As filed with the Securities and Exchange Commission on August 29, 2000
Registration No. 33-46479
File No. 811-06602
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 x
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Pre-Effective Amendment No. --- ---
Post-Effective Amendment No. 17 x
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 x
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Amendment No. 20 x
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THE PREFERRED GROUP OF MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (309) 675-4999
Name and Address of Agent for Service:
David Bomberger
THE PREFERRED GROUP OF MUTUAL FUNDS
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602
Copy to:
J.B. Kittredge, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
The Registrant has previously registered an indefinite number or amount of its
shares of beneficial interest pursuant to Rule 24f-2. The Registrant filed a
Rule 24f-2 Notice on August 22, 1995.
It is proposed that this filing will become effective:
Immediately upon filing pursuant to paragraph (b),
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On _______________ pursuant to paragraph (b),
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60 days after filing pursuant to paragraph (a)(1),
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x On November 1, 2000 pursuant to paragraph (a)(1),
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75 days after filing pursuant to paragraph (a)(2), or
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On _______________ pursuant to paragraph (a)(2), of Rule 485.
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If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
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<PAGE>
Prospectus
November 1, 2000
Preferred Growth Fund
Preferred Value Fund
Preferred International Fund
Preferred Small Cap Fund
Preferred Asset Allocation Fund
Preferred Fixed Income Fund
Preferred Short-Term Government Securities Fund
Preferred Money Market Fund
THE PREFERRED GROUP
OF MUTUAL FUNDS
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104
The Preferred Group of Mutual Funds ("The Preferred Group") is an open-end,
diversified series investment company offering eight portfolios ("funds") with
different investment objectives and strategies. Shares of the funds are offered
without a sales charge at net asset value.
This Prospectus concisely describes the information that investors should know
before investing. Please read this Prospectus carefully and keep it for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
For more information about
The Preferred Group
call 1-800-662-4769.
<PAGE>
Table of Contents
Risk/Return Summaries............... 1
Preferred Growth Fund........... 2
Preferred Value Fund............ 3
Preferred International Fund.... 4
Preferred Small Cap Fund........ 6
Preferred Asset Allocation
Fund......................... 7
Preferred Fixed Income Fund.... 9
Preferred Short-Term
Government Securities Fund... 11
Preferred Money Market Fund.... 13
Summary of Principal Risks..... 14
Schedule of Fund Expenses.......... 17
General Policies and
Risk Considerations.............. 18
About The Preferred Group.......... 24
Portfolio Managers................. 26
Determination of Net Asset
Value and Pricing................ 29
Your Preferred Group Account....... 29
How to Open Your Account....... 29
How to Buy Shares.............. 30
Exchanging and Redeeming
Shares....................... 31
Important Information About
Your Account................. 33
Additional Shareholder Services 34
Distributions.................. 36
Choosing a Distribution Option. 36
Taxes.......................... 37
Financial Highlights............... 39
<PAGE>
Risk/Return Summaries
The following are risk/return summaries of key information about each fund in
The Preferred Group of Mutual Funds. You will find additional information about
each fund, including a detailed description of the risks of an investment in
each fund, after these summaries.
Each summary describes the fund's objectives, principal investment strategies,
principal risks and fees. Each fund's summary page includes a short discussion
of some of the principal risks of investing in that fund. More detailed
descriptions of the funds, including these and other principal risks associated
with investing in the funds, can be found elsewhere in this Prospectus. Please
be sure to read this additional information before you invest.
Each risk/return summary includes a table for each fund showing its average
annual returns and a bar chart showing its annual returns. The table and the bar
chart provide an indication of the historical risk of an investment in each fund
by showing:
o How the fund's average annual returns for one year, five years and the
life of the fund compare to those of a broad based securities market
index; and
o How the fund's performance has changed from year to year over the life of
the fund.
A fund's past performance, of course, does not necessarily indicate how it will
perform in the future.
Other important things for you to note:
o You may lose money by investing in the funds.
o An investment in the funds is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Preferred Growth Fund
OBJECTIVE: THE PREFERRED GROWTH FUND SEEKS ITS OBJECTIVE OF LONG-TERM CAPITAL
APPRECIATION BY INVESTING PRIMARILY IN EQUITY SECURITIES BELIEVED TO OFFER THE
POTENTIAL FOR CAPITAL APPRECIATION, INCLUDING STOCKS OF COMPANIES THAT ARE
EXPERIENCING ABOVE-AVERAGE EARNINGS GROWTH.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
fund invests at least 65% of its total assets in equity securities (common
stocks, preferred stocks and securities convertible to common or preferred
stocks) believed to offer the potential for capital appreciation. These
securities include stocks of companies that are experiencing above-average
earnings growth.
When selecting securities for purchase or sale, the subadviser, Jennison
Associates LLC, considers a variety of factors, including a company's earnings
and revenue growth, profitability, financial condition, the company's business
franchise and market position, strength and experience of its management group,
research and development practices, and marketing strength and capability.
In addition, the fund may invest in options and futures contracts, obligations
issued or guaranteed by the U.S. Government, corporate bonds, short-term debt
obligations, warrants, foreign currencies and related instruments, securities of
foreign issuers, money market instruments, mortgage-backed securities,
collateralized mortgage obligations and asset-backed securities. The fund may
also loan its portfolio securities, make short sales, enter into forward
commitments and repurchase agreements and purchase illiquid securities.
1
<PAGE>
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 16.06%
1994 -1.11%
1995 28.37%
1996 18.88%
1997 31.22%
1998 35.58%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500 Index"). This is a widely recognized,
unmanaged index of U.S. common stocks.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED S&P 500
GROWTH FUND INDEX
-------------------------------------
Past 1 Year x.xx% x.xx%
-------------------------------------
Past 5 Years x.xx% x.xx%
-------------------------------------
Since Inception x.xx% x.xx%
(7/1/92)
-------------------------------------
2
<PAGE>
Preferred Value Fund
OBJECTIVE: THE PREFERRED VALUE FUND SEEKS ITS OBJECTIVE OF CAPITAL APPRECIATION
AND CURRENT INCOME BY INVESTING PRIMARILY IN EQUITY SECURITIES THAT ARE BELIEVED
TO BE UNDERVALUED AND THAT OFFER ABOVE-AVERAGE POTENTIAL FOR CAPITAL
APPRECIATION.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
fund invests at least 65% of its total assets in equity securities (common
stocks, preferred stocks and securities convertible to common or preferred
stocks) believed to be undervalued, thereby offering above-average potential for
capital appreciation.
Oppenheimer Capital, the subadviser, builds the fund one stock at a time by
conducting in-depth research to identify companies that are believed to have
three basic traits:
1. A competitive advantage versus other companies within their industries, a
feature that will enable them to sustain their profitability.
2. Capable management teams who focus on working hard for shareholders through
effective use of discretionary cash, such as reinvesting in profitable
business activities, making astute acquisitions and paying dividends.
3. The stocks can be purchased at a discount to Oppenheimer's estimate of their
intrinsic value.
In short, the fund's focus is on investments in companies that the subadviser
believes are selling at reasonable valuations and have solid fundamentals to
support their businesses in good economic times and bad, with strong prospects
for the long term.
In addition, the fund may invest in options and futures contracts, obligations
issued or guaranteed by the U.S. Government, corporate bonds, short-term debt
obligations, warrants, foreign currencies and related instruments, securities of
foreign issuers, money market instruments, mortgage-backed securities,
collateralized mortgage obligations and asset-backed securities.
The fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 8.79%
1994 0.48%
1995 37.71%
1996 25.31%
1997 28.02%
1998 14.31%
1999 x.xx%
3
<PAGE>
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of the S&P 500 Index. This is
a widely recognized, unmanaged index of U.S. common stocks.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED S&P 500
VALUE FUND INDEX
-------------------------------------
Past 1 Year x.xx% x.xx%
-------------------------------------
Past 5 Years x.xx% x.xx%
-------------------------------------
Since Inception x.xx% x.xx%
(7/1/92)
-------------------------------------
Preferred International Fund
OBJECTIVE: THE PREFERRED INTERNATIONAL FUND SEEKS ITS OBJECTIVE OF LONG-TERM
CAPITAL APPRECIATION BY INVESTING PRIMARILY IN EQUITY SECURITIES TRADED
PRINCIPALLY ON MARKETS OUTSIDE THE UNITED STATES.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: The fund invests primarily in equity
securities (common stocks, preferred stocks and securities convertible to common
or preferred stocks) traded principally outside the United States, including
emerging markets, believed to be undervalued and thereby offering above-average
potential for capital appreciation. The approach of the subadviser, Mercator
Asset Management(R), LP, is to identify attractive, undervalued securities and
to select those that have good earnings prospects. Using its investment model,
the Mercator universe is ranked; the high-ranking stocks are buy candidates and
the low-ranking stocks are sell candidates. Under normal market conditions, the
fund invests at least 65% of its total assets in at least three countries, not
including the United States.
In addition, the fund may invest in options and futures contracts, corporate and
government bonds (including domestic bonds and high-quality short-term corporate
obligations rated at least A by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's ("S&P")), bankers' acceptances or negotiable bank certificates
of deposit issued by U.S. or foreign banks having outstanding debt rated at
least A by Moody's or S&P (or, if not so rated, of equivalent quality as
determined by Mercator), prime commercial paper issued by companies having an
outstanding debt issue rated at least A or Prime-2 by Moody's or A or A-2 by S&P
(or, if not so rated, of comparable quality as determined by Mercator), foreign
currencies and related instruments, money market instruments, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities. The
fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.
4
<PAGE>
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Foreign Risk
o Currency Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 41.53%
1994 3.27%
1995 9.93%
1996 17.14%
1997 6.78%
1998 10.55%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of the Europe, Australasia &
Far East Index (EAFE). This index contains over 1,000 stocks from 20 different
countries with Japan, the United Kingdom, France and Germany being the most
heavily weighted.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED EAFE
INTERNATIONAL FUND INDEX
-------------------------------------
Past 1 Year x.xx% x.xx%
-------------------------------------
Past 5 Years x.xx% x.xx%
-------------------------------------
Since Inception x.xx% x.xx%
(7/1/92)
-------------------------------------
Preferred Small Cap Fund
OBJECTIVE: THE PREFERRED SMALL CAP FUND SEEKS ITS OBJECTIVE OF LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENTS IN COMPANIES WITH SMALL EQUITY CAPITALIZATIONS.
5
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
fund invests at least 65% of its total assets in a diversified portfolio of
common stocks of companies with market capitalizations of not more than $3
billion that the fund's subadviser, Turner Investment Partners, Inc., believes
to have strong earnings growth potential. Under normal market conditions the
fund will maintain a weighted average market capitalization of less than $2
billion. The fund seeks to purchase securities that are well diversified across
economic sectors and to maintain sector concentrations that approximate the
economic sector weightings comprising the Russell 2000 Growth Index (or such
other appropriate index as may be selected by Turner). The fund may invest up to
10% of its total assets in American Depository Receipts.
In addition, the fund may invest in options and futures contracts, equity and
equity-related securities of large-capitalization issuers, obligations issued or
guaranteed by the U.S. Government or its agencies, authorities or
instrumentalities, corporate bonds rated at least A by Moody's or S&P at the
time of purchase (or, if unrated, determined to be of comparable quality by
Turner), short-term debt obligations rated at least Prime-2 by Moody's or A-2 by
S&P at the time of purchase (or, if unrated, determined to be of comparable
quality by Turner), warrants, foreign currencies and related instruments,
securities of foreign issuers, money market instruments, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities. The
fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Smaller Company Risk
o Management Risk
o Market Risk
o Liquidity Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1996 20.44%
1997 31.42%
1998 -5.01%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
6
<PAGE>
The following table shows how the fund's average annual returns for one year and
inception-to-date compare to those of the Russell 2000 Growth Index and Russell
2000 Index. The Russell 2000 Growth Index measures the performance of those
Russell 2000 companies with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index contains the 2,000 smallest of the 3,000
largest U.S. domiciled corporations, ranked by market capitalization. On January
1, 2000, the fund added Turner as subadviser and switched from a value/core
orientation to a growth orientation. As a result, the fund is now measured
against the Russell 2000 Growth Index instead of the Russell 2000 Index.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED RUSSELL 2000 RUSSELL 2000
SMALL CAP FUND INDEX GROWTH INDEX
-----------------------------------------------------------------
Past 1 Year x.xx% x.xx% x.xx%
-----------------------------------------------------------------
Since Inception x.xx%* x.xx% x.xx%
(11/1/95)
-----------------------------------------------------------------
*The fund's performance would have been lower if a portion of the management fee
(0.35%) had not been waived for the period November 1, 1995 through October 31,
1996.
Preferred
Asset Allocation Fund
OBJECTIVE: THE PREFERRED ASSET ALLOCATION FUND SEEKS ITS OBJECTIVE OF BOTH
CAPITAL APPRECIATION AND CURRENT INCOME BY ALLOCATING ITS ASSETS AMONG STOCKS,
BONDS AND HIGH QUALITY MONEY MARKET INSTRUMENTS.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: The fund allocates its assets among
stocks, bonds and money market instruments. Mellon Capital Management
Corporation and PanAgora Asset Management each manage approximately one-half of
the fund's assets (although these proportions may vary due to differential
performance). All amounts received by the fund for sales of its shares and paid
by the fund for redemptions of its shares are split evenly between Mellon and
PanAgora. The portions of the fund's assets invested in stocks, bonds and money
market instruments vary from time to time in light of changes in interest rates
and other economic factors. The fund may invest in any combination of these
asset classes without limit.
HOW MELLON MANAGES THE FUND
Mellon allocates the fund's assets among the three asset classes based on the
projected returns and risks for each class.
The fund generally invests in common stocks, long-term U.S. Treasury bonds and
money market instruments. With respect to securities selection, Mellon pursues a
passive strategy, in which it seeks to match the performance of the S&P 500
Index and the Lehman Brothers Long-Term Treasury Index. The fund's money market
investments are limited to short-term investments meeting one of the following
criteria:
1. Rated Prime-1 by Moody's or A-1 by S&P at the time of purchase;
2. Unrated securities that Mellon determines to be of a quality comparable to
Moody's Prime-1 or S&P's A-1 ratings; or
3. Repurchase agreements with respect to U.S. Government securities.
7
<PAGE>
Mellon may use financial futures and related options to achieve a substantial
portion of the fund's exposure to the stock and bond markets. For instance,
Mellon may increase the fund's exposure to stocks by investing in S&P 500
futures contracts. Similarly, Mellon may increase the fund's exposure to bonds
by investing in futures contracts on U.S. Treasury bonds.
HOW PANAGORA MANAGES THE FUND
PanAgora's investment model provides percentage guidelines for a mix of holdings
among stocks, bonds and money market instruments. These guidelines are
established by comparing the expected performance for each investment class with
its current performance (as measured by the S&P 500 Index, the Lehman Brothers
Long-Term Treasury Index, and 3-month and 1-year Treasury bills, respectively).
PanAgora forecasts the return of each class through a proprietary mix of value,
economic, monetary and sentiment indicators.
In selecting stocks for the fund, PanAgora generally purchases stocks in order
to replicate the S&P 500 Index.
In selecting bonds, the fund invests in highly liquid securities that are issued
by the U.S. Government and included in the Lehman Brothers Long-Term Treasury
Index. PanAgora generally selects bonds to match the Lehman Index in maturity,
quality, sector and coupon characteristics. Typically, the average maturity of
these securities is approximately 20 years, although the fund may invest in
securities with longer or shorter maturities at the discretion of PanAgora.
PanAgora may achieve a substantial portion of the fund's exposure to the stock
and bond markets using financial futures and related options.
GENERAL
For money market instruments, the fund invests in U.S. Government obligations,
bank certificates of deposit and time deposits, bankers' acceptances, prime
commercial paper, high-quality short-term corporate obligations and repurchase
agreements for these instruments.
In addition, the fund may invest in foreign currencies and related instruments,
securities of foreign issuers, mortgage-backed securities, collateralized
mortgage obligations and asset-backed securities. The fund may also loan its
portfolio securities, make short sales, enter into forward commitments and
repurchase agreements and purchase illiquid securities.
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
o Derivatives Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
8
<PAGE>
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 10.60%
1994 -2.57%
1995 32.79%
1996 15.17%
1997 20.92%
1998 27.01%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of the S&P 500 Index and the
65/30/5 Blended Index. The S&P 500 Index is a widely recognized, unmanaged index
of U.S. common stocks. The 65/30/5 Blended Index is composed of the S&P 500
Index (65%); the Lehman Brothers Long-Term Treasury Index (30%); and the 90-Day
Treasury Bill benchmark (5%). The 65/30/5 Blended Index serves as the benchmark
against which the performance of each of the fund's two subadvisers is evaluated
by the trustees of The Preferred Group.
The S&P 500 Index is the most common index for the overall U.S. stock market. It
comprises 500 of the leading U.S. companies representing major industries. The
Lehman Brothers Long-Term Treasury Index is a market-weighted index of all
publicly held Treasury issues with maturities greater than 10 years. The 90-Day
Treasury Bill benchmark is a performance calculation using recently issued
90-Day Treasury Bills.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED 65/30/5
ASSET ALLOCATION S&P 500 BLENDED
FUND INDEX INDEX
-------------------------------------------------
Past 1 Year x.xx% x.xx% x.xx%
-------------------------------------------------
Past 5 Years x.xx% x.xx% x.xx%
-------------------------------------------------
Since Inception x.xx% x.xx% x.xx%
(7/1/92)
-------------------------------------------------
Preferred Fixed Income Fund
OBJECTIVE: THE PREFERRED FIXED INCOME FUND SEEKS ITS OBJECTIVE OF A HIGH LEVEL
OF CURRENT INCOME CONSISTENT WITH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF DEBT
SECURITIES.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
fund invests at least 65% of its total assets in fixed-income securities. The
fund invests primarily in publicly traded domestic debt securities (such as U.S.
Treasury and agency obligations, mortgage-backed securities and corporate debt
securities).
9
<PAGE>
The subadviser, J.P. Morgan Investment Management Inc., may invest in any
security which is rated, at the time of purchase, at least Baa by Moody's or BBB
by S&P, or in any unrated security that Morgan determines is of comparable
quality. In addition, it may invest up to 5% of its assets in any security which
is rated, at the time of purchase, below Baa by Moody's or BBB by S&P, or in any
unrated security that Morgan determines is of comparable quality.
The fund allocates its investments among different fixed-income security market
sectors based on the relative attractiveness of each sector. Following these
sector allocations, Morgan purchases securities it believes are attractively
valued within these sectors.
Under normal market conditions, Morgan manages the fund's portfolio subject to
the following investment guidelines:
1. Minimum average dollar-weighted credit quality of the portfolio (excluding
short-term investments) of A as rated by either Moody's or S&P. To
calculate this average credit requirement, instruments that are not rated
are assigned a rating by Morgan.
2. Minimum credit quality for short-term investments at the time of purchase
of Prime-1 as rated by Moody's or A-1 as rated by S&P.
The fund's portfolio generally has a duration of no less than three years and no
more than seven years (excluding short-term investments). The duration of a
fixed-income security is the weighted average maturity, expressed in years, of
the present value of all future cash flows, including coupon payments and
principal repayments.
Securities rated lower than A by either Moody's or S&P have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to late or defaulted payments on these obligations than on
higher-rated securities. If the rating of any security held by the fund falls
below its rating at the time of purchase, the fund is not obligated to dispose
of it.
The fund's debt securities may include corporate or U.S. Government zero-coupon
securities of any maturity; securities such as Government National Mortgage
Association ("Ginnie Mae") certificates, which represent ownership interests in
mortgage pools; securities backed by commercial mortgages, including mortgages
on a single property; corporate private placements; directly-placed mortgage
obligations and foreign currency denominated bonds, and including, for this
purpose, preferred stocks.
In addition, the fund may invest in options and futures contracts, foreign
currencies and related instruments, securities of foreign issuers, money market
instruments, collateralized mortgage obligations and asset-backed securities.
The fund may also loan its portfolio securities, make short sales, enter into
forward commitments and repurchase agreements and purchase illiquid securities.
