As filed with the Securities and Exchange Commission on October 28, 1998
Registration No. 33-46479
File No. 811-06602
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
---
Pre-Effective Amendment No.
Post-Effective Amendment No. 14 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
---
Amendment No. 17 X
THE PREFERRED GROUP OF MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
First Financial Plaza
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (309) 675-4999
Name and Address of Agent for Service:
Ronald R. Rossmann
THE PREFERRED GROUP OF MUTUAL FUNDS
First Financial Plaza
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602
Copy to:
J.B. Kittredge, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
The Registrant has previously registered an indefinite number or amount of its
shares of beneficial interest pursuant to Rule 24f-2. The Registrant filed a
Rule 24f-2 Notice on August 22, 1995.
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b),
X On November 1, 1998 pursuant to paragraph (b),
60 days after filing pursuant to paragraph (a)(1),
On _______________ pursuant to paragraph (a)(1),
75 days after filing pursuant to paragraph (a)(2), or
On _______________ pursuant to paragraph (a)(2), of Rule 485.
If appropriate, check the following box:
____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
-1-
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
CROSS-REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
Part A
Item No. Item Caption Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Schedule of Fund Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and
Policies; General Policies and
Risk Considerations;
Description of the Preferred
Group
5. Management of the Fund Schedule of Fund Expenses;
Investment Objectives and Policies;
General Policies and Risk
Considerations; Other Information;
Management of the Preferred
Group; Back Cover
5A. Management's Discussion (Contained in Registrant's Annual
of Fund Performance Report)
6. Capital Stock and Other How to Buy Shares; Exchanging
Securities and Redeeming Shares; Other
Information; Additional Shareholder
Services; Distributions; Choosing a
Distribution Option; Taxes;
Description of the Preferred Group
-1-
<PAGE>
7. Purchase of Securities How to Open Your Account; How
Being Offered to Buy Shares; Exchanging and
Redeeming Shares; Important
Information About Your Account;
Additional Shareholder Services;
Determination of Net Asset Value
and Pricing; Back Cover
8. Redemption or Repurchase Important Information About Your
Exchanging and Redeeming Shares; Account
9. Pending Legal Proceedings Not Applicable
Part B
Item No.
Statement of Additional
Item Caption Information Caption
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and Investment Restrictions; Options
Policies and Futures Transactions;
Miscellaneous Investment Practices;
Portfolio Transactions
14. Management of the Fund Management of the Trust
15. Control Persons and Management of the Trust
Principal Holders of
Securities
16. Investment Advisory and Management of the Preferred Group
Other Services (Part A); Management of the Trust;
Independent Accountants and
Financial Statements; Other
Services
-2-
<PAGE>
17. Brokerage Allocation and Portfolio Transactions
Other Practices
18. Capital Stock and Other Organization and Capitalization
Securities of the Trust
19. Purchase, Redemption and Amortized Cost and Daily
Pricing of Securities Valuation; Exchange Privilege;
Being Offered How to Buy; How to Redeem; How
New Asset Value is Determined
20. Tax Status Taxes
21. Underwriters Other Services
22. Calculation of Performance Calculation of Yield and Total
Data Return; Performance Comparisons;
Performance Data
23. Financial Statements Financial Statements
Part C
The information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of the Registration Statement.
-3-
<PAGE>
Logo
THE PREFERRED GROUP OF MUTUAL FUNDS
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, Illinois 61602-1104
Prospectus
November 1, 1998
================================================================================
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
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 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.
- --------------------------------------------------------------------------------
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. 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, 1998, 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
Schedule of Fund Expenses.............2
Financial Highlights..................4
Investment Objectives and Policies....8
Preferred Growth Fund.............8
Preferred Value Fund..............9
Preferred International Fund.....10
Preferred Small Cap Fund.........10
Preferred Asset Allocation Fund..11
Preferred Fixed Income Fund......13
Preferred Short-Term
Government Securities Fund....14
Preferred Money Market Fund......16
General Policies and
Risk Considerations...........17
Performance Information..............25
Your Preferred Group Account.........26
How to Buy Shares................26
Exchanging and Redeeming Shares..28
Important Information
About Your Account.............30
Additional Shareholder Services..31
Determination of Net Asset Value
and Pricing....................33
Other Information............... 34
Distributions....................34
Choosing a Distribution Option...35
Taxes............................35
Statements and Reports...........37
Management of The Preferred Group....37
Description of The Preferred Group...40
Appendix A...........................41
Appendix B...........................43
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
<PAGE>
Schedule of Fund Expenses
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(As a percentage of average net assets)
Total Fund
Fund Management Fees Other Expenses Operating Expenses
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------
Growth .75% .09% .84%
- -----------------------------------------------------------------------------------
Value .75% .09% .84%
- -----------------------------------------------------------------------------------
International .95% .27% 1.22%
- -----------------------------------------------------------------------------------
Small Cap .75% .15% .90%
- -----------------------------------------------------------------------------------
Asset Allocation .70% .22% .92%
- -----------------------------------------------------------------------------------
Fixed Income .50% .17% .67%
- -----------------------------------------------------------------------------------
Short-Term Gov't Securities .35% .25% .60%
- -----------------------------------------------------------------------------------
Money Market .30% .18% .48%
- -----------------------------------------------------------------------------------
</TABLE>
The purpose of the preceeding table is to assist in understanding the various
costs and expenses of The Preferred Group that are paid indirectly by
shareholders.
Example: Your investment of $1,000 would incur the following expenses assuming
5% annual return and redemption at the end of each period:
Fund 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Growth $9 27 47 104
- --------------------------------------------------------------------------------
Value 9 27 47 104
- --------------------------------------------------------------------------------
International 12 39 67 148
- --------------------------------------------------------------------------------
Small Cap 9 29 50 111
- --------------------------------------------------------------------------------
Asset Allocation 9 29 51 113
- --------------------------------------------------------------------------------
Fixed Income 7 21 37 83
- --------------------------------------------------------------------------------
Short-Term Government Securities 6 19 33 75
- --------------------------------------------------------------------------------
Money Market 5 15 27 60
- --------------------------------------------------------------------------------
NOTE: The figures shown in the example above 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,
PricewaterhouseCoopers 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
performance information, is available without charge upon request.
(Selected data for a share of beneficial interest outstanding throughout the
period)
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
------------------------------------------------------- -------------------------------------------------
NET TOTAL NET DISTRIBUTIONS
NET ASSET NET REALIZED INCOME DISTRIBUTIONS FROM NET DISTRIBUTIONS
VALUE, INVESTMENT AND (LOSS) FROM FROM NET REALIZED IN EXCESS
BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT GAINS ON OF REALIZED
OF YEAR (LOSS) GAIN (LOSS) OPERATIONS INCOME INVESTMENTS GAINS
- ---------------------------------------------------------------------------------------------------------------------------------
GROWTH
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $0.01 $2.42 $2.43 $(0.01) $ - $ -
1994 12.42 0.01 0.03 0.04 - - -
1995 12.46 0.01 4.24 4.25 (0.02) (0.06) -
1996 16.63 0.00 2.44 2.44 (0.01) (0.54) -
1997 18.52 0.00 4.76 4.76 - (2.86) -
1998 20.42 0.00 5.93 5.93 - (4.38) -
====== =============================================================================================================================
VALUE
Year Ended June 30,
1993 10.00 0.19 1.44 1.63 (0.11) - -
1994 11.52 0.19 (0.12) 0.07 (0.16) (0.10) -
1995 11.33 0.21 2.62 2.83 (0.20) (0.14) -
1996 13.82 0.20 3.13 3.33 (0.21) (0.29) -
1997 16.65 0.19 5.10 5.29 (0.20) (0.58) (0.02)
1998 21.14 0.28 5.29 5.57 (0.22) - -
====================================================================================================================================
INTERNATIONAL
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38) (0.03) - -
1994 9.59 0.08 2.47 2.55 (0.07) (0.05) -
1995 12.02 0.18 0.60 0.78 (0.13) (0.26) (0.17)
1996 12.24 0.19 1.47 1.66 (0.17) (0.01) -
1997 13.72 0.33 2.67 3.00 (0.35) (0.25) -
1998 16.12 0.26 0.76 1.02 (0.24) (0.72) -
====================================================================================================================================
SMALL CAP (Commenced investment operations on November 1, 1995)
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27 (0.02) - -
1997 11.25 0.06 3.18 3.24 (0.03) (0.16) -
1998 $14.30 $0.03 $3.17 $3.20 $(0.08) $(1.83) $ -
<CAPTION>
DISTRIBUTIONS RATIOS TO AVERAGE NET ASSETS
----------------- ---------------------------------
OPERATING
NET ASSET TOTAL NET EXPENSES NET
VALUE, RETURN AT ASSETS, BEFORE INVESTMENT PORTFOLIO
TOTAL END OF NET ASSET END OF OPERATING VOLUNTARY INCOME TURNOVER
DISTRIBUTIONS YEAR VALUE 1 YEAR EXPENSES WAIVER (LOSS) RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH
Year Ended June 30,
1993 $(0.01) $12.42 24.25% $117,706,665 1.00% - 0.07% 58.12%
1994 - 12.46 0.34% 171,467,064 0.91% - 0.13% 51.56%
1995 (0.08) 16.63 34.21% 374,592,700 0.87% - 0.13% 55.32%
1996 (0.55) 18.52 14.96% 411,688,146 0.86% - (0.16%) 75.24%
1997 (2.86) 20.42 28.57% 455,021,877 0.84% - (0.13%) 58.31%
1998 (4.38) 21.97 33.44% 506,830,491 0.84% - (0.08%) 70.35%
====================================================================================================================================
VALUE
Year Ended June 30,
1993 (0.11) 11.52 16.37% 121,511,090 0.96% - 1.79% 17.77%
1994 (0.26) 11.33 0.60% 121,088,130 0.93% - 1.64% 11.95%
1995 (0.34) 13.82 25.72% 212,678,363 0.89% - 1.95% 29.02%
1996 (0.50) 16.65 24.49% 267,581,693 0.85% - 1.23% 17.04%
1997 (0.80) 21.14 32.62% 373,673,368 0.85% - 1.06% 7.23%
1998 (0.22) 26.49 26.51% 413,609,843 0.84% - 1.03% 10.14%
====================================================================================================================================
INTERNATIONAL
Year Ended June 30,
1993 (0.03) 9.59 (3.77%) 39,126,841 1.60% - 1.83% 16.21%
1994 (0.12) 12.02 26.66% 94,933,414 1.38% - 1.37% 27.78%
1995 (0.56) 12.24 6.70% 118,216,038 1.32% - 1.65% 29.47%
1996 (0.18) 13.72 13.70% 157,627,409 1.31% - 1.64% 19.61%
1997 (0.60) 16.12 22.50% 265,292,395 1.25% - 2.66% 13.16%
1998 (0.96) 16.18 7.18% 284,056,103 1.22% - 1.76% 17.08%
====================================================================================================================================
SMALL CAP
Period Ended June 30,
1996+ (0.02) 11.25 12.67%*++ 45,692,712 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++
1997 (0.19) 14.30 29.00%* 84,877,805 0.88% 0.98% 0.66% 104.45%
1998 $(1.91) $15.59 23.45% $136,303,463 0.90% - 0.29% 105.32%
====================================================================================================================================
1 Total return at net asset value assumes reinvestment of dividends and capital gains distributions.
* Total return for the Small Cap Fund would have been lower if a portion of the fees had not been waived/reimbursed by the
adviser.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
<PAGE>
(Selected data for a share of beneficial interest outstanding throughout the
period)
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
------------------------------------------------------- ----------------------------------------------------
NET TOTAL NET DISTRIBUTIONS
NET ASSET NET REALIZED INCOME DISTRIBUTIONS FROM NET DISTRIBUTIONS
VALUE, INVESTMENT AND (LOSS) FROM FROM NET REALIZED IN EXCESS
BEGINNING INCOME UNREALIZED INVESTMENT INVESTMENT GAINS ON OF REALIZED
OF YEAR (LOSS) GAIN (LOSS) OPERATIONS INCOME INVESTMENTS GAINS
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $0.34 $0.99 $1.33 $(0.34) $(0.09) $ -
1994 10.90 0.30 (0.42) (0.12) (0.30) (0.21) -
1995 10.27 0.38 1.79 2.17 (0.38) (0.09) -
1996 11.97 0.40 1.72 2.12 (0.40) (0.81) -
1997 12.88 0.44 2.17 2.61 (0.44) (0.53) -
1998 14.52 0.47 2.51 2.98 (0.47) (1.38) -
====================================================================================================================================
FIXED INCOME
Year Ended June 30,
1993 10.00 0.51 0.71 1.22 (0.51) (0.11) -
1994 10.60 0.47 (0.50) (0.03) (0.47) (0.14) (0.16)
1995 9.80 0.58 0.50 1.08 (0.58) - -
1996 10.30 0.58 (0.16) 0.42 (0.58) (0.05) -
1997 10.09 0.64 0.19 0.83 (0.64) (0.04) -
1998 10.24 0.64 0.29 0.93 (0.64) (0.11) -
====================================================================================================================================
SHORT-TERM GOVERNMENT SECURITIES
Year Ended June 30,
1993 10.00 0.39 0.23 0.62 (0.39) (0.15) -
1994 10.08 0.37 (0.29) 0.08 (0.37) - (0.02)
1995 9.77 0.51 0.03 0.54 (0.51) - -
1996 9.80 0.53 (0.04) 0.49 (0.53) - -
1997 9.76 0.53 0.02 0.55 (0.53) - -
1998** 9.78 0.56 (0.01) 0.55 (0.56) - -
====================================================================================================================================
MONEY MARKET
Year Ended June 30,
1993 1.00 0.03 - 0.03 (0.03) - -
1994 1.00 0.03 - 0.03 (0.03) - -
1995 1.00 0.05 - 0.05 (0.05) - -
1996 1.00 0.05 - 0.05 (0.05) - -
1997 1.00 0.05 - 0.05 (0.05) - -
1998 $1.00 $0.05 $ - $0.05 $(0.05) $ - $ -
<CAPTION>
DISTRIBUTIONS RATIOS TO AVERAGE NET ASSETS
----------------- ---------------------------------
OPERATING
NET ASSET TOTAL NET EXPENSES NET
VALUE, RETURN AT ASSETS, BEFORE INVESTMENT PORTFOLIO
TOTAL END OF NET ASSET END OF OPERATING VOLUNTARY INCOME TURNOVER
DISTRIBUTIONS YEAR VALUE 1 YEAR EXPENSES WAIVER (LOSS) RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET ALLOCATION
Year Ended June 30,
1993 $(0.43) $10.90 13.57% $48,420,381 1.27% - 3.25% 34.10%
1994 (0.51) 10.27 (1.28%) 58,961,139 1.25% - 2.76% 24.71%
1995 (0.47) 11.97 21.70% 77,745,018 1.11% - 3.52% 18.27%
1996 (1.21) 12.88 18.23% 96,889,348 1.04% - 3.21% 38.25%
1997 (0.97) 14.52 21.01% 28,884,756 0.99% - 3.29% 27.73%
1998 (1.85) 15.65 21.84% 171,833,566 0.92% - 3.19% 27.90%
====================================================================================================================================
FIXED INCOME
Year Ended June 30,
1993 (0.62) 10.60 12.59% 35,889,454 1.05% - 4.91% 316.06%
1994 (0.77) 9.80 (0.46%) 45,872,668 0.97% - 4.53% 254.92%
1995 (0.58) 10.30 11.48% 57,911,899 0.95% - 5.94% 330.55%
1996 (0.63) 10.09 4.12% 111,184,492 0.93% - 5.65% 313.51%
1997 (0.68) 10.24 8.39% 140,158,482 0.74% - 6.32% 105.98%
1998 (0.75) 10.42 9.32% 151,204,274 0.67% - 6.16% 143.66%
====================================================================================================================================
SHORT-TERM GOVERNMENT SECURITIEES
Year Ended June 30,
1993 (0.54) 10.08 6.32% 27,027,485 0.78% - 3.87% 268.36%
1994 (0.39) 9.77 0.86% 30,271,535 0.74% - 3.75% 134.34%
1995 (0.51) 9.80 5.71% 32,121,171 0.71% - 5.27% 256.44%
1996 (0.53) 9.76 5.10% 51,755,317 0.66% - 5.37% 79.04%
1997 (0.53) 9.78 5.81% 54,807,409 0.63% - 5.49% 183.73%
1998** (0.56) 9.77 5.72% 60,236,281 0.60% - 5.67% 263.47%
====================================================================================================================================
MONEY MARKET
Year Ended June 30,
1993 (0.03) 1.00 2.71%* 18,146,496 0.80% 0.87% 2.67% N/A
1994 (0.03) 1.00 2.91%* 45,605,598 0.53% 0.68% 2.97% N/A
1995 (0.05) 1.00 5.27%* 79,585,753 0.39% 0.54% 5.24% N/A
1996 (0.05) 1.00 5.32%* 90,482,435 0.49% 0.54% 5.25% N/A
1997 (0.05) 1.00 5.14% 109,682,146 0.48% - 5.03% N/A
1998 $(0.05) $1.00 5.40% $104,167,524 0.48% - 5.28% N/A
====================================================================================================================================
</TABLE>
1 Total return at net asset value assumes reinvestment of dividends and capital
gains distributions.
* Total return for the Money Market Fund would have been lower if a portion of
the fees had not been waived/reimbursed by the adviser.
** Shareholders holding a majority of the Short-Term Government Fund's shares
approved a new subadviser agreement for the Fund with J.P. Morgan Investment
Management, Inc., which assumed primary responsibility for the day-to-day
management of the Fund's portfolio on November 1, 1997. Caterpillar
Investment Management Ltd. reassumed primary responsibility for the
day-to-day management of the Fund's portfolio on April 1, 1998.
<PAGE>
Investment Objectives and Policies
- ----------------------------------
The investment objective and policies of each Fund are stated on the following
pages. We cannot assure that any Fund will achieve its objective.
Each Fund (other than the Short-Term Government Securities Fund and Money Market
Fund) may transact in options and futures contracts, and each Fund (other than
the Short-Term Government Securities Fund and Money Market Fund) may invest in
securities traded principally outside the United States. For more information,
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 providing a continuing investment program for the Funds in
accordance with the investment objectives and policies of each Fund. To assist
it in carrying out its responsibility, CIML has retained various subadvisers to
provide 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/Executive Vice President, Jennison
- --------------------------------------------------------------------------------
Last Five Years Experience: Portfolio Manager/Research Analyst at Jennison. 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
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Growth Fund seeks long-term capital
appreciation.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities (common stocks, preferred stocks and securities
convertible to common or preferred stocks) believed by Jennison to offer the
potential for capital appreciation. These securities include stocks of companies
that are experiencing above-average earnings growth.
When selecting securities, Jennison considers 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.
<PAGE>
A portion of the Fund's assets may be invested in 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. They may be more severely
affected by economic downturns or other adverse developments than are larger,
more established companies. Securities of these companies often trade less
frequently and in lower volume, and they may be subject to more upside or
downside risk than securities of larger, more established companies.
Preferred Value Fund
================================================================================
Subadviser: Oppenheimer Capital
- --------------------------------------------------------------------------------
Portfolio Manager: John G. Lindenthal
- --------------------------------------------------------------------------------
Title: Managing Director, Oppenheimer Capital
- --------------------------------------------------------------------------------
Last Five Years Experience: Portfolio Manager at Oppenheimer Capital. John has
managed the Preferred Value Fund since its inception on July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.S., MBA--University of Santa Clara
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Value Fund seeks capital appreciation and
current income.
Under normal market conditions, the Fund invests at least 65% of
its total assets in equity securities (common stocks, preferred stocks and
securities convertible to common or preferred stocks) that Oppenheimer Capital
believes are undervalued and that offer above-average potential for capital
appreciation. Oppenheimer Capital builds the Fund one stock at a time by
conducting in-depth research to identify companies it believes have strong
businesses and are selling at reasonable prices.
Oppenheimer Capital believes these companies have three basic traits:
1. They have a competitive advantage versus other companies within their
industries, a feature that will enable them to sustain their profitability.
2. They have capable management teams who focus on working hard for shareholders
through effective use of discretionary cash, such as reinvesting in
profitable business activities, making astute acquisitions and paying
dividends.
3. Their stocks can be purchased at favorable prices.
In short, the focus is on investments in companies that Oppenheimer Capital
believes to have solid fundamentals to support their businesses in good economic
times and bad, with strong prospects for the long term.
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.
<PAGE>
Preferred International Fund
================================================================================
Subadviser: Mercator Asset Management, L.P. ("Mercator")
- --------------------------------------------------------------------------------
Portfolio Manager: Peter F. Spano, CFA
- --------------------------------------------------------------------------------
Title: President, PXS Corp., General Partner
- --------------------------------------------------------------------------------
Last Five Years Experience: Portfolio Manager at Mercator. Pete has managed the
Preferred 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
- --------------------------------------------------------------------------------
Investment Objective: The Preferred International Fund seeks long-term capital
appreciation.
