GRAPHIC:
THE PREFERRED GROUP OF MUTUAL FUNDS(R)
PROSPECTUS
NOVEMBER 1, 1997
AS REVISED MAY 15, 1998
PROSPECTUS
NOVEMBER 1, 1997
AS REVISED MAY 15, 1998
THE PREFERRED GROUP OF MUTUAL FUNDS
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, Illinois 61602-1104
- --------------------------------------------------------------------------------
The Preferred Group of Mutual Funds ("The Preferred Group") is an open-end,
diversified series investment company offering eight portfolios ("Funds") with
different investment objectives and strategies. Shares of the Funds are offered
without a sales charge at net asset value.
PREFERRED GROWTH FUND seeks long-term capital appreciation. The Fund will
invest primarily in equity securities believed to offer the potential for
capital appreciation, including stocks of companies that are experiencing
above-average earnings growth.
PREFERRED VALUE FUND seeks capital appreciation and current income. The Fund
will invest primarily in equity securities that are believed to be undervalued
and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND seeks long-term capital appreciation by
investing its assets primarily in equity securities traded principally on
markets outside the United States.
PREFERRED SMALL CAP FUND seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
PREFERRED ASSET ALLOCATION FUND seeks both capital appreciation and current
income by allocating its assets among stocks, bonds and high quality money
market instruments.
PREFERRED FIXED INCOME FUND seeks a high level of current income consistent with
investment in a diversified portfolio of high quality debt securities.
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND seeks high current income,
consistent with preservation of capital, primarily through investment in U.S.
Government Securities.
PREFERRED MONEY MARKET FUND seeks the maximum current income believed to be
consistent with preser vation of capital and maintenance of liquidity by
investing in a portfolio of short-term, fixed-income
instruments.
AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus concisely describes the information which investors should know
before investing. Please read this Prospectus carefully and keep it for future
reference.
A Statement of Additional Information dated November 1, 1997, as supplemented
from time to time, is available free of charge by writing to The Preferred
Group, P.O. Box 8320, Boston, MA 02266-8320 or by telephoning 1-800-662-4769.
The Statement, which contains more detailed information about The Preferred
Group, has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference in this Prospectus.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR MORE INFORMATION ABOUT THE PREFERRED GROUP CALL
1-800-662-GROW.
<PAGE>
TABLE OF CONTENTS
Page
----------
Schedule of Fund Expenses 1
Financial Highlights 3
Investment Objectives and Policies 7
Preferred Growth Fund 7
Preferred Value Fund 8
Preferred International Fund 8
Preferred Small Cap Fund 9
Preferred Asset Allocation Fund 9
Preferred Fixed Income Fund 11
Preferred Short-Term
Government Securities Fund 12
Preferred Money Market Fund 13
General Policies and Risk Considerations 14
Performance Information 19
Page
----------
OPENING YOUR ACCOUNT 21
How to Buy Shares 21
Exchanging and Redeeming Shares 22
Important Information About
Your Account 24
Additional Shareholder Services 25
Determination of Net Asset
Value and Pricing 26
Other Information 27
Distributions 27
Choosing a Distribution Option 28
Taxes 28
Statements and Reports 29
Management of The Preferred Group 30
Description of The Preferred Group 32
Appendix A 34
Appendix B 36
SCHEDULE OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(ALL FUNDS)
Maximum sales load imposed on purchases ............................ NONE
Maximum sales load imposed on reinvested dividends ................. NONE
Exchange fees ...................................................... NONE
Maximum contingent deferred sales charge ........................... NONE
Redemption fees .................................................... NONE
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
GROWTH VALUE INTERNATIONAL SMALL CAP
<S> <C> <C> <C> <C>
Management Fees ...................................... 0.75% 0.75% 0.95% 0.75%
Other Expenses ....................................... 0.09% 0.10% 0.30% 0.23%
Total Fund Operating Expenses ........................ 0.84% 0.85% 1.25% 0.98%
<CAPTION>
SHORT-TERM
ASSET FIXED GOVERNMENT
ALLOCATION INCOME SECURITIIES MONEY MARKET
<S> <C> <C> <C> <C>
Management Fees ...................................... 0.70% 0.50% 0.35% 0.30%
Other Expenses ....................................... 0.29% 0.19% 0.28% 0.18%
Total Fund Operating Expenses ........................ 0.99% 0.69% 0.63% 0.48%
</TABLE>
<PAGE>
The purpose of this table is to assist in understanding the various costs and
expenses of The Preferred Group that are borne by shareholders. Management Fees
for the Small Cap Fund reflect the termination of a voluntary undertaking by
Caterpillar Investment Management Ltd. ("CIML") to waive a portion of its
Management Fees for such Fund. Actual Management Fees and Total Fund Operating
Expenses for the Small Cap Fund for the period ended June 30, 1997 were 0.65%
and 0.88% of average net assets, respectively. Management Fees shown for the
Fixed Income Fund have been restated to reflect a new management contract with
respect to that Fund. For the year ended June 30, 1997, actual Management Fees
and Total Fund Operating Expenses for the Fixed Income Fund were 0.55% and 0.74%
of average net assets, respectively.
EXAMPLE: Your investment of $1,000 would incur the following expenses assuming
5% annual return and redemption at the end of each period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- -----------------------------------------------
<S> <C> <C> <C> <C>
Growth $9 27 47 104
Value 9 27 47 105
International 13 40 69 151
Small Cap 10 31 54 120
Asset Allocation 10 32 55 121
Fixed Income 7 22 38 86
Short-Term Government Securities 6 20 35 79
Money Market 5 15 27 60
</TABLE>
NOTE: THE FIGURES SHOWN IN THE EXAMPLE ARE ENTIRELY HYPOTHETICAL. THEY ARE NOT
REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES; ACTUAL PERFORMANCE
AND/OR EXPENSES MAY BE GREATER OR LESS THAN SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS
The table on the following pages presents financial highlights for The
Preferred Group, including certain performance information. This information has
been audited and reported on by The Preferred Group's independent accountants,
Price Waterhouse LLP, whose report appears in The Preferred Group's Annual
Report, which is incorporated by reference in the Statement of Additional
Information. The Preferred Group's Annual Report, which contains additional
unaudited performance information, is available without charge upon request.
<TABLE>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
----------------------------------------
Net Total Net
NET ASSET Net Realized Income
VALUE, Investment and (Loss) from
BEGINNING Income Unrealized Investment
OF YEAR (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
1997 18.52 0.00 4.76 4.76
<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
1997 16.65 0.19 5.10 5.29
<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
1997 13.72 0.33 2.67 3.00
<PAGE>
<CAPTION>
DISTRIBUTIONS
-------------
Distributions Distributions
Distributions in Excess from Net Distributions NET ASSET TOTAL
from Net of Net Realized in Excess VALUE, RETURN AT
Investment Investment Gains on of Realized Total END OF NET ASSET
Income Income Investments Gains Distributions YEAR VALUE*
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH
===================================================================================================================================
Year Ended June 30,
1993 $(0.01) $ - $ - $ - $(0.01) $12.42 24.25%
1994 - - - - - 12.46 0.34%
1995 (0.02) - (0.06) - (0.08) 16.63 34.21%
1996 (0.01) - (0.54) - (0.55) 18.52 14.96%
1997 - - (2.86) - (2.86) 20.42 28.57%
<CAPTION>
VALUE
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.11) - - - (0.11) 11.52 16.37%
1994 (0.16) - (0.10) - (0.26) 11.33 0.60%
1995 (0.20) - (0.14) - (0.34) 13.82 25.72%
1996 (0.21) - (0.29) - (0.50) 16.65 24.49%
1997 (0.20) - (0.58) (0.02) (0.80) 21.14 32.62%
<CAPTION>
INTERNATIONAL
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - - (0.03) 9.59 (3.77%)
1994 (0.07) - (0.05) - (0.12) 12.02 26.66%
1995 (0.13) - (0.26) (0.17) (0.56) 12.24 6.70%
1996 (0.17) - (0.01) - (0.18) 13.72 13.70%
1997 (0.35) - (0.25) - (0.60) 16.12 22.50%
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
----------------------------
Operating
Net Expenses Net
Assets, Before Investment Portfolio Average
End of Operating Voluntary Income Turnover Brokerage
Year Expenses Waiver (Loss) Rate Commissions+
<S> <C> <C> <C> <C> <C> <C>
GROWTH
=========================================================================================================================
Year Ended June 30,
1993 $117,706,665 1.00% - 0.07% 58.12%
1994 171,467,064 0.91% - 0.13% 51.56%
1995 374,592,700 0.87% - 0.13% 55.32%
1996 411,688,146 0.86% - (0.16%) 75.24% N/A
1997 455,021,877 0.84% - (0.13%) 58.31% $0.060
<CAPTION>
VALUE
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 121,511,090 0.96% - 1.79% 17.77%
1994 121,088,130 0.93% - 1.64% 11.95%
1995 212,678,363 0.89% - 1.95% 29.02%
1996 267,581,693 0.85% - 1.23% 17.04% N/A
1997 373,673,368 0.85% - 1.06% 7.23% 0.058
<CAPTION>
INTERNATIONAL
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 39,126,841 1.60% - 1.83% 16.21%
1994 94,933,414 1.38% - 1.37% 27.78%
1995 118,216,038 1.32% - 1.65% 29.47%
1996 157,627,409 1.31% - 1.64% 19.61% N/A
1997 265,292,395 1.25% - 2.66% 13.16% 0.030
*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.