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
o Derivatives Risk
o Credit Risk
10
<PAGE>
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 10.30%
1994 -2.38%
1995 17.65%
1996 2.99%
1997 8.45%
1998 6.97%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the Fund's average annual returns for one year,
five years and inception-to-date compare to those of the Salomon Brothers Broad
Investment Grade (BIG) Index. This index contains 5,000 U.S. Treasury, Agency,
mortgage and corporate bonds that have a credit quality of investment grade
(AAA-BBB by Standard & Poor's).
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED BIG
FIXED INCOME FUND INDEX
--------------------------------------
Past 1 Year x.xx% x.xx%
--------------------------------------
Past 5 Years x.xx% x.xx%
--------------------------------------
Since Inception x.xx% x.xx%
(7/1/92)
--------------------------------------
Preferred Short-Term Government Securities Fund
OBJECTIVE: THE PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND SEEKS ITS
OBJECTIVE OF HIGH CURRENT INCOME, CONSISTENT WITH PRESERVATION OF CAPITAL,
PRIMARILY THROUGH INVESTMENT IN U.S. GOVERNMENT SECURITIES.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: Under normal market conditions, the
fund invests at least 65% of its total assets in securities issued or guaranteed
by the U.S. Government and its agencies, authorities or instrumentalities, and
related purchase agreements. In order to reduce risk, the fund maintains a
dollar-weighted average maturity of not more than three years and typically
purchases securities with remaining maturities or average lives of less than
five years.
11
<PAGE>
Some of these U.S. Government securities, such as U.S. Treasury bills, notes and
bonds, mortgage participation certificates guaranteed by the Government National
Mortgage Association ("Ginnie Mae"), and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government securities are supported by the discretionary authority of
the U.S. Government to purchase the issuer's obligations or by the right of the
issuer to borrow from the U.S. Treasury. The U.S. Treasury is under no legal
obligation, however, to purchase securities or to make loans. Still other
securities are supported only by the credit of a government agency or similar
body.
Governmental bodies whose obligations are not backed by the full faith and
credit of the U.S. Government include the Federal National Mortgage Association
("Fannie Mae"), Federal Home Loan Banks, the Tennessee Valley Authority, the
Bank for Cooperatives and the Federal Home Loan Mortgage Corporation. A
significant portion of the fund's portfolio may consist of Ginnie Mae
mortgage-backed certificates and other U.S. Government securities representing
ownership interests in mortgage pools.
U.S. Government securities generally do not involve the credit risks associated
with investments in other types of fixed-income securities. As a result, the
yields from U.S. Government securities are generally lower than the yields from
otherwise comparable corporate fixed-income securities.
In addition, the fund may loan its portfolio securities, make short sales, enter
into forward commitments and repurchase agreements and purchase illiquid
securities. The fund may also purchase securities on a when-issued basis, money
market instruments, U.S. Government zero-coupon securities of any maturity,
mortgage-backed securities, collateralized mortgage obligations and asset-backed
securities.
You could lose money on your investment in the fund, or the fund could
underperform other investments due to the following principal risks:
o Management Risk
o Market Risk
For a description of these and other principal risks of the fund, see "Summary
of Principal Risks."
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 5.57%
1994 -0.69%
1995 9.08%
1996 4.71%
1997 6.18%
1998 4.76%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
12
<PAGE>
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of the Merrill Lynch 1-3 Year
Treasury Index. This is an index composed primarily of U.S. Treasury notes and
bonds with remaining maturities of one to three years.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED MERRILL LYNCH
SHORT-TERM 1-3 YEAR
GOVERNMENT TREASURY
SECURITIES FUND INDEX
-------------------------------------------
Past 1 Year x.xx% x.xx%
-------------------------------------------
Past 5 Years x.xx% x.xx%
-------------------------------------------
Since Inception x.xx% x.xx%
(7/1/92)
-------------------------------------------
Preferred Money Market Fund
OBJECTIVE: THE PREFERRED MONEY MARKET FUND SEEKS ITS OBJECTIVE OF THE MAXIMUM
CURRENT INCOME BELIEVED TO BE CONSISTENT WITH PRESERVATION OF CAPITAL AND
MAINTENANCE OF LIQUIDITY BY INVESTING IN SHORT-TERM, FIXED-INCOME INSTRUMENTS.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS: The fund invests in a portfolio of
U.S. dollar-denominated, short-term, fixed-income instruments, including:
short-term U.S. Government securities; certificates of deposit and bankers'
acceptances; prime commercial paper; high-quality, short-term corporate
obligations; and repurchase agreements with respect to U.S. Government
securities.
All of the fund's investments have remaining maturities of 397 days or less at
the time of investment. The average dollar-weighted maturity of the fund's
portfolio is 90 days or less. The fund's investments are limited to those which,
in accordance with standards established by The Preferred Group's trustees, are
believed to present minimal credit risk.
The subadviser, J.P. Morgan Investment Management Inc., may invest up to 100% of
its assets in bank obligations. Investments in a single industry, even though
representing interests in different companies in such industry, may be affected
by common economic forces and other factors. The fund may be particularly
vulnerable to factors affecting the banking industry.
Because of the high quality and short maturity of the fund's investments, the
fund's yield may be lower than that of funds investing in lower-rated securities
and securities of longer maturities. Unlike investments that pay a fixed yield
for a stated period of time, yields of money market funds fluctuate.
The fund may also invest in Yankeedollar and Eurodollar obligations,
dollar-denominated commercial paper of foreign issuers, mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
13
<PAGE>
Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund. The fund could
underperform other investments due to the following principal risk:
o Money Market Risk
ANNUAL PERFORMANCE
The following bar chart illustrates how the performance of the fund has varied
from year to year.
1993 2.62%
1994 3.92%
1995 5.77%
1996 5.07%
1997 5.16%
1998 5.38%
1999 x.xx%
During the periods shown, the highest quarterly return was x.xx% (for the
quarter ended 00/00/00), and the lowest was x.xx% (for the quarter ended
00/00/00). From January 1, 2000 through September 30, 2000, the fund's return
was x.xx%.
The following table shows how the fund's average annual returns for one year,
five years and inception-to-date compare to those of IBC's Money Fund Report
Average/All Taxable, the benchmark used for taxable money market funds.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
PREFERRED IBC'S MONEY FUND
MONEY MARKET REPORT AVERAGE/
FUND ALL TAXABLE
-----------------------------------------------
Past 1 Year x.xx% x.xx%
-----------------------------------------------
Past 5 Years x.xx%* x.xx%
-----------------------------------------------
Since Inception x.xx%* x.xx%
(7/1/92)
-----------------------------------------------
*The fund's performance would have been lower if a portion of the management fee
(0.15%) had not been waived for the period January 1, 1993 through October 31,
1995.
Summary of Principal Risks
================================================================================
Many factors can affect the value of your investment in a Preferred Group fund.
This summary covers the principal risks that may affect a fund's value.
14
<PAGE>
CREDIT RISK
This is the risk that the issuer or the guarantor of a fixed-income security, or
the counterparty to an over-the-counter transaction (including repurchase
agreements and derivatives contracts), will be unable or unwilling to make
timely payments of interest or principal, or to otherwise honor its obligations.
The degree of risk for a particular security may be reflected in its credit
rating. Credit risk is greater for funds, such as the Fixed Income Fund, that
invest in lower-rated or similar unrated securities ("junk bonds"). Junk bonds
have speculative elements or are predominately speculative credit risks. Foreign
investments are also subject to increased credit risk because of the
difficulties of requiring foreign entities to honor their contractual
commitments, and because a number of foreign governments and other issuers are
already in default. Each of the funds is affected by credit risk.
CURRENCY RISK
This is the risk that fluctuations in the exchange rates between the U.S. dollar
and foreign currencies may negatively affect the value of any fund, such as the
Growth, Value, Small Cap, Asset Allocation and Fixed Income funds and, in
particular, the International Fund, that invests in securities denominated in,
and receiving revenues in, foreign currencies.
DERIVATIVES RISK
Derivatives are financial contracts in which value depends on, or is derived
from, the value of an underlying asset, reference rate, or index. Derivatives
are sometimes used as part of a strategy designed to reduce (hedge) other risks.
Generally, however, derivatives are used to earn income, enhance yield and
increase diversification, all of which entail greater risk than if used solely
for hedging purposes.
In addition to risks such as the credit risk of the counterparty, derivatives
involve the risk of mistakes in pricing and valuation and the risk that changes
in the value of the derivative may not correlate perfectly with the relevant
assets, rates or indices. A fund's use of derivatives may also increase the
amount of taxes payable by shareholders. Each of the funds, other than the
Short-Term Government Securities and Money Market funds, is subject to this
risk.
FOREIGN RISK
Foreign securities may exhibit more extreme changes in value than securities of
U.S. companies. The securities markets of many foreign countries are relatively
small, with a limited number of companies representing a small number of
securities. In addition, foreign companies usually are not subject to the same
degree of regulation as U.S. companies.
Reporting, accounting and auditing standards of foreign countries differ, in
some cases significantly, from U.S. standards. Nationalization, expropriation or
confiscatory taxation, currency blockage, political changes or diplomatic
developments could adversely affect a fund's investments in a foreign country.
In the event of nationalization, expropriation or other confiscation, a fund
could lose its entire investment.
Investments in emerging market countries are likely to involve significant
risks. These countries are generally more likely to experience political and
economic instability. Each of the funds, other than the Short-Term Government
Securities Fund, is subject to this risk.
LEVERAGING RISK
When a fund is borrowing money or otherwise leveraging its portfolio, the value
of an investment in that fund will be more volatile and all other risks will
tend to be compounded. Funds take on leveraging risk when they borrow money to
meet redemption requests, invest collateral from securities loans or use reverse
repurchase agreements, forward commitments, inverse floating rate investments or
derivatives. All funds are subject to this risk.
LIQUIDITY RISK
Liquidity risk exists when particular investments are difficult to purchase or
sell, possibly preventing a fund from selling investments at an advantageous
price. Derivatives and securities involving substantial interest rate and credit
risk tend to involve greater liquidity risk. In addition, liquidity risk tends
to increase when a fund invests in debt securities whose sale may be restricted
by law or by contract. All funds are subject to this risk.
15
<PAGE>
MANAGEMENT RISK
Caterpillar Investment Management Ltd. and the subadvisers to The Preferred
Group apply their investment techniques and risk analyses in making investment
decisions for the funds, but there can be no guarantee that their decisions will
produce the desired results. In some cases, derivative and other investment
techniques may be unavailable or a fund may not use them, possibly even under
market conditions where their use would have benefited the fund. Because they
are actively managed, all Preferred funds are subject to management risk.
MARKET RISK
Each of the funds is subject to market risk, which is the general risk of
unfavorable changes in the market value of a fund's portfolio securities. Those
funds that invest in equity securities are exposed to the risk of changes in the
value of equity securities. Those risks include the risks of broader market
declines as well as more specific risks affecting the issuers, such as
management performance, financial leverage, industry problems and reduced demand
for the issuer's goods or services.
Another aspect of market risk affecting all of the funds is interest rate risk.
As interest rates rise, your investment in a fund is likely to be worth less
because its income-producing equity or debt investments are likely to be worth
less. Even funds such as the Short-Term Government Securities Fund and the Money
Market Fund are subject to interest rate risk, even though they generally invest
substantial portions of their assets in the highest quality debt securities,
such as U.S. Government securities. Interest rate risk is generally greater for
funds that invest in debt securities with longer maturities. This risk is
usually compounded for funds that invest significantly in mortgage-backed or
other asset-backed securities that may be prepaid. These securities have
variable maturities that tend to lengthen when that is least desirable--when
interest rates are rising.
MONEY MARKET RISK
While the Money Market Fund is designed to be a relatively low risk investment,
it is not entirely free of risk. The fund may not be able to maintain a net
asset value of $1.00 per share, as a result of deterioration in the credit
quality of issuers whose securities the fund holds, or an increase in interest
rates. In addition, the value of your investment may be eroded over time by
inflation.
SMALLER COMPANY RISK
Market risk and liquidity risk are particularly pronounced for stocks of
companies with relatively small market capitalizations. These companies may have
limited product lines, markets or financial resources, or they may depend on a
few key employees. The Growth and Small Cap funds in particular have exposure to
this risk.
16
<PAGE>
Schedule of Fund Expenses
Shareholder Transaction Expenses (All Funds)
===============================================================================
Maximum sales load imposed on purchases NONE
Maximum sales load imposed on reinvested dividends NONE
Exchange fees NONE
Maximum contingent deferred sales charge NONE
Redemption fees NONE*
Annual Fund Operating Expenses
(As a percentage of average net assets)
TOTAL FUND
FUND MANAGEMENT FEES OTHER EXPENSES OPERATING EXPENSES
-------------------------------------------------------------------------------
Growth 0.75% 0.08% 0.83%
-------------------------------------------------------------------------------
Value 0.75% 0.09% 0.84%
-------------------------------------------------------------------------------
International 0.95% 0.25% 1.20%
-------------------------------------------------------------------------------
Small Cap 1.00%** 0.17% 1.17%
-------------------------------------------------------------------------------
Asset Allocation 0.70% 0.19% 0.89%
-------------------------------------------------------------------------------
Fixed Income 0.50% 0.15% 0.65%
-------------------------------------------------------------------------------
Short-Term Gov't. Securities 0.35% 0.20% 0.55%
-------------------------------------------------------------------------------
Money Market 0.30% 0.15% 0.45%
-------------------------------------------------------------------------------
*The Preferred Group's bank charges a $10 fee for wire redemptions, minimum
$100, subject to change without notice.
**Shareholders of the Preferred Small Cap Fund approved an increase in the
management fee from 0.75% to 1.00% effective January 1, 2000.
The purpose of the preceding table is to assist in understanding the various
costs and expenses of The Preferred Group that are paid by shareholders.
EXAMPLE: This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in a fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
17
<PAGE>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Growth $85 $265 $460 $1,025
--------------------------------------------------------------------------------
Value 86 268 466 1,037
--------------------------------------------------------------------------------
International 122 381 660 1,455
--------------------------------------------------------------------------------
Small Cap 119 372 644 1,420
--------------------------------------------------------------------------------
Asset Allocation 91 284 493 1,096
--------------------------------------------------------------------------------
Fixed Income 66 208 362 810
--------------------------------------------------------------------------------
Short-Term Government Securities 56 176 307 689
--------------------------------------------------------------------------------
Money Market 46 144 252 567
--------------------------------------------------------------------------------
Note: The figures shown in the example above are hypothetical. They are not
representations of past or future performance or expenses; actual
performance and/or expenses may be greater or less than shown.
General Policies & Risk Considerations
Portfolio Turnover
================================================================================
Portfolio turnover is not a limiting factor in investment decisions. High
portfolio turnover (generally portfolio turnover rates over 100%) involves
higher brokerage commissions and other transaction costs on the sale of
securities and reinvestment in other securities that are borne directly by the
funds and may increase the amount of taxes payable by shareholders. Portfolio
turnover rates for the life of each fund are shown in the section "Financial
Highlights."
Money Market Instruments
================================================================================
The money market instruments in which the Money Market Fund may invest include:
1. Short-term U.S. Government securities.
2. Certificates of deposit, bankers' acceptances and other bank obligations
rated in the two highest rating categories by at least two major rating
agencies or, if rated by only one major agency, in that agency's two highest
grades, or unrated but determined to be comparable by CIML or Morgan. Bank
obligations must be those of a bank that has deposits in excess of $2 billion
or that is a member of the Federal Deposit Insurance Corporation. The fund
may invest in obligations of U.S. branches or subsidiaries of foreign banks
("Yankeedollar obligations") or foreign branches of U.S. banks ("Eurodollar
obligations").
3. Commercial paper rated in the two highest rating categories by at least two
major rating agencies or, if rated by only one major agency, in that agency's
two highest grades or, if not rated, of comparable quality as determined by
the subadviser to the fund according to procedures approved by The Preferred
Group's trustees.
4. Corporate obligations with an initial maturity of over 397 days but a
remaining maturity of 397 days or less whose issuers have outstanding
short-term debt obligations rated in the highest rating category by at least
two major rating agencies or, if rated by only one major agency, in that
agency's highest grade.
18
<PAGE>
5. Repurchase agreements with domestic commercial banks or registered
broker-dealers.
For temporary defensive purposes, each of the other funds may also invest all or
a portion of its assets in the above kinds of money market instruments. However,
determinations of the quality of unrated securities may be made by each fund's
subadviser.
Options and Futures Transactions; Foreign Currency Transactions
================================================================================
Each fund (except the Short-Term Government Securities Fund and the Money Market
Fund) may engage in a variety of transactions involving options and futures
contracts, which are commonly known as "derivative securities," for hedging,
dividend accruals and portfolio allocation purposes.
In order to hedge against possible variations in foreign exchange rates pending
the settlement of securities transactions, each of the funds (other than the
Short-Term Government Securities and Money Market funds) may buy or sell foreign
currencies or may deal in forward foreign currency contracts; that is, agree to
buy or sell a specified currency at a specified price and future date. These
funds may also invest in currency futures contracts and related options. If a
fall in exchange rates for a particular currency is anticipated, a fund may, as
a hedge, sell a currency futures contract or a related call option or purchase a
related put option. If it is anticipated that exchange rates for a particular
currency will rise, a fund may purchase a currency futures contract or a related
call option or sell (write) a related put option to protect against an increase
in the price of securities denominated in the currency the fund intends to
purchase.
These transactions may cause the fund (and, on distribution, its shareholders)
to recognize ordinary income or loss as a result of currency fluctuations. In
addition, the fund's hedging activities (including transactions in foreign
currencies and foreign currency-denominated debt transactions) may cause its
book income to differ from its taxable income. If book income exceeds taxable
income, the distribution of such excess may be treated in part as a return of
capital and in part as capital gain for tax purposes. If book income is less
than taxable income, the fund may be required to make distributions exceeding
book income to qualify as a "regulated investment company" for federal tax
purposes.
These futures contracts and related options are used only as a hedge against
anticipated currency rate changes, and all options on currency futures written
by the funds are covered. These practices, however, may present risks different
from or in addition to the risks associated with investments in foreign
currencies.
Risk Factors of Foreign Investments
================================================================================
The Money Market Fund may invest all or any portion of its assets in
Yankeedollar and Eurodollar obligations and in dollar-denominated commercial
paper of foreign issuers. The Growth, Value, Small Cap, Asset Allocation and
Fixed Income funds each may invest without limit in securities of foreign
issuers that are traded in domestic securities markets, and each may invest up
to 10% of its assets in securities traded principally in securities markets
outside the United States. (Eurodollar certificates of deposit are excluded from
these limitations.)
19
<PAGE>
These investments, as well as investments of the International Fund in
securities of foreign issuers or securities principally traded abroad, may
involve certain special risks due to foreign economic, political and legal
developments. These developments may include unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation of assets, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against
foreign entities. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers.
The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets, and certain foreign securities markets may be
subject to less governmental supervision than in the United States. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded abroad.
The International Fund may also invest in countries whose economies or
securities markets are not highly developed. Special considerations associated
with these investments (in addition to the considerations regarding foreign
investments generally) may include greater political uncertainty, an economy's
dependence on revenues from particular commodities or on international aid or
development assistance, currency transfer restrictions, a limited number of
potential buyers for these securities, and delays and disruptions in securities
settlement procedures.
Loans of Portfolio Securities
================================================================================
Each fund (except the Money Market Fund) may lend its portfolio securities to
counterparties under contracts calling for collateral equal to at least the
market value of the securities loaned. Each fund would continue to benefit from
interest on the securities loaned and would also receive either interest,
through investment of any cash collateral by the fund in permissible
investments, or a fee. Securities lending involves the risk of loss of rights in
the collateral or delay in recovery of the collateral if the borrower fails
financially.
Short Sales
================================================================================
Each fund (except the Money Market Fund) may from time to time make short sales
involving securities held in the fund's portfolio or which the fund has the
right to acquire without further payment.
Forward Commitments, When-Issued and Delayed Delivery Transactions
================================================================================
The Short-Term Government Securities Fund may purchase U.S. Government
securities on a when-issued basis, and may purchase or sell these securities for
delayed delivery.