The International Fund invests primarily in equity securities (common stocks,
preferred stocks and securities convertible to common or preferred stocks)
traded principally outside the United States, including emerging markets, that
Mercator believes are undervalued and offer above-average potential for capital
appreciation. Under normal market conditions, the International Fund invests at
least 65% of its total assets in at least three countries, not including the
United States.
The Fund may also purchase corporate and government bonds, including domestic
bonds. The Fund may also invest in:
1. Bankers' acceptances or negotiable bank certificates of deposit issued by
U.S. 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;
2. Prime commercial paper issued by companies having an outstanding debt issue
rated at least A or Prime-2 by Moody's or A or A-2 by S&P or, if not rated,
of comparable quality as determined by Mercator;
3. High-grade short-term corporate obligations rated at least A by Moody's or
S&P.
The securities markets of many nations can be expected to move relatively
independently of one another. Business cycles and other economic or political
events that influence one country's securities markets may have little effect on
the markets of other countries. The International Fund seeks to reduce the risks
associated with investing in the economy of only one country through
diversification. However, investments in foreign securities involve certain
risks. See "General Policies and Risk ConsiderationsFactors 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. Todd has been involved
in the management of the Preferred Small Cap Fund since its inception on
November 1, 1995.
- --------------------------------------------------------------------------------
Education: B.S.--University of Illinois; Chartered Financial Analyst
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Small Cap Fund seeks long-term capital
appreciation through investments in companies with small equity capitalizations.
<PAGE>
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities (common stocks, preferred stocks and securities
convertible to common or preferred stocks) of small-capitalization issuers.
(Small capitalization companies are 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 such factors as
earnings, price/cash flow ratio, market price/book value ratio and
earnings/price ratio.
The Fund may also invest in other securities, including equity and
equity-related securities of large-capitalization issuers, obligations issued or
guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities, corporate bonds rated at least A by Moody's or S&P at the
time of purchase, and short-term debt obligations rated at least Prime-2 by
Moody's or A-2 by S&P at the time of purchase. If corporate bonds or short-term
debt obligations do not have these ratings, they must be of at least equivalent
quality as determined by CIML.
Stocks of small-capitalization companies may be traded over-the-counter, and
these companies may have limited operating histories. These companies may have
more restricted product lines or more limited financial resources than larger,
more established companies. 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 they may be subject to greater
volatility than are 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 Preferred 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
- --------------------------------------------------------------------------------
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 Preferred Asset Allocation Fund since its inception on
July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.S.--Montclair State College; MBA--Rutgers University
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Asset Allocation Fund seeks both capital
appreciation and current income.
The Fund allocates its assets among stocks, bonds and money market instruments.
Mellon and PanAgora each manage approximately one-half of the Fund's assets
(although these proportions may vary due to differential performance). All
amounts received by the for sales of its shares and paid by the Fund for
redemptions of its shares are split evenly between Mellon and PanAgora. The
portions of the Fund's assets invested in stocks, bonds and money market
instruments vary from time to time in light of changes in interest rates and
other economic factors. The Fund may invest in any combination of these asset
classes without limit.
<PAGE>
How Mellon Manages the Fund.
Mellon allocates the Fund's assets among three asset classes: stocks, bonds and
money market instruments. The allocation among asset classes is based on
expected returns, risks and risk/return correlations among the three asset
classes.
The Fund may invest in common stocks that are in the S&P 500 Index, long-term
U.S. Treasury bonds and money market instruments. The Fund's money market
investments are limited to short-term investments meeting one of the following
criteria:
1. Rated Prime-1 by Moody's or A-1 by S&P at the time of purchase;
2. Unrated securities that Mellon determines to be of a quality comparable to
Moody's Prime-1 or S&P's A-1 ratings; or
3. Repurchase agreements with respect to U.S. Government securities.
Mellon may use financial futures and related options to achieve a substantial
portion of the Fund's exposure to the stock and bond markets. For instance,
Mellon may increase the Fund's exposure to stocks by investing in S&P 500
futures contracts. Similarly, Mellon may increase the Fund's exposure to bonds
by investing in futures contracts on U.S. Treasury bonds. The Fund may make
other types of investments, such as in asset-backed securities. These investment
strategies are described in more detail in "General Policies and Risk
Considerations."
How PanAgora Manages the Fund.
PanAgora's proprietary asset allocation discipline provides percentage
guidelines for a mix of holdings among stocks, bonds and money market
instruments. These guidelines are established by comparing the expected
performance for each investment class with its current performance (as measured
by the S&P 500, the Lehman Brothers Long-Term Treasury Index; and 3-month and
1-year Treasury bills, respectively). 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
analysis of the class's long-term performance. Leading economic and capital
market indicators are also used to establish PanAgora's guidelines.
In selecting stocks for the Fund, PanAgora generally purchases stocks in order
to replicate the S&P 500 Index.
In selecting bonds, the Fund invests in highly liquid securities that are issued
by the U.S. Government and included in the Lehman Brothers Long-Term Treasury
Index. PanAgora generally selects bonds to match the Lehman Index in maturity,
quality, sector and coupon characteristics. Typically, the average maturity of
these securities is approximately 10 years, although the Fund may invest in
securities with longer or shorter maturities at the discretion of PanAgora.
PanAgora may achieve a substantial portion of the Fund's exposure to the stock
and bond markets using financial futures and related options.
<PAGE>
For 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 for 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 Preferred Fixed Income Fund since January 1, 1994.
- --------------------------------------------------------------------------------
Education: B.S.E.E.--University of Pennsylvania
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Fixed Income Fund seeks a high level of
current income consistent with investment in a diversified portfolio of debt
securities.
Under normal market conditions, the Fund invests at least 65% of its total
assets in fixed income securities. The Fund invests primarily in publicly traded
domestic debt securities (such as U.S. Treasury and agency obligations,
mortgage-backed securities and corporate debt securities).
The Fund may, however, invest in any fixed income securities such as corporate
private placements, directly-placed mortgage obligations and foreign currency
denominated bonds, and including, for this purpose, preferred stocks. For
temporary or defensive purposes, Morgan may also invest in money market
instruments.
The Fund allocates its investments among different fixed income security market
sectors based on the relative attractiveness of each sector. Following these
sector allocations, Morgan purchases securities it believes are attractively
valued within these sectors.
Under normal market conditions, Morgan manages the Fund's portfolio subject to
the following investment guidelines:
1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments) of A as rated by either Moody's or S&P. To calculate
this average credit requirement, instruments that are not rated are assigned
a rating by Morgan.
2. Minimum credit quality for short-term investments at the time of purchase of
Prime-1 as rated by Moody's or A-1 as rated by S&P.
The Fund's portfolio generally has 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 by Moody's or BBB by S&P, or in any unrated security that Morgan
determines is of comparable quality. In addition, it may invest up to 5% of its
assets in any security which is rated, at the time of purchase, below Baa by
Moody's or BBB by S&P, or in any unrated security that Morgan determines is of
comparable quality.
<PAGE>
Securities rated lower than A by either Moody's or S&P have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to late or defaulted payments on these obligations than on
higher-rated securities. If the rating of any security held by the Fund falls
below its rating at the time of purchase, the Fund is not obligated to dispose
of it.
The values of debt securities change
as interest rates change. Investments in lower-quality fixed income securities
generally provide more income than investments in higher-rated securities.
However, lower-quality securities are subject to greater market fluctuations and
more risk of losing income and principal than are higher-rated securities.
Fluctuations in the value of portfolio securities do 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: Todd M. Sheridan, CFA
- --------------------------------------------------------------------------------
Title: Senior Portfolio Manager, CIML
- --------------------------------------------------------------------------------
Last Five Years Experience: Portfolio Manager at CIML. Todd has managed the
Preferred Short-Term Government Securities Fund since June 1998 and
participated in the management of the Preferred Short-Term Government
Securities Fund from January 1, 1993, through June 28, 1995.
- --------------------------------------------------------------------------------
Education: B.S.--University of Illinois;
Chartered Financial Analyst
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Short-Term Government Securities Fund seeks
high current income, consistent with preservation of capital.
The Fund invests primarily in securities issued or guaranteed by the U.S.
Government and its agencies, authorities or instrumentalities. Some of these
U.S. Government securities, such as U.S. Treasury bills, notes and bonds,
mortgage participation certificates guaranteed by the Government National
Mortgage Association ("Ginnie Mae"), and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
<PAGE>
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
securities are supported only by the credit of a government agency or similar
body.
Bodies whose obligations are not backed by the full faith and credit of the U.S.
Government include 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 and other U.S. Government securities representing ownership
interests in mortgage pools.
Under normal market conditions, the Fund invests at least 65% of its total
assets in U.S. Government securities and related repurchase agreements. In order
to reduce risk, the Fund maintains an average dollar-weighted portfolio maturity
of not more than three years, and it typically purchases 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. As a result, the yields
from U.S. Government securities are generally lower than the yields 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 do 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. ("Morgan")
- --------------------------------------------------------------------------------
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 Preferred Money Market Fund since its inception on
July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.A.--Dartmouth College
- --------------------------------------------------------------------------------
Investment Objective: The Preferred Money Market Fund seeks the maximum current
income believed to be consistent with preservation of capital and maintenance of
liquidity.
The Fund invests in a portfolio of
U.S. dollar-denominated, short-term, fixed income instruments, including:
- - Short-term U.S. Government securities;
- - Certificates of deposit and bankers' acceptances;
- - Prime commercial paper;
- - High-quality, short-term corporate obligations; and
- - Repurchase agreements with respect to U.S. Government securities.
All of the Fund's investments have remaining maturities of 397 days or less at
the time of investment. The average dollar-weighted maturity of the Fund's
portfolio is 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 assets in bank obligations.
Because of the high quality and short maturity of the Fund's investments, the
Fund's yield may be lower than that of funds investing in lower-rated securities
and securities of longer maturities. Unlike investments which pay a fixed yield
for a stated period of time, yields of money market funds fluctuate.
For more information about the securities in which the Fund may invest, see
"General Policies and Risk Considerations --Money Market Instruments."
<PAGE>
General Policies
and Risk Considerations
Portfolio Turnover
================================================================================
Portfolio turnover is not a limiting factor in investment decisions. High
portfolio turnover involves higher brokerage commissions and other transaction
costs on the sale of securities and reinvestment in other securities that are
borne directly by the Funds. These transactions may also result in the
realization of taxable capital gains. Portfolio turnover rates for the life of
each Fund 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 that agency's two highest
grades, or unrated but determined to be comparable by CIML or Morgan. 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 that
agency's two highest grades, or if not rated, of comparable quality as
determined by the subadviser to the Fund according to procedures approved by
The Preferred Group's Trustees.
4. Corporate obligations with an initial maturity of over 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 that
agency's highest grade.
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 above kinds of money market instruments. However,
determinations of the quality of unrated securities may be made by each Fund's
subadviser.
<PAGE>
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,
dividend accruals and portfolio allocation purposes, as follows:
To increase current return, the Fixed Income Fund may write covered call and
covered put options on any security that it is eligible to purchase. Use of
these options may accelerate or adversely impact the characterization of income
to the Fund. For hedging purposes, it may:
- - Purchase call options on securities it expects to acquire and put options on
securities it holds; and
- - Purchase and sell futures contracts on U.S. Government securities and purchase
and write options on these futures contracts.
The Growth, Value, International, Small Cap and Asset Allocation Funds may each:
- - Purchase call and put options, and purchase warrants, on securities that they
are eligible to purchase;
- - Write covered call and covered put options on these securities; and
- - 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 these 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, as
a hedge, sell a currency futures contract or a related call option or purchase a
related put option. If it is anticipated that exchange rates for a particular
currency will rise, a Fund may purchase a currency futures contract or a related
call option or sell (write) a related put option to protect against an increase
in the price of securities denominated in the currency the Fund intends to
purchase.
These futures contracts and related options are used only as a hedge against
anticipated currency rate changes, and all options on currency futures written
by the Funds are covered. These practices, however, may present risks different
from or in addition to the risks associated with investments in foreign
currencies.
<PAGE>
The Growth, Value, Small Cap, Asset Allocation and Fixed Income Funds may each
invest up to 5% of its assets in foreign currencies, foreign currency forward
contracts, or foreign currency futures contracts and related options.
Hedging strategies may reduce but will not eliminate fluctuations in a Fund's
net asset value. No Fund engages 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 mayn 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 each may invest up
to 10% of its assets in securities traded principally in securities markets
outside the United States. (Eurodollar certificates of deposit are excluded from
these limitations.)
These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded abroad, may
involve certain special risks due to foreign economic, political and legal
developments. These developments may include 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 abroad.
The International Fund may also invest in countries whose economies or
securities markets are not highly developed. Special considerations associated
with these investments (in addition to the considerations regarding foreign
investments generally) may include greater political uncertainty, 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 these securities, and delays and disruptions in securities
settlement procedures.
<PAGE>
If a Fund invests in foreign currency-denominated debt obligations and
hedging activities, its book income is likely to differ from 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 would continue to benefit from
interest on the securities loaned and would also receive either interest,
through investment of cash collateral by the Fund in permissible investments, or
a fee. Securities lending involves the risk of of rights in the collateral or
delay in recovery of the collateral if the borrower fails 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 further payment.
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 these 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").
All Funds may also enter into forward commitments to sell securities. The Funds
may simultaneously be obligated under 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 before the settlement date. This risk is in addition to the
risk that the value of the Fund's other assets may decline. No income accrues to
the purchaser of these securities before delivery.
<PAGE>
Repurchase Agreements
================================================================================
Each of the Funds may enter into repurchase agreements with banks and
broker-dealers. Under a repurchase agreement, 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 greater than the acquisition
price and reflects an agreed-upon market rate unrelated to the coupon rate on
the purchased security. These transactions give the Fund an opportunity 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
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. Because of the pass-through of prepayments of principal
on the underlying mortgages, mortgage-backed securities are often subject to
more rapid prepayment of principal than their stated maturity. 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 they affect the yield and price of the
securities. During periods of declining interest rates, 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 when interest rates are falling is limited
because of the prepayment feature.
CMOs, which are commonly considered to be "derivatives," are securities backed
by a portfolio of mortgages or mortgage-backed securities held under an
indenture agreement. 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 and/or principal on the underlying collateral. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. If there are enough early prepayments on these
mortgages, the class or series of CMOs first to mature generally would be
retired prior to its maturity. Therefore, the early retirement of a particular
class or series of a CMO held by a Fund has 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 CMOs, although other structures are possible. They
may pay fixed or adjustable rates of interest. Commercial mortgage-related
securities are 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 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. They also may not be
fully amortizing, which means 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. (Zero-coupon securities
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.) See "Taxes"
for a discussion of the tax consequences of zero-coupon securities.
The Fixed Income and Short-Term Government Securities Funds may also invest in
"IO/PO Strips" (certificates that represent undivided interests in "stripped"
U.S. Government securities and coupons). 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.
<PAGE>
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 subadviser under procedures approved by The Preferred Group's Trustees. All
other IO/PO Strips are considered illiquid. If either Fund invests in IO/PO
Strips that are "stripped" by private entities, these securities are not
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 or entity (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. Therefore the Fund may have
to sell other investments to obtain cash needed to make income distributions.
Illiquid Securities
================================================================================
Each Fund may purchase "illiquid securities." This includes 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% (10%
for the Money Market Fund) as of the date of this Prospectus) would be invested
in these illiquid securities. There may be relatively few potential purchasers
for these securities, especially under adverse market or economic conditions or
if the financial condition of the issuer deteriorates.
A Fund could find it more difficult to sell these securities when CIML or the
subadviser believes it advisable to do so or may be able to sell these
securities only at prices lower than if the securities were not subject to
restrictions on disposition. At times, it may also be more difficult to
determine the fair value of these securities in computing a Fund's net asset
value. Illiquid securities 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).
Certain securities whose disposition is restricted by the securities laws, such
as securities eligible for resale to qualified institutions under Rule 144A and
privately-placed commercial paper, may be determined by CIML or the subadviser
to be liquid (and so not subject to the 15% or 10% limitations) under procedures
approved by the Preferred Group's Trustees. It is possible that, despite this
determination, there may be relatively few potential purchasers for these
securities and they may therefore be subject to the risks described above.
Limiting Investment Risk
================================================================================
Specific investment restrictions help the Funds limit investment risks for their
shareholders. These restrictions prohibit:
- - Each Fund from investing more than 5% of its assets in the securities
of any one issuer (other than U.S. Government securities and related
repurchase agreements), although up to 25% of the assets of each Fund
may be invested without regard to this restriction.*
- - Each Fund from investing 25% or more of its 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 each foreign government and its agencies or
instrumentalities constitute a separate industry. Issuers of U.S. Government
securities and related repurchase agreements are not subject to this
limitation.)*
<PAGE>
- - Each Fund from investing more than 5% of its 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. (However, this restriction does not include CMOs,
asset-backed securities, U.S. Government securities and related repurchase
agreements.)
"Fundamental" Policies
================================================================================
Restrictions marked with an asterisk (*) above are summaries of fundamental
policies and therefore may only be changed with shareholder approval. 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 are measured when a
security is purchased and are not considered violated unless an excess or
deficiency exists immediately after and as a result of the 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 financial situation
and needs.
Year 2000 Issues
================================================================================
The Funds could be adversely affected if the computer systems used by CIML and
the Funds' other service providers do not properly process and calculate
date-related information relating to the end of this century and the beginning
of the next. While year 2000-related computer problems could have a negative
effect on the Funds, both in their operations and in their investments, CIML is
working to avoid such problems and to obtain assurances from service providers
that they are taking similar steps. No assurances, however, can be provided that
the Funds will not be adversely impacted by these matters.
<PAGE>
Performance Information
From time to time The Preferred Group may make certain information available
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 through the most recent calendar quarter
in advertisements or other written material. Total Return for the one-, three-
and five-year periods and for the life of a Fund represents the average annual
compounded rate of return on an investment of $1,000 in the Fund.
The Asset Allocation, Fixed Income and Short-Term Government Securities Funds
may each advertise its Yield, accompanied by its Total Return. A Fund's Yield is
computed by dividing the net investment income per share earned during a recent
one-month period by the net asset value per share (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the last day
of the period.
The Money Market Fund may advertise its Yield and Effective Yield. The Money
Market Fund's Yield is based upon the income earned by the Fund over a seven-day
period and then annualized, that is, the income earned in the period is assumed
to be earned every seven days over a 52-week period and is stated as a
percentage of the investment. Effective Yield is calculated similarly. However,
when Effective Yield is annualized, the earned income is assumed to be
reinvested in Fund shares and is therefore compounded over 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;
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>
Your Preferred Group
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 are not 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 are generally 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 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). We are happy to assist you.
The following account procedures may not be pertinent to institutional or
employer-sponsored retirement plan accounts. Please call 1-800-662-2465 with
institutional questions.
<PAGE>
How to Buy Shares
================================================================================
You can purchase shares of any Fund by using one of the four methods described
on the following pages.
For new accounts, please mail us your New Account Registration Form and check in
the return envelope provided. For additional investments, please write your
account number on your check and use the remittance form attached to your
confirmation statement. Mail your check in the return envelope provided. All
checks should be made payable to "The Preferred Group (name of Fund)." Third
party checks are not accepted. Please mail all purchase requests to one of the
following addresses:
Regular Mail:
The Preferred Group
P.O. Box 8320
Boston, MA 02266-8320
Registered, Express or Certified Mail:
The Preferred Group
2 Heritage Drive
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.
<TABLE>
<CAPTION>
Additional
Method Initial Investments Minimum 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 all choices below, please call 1-800-662-GROW
<TABLE>
<CAPTION>
Method Initial Investment Minimum Additional Investments Minimum
=====================================================================================
<S> <C> <C>
BY EXCHANGE $1,000 $50
(from another Fund)
- --------------------------------------------------------------------------------------
The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."
<CAPTION>
Method Initial Investment Minimum Additional Investments Minimum
=======================================================================================
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
=======================================================================================
BY MONEY EXPRESS Not Available $50
(Electronic Funds
Transfer Option)
- ---------------------------------------------------------------------------------------
This service may be used only if you authorize it on your account application.
The maximum transfer amount is $50,000.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exchanging and Redeeming Shares
================================================================================
Shares may be exchanged or redeemed on the basis of their 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 one 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.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
For All Options Below, Call Investor Services at 1-800-662-GROW
Method Instructions
================================================================================
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
fee for wire redemptions, minimum $100, subject to change without
notice. Your bank may also charge you for receiving wires.
- --------------------------------------------------------------------------------
BY CHECK If you have authorized the check writing feature on your account
application, you may redeem shares in your account provided that the
appropriate signatures are on your check. The minimum check amount is
$250. There is no charge for this service, and you may write an
unlimited number of checks, provided the account minimum of $1,000 per
Fund is maintained. Check writing privileges apply to the Money Market
and the Short-Term Government Securities Funds ONLY.
- --------------------------------------------------------------------------------
BY MONEY If you have authorized the Preferred Money Express feature on your
EXPRESS account application, you may redeem by electronic funds transfer. The
maximum redemption amount is $50,000.
