeming shares, fees and
expenses of registering and qualifying The Preferred Group and shares of the
respective Funds for distribution under federal and state laws and regulations,
charges of custodians, auditing and legal expenses, expenses of determining net
asset value, reports to shareholders, expenses of meetings of shareholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and insurance premiums and professional association dues
or assessments.
CIML is a Delaware corporation formed on December 18, 1991. Its principal place
of business is 100 N.E. Adams Street, Peoria, Illinois 61629-5330. CIML is a
wholly-owned subsidiary of Caterpillar Inc., an international manufacturer of
machinery and engines and provider of financial products. In addition to
managing the Funds, CIML serves as an investment adviser to the Caterpillar
Investment Management Ltd. Tax Exempt Group Trust (the "Group Trust"). CIML has
advised the Funds since inception and has experience managing portfolios of the
Group Trust that are similar to certain of the Funds.
THE SUBADVISERS. In order to assist it in carrying out its responsibilities,
CIML has retained various sub advisers to render advisory services to the Funds,
under the supervision of CIML and The Preferred Group's Trustees. CIML pays the
fees of each of the subadvisers. The fee paid to the subadvisers (other than
with respect to the Money Market Fund) is based on the Fund assets managed or
advised by such subadviser (the "Fund Assets") together with any other assets
managed or advised by the subadviser relating to Caterpillar Inc. or any of its
affiliates (other than the Money Market Fund). (The Fund Assets together with
such other assets are collectively referred to as the "Combined Assets.") The
subadvisory fee is calculated by applying the average quarterly net asset
value, as of the last business day of each month in the calendar quarter, of
the Combined Assets to the annual rates for each subadviser (other than with
respect to the Money Market Fund), as set forth below. This amount is then
adjusted based upon the ratio of Fund Assets to Combined Assets. The
subadvisory fee paid to Morgan with respect to the Money Market Fund is based
solely on the average net assets of that Fund.
Oppenheimer is a Delaware general partnership formed on July 1, 1987. Its
address is Oppenheimer Tower, World Financial Center, New York, New York 10281.
Oppenheimer provides investment advice to individuals, state and local
government agencies, pension and profit sharing plans, trusts, estates,
businesses and other organizations. For the fiscal year ended June 30, 1996,
Oppenheimer was paid at an effective annual rate of 0.28% of the Value Fund's
average net assets.
Oppenheimer is a registered investment adviser with approximately $49.4 billion
in assets under management as of March 31, 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.
<PAGE>
On February 13, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $110 billion in assets under management
through various subsidiaries, signed an Agreement and Plan of Merger with
Oppenheimer Group, Inc. ("OGI") and its subsidiary Opfin pursuant to which
PIMCO Advisors and its affiliate, Thompson Advisory Group, Inc. ("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 consents from certain lenders, approvals from regulatory
authorities, including a favorable tax ruling from the Internal Revenue Service,
and consents of certain clients of Oppenheimer, including the Fund, which are
expected to take up to six months to obtain.
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. At a meeting held on
April 27, 1997, 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. It is expected
that holders of a majority of the outstanding voting securities of the Fund
will execute a consent approving the new subadvisory agreement, and that
proxies will, therefore, not be solicited.
Jennison provides investment advice to mutual funds, institutional accounts and
other entities. Its principal place of business is 466 Lexington Avenue, New
York, New York 10017. Jennison is a wholly-owned subsidiary of The Prudential
Insurance Company of America, a mutual insurance company and a registered
investment adviser. For the fiscal year ended June 30, 1996, Jennison was paid
at an effective annual rate of 0.25% of the Growth Fund's average net assets and
0.25% of the Balanced Fund's average net assets. Mellon, a Delaware corporation,
is located at 595 Market Street, Suite 3000, San Francisco, California 94105.
Mellon was founded in 1983 and presently manages over $46 billion in funds.
Mellon is a wholly-owned, indirect subsidiary of Mellon Bank Corporation,
Pittsburgh, Pennsylvania, a bank holding company which engages in the businesses
of retail banking, wholesale banking and service products. Mellon serves as an
investment adviser and manager for institutional clients. For the fiscal year
ended June 30, 1996, Mellon was paid at an effective annual rate of 0.30% of the
Asset Allocation Fund's average net assets.
PanAgora's principal place of business is 260 Franklin Street, Boston,
Massachusetts 02110. Fifty percent of the outstanding voting stock of PanAgora
is owned by each of Nippon Life Insurance Company, a mutual life insurance
company, and Lehman Brothers Inc., a brokerage and investment advisory firm.
PanAgora currently provides asset allocations indexing and related investment
advisory services to a variety of endowment funds, pension accounts, other
institutions and investment companies, with total assets under management in
excess of $14 billion. For the fiscal year ended June 30, 1996, PanAgora was
paid at an effective annual rate of 0.15% of the Asset Allocation Fund's
average net assets.
Mercator provides investment advice to mutual funds and other entities.
Its principal place of business is 2400 East Commercial Blvd., Ft. Lauderdale,
Florida 33308. Mercator Asset Management, L.P. is a Delaware general
partnership owned by its executive officers and The Prudential Insurance, a
20% limited partner. For the fiscal year ended June 10, 1996, Mercator was paid
at an effective annual rate of 0.57% of the International Fund's average net
assets.
<PAGE>
Morgan provides investment advice to mutual funds and other entities.