20
<PAGE>
All funds (except the Money Market Fund) may make contracts to purchase
securities for a fixed price at a future date beyond normal settlement time
("forward commitments").
All funds may also enter into forward commitments to sell securities. The funds
may simultaneously be obligated to forward commitment purchase and sale
contracts and may sell a portfolio security or enter into a forward commitment
sale contract (a "dollar-roll transaction") that is coupled with an agreement by
the fund (including a forward commitment) to repurchase a similar, but not
identical, security at a later date. When-issued transactions, delayed delivery
purchases and forward commitments involve a risk of loss if the value of the
securities declines before the settlement date. This risk is in addition to the
risk that the value of the fund's other assets may decline. No income accrues to
the purchaser of these securities before delivery.
Repurchase Agreements
================================================================================
Each of the funds may enter into repurchase agreements with banks and
broker-dealers. Under a repurchase agreement, a fund acquires a security
(usually an obligation of the U.S. Government) for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed-upon price and date. The resale price is greater than the acquisition
price and reflects an agreed-upon market rate unrelated to the coupon rate on
the purchased security. These transactions give the fund an opportunity to earn
a return on temporarily available cash at no market risk, although there is a
risk that the seller may default in its obligation to pay the agreed-upon sum on
the redelivery date. Such a default may subject the fund to expenses, delays and
risks of loss.
Mortgage-Backed Securities, Asset-Backed Securities and Zero-Coupon Securities
================================================================================
Each of the funds may invest in mortgage-backed securities, collateralized
mortgage obligations ("CMOs") and asset-backed securities. Interest and
principal payments (including prepayments) on the mortgages underlying
mortgage-backed securities are passed through to the holders of mortgage-backed
securities. Prepayments occur when the mortgagor on an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
Because of the pass-through of prepayments of principal on the underlying
mortgages, mortgage-backed securities are often subject to more rapid prepayment
of principal than their stated maturity. Because the prepayment characteristics
of the underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates.
Prepayments are important because they affect the yield and price of the
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and a fund would be required to reinvest the proceeds at
the lower interest rates then available. In addition, prepayments of mortgages
which underlie securities purchased at a premium could result in capital losses
because the premium may not have been fully amortized at the time the obligation
is prepaid. As a result of these principal prepayment features, mortgage-backed
securities that are U.S. Government securities are generally more volatile
investments than other U.S. Government securities. Also, although the values of
mortgage-backed securities generally fall when interest rates rise, their
potential for capital appreciation when interest rates are falling is limited
because of the prepayment feature.
21
<PAGE>
CMOs, which are commonly considered to be "derivatives," are securities backed
by a portfolio of mortgages or mortgage-backed securities held under an
indenture agreement. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued with a number of classes or series which have
different maturities and which may represent interests in some or all of the
interest and/or principal on the underlying collateral. CMOs of different
classes are generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. If there are enough early prepayments on these
mortgages, the class or series of CMOs first to mature generally would be
retired prior to its maturity. Therefore, the early retirement of a particular
class or series of a CMO held by a fund has the same effect as the prepayment of
mortgages underlying a mortgage-backed pass-through security.
Commercial mortgage-related securities are generally structured similarly to
pass-through securities or CMOs, although other structures are possible. They
may pay fixed or adjustable rates of interest. Commercial mortgage-related
securities are issued in public or private transactions by a variety of public
and private issuers.
The commercial mortgage loans that underlie commercial mortgage-related
securities have certain distinct risk characteristics. Commercial mortgage loans
generally lack standardized terms, which may complicate their structure.
Commercial properties tend to be unique and are more difficult to value than
single family residential properties. Commercial mortgage loans also tend to
have shorter maturities than residential mortgage loans. They also may not be
fully amortizing, which means that they may have a significant principal
balance, or "balloon" payment, due on maturity. Assets underlying commercial
mortgage-related securities may relate only to a few properties or a single
property. The risk involved in single property financings is highly
concentrated.
Asset-backed securities are structured like mortgage-backed securities, but
instead of mortgage loans or interests in mortgage loans, the underlying assets
may include motor vehicle installment sales or installment loan contracts,
leases of various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying assets may be limited, and
asset-backed securities are subject to prepayment risks similar to those
described above for mortgage-backed securities.
The Fixed Income and Short-Term Government Securities funds may also invest in
"zero-coupon" U.S. Government securities. (Zero-coupon securities are issued at
a significant discount from face value and pay interest only at maturity rather
than at intervals during the life of the security.)
The Fixed Income and Short-Term Government Securities funds may also invest in
"IO/PO Strips" (certificates that represent undivided interests in "stripped"
U.S. Government securities and coupons). IO/PO Strips are usually structured
with two classes that receive different portions of the interest and principal
distributions on a pool of mortgage assets.
22
<PAGE>
Zero-coupon securities and IO/PO Strips tend to be more volatile than other
types of U.S. Government securities. Mortgage-backed IO Strips involve the
additional risk of loss of the entire value of the investment if the underlying
mortgages are prepaid. IO/PO Strips that are U.S. Government securities backed
by fixed-rate mortgages may be considered liquid securities if so determined by
the subadviser under procedures approved by The Preferred Group's trustees. All
other IO/PO Strips are considered illiquid. If either fund invests in IO/PO
Strips that are "stripped" by private entities, these securities are not
considered to be U.S. Government securities.
Zero-coupon securities may be issued by the U.S. Treasury or by a U.S.
Government agency or entity (such as the Student Loan Marketing Association or
the Resolution Funding Corporation). A fund is required to accrue and distribute
income from zero-coupon securities on a current basis, even though it does not
receive that income currently in cash. Therefore the fund may have to sell other
investments to obtain cash needed to make income distributions.
Illiquid Securities
================================================================================
Each fund may purchase "illiquid securities." This includes securities whose
disposition is restricted by the securities laws, so long as no more than a
fixed percentage of that fund's net assets (determined by the SEC to be 15% (10%
for the Money Market Fund) as of the date of this Prospectus) would be invested
in these illiquid securities. There may be relatively few potential purchasers
for these securities, especially under adverse market or economic conditions or
if the financial condition of the issuer deteriorates.
A fund could find it more difficult to sell these securities when CIML or the
subadviser believes it advisable to do so or may be able to sell these
securities only at prices lower than if the securities were not subject to
restrictions on disposition. At times, it may also be more difficult to
determine the fair value of these securities in computing a fund's net asset
value. Illiquid securities include repurchase agreements maturing in more than
seven days, certain IO/PO Strips, over-the-counter options and assets used to
"cover" over-the-counter options written by a fund (to the extent described
under "Options and Futures Transactions--OTC Options" in the Statement of
Additional Information).
Certain securities whose disposition is restricted by the securities laws, such
as securities eligible for resale to qualified institutions under Rule 144A and
privately-placed commercial paper, may be determined by CIML or the subadviser
to be liquid (and so not subject to the 15% or 10% limitations) under procedures
approved by the Preferred Group's trustees. It is possible that, despite this
determination, there may be relatively few potential purchasers for these
securities and they may therefore be subject to the risks described above.
Alternative Strategies
================================================================================
At times, a portfolio manager may judge that market conditions make pursuing a
fund's investment strategies inconsistent with the best interests of its
shareholders. The portfolio manager then may temporarily use alternative
strategies that are mainly designed to limit the fund's losses. Although a
portfolio manager has the flexibility to use these strategies, he or she may
choose not to for a variety of reasons, even in very volatile market conditions.
These strategies may cause the fund to miss out on investment opportunities and
may prevent the fund from achieving its goal.
23
<PAGE>
Investment Objectives
================================================================================
Unless otherwise indicated, the investment policies and objectives of the funds
may be changed without shareholder approval.
About The Preferred Group
Management of The Preferred Group
================================================================================
The Preferred Group is managed by Caterpillar Investment Management Ltd.
("CIML"), which provides investment advisory and portfolio management services
for The Preferred Group. CIML also provides executive and other personnel for
management of The Preferred Group. Pursuant to The Preferred Group's Agreement
and Declaration of Trust, the Trustees supervise the affairs of The Preferred
Group as conducted by CIML.
Caterpillar Investment Management Ltd.
================================================================================
Caterpillar Investment Management Ltd. ("CIML") is a Delaware corporation formed
on December 18, 1991. Its principal place of business is 411 Hamilton Boulevard,
Suite 1200, Peoria, Illinois 61602-1104. CIML is a wholly-owned subsidiary of
Caterpillar Inc., an international manufacturer of machinery and engines and
provider of financial products. In addition to managing the funds, CIML serves
as an investment adviser to the Caterpillar Investment Management Ltd. Tax
Exempt Group Trust (the "Group Trust"). CIML has advised the funds since
inception and has experience managing portfolios of the Group Trust that are
similar to certain of the funds.
For investment advisory services, each fund pays a management fee to CIML, as
follows:
------------------------------------
GROWTH .75%
------------------------------------
VALUE .75%
------------------------------------
INTERNATIONAL .95%
------------------------------------
SMALL CAP 1.00%
------------------------------------
ASSET ALLOCATION .70%
------------------------------------
FIXED INCOME .50%
------------------------------------
SHORT-TERM GOV'T. SECURITIES .35%
------------------------------------
MONEY MARKET .30%
------------------------------------
In turn, CIML pays a portion of the fee it receives from each fund to the
subadviser(s) of that fund for its/their services.
24
<PAGE>
The Subadvisers
================================================================================
To assist it in carrying out its responsibility, CIML has retained various
subadvisers to provide advisory services to the funds under the supervision of
CIML and The Preferred Group's Board of Trustees.
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, a registered investment adviser, is a
wholly-owned subsidiary of The Prudential Insurance Company of America, a mutual
insurance company. As of June 30, 2000, Jennison manages $63 billion in funds.
OPPENHEIMER CAPITAL is a Delaware general partnership formed on July 1, 1987.
Its address is 1345 Avenue of the Americas, 49th Floor, New York, New York
10105. Oppenheimer Capital provides investment advice to individuals, state and
local government agencies, pension and profit sharing plans, trusts, estates,
businesses and other organizations.
Oppenheimer Capital is a registered investment adviser with approximately $40
billion in assets under management as of June 30, 2000. Oppenheimer Capital is
an indirect subsidiary of PIMCO Advisers, L.P., a registered investment adviser,
and Allianz AG, a German insurance company.
MERCATOR provides investment advice to mutual funds and other entities. Its
principal place of business is 2400 East Commercial Blvd., Ft. Lauderdale,
Florida 33308. Mercator Asset Management(R), LP is a Delaware general
partnership owned by its executive officers and The Prudential Insurance Company
of America, a 20% limited partner. As of June 30, 2000, Mercator manages over
$3.5 billion in funds.
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,
2000, manages over $102 billion in funds. Mellon is a wholly-owned, indirect
subsidiary of Mellon Financial 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.
PANAGORA'S principal place of business is 260 Franklin Street, Boston,
Massachusetts 02110. Fifty percent of the outstanding voting stock of PanAgora
is owned by each of Nippon Life Insurance Company, a mutual life insurance
company, and Putnam Investments, Inc. ("Putnam"). Putnam is owned by Marsh &
McLennan Companies, Inc., a publicly-owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management. PanAgora serves as an investment
adviser and manager to a variety of endowment funds, pension accounts, other
institutions and investment companies. As of June 30, 2000, PanAgora manages
over $16.3 billion in funds.
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. As of June 30, 2000, Morgan
manages approximately $369 billion in funds.
25
<PAGE>
TURNER, located at 1235 Westlakes Dr., Suite 350, Berwyn, Pennsylvania 19312,
provides investment advice to mutual funds and other entities. Robert Turner is
the majority shareholder of Turner. As of June 30, 2000, Turner had
approximately $10.2 billion in assets under management.
Portfolio Managers
Preferred Growth Fund
================================================================================
SUBADVISER: Jennison Associates LLC ("Jennison")
PORTFOLIO MANAGER:
Kathleen McCarragher
TITLE: Director, Executive Vice President and Domestic Equity Investment
Strategist
LAST FIVE YEARS EXPERIENCE: Managing Director and Director of Large Cap Growth
Equities at Weiss, Peck & Greer before joining Jennison in May 1998. Kathleen
assumed management of the Preferred Growth Fund in April 1999.
EDUCATION: B.B.A. in Finance--University of Wisconsin; M.B.A.--Harvard Business
School
Preferred Value Fund
================================================================================
SUBADVISER: Oppenheimer Capital
PORTFOLIO MANAGER: John G. Lindenthal
TITLE: Managing Director, Oppenheimer Capital
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Oppenheimer Capital. John has
managed the Preferred Value Fund since its inception on July 1, 1992.
EDUCATION: B.S., MBA--University of Santa Clara
Preferred International Fund
================================================================================
SUBADVISER: Mercator Asset Management(R), LP ("Mercator")
PORTFOLIO MANAGER: Peter F. Spano, CFA
TITLE: President, PXS Corp.,
General Partner
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Mercator. Pete has managed the
Preferred International Fund since its inception on July 1, 1992.
EDUCATION: BBA--St. John's University; MBA--Baruch College (City University of
New York); Chartered Financial Analyst
26
<PAGE>
Preferred Small Cap Fund
================================================================================
SUBADVISER: Turner Investment Partners, Inc. ("Turner")
PORTFOLIO MANAGER: Bill McVail leads an investment committee.
TITLE: Senior Equity Portfolio Manager, Turner
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at PNC Equity Advisers before
joining Turner in 1998. Bill has managed the Preferred Small Cap Fund since
January 1, 2000.
EDUCATION: B.A.--Vassar College.
Preferred
Asset Allocation Fund
================================================================================
SUBADVISERS: Mellon Capital Management Corporation ("Mellon") and PanAgora Asset
Management ("PanAgora")
PORTFOLIO MANAGER: Thomas B. Hazuka
TITLE: Chief Investment Officer, Mellon
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at Mellon. Tom has been involved
in the management of the Preferred Asset Allocation Fund since its inception
on July 1, 1992.
EDUCATION: B.S.--Stevens Institute of Technology; MBA--University of
Connecticut; Ph.D.--Stanford University
PORTFOLIO MANAGER: Edgar E. Peters
TITLE: Director of Asset Allocation and Chief Investment Strategist, PanAgora
LAST FIVE YEARS EXPERIENCE: Portfolio Manager at PanAgora. Ed has been involved
in the management of the Preferred Asset Allocation Fund since its inception
on July 1, 1992.
EDUCATION: B.S.--Montclair State College; MBA--Rutgers University
Preferred Fixed Income Fund
================================================================================
SUBADVISER: J.P. Morgan Investment Management Inc. ("Morgan")
PORTFOLIO MANAGER: E. Luke Farrell
Title: Vice President, Fixed-Income Portfolio Manager, Morgan
LAST FIVE YEARS EXPERIENCE: Portfolio Manager and Fixed-Income Securities
Trader, Morgan. Luke has managed the Preferred Fixed Income Fund since February
1, 2000.
EDUCATION: B.S.--University of Virginia
27
<PAGE>
Preferred Short-Term Government Securities Fund
===============================================================================
PORTFOLIO MANAGER:
Charles T. ("C.T.") Urban, III, CFA
TITLE: Senior Portfolio Manager, CIML
LAST FIVE YEARS EXPERIENCE:
Vice President and Senior Portfolio Manager at Windsor Financial Group before
joining CIML in September 1999.
EDUCATION: B.S.--University of North Carolina; MBA--University of Minnesota;
Chartered Financial Analyst
Preferred Money Market Fund
================================================================================
SUBADVISER: J.P. Morgan Investment Management Inc. ("Morgan")
PORTFOLIO MANAGER: Mark Settles
TITLE: Vice President, Portfolio Manager, Morgan
LAST FIVE YEARS EXPERIENCE: Portfolio Manager, Morgan. Mark has managed the
Preferred Money Market Fund since January 1, 2000.
EDUCATION: B.A.--Columbia University; M.A.--Northwestern University
Net Asset Value and Pricing
Determination of Net Asset Value and Pricing
Net Asset Value
================================================================================
Net asset value per share (NAV), or share price, for each fund is normally
determined on each day the New York Stock Exchange is open as of the close of
regular trading on the Exchange (generally 4:00 p.m. Eastern time). Fund share
prices (other than the Money Market Fund) can be found daily in most major
newspapers' mutual fund listings under the heading "Preferred Group."
Purchase Share Price
================================================================================
If your request is received on a regular business day before 4:00 p.m. (Eastern
time) in good order, your shares will be priced at that day's net asset value.
Requests received after 4:00 p.m. (Eastern time) will be priced at the next
day's net asset value. Requests to purchase shares on other than a regular
business day will be priced at the net asset value determined on the next
regular business day.
Redemption Share Price
================================================================================
If your redemption request is received prior to 4:00 p.m. (Eastern time) in good
order on a regular business day, your shares will be priced at that day's net
asset value. Redemption proceeds will normally be sent on the following business
day. Redemption requests received after 4:00 p.m. (Eastern time) will be
processed on the business day following receipt.
28
<PAGE>
Exchange Share Price
================================================================================
Exchanges are priced in the same manner as purchases and redemptions.
Determination of NAV
================================================================================
Each fund's share price is calculated by dividing the total value of each fund's
assets, minus liabilities, by the total number of outstanding shares. Portfolio
securities, options and futures contracts for which market quotations are
readily available are valued at market value. Short-term obligations having
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. The portfolio investments of the Money Market Fund
are valued using the amortized cost method of valuation, in accordance with Rule
2a-7 under the Investment Company Act of 1940. All other securities and assets
are valued at their fair value as determined in good faith following procedures
approved by the trustees. If a fund holds securities that are primarily listed
on foreign exchanges that trade on days when the Exchange is not open, the net
asset value of the fund's shares may be subject to change on days when
shareholders will not be able to purchase or redeem the fund's shares.
General
================================================================================
Please note that The Preferred Group does not accept requests which specify a
particular date for purchases or redemptions, or which specify any special
conditions. We will notify you if your request cannot be accepted and provide
additional instructions.
Your Preferred Group Account
How to Open Your Account
================================================================================
To open a new account, simply complete and return the New Account Registration
Form included with this Prospectus and mail it with your check or money order.
We must have your correct Social Security or corporate tax identification number
and your signature. In order to open an account, you must meet the minimum
investment requirements described below.
A completed and signed application is required for each new account you open.
Redemptions are not permitted until your completed application is on file.
Purchase orders received by The Preferred Group by 4:00 p.m. (Eastern time) on
any regular business day are processed at the net asset value next determined,
generally that day's net asset value. There are no sales commissions or 12b-1
fees.
All shareholders receive individual confirmations of each purchase, redemption,
dividend reinvestment, exchange or transfer of shares, including the total
number of shares owned as of the confirmation date.
If you have questions about the funds or require additional assistance with the
New Account Registration Form, please call Investor Services at 1-800-662-4769.
We are happy to assist you.
29
<PAGE>
The following account procedures may not be pertinent to institutional or
employer-sponsored retirement plan accounts. Please call 1-800-662-2465 for
information regarding such accounts.
How to Buy Shares
================================================================================
You can purchase shares of any fund by using one of the four methods described
on the following pages.
For new accounts, please mail us your New Account Registration Form and check in
the return envelope provided. For additional investments, please write your
account number on your check and use the remittance form attached to your
confirmation statement. Mail your check in the return envelope provided. All
checks should be made payable to "The Preferred Group (name of Fund)."
Third-party checks are not accepted. Please mail all purchase requests to one of
the following addresses:
REGULAR MAIL:
The Preferred Group
P.O. Box 8320
Boston, MA 02266-8320
REGISTERED, EXPRESS OR CERTIFIED MAIL:
The Preferred Group
2 Heritage Drive
N. Quincy, MA 02171
The Preferred Group reserves the right to accept or reject any order for the
purchase of fund shares.
ADDITIONAL
METHOD INITIAL INVESTMENT MINIMUM INVESTMENTS MINIMUM
================================================================================
BY MAIL $1,000-Regular Account $50 for all Accounts
--------------------------------------------------------------------------------
$ 250-IRAs & Uniform Gifts/Transfers
to Minors Accounts
--------------------------------------------------------------------------------
$ 150-Quarterly Systematic Savings Plan
--------------------------------------------------------------------------------
$ 50-Monthly Systematic Savings Plan
--------------------------------------------------------------------------------
For all choices below, please call 1-800-662-4769
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
================================================================================
BY EXCHANGE $1,000 $50
(from another fund)
--------------------------------------------------------------------------------
The new account will have the same registration as the account from which you
are exchanging. For more information about exchanges, see "Exchanging and
Redeeming Shares."