- --------------------------------------------------------------------------------
BY WIRE If you have authorized the Wire Transfer feature on your account
application, you may have your redemption proceeds wired to your bank
on the next business day after the redemption is processed. The
Preferred Group's bank charges a $10 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. If redemptions are made in
securities rather than cash, the securities are valued using the procedures
described under "Determination of Net Asset Value and Pricing."
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. However, 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 are 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.
Intermediaries
If you purchase or redeem Preferred Group shares through a registered
broker-dealer, a bank, an investment adviser, or other third party, those
entities may charge you 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.
<PAGE>
You will generally 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;
6. Send proceeds to an account address which has been changed within 30 days of
the redemption request; and
7. Pay the proceeds to a corporation, partnership, trust or fiduciary.
Telephone Exchange and Redemption
The Preferred Group may accept telephone redemption or exchange instructions
from any person with respect to accounts of shareholders who elect this service.
The Preferred Group employs reasonable procedures to verify that telephone
requests for redemptions and exchanges are genuine, such as 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 these
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 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 need to sign up for Preferred Money Express on your account
application to use this service.
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(R) 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. The Preferred Group
records telephone transactions to verify data concerning these transactions.
<PAGE>
Systematic Savings Plan
This plan allows you to make monthly or quarterly investments automatically 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 authorization 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.
Tax-Qualified Retirement Plans
Tax-deferred individual retirement plans are available. Please call Investor
Services for details and the appropriate forms for:
- - Individual Retirement Accounts (IRAs). Any wage earner between 18 and 70
1/2 years of age can contribute up to $2,000 per tax year. 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 these 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.
<PAGE>
- - 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 a 20% tax withholding. You can
also roll over an existing IRA to 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
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
regular business day. The Preferred Group reserves the right to accept or reject
any order for the purchase of Fund shares.
Redemption share price
If your redemption request is received prior to 4:00 p.m. (Eastern time) in good
order on a regular business day, your shares will be priced at that day's net
asset value. Redemption proceeds will normally be sent on the following business
day. Redemption requests received after 4:00 p.m. (Eastern time) will be
processed on the business day following receipt.
Exchange share price
Exchanges are priced in the same manner as purchases and redemptions.
Determination of NAV
Each Fund's share price is calculated by dividing the total value of each Fund's
assets, minus liabilities, by the total number of outstanding shares. Portfolio
securities, options and futures contracts for which reliable market quotations
are readily available are valued at market value. Short-term obligations having
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. The portfolio investments of the Money Market Fund
are valued using the amortized cost method of valuation, in accordance with Rule
2a-7 under the Investment Company Act of 1940. All other securities and assets
are valued at their fair value as determined in good faith following procedures
approved by the Trustees.
<PAGE>
General
Please note that The Preferred Group does not accept requests which specify a
particular date for purchases or redemptions, or which specify any special
conditions. We will notify you if your request cannot be accepted and provide
additional instructions.
Other Information
================================================================================
The Trust may pay brokerage commissions to brokers that are affiliated with the
adviser or subadvisers. 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, 1998.
Distributions
================================================================================
General
The Fixed Income, Short-Term Government Securities and Money Market Funds
declare dividends daily and pay them monthly. The Asset Allocation Fund declares
and pays dividends quarterly. The Growth, Value, International and Small Cap
Funds 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
these 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 at the discretion of
the Trustees.
Buying a Dividend On the record date for a distribution, the Fund's share value
is reduced by the amount of the distribution. If you purchase shares just
before the record date ("buying a dividend"), you 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 completing your account application, you may select any one of the
following distribution options. If you do not specify an option, all of your
distributions are 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 are reinvested as of the record date for the
distribution and are 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 are 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.
Your subsequent dividends and other distributions will
be automatically reinvested in additional shares of the relevant Fund until you
notify The Preferred Group of your correct address and request in writing that
the election to receive dividends and other distributions in cash be reinstated.
Taxes
================================================================================
Each Fund is treated as a separate taxable entity for federal income tax
purposes. Each Fund distributes 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 is not subject to federal income
tax on the amounts distributed. Shareholders 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 at ordinary income rates. Distributions
designated as deriving from net gains on securities held for more than one year
are taxable to shareholders as such (generally at a 20% rate for noncorporate
shareholders), regardless of how long a shareholder may have owned shares in the
Fund. Some 1998 distributions of gain realized in 1997 may be subject to tax at
28% rate.
<PAGE>
Distributions are 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 considered 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 exempt.
Shareholders should consult their tax advisers concerning 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 would 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. Each Fund
intends to make sufficient distributions 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 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 these 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. These 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 these liquidations. If a
Fund realizes net capital gains from these transactions, its shareholders may
receive a larger capital gain distribution than they would have received in the
absence of these transactions.
<PAGE>
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 used to complete 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.
- --------------------------------------------------------------------------------
By the end of February each year, 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.
By the end of August each year, 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.
("CIML"), which provides investment advisory and portfolio management services
for The Preferred Group. CIML 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 CIML.
The Preferred Group pays all expenses not assumed by CIML, including, without
limitation, fees and expenses of Trustees who are not "interested persons" of
CIML 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.
<PAGE>
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
To assist it in carrying out its responsibilities, CIML has retained various
subadvisers to provide advisory services to the Funds under the supervision of
CIML and The Preferred Group's Trustees. CIML pays the fees of each of the
subadvisers. The fee paid to the subadvisers (other than with respect to the
Money Market Fund) is based on the Fund assets managed or advised by the
subadviser (the "fund assets") together with any other assets managed or advised
by the subadviser relating to Caterpillar Inc. or any of its affiliates (other
than the Money Market Fund). (The Fund assets together with such other assets
are collectively referred to as the "combined assets.") The subadvisery fee is
calculated by applying the average quarterly net asset value, as of the last
business day of each month in the calendar quarter, of the combined assets to
the annual rates for each subadviser (other than with respect to the Money
Market Fund), as set forth below. This amount is then adjusted based upon the
ratio of Fund assets to combined assets. The subadvisery fee paid to Morgan with
respect to the Money Market Fund is based solely on the average net assets of
that Fund.
Oppenheimer Capital is a Delaware general partnership formed on July 1, 1987.
Its address is Oppenheimer Tower, World Financial Center, New York, New York
10281. Oppenheimer Capital 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, 1998,
Oppenheimer Capital was paid at an effective annual rate of 0.27% of the Value
Fund's average net assets.
Oppenheimer Capital is a registered investment adviser with approximately $67
billion in assets under management as of June 30, 1998. Oppenheimer Capital
is a wholly-owned subsidiary of PIMCO Advisors L.P., a registered investment
adviser.
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, 1998, 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, as of June 30,
1998, manages over $68.2 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, 1998, 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 serves as an investment
adviser and manager to a variety of endowment funds, pension accounts, other
institutions and investment companies, with total assets under management in
excess of $17 billion. For the fiscal year ended June 30, 1998, 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 Company of America,
a 20% limited partner. For the fiscal year ended June 30, 1998, Mercator was
paid at an effective annual rate of 0.52% 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. For the fiscal year ended June 30,
1998, Morgan was paid at an effective annual rate of 0.13% of the Fixed Income
Fund's average net assets. CIML pays Morgan for its subadvisery 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, 1998, 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
.01%.
<PAGE>
Description of
The Preferred Group
================================================================================
The Preferred Group was established in 1991 as a business trust under
Massachusetts law. The Preferred Group has an unlimited authorized number of
shares of beneficial interest which may, without shareholder approval, be
divided into an unlimited number of series of such shares which, in turn, may be
subdivided into an unlimited number of classes of shares. The Preferred Group
currently consists of 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 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 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. Although 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 Fund 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.
<PAGE>
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.
Purchase and Sale of Futures Contracts and Options on Futures Contracts
================================================================================
If CIML or the relevant subadviser 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 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 applicable futures contracts
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 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 their underlying securities. 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.
<PAGE>
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.
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 & Assistant Clerk
. Fred L. Kaufman . . . . . . . . . . .Vice President & 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
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
The Preferred Group
of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
1-800-662-GROW
THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1998
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated November 1, 1998, as
supplemented from time to time, and should be read in conjunction therewith. A
copy of the Prospectus may be obtained from The Preferred Group of Mutual Funds,
P.O. Box 8320, Boston, MA 02266-8320 or by calling 1-800-662-4769.
-1-
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
DEFINITIONS..................................................................1
INVESTMENT RESTRICTIONS......................................................1
OPTIONS AND FUTURES TRANSACTIONS.............................................7
MISCELLANEOUS INVESTMENT PRACTICES..........................................18
AMORTIZED COST VALUATION AND DAILY DIVIDENDS................................21
EXCHANGE PRIVILEGE..........................................................23
HOW TO BUY..................................................................23
HOW TO REDEEM...............................................................23
HOW NET ASSET VALUE IS DETERMINED...........................................24
CALCULATION OF YIELD AND TOTAL RETURN.......................................25
PERFORMANCE COMPARISONS.....................................................27
PERFORMANCE DATA............................................................29
TAXES ...................................................................31
MANAGEMENT OF THE TRUST.....................................................34
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS............................44
OTHER SERVICES..............................................................44
PORTFOLIO TRANSACTIONS......................................................47
ORGANIZATION AND CAPITALIZATION OF THE TRUST................................52
APPENDIX A..................................................................53
APPENDIX B..................................................................56
-i-
<PAGE>
DEFINITIONS
"Asset Allocation Fund" - Preferred Asset Allocation
Fund
"Distributor" - Caterpillar Securities Inc.
"Fixed Income Fund" - Preferred Fixed Income Fund
"Fund" - any of the portfolios offered
by The Preferred Group of
Mutual Funds
"Growth Fund" - Preferred Growth Fund
"International Fund" - Preferred International Fund
"Manager" - Caterpillar Investment
Management Ltd.
"Money Market Fund" - Preferred Money Market Fund
"1940 Act" - Investment Company Act of
1940
"Short-Term Government - Preferred Short-Term
Securities Fund" Government Securities Fund
"Small Cap Fund" - Preferred Small Cap Fund
"Subadviser" - any subadviser of any of the
Funds
"Trust" - The Preferred Group of Mutual
Funds
"Value Fund" - Preferred Value Fund
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
a Fund, the Trust will not take any of the following actions with respect to
such Fund:
(1) Issue senior securities or borrow money in excess of 10%
of the value (taken at the lower of cost or current value) of the
Fund's total assets (not including the amount borrowed) at the time the
borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which
might
-1-
<PAGE>
otherwise require the untimely disposition of portfolio investments or
for extraordinary or emergency purposes. Such borrowings will be repaid
before any additional investments are purchased. For purposes of this
restriction, the purchase or sale of securities on a "when-issued" or
delayed delivery basis, the purchase and sale of futures contracts, the
entry into forward contracts and short sales and collateral
arrangements with respect to any of the foregoing, to the extent
consistent with pronouncements of the Securities and Exchange
Commission, are not deemed to be the issuance of a senior security.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of the Fund's total assets (taken at cost) in
connection with borrowings permitted by Restriction 1 above.
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. (For this purpose, the deposit or payment by a Fund of
initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a
security on margin.)
(4) Make short sales of securities or maintain a short
position for the account of a Fund unless at all times when a short
position is open such Fund owns an equal amount of such securities or
owns securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue
as, and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under federal
securities laws.
(6) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, including securities
of real estate investment trusts, and may purchase securities which are
secured by interests in real estate.
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<PAGE>
(7) Purchase or sell commodities or commodity contracts except
that the Growth, Value, International, Small Cap, Asset Allocation,
Fixed Income, and Short- Term Government Securities Funds may purchase
and sell futures contracts and related options.
(8) Make loans, except by purchase of debt obligations or by
entering into repurchase agreements or through the lending of the
Fund's portfolio securities with respect to not more than 33 1/3% of
its total assets.
(9) Invest in securities of any issuer if, to the knowledge of
the Trust, any officers and Trustees of the Trust and officers and
directors of the Manager who individually own beneficially more than
1/2 of 1% of the securities of that issuer, own beneficially in the
aggregate more than 5%.
(10) With respect to 75% of the total assets of each of the
Funds, invest in securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Fund (taken at
current value) would be invested in the securities of such issuer;
provided that this limitation does not apply to obligations issued or
guaranteed as to interest and principal by the U.S. government or its
agencies or instrumentalities or repurchase agreements relating
thereto.
(11) Acquire more than 10% of the voting securities of any
issuer, both with respect to any Fund and to the Trust in the
aggregate.
(12) Concentrate more than 25% of the value of its total
assets in any one industry; except that the Money Market Fund reserves
freedom of action to invest up to 100% of its assets in certificates of
deposit and bankers' acceptances issued by domestic banks (for the
purposes of this restriction, obligations of a foreign government and
its agencies or instrumentalities constitute a separate "industry" from
those of another foreign country; issuers of U.S. Government Securities
and repurchase agreements relating thereto do not constitute an
"industry"; and the term "domestic banks" includes foreign branches of
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domestic banks only if, in the determination of the Manager or the
relevant Subadviser, the investment risk associated with investing in
instruments issued by the foreign branch of a domestic bank is the same
as that of investing in instruments issued by the domestic parent, in
that the domestic parent would be unconditionally liable in the event
that the foreign branch failed to pay on its instruments for any
reason).
(13) Invest in securities of other registered investment
companies, except by purchase in the open market involving only
customary brokers' commissions. For purposes of this restriction,
foreign banks or their agents or subsidiaries are not considered
investment companies.
In addition, without the approval of a majority of the outstanding
voting securities of the relevant Fund, no Fund will purchase securities the
disposition of which is restricted under federal securities laws if, as a
result, such investments would exceed 15% of the value of the net assets of such
Fund, excluding restricted securities that have been determined by the Trustees
of the Trust (or the person designated by them to make such determinations) to
be readily marketable.
In determining whether to invest in certificates of deposit or bankers'
acceptances, the Money Market Fund will consider a variety of factors such as
interest rates and the credit quality of the issuer.
It is contrary to the Trust's present policy with respect to any Fund
created under the Trust, which may be changed by the Trustees without
shareholder approval, to:
(1) Invest in warrants or rights excluding options (other than
warrants or rights acquired by the Fund as a part of a unit or attached
to securities at the time of purchase) if as a result such investments
(valued at the lower of cost or market) would exceed 5% of the value of
a Fund's net assets; provided that not more than 2% of the Fund's net
assets may be invested in warrants not listed on the New York or
American Stock Exchanges.
(2) Invest in securities of an issuer, which, together with
any predecessors or controlling persons, has been in operation for less
than three consecutive years and in equity securities for which market
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quotations are not readily available (excluding restricted securities)
if, as a result, the aggregate of such investments would exceed 5% of
the value of a Fund's net assets; provided, however, that this
restriction shall not apply to any obligation of the U.S. Government or
its instrumentalities or agencies, repurchase agreements relating
thereto, CMOs or asset- backed securities. (Debt securities having
equity features are not considered "equity securities" for purposes of
this restriction.)
(3) Write (sell) or purchase options except that each Fund
other than the Short-Term Government Securities Fund and the Money
Market Fund may (a) with respect to all or any part of its portfolio
securities, write covered call options or covered put options and
enter into closing purchase transactions with respect to such options,
and (b) in combination therewith, or separately, purchase put and call
options; provided that the premiums paid by each Fund on all
outstanding options it has purchased do not exceed 5% of its total
assets. Each Fund may enter into closing sale transactions with respect
to options it has purchased.
(4) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(5) Make investments for the purpose of gaining control of a
company's management.
(6) Invest in certificates of deposit of any bank if,
immediately after such investment, more than 5% of the total assets of
the Fund (taken at current value) would be invested in the securities
(including certificates of deposit) of that bank, except that (i) the
Money Market Fund may, to the extent permitted by Rule 2a-7 under the
1940 Act, invest more than 5% of its total assets in the securities
(including certificates of deposit) of any bank and (ii) each other
Fund may invest up to 25% of its total assets without regard to this
restriction.
(7) Make any additional investment if, immediately after such
investment, the Fund's outstanding borrowings of money would exceed 5%
of the current value of the Fund's total assets.
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(8) Purchase or sell real property (including real estate
limited partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily marketable
securities of companies which invest in real estate).
(9) With respect to the Money Market Fund, invest in
securities of any issuer if, immediately after such investment, more
than 5% of the total assets of the Fund (taken at current value) would
be invested in the securities of such issuer, except that the Fund may,
to the extent permitted by Rule 2a-7 under the 1940 Act, invest more
than 5% of its total assets in the securities (including certificates
of deposit) of any bank. (Provided that this limitation does not apply
to obligations issued or guaranteed as to interest and principal by the
U.S. government or its agencies or instrumentalities or repurchase
agreements relating thereto.)
(10) With respect to the Small Cap Fund, invest more than 25%
of its assets in any combination of mortgage-backed securities,
asset-backed securities and collateralized mortgage obligations.
(11) With respect to the Small Cap Fund, sell short securities
valued, at the time of purchase, greater than 10% of its assets
(excluding "covered" short sales, i.e. short sales of securities held
by the Fund).
All percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the relevant Fund or the Trust, as the case may be, or (2)
67% or more of the shares of the relevant Fund or the Trust, as the case may be,
present at a meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.
Note on Shareholder Approval
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Unless otherwise indicated, the investment policies and objectives of
the Funds may be changed without shareholder approval.
OPTIONS AND FUTURES TRANSACTIONS (All Funds except the Short-Term
Government Securities Fund and the Money Market Fund)
As disclosed in the Prospectus, the Fixed Income Fund, to increase
current return, may write covered call and covered put options on any security
that it is eligible to purchase. For hedging purposes, it may (1) purchase call
options on securities it expects to acquire, and put options on securities it
holds, and (2) purchase and sell futures contracts on U.S. Government Securities
and purchase and write options on such futures contracts.
The Growth, Value, International, Small Cap and Asset Allocation Funds
may each: (1) purchase call and put options, and purchase warrants, on
securities that they are eligible to purchase; (2) write covered call and
covered put options on such securities; (3) buy and sell stock index options,
stock index futures contracts, options on stock index futures contracts,
currency futures contracts and options on currency futures contracts; and (4)
write covered call and put options on stock indices. In addition, the Asset
Allocation Fund may purchase and sell futures contracts on U.S. government
securities and purchase and write options on such futures contracts.
Use of options and futures transactions may accelerate or adversely
impact the characterization of income to a Fund for federal tax purposes.
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Options Transactions
No Fund will write options that are not "covered." A call option is
"covered" if the Fund owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other high grade short-term
obligations in a segregated account with its custodian. A put option is
"covered" if the Fund segregates cash, Treasury bills or other high grade
obligations with a value equal to the exercise price with its custodian, or else
holds on a share-for-share basis a put on the same security as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written. The premium paid by the purchaser of an
option will reflect, among other things, the relationship of the exercise price
to the market price and volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.
If the writer of an option wishes to terminate his obligation, he may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he has been notified of the exercise of an option. Likewise, an investor
who is the holder of an option may liquidate his position by effecting a
"closing sale transaction." This is accomplished by selling an option of the
same series as the option previously purchased. There is no guarantee that a
Fund will be able to effect a closing purchase or a closing sale transaction at
any particular time.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by depositing cash or high
grade obligations. Also, effecting a closing transaction will permit the cash or
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proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The Funds which may write options may do so in connection with
buy-and-write transactions; that is, the Fund will purchase a security and then
write a call option against that security. The exercise price of the call the
Fund determines to write will depend upon the expected price movement of the
underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the- money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at- the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines, the amount of
such decline will be offset in part, or entirely, by the premium received.
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The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price.
No Fund may invest more than 5% of its assets in the purchase of put
and call options.
The extent to which each Fund will be able to write and
purchase call and put options will also be restricted by the
Trust's intention to qualify each Fund as a regulated investment
company under the federal income tax law. See "Taxes."
OTC Options. The staff of the Securities and Exchange Commission has
taken the position that options purchased on the over-the-counter market ("OTC
Options") and the assets used as "cover" for written OTC Options should
generally be treated as illiquid securities. However, if a dealer recognized by
the Federal Reserve Bank as a "primary dealer" in U.S. Government Securities is
the other party to an option contract written by a Fund, and that Fund has the
absolute right to repurchase the option from the dealer at a formula price
established in a contract with the dealer, the Securities and Exchange
Commission staff has agreed that that Fund only needs to treat as illiquid that
amount of the "cover" assets equal to the amount by which (i) the formula price
exceeds (ii) any amount by which the market value of the security subject to the
option exceeds the exercise price of the option (the amount by which the option
is "in-the-money"). Although the Trust does not believe that OTC Options are
generally illiquid, it has agreed that pending resolution of this issue, the
Funds will conduct their operations in conformity with the views of the
Securities and Exchange Commission staff.
Futures Transactions
Futures Contracts. A futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A futures contract purchase
creates an obligation by the purchaser to take delivery of the underlying
financial instrument in a specified delivery month at a stated price. The
specific instruments delivered or taken, respectively, at settlement date are
not determined until at or
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near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. A stock index
futures contract is similar except that the parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
Futures contracts are traded only on commodity exchanges -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out a futures
contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument and the same
delivery date. If the price of the initial sale of the futures contract exceeds
the price of the offsetting purchase, the seller is paid the difference and
realizes a gain. Conversely, if the price of the offsetting purchase exceeds the
price of the initial sale, the Fund realizes a loss. Similarly, the closing out
of a futures contract purchase is effected by the purchaser entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price,
the purchaser realizes a gain, and if the purchase price exceeds the offsetting
sale price, he realizes a loss.