</TABLE>
<PAGE>
<TABLE>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
----------------------------------------
Net Total Net
NET ASSET Net Realized Income
VALUE, Investment and (Loss) from
BEGINNING Income Unrealized Investment
OF YEAR (Loss) Gain (Loss) Operations
SMALL CAP
===================================================================================
<S> <C> <C> <C> <C>
Period Ended June 30, (Commenced investment operations on November 1, 1995)
1996+ $10.00 $0.05 $1.22 $1.27
1997 11.25 0.06 3.18 3.24
<CAPTION>
ASSET ALLOCATION
===================================================================================
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.34 0.99 1.33
1994 10.90 0.30 (0.42) (0.12)
1995 10.27 0.38 1.79 2.17
1996 11.97 0.40 1.72 2.12
1997 12.88 0.44 2.17 2.61
<CAPTION>
FIXED INCOME
===================================================================================
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.51 0.71 1.22
1994 10.60 0.47 (0.50) (0.03)
1995 9.80 0.58 0.50 1.08
1996 10.30 0.58 (0.16) 0.42
1997 10.09 0.64 0.19 0.83
<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
1997 9.76 0.53 0.02 0.55
<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
1997 1.00 0.05 - 0.05
<PAGE>
<CAPTION>
DISTRIBUTIONS
-------------
Distributions Distributions
Distributions in Excess from Net Distributions NET ASSET TOTAL
from Net of Net Realized in Excess VALUE, RETURN AT
Investment Investment Gains on of Realized Total END OF NET ASSET
Income Income Investments Gains Distributions YEAR VALUE***
SMALL CAP
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Period Ended June 30, (Commenced investment operations on November 1, 1995)
1996+ $(0.02) - $ - $ - $(0.02) $11.25 12.67%*+++
1997 (0.03) - (0.16) - (0.19) 14.30 29.00%*
<CAPTION>
ASSET ALLOCATION
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.34) - (0.09) - (0.43) 10.90 13.57%
1994 (0.30) - (0.21) - (0.51) 10.27 (1.28%)
1995 (0.38) - (0.09) - (0.47) 11.97 21.70%
1996 (0.40) - (0.81) - (1.21) 12.88 18.23%
1997 (0.44) - (0.53) - (0.97) 14.52 21.01%
<CAPTION>
FIXED INCOME
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.51) - (0.11) - (0.62) 10.60 12.59%
1994 (0.47) - (0.14) (0.16) (0.77) 9.80 (0.46%)
1995 (0.58) - - - (0.58) 10.30 11.48%
1996 (0.58) - (0.05) - (0.63) 10.09 4.12%
1997 (0.64) - (0.04) - (0.68) 10.24 8.39%
<CAPTION>
SHORT-TERM GOVERNMENT SECURITIES
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.39) - (0.15) - (0.54) 10.08 6.32%
1994 (0.37) - - (0.02) (0.39) 9.77 0.86%
1995 (0.51) - - - (0.51) 9.80 5.71%
1996 (0.53) - - - (0.53) 9.76 5.10%
1997 (0.53) - - - (0.53) 9.78 5.81%
<CAPTION>
MONEY MARKET
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - - (0.03) 1.00 2.71%*
1994 (0.03) - - - (0.03) 1.00 2.91%*
1995 (0.05) - - - (0.05) 1.00 5.27%*
1996 (0.05) - - - (0.05) 1.00 5.32%*
1997 (0.05) - - - (0.05) 1.00 5.14%
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
----------------------------
Operating
Net Expenses Net
Assets, Before Investment Portfolio Average
End of Operating Voluntary Income Turnover Brokerage
Year Expenses Waiver (Loss) Rate Commissions++
SMALL CAP
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Period Ended June 30, (Commenced investment operations on November 1, 1995)
1996+ $45,692,712 0.88%** 1.23%** 0.75%** 65.70%+++ $0.047
1997 84,877,805 0.88% 0.98% 0.66% 104.45% 0.048
<CAPTION>
ASSET ALLOCATION
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 48,420,381 1.27% - 3.25% 34.10%
1994 58,961,139 1.25% - 2.76% 24.71%
1995 77,745,018 1.11% - 3.52% 18.27%
1996 96,889,348 1.04% - 3.21% 38.25% N/A
1997 128,884,756 0.99% - 3.29% 27.73% 0.032
<CAPTION>
FIXED INCOME
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 35,889,454 1.05% - 4.91% 316.06%
1994 45,872,668 0.97% - 4.53% 254.92%
1995 57,911,899 0.95% - 5.94% 330.55%
1996 111,184,492 0.93% - 5.65% 313.51% N/A
1997 140,158,482 0.74% - 6.32% 105.98% N/A
<CAPTION>
SHORT-TERM GOVERNMENT SECURITIES
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 27,027,485 0.78% - 3.87% 268.36%
1994 30,271,535 0.74% - 3.75% 134.34%
1995 32,121,171 0.71% - 5.27% 256.44%
1996 51,755,317 0.66% - 5.37% 79.04% N/A
1997 54,807,409 0.63% - 5.49% 183.73% N/A
<CAPTION>
MONEY MARKET
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 18,146,496 0.80% 0.87% 2.67% N/A
1994 45,605,598 0.53% 0.68% 2.97% N/A
1995 79,585,753 0.39% 0.54% 5.24% N/A
1996 90,482,435 0.49% 0.54% 5.25% N/A N/A
1997 109,682,146 0.48% - 5.03% N/A N/A
*Total return for the Small Cap and Money Market Funds would have been lower
if a portion of the fees had not been capped or waived by the manager.
**Annualized.
***Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
+ Eight-month period ended June 30, 1996.
++ For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap is the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
+++ Not annualized.
</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 LLC ("Jennison")
Portfolio Manager: Robert B. Corman, CFA,CPA
Title: Director/Senior Vice President, Jennison Associates LLC
Last Five Years Experience: Portfolio Manager/Research Analyst at Jennison
Associates. Bob assumed management of the Preferred Growth Fund in January 1998.
Education: B.A. - University of Wisconsin; MBA - University of Chicago;
Chartered Financial Analyst; Certified Public Accountant
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: Senior Portfolio Manager, CIML
Last Five Years Experience: Portfolio Manager at CIML since October, 1992. Todd
has been involved in the management of the Small Cap Fund since its inception on
November 1, 1995.
Education: B.S. - University of Illinois; Chartered Financial Analyst
The Small Cap Fund seeks long-term capital appreciation through investments in
companies with small equity capitalizations.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in common stock and other equity securities of small-capitalization
issuers (generally defined as companies with equity capitalizations of less than
$1 billion). In selecting securities for the Fund, CIML seeks out
small-capitalization companies according to a variety of factors, including a
company's earnings, price/cash flow ratio, market price to book value,
earnings/price ratio and various technical analyses. The Fund may also invest in
other securities, including equity securities of large-capitalization issuers,
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities, and corporate bonds or short-term debt
obligations rated at the time of purchase at least A or Prime-2, respectively,
by Moody's or A or A-2, respectively, by S&P or, if not so rated, of equivalent
quality as determined by CIML.
Securities of small-capitalization companies may include securities traded
over-the-counter and securities of companies with limited operating histories.
Such companies may have more restricted product lines or more limited financial
resources than larger, more established companies. For these and other reasons,
they may be more severely affected by economic downturns or other adverse
developments than are larger, more established companies. Securities of
small-capitalization companies often trade less frequently and in more limited
volume, and may be subject to greater volatility, than securities of larger,
more established companies.
PREFERRED ASSET ALLOCATION FUND
Subadvisers: Mellon Capital Management Corporation ("Mellon") and PanAgora
Asset Management, Inc. ("PanAgora")
Portfolio Manager: Thomas B. Hazuka
Title: Chief Investment Officer, Mellon
Last Five Years Experience: Portfolio Manager at Mellon. Tom has been
involved in the management of the Asset Allocation Fund since its inception on
July 1, 1992.
Education: B.S. - Stevens Institute of Technology; MBA - University of
Connecticut; Ph.D. - Stanford University
<PAGE>
Portfolio Manager: Edgar E. Peters
Title: Director of Asset Allocation and Chief Investment Strategist, PanAgora
Last Five Years Experience: Portfolio Manager at PanAgora. Ed has been
involved in the management of the Asset Allocation Fund since its inception on
July 1, 1992.
Education: B.S. - Montclair State College; MBA - Rutgers University
The Asset Allocation Fund seeks both capital appreciation and current income.
The Fund allocates its assets among stocks, bonds and money market instruments.
At the date of this Prospectus, Mellon and PanAgora each manage approximately
one-half of the Fund's assets (although these proportions may change due to
differential performance), and it is currently expected that all amounts
received by the Fund for sales of its shares and all amounts paid by the Fund
for redemptions of Fund shares will be split evenly between Mellon and PanAgora.
The portion of the Fund's assets invested in stocks, bonds and money market
instruments will vary from time to time in light of changes in interest rates
and other economic factors. The Fund expects, however, that in the near term it
will invest a substantial portion of its assets in each asset class, although
the Fund may invest without limit in each asset class.
HOW MELLON MANAGES THE FUND. Mellon allocates the Fund's assets among stocks,
bonds and money market instruments based on the expected returns on each of
these three asset classes, the risks of each of the asset classes and the
correlations among the asset classes. The common stocks in which the Fund may
invest are those that from time to time comprise the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500"). The bonds in which the Fund may
invest will be limited to long-term U.S. Treasury Bonds. The money market
instruments in which the Fund may invest will be limited to short-term
investments (i) rated at the time of purchase Prime-1 as determined by Moody's
or A-1 as determined by S&P, (ii) unrated securities that Mellon determines to
be of comparable quality, and (iii) repurchase agreements with respect to U.S.
Government securities. Mellon may also achieve a substantial portion of the
Fund's exposure to the stock and bond markets through the use of financial
futures and related options. For instance, Mellon may increase the Fund's
exposure to stocks by taking long positions in Standard & Poor's 500 Stock Index
futures contracts. Similarly, Mellon may increase the Fund's exposure to bonds
by taking long positions in futures contracts on U.S. Treasury bonds. The Fund
may also engage in a variety of strategies, including the use of futures
contracts and related options and investments in asset-backed securities. See
"General Policies and Risk Considerations" for more information about these
strategies.
