THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1998,
as amended April 13, 1999
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.
<PAGE>
- -----------------------------------------------------------------
TABLE OF CONTENTS
- -----------------------------------------------------------------
DEFINITIONS.....................................................1
INVESTMENT RESTRICTIONS.........................................1
OPTIONS AND FUTURES TRANSACTIONS................................6
MISCELLANEOUS INVESTMENT PRACTICES.............................17
AMORTIZED COST VALUATION AND DAILY DIVIDENDS...................21
EXCHANGE PRIVILEGE.............................................23
HOW TO BUY.....................................................23
HOW TO REDEEM..................................................24
HOW NET ASSET VALUE IS DETERMINED..............................24
CALCULATION OF YIELD AND TOTAL RETURN..........................26
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
ADDITIONAL INFORMATION.........................................53
APPENDIX A.....................................................54
APPENDIX B.....................................................57
-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.
(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.
-2-
<PAGE>
(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
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.
-3-
<PAGE>
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
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
-4-
<PAGE>
enter into closing purchase transactions with respect to such options,
and (b) in combination therewith, or separately, purchase put and call
options; provided that the premiums paid by each Fund on all
outstanding options it has purchased do not exceed 5% of its total
assets. Each Fund may enter into closing sale transactions with respect
to options it has purchased.
(4) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(5) Make investments for the purpose of gaining control of a
company's management.
(6) Invest in certificates of deposit of any bank if,
immediately after such investment, more than 5% of the total assets of
the Fund (taken at current value) would be invested in the securities
(including certificates of deposit) of that bank, except that (i) the
Money Market Fund may, to the extent permitted by Rule 2a-7 under the
1940 Act, invest more than 5% of its total assets in the securities
(including certificates of deposit) of any bank and (ii) each other
Fund may invest up to 25% of its total assets without regard to this
restriction.
(7) Make any additional investment if, immediately after such
investment, the Fund's outstanding borrowings of money would exceed 5%
of the current value of the Fund's total assets.
(8) Purchase or sell real property (including real estate
limited partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily marketable
securities of companies which invest in real estate).
(9) With respect to the Money Market Fund, invest in
securities of any issuer if, immediately after such investment, more
than 5% of the total assets of the Fund (taken at current value) would
be invested in the securities of such issuer, except that the Fund may,
to the extent permitted by Rule 2a-7 under the 1940 Act, invest more
than 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
-5-
<PAGE>
securities, asset-backed securities and collateralized mortgage
obligations.
(11) With respect to the Small Cap Fund, sell short securities
valued, at the time of purchase, greater than 10% of its assets
(excluding "covered" short sales, i.e. short sales of securities held
by the Fund).
All percentage limitations on investments set forth herein and in the
Prospectus will apply at the time of the making of an investment and shall not
be considered violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase a "vote of a majority of the outstanding voting securities," as used
herein, means the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the relevant Fund or the Trust, as the case may be, or (2)
67% or more of the shares of the relevant Fund or the Trust, as the case may be,
present at a meeting if more than 50% of the outstanding shares are represented
at the meeting in person or by proxy.
Note on Shareholder Approval
Unless otherwise indicated, the investment policies and objectives of
the Funds may be changed without shareholder approval.
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
-6-
<PAGE>
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.
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
-7-
<PAGE>
will permit the Fund to write another put option to the extent that the exercise
price thereof is secured by depositing cash or high grade obligations. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the 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.
-8-
<PAGE>
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
-9-
<PAGE>
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).
-10-
<PAGE>
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
-11-
<PAGE>
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
-12-
<PAGE>
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
-13-
<PAGE>
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
-14-
<PAGE>
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
-15-
<PAGE>
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,
-16-
<PAGE>
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
-17-
<PAGE>
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--
-18-
<PAGE>
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
-19-
<PAGE>
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
-20-
<PAGE>
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
-21-
<PAGE>
Securities and Exchange Commission Rule 2a-7 and certain procedures adopted by
the Trustees. The amortized cost of an instrument is determined by valuing it at
cost originally and thereafter amortizing any discount or premium from its face
value at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
of portfolio instruments during periods of rising or falling interest rates will
not normally be reflected either in the computation of net asset value of the
Fund's portfolio or in the daily computation of net income. Under the procedures
adopted by the Trustees, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments 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
-22-
<PAGE>
shareholder who is withdrawing all or substantially all of the shares in an
account, at the time of withdrawal), such negative amount exceeds a
shareholder's accrued dividends, the Fund will reduce the number of outstanding
shares by treating the shareholder as having contributed to the capital of the
Fund that number of full and fractional shares which represent the amount of the
excess. Each shareholder is deemed to have agreed to such 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.