The purchase (that is, assuming a long position in) or sale (that is,
assuming a short position in) of a futures contract differs from the purchase or
sale of a security, in that no price or premium is paid or received. Instead, an
amount of cash or U.S. Treasury bills generally not exceeding 5% of the contract
amount must be deposited with the broker. This amount is known as initial
margin. Subsequent payments to and from the broker, known as variation margin,
are made on a daily basis as the price of the underlying futures contract
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. A commission is also paid on each completed
purchase and sale transaction. In addition, a Fund that purchases a futures
contract will segregate liquid assets in an amount at least equal to the
purchase price under the futures contract (less any margin on deposit).
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Alternatively, a fund that purchases a futures contract may cover the position
by purchasing a put option on the same contract with a strike price as high or
higher than the purchase price of the futures contract it covers.
The Funds may engage in transactions in futures contracts and related
options for purposes of reallocating a Fund's exposure to the equity or fixed
income markets and also for the purpose of hedging against changes in the values
of securities they own or intend to acquire. In the case of transactions entered
into for purposes of reallocating a Fund's exposure to the equity or fixed
income markets, the futures contracts may be used to expose a substantial
portion of the Fund to equities and/or fixed income instruments to facilitate
trading and/or to minimize transaction costs. Futures contracts will not be used
to leverage the Fund. For example, in the case of the Asset Allocation Fund, if
the Fund purchases futures contracts relating to equity securities (e.g., S&P
500 index futures), the face amount of the futures contracts plus the value of
the Fund's equity securities will not exceed the Fund's net assets. Similarly,
if the Fund purchases interest rate futures contracts, the face amount of the
futures contracts plus the value of the Fund's fixed income securities will not
exceed the Fund's net assets. In the case of transactions in futures contracts
for hedging purposes, the Funds may sell such futures contracts in anticipation
of a decline in the value of its investments. The risk of such a decline can be
reduced without employing futures as a hedge by selling portfolio securities and
either reinvesting the proceeds in securities subject to lesser risk or by
holding assets in cash. This strategy, however, entails increased transaction
costs in the form of brokerage commissions and dealer spreads and will typically
reduce a Fund's total return or, with respect to futures on fixed income
securities, yield. The sale of futures contracts provides an alternative means
of hedging a Fund against a decline in the value of its investments. As such
values decline, the value of a Fund's position in the futures contracts will
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of a Fund's securities which are being hedged. While the Fund will
incur commission expenses in establishing and closing out futures positions,
commissions on futures transactions may be significantly lower than transaction
costs incurred in the purchase and sale of securities. Employing futures as a
hedge may also permit a Fund to assume a defensive posture without reducing its
total return or yield.
Call Options on Futures Contracts. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
underlying securities, it may or may not be less risky than
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ownership of the futures contract or underlying securities. As with the purchase
of a futures contract, a Fund may purchase a call option on a futures contract
to hedge against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of put options on a
futures contract is similar in some respects to the purchase of put options on
portfolio securities. Each Fund may purchase put options on futures contracts to
hedge the Fund's portfolio against the risk of rising interest rates or
declining stock market prices.
A Fund may write a put option on a futures contract as a partial hedge
against increasing prices of the assets which are deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
assets that the Fund intends to purchase.
Currency Futures and Related Options. As described in the Prospectus,
each Fund (other than the Short-Term Government Securities and Money Market
Funds) may invest in currency futures contracts and related options thereon to
hedge its portfolio investments and to protect itself against changes in foreign
exchange rates. A currency futures contract sale creates an obligation by the
Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time for a specified price. A currency futures contract
purchase creates an obligation by the Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction.
Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to enter into the contract, the premium paid
for the
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option is lost. Since the value of the option is fixed at the point of sale,
there are no daily payments of cash in the nature of "variation" or
"maintenance" margin payments to reflect the change in the value of the
underlying contract as there are by a purchaser or seller of a currency futures
contract. The value of the option does not change and is reflected in the net
asset value of the Fund.
The Funds will write only covered put and call options on currency
futures. This means that each such Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. Set forth below is a description of
methods of providing cover that the Funds currently expect to employ, subject to
applicable exchange and regulatory requirements. If other methods of providing
appropriate cover are developed, the Funds reserve the right to employ them to
the extent consistent with applicable regulatory and exchange requirements.
A Fund will, so long as it is obligated as the writer of a call option
on currency futures, own on a contract-for-contract basis an equal long position
in currency futures with the same delivery date or a call option on currency
futures with the difference, if any, between the market value of the call
written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, Treasury bills, or other high-grade short-term
obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by the Fund falls
below 100% of the market value of the call written by the Fund, the Fund will so
segregate an amount of cash, Treasury bills or other high grade short-term
obligations equal in value to the difference. Alternatively, the Fund may cover
the call option through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
In the case of put options on currency futures written by a Fund, the
Fund will hold the aggregate exercise price in cash, Treasury bills, or other
high grade short-term obligations in a segregated account with its custodian, or
own put options on currency futures or short currency futures, with the
difference, if any, between the market value of the put written and the market
value of the puts purchased or the currency futures sold maintained by the Fund
in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures sold by
the Fund falls below 100% of the market value of the put
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options written by the Fund, the Fund will so segregate an amount of cash,
Treasury bills or other high grade short-term obligations equal in value to the
difference.
Stock Index Futures. The Growth, Value, International, Small Cap and
Asset Allocation Funds may also purchase and sell United States and foreign
stock index futures contracts and options thereon in order to reallocate their
equity market exposure or to hedge themselves against changes in market
conditions. A stock index assigns relative values to the common stocks
comprising the index. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
As indicated above, the Funds may engage in transactions in stock index
futures contracts and related options for the purpose of reallocating a Fund's
exposure to the equity markets and also for the purpose of hedging against
changes resulting from market conditions in the values of securities held in the
Fund's portfolio or which the Fund intends to purchase. If a transaction
involves the purchase of stock index futures contracts (for example, in a
transaction designed to increase a Fund's equity market exposure), the Fund will
deposit an amount of cash and cash equivalents, equal to the market value of the
futures contracts, in a segregated account with its custodian and/or in a margin
account with a broker. Each Fund will cover any options it writes on stock index
futures in the manner described above with respect to currency futures.
Limitations on the Use of Options and Futures Portfolio
Strategies
No Fund will "over-hedge," that is, no Fund will maintain open short
positions in futures contracts if, in the aggregate, the value of its open
positions (marked to market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on such open positions,
adjusted for the historical volatility relationship between the portfolio and
futures contracts. A Fund will not use futures contracts for leveraging
purposes. Thus, when a Fund uses futures contracts to reallocate the Fund's
exposure to equity (or fixed income) markets, that Fund will not maintain open
long positions in stock index (or interest rate) futures contracts if, in the
aggregate, the face amount of the contracts plus the Fund's equity (or fixed
income) securities would exceed the Fund's net assets.
A Fund's ability to engage in the options and futures strategies
described above will depend on the availability of
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liquid markets in such instruments. Markets in certain options and futures are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore, no assurance can be given that a Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, a Fund's
ability to engage in options and futures transactions may be limited by tax
considerations and CFTC rules.
No Fund may enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the market
value of the Fund's total assets.
Risk Factors in Options and Futures Transactions
Options Transactions. The option writer has no control over when the
underlying securities must be sold, in the case of a call option, or purchased,
in the case of a put option, since the writer may be assigned an exercise notice
at any time prior to the termination of the obligation. If an option expires
unexercised, the writer realizes a gain in the amount of the premium. Such a
gain, of course, may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security at the exercise
price, which will usually exceed the then market value of the underlying
security.
An exchange-traded option may be closed out only on a national
securities exchange (an "Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing sale transaction with respect to a particular
option with the result that the Fund would have to exercise the option in order
to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an Exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
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interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Trust and other clients of the Manager and
Subadvisers may be considered to be such a group. These position limits may
restrict the Funds' ability to purchase or sell options on a particular
security.
Futures Transactions. Investment by a Fund in futures contracts
involves risk. In the case of hedging transactions, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation. For
example, if the price of the futures contract moves more than the price of the
hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater dollar amount than the hedged securities if
the volatility of the hedged securities is historically greater than the
volatility of the futures contracts. Conversely, a Fund may purchase or sell
fewer contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the futures
contract approaches.
As noted above, a Fund may purchase futures contracts to hedge against
a possible increase in the price of securities which the Fund anticipates
purchasing, or options thereon. In such instances, it is possible that the
market may instead decline. If the Fund does not then invest in such securities
because of concern as to possible further market decline or for other reasons,
the Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased. In the case of futures
contracts purchased to increase a Fund's exposure to the equity (or fixed
income) markets, the Fund could suffer a loss on the futures contracts similar
to the loss which the Fund would have suffered if,
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instead, it had actually purchased equity or fixed income securities.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also
depends on the ability of the Manager or relevant Subadviser to forecast
correctly the direction and extent of market and interest rate movements within
a given time frame. In the case of hedging transactions, to the extent market
prices or interest rates remain stable during the period in which a futures
contract or related option is held by a Fund or such prices or rates move in a
direction opposite to that anticipated, a Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, a Fund's total return for such period may
be less than if it had not engaged in the hedging transaction.
MISCELLANEOUS INVESTMENT PRACTICES
Lower-rated Securities. The Fixed Income Fund may invest up to 5% of
its total assets in lower-rated fixed-income securities (commonly known as "junk
bonds"), provided that the dollar-weighted average credit quality of its debt
portfolio (excluding short-term investments) is at least A by either Moody's
Investors Service, Inc. or Standard & Poor's. The lower ratings of certain
securities held by the Fund reflect a greater possibility that adverse changes
in the financial condition of the issuer or in general economic conditions, or
both, or an unanticipated rise in interest rates, may impair the ability of the
issuer to make payments of interest and principal. The inability (or perceived
inability) of issuers to make timely payment of interest and principal would
likely make the values of securities held by the Fund more volatile and could
limit the Fund's ability to sell its securities at prices approximating the
values the Fund had placed on such securities. In the absence of a liquid
trading market
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for securities held by it, the Fund may be unable at times to establish the fair
value of such securities. The rating assigned to a security by Moody's Investors
Service, Inc. or Standard & Poor's (or by any other nationally recognized
securities rating organization) does not reflect an assessment of the volatility
of the security's market value or the liquidity of an investment in the
security. See Appendix A to this Statement for a description of security
ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Fund's debt securities. Conversely, during periods of rising interest rates, the
value of the Fund's debt securities will generally decline. In addition, the
values of fixed income securities are also affected by changes in general
economic conditions and business conditions affecting the specific industries of
their issuers. Changes by recognized rating services in their ratings of any
fixed income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. Changes
in the value of portfolio securities generally will not affect cash income
derived from such securities, but will affect the Fund's net asset value. The
Fund will not necessarily dispose of a security when its rating is reduced below
its rating at the time of purchase, although CIML or the relevant Subadviser
will monitor the investment to determine whether its retention will assist in
meeting the Fund's investment objective.
Portfolio Turnover. A change in securities held by a Fund is known as
"portfolio turnover" and almost always involves the payment by the Fund of
brokerage commissions or dealer markup and other transaction costs on the sale
of securities as well as on the reinvestment of the proceeds in other
securities. These transactions may also result in the realization of taxable
capital gains. As a result of the investment policies of the Funds, under
certain market conditions their portfolio turnover may be higher than those of
many other investment companies. It is, however, impossible to predict portfolio
turnover in future years. Portfolio turnover rates in excess of 100% are
generally considered to be high. For purposes of reporting portfolio turnover
rates, all securities the maturities of which at the time of purchase are one
year or less are excluded, so that it is expected that the policies of the Money
Market Fund will result in a reported portfolio turnover rate of zero for that
Fund, although it is anticipated that, like other funds with similar portfolios,
it will change the securities in its portfolio frequently.
Forward Commitments. As described in the Prospectus following the
caption "General Policies and Risk Considerations-- Forward Commitments,
When-Issued and Delayed Delivery Transactions," all of the Funds except the
Money Market Fund may make contracts to purchase securities for a fixed price at
a future date beyond customary settlement time ("forward commitments"), if the
Fund either (i) holds, and segregates until the settlement date, liquid assets
in an amount sufficient to meet the purchase price or (ii) enters into an
offsetting contract for the forward sale of securities of equal value that it
owns. Each Fund may simultaneously be obligated with respect to forward
commitment purchase and sale contracts and may sell a portfolio security or
enter into a forward commitment sale contract (a "dollar-roll transaction") if
that sale or forward commitment is coupled with an agreement by the Fund,
including a forward commitment, to repurchase the security at a later date.
Forward commitments may be considered securities in themselves. They involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. A Fund may dispose of a commitment prior to settlement
and may realize short-term profits or losses upon such disposition.
Repurchase Agreements. A repurchase agreement is a contract under which
a Fund would acquire a security for a relatively short period (usually not more
than one week) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). The value of the underlying securities (or collateral) will
be at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities. The Manager (in the case of the Small Cap and Short-Term
Government Securities Funds) and the Subadvisers (in the case of the other
Funds), as appropriate, will monitor the creditworthiness of the counterparties.
Securities Loans. Each Fund (other than the Money Market Fund) may make
secured loans of its portfolio securities amounting to no more than 33 1/3% of
its total assets. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
However, such loans will be made only to broker-dealers that are believed by the
Manager (in the case of the Small Cap and Short-Term Government Securities
Funds) and the Subadvisers (in the case of the other Funds) to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral in
cash or U.S. Government
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Securities at least equal at all times to the market value of the securities
lent. The borrower pays to the lending Fund an amount equal to any dividends or
interest received on the securities lent. The Fund may invest the cash
collateral received in interest-bearing, short-term securities or receive a fee
from the borrower. Although voting rights or rights to consent with respect to
the loaned securities pass to the borrower, the Fund retains the right to call
the loans at any time on reasonable notice, and it will do so in order that the
securities may be voted by the Fund if the holders of such securities are asked
to vote upon or consent to matters materially affecting the investment. A Fund
may also call such loans in order to sell the securities involved.
Warrants. Each of the Growth, Value, International, Small Cap and Asset
Allocation Funds may invest up to 5% of its total assets in warrants which
entitle the holder to buy equity securities at a specific price for a specified
period of time, provided that no more than 2% of its assets are invested in
warrants not listed on the New York or American Stock Exchanges.
Foreign Currency Transactions. Each of the Funds (other than the
Short-Term Government Securities and the Money Market Funds) may enter into
forward foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. Since investment in
foreign companies will usually involve currencies of foreign countries, and
since a Fund may temporarily hold funds in bank deposits in foreign currencies
during the course of investment programs, the value of the assets of a Fund as
measured in United States dollars may be affected by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversion between various currencies.
A Fund may enter into forward contracts only under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the investment is purchased or sold and the
date on which payment is made or received.
Second, when the Subadviser of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the
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Fund's portfolio investments denominated in such foreign currency if the fund
either (i) holds, and segregates until the settlement date, liquid assets in an
amount sufficient to meet the purchase price or (ii) enters into an offsetting
forward currency contract for the forward sale of securities of equal value that
it owns. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those investments between the date the forward
contract is entered into and the date it matures.
The Funds generally will not enter into a forward contract
with a term of greater than one year. The Funds' ability to
engage in forward contracts may be limited by tax considerations.
The Funds may also engage in currency futures contracts and
related options. See "Options and Futures Transactions: Currency
Futures and Related Options."
When-Issued and Delayed Delivery Transactions. As described in the text
of the Prospectus following the caption "General Policies and Risk
Considerations--Forward Commitments, When- Issued and Delayed Delivery
Transactions," the Short-Term Government Securities Fund may enter into
agreements with banks or broker-dealers for the purchase or sale of securities
at an agreed-upon price on a specified future date. Such agreements might be
entered into, for example, when the Fund anticipates a decline in interest rates
and is able to obtain a more advantageous yield by committing currently to
purchase securities to be issued later. When the Fund purchases securities on a
when-issued or delayed delivery basis, it is required to either (i) segregate
and maintain with the Fund's custodian cash, U.S. Government securities or other
high grade debt obligations in an amount equal on a daily basis to the amount of
the Fund's when- issued or delayed delivery commitments or (ii) enter into an
offsetting forward sale of securities it owns equal in value to those purchased.
The Fund will only make commitments to purchase securities on a when-issued or
delayed-delivery basis with the intention of actually acquiring the securities.
However, the Fund may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy. When the time comes to pay
for when-issued or delayed-delivery securities, the Fund will meet its
obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the when-issued
or delayed delivery securities themselves (which may have a value greater or
less than the Fund's payment obligation).
AMORTIZED COST VALUATION AND DAILY DIVIDENDS
The valuation of the Money Market Fund's portfolio instruments at
amortized cost is permitted in accordance with Securities and Exchange
Commission Rule 2a-7 and certain procedures adopted by the Trustees. The
amortized cost of an instrument is determined by valuing it at cost originally
and thereafter amortizing any discount or premium from its face value
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at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
of portfolio instruments during periods of rising or falling interest rates will
not normally be reflected either in the computation of net asset value of the
Fund's portfolio or in the daily computation of net income. Under the procedures
adopted by the Trustees, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less and invest in securities determined by
the Trustees to be of high quality with minimal credit risks. The Trustees have
also established procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per share as computed for the purpose of
distribution, redemption and repurchase at $1.00. These procedures include
review of the Fund's portfolio holdings to determine whether the Fund's net
asset value calculated by using readily available market quotations deviates
from $1.00 per share, and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders. In the event the
Trustees determine that such a deviation exists, or in any event if the
deviation exceeds .5%, they will take such corrective action as they regard as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redemption of shares in kind; or establishing a
net asset value per share by using readily available market quotations.
Since the net income of the Money Market Fund is declared as a dividend
each time it is determined, the net asset value per share of the Fund remains at
$1.00 per share immediately after such determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund representing
the reinvestment of dividend income is reflected by an increase in the number of
shares of the Fund in the shareholder's account at the end of each month. It is
expected that the Fund's net income will be positive each time it is determined.
However, if because of realized losses on sales of portfolio investments, a
sudden rise in interest rates, or for any other reason the net income of the
Fund determined at any time is a negative amount, the Fund will offset such
amount allocable to each then shareholder's account from dividends accrued
during the month with respect to such account. If at the time of payment of a
dividend (either at the regular monthly dividend payment date, or, in the case
of a shareholder who is withdrawing all or substantially all of the shares in an
account, at the time of withdrawal), such negative amount exceeds a
shareholder's accrued dividends, the Fund will reduce the number of outstanding
shares by treating the
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shareholder as having contributed to the capital of the Fund that number of full
and fractional shares which represent the amount of the excess. Each shareholder
is deemed to have agreed to such contribution in these circumstances by his or
her investment in the Fund.
EXCHANGE PRIVILEGE
As described in the Prospectus under the caption "Exchanging and
Redeeming Shares," a shareholder may exchange shares of any Fund for shares of
any other Fund on the basis of their respective net asset values beginning 10
days after their purchase on any day the New York Stock Exchange is open. Orders
for exchanges accepted by the Distributor prior to 4:00 p.m. (Eastern Time) on
any day the Trust is open for business will be executed at the respective net
asset values determined as of the close of business that day. Orders for
exchanges received after 4:00 p.m. (Eastern Time) on any business day will be
executed at the respective net asset values determined at the close of the next
business day.
An excessive number of exchanges may be disadvantageous to the Trust.
Therefore, the Trust, in addition to its right to reject any exchange, reserves
the right to restrict exchanges to one purchase and redemption of shares in the
same Fund during any 120-day period.
The Trust reserves the right to modify or discontinue the exchange
privilege at any time. Except as otherwise permitted by SEC regulations, the
Trust will give 60 days' advance written notice to shareholders of any
termination or material modification of the exchange privilege.
HOW TO BUY
The procedures for purchase of Trust shares are summarized in the text
of the Prospectus under the caption "How to Buy Shares." The Trust reserves the
right to reject any purchase orders.
In addition to the methods described therein, shares may be purchased
through regular payroll deductions, provided that such deductions are available
through the relevant employer. The minimum initial investment and minimum
additional investment through regular payroll deduction is $50. For more
information about purchasing Trust shares through regular payroll deductions,
please call Investor Services at 1-800-662-GROW (1-800-662-4769).
HOW TO REDEEM
The procedures for redemption of Trust shares are summarized in the
text of the Prospectus under the caption "Exchanging and Redeeming Shares."
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The Trust may suspend the right of redemption and may postpone payment
only when the New York Stock Exchange is closed for other than customary
weekends and holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during any emergency which makes it impracticable for the Trust to dispose of
its securities or to determine fairly the value of its net assets, or during any
other period permitted by order of the Securities and Exchange Commission.