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
================================================================================
BY WIRE $1,000 $1,000
--------------------------------------------------------------------------------
30
<PAGE>
Federal funds should be wired to: State Street Bank & Trust Company, Custody and
Shareholder Services Division, Boston, MA 02110, ABA No. 011000028, DDA:
9904-636-9, The Preferred Group, your name and your Fund/Account Number.
METHOD INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM
================================================================================
BY MONEY EXPRESS NOT AVAILABLE $50
(Electronic Funds
Transfer Option)
--------------------------------------------------------------------------------
This service may be used only if you authorize it on your account application.
The maximum transfer amount is $50,000.
Exchanging and Redeeming Shares
================================================================================
Shares may be exchanged on the basis of their net asset values beginning 10 days
after purchase on any day the New York Stock Exchange is open. There are
currently no exchange or redemption fees or charges. You may redeem all or a
portion of your shares.
Please note that an exchange is treated as a redemption and a subsequent
purchase. Therefore, you could realize a taxable gain or loss on your
transaction.
The Preferred Group reserves the right to modify or terminate the exchange
privilege at any time.
The Preferred Group's exchange service is not intended to encourage shareholder
speculation on short-term movements in the market. Each fund reserves the right
to restrict exchanges to one purchase and one redemption of shares in the same
fund during any 120-day period. The exchange privilege may not be exercised for
shares of any fund which are not qualified or exempt under the securities laws
of the state in which the shareholder resides.
The redemption of shares will be suspended during any period in which the New
York Stock Exchange is closed for other than weekends or holidays or, if
permitted by the rules of the SEC, when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the funds to dispose of
their securities or to determine fairly the value of their net assets, or during
any other period permitted by the SEC for the protection of investors.
Redemption proceeds are normally paid in cash. However, if you redeem more than
$250,000, or 1% of a fund's net assets, in any 90-day period, the fund may, at
its discretion, pay the difference between the redemption amount and the lesser
of those two figures with securities of the fund. If redemptions are made in
securities rather than cash, the securities are valued using the procedures
described under "Determination of Net Asset Value and Pricing."
The Preferred Group will normally send you payment for your shares the following
business day after your request is received in proper form by the Transfer
Agent. However, the transmission of your proceeds may be delayed for up to seven
days after your request is received. The mailing of proceeds on redemption
requests involving any shares purchased by personal, corporate or government
check, or bank-fund transfers is generally subject to a 10-day delay to allow
the check or transfer to clear. The clearing period does not apply to purchases
made by wire, Systematic Savings Plan, or cashier's, treasurer's or certified
checks. Redemption or transfer requests will not be honored until all required
documents in the proper form have been received by the Transfer Agent.
31
<PAGE>
How to Redeem or Exchange Shares
METHOD INSTRUCTIONS
================================================================================
BY MAIL To redeem or exchange shares in writing, send an instruction
letter signed by all registered owners, including fiduciary titles,
specifying the name on the account and the account number, the fund
name and the number of shares or dollar amount you want to exchange or
redeem. For exchanges, mail to the attention of the fund you are
exchanging from and specify the fund you are exchanging to. We require
the signature of all owners exactly as registered. For redemptions
over $50,000, we require a signature guarantee.
----------------------------------------------------------------------
REGULAR MAIL: REGISTERED, EXPRESS OR CERTIFIED MAIL:
The Preferred Group The Preferred Group
P.O. Box 8320 2 Heritage Drive
Boston, MA 02266-8320 N. Quincy, MA 02171
---------------------------------------------------------------------
CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS. The letter of instruction
must be accompanied by a resolution. The letter must be signed by at
least one individual authorized by resolution to act on the account.
The resolution must include a signature guarantee.
---------------------------------------------------------------------
TRUSTS. The letter of instruction must be signed by the Trustee(s)
with a signature guarantee.
--------------------------------------------------------------------------------
FOR ALL OPTIONS BELOW, CALL INVESTOR SERVICES AT 1-800-662-4769
METHOD INSTRUCTIONS
================================================================================
BY PHONE If you have authorized Preferred Tele-Services on your account
application, exchanges or redemptions can be made between 8:00 a.m.
(Eastern time) and the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time).
Redemption proceeds can be mailed, wired to your bank or sent by
electronic funds transfer. The Preferred Group's bank charges a $10
fee for wire redemptions, minimum $100, subject to change without
notice. Your bank may also charge you for receiving wires.
--------------------------------------------------------------------------------
BY CHECK If you have authorized the check writing feature on your
account application, you may redeem shares in your account provided
that the appropriate signatures are on your check. The minimum check
amount is $250. There is no charge for this service, and you may
write an unlimited number of checks, provided the account minimum of
$1,000 per fund is maintained. Check writing privileges apply to the
Money Market and the Short-Term Government Securities funds ONLY.
--------------------------------------------------------------------------------
32
<PAGE>
BY MONEY If you have authorized the Preferred Money Express feature on your
EXPRESS account application, you may redeem by electronic funds transfer.
The maximum redemption amount is $50,000.
--------------------------------------------------------------------------------
BY WIRE If you have authorized the Wire Transfer feature on your account
application, you may have your redemption proceeds wired to your bank
on the next business day after the redemption is processed. The
Preferred Group's bank charges a $10 fee for wire redemptions,
minimum $100, subject to change without notice. Your bank may also
charge you for receiving wires.
--------------------------------------------------------------------------------
NOTE: If you want to keep your account open, please maintain a balance of at
least $1,000. If you have questions, please call Investor Services at
1-800-662-4769.
Important Information
About Your Account
================================================================================
ACCOUNT BALANCES
The Preferred Group reserves the right to redeem shares in any account which
drops below the minimum initial investment amount of $1,000 due to shareholder
redemptions. You are allowed 60 days to make an additional investment before the
account is liquidated. The minimum does not apply to IRAs or other retirement
accounts, Uniform Gifts/Transfers to Minors Act accounts, or Systematic Savings
accounts.
INTERMEDIARIES
If you purchase or redeem Preferred Group shares through a registered
broker-dealer, a bank, an investment adviser, or other third party, those
entities may charge you a service fee.
NON-U.S. BANK CHECKS
All deposit checks must be drawn on U.S. chartered banks. Checks drawn on
foreign banks must be converted to U.S. dollars; in the case of smaller
investments, the fee for conversion may be disproportionately high in relation
to the value of the investment.
PURCHASES BY CHECK
Purchases are accepted subject to collection of checks at full value and
conversion into federal funds. Payment by a check drawn on any member of the
Federal Reserve System can normally be converted into federal funds within two
business days after receipt of the check. Checks drawn on a nonmember bank may
take up to 10 days to convert into federal funds. In all cases, the purchase
price is based on the net asset value next determined after the purchase order
and check are received in proper order, even though the check may not yet have
been converted into federal funds. Third-party checks will not be accepted.
SHARE CERTIFICATES
When you open your account, you will receive a confirmation indicating your name
and account number, which will be evidence that you have opened a Preferred
Group account. No share certificates will normally be issued.
33
<PAGE>
SIGNATURE GUARANTEES
A signature guarantee verifies the authenticity of your signature and is
sometimes required for our mutual protection. When a signature guarantee is
required, you should have "Signature Guaranteed" stamped under your signature
and guaranteed at a commercial bank (FDIC member), trust company, firm that is a
member of a domestic stock exchange, foreign branches of any of the above and
certain other financial institutions.
You will generally need a signature guarantee to:
1. Authorize or change certain services after your account is opened;
2. Transfer shares to another owner;
3. Redeem over $50,000 by written request;
4. Redeem or exchange shares when someone who is not a registered owner of the
account will receive the proceeds;
5. Send proceeds to an address other than the account address;
6. Send proceeds to an account address which has been changed within 30 days
of the redemption request; and
7. Pay the proceeds to a corporation, partnership, trust or fiduciary.
TELEPHONE EXCHANGE AND REDEMPTION
The Preferred Group may accept telephone redemption or exchange instructions
from any person with respect to accounts of shareholders who elect this service.
The Preferred Group employs reasonable procedures to verify that telephone
requests for redemptions and exchanges are genuine, such as requiring a form of
personal identification prior to acting on telephone instructions, recording
telephone instructions and sending written confirmations of the resulting
transactions to shareholders.
The Preferred Group reserves the right to terminate or modify the telephone
exchange or telephone redemption service at any time. During times of severe
disruption in the securities markets, the volume of calls may make it difficult
to exchange or redeem shares by telephone, in which case a shareholder may wish
to send a written request for exchange or redemption as described under
"Exchanging and Redeeming Shares--By Mail."
Additional Shareholder Services
================================================================================
CHECK-WRITING SERVICES
(Money Market and Short-Term Government Securities funds only)
The minimum check amount is $250. This service is FREE and you may write an
unlimited number of checks. You must maintain a minimum $1,000 account balance
after your withdrawal. (Remember that redeeming shares from the Short-Term
Government Securities Fund will be treated as a capital gain or loss transaction
for tax purposes.)
PREFERRED MONEY EXPRESS
(Electronic Funds Transfer Option)
This plan allows you to buy or sell shares by transferring money between your
fund account and your account at a bank, savings and loan association or credit
union that is a member of the ACH (Automated Clearing House) system. Preferred
Money Express eliminates the expense of wiring funds and the delay of mailing a
check. You need to sign up for Preferred Money Express on your account
application to use this service.
34
<PAGE>
PREFERRED TELE-SERVICES LINE
You may reach The Preferred Group by calling Preferred Tele-Services at
1-800-662-4769, 24-hours a day. Between the hours of 8:00 a.m. and 6:00 p.m.
(Eastern time) you will reach an Investor Services Representative. If you are
calling after 6:00 p.m. (Eastern time) on a Touch-Tone(r) phone, you will
receive instructions on how you can (1) listen to price and yield information
and (2) obtain your share balance and account value. The Preferred Group records
telephone transactions to verify data concerning these transactions.
SYSTEMATIC SAVINGS PLAN
This plan allows you to make monthly or quarterly investments automatically by
authorizing us to move $50 or more on the same day each month (or $150 per
quarter) from your checking account to any fund. You will be sent a confirmation
statement for each transaction, and a debit will appear on your checking account
statement. To change the amount of your systematic savings authorization or to
terminate this service, please call Investor Services or write to the address
printed on your account statement. Be sure to include your account number.
SYSTEMATIC WITHDRAWAL PLAN
This plan automatically redeems enough shares each month or quarter to provide
you with a check, wire or electronic funds transfer to your checking account for
a minimum amount of $50 monthly or $150 quarterly. You must maintain a $1,000
minimum account balance after your withdrawal.
TAX-QUALIFIED RETIREMENT PLANS
Tax-deferred individual retirement plans are available. Please call Investor
Services for details and the appropriate forms for:
o INDIVIDUAL RETIREMENT ACCOUNTS (IRAs). Any wage earner between 18 and 70 1/2
years of age can deduct contributions to an IRA up to the lesser of $2,000 or
the amount of compensation included in gross income for the tax year. This
$2,000 contribution limit is reduced or eliminated if the wage earner (or the
wage earner's spouse) actively participates in an employer-sponsored
qualified retirement plan. For married individuals, the annual contribution
limit is $2,000 for each spouse, but the couple's aggregate deductible
contributions may not exceed the combined compensation of both spouses
(reduced by any contributions made to other forms of IRAs, such as "Roth
IRAs").
o ROTH IRAs. Single wage earners with an adjusted gross income of less than
$95,000 (and married wage earners who file jointly and have an aggregate
adjusted gross income of less than $150,000) can make non-deductible
contributions to Roth IRAs of up to $2,000 per year less amounts contributed
on behalf of these individuals to other IRAs. The $2,000 contribution limit
is phased out for wage earners with adjusted gross incomes that exceed the
above amounts. Qualifying distributions from a Roth IRA are tax-free,
provided the Roth IRA has been in existence for at least five years.
o ROLLOVER IRAs. When a participant of a tax-favored retirement plan receives
an eligible rollover distribution of assets, the assets may be "directly
transferred" or "directly rolled over" into an IRA. Eligible rollover
distributions that are not "directly transferred" to an IRA or other tax-
favored retirement plan are subject to a 20% withholding tax. You can also
roll over an existing IRA to a Preferred Group IRA.
35
<PAGE>
o SEP-IRAs. Simplified Employee Pension Plans are arrangements under which
employers may contribute directly to an employee's IRA.
In addition, The Preferred Group may be an appropriate investment for 403(b)
plans, 401(k) plans and Keogh or corporate profit-sharing plans.
Distributions
================================================================================
OPTIONS
You can select the distribution option that best suits your needs. See "Choosing
a Distribution Option" in this section.
GENERAL
The Fixed Income, Short-Term Government Securities and Money Market funds
declare dividends daily and pay them monthly. The Asset Allocation Fund declares
and pays dividends quarterly. The Growth, Value, International and Small Cap
funds declare and pay dividends at least annually. Each fund pays out as
dividends substantially all of its net investment income (which comes from
dividends and interest it receives from its investments) and net realized
short-term capital gains. For these purposes and for federal income tax
purposes, a portion of the premiums from certain expired call or put options
written by a fund, net gains from closing purchase and sale transactions with
respect to these options, and net gains from futures transactions are treated as
short-term capital gains.
Each fund distributes substantially all of its net realized capital gains, if
any, at least annually after giving effect to any available capital loss
carry-over. The Fixed, Short-Term Government and Small Cap funds currently have
available capital loss carry-overs. Subject to law, dividends and capital gains
distributions may be declared more or less frequently at the discretion of the
Trustees.
Choosing a Distribution Option
================================================================================
When completing your account application, you may select any one of the
following distribution options. If you do not specify an option, all of your
distributions are reinvested in additional shares of the relevant fund. If you
choose to change your distribution election, you must notify Investor Services
in writing. The address for Investor Services is The Preferred Group, P.O. Box
8320, Boston, MA 02266-8320.
REINVEST OPTION
All dividends and distributions of net realized capital gains are reinvested in
additional shares. All distributions are reinvested as of the record date for
the distribution and are paid on the payment date.
CASH DIVIDEND OPTION
All dividends are paid in cash (by check). All distributions of net realized
capital gains are reinvested in additional fund shares as of the record date for
the distribution and are paid on the payment date.
ALL CASH OPTION
All dividends and distributions of net realized capital gains are paid in cash
(by check).
36
<PAGE>
In addition, an option to invest your cash dividends and/or capital gains
distributions of a Preferred Group fund in another Preferred Group fund is
available. Please call Investor Services (1-800-662-4769) for more information.
If it is determined that the U.S. Postal Service cannot properly deliver fund
mailings to you, The Preferred Group will terminate your election to receive
dividends and other distributions in cash, and will invest the undeliverable
distributions in shares of the relevant fund. Your subsequent dividends and
other distributions will be automatically reinvested in additional shares of the
relevant fund until you notify The Preferred Group of your correct address and
request in writing that the election to receive dividends and other
distributions in cash be reinstated.
Taxes
================================================================================
Distributions of net investment income and short-term capital gains (that is,
distributions of gains from investments held by the fund for one year or less)
are taxable to the shareholder at ordinary income rates. Distributions of gains
on investments held by the fund for more than one year are taxable to
shareholders as capital gains (generally at a 20% rate for noncorporate
shareholders), regardless of how long a shareholder may have owned shares in the
fund.
Distributions are taxable as described above whether received in cash or in
shares through the reinvestment of distributions.
Dividends derived from interest on certain U.S. Government securities may be
exempt from state and local taxes, although interest on mortgage-backed U.S.
Government securities (which may constitute a substantial portion of the
Short-Term Government Securities Fund's assets) may not be exempt.
A fund's investments in certain debt obligations may cause the fund to recognize
taxable income in excess of the cash generated by such obligations. Thus, the
fund could be required at times to liquidate other investments to satisfy its
distribution obligations.
Shareholders should consult their tax advisers concerning the possible
application of state and local income tax laws to a fund's dividends and capital
gains distributions.
The International Fund's investments in foreign securities may be subject to
foreign withholding taxes, which may decrease the International Fund's yield on
such securities. The International Fund may make an election which allows
shareholders who are U.S. citizens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. income tax returns. As a
result, the amounts of foreign income taxes paid by the International Fund would
be treated as additional income to International Fund shareholders from non-U.S.
sources and as foreign taxes paid by International Fund shareholders for
purposes of the foreign tax credit.
Only shareholders who hold fund shares (without protection from risk of loss) on
the ex-dividend date and for at least 15 other days during the 30-day period
surrounding the ex-dividend date would be entitled to claim a foreign tax
credit. Investors should consult their tax advisers for further information
relating to the foreign tax credit and deduction, which are subject to certain
restrictions and limitations.
37
<PAGE>
Shareholders who are not U.S. citizens or which are foreign corporations may be
subject to substantially different tax treatment on distributions.
BUYING A DIVIDEND
On the record date for a distribution, the fund's share value is reduced by the
amount of the distribution. If you purchase shares just before the record date
("buying a dividend"), you pay the full price for the shares and then receive a
portion of the purchase price back as a taxable distribution.
38
<PAGE>
FINANCIAL
HIGHLIGHTS
The table on the following pages presents financial highlights for The Preferred
Group, including certain performance information. This information has been
audited and reported on by The Preferred Group's independent accountants,
PricewaterhouseCoopers LLP, whose report appears in The Preferred Group's Annual
Report, which is incorporated by reference in the Statement of Additional
Information. The Preferred Group's Annual Report, which contains additional
performance information, is available without charge upon request.