HOW PANAGORA MANAGES THE FUND. PanAgora uses a proprietary asset allocation
discipline that provides percentage guidelines (the "Guidelines") indicating the
mix of holdings among stocks, bonds and money market instruments that may be
appropriate at any given time. The Guidelines are established by comparing the
expected performance with the current performance for each investment class. The
expected performance for each investment class is the performance that PanAgora
would ordinarily expect to obtain over a ten-year period from investments in
that class, based upon its empirical analysis of the long-term performance of
stocks, bonds and money market instruments. The current performance for each
investment class is the actual performance for that class during a current
period with reference to the following: stocks -- the S&P 500; bonds -- the
Shearson Lehman Long Treasury Index; and money market instruments -- the 3-month
and 1-year Treasury bills. Leading economic and capital market indicators are
also integrated into the process of establishing Guidelines. PanAgora may
achieve a substantial portion of the Fund's exposure to the stock and bond
markets through the use of financial futures and related options, as described
in the preceding paragraph.
<PAGE>
In selecting stocks for the Fund, PanAgora will generally purchase a
substantial percentage of the stocks comprising the S&P 500 and gives important
consideration to diversification and trading liquidity. PanAgora attempts to
select stocks which, as a portfolio, have similar investment characteristics,
such as industry representation, dividend yield and capitalization, and which
have investment performance similar to the stocks comprising the S&P 500. In
selecting stocks, PanAgora also gives consideration to the value and growth
potential of individual stocks.
With respect to bonds, the Fund invests in highly liquid securities issued by
the U.S. Government. All such securities are included in the Lehman Brothers
Long Treasury Bond Index. PanAgora generally selects fixed income securities for
the Fund to match the Lehman Index in maturity, quality, sector and coupon
characteristics. Typically, the average maturity of fixed income securities
selected is approximately 10 years, although the Fund may invest in longer or
shorter maturities when, in the opinion of PanAgora, investment opportunities
warrant.
With respect to money market instruments, the Fund invests in U.S. Government
obligations, bank certificates of deposit and time deposits, bankers'
acceptances, prime commercial paper, high-grade, short-term corporate
obligations and repurchase agreements with respect to these instruments.
PREFERRED FIXED INCOME FUND
Subadviser: J.P. Morgan Investment Management Inc. ("Morgan")
Portfolio Manager: Paul L. Zemsky, CFA
Title: Managing Director, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Paul has been involved
in the management of the Fixed Income Fund since January 1, 1994.
Education: B.S.E.E. - University of Pennsylvania
The investment objective of the Fixed Income Fund is a high level of current
income consistent with investment in a diversified portfolio of debt securities.
Morgan will pursue the Fund's objective by investing the Fund's assets primarily
in publicly traded domestic debt securities (e.g., U.S. Treasury and agency
obligations, mortgage-backed 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:
<PAGE>
1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments): A by either Moody's or S&P. For purposes of calculating
this average credit requirement, instruments that are not rated will be assigned
a rating by Morgan.
2. Minimum credit quality for short-term investments at the time of purchase:
Prime-1 by Moody's or A-1 by S&P.
It is expected that the Fund's portfolio will generally have a duration of no
less than three years and no more than seven years (excluding short-term
investments). The duration of a fixed income security is the weighted average
maturity, expressed in years, of the present value of all future cash flows,
including coupon payments and principal repayments.
The Fund may invest in any security which is rated, at the time of purchase,
at least Baa as determined by Moody's or BBB as determined by S&P, or in any
unrated security that Morgan determines to be of comparable quality and, in
addition, may invest up to 5% of its total assets in any security which is
rated, at the time of purchase, below Baa as determined by Moody's or BBB as
determined by S&P, or in any unrated security that Morgan determines to be of
comparable quality. Securities rated lower than A by either Moody's or S&P have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on such obligations than in the case of higher-rated
securities. In the event that the rating of any security held by the Fund falls
below its rating at the time of purchase, the Fund will not be obligated to
dispose of such security, and may continue to hold the obligation if, in the
opinion of Morgan, such investment is considered appropriate in the
circumstance. The values of debt securities change as interest rates fluctuate.
Investments in lower-quality fixed income securities generally provide greater
income than investments in higher-rated securities, but are subject to greater
market fluctuations and risks of loss of income and principal than higher-rated
securities. Fluctuations in the value of portfolio securities will not affect
interest income on existing portfolio securities but will be reflected in the
Fund's net asset value.
The Fund's debt securities may include corporate or U.S. Government
zero-coupon securities of any maturity, securities such as Government National
Mortgage Association ("Ginnie Mae") certificates which represent ownership
interests in mortgage pools and securities backed by commercial mortgages,
including mortgages on a single property. For additional information about these
securities, see "General Policies and Risk Considerations -- Mortgage-Backed
Securities, Asset-Backed Securities and Zero-Coupon Securities."
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
Portfolio Manager: Robert H. Schumacher
Title: Senior Portfolio Manager, CIML
Last Five Years Experience: Rob has been employed by CIML since January 1998.
Prior to joining CIML, he was Vice President at Arbor Research and Trading
(April 1997 - January 1998) and Senior Vice President (July 1990 - February
1997), Chief Fixed Income Strategist (January 1994 - February 1997) and Senior
Portfolio Manager (July 1990 - January 1994) for Zurich-Kemper Investments. Rob
has been involved in the management of the Short-Term Government Securities Fund
since April, 1998.
Education: B.A. - DePauw University; Master of Management - Northwestern
University
The investment objective of the Short-Term Government Securities Fund is high
current income, consistent with preservation of capital.
<PAGE>
As of the date of this Prospectus, it is expected that a new subadvisory
agreement between CIML and Morgan will be submitted for approval of the
shareholders of the Short-Term Government Securities Fund. If the new
subadvisory agreement is not approved by shareholders, CIML will continue to
manage the Fund without any subadviser. Todd M. Sheridan, who previously had
primary responsibility for the day-to-day management of the Fund from January 1,
1993, through June 28, 1995, will serve as portfolio manager of the Fund, and
this Prospectus will be supplemented.
The Fund will invest primarily in securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities. Certain of these "U.S. Government Securities," such as U.S.
Treasury bills, notes and bonds, mortgage participation certificates guaranteed
by Ginnie Mae and Federal Housing Administration debentures, are supported by
the full faith and credit of the United States. Other U.S. Government Securities
are supported by the discretionary authority of the U.S. Government to purchase
the issuer's obligations or by the right of the issuer to borrow from the U.S.
Treasury. The U.S. Treasury is under no legal obligation, however, to purchase
securities or to make loans. Still other U.S. Government Securities are
supported only by the credit of the agency, authority or instrumentality itself.
Agencies or instrumentalities whose obligations are not backed by the full faith
and credit of the U.S. Government include, among others, the Federal National
Mortgage Association ("Fannie Mae"), Federal Home Loan Banks, the Tennessee
Valley Authority, the Bank for Cooperatives and the Federal Home Loan Mortgage
Corporation. A significant portion of the Fund's portfolio may consist of Ginnie
Mae mortgage-backed certificates ("Ginnie Mae Certificates") and other U.S.
Government Securities representing ownership interests in mortgage pools. Under
normal market conditions, not less than 65% of the Fund's total assets will be
invested in U.S. Government Securities and related repurchase agreements. In
order to reduce risk, the Fund will maintain an average dollar-weighted
portfolio maturity of not more than three years and will typically purchase
securities with remaining maturities of less than five years.
U.S. Government Securities do not involve the credit risks associated with
investments in other types of fixed income securities, although, as a result,
the yields available from U.S. Government Securities are generally lower than
the yields available from otherwise comparable corporate fixed income
securities. Like other fixed income securities, however, the values of U.S.
Government Securities change as interest rates fluctuate. Fluctuations in the
value of portfolio securities will not affect interest income on existing
portfolio securities but will be reflected in the Fund's net asset value.
The Fund's debt securities may include U.S. Government zero-coupon securities
of any maturity and securities such as Ginnie Mae Certificates which represent
ownership interests in mortgage pools. For additional information about these
securities, see "General Policies and Risk Considerations -- Mortgage-Backed
Securities, Asset-Backed Securities and Zero-Coupon Securities."
PREFERRED MONEY MARKET FUND
Subadviser: J.P. Morgan Investment Management Inc.
Portfolio Manager: Robert (Skip) R. Johnson
Title: Vice President, Morgan
Last Five Years Experience: Portfolio Manager at Morgan. Skip has been
involved with the management of the Money Market Fund since its inception on
July 1, 1992.
Education: B.A. - Dartmouth College
<PAGE>
The Money Market Fund seeks the maximum current income believed to be
consistent with preservation of capital and maintenance of liquidity by
investing in a portfolio of U.S. dollar-denominated short-term, fixed income
instruments which include:
o short-term U.S. Government Securities;
o certificates of deposit and bankers' acceptances;
o prime commercial paper;
o high-quality, short-term corporate obligations; and
o repurchase agreements with respect to U.S. Government Securities.
All of the Fund's investments will, at the time of investment, have remaining
maturities of 397 days or less. The average dollar-weighted maturity of the
Fund's portfolio will be 90 days or less. The Fund's investments are limited to
those which, in accordance with standards established by The Preferred Group's
Trustees, are believed to present minimal credit risk.
The Money Market Fund may invest up to 100% of its total assets in bank
obligations.
For more information about the securities in which the Fund may invest, see
"General Policies and Risk Considerations -- Money Market Instruments."
Because of the high quality and short maturity of the Fund's investments, the
Fund's yield may be lower than that of funds that invest in lower-rated
securities and securities of longer maturities. Unlike investments which pay a
fixed yield for a stated period of time, money market fund yields fluctuate.