The Trust reserves the right to redeem shares and mail the proceeds to
the shareholder if at any time the net asset value of the shares in the
shareholder's account in any Fund falls below a specified level due to
redemptions, currently set at $1,000. Shareholders will be notified and will
have 60 days to bring the account up to the required level before any redemption
action will be taken by the Trust. The Trust also reserves the right to redeem
shares in a shareholder's account in excess of an amount set from time to time
by the Trustees. No such limit is presently in effect, but such a limit could be
established at any time and could be applicable to existing as well as future
shareholders.
HOW NET ASSET VALUE IS DETERMINED
As described in the text of the Prospectus following the caption
"Determination of Net Asset Value and Pricing," the net asset value of shares of
each Fund of the Trust will be determined once on each day on which the New York
Stock Exchange is open, as of the close of regular trading on the Exchange. The
Trust expects that the days, other than weekend days, that the Exchange will not
be open are New Year's Day, Rev. Dr. Martin Luther King, Jr. Day President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Portfolio securities, options, futures and options on futures
for which market quotations are readily available are valued at market value,
which is determined by using the last reported sale price, or, if no sales are
reported, the last reported bid price. Over-the-counter options are valued at
fair value, as determined in good faith by the Trustees or by persons acting at
their direction, based on prices supplied by a broker, usually the option
counterparty. Obligations having remaining maturities of 60 days or less and
securities held in the Money Market Fund portfolio are valued at amortized cost.
The amortized cost value of a security is determined by valuing it at cost
originally and thereafter amortizing any discount or premium from its face value
at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
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of portfolio instruments during periods of rising or falling interest rates will
not be reflected either in the computation of the net asset value of the Fund's
portfolio or, in the case of the Money Market Fund, in the daily computation of
net income.
As described in the Prospectus, certain securities and assets of the
Funds are valued at fair value as determined in good faith by the Trustees or by
persons acting at their direction. The fair value of any securities from time to
time held by any Fund of the Trust for which no ready market exists is
determined in accordance with procedures approved by the Trustees. The Trustees,
however, are ultimately responsible for such determinations. The fair value of
such securities is generally determined as the amount which the Trust could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case, and may include receiving a quote
from a broker and the use of a pricing service. Consideration may also be given
to the financial position of the issuer and other fundamental analytical data
relating to the investment and to the nature of the restrictions on disposition
of the securities (including any registration expenses that might be borne by
the Trust in connection with such disposition). In addition, such specific
factors may also be considered as the cost of the investment, the size of the
holding, the prices of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the issuer.
Generally, trading in foreign securities, as well as corporate bonds,
U.S. Government Securities and money market instruments is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in determining the net asset value of a Fund's
shares are computed as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of a Fund's
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.
CALCULATION OF YIELD AND TOTAL RETURN
Yield of the Money Market Fund. As summarized in the Prospectus under
the heading "Performance Information," the "Yield" of the Money Market Fund for
a seven-day period (the "base period") will be computed by determining the "net
change in value" (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period,
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dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by 365/7 with the resulting yield figure carried to the
nearest hundredth of one percent. Net changes in value of a hypothetical account
will include the value of additional shares purchased with dividends from the
original share and dividends declared on both the original share and any such
additional shares, but will not include realized gains or losses or unrealized
appreciation or depreciation on portfolio investments. Yield may also be
calculated on a compound basis (the "Effective Yield") which assumes that net
income is reinvested in Fund shares at the same rate as net income is earned by
the Fund for the base period.
The Money Market Fund's Yield and Effective Yield will vary in response
to fluctuations in interest rates. For comparative purposes the current and
Effective Yields should be compared to current and effective yields offered by
competing money market funds for that base period only and calculated by the
methods described above.
Yields of the Asset Allocation, Fixed Income and Short-Term Government
Securities Funds. As summarized in the Prospectus under the heading "Performance
Information," Yields of these Funds will be computed by analyzing net investment
income for a recent 30-day period and dividing that amount by the maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The Funds' Yields will vary from
time to time depending upon market conditions, the composition of the Funds'
portfolios and operating expenses of the Trust allocated to each Fund. These
factors, and possible differences in the methods used in calculating yield,
should be considered when comparing a Fund's Yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Funds' shares and to the
relative risks associated with the investment objectives and policies of the
Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
Investors in these Funds are specifically advised that the net asset
value per share of each Fund will vary just as Yields for each Fund will vary.
An investor's focus on the Yield to the exclusion of the consideration of the
value of shares of that
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Fund may result in the investor's misunderstanding the Total Return he or she
may derive from that Fund.
Calculation of Total Return. As summarized in the Prospectus under the
heading "Performance Information," Total Return with respect to a Fund is a
measure of the change in value of an investment in such Fund over the period
covered, which assumes any dividends or capital gains distributions are
reinvested immediately rather than paid to the investor in cash. The formula for
Total Return used herein includes four steps: (1) adding to the total number of
shares purchased by a hypothetical $1,000 investment in the Fund all additional
shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment.
PERFORMANCE COMPARISONS
Yield and Total Return. Each Fund may from time to time include the
Total Return of its shares in advertisements or in information furnished to
present or prospective shareholders. Each of the Asset Allocation, Fixed Income
and Short-Term Government Securities Funds may from time to time include the
Yield and/or Total Return of its shares in advertisements or information
furnished to present or prospective shareholders. The Money Market Fund may from
time to time include its Yield and Effective Yield in advertisements or
information furnished to present or prospective shareholders. Each Fund may from
time to time include in advertisements or information furnished to present or
prospective shareholders (i) the ranking of performance figures relative to such
figures for groups of mutual funds categorized by Lipper Analytical Services,
Inc. as having the same investment objectives,(ii) the rating assigned to the
Fund by Morningstar, Inc. based on the Fund's risk-adjusted performance relative
to other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.
Performance information may also be used to compare the performance of
the Fund against certain widely acknowledged standards or indices for stock and
bond market performance.
EAFE Index. The Europe, Australia & Far East Index contains over 1000
stocks from 20 different countries with Japan
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(approximately 50%), United Kingdom, France and Germany being the most heavily
weighted.
IBC's Money Fund Report Average -- Taxable (commonly known as
Donoghue's Taxable Money Market Fund Average). An average of approximately 750
taxable money market funds published by IBC/Donoghue, Inc.
Lehman Brothers Government/Corporate Bond Index. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged list of publicly issued U.S.
Treasury obligations, debt obligations of the U. S. Government and its agencies
(excluding mortgage-backed securities), fixed-rate, non-convertible,
investment-grade corporate debt securities and U.S. dollar-denominated, SEC-
registered non-convertible debt issued by foreign governmental entities or
international agencies used as a general measure of the performance of fixed
income securities.
Lehman Brothers Long-Term Treasury Index. The Lehman Brothers Long-Term
Treasury Index is a market weighted index of all publicly held Treasury issues
with maturities greater than 10 years.
Merrill Lynch 1-3 Year Treasury Index. The Index contains
primarily all U.S. Treasury Notes and Bonds with remaining
maturities of one to three years.
90-Day Treasury Bill Index. The index is calculated using a one-bill
portfolio containing the most recently auctioned 90-day Treasury bill.
Russell 2000 Index. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.
S&P 500 Index. The S&P 500 is the most common index for the overall
U.S. stock market. It is comprised of 500 of the largest U.S. companies
representing all major industries.
Salomon Brothers Broad Investment Grade Index. The Index contains 5000
U.S. Treasury, Agency, Mortgage and Corporate Bonds. Credit quality must be
investment grade (AAA-BBB by Standard & Poor's).
65% S&P Index/30% Lehman Brothers Long-Term Treasury Index/5% 90-day
Treasury Bills. The 65% S&P 500 Index/30% Lehman Brothers Long-Term Treasury
Index/5% 90-day Treasury Bills is a benchmark representing a hypothetical
portfolio 65% of which is invested in the S&P 500, 30% of which is invested in
the Lehman Brothers Long-Term Treasury Index, and 5% of which is invested in
90-day Treasury Bills.
-28-
<PAGE>
From time to time, articles about the Funds regarding performance,
rankings and other characteristics of the Funds may appear in national
publications including, but not limited to, the Wall Street Journal, Forbes,
Fortune, CDA Investment Technologies and Money Magazine. In particular, some or
all of these publications may publish their own rankings or performance reviews
of mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the Manager or the Subadvisers who have portfolio
management responsibility may also be used in the Funds' promotional literature.
PERFORMANCE DATA
The manner in which Total Return and Yield of the Funds will be
calculated for public use is described above. The following table summarizes the
calculation of Total Return and Yield for the Funds, where applicable, (i) for
the one-year period ended June 30, 1998, (ii) for the five-year period ended
June 30, 1998 and (iii) since the commencement of operations (July 1, 1992 for
all Funds other than the Small Cap Fund, and November 1, 1995 for the Small Cap
Fund) through June 30, 1998.
-29-
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE DATA
Average
Annual Average
Total Annual
Average Return Total
Annual for the Return
Total Return Five- from the
for the Year Commencement
Current SEC One-Year Period Period of Operations
Yield ended ended through
FUND at 6/30/98+ 6/30/98 6/30/98 6/30/98
- ---- ----------- ------- ------- -------
<S> <C> <C> <C> <C>
Growth N/A 33.44% 21.58% 22.01%
Value N/A 26.51% 21.44% 20.57%
International N/A 7.18% 15.07% 11.69%
Small Cap N/A 23.45% N/A 24.55%*
Asset Allocation N/A 21.84% 15.93% 15.53%
Fixed Income 5.82% 9.32% 6.49% 7.48%
Short-Term 5.32% 5.72% 4.62% 4.90%
Government
Securities
Money Market 5.19% 5.40% 4.80%** 4.45%**
</TABLE>
*Performance for the Small Cap Fund would have been lower if an expense
limitation had not been in effect. In the absence of this expense limitation,
actual performance would have been 24.42% for the period since commencement of
operations (November 1, 1995).
**Performance for the Money Market Fund would have been lower if a portion of
the management fee had not been waived by the Manager during the period January
1, 1993 to October 31, 1995. In the absence of this limitation, actual
performance would have been 4.73% for the five-year period and 4.38% for the
period since commencement of operations (July 1, 1992).
+The yield shown for the Fixed Income and Short-Term Government Securities Funds
is the 30-day current yield as of 6/30/98. The yield shown for the Money Market
Fund is a seven-day current yield as of 6/30/98, in accordance with Securities
and Exchange Commission rules for reporting yields of money market funds. The
Money Market Fund's seven-day effective yield as of June 30, 1998 was 5.32%.
-30-
<PAGE>
TAXES
The tax status of the Trust and the distributions which it
may make are summarized in the Prospectus under the heading
"Taxes."
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order so to qualify, each Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (b) each year
distribute at least 90% of its dividend, interest (including tax-exempt
interest), certain other income and the excess, if any, of its net short-term
capital gains over its net long-term capital losses; and (c) diversify its
holdings so that, at the end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
other securities, limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses. By so qualifying, each Fund will not be subject to
federal income taxes to the extent that its net investment income, net realized
short-term capital gains and net realized long-term capital gains are
distributed to shareholders.
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by the 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 that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
In years when a Fund distributes amounts in excess of its earnings and
profits, such distributions may be treated in part
-31-
<PAGE>
as a return of capital. A return of capital is not taxable to a shareholder and
has the effect of reducing the shareholder's basis in the shares. To the extent
such distributions exceed a shareholder's basis in the shares the distributions
will be taxed to the shareholder as capital gain.
Hedging Transactions. If a Fund engages in certain transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, constructive sale and short sale rules),
the effect of which may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. A Fund engaging in such transactions will endeavor to make any
available elections pertaining to such transactions in a manner believed to be
in the best interests of the Fund.
Certain of a Fund's hedging activities (including its transactions in
foreign currencies) are likely to produce a difference between its book income
and its taxable income. If a Fund's book income exceeds its taxable income, the
distribution (if any) of such excess will be treated as a dividend to the extent
of the Fund's remaining earnings and profits, and thereafter as a return of
capital or as gain from the sale or exchange of a capital asset, as the case may
be. If the Fund's book income is less than its taxable income, the Fund could be
required to make distributions exceeding book income to qualify as a regulated
investment company that is accorded special tax treatment.
Foreign Currency-Denominated Securities and Related Hedging
Transactions. A Fund's transactions in foreign currency- denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts may give rise to ordinary income or loss to the extent such income or
loss results from fluctuations in the value of the foreign currency concerned.
Distributions from Net Realized Capital Gains. As described in the
Prospectus, the Trust's policy is to distribute substantially all of the net
realized capital gain, if any, of each Fund, after giving effect to any
available capital loss carryover. Net realized capital gain for any Fund is the
excess of net realized long-term capital gain over net realized short-term
capital loss. Each Fund of the Trust is treated as a separate entity for federal
income tax purposes and accordingly its net realized gains or losses will be
determined separately, and capital loss carryovers will be determined and
applied on a separate Fund basis. Each of the Funds distributes its net realized
capital gains annually, although the Money Market Fund
-32-
<PAGE>
may distribute any net realized long-term capital gains more frequently if
necessary in order to maintain a net asset value of $1.00 per share for the
shares of that Fund.
Sixty percent of any gain or loss realized by any Fund (i) from net
premiums, from expired nonequity listed options and from closing purchase
transactions, (ii) with respect to listed nonequity options upon the exercise
thereof, and (iii) from transactions in certain foreign currency contracts,
regulated futures contracts and nonequity listed options thereon generally will
constitute long-term capital gains or losses and the balance will be short-term
gains or losses.
Since Funds which invest in zero-coupon securities will not receive
cash interest payments thereon, to the extent shareholders of these Funds elect
to take their distributions in cash, the relevant Fund may have to generate the
required cash from the disposition of non-zero-coupon securities, or possibly
from the disposition of some of its zero-coupon securities that it otherwise
would have continued to hold.
Taxation of Shareholders. For federal income tax purposes,
distributions paid from net investment income and from any net realized
short-term capital gain (that is, net gains on securities held for not more than
a year), including premiums from expired options and gains from any closing
purchase transactions with respect to options written by the Trust for any Fund,
are taxable to shareholders at ordinary income rates, whether received in cash
or in additional shares. Distributions designated by a Fund as deriving from net
gains on securities held for more than one year will be taxable to shareholders
as such (generally at a 20 percent rate for noncorporate shareholders),
regardless of how long a shareholder has held his or her shares. Some 1998
distributions of gain realized in 1997 may be subject to tax at a 28 percent
rate.
All dividends and distributions of a Fund, whether received in shares
or cash, are taxable for U.S. federal income tax purposes to the shareholder who
receives them and must be reported by such shareholder on his or her federal
income tax return. A dividend or capital gains distribution received after the
purchase of a Fund's shares reduces the net asset value of the shares by the
amount of the dividend or distribution and will be subject to federal income
taxes. A subsequent loss on the sale of shares held for six months or less will
be treated as a long-term capital loss for federal income tax purposes to the
extent of any long-term capital gain distribution made with respect to such
shares.
Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed a Fund's
realized income and gains, even
-33-
<PAGE>
though such dividends and distributions may economically represent a return of a
particular shareholder's investment. Such distributions are likely to occur in
respect of shares purchased at a time when a Fund's net asset value reflects
gains that are either unrealized, or realized but not distributed.
Annually, shareholders will receive information as to the tax status of
distributions made by the Trust in each calendar year.
The Trust is required to withhold and remit to the U.S. Treasury 31% of
all dividend income earned by any shareholder account for which an incorrect or
no taxpayer identification number has been provided or where the Trust is
notified that the shareholder has under-reported income in the past (or the
shareholder fails to certify that he or she is not subject to such withholding).
In addition, the Trust will be required to withhold and remit to the U.S.
Treasury 31% of the amount of the proceeds of any redemption of shares of a
shareholder account for which an incorrect or no taxpayer identification number
has been provided.
The foregoing relates to U.S. federal income taxation. Distributions
only may also be subject to state and local taxes. The Trust is organized as a
Massachusetts business trust. Under current law, so long as each Fund qualifies
for the federal income tax treatment described above, it is believed that
neither the Trust nor any Fund will be liable for any income or franchise tax
imposed by Massachusetts.
MANAGEMENT OF THE TRUST
Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held with the Principal Occupation(s) During
Trust Past 5 Years
<S> <C> <C>
F. Lynn McPheeters*, 56, Trustee Vice President and Chief
100 N.E. Adams Street Financial Officer, Caterpillar,
Peoria, IL 61629-5330 Inc. 1998 to present;
Treasurer, Caterpillar Inc.,
1996 to 1998; Executive
Vice President, Caterpillar
Financial Services Inc., 1990
to 1996
Ronald R. Rossmann, 49, President President and Director,
411 Hamilton Boulevard Caterpillar Investment
Peoria, IL 61602 Management Ltd.; President and
Director, Caterpillar Securities Inc.
Gary Michael Anna, 45, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, Bradley University
Peoria, IL 61625
-34-
<PAGE>
William F. Bahl, 47, Trustee Chairman of the Board, Bahl &
212 E. Third Street Gaynor, Inc. (a registered
Suite 200 investment adviser)
Cincinnati, OH 45202
James F. Masterson*, 61, Trustee Director, Investor Relations,
100 N.E. Adams Street Caterpillar Inc.; Manager,
Peoria, IL 61629-5330 Treasury/Orders, Caterpillar
Inc., September 1988 to
January 1995
Dixie Louise Mills, 50, Trustee Dean, College of Business,
Illinois State University Illinois State University
15 Williams Hall
Normal, IL 61790-5500
Carol K. Burns, 53, Vice President and Assistant Manager of Marketing,
411 Hamilton Boulevard Clerk Caterpillar Investment
Peoria, IL 61602 Management Ltd.; Director,
Caterpillar Securities Inc.
Fred L. Kaufman, 51, Vice President and Treasurer Treasurer, Caterpillar
411 Hamilton Boulevard Investment Management Ltd.;
Peoria, IL 61602 Treasurer and Director,
Caterpillar Securities Inc.
Richard P. Konrath, 37, Clerk Securities Counsel,
100 N.E. Adams Street Caterpillar Inc.
Peoria, IL 61629-5330
</TABLE>
* Messrs. McPheeters and Masterson are each "interested persons" (as
defined in the 1940 Act) of the Trust, the Manager and the Distributor
and, therefore, may benefit from the management fees paid to the
Manager.
The mailing address of each of the officers and Trustees is c/o the
Trust, 411 Hamilton Boulevard, Suite 1200, Peoria, Illinois 61602.
The Trust's Agreement and Declaration of Trust provides that the Trust
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Trust or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties. The Trust,
at its expense, will provide liability insurance for the benefit of its Trustees
and officers.
Trustees other than those who are interested persons of the Manager
receive an annual fee of $10,000 plus $1,500 for each Trustees' meeting
attended. The table below shows the compensation paid to the Trust's Trustees
and officers for the year ended June 30, 1998.
-35-
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Pension or Estimated Annual Total
Position Compensation from Retirement Benefits Upon Compensation from
the Trust Benefits Accrued Retirement the Trust and
as Part of Fund Fund Complex Paid
Expenses to Trustees
<S> <C> <C> <C> <C>
F. Lynn $0 $0 $0 $0
McPheeters,
Trustee
Gary Michael $16,000 $0 $0 $16,000
Anna, Trustee
William F. Bahl, $16,000 $0 $0 $16,000
Trustee
James F. $0 $0 $0 $0
Masterson,
Trustee
Dixie Louise $16,000 $0 $0 $16,000
Mills, Trustee
Ronald R. $0 $0 $0 $0
Rossmann,
President
Carol K. Burns $0 $0 $0 $0
Vice President
and Assistant
Clerk
Fred L. Kaufman $0 $0 $0 $0
Vice President
and Treasurer
</TABLE>
At the date of this Statement, the Trust believes that the officers and
Trustees as a group own less than 1% of the outstanding shares of any Fund. As
of September 30, 1998, the following entities were the recordholders of the
following percentages of outstanding securities of the following Funds:
<TABLE>
<CAPTION>
Percentage Ownership
as of September 30, 1998
--------------------------------------------------------------------
Caterpillar
Inc. Supp-
lemental
Unemploy-
ment and
Benefits
Group
Insurance
Trust A Caterpillar
and Insurance Preferred
Caterpillar Caterpillar Company Stable
Investment Group Ltd. Principal
Trust Insurance Insurance Collective
401(k) Plan Trust B Reserve(1) Trust
FUND % TOTAL % TOTAL % TOTAL % Total
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Growth 64.83% 7.48%
Value 68.52% 9.44%
International 33.30% 39.13% 7.09%
Small Cap 33.21% 48.30% 10.04%
Asset Allocation 43.62% 28.15%
Fixed Income 22.83% 27.12% 35.65%
Short-Term Government
Securities 26.83% 30.70%
Money Market 62.43% 5.71%
</TABLE>
1 Does not include 36.64% of the outstanding shares of the Short-Term Government
Securities Fund held of record by American Bankers' Insurance Co.
for the benefit of Caterpillar Insurance Company Ltd.
-36-
To the extent either Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance Trust A
or Caterpillar Group Insurance Trust B, each a trust formed under the laws of
Illinois for the benefit of employees of Caterpillar Inc., beneficially owns
more than 25% of a Fund, it may be deemed to "control" such Fund. As a result,
it may not be possible for matters subject to a vote of a majority of the
outstanding voting securities of a Fund to be approved without the affirmative
vote of such shareholders, and it may be possible for such matters to be
approved by such shareholders without the affirmative vote of any other
shareholders.