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
------------------------------------------ --------------------------------------------------------
Net Total Distributions
NET ASSET Net Realized Net Income Distributions from Net Distributions
VALUE, Investment and (Loss) from from Net Realized in Excess
BEGINNING Income Unrealized Investment Investment Gains on of Realized Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Distributions
Growth
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 16.63 0.00 2.44 2.44 (0.01) (0.54) - (0.55)
1997 18.52 0.00 4.76 4.76 - (2.86) - (2.86)
1998 20.42 0.00 5.93 5.93 - (4.38) - (4.38)
1999 21.97 0.00 5.87 5.87 - (4.96) - (4.96)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Value
Year Ended June 30,
1996 13.82 0.20 3.13 3.33 (0.21) (0.29) - (0.50)
1997 16.65 0.19 5.10 5.29 (0.20) (0.58) (0.02) (0.80)
1998 21.14 0.28 5.29 5.57 (0.22) - - (0.22)
1999 26.49 0.19 1.43 1.62 (0.26) (1.05) - (1.31)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
International
Year Ended June 30,
1996 12.24 0.19 1.47 1.66 (0.17) (0.01) - (0.18)
1997 13.72 0.33 2.67 3.00 (0.35) (0.25) - (0.60)
1998 16.12 0.26 0.76 1.02 (0.24) (0.72) - (0.96)
1999 16.18 0.21 0.88 1.09 (0.17) (0.47) - (0.64)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Small Cap
(Commenced investment
operations on
November 1, 1995)
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27 (0.02) - - (0.02)
1997 11.25 0.06 3.18 3.24 (0.03) (0.16) - (0.19)
1998 14.30 0.03 3.17 3.20 (0.08) (1.83) - (1.91)
1999 $15.59 $0.01 $(2.96) $(2.95) $(0.02) $(0.57) $ - $(0.59)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
----------------------------------
Operating
NET ASSET TOTAL Expenses Net
VALUE, RETURN AT Before Investment Portfolio
END OF NET ASSET Net Assets, Operating Voluntary Income Turnover
YEAR VALUE(1) End of Year Expenses Waiver (Loss) Rate
Growth
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 18.52 14.96% 411,688,146 0.86% - (0.16%) 75.24%
1997 20.42 28.57% 455,021,877 0.84% - (0.13%) 58.31%
1998 21.97 33.44% 506,830,491 0.84% - (0.08%) 70.35%
1999 22.88 30.56% 666,402,699 0.83% - (0.15%) 74.31%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Value
Year Ended June 30,
1996 16.65 24.49% 267,581,693 0.85% - 1.23% 17.04%
1997 21.14 32.62% 373,673,368 0.85% - 1.06% 7.23%
1998 26.49 26.51% 413,609,843 0.84% - 1.03% 10.14%
1999 26.80 6.59% 427,233,476 0.84% - 0.71% 23.26%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
International
Year Ended June 30,
1996 13.72 13.70% 157,627,409 1.31% - 1.64% 19.61%
1997 16.12 22.50% 265,292,395 1.25% - 2.66% 13.16%
1998 16.18 7.18% 284,056,103 1.22% - 1.76% 17.08%
1999 16.63 7.21% 312,384,280 1.20% - 1.43% 15.31%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Small Cap
(Commenced investment
operations on
November 1, 1995)
Period Ended June 30,
1996+ 11.25 12.67%*++ 45,692,712 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++
1997 14.30 29.00%* 84,877,805 0.88% 0.98% 0.66% 104.45%
1998 15.59 23.45% 136,303,463 0.90% - 0.29% 105.32%
1999 $12.05 (19.07%) $107,618,457 0.92% - 0.15% 121.53%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
</TABLE>
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
* Total return for Small Cap would have been lower if a portion of the fees
had not been waived/reimbursed by the advisor.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
40
<PAGE>
<TABLE>
<CAPTION>
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
------------------------------------------ ---------------------------------------------
Net Total Distributions
NET ASSET Net Realized Net Income Distributions from Net Distributions
VALUE, Investment and (Loss) from from Net Realized in Excess
BEGINNING Income Unrealized Investment Investment Gains on of Realized Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Distributions
Asset Allocation
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 11.97 0.40 1.72 2.12 (0.40) (0.81) - (1.21)
1997 12.88 0.44 2.17 2.61 (0.44) (0.53) - (0.97)
1998 14.52 0.47 2.51 2.98 (0.47) (1.38) - (1.85)
1999 15.65 0.46 2.18 2.64 (0.46) (1.02) - (1.48)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Fixed Income
Year Ended June 30,
1996 10.30 0.58 (0.16) 0.42 (0.58) (0.05) - (0.63)
1997 10.09 0.64 0.19 0.83 (0.64) (0.04) - (0.68)
1998 10.24 0.64 0.29 0.93 (0.64) (0.11) - (0.75)
1999 10.42 0.58 (0.46) 0.12 (0.59) (0.11) (0.08) (0.78)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Short-Term
Government Securities
Year Ended June 30,
1996 9.80 0.53 (0.04) 0.49 (0.53) - - (0.53)
1997 9.76 0.53 0.02 0.55 (0.53) - - (0.53)
1998 9.78 0.56 (0.01) 0.55 (0.56) - - (0.56)
1999 9.77 0.47 (0.16) 0.31 (0.47) - - (0.47)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Money Market
Year Ended June 30,
1996 1.00 0.05 - 0.05 (0.05) - - (0.05)
1997 1.00 0.05 - 0.05 (0.05) - - (0.05)
1998 1.00 0.05 - 0.05 (0.05) - - (0.05)
1999 $1.00 $0.05 $ - $0.05 $(0.05) $ - $ - $(0.05)
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx x.xx
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
----------------------------------
Operating
NET ASSET TOTAL Expenses Net
VALUE, RETURN AT Before Investment Portfolio
END OF NET ASSET Net Assets, Operating Voluntary Income Turnover
YEAR VALUE(1) End of Year Expenses Waiver (Loss) Rate
Asset Allocation
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 12.88 18.23% 96,889,348 1.04% - 3.21% 38.25%
1997 14.52 21.01% 128,884,756 0.99% - 3.29% 27.73%
1998 15.65 21.84% 171,833,566 0.92% - 3.19% 27.90%
1999 16.81 17.19% 241,512,121 0.89% - 2.85% 5.80%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Fixed Income
Year Ended June 30,
1996 10.09 4.12% 111,184,492 0.93% - 5.65% 313.51%
1997 10.24 8.39% 140,158,482 0.74% - 6.32% 105.98%
1998 10.42 9.32% 151,204,274 0.67% - 6.16% 143.66%
1999 9.76 1.07% 180,048,188 0.65% - 5.77% 158.46%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Short-Term
Government Securities
Year Ended June 30,
1996 9.76 5.10% 51,755,317 0.66% - 5.37% 79.04%
1997 9.78 5.81% 54,807,409 0.63% - 5.49% 183.73%
1998 9.77 5.72% 60,236,281 0.60% - 5.67% 263.47%
1999 9.61 3.27% 66,551,373 0.55% - 4.87% 66.64%
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
Money Market
Year Ended June 30,
1996 1.00 5.32%* 90,482,435 0.49% 0.54% 5.25% N/A
1997 1.00 5.14% 109,682,146 0.48% - 5.03% N/A
1998 1.00 5.40% 104,167,524 0.48% - 5.28% N/A
1999 $1.00 4.89% $194,808,109 0.45% - 4.73% N/A
2000 x.xx x.xx x.xx x.xx x.xx x.xx x.xx
</TABLE>
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
* Total return for the Money Market Fund would have been lower if a portion
of the fees had not been waived/reimbursed by the advisor.
42
<PAGE>
OFFICERS AND TRUSTEES
OFFICERS AND TRUSTEES
Gary M. Anna............Trustee
William F. Bahl.........Trustee
F. Lynn McPheeters......Trustee
Dixie L. Mills..........Trustee
Kenneth J. Zika.........Trustee
David L. Bomberger......President
Fred L. Kaufman.........Vice President & Treasurer
Sean X. McKessy.........Clerk
INVESTMENT ADVISER
Caterpillar Investment Management Ltd.
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
411 Hamilton Boulevard, Suite 1200
Peoria, Illinois 61602-1104
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
43
<PAGE>
Preferred Group
The Preferred Group of Mutual Funds
For investors who want more information about Preferred Group funds, the
following documents are available upon request.
Annual Reports
The annual and semiannual reports of The Preferred Group provide additional
information about its investments. In the annual report, you will also find a
discussion of the market conditions and investment strategies that
significantly affected the performance of Preferred Group funds during the
last fiscal year.
Statement of Additional Information (SAI)
The SAI contains additional detailed information about The Preferred Group of
Mutual Funds and is incorporated by reference into (and legally part of) this
prospectus.
Investors can receive free copies of these materials, request other
information about the funds and make shareholder inquiries by writing to: The
Preferred Group, P.O. Box 8320, Boston, MA 02266-8320; or calling The
Preferred Group at 1-800-662-4769.
Information about The Preferred Group (including the SAI) can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling the SEC
at 1-202-942-8090. Reports and other information about The Preferred Group
are available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. Copes of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
The Preferred Group
of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
1-800-662-4769
The Funds' Investment Company Act of 1940 file number is 811-06602.
44
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
November 1, 2000
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated November 1, 2000, as
supplemented from time to time, and should be read in conjunction therewith. A
copy of the Prospectus and the annual and semi-annual reports of The Preferred
Group may be obtained without charge 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..............................................4
MISCELLANEOUS INVESTMENT PRACTICES...........................................15
AMORTIZED COST VALUATION AND DAILY DIVIDENDS.................................20
EXCHANGE PRIVILEGE...........................................................21
HOW TO BUY...................................................................22
HOW TO REDEEM................................................................22
HOW NET ASSET VALUE IS DETERMINED............................................23
CALCULATION OF YIELD AND TOTAL RETURN........................................24
PERFORMANCE COMPARISONS......................................................26
PERFORMANCE DATA.............................................................28
TAXES ....................................................................30
MANAGEMENT OF THE TRUST......................................................34
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.............................44
OTHER SERVICES...............................................................44
PORTFOLIO TRANSACTIONS.......................................................45
ORGANIZATION AND CAPITALIZATION OF THE TRUST.................................49
ADDITIONAL INFORMATION.......................................................50
APPENDIX A...................................................................52
APPENDIX B...................................................................56
-i-
<PAGE>
DEFINITIONS
"Asset Allocation Fund" - Preferred Asset Allocation
Fund
"Distributor" - Caterpillar Securities Inc.
"Fixed Income Fund" - Preferred Fixed Income Fund
"Fund" - any of the portfolios offered
by The Preferred Group of
Mutual Funds
"Growth Fund" - Preferred Growth Fund
"International Fund" - Preferred International Fund
"Manager" - Caterpillar Investment
Management Ltd.
"Money Market Fund" - Preferred Money Market Fund
"1940 Act" - Investment Company Act of
1940
"Short-Term Government - Preferred Short-Term
Securities Fund" Government Securities Fund
"Small Cap Fund" - Preferred Small Cap Fund
"Subadviser" - any subadviser of any of the
Funds
"Trust" - The Preferred Group of Mutual
Funds
"Value Fund" - Preferred Value Fund
INVESTMENT RESTRICTIONS
Without a vote of the majority of the outstanding voting securities of
a Fund, the Trust will not take any of the following actions with respect to
such Fund:
(1) Issue senior securities or borrow money in excess of 10%
of the value (taken at the lower of cost or current value) of the
Fund's total assets (not including the amount borrowed) at the time the
borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not
-1-
<PAGE>
for leverage) which might otherwise require the untimely disposition of
portfolio investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased. For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed delivery basis, the purchase
and sale of futures contracts, the entry into forward contracts and
short sales and collateral arrangements with respect to any of the
foregoing, to the extent consistent with pronouncements of the
Securities and Exchange Commission, are not deemed to be the issuance
of a senior security.
(2) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of the Fund's total assets (taken at cost) in
connection with borrowings permitted by Restriction 1 above.
(3) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. (For this purpose, the deposit or payment by a Fund of
initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a
security on margin.)
(4) Make short sales of securities or maintain a short
position for the account of a Fund unless at all times when a short
position is open such Fund owns an equal amount of such securities or
owns securities 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.
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)
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.
-4-
<PAGE>
The Growth, Value, International, Small Cap and Asset Allocation Funds
may each: (1) purchase call and put options, and purchase warrants, on
securities that they are eligible to purchase; (2) write covered call and
covered put options on such securities; (3) buy and sell stock index options,
stock index futures contracts, options on stock index futures contracts,
currency futures contracts and options on currency futures contracts; and (4)
write covered call and put options on stock indices. In addition, the Asset
Allocation Fund may purchase and sell futures contracts on U.S. Government
securities and purchase and write options on such futures contracts.
Use of options and futures transactions may accelerate or adversely
impact the characterization of income to a Fund for federal tax purposes.
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 liquid assets 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
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the option previously purchased. There is no guarantee that a Fund will be able
to effect a closing purchase or a closing sale transaction at any particular
time.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by depositing cash or high
grade obligations. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the 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
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maximum gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of the
security and the exercise price. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received 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 the 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.
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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 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
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terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. A commission
is also paid on each completed purchase and sale transaction. In addition, a
Fund that purchases a futures contract will segregate liquid assets in an amount
at least equal to the purchase price under the futures contract (less any margin
on deposit). Alternatively, a fund that purchases a futures contract may cover
the position by purchasing a put option on the same contract with a strike price
as high or higher than the purchase price of the futures contract it covers.
The Funds may engage in transactions in futures contracts and related
options for purposes of reallocating a Fund's exposure to the equity or fixed
income markets and also for the purpose of hedging against changes in the values
of securities they own or intend to acquire. In the case of transactions entered
into for purposes of reallocating a Fund's exposure to the equity or fixed
income markets, the futures contracts may be used to expose a substantial
portion of the Fund to equities and/or fixed income instruments to facilitate
trading and/or to minimize transaction costs. Futures contracts will not be used
to leverage the Fund. For example, in the case of the Asset Allocation Fund, if
the Fund purchases futures contracts relating to equity securities (e.g., S&P
500 index futures), the face amount of the futures contracts plus the value of
the Fund's equity securities will not exceed the Fund's net assets. Similarly,
if the Fund purchases interest rate futures contracts, the face amount of the
futures contracts plus the value of the Fund's fixed income securities will not
exceed the Fund's net assets. In the case of transactions in futures contracts
for hedging purposes, the Funds may sell such futures contracts in anticipation
of a decline in the value of its investments. The risk of such a decline can be
reduced without employing futures as a hedge by selling portfolio securities and
either reinvesting the proceeds in securities subject to lesser risk or by
holding assets in cash. This strategy, however, entails increased transaction
costs in the form of brokerage commissions and dealer spreads and will typically
reduce a Fund's total return or, with respect to futures on fixed income
securities, yield. The sale of futures contracts provides an alternative means
of hedging a 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
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than transaction costs incurred in the purchase and sale of securities.
Employing futures as a hedge may also permit a Fund to assume a defensive
posture without reducing its total return or yield.
CALL OPTIONS ON FUTURES CONTRACTS. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the futures contract upon which it is based, or upon the price of the
underlying securities, it may or may not be less risky than ownership of the
futures contract or underlying securities. As with the purchase of a futures
contract, a Fund may purchase a call option on a futures contract to hedge
against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings.
PUT OPTIONS ON FUTURES CONTRACTS. The purchase of put options on a
futures contract is similar in some respects to the purchase of put options on
portfolio securities. Each Fund may purchase put options on futures contracts to
hedge the Fund's portfolio against the risk of rising interest rates or
declining stock market prices.
A Fund may write a put option on a futures contract as a partial hedge
against increasing prices of the assets which are deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the 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. 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
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the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction.
Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to enter into the contract, the premium paid
for the option is lost. Since the value of the option is fixed at the point of
sale, there are no daily payments of cash in the nature of "variation" or
"maintenance" margin payments to reflect the change in the value of the
underlying contract as there are by a purchaser or seller of a currency futures
contract. The value of the option does not change and is reflected in the net
asset value of the Fund.
The Funds will write only covered put and call options on currency
futures. This means that each such Fund will provide for its obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. Set forth below is a description of
methods of providing cover that the Funds currently expect to employ, subject to
applicable exchange and 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 liquid
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assets 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 liquid assets in a
segregated account with its custodian. If at the close of business on any day
the market value of the put options purchased or the currency futures sold by
the Fund falls below 100% of the market value of the put options written by the
Fund, the Fund will so segregate an amount of liquid assets 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 liquid assets, 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
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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 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
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exercise. Reasons for the absence of a liquid secondary market on an Exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Trust and other clients of the Manager and
Subadvisers may be considered to be such a group. These position limits may
restrict the Funds' ability to purchase or sell options on a particular
security.
FUTURES TRANSACTIONS. Investment by a Fund in futures contracts
involves risk. In the case of hedging transactions, some of that risk may be
caused by an imperfect correlation between movements in the price of the futures
contract and the price of the security or other investment being hedged. The
hedge will not be fully effective where there is such imperfect correlation. For
example, if the price of the futures contract moves more than the price of the
hedged security, a Fund would experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater dollar amount 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
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decline. If the Fund does not then invest in such securities because of concern
as to possible further market decline or for other reasons, the Fund may realize
a loss on the futures contract that is not offset by a reduction in the price of
the securities purchased. In the case of futures contracts purchased to increase
a Fund's exposure to the equity (or fixed income) markets, the Fund could suffer
a loss on the futures contracts similar to the loss which the Fund would have
suffered if, instead, it had actually purchased equity or fixed income
securities.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days.
The successful use of transactions in futures and related options also
depends on the ability of the Manager or relevant Subadviser to forecast
correctly the direction and extent of 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
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general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Fund more volatile and could limit the Fund's ability to sell its
securities at prices approximating the values the Fund had placed on such
securities. In the absence of a liquid trading market for securities held by it,
the Fund may be unable at times to establish the fair value of such securities.
The rating assigned to a security by Moody's Investors Service, Inc. or Standard
& Poor's (or by any other nationally recognized securities rating organization)
does not reflect an assessment of the volatility of the security's market value
or the liquidity of an investment in the security. See Appendix A to this
Statement for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in the value of the
Fund's debt securities. Conversely, during periods of rising interest rates, 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
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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. The International Fund's variation in portfolio turnover
from the previous fiscal year reflects transactions completed to shift the
Fund's country allocation.
FORWARD COMMITMENTS. As described in the Prospectus following the
caption "General Policies and Risk Considerations-- Forward Commitments,
When-Issued and Delayed Delivery Transactions," all of the Funds except the
Money Market Fund may make contracts to purchase securities for a fixed price at
a future date beyond customary settlement time ("forward commitments"), if the
Fund either (i) holds, and segregates until the settlement date, liquid assets
in an amount sufficient to meet the purchase price or (ii) enters into an
offsetting contract for the forward sale of securities of equal value that it
owns. Each Fund may simultaneously be obligated with respect to forward
commitment purchase and sale contracts and may sell a portfolio security or
enter into a forward commitment sale contract (a "dollar-roll transaction") if
that sale or forward commitment is coupled with an agreement by the Fund,
including a forward commitment, to repurchase the security at a later date.
Forward commitments may be considered securities in themselves. They involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. A Fund may dispose of a commitment prior to settlement
and may realize short-term profits or losses upon such disposition.
REPURCHASE AGREEMENTS. A repurchase agreement is a contract under which
a Fund would acquire a security for a relatively short period (usually not more
than one week) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). The value of the underlying securities (or collateral) will
be at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities. The Manager (in the case of the Short-Term Government
Securities Fund) 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
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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 counterparties that are believed by the Manager to be
of relatively high credit standing. Securities loans are made to counterparties
pursuant to agreements requiring that the loans be continuously secured by
collateral 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 any cash
collateral received in interest-bearing, short-term investments and may 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.
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Second, when the Subadviser of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio investments denominated in such foreign currency 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."
AMERICAN DEPOSITORY RECEIPTS. American Depositary Receipts, or "ADRs,"
are securities issued by a U.S. depositary (usually a bank) and represent a
specified quantity of underlying non-U.S. securities on deposit with a custodian
bank as collateral. A foreign issuer of the security underlying an ADR is
generally not subject to the same reporting requirements in the United States as
a domestic issuer. Accordingly, the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security. ADRs may
also be subject to exchange rate risks if the underlying securities are
denominated in foreign currency. For purposes of its investment policies, each
Fund will treat ADRs and similar instruments as equivalent to investment in the
underlying securities.
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
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when-issued or delayed delivery basis, it is required to either (i) segregate
and maintain with the Fund's custodian cash, U.S. Government securities or other
high grade debt obligations in an amount equal on a daily basis to the amount of
the Fund's when- issued or delayed delivery commitments or (ii) enter into an
offsetting forward sale of securities it owns equal in value to those purchased.
The Fund will only make commitments to purchase securities on a when-issued or
delayed-delivery basis with the intention of actually acquiring the securities.
However, the Fund may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy. When the time comes to pay
for when-issued or delayed-delivery securities, the Fund will meet its
obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the when-issued
or delayed delivery securities themselves (which may have a value greater or
less than the Fund's payment obligation).
AMORTIZED COST VALUATION AND DAILY DIVIDENDS
The valuation of the Money Market Fund's portfolio instruments at
amortized cost is permitted in accordance with Securities and Exchange
Commission Rule 2a-7 and certain procedures adopted by the Trustees. The
amortized cost of an instrument is determined by valuing it at cost originally
and thereafter amortizing any discount or premium from its face value at a
constant rate until maturity, regardless of the effect of fluctuating interest
rates on the market value of the instrument. Although the amortized cost method
provides certainty in valuation, it may result at times in determinations of
value that are higher or lower than the price the Fund would receive if the
instruments were sold. Consequently, changes in the market value of portfolio
instruments during periods of rising or falling interest rates will not normally
be reflected either in the computation of net asset value of the Fund's
portfolio or in the daily computation of net income. Under the procedures
adopted by the Trustees, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments 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,
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including the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends;
redemption of shares in kind; or establishing a net asset value per share by
using readily available market quotations.
Since the net income of the Money Market Fund is declared as a dividend
each time it is determined, the net asset value per share of the Fund remains at
$1.00 per share immediately after such determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund representing
the reinvestment of dividend income is reflected by an increase in the number of
shares of the Fund in the shareholder's account at the end of each month. It is
expected that the Fund's net income will be positive each time it is determined.