Each Fund has authorized one or more brokers to receive on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to receive purchase and redemption orders on the Fund's behalf.
Each Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, receives
the order and, accordingly, orders received by an authorized broker or the
broker's authorized designee will be
-23-
<PAGE>
priced at the Fund's net asset value next computed after they are received by
the authorized broker or the broker's authorized designee.
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."
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.
-24-
<PAGE>
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
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
-25-
<PAGE>
shares are computed as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of a Fund's
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Trustees.
CALCULATION OF YIELD AND TOTAL RETURN
Yield of the Money Market Fund. As summarized in the Prospectus under
the heading "Performance Information," the "Yield" of the Money Market Fund for
a seven-day period (the "base period") will be computed by determining the "net
change in value" (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by 365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the value
of additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments. Yield may also be calculated on a
compound basis (the "Effective Yield") which assumes that net income is
reinvested in Fund shares at the same rate as net income is earned by the Fund
for the base period.
The Money Market Fund's Yield and Effective Yield will vary in response
to fluctuations in interest rates. For comparative purposes the current and
Effective Yields should be compared to current and effective yields offered by
competing money market funds for that base period only and calculated by the
methods described above.
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
-26-
<PAGE>
conditions, the composition of the Funds' portfolios and operating expenses of
the Trust allocated to each Fund. These factors, and possible differences in the
methods used in calculating yield, should be considered when comparing a Fund's
Yield to yields published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the value of
the Funds' shares and to the relative risks associated with the investment
objectives and policies of the Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
Investors in these Funds are specifically advised that the net asset
value per share of each Fund will vary just as Yields for each Fund will vary.
An investor's focus on the Yield to the exclusion of the consideration of the
value of shares of that Fund may result in the investor's misunderstanding the
Total Return he or she may derive from that Fund.
Calculation of Total Return. As summarized in the Prospectus under the
heading "Performance Information," Total Return with respect to a Fund is a
measure of the change in value of an investment in such Fund over the period
covered, which assumes any dividends or capital gains distributions are
reinvested immediately rather than paid to the investor in cash. The formula for
Total Return used herein includes four steps: (1) adding to the total number of
shares purchased by a hypothetical $1,000 investment in the Fund all additional
shares 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
-27-
<PAGE>
time include in advertisements or information furnished to present or
prospective shareholders (i) the ranking of performance figures relative to such
figures for groups of mutual funds categorized by Lipper Analytical Services,
Inc. as having the same investment objectives,(ii) the rating assigned to the
Fund by Morningstar, Inc. based on the Fund's risk-adjusted performance relative
to other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.
Performance information may also be used to compare the performance of
the Fund against certain widely acknowledged standards or indices for stock and
bond market performance.
EAFE Index. The Europe, Australia & Far East Index contains over 1000
stocks from 20 different countries with Japan (approximately 50%), United
Kingdom, France and Germany being the most heavily weighted.
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.
-28-
<PAGE>
Russell 2000 Index. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.
S&P 500 Index. The S&P 500 is the most common index for the overall
U.S. stock market. It is comprised of 500 of the largest U.S. companies
representing all major industries.
Salomon Brothers Broad Investment Grade Index. The Index contains 5000
U.S. Treasury, Agency, Mortgage and Corporate Bonds. Credit quality must be
investment grade (AAA-BBB by Standard & Poor's).
65% S&P Index/30% Lehman Brothers Long-Term Treasury Index/5% 90-day
Treasury Bills. The 65% S&P 500 Index/30% Lehman Brothers Long-Term Treasury
Index/5% 90-day Treasury Bills is a benchmark representing a hypothetical
portfolio 65% of which is invested in the S&P 500, 30% of which is invested in
the Lehman Brothers Long-Term Treasury Index, and 5% of which is invested in
90-day Treasury Bills.
From time to time, articles about the Funds regarding performance,
rankings and other characteristics of the Funds may appear in national
publications including, but not limited to, the Wall Street Journal, Forbes,
Fortune, CDA Investment Technologies and Money Magazine. In particular, some or
all of these publications may publish their own rankings or performance reviews
of mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the Manager or the Subadvisers who have portfolio
management responsibility may also be used in the Funds' promotional literature.
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%**
*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%.
</TABLE>
-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.
-34-
<PAGE>
<CAPTION>
<S> <C> <C>
Gary Michael Anna, 45, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, Bradley University
Peoria, IL 61625
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
* 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.
</TABLE>
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
-35-
<PAGE>
compensation paid to the Trust's Trustees and officers for the year ended June
30, 1998.