The address of each of the recordholders listed above is 100 N.E. Adams
Street, Peoria, Illinois 61629, except for Caterpillar Insurance Company Ltd.,
the address of which is 3322 West End Avenue, Nashville, Tennessee 37203-1031.
As of September 30, 1998, the Trust believes that no other person, other than
Marshall & Ilsley Trust Company, which owns of record 7.91% of the outstanding
shares of the Value Fund, 5.31% of the outstanding shares of the Fixed Income
Fund, and 12.15% of the outstanding shares of the Asset Allocation Fund, owns
beneficially more than 5% of the outstanding shares of any Fund.
The Manager and the Subadvisers
Under written Management Contracts between the Trust and the Manager
with respect to each Fund, subject to such policies as the Trustees of the Trust
may determine, the Manager, at its expense, will furnish continuously an
investment program for the Trust and will make investment decisions on behalf of
the Funds and place all orders for the purchase and sale of portfolio securities
subject always to applicable investment objectives, policies and restrictions
provided. In order to assist it in carrying out its responsibilities, the
Manager has retained
-37-
<PAGE>
Subadvisers to render advisory services to each Fund other than the Small Cap
Fund.
The Manager has advised the Funds since inception, and the Manager and
its subsidiaries have provided investment advisory services to other entities
since 1989. The Manager and the Subadvisers have managed assets for the
Caterpillar Inc. $6.95 billion pension fund. The Manager currently manages more
than $652 million of assets in various stock and bond portfolios for the
Caterpillar Inc. pension fund, Caterpillar Insurance Company Ltd., Caterpillar
Inc. Supplemental Unemployment and Benefits Group Insurance Trust A and
Caterpillar Group Insurance Trust B, and other Caterpillar Inc. subsidiaries. In
addition, the Manager manages more than $233 million in pension plan assets in
its pension group trust created in 1990 to serve the pension investment needs of
Caterpillar Inc. dealers and suppliers. The Manager is a wholly-owned subsidiary
of Caterpillar, Inc. Certain entities listed in Exhibit 21 to the most recent
Annual Report or Form 10-K under the Securities Exchange Act of 1934 of
Caterpillar Inc. (File No. 33-46194) may be deemed to be affiliates of both the
Manager and the Trust.
Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business of the Trust, furnishes
office space and equipment, provides bookkeeping and certain clerical services
and pays all salaries, fees and expenses of officers and Trustees of the Trust
who are affiliated with the Manager. As indicated under "Portfolio Transactions
- -- Brokerage and Research Services," the Trust's portfolio transactions may be
placed with broker-dealers which furnish the Manager or the Subadvisers, without
cost, certain research, statistical and quotation services of value to them or
their respective affiliates in advising the Trust or their other clients. In so
doing, a Fund may incur greater brokerage commissions than it might otherwise
pay.
Each Fund pays the Manager a monthly Management Fee based on the
average net assets of the Fund at the following annual rates:
Annual Percentage of
Fund Average Net Assets
Growth................................................ .75%
Value................................................. .75
International......................................... .95
Small Cap............................................. .75
Asset Allocation...................................... .70
Fixed Income.......................................... .50*
Short-Term Government Securities...................... .35
Money Market.......................................... .30
* CIML's fee with respect to the Fixed Income Fund is paid at
an annual rate equal to the lesser of (i) .50% of the average net
-38-
<PAGE>
assets of the Fixed Income Fund and (ii) the rate at which (A) the excess of (I)
the fee paid by the Fixed Income Fund to CIML over (II) the fee paid by CIML to
Morgan with respect to the Fixed Income Fund (see below) equals (B) the excess
that would have existed under the advisory and subadvisory fee schedules in
effect with respect to the Fixed Income Fund prior to November 1, 1996.
For the fiscal years ended June 30, 1998, 1997, and 1996, the Funds
paid to the Manager the following amounts as Management Fees pursuant to the
relevant Management Contracts and, with respect to the Fixed Income Fund, a
management contract in effect prior to November 1, 1996, under which the Manager
was paid at the annual rate of .65% of average net assets:
<TABLE>
<CAPTION>
Fund Management Fees
---------------------------------------------------------------
Fiscal Year Ended June 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Growth............................... $3,631,767 $2,983,971 $3,095,694
Value................................ 2,912,039 2,331,391 1,799,524
International........................ 2,506,446 2,020,096 1,305,859
Small Cap1........................... 918,583 507,435 176,148
Asset Allocation ................... 1,023,199 773,756 613,440
Fixed Income......................... 747,105 724,846 466,424
Short-Term
Government
Securities......................... 199,653 187,517 134,564
Money Market2........................ 298,521 301,906 236,873
</TABLE>
- ---------------------------
1 The Manager waived $69,005 and $82,203 in management fees during the fiscal
years ended June 30, 1997 and 1996, respectively.
2 The Manager waived $38,738 in management fees during the fiscal year ended
June 30, 1996.
Under the Subadviser Agreement for each Fund between the Manager and the
Subadviser for such Fund (the "Subadviser Agreements"), subject always to the
control of the Trustees of the Trust, each Subadviser's obligation is to furnish
continuously an investment program for the Fund, to make investment decisions on
behalf of the Fund and to place all orders for the purchase and sale of
portfolio securities and all other investments for the Fund.
In performing their duties under the Subadviser Agreements, each Subadviser
is subject to the control of the Trustees, the policies determined by the
Trustees, the provisions of the Trust's Agreement and Declaration of Trust and
By-laws and any applicable investment objectives, policies and restrictions in
effect from time to time.
-39-
<PAGE>
The Management Contracts for all of the Funds and the Subadviser Agreements
were approved by the Trustees of the Trust (including all of the Trustees who
are not "interested persons" of the Manager or the relevant Subadvisers). The
Management Contracts and the Subadviser Agreements continue in force with
respect to the relevant Fund for two years from their respective dates, and from
year to year thereafter, but only so long as their continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority of those Trustees who are not "interested persons" of the Trust,
the Manager or the relevant Subadviser, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of that Fund. Each of the Management Contracts and the Subadviser Agreements
automatically terminates on assignment, and each is terminable upon notice by
the Trust. In addition, the Management Contracts may be terminated on not more
than 60 days' notice by the Manager to the Trust, and the Subadviser Agreements
may be terminated upon 60 days' notice by the Manager or 90 days' notice by the
Subadviser.
As described in the Prospectus under the caption "Management of the Trust,"
the Trust pays, in addition to the Management Fees described above, all expenses
not assumed by the Manager, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of the Manager or the Trust, interest
charges, taxes, brokerage commissions, expenses of issue or redemption of
shares, fees and expenses of registering and qualifying the Trust and shares of
the respective Funds for distribution under federal and state laws and
regulations, charges of custodians, auditing and legal expenses, expenses of
determining the net asset value of the Trust's shares, reports to shareholders,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, and
insurance premiums and professional association dues or assessments. The Trust
is also responsible for such nonrecurring expenses as may arise, including
litigation in which the Trust may be a party, and other expenses as determined
by the Trustees. The Trust may have an obligation to indemnify its officers and
Trustees with respect to such litigation.
Each Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Subadvisers. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The fee
paid to the Subadvisers
-40-
<PAGE>
(other than Morgan, with respect to the Short-Term Government and Money Market
Funds) is based on the Fund assets managed or advised by such Subadviser (the
"Fund Assets") together with any other assets managed or advised by the
Subadviser, at the time the Subadviser Agreement was entered into or as agreed
by CIML and the Subadviser, relating to Caterpillar Inc. or any of its
affiliates (other than the Short-Term Government and Money Market Funds). (The
Fund Assets together with such other assets are collectively referred to as the
"Combined Assets.") The subadvisory fee is calculated by applying the average
quarterly net asset value, as of the last business day of each month in the
calendar quarter, of the Combined Assets to the annual rates for each Subadviser
(other than Morgan, with respect to the Short- Term Government and Money Market
Funds), as set forth below. This amount is then adjusted based upon the ratio of
Fund Assets to Combined Assets. The subadvisory fee paid to Morgan with respect
to each of the Short-Term Government and Money Market Funds is based solely on
the average net assets of the relevant Fund.
Oppenheimer Capital ("Oppenheimer") is a Delaware general partnership
formed on July 1, 1987. Its address is Oppenheimer Tower, One World Financial
Center, New York, New York 10281. Oppenheimer Capital is a wholly owned
subsidiary of PIMCO Advisors LP, a registered investment advisor with over $200
billion in assets under management through its various subsidiaries. Oppenheimer
provides investment advice to individuals, state and local government agencies,
pension and profit sharing plans, trusts, estates, businesses and other
organizations. The Manager pays Oppenheimer for its subadvisory services with
respect to the Value Fund a fee, calculated as described above, at the annual
rate of 0.50% of the first $50 million of Combined Assets, 0.375% of the next
$50 million of Combined Assets and 0.25% of Combined Assets in excess of $100
million. The Manager has informed the Trust that for the fiscal years ended June
30, 1998, 1997, and 1996, Oppenheimer earned $1,051,909, $875,258, and $679,488,
respectively, in subadvisory fees.
Jennison Associates Capital LLC("Jennison") provides investment advice to
mutual funds, institutional accounts and other entities. Its principal place of
business is 466 Lexington Avenue, New York, New York 10017. Jennison is a
wholly-owned subsidiary of The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Jennison
for its subadvisory services with respect to the Growth Fund a fee, calculated
as described above, at the annual rate of 0.75% of the first $10 million of
Combined Assets, 0.50% of the next $30 million of Combined Assets, 0.35% of the
next $25 million of Combined Assets, 0.25% of the next $335 million of Combined
Assets, 0.22% of the next $600 million of Combined Assets and 0.20% of Combined
Assets in excess of $1 billion. The Manager has informed the Trust that for the
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<PAGE>
fiscal years ended June 30, 1998, 1997, and 1996, Jennison earned $1,185,328,
$994,791, and $1,038,575, respectively, in subadvisory fees with respect to the
Growth Fund.
Mellon Capital Management Corporation ("Mellon"), a Delaware corporation,
is located at 595 Market Street, Suite 3000, San Francisco, California 94105.
Mellon was founded in 1983 and as of June 30, 1998, manages over $68.2 billion
in funds. Mellon is a wholly-owned, indirect subsidiary of Mellon Bank
Corporation, Pittsburgh, Pennsylvania, a bank holding company which engages in
the businesses of retail banking, wholesale banking, and service products.
Mellon serves as an investment adviser and manager for institutional clients.
The Manager pays Mellon for its subadvisory services with respect to the Asset
Allocation Fund a fee, calculated as described above, at the annual rate of
0.50% of the first $200 million of Combined Assets and 0.20% of Combined Assets
in excess of $200 million. The Manager has informed the Trust that for the
fiscal years ended June 30, 1998, 1997, and 1996, Mellon earned $234,690,
$169,192, and $136,133, respectively, in subadvisory fees.
PanAgora Asset Management, Inc.'s ("PanAgora") principal place of business
is 260 Franklin Street, Boston, Massachusetts 02110. Fifty percent of the
outstanding voting stock of PanAgora is owned by each of Nippon Life Insurance
Company, a mutual life insurance company, and Putnam Investments, an investment
advisory firm. PanAgora currently provides asset allocation, indexing and
related investment advisory services to a variety of endowment funds, pension
accounts, other institutions and investment companies, with total assets under
management in excess of $16 billion. The Manager pays PanAgora for its
subadvisory services with respect to the Asset Allocation Fund a fee, calculated
as described above, at the annual rate of 0.50% of the first $10 million of
Combined Assets, 0.40% of the next $40 million of Combined Assets, 0.20% of the
next $50 million of Combined Assets and 0.10% of Combined Assets in excess of
$100 million. The Manager has informed the Trust that for the fiscal years ended
June 30, 1998, 1997, and 1996 PanAgora earned $94,155, $77,664, and $64,517,
respectively, in subadvisory fees.
Mercator Asset Management, L.P. provides investment advice to mutual
funds and other entities. Its principal place of business is 2400 East
Commercial Blvd., Ft. Lauderdale, Florida 33308. Mercator Asset Management, L.P.
is a limited partnership a minority portion of the limited partnership interest
in which is owned by The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Mercator
Asset Management, L.P. for its subadvisory services with respect to the
International Fund a fee, calculated as described above, at the annual rate of
0.75% of the first $50 million of Combined Assets, 0.60% of the next $250
million of
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<PAGE>
Combined Assets, and 0.45% of Combined Assets in excess of $300 million. The
Manager has informed the Trust that for the fiscal years ended June 30, 1998,
1997, and 1996 Mercator Asset Management L.P. earned $1,356,689, $1,165,898, and
$778,254, respectively, in subadvisory fees.
Morgan provides investment advice to mutual funds and other entities. Its
principal place of business is 522 Fifth Avenue, New York, New York 10036.
Morgan is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, an
international financial services corporation. The Manager pays Morgan for its
subadvisory services with respect to the Money Market Fund a fee computed and
paid quarterly at the annual rate of 0.15% of the average quarterly net assets,
as of the last business day of each month in the calendar quarter, of the Money
Market Fund. The Manager pays Morgan for its subadvisory services with respect
to the Fixed Income Fund a fee computed and paid quarterly at the annual rate of
0.25% of the first $75 million of Combined Assets, 0.225% of the next $75
million of Combined Assets, 0.175% of the next $150 million of Combined Assets,
0.125% of the next $100 million of Combined Assets, and 0.10% of Combined Assets
in excess of $400 million. The Manager paid Morgan for its subadvisory services
with respect to the Short Term Government Securities Fund a fee computed and
paid quarterly at the annual rate of 0.50% of the first $10 million of Combined
Assets, 0.40% of the next $40 million of Combined Assets, 0.20% of the next $50
million of Combined Assets, and 0.10% of Combined Assets in excess of $100
million. The Manager has informed the Trust that for the fiscal years ended June
30, 1998, 1997, and 1996, pursuant to the subadvisory agreement described above
and a subadvisory agreement in effect prior to November 1, 1996, under which
Morgan was paid quarterly at the annual rate of 0.30% of the average quarterly
net assets of the Fixed Income Fund, as of the last business day of each month
in the calendar quarter, of the first $75 million of such assets, 0.25% of the
next $75 million of such assets, 0.22% of the next $150 million of such assets,
and 0.15% of such assets in excess of $300 million, Morgan earned $186,150,
$240,532, and $198,111, respectively, in subadvisory fees with respect to the
Fixed Income Fund. The Manager has informed the Trust that for the fiscal years
ended June 30, 1998, 1997, and 1996, Morgan earned $134,077, $143,165, and
$104,334, respectively, in subadvisory fees with respect to the Money Market
Fund. In addition, the Manager has informed the Trust that for the fiscal year
ended June 30, 1998, Morgan earned $41,022 in subadvisory fees with respect to
the Short Term Government Securities Fund.
Each of the Subadvisers also serves as investment adviser to certain
separate accounts with minimum balances ranging from $10 million to $50 million.
Jennison has informed the Trust that its separate account minimum balance is
typically $50 million.
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<PAGE>
The Subadvisers are registered as investment advisers with the Securities
and Exchange Commission. This registration does not involve supervision of
management or investment policy by any federal agency.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.
The Trust's independent accountants are PricewaterhouseCoopers LLP, 160 Federal
Street, Boston, MA 02110. PricewaterhouseCoopers LLP conducts an annual audit of
the Trust, assists in the preparation of each Fund's federal and state income
tax returns and consults with the Trust as to matters of accounting and federal
and state income taxation. The financial statements included in the Trust's
Annual Report for the period ended June 30, 1998, filed electronically on August
28, 1998 (File No. 811-06602) are incorporated by reference into this Statement
of Additional Information.
OTHER SERVICES
Custodial Arrangements. State Street Bank and Trust Company ("State
Street"), P.O. Box 1713, Boston, MA 02101, is the custodian for all Funds of the
Trust. As such, State Street holds in safekeeping certificated securities and
cash belonging to the Trust and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Trust. Upon instruction, State
Street receives and delivers cash and securities of the Trust in connection with
Fund transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. State Street also maintains certain
accounts and records of the Trust. In addition, State Street has contracted with
various foreign banks and depositories to hold portfolio securities outside of
the United States on behalf of certain of the Funds. State Street also
calculates the total net asset value, total net income and net asset value per
share of each Fund on a daily basis (and as otherwise may be required by the
1940 Act) and performs certain accounting services for all Funds of the Trust.
As compensation for its services as custodian, the Funds accrued expenses
in the following amounts to be paid to State Street for the periods indicated:
<TABLE>
<CAPTION>
Custodian
Year ended June 30
---------------------------------------
Fund 1998 1997 1996
- ----
<S> <C> <C> <C>
Growth $128,000 $117,000 $119,000
Value $ 91,000 $ 78,000 $ 77,000
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<PAGE>
International $501,000 $434,000 $300,000
Small Cap $ 93,000 $ 75,000 $ 36,000
Asset
Allocation $175,000 $180,000 $172,000
Fixed Income $107,000 $102,000 $ 72,000
Short-Term
Government
Securities $ 48,000 $ 44,000 $ 39,000
Money Market $ 65,000 $ 58,000 $ 60,000
</TABLE>
Transfer Agent. Boston Financial Data Services, Inc., The BFDS Building,
Two Heritage Drive, Quincy, MA 02171, acts as the Trust's transfer agent and
dividend disbursing agent.
As compensation for its services as transfer agent, the Funds accrued
expenses in the following amounts to be paid to Boston Financial Data Services,
Inc. for the periods indicated:
<TABLE>
<CAPTION>
Transfer Agent
Year ended June 30
----------------------------------------
Fund 1998 1997 1996
- ----
<S> <C> <C> <C>
Growth $ 96,000 $ 93,000 $ 86,000
Value $ 92,000 $ 79,000 $ 66,000
International $ 71,000 $ 73,000 $ 65,000
Small Cap $ 25,000 $ 22,000 8,000
Asset
Allocation $ 54,000 $ 56,000 $ 48,000
Fixed Income $ 52,000 $ 56,000 $ 48,000
Short-Term
Government
Securities $ 25,000 $ 26,000 $ 23,500
Money Market $ 49,000 $ 48,000 $ 42,000
</TABLE>
Distributor. Caterpillar Securities Inc. ("CSI"), a wholly- owned
subsidiary of CIML, is the Trust's principal underwriter. CSI is not obligated
to sell any specific amount of shares of the Trust and will purchase shares for
resale only against orders therefor.
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<PAGE>
PORTFOLIO TRANSACTIONS
Investment Decisions. Investment decisions for the Trust and for the other
investment advisory clients of the Manager and the Subadvisers are made with a
view to achieving their respective investment objectives. The Manager and the
Subadvisers operate independently in providing services to their respective
clients. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, for example, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also happens that two or more clients
may simultaneously buy or sell the same security, in which event each day's
transactions in such security are, insofar as possible, averaged as to price and
allocated between such clients in a manner which in the opinion of the Manager
or the relevant Subadviser is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.
Brokerage and Research Services. Transactions on stock exchanges and other
agency transactions involve the payment by the Trust of brokerage commissions.
In the United States and certain foreign countries, such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction. There
is generally no stated commission in the case of securities, such as U.S.
Government securities, traded in the over-the-counter markets, but the price
paid by the Trust usually includes an undisclosed dealer commission or mark-up.
It is anticipated that most purchases and sales of portfolio securities for the
Money Market Fund will be with the issuer or with major dealers in money market
instruments acting as principals. Accordingly, it is not anticipated that the
Short- Term Government Securities or Money Market Funds will pay significant
brokerage commissions. In underwritten offerings, the price paid includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Securities firms may receive brokerage commissions on transactions involving
options, futures and options on futures and the purchase and sale of underlying
securities upon exercise of options. The brokerage commissions associated with
buying and selling options may be proportionately higher than those associated
with general securities transactions.
When the Manager or a Subadviser places orders for the purchase and
sale of portfolio securities for a particular Fund
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<PAGE>
and buys and sells securities for such Fund it is anticipated that such
transactions will be effected through a number of brokers and dealers. In so
doing, the Manager or the relevant Subadviser, as the case may be, intends to
use its best efforts to obtain for each Fund the most favorable price and
execution available, except to the extent that it may be permitted to pay higher
brokerage commissions as described below. In seeking the most favorable price
and execution, the Manager or the relevant Subadviser, as the case may be,
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research, statistical and quotation services from broker-dealers
which execute portfolio transactions for the clients of such advisers.
Consistent with this practice, the Manager and the Subadvisers may receive
research, statistical and quotation services from many broker-dealers with which
the Trust's portfolio transactions are placed. These services, which in some
instances could also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews, evaluations
of securities and recommendations as to the purchase and sale of securities.