GENERAL POLICIES AND RISK CONSIDERATIONS
PORTFOLIO TURNOVER. Portfolio turnover is not a limiting factor with respect to
investment decisions. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs on the sale of securities and
reinvestment in other securities, which will be borne directly by the Funds.
These transactions may also result in the realization of taxable capital gains.
Portfolio turnover rates for the life of the Funds are shown in the section
"Financial Highlights."
MONEY MARKET INSTRUMENTS. The money market instruments in which the Money
Market Fund may invest include:
(1) short-term U.S. Government Securities;
(2) certificates of deposit, bankers' acceptances and other bank
obligations rated in the two highest rating categories by at least two
major rating agencies, or, if rated by only one major agency, in such
agency's two highest grades, or unrated but determined to be comparable by
the subadviser to the Fund pursuant to procedures approved by The
Preferred Group's Trustees. Bank obligations must be those of a bank that
has deposits in excess of $2 billion or that is a member of the Federal
Deposit Insurance Corporation. The Fund may invest in obligations of U.S.
branches or subsidiaries of foreign banks ("Yankeedollar obligations") or
foreign branches of U.S. banks ("Eurodollar obligations");
(3) commercial paper rated in the two highest rating categories by at
least two major rating agencies, or, if rated by only one major agency, in
such agency's two highest grades, or if not rated, of comparable quality
as determined by the subadviser to the Fund pursuant to procedures
approved by The Preferred Group's Trustees;
<PAGE>
(4) corporate obligations with an initial maturity in excess of 397
days but a remaining maturity of 397 days or less whose issuers have
outstanding short-term debt obligations rated in the highest rating
category by at least two major rating agencies, or, if rated by only one
major agency, in such agency's highest grade; and
(5) repurchase agreements with domestic commercial banks or
registered broker-dealers. See "Repurchase Agreements."
For temporary defensive purposes, each of the other Funds may also invest all or
a portion of its assets in the foregoing kinds of money market instruments,
although determinations of the quality of unrated securities may be made by each
Fund's subadviser.
Federal law limits the percentage of the Money Market Fund's assets that may be
invested in instruments that are not rated in the highest rating category (or
that are unrated but determined to be of comparable quality).
OPTIONS AND FUTURES TRANSACTIONS; FOREIGN CURRENCY TRANSACTIONS. Each
Fund (except the Short-Term Government Securities Fund and the Money Market
Fund) may engage in a variety of transactions involving options and futures
contracts, which are commonly known as "derivative securities," for hedging, for
dividend accruals and portfolio allocation purposes and not for speculation, as
follows:
To increase current return, the Fixed Income Fund may write covered call and
covered put options on any security that they are eligible to purchase. For
hedging purposes, it may (1) purchase call options on securities it expects to
acquire, and put options on securities it holds, and (2) purchase and sell
futures contracts on U.S. Government Securities and purchase and write options
on such futures contracts.
The Growth, Value, International, Small Cap and Asset Allocation Funds may
each: (1) purchase call and put options, and purchase warrants, on securities
that they are eligible to purchase; (2) write covered call and covered put
options on such securities; and (3) buy and sell stock index options, stock
index futures contracts and options on stock index futures contracts. In
addition, the Asset Allocation Fund may purchase and sell futures contracts on
U.S. Government Securities and purchase and write options on such futures
contracts.
In order to hedge against possible variations in foreign exchange rates
pending the settlement of securities transactions, each of the Funds (other than
the Short-Term Government Securities and Money Market Funds) may buy or sell
foreign currencies or may deal in forward foreign currency contracts; that is,
agree to buy or sell a specified currency at a specified price and future date.
These Funds may also invest in currency futures contracts and related options.
If a fall in exchange rates for a particular currency is anticipated, a Fund may
sell a currency futures contract or a call option thereon or purchase a put
option on such futures contract as a hedge. If it is anticipated that exchange
rates for a particular currency will rise, a Fund may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in that
currency the Fund intends to purchase. These futures contracts and related
options will be used only as a hedge against anticipated currency rate changes,
and all options on currency futures written by the Funds will be covered. These
practices, however, may present risks different from or in addition to the risks
associated with investments in foreign currencies. Each of the Growth, Value,
Small Cap, Asset Allocation and Fixed Income Funds will invest no more than 5%
of its assets in foreign currencies, foreign currency forward contracts or
foreign currency futures contracts and options on such futures contracts.
<PAGE>
Although hedging strategies are intended to reduce fluctuations in a Fund's
net asset value, each Fund (other than the Money Market Fund) nonetheless
anticipates that its net asset value will fluctuate to some degree. No Fund will
engage in options and futures transactions for leveraging
purposes.
Appendix B and the Statement of Additional Information contain more
information about options and futures contracts and related risks.
RISK FACTORS OF FOREIGN INVESTMENTS. The Money Market Fund may invest all or
any portion of its assets in Yankeedollar and Eurodollar obligations and in
dollar-denominated commercial paper of foreign issuers. The Growth, Value, Small
Cap, Asset Allocation and Fixed Income Funds each may invest without limit in
securities of foreign issuers which are traded in domestic securities markets
and may invest up to 10% of their respective total assets in securities traded
principally in securities markets outside the United States. (Eurodollar
certificates of deposit are excluded for purposes of these limitations.)
These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded overseas, may
involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against foreign
entities. Furthermore, issuers of foreign securities are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The securities of some foreign companies and foreign
securities markets are less liquid and at times more volatile than securities of
comparable U.S. companies and U.S. securities markets, and certain foreign
securities markets may be subject to less governmental supervision than in the
United States. Foreign brokerage commissions and other fees are also generally
higher than in the United States. There are also special tax considerations
which apply to securities of foreign issuers and securities principally traded
overseas.
The International Fund may also invest in countries whose economies or
securities markets are not yet highly developed. Special considerations
associated with these investments (in addition to the considerations regarding
foreign investments generally) may include, among others, greater political
uncertainties, an economy's dependence on revenues from particular commodities
or on international aid or development assistance, currency transfer
restrictions, a limited number of potential buyers for such securities and
delays and disruptions in securities settlement procedures.
A Fund's investments in foreign currency-denominated debt obligations and
hedging activities will likely produce a difference between its book income and
its taxable income. This difference may cause a portion of the Fund's income
distributions to constitute a return of capital for tax purposes or require the
Fund to make distributions exceeding book income to qualify as a "regulated
investment company" for federal tax purposes.
LOANS OF PORTFOLIO SECURITIES. Each Fund (except the Money Market Fund) may
lend its portfolio securities to broker-dealers under contracts calling for
collateral in cash, U.S. Government Securities or other high-quality debt
securities equal to at least the market value of the securities loaned. Each
Fund will continue to benefit from interest on the securities loaned and will
also receive either interest, through investment of cash collateral by the Fund
in permissible investments, or a fee, if the collateral is U.S. Government
Securities. Securities lending involves the risk of loss of rights in the
collateral or delay in recovery of the collateral should the borrower fail
financially.
SHORT SALES. Each Fund (except the Money Market Fund) may from time to time
make short sales involving securities held in the Fund's portfolio or which the
Fund has the right to acquire without the payment of further consideration.
<PAGE>
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The
Short-Term Government Securities Fund may purchase U.S. Government Securities on
a when-issued basis, and may purchase or sell such securities for delayed
delivery. All Funds except the Money Market Fund may make contracts to purchase
securities for a fixed price at a future date beyond normal settlement time
("forward commitments"). Each of these Funds may also enter into forward
commitments to sell securities. Each Fund may simultaneously be obligated with
respect to forward commitment purchase and sale contracts and may sell a
portfolio security or enter into a forward commitment sale contract (a
"dollar-roll transaction") that is coupled with an agreement by the Fund
(including a forward commitment) to repurchase a similar, but not identical,
security at a later date. When-issued transactions, delayed delivery purchases
and forward commitments involve a risk of loss if the value of the securities
declines prior to the settlement date, which risk is in addition to the risk of
decline in the value of the Fund's other assets. No income accrues to the
purchaser of such securities prior to delivery.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase agreements
with banks and broker-dealers, which are agreements by which a Fund acquires a
security (usually an obligation of the U.S. Government) for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date. The resale price is in excess of the acquisition
price and reflects an agreed-upon market rate unrelated to the coupon rate on
the purchased security. Such transactions afford an opportunity for the Fund to
earn a return on temporarily available cash at no market risk, although there is
a risk that the seller may default in its obligation to pay the agreed-upon sum
on the redelivery date. Such a default may subject the Fund to expenses, delays
and risks of loss.
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND ZERO-COUPON
SECURITIES. Each of the Funds may invest in mortgage-backed securities,
collateralized mortgage obligations ("CMOs") and asset-backed securities.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed security. Prepayments occur when the mortgagor on an individual
mortgage prepays the remaining principal before the mortgage's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. Because
the prepayment characteristics of the underlying mortgages vary, it is not
possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate and a
Fund would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the premium may
not have been fully amortized at the time the obligation is prepaid. As a result
of these principal prepayment features, mortgage-backed securities that are U.S.
Government Securities are generally more volatile investments than other U.S.
Government Securities. Also, although the values of mortgage-backed securities
generally fall when interest rates rise, their potential for capital
appreciation in periods of falling interest rates is limited because of the
prepayment feature.
CMOs, which are commonly known as "derivatives," are securities backed by a
portfolio of mortgages or mortgage-backed securities held under an indenture.
The issuer's obligation to make interest and principal payments is secured by
the underlying portfolio of mortgages or mortgage-backed securities. CMOs are
issued with a number of classes or series which have different maturities and
which may represent interests in some or all of the interest or principal on the
underlying collateral or a combination thereof. CMOs of different classes are
generally retired in sequence as the underlying mortgage loans in the mortgage
pool are repaid. In the event of sufficient early prepayments on such mortgages,
the class or series of CMOs first to mature generally will be retired prior to
its maturity. Thus, the early retirement of a particular class or series of a
CMO held by a Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security.