However, if because of realized losses on sales of portfolio investments, a
sudden rise in interest rates, or for any other reason the net income of the
Fund determined at any time is a negative amount, the Fund will offset such
amount allocable to each then shareholder's account from dividends accrued
during the month with respect to such account. If at the time of payment of a
dividend (either at the regular monthly dividend payment date, or, in the case
of a shareholder who is withdrawing all or substantially all of the shares in an
account, at the time of withdrawal), such negative amount exceeds a
shareholder's accrued dividends, the Fund will reduce the number of outstanding
shares by treating the shareholder as having contributed to the capital of the
Fund that number of full and fractional shares which represent the amount of the
excess. Each shareholder is deemed to have agreed to such 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.
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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 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 1-800-662-4769.
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.
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The Trust reserves the right to redeem shares and mail the proceeds to
the shareholder if at any time the net asset value of the shares in the
shareholder's account in any Fund falls below a specified level due to
redemptions, currently set at $1,000. Shareholders will be notified and will
have 60 days to bring the account up to the required level before any redemption
action will be taken by the Trust. The Trust also reserves the right to redeem
shares in a shareholder's account in excess of an amount set from time to time
by the Trustees. No such limit is presently in effect, but such a limit could be
established at any time and could be applicable to existing as well as future
shareholders.
HOW NET ASSET VALUE IS DETERMINED
As described in the text of the Prospectus following the caption
"Determination of Net Asset Value and Pricing," the net asset value of shares of
each Fund of the Trust will be determined once on each day on which the New York
Stock Exchange is open, as of the close of regular trading on the Exchange. The
Trust expects that the days, other than weekend days, that the Exchange will not
be open are New Year's Day, Rev. Dr. Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Portfolio securities, options, futures and options on futures
for which market quotations are readily available are valued at market value,
which is determined by using the last reported sale price, or, if no sales are
reported, the last reported bid price. Over-the-counter options are valued at
fair value, as determined in good faith by the Trustees or by persons acting at
their direction, based on prices supplied by a broker, usually the option
counterparty. Obligations having remaining maturities of 60 days or less and
securities held in the Money Market Fund portfolio are valued at amortized cost.
The amortized cost value of a security is determined by valuing it at cost
originally and thereafter amortizing any discount or premium from its face value
at a constant rate until maturity, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although the amortized
cost method provides certainty in valuation, it may result at times in
determinations of value that are higher or lower than the price the Fund would
receive if the instruments were sold. Consequently, changes in the market value
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.
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As described in the Prospectus, certain securities and assets of the
Funds are valued at fair value as determined in good faith by the Trustees or by
persons acting at their direction. The fair value of any securities from time to
time held by any Fund of the Trust for which no ready market exists is
determined in accordance with procedures approved by the Trustees. The Trustees,
however, are ultimately responsible for such determinations. The fair value of
such securities is generally determined as the amount which the Trust could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case, and may include receiving a quote
from a broker and the use of a pricing service. Consideration may also be given
to the financial position of the issuer and other fundamental analytical data
relating to the investment and to the nature of the restrictions on disposition
of the securities (including any registration expenses that might be borne by
the Trust in connection with such disposition). In addition, such specific
factors may also be considered as the cost of the investment, the size of the
holding, the prices of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the issuer.
Generally, trading in foreign securities, as well as corporate bonds,
U.S. Government securities and money market instruments is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in determining the net asset value of a Fund's
shares are computed as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the Exchange. Occasionally, events
affecting the value of such securities may occur between such times and the
close of the Exchange which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of a Fund's
securities occur during such period, then these securities may 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. 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
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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 FIXED INCOME AND SHORT-TERM GOVERNMENT SECURITIES FUNDS.
Yields of these Funds will be computed by analyzing net investment income for a
recent 30-day period and dividing that amount by the maximum offering price
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last trading day of that period. Net investment income will
reflect amortization of any market value premium or discount of fixed income
securities (except for obligations backed by mortgages or other assets) and may
include recognition of a pro rata portion of the stated dividend rate of
dividend paying portfolio securities. The Funds' Yields will vary from time to
time depending upon market conditions, the composition of the Funds' portfolios
and operating expenses of the Trust allocated to each Fund. These factors, and
possible differences in the methods used in calculating yield, should be
considered when comparing a Fund's Yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Funds' shares and to the
relative risks associated with the investment objectives and policies of the
Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
Investors in these Funds are specifically advised that the net asset
value per share of each Fund will vary just as Yields for each Fund will vary.
An investor's focus on the Yield to the exclusion of the consideration of the
value of shares of that Fund may result in the investor's misunderstanding the
Total Return he or she may derive from that Fund.
CALCULATION OF TOTAL RETURN. 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
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used herein includes four steps: (1) adding to the total number of shares
purchased by a hypothetical $10,000 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 $10,000 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 $10,000 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 Fixed Income and Short-Term
Government Securities Funds may from time to time include the Yield and/or Total
Return of its shares in advertisements or information furnished to present or
prospective shareholders. The Money Market Fund may from time to time include
its Yield and Effective Yield in advertisements or information furnished to
present or prospective shareholders. Each Fund may from time to time include in
advertisements or information furnished to present or prospective shareholders
(i) the ranking of performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services, Inc. as having the same
investment objectives,(ii) the rating assigned to the Fund by Morningstar, Inc.
based on the Fund's risk-adjusted performance relative to other mutual funds in
its broad investment class, and/or (iii) the ranking of performance figures
relative to such figures for mutual funds in its general investment category as
determined by CDA/Weisenberger's Management Results.
Performance information may be quoted numerically or may be presented
in a graph, table or other illustration.
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, including those listed below.
EAFE INDEX. The Europe, Australasia & Far East Equity Index is a market
capitalization-weighted equity index representing the developed stock markets
outside of North America. Its stocks are screened for liquidity, cross-ownership
and industry representation.
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IBC'S MONEY FUND REPORT AVERAGE -- TAXABLE. The index is an average of
all taxable major money market returns and serves as a common investor benchmark
for money market funds.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged list of publicly issued U.S.
Treasury obligations, debt obligations of the U. S. Government and its agencies
(excluding mortgage-backed securities), fixed-rate, non-convertible,
investment-grade corporate debt securities and U.S. dollar-denominated, SEC-
registered non-convertible debt issued by foreign governmental entities or
international agencies used as a general measure of the performance of fixed
income securities.
LEHMAN BROTHERS LONG-TERM TREASURY INDEX. The Lehman Brothers Long-Term
Treasury Index is a market weighted index of all publicly held Treasury issues
with maturities greater than 10 years.
MERRILL LYNCH 1-3 YEAR TREASURY INDEX. The Index contains
primarily all U.S. Treasury Notes and Bonds with remaining maturities of one to
three years.
90-DAY TREASURY BILL INDEX. The index is calculated using a one-bill
portfolio containing the most recently auctioned 90-day Treasury bill.
RUSSELL 2000 INDEX. The index contains the 2000 smallest of the 3000
largest U.S.-domiciled corporations, ranked by market capitalization.
RUSSELL 2000 GROWTH INDEX. The index measures the performance of those
Russell 2000 companies with higher price-to- book ratios and higher forecasted
growth values.
S&P 500 INDEX. The S&P 500 is a large-cap index based on 500 widely
held common stocks representing major industries. The index composition is
flexible and the number of issues in each sector varies over time. The index is
generally regarded as a proxy for the U.S. stock markets.
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
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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, 2000, (ii) for the five-year period ended
June 30, 2000 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, 2000.
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<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 6/30/00+ 6/30/00 6/30/00 6/30/00
---- ----------- ------- ------- -------
<S> <C> <C> <C> <C>
Growth N/A 30.00% 27.33% 24.02%
Value N/A -5.19% 16.11% 15.22%
International N/A 14.15% 12.81% 11.42%
Small Cap N/A 5.22% N/A 9.51%*
Asset Allocation N/A 5.60% 16.62% 14.44%
Fixed Income 6.44% 3.62% 5.26% 6.17%
Short-Term 6.37% 4.46% 4.87% 4.64%
Government
Securities
Money Market 6.23% 5.45% 5.24%** 4.63%**
</TABLE>
*Performance for the Small Cap Fund would have been lower if an expense
limitation had not been in effect. In the absence of this expense limitation,
actual performance would have been 9.44% 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 5.23% for the five-year period and 4.58% 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 6/30/00. The yield shown for the Money Market
Fund is a seven-day current yield as of 6/30/00, 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, 2000 was 6.43%.
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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 derived with respect to its
business of investing in such stock, securities or currencies (including but not
limited to gains from options, futures or forward contracts) ; (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
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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
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, convert
long-term capital gains into short-term capital gains 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.
ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES. Current federal tax law
requires the holder of a Treasury or other fixed income zero-coupon security to
accrue as income each year a portion of the discount at which the security was
purchased, even though the holder receives no interest payment in cash on the
security during the year. In addition, so-called payment-in-kind securities give
rise to income which is required to be distributed and is taxable even though
the Fund holding the security receives no interest payments in cash on the
security during the year. Accordingly, each Fund that holds these kinds of
securities may be required to pay out as an income
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<PAGE>
distribution each year an amount which is greater than the total amount of cash
interest the Fund actually received. These distributions may be made from the
cash assets of the Fund or by liquidation of portfolio securities, if necessary.
The Fund may realize gains or losses from these liquidations. If a Fund realizes
net capital gains from these transactions, its shareholders may receive a larger
capital gain distribution than they would have received in the absence of these
transactions.
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.
DISTRIBUTIONS FROM NET REALIZED CAPITAL GAINS. As described in the
Prospectus, the Trust's policy is to distribute substantially all of the net
realized capital gain, if any, of each Fund, after giving effect to any
available capital loss carryover. Net realized capital gain for any Fund is the
excess of net realized long-term capital gain over net realized short- term
capital loss. Each Fund of the Trust is treated as a separate entity for federal
income tax purposes and accordingly its net realized gains or losses will be
determined separately, and capital loss carryovers will be determined and
applied on a separate Fund basis. Each of the Funds distributes its net realized
capital gains annually, although the Money Market Fund may distribute any net
realized long-term capital gains more frequently if necessary in order to
maintain a net asset value of $1.00 per share for the shares of that Fund.
Sixty percent of any gain or loss realized by any Fund (i) from net
premiums from expired nonequity listed options and from closing purchase
transactions, (ii) with respect to listed nonequity options upon the exercise
thereof, and (iii) from transactions in 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, without regard to the Fund's holding period.
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 one year or
less), 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
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<PAGE>
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.
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 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.
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<PAGE>
STATEMENTS AND REPORTS. You will receive a confirmation statement after
every transaction that affects the share balance in any of your accounts.
By January 31 of each year, The Preferred Group will send you the
following reports which may be used to complete your U.S. income tax return:
FORM 1099-DIV Reports taxable distributions during the
preceding calendar year.
FORM 1099-B Reports redemption proceeds during the
preceding calendar year.
FORM 1099-R Reports distributions from IRAs and 403(b)
plans during the preceding calendar year.
By the end of February of each year, The Preferred Group will send you
a semiannual report that includes unaudited financial statements for the six
months ending the preceding December 31, as well as a list of portfolio holdings
as of that date.
By the end of August each year, The Preferred Group will send you an
annual report that includes audited financial statements for the fiscal year
ending the preceding June 30, as well as a list of portfolio holdings as of that
date.
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of a
Board of Trustees, and the Trustees are responsible for generally overseeing the
conduct of each Fund's business. 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*, 58, 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; Director, Caterpillar
Investment Management Ltd.
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<PAGE>
David L. Bomberger, 45, President President and Director,
411 Hamilton Boulevard Caterpillar Investment
Peoria, IL 61602 Management Ltd.; President and
Director, Caterpillar
Securities Inc., 1999 to
present; Vice President,
Commercial Mortgages,
Commercial Federal Bank,
January 1999 to May 1999;
Senior Vice President,
Treasurer and Chief Investment
Officer, The Guarantee Life
Companies, Inc., 1977 to 1998
Gary M. Anna, 47, Trustee Vice President, Business
1501 W. Bradley Avenue Affairs, Bradley University
Peoria, IL 61625
William F. Bahl, 49, Trustee Chairman of the Board, Bahl &
212 E. Third Street Gaynor, Inc. (a registered
Suite 200 investment adviser)
Cincinnati, OH 45202
Kenneth J. Zika*, 53, Trustee Treasurer, Caterpillar Inc.,
100 N.E. Adams Street 1998 to present; Cost
Peoria, IL 61629-5330 Management and Business
Services Manager, Caterpillar
Inc., 1997 to 1998; Business
Resource Manager, Caterpillar
Inc., 1994 to 1997; Director,
Caterpillar Investment
Management Ltd.
Dixie L. Mills, 52, Trustee Dean, College of Business,
Illinois State University Illinois State University
15 Williams Hall
Normal, IL 61790-5500
Fred L. Kaufman, 53, Vice President and Treasurer Treasurer, Caterpillar
411 Hamilton Boulevard Investment Management Ltd.;
Peoria, IL 61602 Treasurer and Director,
Caterpillar Securities Inc.
Sean X. McKessy, 33, Clerk Securities Counsel,
100 N.E. Adams Street Caterpillar Inc., 2000 to
Peoria, IL 61629-5330 present; Staff Attorney, SEC,
1997 to 2000; Associate,
Wiley, Rein & Fielding, 1995
to 1997; Clerk, Caterpillar
Investment Management Ltd.
</TABLE>
* Messrs. McPheeters and Zika are each "interested persons" (as defined
in the 1940 Act) of the Trust, the Manager and the Distributor and,
therefore, may benefit from the management fees paid to the Manager.
The mailing address of each of the officers and Trustees is c/o the
Trust, 411 Hamilton Boulevard, Suite 1200, Peoria, Illinois 61602.
The Trust's Agreement and Declaration of Trust provides that the Trust
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Trust, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in
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<PAGE>
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.
For the year ended June 30, 2000, Trustees other than those who are
interested persons of the Manager received an annual fee of $12,000 plus $2,500
for each Trustee's meeting attended. The table below shows the compensation paid
to the Trust's Trustees and officers for the year ended June 30, 2000.
<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>
Gary Michael $22,000 $0 $0 $22,000
Anna, Trustee
William F. Bahl, $22,000 $0 $0 $22,000
Trustee
Dixie Louise $22,000 $0 $0 $22,000
Mills, Trustee
</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, 2000, the following entities were the recordholders of the
following percentages of outstanding securities of the following Funds:
<TABLE>
<CAPTION>
Percentage Ownership
as of September 30, 2000
-----------------------------------------
Caterpillar
Inc. Supp-
lemental
Unemploy-
ment and
Benefits
Group
Insurance
Trust A Caterpillar
and Insurance Preferred
Caterpillar Caterpillar Company Stable
Investment Group Ltd. Principal
Trust Insurance Insurance Collective
401(k) Plan Trust B Reserves(1) Trust
FUND % TOTAL % TOTAL % TOTAL % Total
---- ------- ------- -------- -------
<S> <C> <C> <C> <C>
Growth _____%
Value _____% _____%
International _____% _____%
Small Cap _____% _____% _____%
Asset Allocation _____% _____%
Fixed Income _____% _____% _____%
Short-Term Government
Securities _____% _____%
Money Market _____%
</TABLE>
1 Does not include _____% 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.
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<PAGE>
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, 2000, the Trust believes that no other person, other than
Marshall & Ilsley Trust Company, which owns of record _____% of the outstanding
shares of the Growth Fund, _____% of the outstanding shares of the Value
Fund,_____% of the outstanding shares of the Fixed Income Fund, and _____% of
the outstanding shares of the Asset Allocation Fund, owns beneficially more than
5% of the outstanding shares of any Fund.
THE MANAGER AND THE SUBADVISERS
Under written Management Contracts between the Trust and the Manager
with respect to each Fund, subject to such policies as the Trustees of the Trust
may determine, the Manager, at its expense, will furnish continuously an
investment program for the Trust and will make investment decisions on behalf of
the Funds and place all orders for the purchase and sale of portfolio securities
subject always to applicable investment objectives, policies and restrictions
provided. In order to assist it in carrying out its responsibilities, the
Manager has retained Subadvisers to render advisory services to each Fund other
than the Short-Term Government Securities Fund.
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<PAGE>
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. $____ billion pension fund. The Manager currently manages more
than $____ 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 $_____ 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....................................................... 1.00
Asset Allocation................................................ .70
Fixed Income.................................................... .50*
Short-Term Government Securities................................ .35
Money Market.................................................... .30
* CIML's fee with respect to the Fixed Income Fund is paid at an annual rate
equal to the lesser of (i) .50% of the average net 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
-38-
<PAGE>
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, 2000, 1999, and 1998, the Funds
paid to the Manager the following amounts as Management Fees pursuant to the
relevant Management Contracts:
<TABLE>
<CAPTION>
Management Fees
Fiscal Year Ended June 30,
2000 1999 1998
---- ---- ----
Fund
-----
<S> <C> <C> <C>
Growth............................... $5,722,215 $4,114,811 $3,631,767
Value................................ 2,816,147 2,963,545 2,912,039
International........................ 3,196,903 2,634,044 2,506,446
Small Cap............................ 932,521 843,965 918,583
Asset Allocation ................... 1,554,952 1,453,421 1,023,199
Fixed Income......................... 866,459 828,737 747,105
Short-Term
Government
Securities......................... 241,341 222,980 199,653
Money Market......................... 475,539 436,917 298,521
</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.
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
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<PAGE>
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.
The Trust pays, in addition to the Management Fees described above, all
expenses not assumed by the Manager, including, without limitation, fees and
expenses of Trustees who are not "interested persons" of the Manager or the
Trust, interest charges, taxes, brokerage commissions, expenses of issue or
redemption of shares, fees and expenses of registering and qualifying the Trust
and shares of the respective Funds for distribution under federal and state laws
and regulations, charges of custodians, auditing and legal expenses, expenses of
determining the net asset value of the Trust's shares, reports to shareholders,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, and
insurance premiums and professional association dues or assessments. The Trust
is also responsible for such nonrecurring expenses as may arise, including
litigation in which the Trust may be a party, and other expenses as determined
by the Trustees. The Trust may have an obligation to indemnify its officers and
Trustees with respect to such litigation.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
THE SUBADVISERS. In order to assist it in carrying out its
responsibilities, the Manager has retained various Subadvisers to render
advisory services to the Funds, under the supervision of the Manager and the
Trust's Trustees. The Manager pays the fees of each of the Subadvisers. The fee
paid to the Subadvisers (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
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<PAGE>
fee schedule for each Subadviser (other than Morgan, with respect to the Money
Market Fund), as set forth below. This amount is then allocated 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 1345 Avenue of the Americas, New York,
New York 10105. Oppenheimer Capital is an indirect subsidiary of PIMCO Advisers
LP ("PIMCO Advisors"), a registered investment adviser with over $264 billion in
assets under management through its various subsidiaries. Allianz AG, a German
insurance company, is the majority owner of PIMCO Advisors. Pacific Life
Insurance Company has an approximately 30% interest in PIMCO Advisors.
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, 2000, 1999, and 1998, Oppenheimer
earned $_____________, $1,062,291 and $1,051,909, respectively, in subadvisory
fees.
Jennison Associates LLC ("Jennison") provides investment advice to
mutual funds, institutional accounts and other entities. Its principal place of
business is 466 Lexington Avenue, New York, New York 10017. Jennison is a
wholly-owned subsidiary of The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Jennison
for its subadvisory services with respect to the Growth Fund a fee, calculated
as described above, at the annual rate of 0.75% of the first $10 million of
Combined Assets, 0.50% of the next $30 million of Combined Assets, 0.35% of the
next $25 million of Combined Assets, 0.25% of the next $335 million of Combined
Assets, 0.22% of the next $600 million of Combined Assets and 0.20% of Combined
Assets in excess of $1 billion. The Manager has informed the Trust that for the
fiscal years ended June 30, 2000, 1999 and 1998, Jennison earned $1,746,079,
$1,322,151 and $1,185,328, 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, 2000, manages
over $102 billion in funds. Mellon is a wholly-owned, indirect subsidiary of
Mellon Financial Corporation, Pittsburgh, Pennsylvania, a bank holding company
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<PAGE>
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, 2000, 1999 and 1998, Mellon earned
$300,056, $287,483 and $215,940, 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 $16.3 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, 2000, 1999 and 1998, PanAgora earned $141,587, $134,213 and $94,155,
respectively, in subadvisory fees.