Its principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation. Prior to November 1, 1996, CIML
paid Morgan for its subadvisory services with respect to the Fixed Income Fund
on the basis of the average net assets of that Fund only, rather than on
Combined Assets. In addition, effective November 1, 1996, the subadvisory fee
for the Fixed Income Fund was reduced. For more information regarding the fees
paid to Morgan, see the Statement of Additional Information. For the fiscal
year ended June 30, 1996, Morgan was paid at an effective annual rate of 0.27%
of the Fixed Income Fund's average net assets. CIML pays Morgan for its
subadvisory services with respect to the Money Market Fund a fee computed and
paid quarterly at the annual rate of 0.15% of the average quarterly net assets,
as of the last business day of each month in the calendar quarter, of the Money
Market Fund. For the fiscal year ended June 30, 1996, Morgan was paid at an
effective annual rate of 0.15% of the Money Market Fund's average net assets.
DESCRIPTION OF THE PREFERRED GROUP
The Preferred Group was established in 1991 as a business trust under
Massachusetts law. The Preferred Group has an unlimited authorized number of
shares of beneficial interest which may, without shareholder approval,
be divided into an unlimited number of series of such shares which, in turn,
may be subdivided into an unlimited number of classes of shares. The Preferred
Group currently consists of nine series of shares, each series of which
represents interests in a separate Fund. Each Fund is an open-end, diversified
management investment company. The Funds' shares are not currently divided into
classes. Matters submitted to shareholder vote must be approved by each Fund
separately except that (i) when required by law, shares shall be voted together
and (ii) when the Trustees have determined that the matter does not affect all
Funds, only shareholders of the Fund or Funds affected shall be entitled to vote
on the matter. Shares of a Fund are freely transferable, are entitled to
dividends as declared by the Trustees and, in liquidation of such Fund or
The Preferred Group, are entitled to receive the net assets of such Fund, but
not of the other Funds. The Preferred Group does not generally hold annual
meetings of shareholders and will do so only when required by law. Shareholders
may remove Trustees from office by votes cast in person or by proxy at a meeting
of shareholders or by written consent. Such a meeting will be called at the
written request of the holders of 10% of The Preferred Group's outstanding
shares.
<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 ability to terminate options
<PAGE>
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, the Balanced Fund's or the Fixed Income
Fund's respective investments in debt securities against an increase in interest
rates, it might sell futures contracts with respect to U.S. Government
Securities. If interest rates rise and the value of the securities declines, the
value of the futures contracts should increase. Likewise, if the Asset
Allocation, Balanced or Fixed Income Funds hold cash reserves and short-term
investments and CIML or the relevant subadviser, as the case may be, expects
interest rates to fall, the relevant Fund might purchase futures contracts. If,
as expected, the market value both of long-term debt securities and futures
contracts with respect thereto increased, the Fund would benefit from a rise in
the value of long-term securities without actually buying them until the market
had stabilized. The Growth, Value, International, Small Cap and Asset Allocation
Funds may similarly buy or sell futures contracts on stock indices in
anticipation of broad movements in equity market prices. The Asset Allocation
Fund may also buy and sell futures contracts in order to reallocate its exposure
to the equity or fixed income markets and for dividend accruals. The successful
use of futures and related options depends on CIML's or the relevant
subadviser's ability to forecast correctly movements in interest rates or equity
markets generally.
The correlation between price movements of futures contracts and of the
securities which are the subject of the hedge is usually imperfect. The
correlation is higher between price movements of futures contracts and the
underlying securities. The correlation is lower when futures are used to hedge
securities other than the securities underlying such futures. For example, a
Fund that invests in equity securities will generally not own all the securities
included in a particular stock index, so the value of the Fund's holdings of
equities may change to a different extent than does the value of a futures
contract on that index.
Options on futures contracts may also be used for hedging. For example, if the
value of the Fixed Income Fund's portfolio securities is expected to decline as
a result of an increase in interest rates, the Fund might purchase put options
or write call options on futures contracts rather than selling futures
contracts. Similarly, to hedge against an anticipated increase in the price of
long-term debt securities, the Asset Allocation, Balanced or Fixed Income Funds
may purchase call options or write put options as a substitute for the purchase
of futures contracts. The Growth, Value, International, Small Cap and Asset
Allocation Funds may engage in similar transactions in options on stock index
futures contracts, and the Asset Allocation Fund may purchase and sell options
on futures contracts in order to reallocate the Fund's exposure to the equity or
fixed income markets.
When a Fund enters into a futures contract, it is required to deposit with the
broker as "initial margin" an amount of cash or short-term U.S. Government
Securities equal to approximately 5% of the contract amount. That amount is
adjusted by payments to or from the broker ("variation margin") as the value of
the contract changes. No Fund will purchase or sell futures contracts or related
options for non-hedging purposes if as a result such Fund's initial margin
deposits on existing futures contracts plus premiums paid for outstanding
options on future contracts would be greater than 5% of the Fund's assets.
Positions in long futures contracts may be closed out only by entering into a
futures contract sale on the exchange where the futures are traded. The
liquidity of the futures markets could be adversely affected by "daily price
fluctuation limits" established by the exchange which limit the amount of
fluctuations in the price of futures contracts during a single trading day. In
such events, it may not be possible for the Fund to close out its futures
contract positions and, in the event of adverse price movements, the Fund would
continue to be exposed to the relevant market and be required to make daily
variation margin payments.
<PAGE>
OFFICERS AND TRUSTEES
Ronald R. Rossmann President
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
Dixie L. Mills Trustee
Carol K. Burns Vice President and
Assistant Clerk
Fred L. Kaufman Vice President and
Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
100 N.E. Adams Street
Peoria, IL 61629-5330
DISTRIBUTOR
Caterpillar Securities Inc.
100 N.E. Adams Street
Peoria, IL 61629-5330
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