<PAGE>
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.
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).
<PAGE>
LIMITING INVESTMENT RISK. Specific investment restrictions help the Funds limit
investment risks for their shareholders. These restrictions prohibit:
o each Fund from investing more than 5% of its total assets in the
securities of any one issuer (other than U.S. Government Securities and
repurchase agreements relating thereto), although up to 25% of the total
assets of each Fund may be invested without regard to this restriction;*
o each Fund from investing 25% or more of its total assets in the
securities of any one industry, except that the Money Market Fund may
invest up to 100% of its assets in certificates of deposit and bankers'
acceptances issued by domestic banks (obligations of a foreign
government and its agencies or instrumentalities constitute a separate
"industry" from those of another foreign country; issuers of U.S.
Government Securities and repurchase agreements relating thereto do not
constitute an "industry");* and
o each Fund from investing more than 5% of its total assets in securities
of any issuers if the issuers (or the parties responsible for payment in
the case of debt securities), together with any predecessors, have been
in operation for less than three years (except CMOs, asset-backed
securities, U.S. Government Securities and repurchase agreements
relating thereto).
"FUNDAMENTAL" POLICIES. Restrictions marked with an asterisk (*) above are
summaries of fundamental policies and therefore may only be changed with the
approval of shareholders. See the Statement of Additional Information for the
full text of these policies and the Funds' other fundamental policies. Except
for any policy explicitly identified as "fundamental," the investment objective
and policies of each Fund described in this Prospectus may be changed without
shareholder approval. Except as otherwise noted, all percentage investment
limitations will be measured at the time a security is purchased and will not be
considered violated unless an excess or deficiency exists immediately after and
as a result of such purchase. If there is a change in a Fund's investment
objective, shareholders 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, three and five-year periods and for the life
of a Fund, each through the most recent calendar quarter, represents the average
annual compounded rate of return on an investment of $1,000 in the Fund.
Each of the Asset Allocation, Fixed Income and Short-Term Government
Securities Funds may advertise its Yield, accompanied by its Total Return. A
Fund's Yield will be computed by dividing the net investment 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.
<PAGE>
The Money Market Fund may advertise its Yield and Effective Yield. The Money
Market Fund's Yield is based upon the income earned by the Fund over a seven-day
period and then annualized (i.e., the income earned in the period is assumed to
be earned every seven days over a 52-week period and stated as a percentage of
the investment). Effective Yield is calculated similarly but, when annualized,
the income earned by the investment is assumed to be reinvested in Fund shares
and thus compounded over the course of a 52-week period. Methods used to
calculate advertised yields are standardized for money market funds.
The Preferred Group may also include in its advertising and sales materials
editorial comments and performance rankings published by 1) recognized mutual
fund statistical services, such as Lipper Analytical Services, Inc.,
Morningstar, Inc. or IBC's Money Fund Report, and 2) publications of general
interest, such as Money, Forbes or Business Week magazines. Performance
information may be quoted numerically or may be presented in a graph, table or
other illustration. The Preferred Group may also compare the performance of a
Fund to that of well-known market indicators.
<PAGE>
- --------------------------------------------------------------------------------
OPENING YOUR ACCOUNT
- --------------------------------------------------------------------------------
To open a new account, simply complete and return the New Account Registration
Form included with this Prospectus and mail with your check or money order. We
must have your correct Social Security or corporate tax identification number
and your signature. In order to open an account, you must meet the minimum
investment requirements described below. A completed and signed application is
required for each new account you open. Redemptions will not be permitted until
your completed application is on file. Purchase orders received by The Preferred
Group by 4:00 p.m. (Eastern time) on any regular business day will be processed
at that day's net asset value. (See "Determination of Net Asset Value and
Pricing.") There are no sales commissions or 12b-1 fees. All shareholders will
receive individual confirmations of each purchase, redemption, dividend
reinvestment, exchange or transfer of shares, including the total number of
shares owned as of the confirmation date. If you have questions about the Funds,
or require additional assistance with the New Account Registration Form, please
call Investor Services at 1-800-662-GROW (1-800-662-4769).
HOW TO BUY SHARES
You can purchase shares of any Fund by using one of the four methods described
below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- -----------------------------------------------------------------------------------
<S> <C> <C>
BY MAIL $1,000--Regular Account $50 for All Accounts
$ 250--IRAs & Uniform
Gifts/Transfers to Minors
Accounts
$ 150--Quarterly Systematic Savings
Plan
$ 50--Monthly Systematic
Savings Plan
</TABLE>
For new accounts, please mail us your New Account Registration Form and check in
the return envelope provided. For additional investments, please mail us your
check, write your account number on your check, use the remittance form attached
to your confirmation statement, and mail in the return envelope provided. All
checks should be made payable to "The Preferred Group (name of Fund)." Third
party checks will not be accepted. All purchase requests should be mailed to one
of the following addresses:
Regular Mail: Registered, Express or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
Shares of each Fund of The Preferred Group are continuously offered to the
public each day the New York Stock Exchange is open.
<PAGE>
<TABLE>
FOR ALL CHOICES BELOW, PLEASE CALL 1-800-662-GROW
<CAPTION>
- ------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY EXCHANGE $1,000 $50
(from another Fund)
The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."
<CAPTION>
- ------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY WIRE $1,000 $1,000
Federal funds should be wired to: State Street Bank & Trust Company, Custody
and Shareholder Services Division, Boston, MA 02110, ABA No. 011000028, DDA:
9904-636-9, The Preferred Group, your name and your Fund/Account Number.
<CAPTION>
- ------------------------------------------------------------------------------------------------------
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY MONEY Not Available $50
EXPRESS
(Electronic Funds
Transfer Option)
You must authorize this service on your account application. The maximum
transfer amount is $50,000.
</TABLE>
EXCHANGING AND REDEEMING SHARES
Shares may be exchanged or redeemed on the basis of their respective net asset
values beginning 10 days after purchase on any day the New York Stock Exchange
is open. There are currently no exchange or redemption fees or charges. You may
redeem all or a portion of your shares. Please note that an exchange is treated
as a redemption and a subsequent purchase. Therefore, you could realize a
taxable gain or loss on your transaction. The Preferred Group reserves the right
to modify or terminate the exchange privilege at any time. Except as otherwise
permitted by SEC regulations, The Preferred Group will give 60 days' advance
written notice to shareholders of any termination or material modification of
the exchange privilege. The Preferred Group's exchange service is not intended
to encourage shareholder speculation on short-term movements in the market. Each
Fund reserves the right to restrict exchanges to one purchase and redemption of
shares in the same Fund during any 120-day period. The exchange privilege may
not be exercised for shares of any Fund which are not qualified or exempt under
the securities laws of the state in which the shareholder resides.
HOW TO REDEEM OR EXCHANGE SHARES
- --------------------------------------------------------------------------------
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY MAIL To redeem or exchange shares in writing, send an instruction
letter signed by all registered owners, including fiduciary
titles, specifying the name on the account and the account
number, the Fund name and the number of shares or dollar
amount you want to exchange or redeem. For exchanges, mail to
the attention of the Fund you are exchanging from and specify
the Fund you are exchanging to. We require the signature of
all owners exactly as registered. For redemptions over
$50,000 we require a signature guarantee.
<PAGE>
Regular Mail Address: Express, Registered or Certified Mail:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS. The letter of
instruction must be accompanied by a resolution. The letter
must be signed by at least one individual authorized by
resolution to act on the account. The resolution must include
a signature guarantee.
TRUSTS. The letter of instruction must be signed by the
Trustee(s) with a signature guarantee.
NOTE: If you want to keep your account open, please maintain
a balance of at least $1,000. If you have questions, please
call Investor Services at 1-800-662-GROW.
- --------------------------------------------------------------------------------
FOR ALL OPTIONS BELOW, CALL INVESTOR SERVICES AT 1-800-662-GROW
- --------------------------------------------------------------------------------
BY PHONE If you have authorized Preferred Tele-Services on your
account application, exchanges or redemptions can be made
between 8:00 a.m. (Eastern time) and the close of regular
trading on the New York Stock Exchange (generally 4:00 p.m.
(Eastern time)). Redemption proceeds can be mailed, wired to
your bank or sent by electronic funds transfer. The Preferred
Group's bank charges a $10.00 fee for wire redemptions,
minimum $100, subject to change without notice. Your bank may
also charge you for receiving wires.
- --------------------------------------------------------------------------------
BY CHECK If you have authorized the check writing feature on your
account application, you may redeem shares in your account
provided that the appropriate signatures are on your check.
The minimum check amount is $250. There is no charge for this
service, and you may write an unlimited number of checks,
provided the account minimum of $1,000 per Fund is maintained.
Check writing privileges apply to the Money Market and the
Short-Term Government Securities Funds ONLY.
- --------------------------------------------------------------------------------
BY MONEY If you have authorized the Preferred Money Express feature on
EXPRESS your 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
are made in securities rather than cash, such securities will be valued using
the procedures described under "Determination of Net Asset Value and Pricing."
Although The Preferred Group will normally send you payment for your shares the
following business day after your request is received in proper form by the
Transfer Agent, the transmission of your proceeds may be delayed for up to seven
days after your request is received. The mailing of proceeds on redemption
requests involving any shares purchased by personal, corporate or government
check, or bank-fund transfers is generally subject to a 10-day delay to allow
the check or transfer to clear. The clearing period does not apply to purchases
made by wire, Systematic Savings Plan, or cashier's, treasurer's or certified
checks. Redemption or transfer requests will not be honored until all required
documents in the proper form have been received by the Transfer Agent.
<PAGE>
IMPORTANT INFORMATION ABOUT YOUR ACCOUNT ACCOUNT BALANCES.