Mercator Asset Management, L.P. provides investment advice to mutual
funds and other entities. Its principal place of business is 2400 East
Commercial Blvd., Ft. Lauderdale, Florida 33308. Mercator Asset Management, L.P.
is a limited partnership a minority portion of the limited partnership interest
in which is owned by The Prudential Insurance Company of America, a mutual
insurance company and a registered investment adviser. The Manager pays Mercator
Asset Management, L.P. for its subadvisory services with respect to the
International Fund a fee, calculated as described above, at the annual rate of
0.75% of the first $50 million of Combined Assets, 0.60% of the next $250
million of Combined Assets, and 0.45% of Combined Assets in excess of $300
million. The Manager has informed the Trust that for the fiscal years ended June
30, 2000, 1999 and 1998, Mercator Asset Management L.P. earned $1,692,017,
$1,408,160 and $1,356,689, 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
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<PAGE>
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. Morgan has voluntarily agreed to fee reductions in the event that
Combined Assets, together with Money Market Fund assets, exceed $1 million. The
Manager has informed the Trust that for the fiscal years ended June 30, 2000,
1999 and 1998, Morgan earned $___________, $211,272 and $186,150, 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, 2000, 1999 and 1998,
Morgan earned $___________, $226,084 and $134,077, respectively, in subadvisory
fees with respect to the Money Market Fund. In addition, the Manager has
informed the Trust that for the fiscal year ended June 30, 1998, Morgan earned
$41,022 in subadvisory fees with respect to the Short Term Government Securities
Fund. Morgan is no longer the subadviser to the Short-Term Government Securities
Fund.
Turner Investment Partners, Inc. ("Turner"), a Pennsylvania
corporation, is located at 1235 Westlakes Drive, Suite 350, Berwyn, Pennsylvania
19312. Robert E. Turner is the Chairman and controlling shareholder of Turner.
Turner was founded in 1990 and as of June 30, 2000, manages over $10.2 billion
in funds. Turners serves as investment adviser for investment companies and
other institutional accounts. The Manager pays Turner for its subadvisory
services with respect to the Small Cap Fund a fee, calculated as described
above, at the annual rate of 0.75% of Combined Assets. The Manager has informed
the Trust that for the fiscal year ended June 30, 2000, Turner earned $440,776
in subadvisory fees.
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 $100 million.
The Subadvisers are registered as investment advisers with the
Securities and Exchange Commission. This registration does
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not involve supervision of management or investment policy by any
federal agency.
CODES OF ETHICS
The Trust, the Manager, the Distributor and each Subadviser have
adopted codes of ethics under Rule 17j-l of the 1940 Act. These codes of ethics
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Trust.
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, 2000, filed electronically
on ______ ___, 2000 (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.
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.
DISTRIBUTOR. Caterpillar Securities Inc. ("CSI"), a wholly-owned
subsidiary of CIML, is the Trust's principal underwriter. Certain entities
listed in Exhibit 21 to the most recent Annual Report on Form 10-K under the
Securities Exchange Act of 1934 of Caterpillar Inc. (File No. 33-46194) may be
deemed to be affiliates of both CSI and the Trust. CSI is not obligated to sell
any specific amount of shares of the Trust and will purchase shares for resale
only against orders
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<PAGE>
therefor. Except as noted in the Prospectus, the Trust's shares are distributed
in a continuous offering.
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.
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<PAGE>
When the Manager or a Subadviser places orders for the purchase and
sale of portfolio securities for a particular Fund and buys and sells securities
for such Fund it is anticipated that such transactions will be effected through
a number of brokers and dealers. In so doing, the Manager or the relevant
Subadviser, as the case may be, intends to use its best efforts to obtain for
each Fund the most favorable price and execution available, except to the extent
that it may be permitted to pay higher brokerage commissions as described below.
In seeking the most favorable price and execution, the Manager or the relevant
Subadviser, as the case may be, considers all factors it deems relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of commission, the timing of
the transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions.
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, 2000, 1999, and 1998, are set forth below:
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FISCAL YEAR ENDED JUNE 30, 2000:
Aggregate Brokerage
Fund Commissions
---- -------------------
Growth $619,771
Value 138,315
International 467,417
Small Cap 465,919
Asset Allocation 2,477
Fixed Income 0
Short-Term Government Securities 0
Money Market 0
FISCAL YEAR ENDED JUNE 30, 1999:
Aggregate Brokerage
Fund Commissions
---- -------------------
Growth $611,267
Value 211,496
International 216,816
Small Cap 602,826
Asset Allocation 2,961
Fixed Income 0
Short-Term Government Securities 0
Money Market 0
FISCAL YEAR ENDED JUNE 30, 1998:
Aggregate Brokerage
Fund Commissions
---- -------------------
Growth $613,345
Value 55,691
International 279,567
Small Cap 497,411
Asset Allocation 1,437
Fixed Income 0
Short-Term Government Securities 0
Money Market 0
The increase in brokerage commissions for the International Fund
reflects increased net assets and increased portfolio turnover.
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
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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, 2000, the Growth, Value and Small
Cap Funds placed orders for the purchase and sale of securities with J.P. Morgan
Securities, Inc., an affiliate of Morgan, and the Small Cap Fund placed orders
for the purchase and sale of securities with Deutsche Bank Alex Brown, an
affiliate of Oppenheimer. These brokerage transactions are set forth below:
FISCAL YEAR ENDED JUNE 30, 2000
<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 $50,117 8.09% 6.11%
Securities,
Inc.
Value Fund J.P. Morgan $1,200 0.87% 0.31%
Securities,
Inc.
Small Cap Fund J.P. Morgan $3,058 0.66% 0.69%
Securities,
Inc.
Small Cap Fund Deutsche Bank $300 0.06% 0.00%
Alex Brown
</TABLE>
During the fiscal year ended June 30, 1999, the Growth Fund placed
orders for the purchase and sale of securities with J.P. Morgan
Securities, Inc., an affiliate of Morgan. These brokerage transactions
are set forth below:
FISCAL YEAR ENDED JUNE 30, 1999
Amount of
Affiliated Brokerage
Fund Broker Commissions
---- ------------ -----------
Growth Fund J.P. Morgan
Securities, $52,788
Inc.
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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., 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
Amount of
Affiliated Brokerage
Fund Broker Commissions
---- ----------- -----------
Value Fund Oppenheimer $8,115
& Co.
Growth Fund J.P. Morgan $14,518
Securities,
Inc.
Oppenheimer $4,061
& Co.
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.
The Preferred Group has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series of such shares which, in turn, may be subdivided into
an unlimited number of classes of shares. The Preferred Group currently consists
of eight series of shares, each series of which represents interests in a
separate Fund. Each Fund is an open-end diversified management investment
company. The Funds' shares are not currently divided into classes. Shares are
freely transferable, are entitled to dividends as declared by the Trustees, and,
if a Fund were liquidated, would receive the net assets of that Fund. Voting
rights are not cumulative, and all shares of the Funds are fully paid,
redeemable and nonassessable and have no conversion rights. Shares do not have
preemptive rights or subscription rights.
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
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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.
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.
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<PAGE>
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 $____ 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) 662-4769. Institutional
investors may call (309) 675-8147.
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APPENDIX A
TAX EXEMPT BOND, CORPORATE BOND AND COMMERCIAL PAPER RATINGS
TAX EXEMPT AND CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged". 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 other
marked shortcomings.
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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 -- An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB -- An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity on the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
D -- An obligation rated D is in payment default. The D rating category is used
when payments on an obligation 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 upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
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RATINGS OF COMMERCIAL PAPER
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 -- Issues rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-terms obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS:
A-1 -- A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated A-2 is somewhat more susceptible
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to the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 -- A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated C is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation 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 upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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APPENDIX B
DESCRIPTION OF MONEY MARKET FUND INVESTMENTS
OBLIGATIONS BACKED BY FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT --
are bills, certificates of indebtedness, notes and bonds issued by (i) the U.S.
Treasury or (ii) agencies, authorities and instrumentalities of the U.S.
Government or other entities and backed by the full faith and credit of the U.S.
Government. Such obligations include, but are not limited to, obligations issued
by the Government National Mortgage Association, Farmers' Home Administration
and the Small Business Administration.
OTHER U.S. GOVERNMENT OBLIGATIONS -- are bills, certificates of
indebtedness, notes, and bonds issued by agencies, authorities and
instrumentalities of the U.S. Government which are supported by the right of the
issuer to borrow from the U.S. Treasury or by the credit of the agency,
authority or instrumentality itself. Such obligations include, but are not
limited to, obligations issued by the Tennessee Valley Authority, the Bank for
Cooperatives, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks and the Federal National Mortgage Association.
REPURCHASE AGREEMENTS -- are agreements by which a Fund purchases a
U.S. Treasury or agency obligation and obtains a simultaneous commitment from
the seller (a domestic commercial bank or, to the extent permitted by the 1940
Act, a recognized securities dealer) to repurchase the security at an agreed
upon price and date. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford an opportunity for the Fund to earn
a return on temporarily available cash at no market risk, although the Fund may
be subject to various delays and risks of loss if the seller is unable to meet
its obligation to repurchase.
CERTIFICATES OF DEPOSIT -- are certificates issued against funds
deposited in a bank, are for a definite period of time, earn a specified rate of
return, and are normally negotiable.
BANKERS' ACCEPTANCES -- are short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are term
"accepted" when a bank guarantees their payment at maturity.
EURODOLLAR OBLIGATIONS -- obligations of foreign branches of U.S.
banks.
YANKEEDOLLAR OBLIGATIONS -- obligations of domestic branches of foreign
banks.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations
in order to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations
in order to finance longer term credit needs.
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THE PREFERRED GROUP OF MUTUAL FUNDS
PART C. OTHER INFORMATION
Item 23. EXHIBITS
(a)(1). Agreement and Declaration of Trust -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.
(a)(2). Amendment No. 1 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(a)(3). Amendment No. 2 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(a)(4). Amendment No. 3 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(a)(5). Amendment No. 4 to Agreement and Declaration of
Trust -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(b). By-laws -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(c). Portions of the Registrant's Agreement and
Declaration of Trust and By-laws pertaining to
shareholders' rights -- incorporated by reference
to Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
(d)(1). Form of Management Contract between The Preferred
Group of Mutual Funds (the "Trust") and
Caterpillar Investment Management Ltd. (the
"Manager" or "CIML") with respect to the Preferred
Growth Fund -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(d)(2). Form of Management Contract between the Trust and
the Manager with respect to the Preferred Value
Fund -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(d)(3). Form of Management Contract between the Trust and
the Manager with respect to the Preferred
International Fund -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
(d)(4). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Small Cap Fund -- filed
herewith.
(d)(5). Form of Management Contract between the Trust and
the Manager with respect to the Preferred Asset
Allocation Fund -- incorporated by reference to
Post-Effective Amendment No. 11 to the
Registrant's Registration Statement.
(d)(6). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Fixed Income Fund --
incorporated by reference to Post- Effective Amendment No. 13
to the Registrant's Registration Statement.
(d)(7). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Short- Term Government
Securities Fund -- incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration Statement.
(d)(8). Form of Management Contract between the Trust and the Manager
with respect to the Preferred Money Market Fund --
incorporated by reference to Post- Effective Amendment No. 11
to the Registrant's Registration Statement.
(d)(9). Form of Subadviser Agreement between the Manager
and Jennison Associates LLC ("Jennison") --
incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.
(d)(10). Form of Subadviser Agreement between the Manager
and Oppenheimer Capital ("Oppenheimer") -- filed
herewith.
(d)(11). Form of Subadviser Agreement between the Manager
and Mercator Asset Management, L.P. ("Mercator") -
- incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.
-1-
<PAGE>
(d)(12). Form of Subadviser Agreement between the Manager
and Mellon Capital Management Corporation
("Mellon") -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(d)(13). Form of Subadviser Agreement between the Manager
and PanAgora Asset Management, Inc. ("PanAgora") -
- filed herewith.
(d)(14). Form of Subadviser Agreement between the Manager
and J.P. Morgan Investment Management Inc.
("Morgan") with respect to the Preferred Fixed
Income Fund -- incorporated by reference to Post-
Effective Amendment No. 13 to the Registrant's
Registration Statement.
(d)(15). Form of Subadviser Agreement between the Manager and Morgan
with respect to the Preferred Money Market Fund --
incorporated by reference to Post- Effective Amendment No. 11
to the Registrant's Registration Statement.
(d)(16). Form of Subadviser Agreement between the Manager
and Turner Investment Partners, Inc. ("Turner") --
filed herewith.
(e). Form of Distributor's Contract between the Trust
and Caterpillar Securities Inc. ("CSI") --
incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement
(f). None.
(g). Form of Custodian Contract between the Trust and
State Street Bank and Trust Company ("State
Street") -- incorporated by reference to Post-
Effective Amendment No. 11 to the Registrant's
Registration Statement.
(h). Form of Transfer Agency and Service Agreement
between the Trust and State Street -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.
(i). Opinion and Consent of Ropes & Gray --
incorporated by reference to Post-Effective
Amendment No. 11 to the Registrant's Registration
Statement.
(j). Consent of PricewaterhouseCoopers LLP -- to be
filed by amendment.
-2-
<PAGE>
(k). None.
(l). Form of Initial Capital Agreement -- incorporated
by reference to Post-Effective Amendment No. 11 to
the Registrant's Registration Statement.
(m). None.
(n). None.
(o). Power of Attorney -- incorporated by reference to
Post-Effective Amendment No. 15 to the
Registrant's Registration Statement.
(p)(1). Code of Ethics of the Trust, the Manager and CSI
-- filed herewith.
(p)(2). Code of Ethics of Jennison -- filed herewith.
(p)(3). Code of Ethics of Oppenheimer -- filed herewith.
(p)(4). Code of Ethics of Mercator -- filed herewith.
(p)(5). Code of Ethics of Mellon -- filed herewith.
(p)(6). Code of Ethics of PanAgora -- filed herewith.
(p)(7). Code of Ethics of Morgan -- filed herewith.
(p)(8). Code of Ethics of Turner -- filed herewith.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
The Registrant may be deemed to be controlled by Caterpillar Inc., a
Delaware corporation, which owns 100% of the outstanding voting securities of
CIML and Caterpillar Insurance Company Ltd., each of which may be deemed to
control one or more series of the Registrant, and for the benefit of the
employees of which Caterpillar Investment Trust 401(k) Plan, Caterpillar Inc.
Supplemental Unemployment and Benefits Group Insurance Trust A and Caterpillar
Group Insurance Trust B, which may be deemed to control one or more series of
the Registrant, were established. To the extent any of these entities may be
deemed to control the Registrant, the various entities listed in Exhibit 21 to
the most recent Annual Report on Form 10-K under the Securities Exchange Act of
1934 of Caterpillar Inc. (File No. 33-46194) may be deemed to be under common
control with the Registrant.
Item 25. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:
-3-
<PAGE>
SECTION 1. TRUSTEES, OFFICERS, ETC. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
SECTION 2. COMPROMISE PAYMENT. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial
-4-
<PAGE>
type inquiry) that such Covered Person is not liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office,
or (b) there has been obtained an opinion in writing of independent legal
counsel, based upon a review of readily available facts (as opposed to a full
trial type inquiry) to the effect that such indemnification would not protect
such Person against any liability to the Trust to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Any approval pursuant to this Section shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently adjudicated by
a court of competent jurisdiction to have been liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
SECTION 3. INDEMNIFICATION NOT EXCLUSIVE. The right of indemnification
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an "interested person" of
the Trust as defined in Section 2(a)(19) of the 1940 Act (or who has been
exempted from being an "interested person" by any rule, regulation or order of
the Commission), and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Trust shall
not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation the 1940 Act.
* * *
The Trust, at its expense, provides liability insurance for the benefit
of its Trustees and officers.
* * *
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Trust pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
-5-
<PAGE>
Securities Act of 1933, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Trust of expenses incurred or paid by a Trustee, officer or controlling
person of the Trust in the successful defense of any action, suit or proceeding)
is asserted against the Trust by such Trustee, officer or controlling person in
connection with the securities being registered, the Trust will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The Manager is the investment adviser to the Trust and its business
is summarized under the caption "Management of The Preferred Group" in the
Prospectus constituting Part A of this Registration Statement, which summary is
incorporated herein by reference.
The principal occupations for the past two years for the directors and
officers of the Manager is set forth under the caption "Management of the Trust"
in the Statement of Additional Information constituting Part B of this
Registration Statement, which information is incorporated herein by reference.
NAME AND POSITION
WITH MANAGER
David Bomberger
President, Director
F. Lynn McPheeters
Director
Kenneth J. Zika
Director
Sean X. McKessy
Clerk
Fred L. Kaufman
Treasurer
(b) Jennison is the subadviser to the Preferred Growth Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
-6-
<PAGE>
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Jennison is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH JENNISON OTHER CONNECTIONS
Francisco Alfaro Prior to November 1999, Vice
Vice President President, European Equities,
J.P. Morgan Securities Inc.
Pamela Allen Prior to March 2000, Principal
Vice President and Portfolio Manager, Fixed
Income, Lincoln Capital
Lisa Beach None
Assistant Vice President
Blair Boyer None
Executive Vice President,
Director
Cecilia Brancato None
Senior Vice President,
Director
Mindy Newman Brian None
Vice President
Erik Brown None
Vice President
Kevin Cantor None
Vice President
David Chan None
Senior Vice President,
Director
James Chavis None
Assistant Vice President
Mark DeFranco Prior to December 1998, Equity
Vice President Analyst and Portfolio Manager,
Pomboy Capital; since May
2000, Vice President, The
Prudential Investment
Corporation
-7-
<PAGE>
Michael Del Balso None
Executive Vice President &
Director of Equity
Research, Director
Paula Diaz None
Assistant Vice President
Thomas Doyle None
Executive Vice President,
Director
Joseph Ferrugio None
Senior Vice President,
Director
Brian Gillot Prior to September 1998,
Vice President Equity Analyst, Soros Fund
Management
Bradley Goldberg Since May 2000, Vice
Executive Vice President, President, The Prudential
Director Investment Corporation
Kathleen Hausner None
Vice President
John Hobbs Since May 2000, Vice
Chairman & Chief Executive President, The Prudential
Officer, Director Investment Corporation
Caroline Hovey None
Vice President
Mirry Hwang None
Vice President, Assistant
Secretary
Richard Klemmer None
Vice President
Karen Kohler None
Chief Administrative
Officer, Chief Compliance
Officer, Treasurer,
Secretary, Senior Vice
President, Director
Jonathan Longley None
Executive Vice President,
Director
Paul Lowenstein Chief Administrative Officer,
Director Prudential Investments
-8-
<PAGE>
Kathleen McCarragher None
Executive Vice President &
Domestic Growth Equity
Investment Strategist,
Director
Katharine Gleason Madigan None
Vice President
Philip H.B. Moss None
Executive Vice President,
Director
Charlene Parrish Since May 2000, Vice
Assistant Vice President President, The Prudential
Investment Corporation
Eric Philo None
Senior Vice President,
Director
Michele Polansky None
Assistant Vice President
David Ravera Prior to January 2000, Senior
Senior Vice President Vice President and Equity
Analyst, Putnam Investments,
Inc.
Peter Reinemann None
Senior Vice President,
Director
Stephen Rentschler None
Assistant Vice President
Charles Ringhel Since May 2000, Vice
Senior Vice President President, The Prudential
Investment Corporation
Seth Robbins Prior to August 1998,
Vice President Portfolio Manager, John
Hancock Advisors
Nicolas Rubinstein None
Vice President
Rosemary Sammarco None
Senior Vice President
Spiros Segalas None
President & Chief
Investment Officer,
Director
-9-
<PAGE>
Kerry Shanley None
Vice President
Jeffrey Siegel Prior to June 1999, Managing
Executive Vice President, Director, Portfolio Manager,
Director College Retirement & Equity
Fund
Leya Strauss None
Vice President, Assistant
Treasurer
Adam Susser None
Vice President
Andrew Tucker None
Vice President
Chris Vatis None
Vice President
Michael Wilburn Since May 2000, Vice
Vice President President, The Prudential
Investment Corporation
Stephanie Willis None
Vice President
Thomas Wolfe Prior to February 1999, Senior
Senior Vice President Portfolio Manager, Director of
Fixed Income Credit Research
of N&B Management, an
affiliate of Neuberger Berman,
LLC
The principal business address of The Prudential Investment Corporation
is Gateway Center Two, 100 Mulberry Street, Newark, New Jersey 07102.