<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>
Percentage Ownership
as of September 30, 1998
<CAPTION>
Caterpillar
Inc. Supp-
lemental
Unemploy-
ment and
Benefits
Group
Insurance
Trust A
and Caterpillar
Caterpillar Caterpillar Insurance Preferred
Investment Group Company Stable
Trust Insurance Ltd. Principal
-36-
<PAGE>
<CAPTION>
401(k) Plan Trust B Insurance Collective
Reserves1 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%
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.
</TABLE>
To the extent either Caterpillar Investment Trust 401(k) Plan,
Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance Trust A
or Caterpillar Group Insurance Trust B, each a trust formed under the laws of
Illinois for the benefit of employees of Caterpillar Inc., beneficially owns
more than 25% of a Fund, it may be deemed to "control" such Fund. As a result,
it may not be possible for matters subject to a vote of a majority 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,
-37-
<PAGE>
policies and restrictions provided. In order to assist it in carrying out its
responsibilities, the Manager has retained Subadvisers to render advisory
services to each Fund other than the Small Cap Fund and the Short-Term
Government Securities 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
-38-
<PAGE>
* CIML's fee with respect to the Fixed Income Fund is paid at an annual rate
equal to the lesser of (i) .50% of the average net assets of the Fixed Income
Fund and (ii) the rate at which (A) the excess of (I) the fee paid by the Fixed
Income Fund to CIML over (II) the fee paid by CIML to J.P. Morgan Investment
Management Inc. ("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
- ---------------------------
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.
</TABLE>
Under the Subadviser Agreement for each Fund between the Manager and the
Subadviser for such Fund (the "Subadviser Agreements"), subject always to the
control of the Trustees of the Trust, each Subadviser's obligation is to furnish
continuously an investment program for the Fund, to make investment decisions on
behalf of the Fund and to place all orders for the purchase and sale of
portfolio securities and all other investments for the Fund.
-39-
<PAGE>
In performing their duties under the Subadviser Agreements, each Subadviser
is subject to the control of the Trustees, the policies determined by the
Trustees, the provisions of the Trust's Agreement and Declaration of Trust and
By-laws and any applicable investment objectives, policies and restrictions in
effect from time to time.
The Management Contracts for all of the Funds and the Subadviser Agreements
were approved by the Trustees of the Trust (including all of the Trustees who
are not "interested persons" of the Manager or the relevant Subadvisers). The
Management Contracts and the Subadviser Agreements continue in force with
respect to the relevant Fund for two years from their respective dates, and from
year to year thereafter, but only so long as their continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority of those Trustees who are not "interested persons" of the Trust,
the Manager or the relevant Subadviser, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of that Fund. Each of the Management Contracts and the Subadviser Agreements
automatically terminates on assignment, and each is terminable upon notice by
the Trust. In addition, the Management Contracts may be terminated on not more
than 60 days' notice by the Manager to the Trust, and the Subadviser Agreements
may be terminated upon 60 days' notice by the Manager or 90 days' notice by the
Subadviser.
As described in the Prospectus under the caption "Management of the Trust,"
the Trust pays, in addition to the Management Fees described above, all expenses
not assumed by the Manager, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of the Manager or the Trust, interest
charges, taxes, brokerage commissions, expenses of issue or redemption of
shares, fees and expenses of registering and qualifying the Trust and shares of
the respective Funds for distribution under federal and state laws and
regulations, charges of custodians, auditing and legal expenses, expenses of
determining the net asset value of the Trust's shares, reports to shareholders,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, and
insurance premiums and professional association dues or assessments. The Trust
is also responsible for such nonrecurring expenses as may arise, including
litigation 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,
-40-
<PAGE>
bad faith, gross negligence or reckless disregard of its obligations and duties.
The Subadvisers. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The fee
paid to the Subadvisers (other than Morgan, with respect to the Money Market
Fund) is based on the Fund assets managed or advised by such Subadviser (the
"Fund Assets") together with any other assets managed or advised by the
Subadviser, 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 Money Market Fund). (The Fund Assets together with
such other assets are collectively referred to as the "Combined Assets.") The
subadvisory fee is calculated by applying the average quarterly net asset value,
as of the last business day of each month in the calendar quarter, of the
Combined Assets to the annual rates for each Subadviser (other than Morgan, with
respect to the Money Market Fund), as set forth below. This amount is then
adjusted based upon the ratio of Fund Assets to Combined Assets. The subadvisory
fee paid to Morgan with respect to the Money Market Fund is based solely on the
average net assets of the 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
-41-
<PAGE>
mutual insurance company and a registered investment adviser. The Manager pays
Jennison for its subadvisory services with respect to the Growth Fund a fee,
calculated as described above, at the annual rate of 0.75% of the first $10
million of Combined Assets, 0.50% of the next $30 million of Combined Assets,
0.35% of the next $25 million of Combined Assets, 0.25% of the next $335 million
of Combined Assets, 0.22% of the next $600 million of Combined Assets and 0.20%
of Combined Assets in excess of $1 billion. The Manager has informed the Trust
that for the fiscal years ended June 30, 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 $215,940,
$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.