The Preferred Group reserves the right to redeem shares in any account which
drops below the minimum initial investment amount of $1,000 due to shareholder
redemptions. You will be allowed 60 days to make an additional investment
before the account is liquidated. The minimum does not apply to IRAs or other
retirement accounts, Uniform Gifts/Transfers to Minors Act accounts, or
Systematic Savings Accounts.
BROKER-DEALERS. If you purchase Preferred Group shares through a registered
broker-dealer, a bank or other institution, those entities may charge a service
fee.
DISTRIBUTION OPTIONS. You can select the distribution option that best
suits your needs. See "Choosing a Distribution Option."
NON-U.S. BANK CHECKS. All deposit checks must be drawn on U.S. chartered
banks. Checks drawn on foreign banks must be converted to U.S. dollars; in the
case of smaller investments, the fee for conversion may be disproportionately
high in relation to the value of the investment.
PURCHASES BY CHECK. Purchases are accepted subject to collection of checks at
full value and conversion into federal funds. Payment by a check drawn on any
member of the Federal Reserve System can normally be converted into federal
funds within two business days after receipt of the check. Checks drawn on a
nonmember bank may take up to 10 days to convert into federal funds. In all
cases, the purchase price is based on the net asset value next determined after
the purchase order and check are accepted, even though the check may not yet
have been converted into federal funds. Third-party checks will not be accepted.
SHARE CERTIFICATES. When you open your account, you will receive a
confirmation indicating your name and account number which will be evidence that
you have opened a Preferred Group account. No share certificates will normally
be issued.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature and is sometimes required for our mutual protection. When a signature
guarantee is required, you should have "Signature Guaranteed" stamped under your
signature and guaranteed at a commercial bank (FDIC member), trust company, firm
that is a member of a domestic stock exchange, foreign branches of any of the
above and certain other financial institutions.
You will need a signature guarantee to: (1) authorize or change certain
services after your account is opened; (2) transfer shares to another owner; (3)
redeem over $50,000 by written request; (4) redeem or exchange shares when
someone who is not a registered owner of the account will receive the proceeds;
(5) send proceeds to an address other than the account address; and (6) pay the
proceeds to a corporation, partnership, trust or fiduciary.
<PAGE>
TELEPHONE EXCHANGE AND REDEMPTION. The Preferred Group may accept telephone
redemption or exchange instructions from any person with respect to accounts of
shareholders who elect this service. The Preferred Group will employ reasonable
procedures in order to verify that telephone requests for redemptions and
exchanges are genuine, including, among others, requiring a form of personal
identification prior to acting on telephone instructions, recording telephone
instructions and sending written confirmations of the resulting transactions to
shareholders. If the Preferred Group did not employ such procedures, it could be
liable for losses arising from unauthorized or fraudulent telephone
instructions. The Preferred Group reserves the right to terminate or modify the
telephone exchange or telephone redemption service at any time. Except as
otherwise permitted by SEC regulations, The Preferred Group will give 60 days'
advance written notice to shareholders of any termination or material
modification of the telephone exchange or telephone redemption service. During
times of severe disruption in the securities markets, the volume of calls may
make it difficult to exchange or redeem by telephone, in which case a
shareholder may wish to send a written request for exchange or redemption as
described under "Exchanging and Redeeming Shares -- By Mail."
ADDITIONAL SHAREHOLDER SERVICES
CHECK-WRITING SERVICES (MONEY MARKET AND SHORT-TERM GOVERNMENT SECURITIES
FUNDS ONLY). The minimum check amount is $250. This service is FREE and you may
write an unlimited number of checks. You must maintain a minimum $1,000 account
balance after your withdrawal. (Remember that redeeming shares from the
Short-Term Government Securities Fund will be treated as a capital gain or loss
transaction for tax purposes.)
PREFERRED MONEY EXPRESS (ELECTRONIC FUNDS TRANSFER OPTION). This plan allows
you to buy or sell shares by transferring money between your Fund account and
your account at a bank, savings and loan association or a credit union that is a
member of the ACH (Automated Clearing House) system. Preferred Money Express
eliminates the expense of wiring funds and the delay of mailing a check. You
will need to sign up for Preferred Money Express on your account application.
PREFERRED TELE-SERVICES LINE. You may reach The Preferred Group by calling
Preferred Tele-Services at 1-800-662-GROW, 24 hours a day. Between the hours of
8:00 a.m. and 6:00 p.m. (Eastern time) you will reach an Investor Services
Representative. If you are calling after 6:00 p.m. (Eastern Time) on a
Touch-Tone phone, you will receive instructions on how you can (1) listen to
price and yield information and (2) obtain your share balance and account value.
If you are calling on a rotary dial phone during normal business hours, you will
be connected with an Investor Services Representative. The Preferred Group will
record telephone transactions to verify data concerning these transactions.
SYSTEMATIC SAVINGS PLAN. This option allows you to make monthly or quarterly
investments automati cally by authorizing us to move $50 or more on the same day
each month (or $150 per quarter) from your checking account to any Fund. You
will be sent a confirmation statement for each transaction, and a debit will
appear on your checking account statement. To change the amount of your
systematic savings or to terminate this service, please call Investor Services
or write to the address printed on your account statement. Be sure to include
your account number.
SYSTEMATIC WITHDRAWAL PLAN. This plan automatically redeems enough shares
each month or quarter to provide you with a check, wire or electronic funds
transfer to your checking account for a minimum amount of $50 monthly or $150
quarterly. You must maintain a $1,000 minimum account balance after your
withdrawal.
<PAGE>
TAX-QUALIFIED RETIREMENT PLANS. Tax-deferred individual retirement plans are
available. Please call Investor Services for details and the appropriate
forms for:
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS). Any wage earner between 18 and
701/2 years of age can contribute up to $2,000 per tax year. This $2,000
contribution limit is phased out if the wage earner (or the wage earner's
spouse) actively participates in an employer-sponsored qualified
retirement plan. For married individuals, the annual contribution limit is
$2,000 for each spouse, but the couple's aggregate deductible
contributions may not exceed the combined compensation of both spouses
(reduced by any contributions made to other forms of IRAs -- such as "Roth
IRAs").
ROTH IRAS. Single wage earners with an adjusted gross income of
less than $95,000 (and married wage earners who file jointly and have an
aggregate adjusted gross income of less than $150,000) can make
non-deductible contributions to Roth IRAs of up to $2,000 per year less
amounts contributed on behalf of such individuals to other IRAs. The
$2,000 contribution limit is phased out for wage earners with adjusted
gross incomes that exceed the above amounts. Qualifying distributions from
a Roth IRA are tax-free, provided the Roth IRA has been in existence for
at least five years.
EDUCATION IRAS. Additionally, individuals can make non-deductible
contributions to Education IRAs of up to $500 per year. Distributions
from an Education IRA will be tax-free provided that all contributions to
the IRA are made before the beneficiary turns 18 years old and the
distributions are used for qualified higher education expenses. The same
adjusted gross income limitations that apply for Roth IRAs apply to
contributors to Education IRAs, and the annual $500 contribution limit
is imposed per beneficiary.
ROLLOVER IRAS. When a participant of a tax-favored retirement plan
receives an eligible rollover distribution of assets, the assets may be
"directly transferred" or "directly rolled over" into an IRA. Eligible
rollover distributions that are not "directly transferred"to an IRA or
other tax-favored retirement plan are subject to tax withholding at a 20%
rate. Rollovers can also occur from an existing IRA into a Preferred
Group IRA.
SEP-IRAS. Simplified Employee Pension Plans are arrangements under which
employers may contribute directly to an employee's IRA.
In addition, The Preferred Group may be an appropriate investment for 403(b)
Plans, 401(k) Plans and Keogh or corporate Profit-Sharing Plans.
DETERMINATION OF NET ASSET VALUE AND PRICING
NET ASSET VALUE PER SHARE (NAV), or share price, for each Fund is normally
determined on each day the New York Stock Exchange is open as of the close of
regular trading on the Exchange (generally 4:00 p.m. (Eastern time)). Fund share
prices (other than the Money Market Fund) can be found daily in most major
newspapers' mutual fund listings under the heading "Preferred Group."
PURCHASE SHARE PRICE. If your request is received on a regular business day
before 4:00 p.m. (Eastern time) in good order, your shares will be priced at
that day's net asset value. Requests received after 4:00 p.m. (Eastern time)
will be priced at the next day's net asset value. Requests to purchase shares on
other than a regular business day will be priced at the net asset value
determined on the next succeeding regular business day. The Preferred Group
reserves the right to accept or reject any order for the purchase of Fund
shares.
REDEMPTION SHARE PRICE. If your redemption request is received prior to 4:00
p.m. (Eastern time) in good order on a regular business day, your shares will be
priced at that day's net asset value. 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.
<PAGE>
EXCHANGE SHARE PRICE. Exchanges are priced in the same manner as purchases
and redemptions.
DETERMINATION OF NAV. Each Fund's share price is calculated by dividing the
total value of each Fund's assets, minus liabilities, by the total number of
shares outstanding. Portfolio securities, options and futures contracts for
which market quotations are readily available are valued at market value.
Short-term obligations having remaining maturities of 60 days or less are valued
at amortized cost, which approximates market value. The portfolio investments of
the Money Market Fund are valued using the amortized cost method of valuation,
in accordance with Rule 2a-7 under the Investment Company Act of 1940. All other
securities and assets are valued at their fair value as determined in good faith
following procedures approved by the Trustees.
GENERAL. Please note that The Preferred Group does not accept requests which
specify a particular date for purchases or redemptions, or which specify any
special conditions. We will notify you if your request cannot be accepted and
provide additional instructions.