Some of these services may be of value to the Manager or the Subadvisers in
advising various of its clients (including the Trust), although not all of these
services are necessarily useful and of value in managing the Trust or any
particular Fund. The fees paid to the Manager and the Subadvisers are not
reduced because they receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Management Contracts and the Subadviser Agreements, the Manager and the
Subadvisers may cause a Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in the Securities Exchange Act of 1934) to
the Manager or the Subadvisers an amount of disclosed commission for effecting a
securities transaction for a Fund on an agency basis in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
The authority of the Manager and the Subadvisers to cause the Funds to pay any
such greater commissions is subject to such policies as the Trustees may adopt
from time to time.
The aggregate brokerage commissions paid by the Funds during the fiscal
years ended June 30, 1998, 1997, and 1996 and the amounts of brokerage
commissions allocated to persons or firms supplying research, statistical and
quotation services during
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<PAGE>
such fiscal years are set forth below:
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1998:
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
---- --------------------- -------------- ------------------
<S> <C> <C> <C>
Growth $ 613,345 $303,884,643 $306,660
Value 55,691 21,835,794 27,404
International 279,567 0 0
Small Cap 497,411 0 0
Asset Allocation 1,437 0 0
Fixed Income 0 0 0
Short-Term
Gov't Securities 0 0 0
Money Market 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1997:
Transactions
Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
---- --------------------- -------------- ------------------
<S> <C> <C> <C>
Growth $465,218 $174,031,891 $244,172
Value 67,421 9,384,874 13,200
International 326,670 0 0
Small Cap 322,594 0 0
Asset Allocation 4,457 0 0
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
Fiscal year ended June 30, 1996:
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
---- --------------------- -------------- ------------------
Growth $546,681 $173,654,639 $250,056
Value 139,551 31,580,857 53,339
International 202,476 0 0
Small Cap 181,028 0 0
Asset Allocation 7,089 0 0
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<PAGE>
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
</TABLE>
The Funds may from time to time place orders for the purchase or sale of
securities with brokers that may be affiliated with the Manager or a Subadviser.
In such instances, the placement of orders with such brokers would be consistent
with the Funds' objective of obtaining the best execution and could not be
dependent upon the fact that such brokers are affiliates of the Manager or a
Subadviser. With respect to orders placed with affiliated brokers for execution
on a national securities exchange, commissions received must conform to Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which permit an
affiliated person of a registered investment company (such as the Trust), or any
affiliated person of such person, to receive a brokerage commission from such
registered investment company provided that such commission is reasonable and
fair compared to the commissions received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time.
During the fiscal year ended June 30, 1998, the Growth Fund placed orders
for the purchase and sale of securities with J.P. Morgan Securities, Inc., an
affiliate of Morgan, and Oppenheimer & Co., Inc., an affiliate of Oppenheimer,
and the Value Fund placed orders for the purchase and sale of securities with
Oppenheimer & Co. These brokerage transactions are set forth below.
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1998
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
- ---- ------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Value Fund Oppenheimer $8,115 14.57% 16.77%
& Co.
Growth Fund J.P. Morgan 14,518 2.37% 3.49%
Securities,
Inc.
Oppenheimer 4,061 0.66% 0.69%
& Co.
</TABLE>
During the fiscal year ended June 30, 1997, the Growth Fund placed
orders for the purchase and sale of securities with J.P. Morgan Securities,
Inc., an affiliate of Morgan, and Oppenheimer & Co., Inc., an affiliate of
Oppenheimer, the Value Fund placed orders for the purchase and sale of
securities with Oppenheimer & Co., and the International Fund placed orders for
the purchase and sale of
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<PAGE>
securities with J.P. Morgan. These brokerage transactions are set
forth below.
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1997
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
- ---- ------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Growth Fund J.P. Morgan $ 5,835 1.25% 0.97%
Securities, Inc.
Oppenheimer $ 3,906 0.84% 0.79%
& Co., Inc.
Value Fund Oppenheimer $12,316 18.27% 18.92%
& Co., Inc.
International
Fund J.P. Morgan $ 322 0.10% 0.10%
Securities, Inc.
</TABLE>
During the fiscal year ended June 30, 1996, the Value and Growth Funds
placed orders for the purchase or sale of securities with Oppenheimer & Co.
Also, during the fiscal year ended June 30, 1996, the Growth Fund placed orders
for the purchase or sale of securities with J.P. Morgan and the Value Fund
placed orders for the purchase or sale of securities with Prudential Securities,
Inc., an affiliate of Jennison. These brokerage transactions are set forth
below:
<TABLE>
<CAPTION>
Fiscal year ended June 30, 1996
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
- ---- ------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Value Oppenheimer & Co, Inc. $5,650 4.05% 3.42%
Prudential
Securities, Inc. $6,600 4.73% 19.55%
Growth J.P. Morgan
Securities, Inc. $4,115 0.75% 1.99%
Oppenheimer & Co., Inc. $584 0.11% 0.05%
</TABLE>
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<PAGE>
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The Trust was established as a Massachusetts business trust under the
laws of Massachusetts by an Agreement and Declaration of Trust dated November
19, 1991. A copy of the Agreement and Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Trust's fiscal year
ends on June 30.
As described in the Prospectus following the caption "Description of
The Preferred Group," shares of the Trust are each entitled to one vote per
share (with proportional voting for fractional shares) on such matters as
shareholders are entitled to vote. Shareholders vote by individual Fund on all
matters except (i) when required by the law, shares shall be voted as a single
class, and (ii) when the Trustees have determined that the matter affects only
the interests of one or more Funds, then only shareholders of such Funds
affected shall be entitled to vote thereon. There will normally be no meetings
of shareholders for the purpose of electing Trustees unless and until such time
as less than a majority of the Trustees have been elected by the shareholders,
at which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. In addition, Trustees may be removed from office by a
written consent signed by the holders of two-thirds of the outstanding shares of
the Trust and filed with the Trust's custodian or by a vote of the holders of
two-thirds of the outstanding shares of the Trust at a meeting duly called for
the purpose, which meeting shall be held upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders, who have been such for at least six months, and who hold
shares constituting 1% of the outstanding shares, stating that such shareholders
wish to communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Trust has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders). Except as
set forth above, the Trustees shall continue to hold office and may appoint
their successors.
Shareholder Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of a Fund's property for all loss and expense of any
shareholder of that Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund of which
he is or was a shareholder would be unable to meet its obligations.
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<PAGE>
APPENDIX A
TAX EXEMPT BOND, CORPORATE BOND AND COMMERCIAL PAPER RATINGS
Tax Exempt and Corporate Bond Ratings
Description of Moody's Investors Service, Inc.'s Corporate Bond
Ratings:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
B -- Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
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<PAGE>
other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Description of Standard & Poor's Corporate Bond Ratings:
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC-C -- Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major risk exposures to adverse
conditions.
D -- Bonds rated D are in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
Ratings of Commercial Paper
Description of Moody's Investors Service, Inc.'s Commercial Paper
Ratings:
Moody's Investors Service, Inc. evaluates the salient features
that affect a Commercial Paper issuer's financial and competitive
position. Its appraisal includes, but is not limited to, the review of
such factors as: quality of management, industry strengths and risks,
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<PAGE>
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.
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<PAGE>
APPENDIX B
DESCRIPTION OF MONEY MARKET FUND INVESTMENTS
Obligations Backed by Full Faith and Credit of the U.S. Government --
are bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the U.S.
Government. Such obligations include, but are not limited to, obligations issued
by the Government National Mortgage Association, Farmers' Home Administration
and the Small Business Administration.
Other U.S. Government Obligations -- are bills, certificates of
indebtedness, notes, and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government which are supported by the right of the
issuer to borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but are not
limited to, obligations issued by the Tennessee Valley Authority, the Bank for
Cooperatives, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks and the Federal National Mortgage Association.
Repurchase Agreements -- are agreements by which a Fund purchases a
U.S. Treasury or agency obligation and obtains a simultaneous commitment from
the seller (a domestic commercial bank or, to the extent permitted by the 1940
Act, a recognized securities dealer) to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Fund to earn
a return on temporarily available cash at no market risk, although the Fund may
be subject to various delays and risks of loss if the seller is unable to meet
its obligation to repurchase.
Certificates of Deposit -- are certificates issued against funds
deposited in a bank, are for a definite period of time, earn a specified rate of
return, and are normally negotiable.
Bankers' Acceptances -- are short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are term
"accepted" when a bank guarantees their payment at maturity.
Eurodollar Obligations -- obligations of foreign branches of U.S.
banks.
Yankeedollar Obligations -- obligations of domestic branches of foreign
banks.
Commercial Paper -- refers to promissory notes issued by corporations
in order to finance their short-term credit needs.
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Corporate Obligations -- include bonds and notes issued by corporations
in order to finance longer term credit needs.
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THE PREFERRED GROUP OF MUTUAL FUNDS
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Statements of assets and liabilities -- June 30, 1998 (a).
Statements of operations -- year ended June 30, 1998 (a).
Statements of changes in net assets -- year ended June 30,
1998 (a).
Financial Highlights (a)(b).
Notes to financial statements (a).
Supporting Schedules:
Schedule I -- Portfolio of investments owned -- June
30, 1998(a).
Schedules II through IX omitted because the required
matter is not present.
- --------------------
(a) Incorporated by reference
into Parts A and B.
(b) Included in Part A.
(b) Exhibits:
1(a). Agreement and Declaration of Trust --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
1(b). Amendment No. 1 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
1(c). Amendment No. 2 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
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<PAGE>
Statement.
1(d). Amendment No. 3 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
1(e). Amendment No. 4 to Agreement and
Declaration of Trust -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
2. By-laws -- incorporated by reference
to Post-Effective Amendment No. 11 to
the Registrant's Registration
Statement.
3. None.
4. Portions of the Registrant's
Agreement and Declaration of Trust
and By-laws pertaining to
shareholder's rights -- incorporated
by reference to Post- Effective
Amendment No. 11 to the Registrant's
Registration Statement.
5(a). Form of Management Contract between The
Preferred Group of Mutual Funds (the
"Trust") and Caterpillar Investment
Management Ltd. (the "Manager" or "CIML")
with respect to the Preferred Growth Fund
-- incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
5(b). Form of Management Contract between
the Trust and the Manager with
respect to the Preferred Value Fund
-- incorporated by reference to
Post-Effective Amendment No. 11 to
the Registrant's Registration
Statement.
5(c). Form of Management Contract between
the Trust and the Manager with
respect to the Preferred
International Fund -- incorporated by
reference to Post- Effective
Amendment No. 11 to the Registrant's
Registration Statement.
5(d). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Small Cap Fund -- incorporated
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<PAGE>
by reference to Post-Effective Amendment
No. 11 to the Registrant's Registration
Statement.
5(e). Form of Management Contract between
the Trust and the Manager with
respect to the Preferred Asset
Allocation Fund -- incorporated by
reference to Post- Effective
Amendment No. 11 to the Registrant's
Registration Statement.
5(f). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Fixed Income Fund --
incorporated by reference to Post-
Effective Amendment No. 13 to the
Registrant's Registration Statement.
5(g). Form of Management Contract between the
Trust and the Manager with respect to the
Preferred Short-Term Government
Securities Fund -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(h). Form of Management Contract between
the Trust and the Manager with
respect to the Preferred Money Market
Fund -- incorporated by reference to
Post- Effective Amendment No. 11 to
the Registrant's Registration
Statement.
5(i). Form of Subadviser Agreement between the
Manager and Jennison Associates Capital
Corp. ("Jennison") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(j). Form of Subadviser Agreement between the
Manager and Oppenheimer Capital
("Oppenheimer") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(k). Form of Subadviser Agreement between the
Manager and Mercator Asset Management,
L.P. ("Mercator") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
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<PAGE>
5(l). Form of Subadviser Agreement between the
Manager and Mellon Capital Management
Corporation ("Mellon") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(m). Form of Subadviser Agreement between the
Manager and PanAgora Asset Management,
Inc. ("PanAgora") -- incorporated by
reference to Post-Effective Amendment No.
11 to the Registrant's Registration
Statement.
5(n). Form of Subadviser Agreement between the
Manager and J.P. Morgan Investment
Management Inc. ("Morgan") with respect
to the Preferred Fixed Income Fund --
incorporated by reference to Post-
Effective Amendment No. 13 to the
Registrant's Registration Statement.
5(o). Form of Subadviser Agreement between
the Manager and Morgan with respect
to the Preferred Money Market Fund --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
6. Form of Distributor's Contract
between the Trust and Caterpillar
Securities Inc. -- incorporated by
reference to Post- Effective
Amendment No. 11 to the Registrant's
Registration Statement
7. None.
8. Form of Custodian Contract between
the Trust and State Street Bank and
Trust Company ("State Street") --
incorporated by reference to
Post-Effective Amendment No. 11 to
the Registrant's Registration
Statement.
9. Form of Transfer Agency and Service
Agreement between the Trust and State
Street -- incorporated by reference
to Post-Effective Amendment No. 11 to
the Registrant's Registration
Statement.
10. Opinion and Consent of Ropes & Gray --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
-4-
<PAGE>
11. Consent of PricewaterhouseCoopers LLP.
12. None.
13. Form of Initial Capital Agreement --
incorporated by reference to Post-
Effective Amendment No. 11 to the
Registrant's Registration Statement.
14. None.
15. None.
16. Calculation of Performance Information
and Yield -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
17(a). Financial Data Schedule for the Preferred
Growth Fund.
17(b). Financial Data Schedule for the Preferred
Value Fund.
17(c). Financial Data Schedule for the Preferred
International Fund.
17(d). Financial Data Schedule for the Preferred
Small Cap Fund.
17(e). Financial Data Schedule for the Preferred
Asset Allocation Fund.
17(f). Financial Data Schedule for the Preferred
Fixed Income Fund.
17(g). Financial Data Schedule for the Preferred
Short-Term Government Securities Fund.
17(h). Financial Data Schedule for the Preferred
Money Market Fund.
18. None.
19. Power of Attorney -- incorporated by
reference to Post-Effective Amendment No.
13 to the Registrant's Registration
Statement.
Item 25. Persons Controlled by or Under Common Control with
Registrant
The Registrant may be deemed to be controlled by Caterpillar Inc., a
Delaware corporation, which owns 100% of the outstanding
-5-
<PAGE>
voting securities of CIML and Caterpillar Insurance Company Ltd., each of which
may be deemed to control one or more series of the Registrant, and for the
benefit of the employees of which Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance Trust A
and Caterpillar Group Insurance Trust B, which may be deemed to control one or
more series of the Registrant, were established. To the extent any of these
entities may be deemed to control the Registrant, the various entities listed in
Exhibit 21 to the most recent Annual Report on Form 10-K under the Securities
Exchange Act of 1934 of Caterpillar Inc. (File No. 33-46194) may be deemed to be
under common control with the Registrant.
Item 26. Number of Holders of Securities
(As of September 30, 1998)
(1) (2)
Number of
Name of Fund Recordholders
------------ -------------
Growth Fund 3968
Value Fund 3912
International Fund 2661
Small Cap Fund 645
Asset Allocation Fund 2006
Fixed Income Fund 1648
Short-Term Government
Securities Fund 383
Money Market Fund 2034
Item 27. Indemnification
Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:
Section 1. Trustees, Officers, Etc. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
-6-
<PAGE>
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
Section 2. Compromise Payment. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Any approval pursuant to this Section shall not
prevent the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
Section 3. Indemnification Not Exclusive. The right of
indemnification hereby provided shall not be exclusive of or
-7-
<PAGE>
affect any other rights to which such Covered Person may be entitled. As used in
this Article VIII, the term "Covered Person" shall include such person's heirs,
executors and administrators and a "disinterested Trustee" is a Trustee who is
not an "interested person" of the Trust as defined in Section 2(a)(19) of the
1940 Act (or who has been exempted from being an "interested person" by any
rule, regulation or order of the Commission), and against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending. Nothing contained in
this Article shall affect any rights to indemnification to which personnel of
the Trust, other than Trustees or officers, and other persons may be entitled by
contract or otherwise under law, nor the power of the Trust to purchase and
maintain liability insurance on behalf of any such person; provided, however,
that the Trust shall not purchase or maintain any such liability insurance in
contravention of applicable law, including without limitation the 1940 Act.
* * *
The Trust, at its expense, provides liability insurance for the benefit
of its Trustees and officers.
* * *
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Trust pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Trust of
expenses incurred or paid by a Trustee, officer or controlling person of the
Trust in the successful defense of any action, suit or proceeding) is asserted
against the Trust by such Trustee, officer or controlling person in connection
with the securities being registered, the Trust will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
(a) The Manager is the investment adviser to the Trust and its business
is summarized under the caption "Management of The Preferred Group" in the
Prospectus constituting Part A of this Registration Statement, which summary is
incorporated herein by reference.
-8-
<PAGE>
The directors and officers of the Manager have been engaged during the
last two fiscal years in no business, vocation or employment of a substantial
nature other than as directors or officers of the Manager or certain of its
corporate affiliates. Certain officers of the investment adviser serve as
officers of the Trust. The address of the Manager, its corporate affiliates and
the Trust is 100 N.E. Adams Street, Peoria, Illinois 61629.
NAME AND POSITION
WITH MANAGER
Ronald R. Rossmann
President, Director
Robert C. Frantz
Vice President, Director
Richard P. Konrath
Clerk
Fred L. Kaufman
Treasurer
(b) Jennison is the subadviser to the Preferred Growth Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
The list required by this Item 28 of officers and directors of
Jennison, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A
and D of Form ADV filed by Jennison pursuant to the Advisers Act (SEC File No.
801-5608).
(c) Oppenheimer Capital is the subadviser to the Preferred Value Fund
and its business is summarized under the caption "Management of The Preferred
Group" in the Prospectus constituting Part A of this Registration Statement,
which summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Oppenheimer Capital is or has been,
at any time during the past two fiscal years, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH OPPENHEIMER OTHER CONNECTIONS
Robert J. Bluestone None
Managing Director
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<PAGE>
Charles H. Brunie None
Chairman Emeritus
Thomas E. Duggan Assistant Secretary of
Secretary, General Oppenheimer Financial Corp.
Counsel
Linda S. Ferrante None
Managing Director
Herbert S. Fitz Gibbon, II None
Managing Director
Richard J. Glasebrook, II None
Managing Director
Colin J. Glinsman None
Managing Director
Jonathan K. Greenberg None
Senior Vice President
Matthew Greenwald None
Senior Vice President
Alan Gutman None
Senior Vice President
Joseph M. LaMotta None
Chairman Emeritus
Frank A. Lecates, Jr. None
Managing Director, Director
of Research
John G. Lindenthal None
Managing Director
George A. Long None
Chairman, Chief Investment
Officer
James McCaughan President, UBS Asset
President Management (New York), Inc.
prior to May 1998
William P. McDaniel None
Managing Director
Kenneth H. Mortenson None
Managing Director
Julius A. Nicolai None
Managing Director
-10-
<PAGE>
John Rowley None
Vice President
Philip T. Rodilosso None
Managing Director
Eileen P. Rominger None
Managing Director
Joseph M. Rusbarsky Vice President, Capital
Managing Director Guardian prior to October 1996
David G. Santry None
Senior Vice President
Thomas Scerbo Senior Vice President, Lazard
Senior Vice President Freres prior to August 1996
Sheldon M. Siegel None
Chief Financial Officer,
Treasurer
Jeffrey Tarnoff None
Senior Vice President
Eugene B. Vesell None
Managing Director
Jeffrey Whittington None
Senior Vice President
The principal business address of Oppenheimer Capital is Oppenheimer
Tower, One World Financial Center, New York, New York 10281.
(d) Mercator is the subadviser to the Preferred International Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mercator is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
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<PAGE>
NAME AND POSITION BUSINESS AND
WITH MERCATOR OTHER CONNECTIONS
John G. Thompson None
President, JZT Corp., General
Partner
Peter F. Spano None
President, PXS Corp., General
Partner
Michael A. Williams Sole Stockholder, Director and
President, MXW Corp., General Officer of Newbrook, Inc. and
Partner affiliated companies, which
own and manage commercial real
estate (leased to unaffiliated
businesses).
The principal business address of Newbrook, Inc. is 401 The Hill, Suite 201,
Portsmouth, New Hampshire 03801.
(e) Mellon is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
The list required by this Item 28 of officers and directors of Mellon,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by Mellon pursuant to the Advisers Act (SEC File No. 801-8147).
Additional information required by this Item 28 and not included in the Form ADV
referenced above is as follows:
The principal business address of Mellon Bank, N.A. is One Mellon Bank
Center, Suite 4700, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Capital Management Corporation
is 595 Market Street, Suite 3000, San Francisco, California 94105.
The principal business address of Mellon Equity Associates,
LLP is One Mellon Bank Center, Suite 3715, Pittsburgh, Pennsylvania 15258.
The principal business address of The Dreyfus Corporation is 200 Park
Avenue, New York, New York 10166.
The principal business address of Certus Asset Advisors
Corporation is One Bush Street, Suite 450, San Francisco, California 94104.
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<PAGE>
The principal business address of Boston Safe Advisors, Inc.
is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Bond Associates, LLP
is One Mellon Bank Center, Suite 4135, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company Asset
Management, LLC is One Boston Place, Boston, Massachusetts 02106.
The principal business address of Mellon Bank Corporation is
One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company, Inc. is
One Boston Place, Boston, Massachusetts 02106.