(c) Oppenheimer Capital is the subadviser to the Preferred Value Fund
and its business is summarized under the caption "Management of The Preferred
Group" in the Prospectus constituting Part A of this Registration Statement,
which summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Oppenheimer Capital is or has been,
at any time during the past two fiscal years, engaged for his own account or in
the capacity of director, officer, employee, partner or trustee is as follows:
-10-
<PAGE>
NAME AND POSITION BUSINESS AND
WITH OPPENHEIMER OTHER CONNECTIONS
Charles H. Brunie None
Chairman Emeritus
Mark Degenhart Director of Research,
Vice President Palisade Capital Management
Linda S. Ferrante None
Managing Director
Herbert S. Fitz Gibbon, II None
Managing Director
Richard J. Glasebrook, II None
Managing Director
Colin J. Glinsman None
Chief Investment Officer
Louis P. Goldstein None
Senior Vice President
Jonathan K. Greenberg None
Senior Vice President
Matthew Greenwald None
Senior Vice President
Alan Gutman None
Senior Vice President
Vikki Y. Hanges None
Senior Vice President
Joseph M. LaMotta None
Chairman Emeritus
Frank A. Lecates, Jr. None
Managing Director, Director
of Research
John G. Lindenthal None
Managing Director
William P. McDaniel None
Managing Director
Julius A. Nicolai None
Managing Director
Nancy O. Preiss None
Senior Vice President
-11-
<PAGE>
John Rowley None
Vice President
David G. Santry None
Senior Vice President
Thomas Scerbo None
Managing Director
Jeffrey Tarnoff None
Senior Vice President
Robert Urquhart Managing Director,
Senior Vice President Pilgrim Baxter & Associates
Jeffrey Whittington None
Senior Vice President
Sturgis Woodberry None
Vice President
The principal business address of Palisade Capital Management is 1
Bridge Plaza, Fort Lee, NJ 07024.
The principal business address of Pilgrim Baxter & Associates is 825
Duportail Road, Wayne, PA 19087.
(d) Mercator is the subadviser to the Preferred International Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mercator is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH MERCATOR OTHER CONNECTIONS
John G. Thompson None
President, JZT Corp.,
General Partner
Peter F. Spano None
President, PXS Corp.,
General Partner
-12-
<PAGE>
Kevin J. Shaver None
President, KXS Corp.,
General Partner
(e) Mellon is a subadviser to the Preferred Asset Allocation Fund and
its business is summarized under the caption "Management of The Preferred Group"
in the Prospectus constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Mellon is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH MELLON OTHER CONNECTIONS
Bernedette L. Bolger None
Senior Vice President, Chief
Counsel
Stephen E. Canter Executive Committee Member of Mellon
Director Equity Associates, LLP; Executive
Committee Member of Mellon Bond
Associates, LLP; Director of The Boston
Company Asset Management, LLC; Director
of TBCAM Holdings, Inc; President & COO
of The Dreyfus Corporation; Director &
CII of The Dreyfus Corporation; Vice
Chairman of The Dreyfus Corporation;
Chairman of the Board of Dreyfus
Investment Advisors; Director &
President of Dreyfus Investment
Advisors; Chairman, President & CEO of
The Dreyfus Trust Company; Director of
the Dreyfus Trust Company; Director of
Franklin Portfolio Associates LLC;
Director of Franklin Portfolio Holdings,
Inc; Member, Board of Managers of
Founders Asset Management, LLC; Director
of Newton Management Ltd.
-13-
<PAGE>
Christopher M. Condron Executive Committee Member of Mellon
Director Bond Associates LLP; Executive Committee
Member of Mellon Equity Associates LLP;
Director of The Boston Company Asset
Management, LLC; Chairman & Director of
Founders Asset Managment, LLC; Director
of TBCAM Holdings, Inc.; Chairman of The
Dreyfus Corporation; CEO of The Dreyfus
Corporation; Director of the Dreyfus
Corporation; Director of Franklin
Portfolio Holdings, Inc.; Director of
Franklin Portfolio Associates, LLC;
Director of Certus Asset Advisors
Corporation; Director & President of
Boston Safe Advisors, Inc.; Director of
Mellon Bank, N.A.; President & COO of
Mellon Bank, N.A.; President & COO of
Mellon Financial Corporation; Director
of Mellon Financial Corporation; Vice
Chairman of The Boston Company, Inc.;
Director of The Boston Company, Inc.;
Director & President of Boston Safe
Deposit & Trust Company; President &
Director of the Boston Company Financial
Strategies, Inc.
Barbara W. Daugherty Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Client Services
and Marketing Communications
Susan M. Ellison Officer of Mellon Bank, N.A.
Senior Vice President,
Director of Equity Portfolio
Management
Richard J. Forster Officer of Mellon Bank, N.A.
Senior Vice President,
Senior Client Service
William L. Fouse Officer of Mellon Bank, N.A.
Chairman Emeritus
-14-
<PAGE>
Ralph P. Goldsticker Officer of Mellon Bank, N.A.
Senior Vice President &
Director of Research
Thomas B. Hazuka Officer of Mellon Bank, N.A.
Executive Vice President and
Chief Investment Officer
Alexander C. Huberts Officer of Mellon Bank, N.A.
Senior Vice President and
Director of Asset Allocation
Strategies
Charles J. Jacklin Officer of Mellon Bank, N.A.
Executive Vice President and
Chief Investment Strategist
David C. Kwan Officer of Mellon Bank, N.A.
Senior Vice President &
Director of Fixed Income and
Trading
Thomas F. Loeb Officer of Mellon Bank, N.A.
Director, Chairman & Chief
Executive Officer
John J. Nagorniak Executive Committee Member of Mellon
Director Equity, LLP; Executive Committee Member
of Mellon Bond Associates; Director of
Certus Asset Advisors Corporation;
Director of The Boston Company Asset
Management Holdings, Inc.; Chairman &
Director of Franklin Portfolio Holdings,
Inc.
Brenda J. Oakley Officer of Mellon Bank, N.A.
Executive Vice President &
Chief Administrative Officer
Ronald P. O'Hanley, III Director of Boston Safe Deposit & Trust
Director Company; Director of The Boston Company,
Inc.; Director of Buck Consultants,
Inc.; Director of Newton Management
Ltd.; Non-Resident Director of Dreyfus
Mellon Asset Management (Japan) Co,
Ltd,; Director of Franklin Portfolio
Holdings, Inc.; Director of Franklin
Portfolio Associates, LLC; Vice Chairman
-15-
<PAGE>
of the Dreyfus Corporation; Director of
TBCAM Holdings, Inc.; Director of The
Boston Company Asset Management, LLC;
Chairman & Director of Boston Safe
Advisors, Inc.; Partner & Representative
of Pareto Partners; Director of Certus
Asset Advisors Corporation; Trustee &
Chairman of Mellon Equity Associates,
LLP; Trustee & Chairman of Mellon Bond
Associates, LLP; Director of
Mellon-France Corporation; Trustee of
Laurel Capital Advisors.
Barbara J. Parrish Secretary of Certus Asset Advisors
Secretary Corporation; Secretary of Laurel Capital
Advisors; Secretary of Mellon Financial
Services Corporation #17, LLC; Secretary
of Mellon Equity Associates, LLP;
Secretary of Mellon Bond Associates,
LLP.
Patrick J. Sheppard Treasurer of Mellon Equity Associates,
Treasurer LLP; Treasurer of Mellon Bond
Associates, LLP
Mary C. Shouse Officer of Mellon Bank, N.A.
Executive Vice President
Christine C. Smith Officer of Mellon Bank, N.A.
Vice President & Director of
Compliance and Risk
Management
James R. Tufts Officer of Mellon Bank, N.A.
Executive Vice President &
Chief Operation Officer
Roger A. Wharton None
Senior Vice President
The principal business address of Mellon Bank, N.A. is One Mellon Bank
Center, Suite 4700, Pittsburgh, Pennsylvania 15258.
The principal business address of Mellon Capital Management Corporation
is 595 Market Street, Suite 3000, San Francisco, California 94105.
-16-
<PAGE>
The principal business address of The Dreyfus Corporation is 200 Park
Avenue, New York, New York 10166.
The principal business address of Certus Asset Advisors Corporation is
One Bush Street, Suite 450, San Francisco, California 94104.
The principal business address of Boston Safe Advisors, Inc. is One
Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon Bond Associates is One Mellon
Bank Center, Suite 4135, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company Asset
Management, Inc. is One Boston Place, Boston, Massachusetts 02108.
The principal business address of Mellon Bank Corporation is One Mellon
Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania 15258.
The principal business address of The Boston Company, Inc.
is One Boston Place, Boston, Massachusetts 02108.
The principal business address of Laurel Capital Advisors is One Mellon
Bank Center, Suite 3935, Pittsburgh, Pennsylvania 15258.
The principal business address of Franklin Portfolio Holdings, Inc. is
Two International Place, 22nd Floor, Boston, Massachusetts 02110.
The principal business address of The Boston Company Financial
Strategies Group, Inc. is One Boston Place, Boston, Massachusetts 02108-4402.
The principal business address of Mellon-France Corporation is One
Mellon Bank Center, Suite 4000, Pittsburgh, Pennsylvania 15258.
The principal business address of Pareto Partners is 271 Regent Street,
London, WIR8PP, ENGLAND.
The principal business address of Boston Safe Deposit and Trust Company
is One Boston Place, Boston, Massachusetts 02108.
The principal business address of Mellon Financial Services Corporation
#17 is One Executive Drive, Fort Lee, New Jersey 07024.
The principal business address of Mellon Financial Company is One
Mellon Bank Center, Suite 747, Pittsburgh, Pennsylvania 15258.
-17-
<PAGE>
The principal business address of Buck Consultants, Inc. is 2 Penn
Plz., 23rd fl., New York, NY 10121-0001.
The principal business address of TBCAM Holdings, Inc. is One Boston
Place, Boston, MA 02108.
The principal business address of Mellon Equity Associates, LLP is One
Mellon Bank Center, Suite 3715, Pittsburgh, Pennsylvania 15258.
The principal business address of Dreyfus Mellon Asset Management
(Japan) Co., Ltd. is 3-2-3, Marunouchi, Chiyoda-ku, Fuji Building 3F, Tokyo,
Japan 100-0005.
The principal business address of Franklin Portfolio Associates, LLC is
2 International Place, 22nd Floor, Boston, MA 02110.
The principal business address of Founders Asset Management, LLC is
2930 East 3rd Avenue, Denver, CO 80206.
The principal business address of Newton Management Ltd. is 71 Queen
Victoria Street, London, United Kingdom EC4V 4DR.
(f) PanAgora is a subadviser to the Preferred Asset Allocation Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial nature
in which each director or officer of PanAgora is or has been, at any time during
the past two fiscal years, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH PANAGORA OTHER CONNECTIONS
John F. Boneparth Managing Director and Chief of
Director International Distribution and
Business Development for
Putnam Investments, Inc.
Kiyoshi Ujihara General Manager of the
Director Americas, Nippon Life
Insurance Company
Hideichiro Kobayashi Director and General Manager
Director for the Americas of Nippon
Life Insurance Company
-18-
<PAGE>
Thomas J. Lucey Director, Senior Managing and
Director Chief of Operations Director
of Putnam Investments, Inc.
Takashi Minagawa Director and General Manager
Director for Europe of Nippon Life
Insurance Company
Masahiro Yamada Senior Managing Director,
Director Nippon Life Insurance Company
Edgar E. Peters None
Chief Investment Strategist
and Chief Investment Officer
William J. Poutsiaka Chief Executive Officer and
Director, President and Compliance Officer of PanAgora
Chief Executive Officer Asset Management Limited
Steven Spiegel Director, Senior Managing and
Director Chief of Corporate Development
Director of Putnam
Investments, Inc.
Irene M. Esteres Managing Director and Chief
Director Financial Officer of Putnam
Investments, Inc.
Michael H. Turpin None
Treasurer, Director of
Administration
The principal business address of PanAgora Asset Management Limited is 3
Finsbury Avenue, London, England EC2M 2PA.
The principal business address of Putnam Investments, Inc. is One Post
Office Square, Boston, MA 02109-2106.
The principal business address of Nippon Life Insurance Company and NLI
International, Inc. Life Insurance Company is 5-12, Imbashi, 3-Chome, Chuo-Ku,
Osaka, Japan.
(g) Morgan is the subadviser to the Preferred Fixed Income Fund and the
Preferred Money Market Fund and its business is summarized under the caption
"Management of The Preferred Group" in the Prospectus constituting Part A of
this Registration Statement, which summary is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Morgan is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
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<PAGE>
NAME AND POSITION BUSINESS AND
WITH MORGAN OTHER CONNECTIONS
Kenneth W. Anderson Managing Director, Morgan
Director, Managing Director Guaranty Trust Company of New
York
Ronald. R. Dewhurst Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
Gerard W. Lillis, Managing Director, Morgan
Director, Managing Guaranty Trust Company of New
Director York
Keith M. Schappert Managing Director, Morgan
President, Director, Guaranty Trust Company of New
Managing Director York
John W. Schmidlin Managing Director, Morgan
Director, Managing Director Guaranty Trust Company of New
York
Isabel H. Sloane Managing Director, Morgan
Director, Managing Director Guaranty Trust Company of New
York
Hendrik Van Riel Managing Director, Morgan
Director, Managing Director Guaranty Trust Company of New
York
The principal business address of Morgan Guaranty Trust
Company of New York and of J.P. Morgan & Co. Incorporated is 60
Wall Street, New York, New York 10260-0060.
(f) Turner is the subadviser to the Preferred Small Cap Fund and its
business is summarized under the caption "Management of The Preferred Group" in
the Prospectus constituting Part A of this Registration Statement, which summary
is incorporated herein by reference.
Other business, profession, vocation or employment of a substantial
nature in which each director or officer of Turner is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee is as follows:
NAME AND POSITION BUSINESS AND
WITH TURNER OTHER CONNECTIONS
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<PAGE>
Stephen J. Kneeley SEI Investments Distribution
Chief Operating Officer, Co., Registered
Secretary, President, Representative; The Chesapeake
Director Funds, Board of Trustees; TIP
Funds, President
Thomas R. Trala None
CFO, Treasurer
Mark D. Turner None
Vice Chairman, Director
Robert E. Turner, Jr. Episcopal Academy, Board of
Chairman, CIO, Director Trustees; Bradley University,
Board of Trustees; TIP Funds,
Board of Trustees
The principal business address of SEI Investments is One Freedom Valley
Way, Oaks, PA 19456.
The principal business address of The Chesapeake Funds is 105 N.
Washington Street, P.O. Box 69, Rocky Mount, NC 27802-0069.
-21-
<PAGE>
The principal business address of Bradley University is 1501
W. Bradley Ave, Peoria, IL 61625.
The principal business address of Episcopal Academy is 376
N. Latches Lane, Merion, PA 19066.
Item 27. PRINCIPAL UNDERWRITER
(a) Caterpillar Securities Inc., the Registrant's Principal
Underwriter, does not serve as underwriter for any other investment companies.
(b) Information with respect to directors and officers of the Principal
Underwriter is as follows:
<TABLE>
<CAPTION>
Positions and Offices Positions and
Names and Principal with Principal Offices with
Business Addresses Underwriter Registrant
------------------ --------------------- -------------
<S> <C> <C>
David L. Bomberger President, Director President
Caterpillar
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
Frederick L. Kaufman Treasurer, Director Vice President,
Caterpillar Treasurer
Securities, Inc.
411 Hamilton Boulevard
Suite 1200
Peoria, IL 61602
</TABLE>
(c) The Registrant has no principal underwriter that is not an
affiliated person of the Registrant or an affiliated person of such an
affiliated person.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder include Registrant's Clerk,
Sean X. McKessy; Registrant's investment adviser, CIML; Registrant's Custodian,
State Street; Registrant's Transfer Agent and Shareholder Servicing Agent, State
Street; and each of the Registrant's subadvisers. The address of the Clerk is
100 N.E. Adams Street, Peoria, Illinois 61629; the address of CIML is 411
Hamilton Boulevard, Suite 1200, Peoria, IL 61602; the address of the Custodian,
Transfer Agent and Shareholder Servicing Agent is P.O. Box 1713, Boston,
Massachusetts 02110; and the addresses of the Registrant's subadvisers are as
follows: Oppenheimer, 1345 Avenue of the Americas, New York, New York 10105;
Jennison, 466 Lexington Avenue, New York, New York 10017; Mellon, 595 Market
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<PAGE>
Street, Suite 3000, San Francisco, California 94105; PanAgora, 260 Franklin
Street, Boston, Massachusetts 02110; Mercator, 2400 East Commercial Boulevard,
Suite 810, Fort Lauderdale, Florida 33308; Morgan, 522 Fifth Avenue, New York,
New York 10036; and Turner, 1235 Westlakes Drive, Suite 350, Berwyn,
Pennsylvania 19312.
Item 29 MANAGEMENT SERVICES
None.
Item 30. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting on the removal of a Trustee or Trustees
when requested in writing to do so by the holders of at least 10% of the
Registrant's outstanding voting securities and in confirmation with the
provisions of Section 16(c) of the Investment Company Act of 1940 relating to
shareholder communications.
(b) The undersigned Registrant hereby undertakes to provide to each
person to whom a Prospectus is delivered a copy of its Annual Report without
charge upon request.
NOTICE
A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of State of The Commonwealth of Massachusetts and notice is
hereby given that this instrument is executed on behalf of the Trust by an
officer of the Trust as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
each of the respective constituent series of the Trust.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Peoria and the State of
Illinois on the 25th day of August, 2000.
THE PREFERRED GROUP OF MUTUAL FUNDS
By: /s/David L. Bomberger*
---------------------------
Title: President
Pursuant to the Securities Act of 1933, this Amendment has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/David L. Bomberger* President August 25, 2000
----------------------
David L. Bomberger (Principal Executive Officer)
/s/Gary M. Anna* Trustee August 25, 2000
----------------
Gary M. Anna
/s/William F. Bahl* Trustee August 25, 2000
-------------------
William F. Bahl
/s/F. Lynn McPheeters* Trustee August 25, 2000
----------------------
F. Lynn McPheeters
/s/Dixie L. Mills* Trustee August 25, 2000
------------------
Dixie L. Mills
/s/Kenneth J. Zika* Trustee August 25, 2000
-------------------
Kenneth J. Zika
/s/Fred L. Kaufman* Treasurer and Vice August 25, 2000
------------------- President (Principal
Fred L. Kaufman Financial and Principal
Accounting Officer)
</TABLE>
*By:/s/ Fred L. Kaufman
----------------------
Fred L. Kaufman
Attorney-in-Fact Pursuant to
Powers of Attorney Filed
Previously and for Himself
-24-
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
Index to Exhibits
Exhibit No. Description
----------- -----------
(d)(4) Form of Management
Contract between the
Trust and the Manager
with respect to the
Preferred Small Cap Fund.
(d)(10) Form of Subadviser
Agreement between the
Manager and Oppenheimer.
(d)(13) Form of Subadviser
Agreement between the
Manager and PanAgora.
(d)(16) Form of Subadviser
Agreement between the
Manager and Turner.
(p)(1) Code of Ethics of the
Trust, the Manager and
CSI.
(p)(2) Code of Ethics of
Jennison.
(p)(3) Code of Ethics of
Oppenheimer.
(p)(4) Code of Ethics of
Mercator.
(p)(5) Code of Ethics of Mellon.
(p)(6) Code of Ethics of
PanAgora.
(p)(7) Code of Ethics of Morgan.
(p)(8) Code of Ethics of Turner.
-25-