OTHER INFORMATION
The Trust may pay brokerage commissions to brokers that are affiliated with
the advisor or subadvisors. Caterpillar Investment Trust 401(k) Plan may be
deemed to "control" the Growth, Value, International, Small Cap, Asset
Allocation, Short-Term Government Securities and Money Market Funds. Caterpillar
Inc. Supplemental Unemployment Benefits Group Insurance Trust A and Caterpillar
Group Insurance Trust B may be deemed to "control" the International, Small Cap,
Asset Allocation, Fixed Income and Short-Term Government Securities Funds. The
Preferred Stable Principal Collective Trust and American Banker's Insurance Co.
may be deemed to "control" the Fixed Income and Short-Term Government Securities
Funds, respectively. In each case the indicated entity owned of record more than
25% of the relevant Fund's outstanding securities as of September 30, 1997.
DISTRIBUTIONS
GENERAL. Dividends will be declared daily and paid monthly for the Fixed
Income, Short-Term Government Securities and Money Market Funds. Dividends will
be declared and paid quarterly for the Asset Allocation Fund. The Growth, Value,
International and Small Cap Funds will declare and pay dividends at least
annually. Each Fund pays out as dividends substantially all of its net
investment income (which comes from dividends and interest it receives from its
investments) and net realized short-term capital gains. For these purposes and
for federal income tax purposes, a portion of the premiums from certain expired
call or put options written by a Fund, net gains from closing purchase and sale
transactions with respect to such options, and net gains from futures
transactions are treated as short-term capital gains. Each Fund distributes
substantially all of its net realized capital gains, if any, at least annually
after giving effect to any available capital loss carry-over. The Short-Term
Government Fund currently has available capital loss carry-overs. Subject to
applicable law, dividends and capital gains distributions may be declared more
or less frequently in the discretion of the Trustees.
BUYING A DIVIDEND. On the record date for a distribution, the Fund's share
value will be reduced by the amount of the distribution. If you purchase shares
just before the record date ("buying a dividend"), you will pay the full price
for the shares and then receive a portion of the purchase price back as a
taxable distribution.
<PAGE>
CHOOSING A DISTRIBUTION OPTION
When you fill out your account application, you may select any one of the
following distribution options. If you do not specify an option, all of your
distributions will be reinvested in additional shares of the relevant Fund. If
you choose to change your distribution election, you must notify Investor
Services in writing. The address for Investor Services is The Preferred Group,
P.O. Box 8320, Boston, MA 02266-8320.
REINVEST OPTION. All dividends and capital gain distributions are reinvested
in additional shares. All distributions will be reinvested as of the record date
for the distribution and will be paid on the payment date. CASH DIVIDEND OPTION.
All dividends are paid in cash (by check). All capital gains distributions are
reinvested in additional Fund shares as of the record date for the distribution
and will be paid on the payment date.
ALL CASH OPTION. All dividends and capital gain distributions are paid in
cash (by check).
In addition, an option to invest your cash dividends and/or capital gains
distributions of a Preferred Group Fund in another Preferred Group Fund is
available. Please call Investor Services (1-800-662-GROW) for more information.
If it is determined that the U.S. Postal Service cannot properly deliver Fund
mailings to you, The Preferred Group will terminate your election to receive
dividends and other distributions in cash, and will invest the undeliverable
distributions in shares of the relevant Fund. Thereafter, your subsequent
dividends and other distributions will be automati cally reinvested in
additional shares of the relevant Fund until you notify The Preferred Group in
writing of your correct address and request in writing that the election to
receive dividends and other distributions in cash be reinstated.
TAXES
Each Fund will be treated as a separate taxable entity for federal income
tax purposes. Each Fund plans to distribute substantially all of its net
investment income and net realized short-term capital gains, if any, to its
shareholders. So long as it does so and otherwise satisfies the requirements for
being taxed as a regulated investment company, the Fund itself will not be
subject to federal income tax on the amounts distributed. Shareholders will
receive an annual statement detailing federal tax information about dividends
and distributions paid to shareholders during or with respect to the preceding
calendar year.
Dividends and any short-term capital gains distributions (that is,
distributions derived from net gains from securities held for not more than a
year) of the Funds are taxable to the shareholder as ordinary income.
Distributions designated as deriving from net gains on securities held for more
than one year but not more that 18 months and from net gains on securities held
for more than 18 months are taxable to shareholders as such, regardless of how
long a shareholder may have owned shares in the Fund.
Distributions will be taxable as described above whether received in cash or
in shares through the reinvestment of distributions. A dividend paid to a
shareholder by a Fund in January of a year generally is deemed to have been paid
by the Fund on December 31 of the preceding year if the dividend was declared
and payable to shareholders of record on a date in October, November or December
of the preceding year.
Dividends derived from interest on certain U.S. Government Securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government Securities (which may constitute a substantial portion of the
Short-Term Government Securities Fund's assets) may not be so exempt.
<PAGE>
Shareholders should consult their tax advisers as to the possible application
of state and local income tax laws to a Fund's dividends and capital gains
distributions.
The International Fund may make an election which allows shareholders who are
U.S. citizens or U.S. corporations to claim a foreign tax credit or deduction
(but not both) on their U.S. income tax returns. As a result, the amounts of
foreign income taxes paid by the International Fund would be treated as
additional income to International Fund shareholders from non-U.S. sources and
as foreign taxes paid by International Fund shareholders for purposes of the
foreign tax credit. Only shareholders who hold Fund shares (without protection
from risk of loss) on the ex-dividend date and for at least 15 other days during
the 30-day period surrounding the ex-dividend date will be entitled to claim a
foreign tax credit. Investors should consult their tax advisers for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations.
Shareholders who are not U.S. citizens or which are foreign corporations may be
subject to substantially different tax treatment on distributions.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes a 4%
excise tax on the undistributed ordinary income of any Fund that fails to
distribute prior to calendar year end virtually all of its ordinary income on a
calendar year basis. Capital gain net income realized by each Fund in the
one-year period ending October 31 and not distributed during the calendar year
is also subject to the 4% excise tax, as is any retained amount from the prior
year. It is each Fund's intention to make distributions sufficient to avoid this
excise tax.
Current federal tax law requires the holder of a Treasury or other fixed
income zero-coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives no
interest payment in cash on the security during the year. In addition, so-called
payment-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Fund holding the security receives no
interest payments in cash on the security during the year. Accordingly, each
Fund that holds the foregoing kinds of securities may be required to pay out as
an income distribution each year an amount which is greater than the total
amount of cash interest the Fund actually received. Such distributions may be
made from the cash assets of the Fund or by liquidation of portfolio securities,
if necessary. The Fund may realize gains or losses from such liquidations. In
the event a Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would have received in the absence of such transactions.
STATEMENTS AND REPORTS
You will receive a confirmation statement after every transaction that affects
the share balance in any of your accounts.
By January 31 of each year, The Preferred Group will send you the following
reports which may be utilized in completing your U.S. income tax return:
Form 1099 - DIV Reports taxable distributions during the preceding calendar
year.
Form 1099 - B Reports redemption proceeds during the preceding calendar
year.
Form 1099 - R Reports distributions from IRAs and 403(b) plans during the
preceding calendar year.
<PAGE>
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 was
reduced to an annual rate equal to the lesser of (i) .50% of the average net
assets of the Fixed Income Fund and (ii) the rate at which (A) the excess of (I)
the fee paid by the Fixed Income Fund to CIML over (II) the fee paid by CIML to
Morgan with respect to the Fixed Income Fund (see below) equals (B) the excess
that would have existed under the advisory and subadvisory fee schedules in
effect with respect to the Fixed Income Fund prior to November 1, 1996. For more
information regarding the fees paid to CIML by the Fixed Income Fund, see the
Statement of Additional Information.
The Preferred Group pays all expenses not assumed by the Manager, including,
without limitation, fees and expenses of Trustees who are not "interested
persons" of the Manager or The Preferred Group, interest charges, taxes,
brokerage commissions, expenses of issuing or redeeming shares, fees and
expenses of registering and qualifying The Preferred Group and shares of the
respective Funds for distribution under federal and state laws and regulations,
charges of custodians, auditing and legal expenses, expenses of determining net
asset value, reports to shareholders, expenses of meetings of shareholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and insurance premiums and professional association dues
or assessments.
CIML is a Delaware corporation formed on December 18, 1991. Its principal
place of business is 1200 First Financial Plaza, 411 Hamilton Boulevard, Peoria,
Illinois 61602-1104. CIML is a wholly-owned subsidiary of Caterpillar Inc., an
international manufacturer of machinery and engines and provider of financial
products. In addition to managing the Funds, CIML serves as an investment
adviser to the Caterpillar Investment Management Ltd. Tax Exempt Group Trust
(the "Group Trust"). CIML has advised the Funds since inception and has
experience managing portfolios of the Group Trust that are similar to certain of
the Funds.
THE SUBADVISERS. In order to assist it in carrying out its responsibilities,
CIML has retained various sub advisers to render advisory services to the Funds,
under the supervision of CIML and The Preferred Group's Trustees. CIML pays the
fees of each of the subadvisers. The fee paid to the subadvisers (other than
with respect to the Money Market and the Short-Term Government Securities Funds)
is based on the Fund assets managed or advised by such subadviser (the "Fund
Assets") together with any other assets managed or advised by the subadviser
relating to Caterpillar Inc. or any of its affiliates (other than the Money
Market and the Short-Term Government Securities Funds). (The Fund Assets
together with such other assets are collectively referred to as the "Combined
Assets.") The subadvisory fee is calculated by applying the average quarterly
net asset value, as of the last business day of each month in the calendar
quarter, of the Combined Assets to the annual rates for each subadviser (other
than with respect to the Money Market and the Short-Term Government Securities
Funds), as set forth below. This amount is then adjusted based upon the ratio of
Fund Assets to Combined Assets. The subadvisory fee paid to Morgan with respect
to each of the Money Market and the Short-Term Government Securities Funds is
based solely on the average net assets of the relevant Fund.
<PAGE>
Oppenheimer is a Delaware general partnership formed on July 1, 1987. Its
address is Oppenheimer Tower, World Financial Center, New York, New York 10281.