The principal business address of Laurel Capital Advisors, LLP
is One Mellon Bank Center, Suite 3935, Pittsburgh, Pennsylvania 15258.
The principal business address of Franklin Portfolio Holdings,
Inc. is Two International Place, 22d Floor, Boston, Massachusetts 02110.
The principal business address of The Boston Company Financial
Strategies Group, Inc. is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Asia Limited is Plaza Business
Center, 35/F Harbor Road, Central Plaza, Hong Kong.
The principal business address of CCF-Mellon Partners is One Mellon
Bank Center, Suite 4150, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon-France Corporation is One
Mellon Bank Center, Suite 4000, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Global Investing
Corp. is One Mellon Bank Center, Suite 1935, Pittsburgh, Pennsylvania 15258.
The principal business address of Pareto Partners is One Mellon Bank
Center, Suite 4040, Pittsburgh, Pennsylvania 15258.
The principal business address of Wellington-Medford II
Properties, Inc. is One Boston Place, Boston, Massachusetts 02106.
The principal business address of TBC Securities Co., Inc. is
One Boston Place, Boston, Massachusetts 02106.
The principal business address of Boston Safe Deposit and Trust Company
is One Boston Place, Boston, Massachusetts 02106.
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<PAGE>
The principal business address of Boston Group Holdings, Inc.
is One Mellon Bank Center, Suite 1820, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Financial Services Corporation
#17 is One Executive Drive, Fort Lee, New Jersey 07024.
The principal business address of Mellon Accounting Services,
Inc. is Three Mellon Bank Center, Suite 3102, Pittsburgh, Pennsylvania 15259.
The principal business address of MGIC-UK Ltd. is 6 Devonshire
Square, London EC2M 4LR, England.
The principal business address of Mellon Financial Company is One
Mellon Bank Center, Suite 747, Pittsburgh, Pennsylvania 15258.
The principal business address of APT Holdings Corporation is Pike
Creek Operations Center, 4500 New Linden Hill Road, Wilmington, Delaware 19808.
The principal business address of Allomon Corporation is Suite 329, Two
Mellon Bank Center, Pittsburgh, Pennsylvania 15259.
The principal business address of Beaver Valley Leasing Corporation is
Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Katrena Corporation is 4500 New
Linden Hill road, Suite 210, Wilmington, Delaware 19808.
The principal business address of MFS Leasing Corp. is Suite
4444, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Financial Services Corporation
4 and 13 is Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania
15258-0001.
The principal business address of Mellon Leasing Corporation
is Suite 4444, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001
The principal business address of Mellon International Leasing
Company is 4500 New Linden Hill Road, Suite 210, Wilmington, Delaware 19808.
The principal business address of Mellon Overseas Investment
Corporation is 10th and Market Street, Second Floor, Wilmington,
Delaware 19801.
The principal business address of Mellon Securities Limited is
Suite 400, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001.
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<PAGE>
The principal business address of Mellon Securities Trust Company is
120 Broadway, New York, New York 10271.
The principal business address of Mellon Ventures, Inc. is
Suite 3200, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Pontus, Inc. is Suite 4444,
One Mellon Bank Center, Pittsburgh, Pennsylvania 15258-0001.
The principal business address of RECR, Inc. is Mellon Bank Center, 8th
Floor, Legal Affairs, 1735 Market Street, Philadelphia, Pennsylvania 19103.
The principal business address of Bridgewater Land Company,
Inc. is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Preferred Capital Corporation
is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of AP Colorado, Inc., AP Colorado, Inc.
#2, AP Colorado, Inc. #3, AP Rural Land, Inc., AP Properties Minnesota, Inc., AP
Wheels, Inc., APD Chimney Lakes, Inc., APD Cross Creek, Inc., APD Crossings,
Inc., APD Cypress Springs, Inc., APU Chimney Lakes, Inc., APU Cross Creek, Inc.,
APU Cypress Springs, Inc., Cacalaba, Inc., FSFC, Inc., Festival, Inc., Holiday
Properties, Inc., Laplace Land Company, Inc., Lucien Land Company, Inc.,
Melnamor Corporation, Promenade, Inc., SKAP #7, Inc., Texas AP, Inc., Trilem,
Inc. and Vacation Properties, Inc. is Suite 1535, One Mellon Bank Center,
Pittsburgh, Pennsylvania 15258.
The principal business address of Baltimore Realty Corporation
is Suite 325, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258.
The principal business address of Central Valley Management Co., Inc.
and Mellon Mortgage Company is 3100 Travis Street, Houston, Texas 77006.
The principal business address of Dreyfus Financial Services
Corporation is 200 Park Avenue, 8th Floor West, New York, New York 10166.
The principal business address of Dreyfus Investment Services
Corporation is Suite 0179, Two Mellon Bank Center, Pittsburgh, Pennsylvania
15259.
The principal business address of Meriton Mortgage Corporation -- East
is Mellon Bank Center, 8th Floor, Legal Affairs, 1735 Market Street,
Philadelphia, Pennsylvania 19103.
The principal business address of Mellon International Investment
Corporation is Caladonian Bank and Trust, Ltd., Caladonian House, P.O. Box 1043,
Cayman Island BWI.
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<PAGE>
The principal business address of Buck Consultants, Inc. is 2 Penn
Plz., 23rd Fl., New York, NY 10121-0001.
The principal business address of TBCAM Holdings, Inc. is One
Boston Place, Boston, MA 02108.
The principal business address of Mellon Europe Ltd. is 12
Devonshire Sq., London, England EC2.
The principal business address of APT Holdings Corporation is
Pike Creek Operations Center, 4500 New Linden Hill Road,
Wilmington, DE 19808.
The principal business address of Mellon Insurance Agency,
Inc. is One Mellon Bank Center, Suite 2890, Pittsburgh, PA 15258-0001.
The principal business address of Mellon Trust Company of Illinois is
One Mellon Bank Center, Room 1820, Pittsburgh, PA 15258-0001.
(f) PanAgora is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of PanAgora is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH PANAGORA OTHER CONNECTIONS
John F. Boneparth Managing Director and Chief of
Director International Distribution for
Putnam Investments, Inc.
Bruce E. Clarke Chief Executive Officer of
President and Chief PanAgora Asset Management
Executive Officer Limited
Gary N. Coburn Director and Senior Managing
Director Director of Putnam
Investments, Inc.
Hideichiro Kobayashi Director and General Manager
Director for the Americas of Nippon
Life Insurance Company
Robert F. Lucey Director, Senior Managing and
Director Chief of Operations Director
of Putnam Investments, Inc.
<PAGE>
-16-
Takashi Minagawa Director and General Manager
Director for Europe of Nippon Life
Insurance Company
Toru Morishige Director of PanAgora Asset
Managing Director, Management Limited
Director, Vice Chairman
Tadao Nishioka Senior Managing Director of
Director Nippon Life Insurance Company
Edgar E. Peters None
Chief Investment
Strategist
Steven Spiegel Director, Senior Managing and
Director Chief of Corporate Development
Director of Putnam
Investments, Inc.
Michael H. Turpin None
Treasurer, Director of
Administration
The principal business address of PanAgora Asset Management Limited is
3 Finsbury Avenue, London, England EC2M 2PA.
The principal business address of Putnam Investments, Inc. is
One Post Office Square, Boston, MA 02109-2106.
The principal business address of Nippon Life Insurance
Company and NLI International, Inc. Life Insurance Company is 5-12,
Imbashi, 3-Chome, Chuo-Ku, Osaka, Japan.
(g) Morgan is the subadviser to the Preferred Fixed Income Fund and the
Preferred Money Market Fund and its business is summarized under the caption
"Management of The Preferred Group" in the Prospectus constituting Part A of
this Registration Statement, which summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Morgan is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH MORGAN OTHER CONNECTIONS
Kenneth W. Anderson Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
Jeff M. Garrity Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
-17-
<PAGE>
Michael E. Patterson Vice Chairman, Director, J.P.
Director Morgan & Co. Incorporated and
Morgan Guaranty Trust Company
of New York
Keith M. Schappert Managing Director, Morgan
President, Chairman, Guaranty Trust Company of New
Director, Managing York
Director
John W. Schmidlin Managing Director, Morgan
Director Guaranty Trust Company of New
York
Isabel H. Sloane Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
Gilbert Van Hassel Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
Hendrik Van Riel Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
The principal business address of Morgan Guaranty Trust
Company of New York and of J.P. Morgan & Co. Incorporated is 60
Wall Street, New York, New York 10260-0060.
Item 29. Principal Underwriter
(a) Caterpillar Securities Inc., the Registrant's Principal
Underwriter, does not serve as underwriter for any other investment companies.
(b) Information with respect to directors and officers of the Principal
Underwriter is as follows:
<TABLE>
<CAPTION>
Positions and Offices Positions and
Names and Principal with Principal Offices with
Business Addresses Underwriter Registrant
<S> <C> <C>
Ronald R. Rossmann President, Director President
Caterpillar
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
Frederick L. Kaufman Treasurer, Director Vice President,
Caterpillar Treasurer
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
Carol K. Burns Director Vice President,
Caterpillar Assistant Clerk
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
</TABLE>
-18-
<PAGE>
(c) The Registrant has no principal underwriter that is not an
affiliated person of the Registrant or an affiliated person of such an
affiliated person.
Item 30. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include Registrant's Clerk,
Richard P. Konrath; Registrant's investment adviser, CIML; Registrant's
Custodian, State Street; Registrant's Transfer Agent and Shareholder Servicing
Agent, State Street; and each of the Registrant's subadvisers. The address of
the Clerk is 100 N.E. Adams Street, Peoria, Illinois 61629; the address of CIML
is 411 Hamilton Boulevard, Suite 1200, Peoria, IL 61602; the address of the
Custodian, Transfer Agent and Shareholder Servicing Agent is P.O. Box 1713,
Boston, Massachusetts 02110; and the addresses of the Registrant's subadvisers
are as follows: Oppenheimer, Oppenheimer Tower, One World Financial Center, New
York, New York 10281; Jennison, 466 Lexington Avenue, New York, New York 10017;
Mellon, 595 Market Street, Suite 3000, San Francisco, California 94105;
PanAgora, 260 Franklin Street, Boston, Massachusetts 02110; Mercator, 2400 East
Commercial Boulevard, Suite 810, Fort Lauderdale, Florida 33308; and Morgan, 522
Fifth Avenue, New York, New York 10036.
Item 31. Management Services
None.
Item 32. Undertakings
(a) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a Trustee or Trustees
when requested in writing to do so by the holders of at least 10% of the
Registrant's outstanding voting securities and in confirmation with the
provisions of Section 16(c) of the Investment Company Act of 1940 relating to
shareholder communications.
(b) The undersigned Registrant hereby undertakes to provide to each
person to whom a Prospectus is delivered a copy of its Annual Report without
charge upon request.
NOTICE
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer of the Trust as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
each of the respective constituent series of the Trust.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Peoria and the State of Illinois on the
21st day of October, 1998.
THE PREFERRED GROUP OF MUTUAL FUNDS
By: Ronald R. Rossmann*
Title: President
Pursuant to the Securities Act of 1933, this Amendment has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Ronald R. Rossmann* President October 21, 1998
- -------------------
Ronald R. Rossmann (Principal Executive Officer)
Gary M. Anna* Trustee October 21, 1998
Gary M. Anna
William F. Bahl* Trustee October 21, 1998
William F. Bahl
James F. Masterson* Trustee October 21, 1998
James F. Masterson
F. Lynn McPheeters* Trustee October 21, 1998
F. Lynn McPheeters
Dixie L. Mills* Trustee October 21, 1998
Dixie L. Mills
Fred L. Kaufman* Treasurer and Vice October 21, 1998
</TABLE>
- ----------------
Fred L. Kaufman President (Principal
Financial and Principal
Accounting Officer)
*By:/s/ Fred L. Kaufman
Fred L. Kaufman
Attorney-in-Fact Pursuant
to Powers of Attorney
Filed Herewith and for
Himself
-20-
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
Index to Exhibits
Exhibit No. Description
11 Consent of PricewaterhouseCoopers
LLP.
17(a). Financial Data Schedule for the
Preferred Growth Fund.
17(b). Financial Data Schedule for the
Preferred Value Fund.
17(c). Financial Data Schedule for the
Preferred International Fund.
17(d). Financial Data Schedule for the
Preferred Small Cap Fund.
17(e). Financial Data Schedule for the
Preferred Asset Allocation Fund.
17(f). Financial Data Schedule for the
Preferred Fixed Income Fund.
17(g). Financial Data Schedule for the
Preferred Short-Term Government
Securities Fund.
17(h). Financial Data Schedule for the
Preferred Money Market Fund.
-21-
<PAGE>
EX. - 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
and Statement of Additional Information constituting parts of this
Post-Effective Amendment No. 14 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated August 13, 1998, relating to the
financial statements and financial highlights appearing in the June 30, 1998
Annual Report to Shareholders of The Preferred Group of Mutual Funds, which is
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectus and "Independent Accountants and Financial Statements" in the
Statement of Additional Information.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 27, 1998
-1-
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<PERIOD-START> JUL-01-1997
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<INVESTMENTS-AT-VALUE> 415,493,293
<RECEIVABLES> 2,066,112
<ASSETS-OTHER> 580
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 417,559,985
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,950,142
<TOTAL-LIABILITIES> 3,950,142
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<PAID-IN-CAPITAL-COMMON> 185,250,771
<SHARES-COMMON-STOCK> 15,613,985
<SHARES-COMMON-PRIOR> 17,679,128
<ACCUMULATED-NII-CURRENT> 2,410,338
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,015,774
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 214,932,960
<NET-ASSETS> 413,609,843
<DIVIDEND-INCOME> 6,012,624
<INTEREST-INCOME> 1,239,009
<OTHER-INCOME> 0
<EXPENSES-NET> 3,255,198
<NET-INVESTMENT-INCOME> 3,996,435
<REALIZED-GAINS-CURRENT> 39,129,419
<APPREC-INCREASE-CURRENT> 47,165,553
<NET-CHANGE-FROM-OPS> 90,291,407
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<DISTRIBUTIONS-OF-INCOME> 3,250,000
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 8,741,834
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 3,255,198
<AVERAGE-NET-ASSETS> 388,271,879
<PER-SHARE-NAV-BEGIN> 21.14
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> 5.29
<PER-SHARE-DIVIDEND> .22
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<PERIOD-END> JUN-30-1998
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<INVESTMENTS-AT-VALUE> 498,899,541
<RECEIVABLES> 12,091,079
<ASSETS-OTHER> 1,174
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 510,991,794
<PAYABLE-FOR-SECURITIES> 2,005,899
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,155,404
<TOTAL-LIABILITIES> 4,161,303
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 265,918,632
<SHARES-COMMON-STOCK> 23,064,696
<SHARES-COMMON-PRIOR> 22,284,278
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 101,530,358
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 139,381,501
<NET-ASSETS> 506,830,491
<DIVIDEND-INCOME> 3,288,897
<INTEREST-INCOME> 396,590
<OTHER-INCOME> 0
<EXPENSES-NET> 4,095,873
<NET-INVESTMENT-INCOME> (410,386)
<REALIZED-GAINS-CURRENT> 143,439,200
<APPREC-INCREASE-CURRENT> (4,397,983)
<NET-CHANGE-FROM-OPS> 138,630,831
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 86,312,238
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,681,087
<NUMBER-OF-SHARES-REDEEMED> 16,742,714
<SHARES-REINVESTED> 4,842,045
<NET-CHANGE-IN-ASSETS> 51,808,614
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 45,338,436
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,631,767
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,095,873
<AVERAGE-NET-ASSETS> 484,235,593
<PER-SHARE-NAV-BEGIN> 20.42
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 5.93
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 4.38
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.97
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<AVG-DEBT-PER-SHARE> 0
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<NAME> PREFERRED INTERNATIONAL FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 223,547,172
<INVESTMENTS-AT-VALUE> 285,421,034
<RECEIVABLES> 2,010,850
<ASSETS-OTHER> 251
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<TOTAL-ASSETS> 287,432,135
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,376,032
<TOTAL-LIABILITIES> 3,376,032
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 211,437,325
<SHARES-COMMON-STOCK> 17,554,859
<SHARES-COMMON-PRIOR> 16,461,492
<ACCUMULATED-NII-CURRENT> 2,672,340
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,069,437
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,877,001
<NET-ASSETS> 284,056,103
<DIVIDEND-INCOME> 7,920,067
<INTEREST-INCOME> 829,653
<OTHER-INCOME> 0
<EXPENSES-NET> 4,130,397
<NET-INVESTMENT-INCOME> 4,619,323
<REALIZED-GAINS-CURRENT> 15,656,786
<APPREC-INCREASE-CURRENT> 379,437
<NET-CHANGE-FROM-OPS> 20,655,546
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<DISTRIBUTIONS-OF-INCOME> 3,800,000
<DISTRIBUTIONS-OF-GAINS> 11,334,089
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,075,789
<NUMBER-OF-SHARES-REDEEMED> 15,054,821
<SHARES-REINVESTED> 1,072,399
<NET-CHANGE-IN-ASSETS> 18,763,708
<ACCUMULATED-NII-PRIOR> 2,113,109
<ACCUMULATED-GAINS-PRIOR> 3,486,648
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,506,446
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,130,397
<AVERAGE-NET-ASSETS> 262,211,230
<PER-SHARE-NAV-BEGIN> 16.12
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .76
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<AVG-DEBT-PER-SHARE> 0
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
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<INVESTMENTS-AT-VALUE> 142,384,198
<RECEIVABLES> 9,488,586
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<TOTAL-ASSETS> 151,873,259
<PAYABLE-FOR-SECURITIES> 486,248
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,737
<TOTAL-LIABILITIES> 668,985
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 146,887,681
<SHARES-COMMON-STOCK> 14,505,934
<SHARES-COMMON-PRIOR> 13,692,130
<ACCUMULATED-NII-CURRENT> 104,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,231,690
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,980,091
<NET-ASSETS> 151,204,274
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,188,234
<OTHER-INCOME> 0
<EXPENSES-NET> 1,003,105
<NET-INVESTMENT-INCOME> 9,185,129
<REALIZED-GAINS-CURRENT> 2,325,218
<APPREC-INCREASE-CURRENT> 1,854,703
<NET-CHANGE-FROM-OPS> 13,365,050
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,184,514
<DISTRIBUTIONS-OF-GAINS> 1,541,898
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,386,283
<NUMBER-OF-SHARES-REDEEMED> 2,600,762
<SHARES-REINVESTED> 1,028,283
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<ACCUMULATED-NII-PRIOR> 89,002
<ACCUMULATED-GAINS-PRIOR> 463,565
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 747,105
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<GROSS-EXPENSE> 1,003,105
<AVERAGE-NET-ASSETS> 149,032,844
<PER-SHARE-NAV-BEGIN> 10.24
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<NAME> PREFERRED ASSET ALLOCATION FUND
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<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
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<TOTAL-LIABILITIES> 284,922
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<PAID-IN-CAPITAL-COMMON> 129,895,653
<SHARES-COMMON-STOCK> 10,980,440
<SHARES-COMMON-PRIOR> 8,874,193
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 124,012
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,813,901
<NET-ASSETS> 171,833,566
<DIVIDEND-INCOME> 1,040,505
<INTEREST-INCOME> 4,974,335
<OTHER-INCOME> 0
<EXPENSES-NET> 1,354,240
<NET-INVESTMENT-INCOME> 4,660,600
<REALIZED-GAINS-CURRENT> 7,399,430
<APPREC-INCREASE-CURRENT> 16,859,318
<NET-CHANGE-FROM-OPS> 28,919,348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,660,600
<DISTRIBUTIONS-OF-GAINS> 12,219,032
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,147,829
<NUMBER-OF-SHARES-REDEEMED> 1,201,202
<SHARES-REINVESTED> 1,159,620
<NET-CHANGE-IN-ASSETS> 42,948,810
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,943,169
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,023,199
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,354,240
<AVERAGE-NET-ASSETS> 146,171,270
<PER-SHARE-NAV-BEGIN> 14.52
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> 2.51
<PER-SHARE-DIVIDEND> .47
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.65
<EXPENSE-RATIO> .92
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<AVG-DEBT-PER-SHARE> 0
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 59,842,348
<INVESTMENTS-AT-VALUE> 59,821,492
<RECEIVABLES> 470,928
<ASSETS-OTHER> 50
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,292,470
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,189
<TOTAL-LIABILITIES> 56,189
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 61,188,500
<SHARES-COMMON-STOCK> 6,166,612
<SHARES-COMMON-PRIOR> 5,604,004
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (931,363)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (20,856)
<NET-ASSETS> 60,236,281
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,578,681
<OTHER-INCOME> 0
<EXPENSES-NET> 343,788
<NET-INVESTMENT-INCOME> 3,234,893
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<NAME> THE PREFERRED GROUP OF MUTUAL FUNDS
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<NAME> PREFERRED MONEY MARKET FUND
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<CIK> 0000885414
<NAME> THE PREFFERED GROUP OF MUTUAL FUNDS
<SERIES>
<NUMBER> 9
<NAME> PREFERRED SMALL CAP FUND
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