-42-
<PAGE>
Mercator Asset Management, L.P. is a limited partnership a minority portion of
the limited partnership interest in which is owned by The Prudential Insurance
Company of America, a mutual insurance company and a registered investment
adviser. The Manager pays Mercator Asset Management, L.P. for its subadvisory
services with respect to the International Fund a fee, calculated as described
above, at the annual rate of 0.75% of the first $50 million of Combined Assets,
0.60% of the next $250 million of Combined Assets, and 0.45% of Combined Assets
in excess of $300 million. The Manager has informed the Trust that for the
fiscal years ended June 30, 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
-43-
<PAGE>
$41,022 in subadvisory fees with respect to the Short Term Government Securities
Fund. Morgan is no longer the subadviser 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.
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:
-44-
<PAGE>
<TABLE>
Custodian
Year ended June 30
--------------------------------------------
<CAPTION>
Fund 1998 1997 1996
----
<S> <C> <C> <C>
Growth $128,000 $117,000 $119,000
Value $ 91,000 $ 78,000 $ 77,000
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
-45-
<PAGE>
<CAPTION>
<S> <C> <C> <C>
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.
-46-
<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
-47-
<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
-48-
<PAGE>
such fiscal years are set forth below:
Fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
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
<CAPTION>
Fiscal year ended June 30, 1997:
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
<S> <C> <C> <C>
Growth $465,218 $174,031,891 $244,172
Value 67,421 9,384,874 13,200
International 326,670 0 0
Small Cap 322,594 0 0
Asset Allocation 4,457 0 0
Fixed Income 0 0 0
Short-Term
Government Securities 0 0 0
Money Market 0 0 0
<CAPTION>
Fiscal year ended June 30, 1996:
Transactions Brokerage
Directed to a Commissions
Broker Because of Allocated to
Aggregate Research and Research
Fund Brokerage Commissions Other Services and Other Services
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
-49-
<PAGE>
<CAPTION>
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.
Fiscal year ended June 30, 1998
<TABLE>
<CAPTION>
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
<S> <C> <C> <C> <C>
Value Fund Oppenheimer $ 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
-50-
<PAGE>
securities with J.P. Morgan. These brokerage transactions are set
forth below.
Fiscal year ended June 30, 1997
<TABLE>
<CAPTION>
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
<S> <C> <C> <C> <C>
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:
Fiscal year ended June 30, 1996
<TABLE>
<CAPTION>
% of Fund's % of Fund's
Amount of Aggregate Aggregate
Affiliated Brokerage Brokerage Dollar Amount
Fund Broker Commissions Commissions of Transactions
<S> <C> <C> <C> <C>
Value 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>
-51-
<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.
-52-
<PAGE>
ADDITIONAL INFORMATION
Retirement Plan Services. The Preferred Group of Mutual Funds was
developed with an employee benefit perspective in mind. For individual
participants in employer-sponsored retirement plans, The Preferred Group
provides a flexible and diversified range of investment choices. Employers may
enhance their current plans by adding one or more of the funds. If a plan is
built around The Preferred Group and offers all or most of the funds, two
additional benefits are available: award-winning communication materials and a
404(c) compliance program.
For more comprehensive services, The Preferred Group Retirement Plan
Services offers a turnkey 401(k) service with support from plan design and
enrollment to investment information, employee account information,
recordkeeping, trusteeship, administration, compliance and more. In addition,
several arrangements featuring world-class third-party administrators and
trustees are available for retirement plans desiring an unbundled approach.
IRAs and a direct rollover program are available to employees leaving a
retirement plan.
Investment Advisers. The Preferred Group brings to the mutual fund
marketplace the highly respected institutional investment advisers who service
the Caterpillar pension fund and who have demonstrated consistently superior
long-term performance. Collectively, they manage over $400 billion in assets.
Most were not previously available to institutions or individuals in a no-load
mutual fund. The Manager has represented to the Trust that the Funds' expense
ratios are competitive and believes that they are typically below average for
each Fund's Morningstar category.
Contact Information. The funds are available for a wide variety of
institutional and retail applications, including endowments, foundations,
corporations, insurance reserves and personal investing. Investors may contact
The Preferred Group of Mutual Funds directly at (800) 662-GROW (800-662-4769).
Institutional investors may call (309) 675-8147.
-53-
<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
-54-
<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,
-55-
<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.
-56-
<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.
-57-
<PAGE>
Corporate Obligations -- include bonds and notes issued by corporations
in order to finance longer term credit needs.
-58-
<PAGE>