Oppenheimer provides investment advice to individuals, state and local
government agencies, pension and profit sharing plans, trusts, estates,
businesses and other organizations. For the fiscal year ended June 30, 1997,
Oppenheimer was paid at an effective annual rate of 0.28% of the Value Fund's
average net assets.
Oppenheimer is a registered investment adviser with approximately $60.9
billion in assets under management as of September 30, 1997. Oppenheimer
Financial Corp. ("Opfin") holds a one-third managing general partner interest in
Oppenheimer, and Oppenheimer Capital, L.P., a Delaware limited partnership whose
units are traded on the New York Stock Exchange and of which Opfin is the sole
1.0% general partner, owns the remaining two-thirds interest in Oppenheimer.
On July 22, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $125 billion in assets under management
through various subsidiaries, entered into an Amended and Restated Merger
Agreement with Oppenheimer Group, Inc. ("OGI") and its subsidiary Opfin pursuant
to which PIMCO Advisors and its affiliate, Thompson Advisory Group, Inc. and its
successor ("TAG"), will acquire Opfin's one-third managing general partner
interest in Oppenheimer, and Opfin's 1.0% general partnership interest in
Oppenheimer Capital, L.P. The proposed transaction is subject to certain
conditions being satisfied prior to closing, including the consummation of the
sale by OGI and Oppenheimer Equities, Inc. of all of the stock of Oppenheimer
Holdings, Inc. and Oppenheimer &Co., Oppenheimer Capital's broker-dealer
affiliate, to CIBC Wood Gundy Securities Corp. (the "CIBCSale"), consents from
certain lenders, approvals from regulatory authorities, and consents of certain
clients of Oppenheimer, including the Fund. Under the terms of the Amended and
Restated Merger Agreement, the proposed transaction can take place only if the
CIBC sale takes place first. It is currently contemplated that the proposed
transaction will be concluded in November 1997.
If the proposed transaction is consummated, it will involve a change in
control of Oppenheimer, which will constitute an assignment of, and result in
the termination of, the subadvisory agreement between Oppenheimer and
Caterpillar Investment Management Ltd. with respect to the Value Fund. The
Trustees, including all of the Trustees who are not "interested persons" of the
Value Fund, Oppenheimer or PIMCO Advisors, approved and determined to submit to
shareholders for approval a new subadvisory agreement identical to the existing
subadvisory agreement except as to dates, to take effect upon consummation of
the proposed transaction. Holders of a majority of the outstanding voting
securities of the Fund have executed a consent approving the new subadvisory
agreement.
Jennison provides investment advice to mutual funds, institutional accounts
and other entities. Its principal place of business is 466 Lexington Avenue, New
York, New York 10017. Jennison is a wholly-owned subsidiary of The Prudential
Insurance Company of America, a mutual insurance company and a registered
investment adviser. For the fiscal year ended June 30, 1997, Jennison was paid
at an effective annual rate of 0.25% of the Growth Fund's average net assets.
<PAGE>
Mellon, a Delaware corporation, is located at 595 Market Street, Suite 3000,
San Francisco, California 94105. Mellon was founded in 1983 and presently
manages over $64.9 billion in funds. Mellon is a wholly-owned, indirect
subsidiary of Mellon Bank Corporation, Pittsburgh, Pennsylvania, a bank holding
company which engages in the businesses of retail banking, wholesale banking and
service products. Mellon serves as an investment adviser and manager for
institutional clients. For the fiscal year ended June 30, 1997, Mellon was paid
at an effective annual rate of 0.30% of the Asset Allocation Fund's average net
assets.
PanAgora's principal place of business is 260 Franklin Street, Boston,
Massachusetts 02110. Fifty percent of the outstanding voting stock of PanAgora
is owned by each of Nippon Life Insurance Company, a mutual life insurance
company, and Putnam Investments, Inc. ("Putnam"). Putnam is owned by Marsh &
McLennan Companies, Inc., a publicly-owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management. PanAgora currently provides asset
allocations indexing and related investment advisory services to a variety of
endowment funds, pension accounts, other institutions and investment companies,
with total assets under management in excess of $14 billion. For the fiscal year
ended June 30, 1997, PanAgora was paid at an effective annual rate of 0.15% of
the Asset Allocation Fund's average net assets.
Mercator provides investment advice to mutual funds and other entities. Its
principal place of business is 2400 East Commercial Blvd., Ft. Lauderdale,
Florida 33308. Mercator Asset Management, L.P. is a Delaware general partnership
owned by its executive officers and The Prudential Insurance, a 20% limited
partner. For the fiscal year ended June 30, 1997, Mercator was paid at an
effective annual rate of 0.55% of the International Fund's average net assets.
Morgan provides investment advice to mutual funds and other entities. Its
principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation. Prior to November 1, 1996, CIML
paid Morgan for its subadvisory services with respect to the Fixed Income Fund
on the basis of the average net assets of that Fund only, rather than on
Combined Assets. In addition, effective November 1, 1996, the subadvisory fee
for the Fixed Income Fund was reduced. For more information regarding the fees
paid to Morgan, see the Statement of Additional Information. For the fiscal year
ended June 30, 1997, Morgan was paid at an effective annual rate of 0.18% of the
Fixed Income Fund's average net assets. CIML pays Morgan for its subadvisory
services with respect to the Money Market Fund a fee computed and paid quarterly
at the annual rate of 0.15% of the average quarterly net assets, as of the last
business day of each month in the calendar quarter, of the Money Market Fund.
For the fiscal year ended June 30, 1997, Morgan was paid at an effective annual
rate of 0.14% of the Money Market Fund's average net assets, reflecting a waiver
of less than 0.01%. It is expected that, subject to shareholder approval, Morgan
will assume primary responsibility for the day-to-day management of the
Short-Term Government Securities Fund on or about November 3, 1997, for which
Morgan will receive a subadvisory fee from CIML at the annual rate of 0.20%.
DESCRIPTION OF THE PREFERRED GROUP
The Preferred Group was established in 1991 as a business trust under
Massachusetts law. The Preferred Group has an unlimited authorized number of
shares of beneficial interest which may, without shareholder approval, be
divided into an unlimited number of series of such shares which, in turn, may be
subdivided into an unlimited number of classes of shares. The Preferred Group
currently consists of eight series of shares, each series of which represents
interests in a separate Fund. Each Fund is an open-end, diversified management
investment company. The Funds' shares are not currently divided into classes.
Matters submitted to shareholder vote must be approved by each Fund separately
except that (i) when required by law, shares shall be voted together and (ii)
when the Trustees have 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
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Fund.
<PAGE>
PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If CIML or the relevant subadviser, as the case may be, wants to hedge the Asset
Allocation Fund's or the Fixed Income Fund's respective investments in debt
securities against an increase in interest rates, it might sell futures
contracts with respect to U.S. Government Securities. If interest rates rise and
the value of the securities declines, the value of the futures contracts should
increase. Likewise, if the Asset Allocation or Fixed Income Funds hold cash
reserves and short-term investments and CIML or the relevant subadviser, as the
case may be, expects interest rates to fall, the relevant Fund might purchase
futures contracts. If, as expected, the market value both of long-term debt
securities and futures contracts with respect thereto increased, the Fund would
benefit from a rise in the value of long-term securities without actually buying
them until the market had stabilized. The Growth, Value, International, Small
Cap and Asset Allocation Funds may similarly buy or sell futures contracts on
stock indices in anticipation of broad movements in equity market prices. The
Asset Allocation Fund may also buy and sell futures contracts in order to
reallocate its exposure to the equity or fixed income markets and for dividend
accruals. The successful use of futures and related options depends on CIML's or
the relevant subadviser's ability to forecast correctly movements in interest
rates or equity markets generally.
The correlation between price movements of futures contracts and of the
securities which are the subject of the hedge is usually imperfect. The
correlation is higher between price movements of futures contracts and the
underlying securities. The correlation is lower when futures are used to hedge
securities other than the securities underlying such futures. For example, a
Fund that invests in equity securities will generally not own all the securities
included in a particular stock index, so the value of the Fund's holdings of
equities may change to a different extent than does the value of a futures
contract on that index.
Options on futures contracts may also be used for hedging. For example, if the
value of the Fixed Income Fund's portfolio securities is expected to decline as
a result of an increase in interest rates, the Fund might purchase put options
or write call options on futures contracts rather than selling futures
contracts. Similarly, to hedge against an anticipated increase in the price of
long-term debt securities, the Asset Allocation or Fixed Income Funds may
purchase call options or write put options as a substitute for the purchase of
futures contracts. The Growth, Value, International, Small Cap and Asset
Allocation Funds may engage in similar transactions in options on stock index
futures contracts, and the Asset Allocation Fund may purchase and sell options
on futures contracts in order to reallocate the Fund's exposure to the equity or
fixed income markets.
When a Fund enters into a futures contract, it is required to deposit with the
broker as "initial margin" an amount of cash or short-term U.S. Government
Securities equal to approximately 5% of the contract amount. That amount is
adjusted by payments to or from the broker ("variation margin") as the value of
the contract changes. No Fund will purchase or sell futures contracts or related
options for non-hedging purposes if as a result such Fund's initial margin
deposits on existing futures contracts plus premiums paid for outstanding
options on future contracts would be greater than 5% of the Fund's assets.
Positions in long futures contracts may be closed out only by entering into a
futures contract sale on the exchange where the futures are traded. The
liquidity of the futures markets could be adversely affected by "daily price
fluctuation limits" established by the exchange which limit the amount of
fluctuations in the price of futures contracts during a single trading day. In
such events, it may not be possible for the Fund to close out its futures
contract positions and, in the event of adverse price movements, the Fund would
continue to be exposed to the relevant market and be required to make daily
variation margin payments.
<PAGE>
OFFICERS AND TRUSTEES
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
Carol K. Burns Vice President and Assistant Clerk
Fred L. Kaufman Vice President and Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
