<PAGE>
Filed Pursuant to Rule
497(e) under the
Securities Act of 1933.
Registration No. 33-75708
McM Funds
Supplement dated June 14, 1996
to the Prospectus dated October 27, 1995
- -------------------------------------------------------------------------------
This Supplement provides new and additional information beyond that contained in
the Prospectus and should be read in conjunction with such Prospectus.
CUSTODIAN
Effective April 29, 1996, The Bank of New York, New York, N.Y., replaced
Citibank, N.A., New York, N.Y., to serve as custodian for the securities and
cash of each Fund.
<PAGE>
McM FUNDS McM Funds PROSPECTUS
One Bush Street, Suite 800
San Francisco, CA 94104 October 27, 1995
===============================================================================
McM Funds (the "Company") is a no-load, open-end management investment company.
The Company was organized as a Delaware business trust and currently offers
shares of five separate series or funds (each a "Fund" and collectively, the
"Funds"), each having its own investment objectives and policies. Each of the
Funds is diversified and individually advised by McMorgan & Company (the
"Advisor").
Money Market Fund
-----------------------------------------------------
Principal Preservation Fund seeks to realize maximum current income,
consistent with preservation of capital. The Fund seeks to achieve its
investment objective by investing in short-term, high quality, U.S.
dollar-denominated money market instruments having expected maturities
of thirteen months or less. This Fund attempts to maintain a stable net
asset value of $1.00.
Fixed Income Funds
-----------------------------------------------------
Intermediate Fixed Income Fund seeks to achieve above-average total
return over a market cycle of three to five years. The Fund invests in
a diversified portfolio of short to intermediate-term debt securities.
Average weighted maturity is expected to be between three and ten
years. This Fund is designed for investors wishing a greater return
than the Principal Preservation Fund and less risk than the Equity
Investment Fund, Balanced Fund and Fixed Income Fund.
Fixed Income Fund seeks to achieve above-average total return
consistent with what the Advisor believes to be prudent risk to
principal over a market cycle of three to five years. The Fund invests
in a diversified portfolio of intermediate and long-term debt
securities. Average weighted maturity is expected to be between three
and fifteen years. This Fund is designed for those investors wishing to
receive a high level of income with protection of principal.
An investment in the Principal Preservation Fund is neither insured nor
guaranteed by the U.S. Government, and there can be no assurance that the Fund
will be able to maintain a stable net asset value of $1.00 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Balanced Fund
-----------------------------------------------------
Balanced Fund seeks to achieve a balance of capital appreciation,
income and preservation of capital over a market cycle of three to five
years. The Fund invests in common stocks and fixed-income securities.
This Fund is designed for investors willing to accept the risks
associated with a combination of investments in equity and fixed-income
securities.
Stock Fund
-----------------------------------------------------
Equity Investment Fund seeks to achieve above-average total return over
a market cycle of three to five years consistent with reasonable risk.
The Fund invests primarily in common stocks of companies which are
deemed by the Advisor to have earnings growth, dividend growth and
capital appreciation potential. This Fund is designed for investors
wishing long-term growth and who are willing to accept the risk of
occasional volatile returns. Above-average total return may be
difficult to achieve in all market conditions.
Shares of each Fund are purchased and redeemed without any purchase or
redemption charge imposed by the Company, although the Advisor and other
institutions may charge their customers for services provided in connection with
their investments.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the above Funds. Investors should read
this Prospectus and retain it for future reference. Additional information about
the Funds, contained in the Statement of Additional Information, has been filed
with the Securities and Exchange Commission and is available upon request
without charge by writing to the Advisor at the address below. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference into the Prospectus.
Underwriter: Advisor:
Fund/Plan Broker Services, Inc. McMorgan & Company
2 W. Elm Street One Bush Street, Suite 800
Conshohocken, PA 19428 San Francisco, CA 94104
(800) 831-1146 (800) 788-9485
2
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 4
Expense Information........................................................ 6
Financial Highlights....................................................... 7
Investment Philosophies.................................................... 8
Investment Objectives
Equity Investment Fund ............................................... 9
Balanced Fund......................................................... 10
Fixed Income Fund..................................................... 11
Intermediate Fixed Income Fund........................................ 11
Principal Preservation Fund........................................... 13
Investment Strategies...................................................... 13
Management of the Funds.................................................... 19
How to Invest in the Funds................................................. 21
Exchange of Shares......................................................... 23
How to Redeem Shares....................................................... 23
Account Options............................................................ 25
Net Asset Value............................................................ 26
Dividends and Taxes........................................................ 26
Performance Information.................................................... 27
General Information........................................................ 28
THISPROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN
ANY JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE
FUNDS TO MAKE SUCH AN OFFER OR SOLICITATION. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS.
3
<PAGE>
PROSPECTUS SUMMARY
The Funds
The Company is an open-end, management investment company commonly known as a
mutual fund. The Company was established as a Delaware business trust on
February 3, 1994. The Company is currently comprised of five diversified series
of shares which offer a variety of investment opportunities -- Equity Investment
Fund, Balanced Fund, Fixed Income Fund, Intermediate Fixed Income Fund, and
Principal Preservation Fund.
Investment Objectives of the Funds
The Equity Investment Fund seeks to achieve above-average total return by
investing primarily in common stocks. The Balanced Fund seeks to achieve a
balance of capital appreciation, income and preservation of capital. The
Intermediate Fixed Income Fund and Fixed Income Fund both seek to achieve
above-average total return by investing in diversified portfolios of debt
securities. The average weighted portfolio maturity of the Intermediate Fixed
Income Fund is expected to be between three and ten years, and the average
weighted portfolio maturity of the Fixed Income Fund is expected to be between
three and fifteen years. The Principal Preservation Fund, a money market fund,
seeks to realize maximum current income, consistent with preservation of
capital.
Due to the inherent risks of investments, there can be no assurance that the
objective of a Fund will be achieved. See "Investment Objectives" on page 9 and
"Investment Strategies" on page 13.
Risk Factors of Investing in the Funds
There is no assurance that the investment objective of any Fund will be
achieved, and investment in each Fund includes risks, which vary in kind and
degree depending upon the investment policies of the Fund. The returns and net
asset value of a Fund will fluctuate except that the Principal Preservation Fund
seeks to maintain a net asset value of $1.00 per share (although there is no
assurance that the Principal Preservation Fund will maintain a net asset value
of $1.00 per share). The securities contained in the Intermediate Fixed Income
Fund and Fixed Income Fund are subject to market and credit risk. See "Risk
Factors of Fixed Income Investing" on page 12.
How to Purchase Shares
The minimum initial investment for all accounts is $5,000 for each Fund. The
minimum for additional investments is $250. The Funds do not impose any sales
load, distribution plans (12b-1), redemption or exchange fees. The public
offering price for shares of each of the Funds is the net asset value per share
next determined after receipt of a purchase order. See " How to Invest in the
Funds" on page 21.
How to Redeem Shares
Shares of each Fund may be redeemed at the net asset value per share of the Fund
next determined after receipt by the transfer agent of a redemption request in
proper form. Signature guarantees may be required. See "How to Redeem Shares" on
page 23.
Dividends
Each Fund intends to distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. Distributions of net
capital gains, if any, will be made annually. All distributions are reinvested
at net asset value, in additional full and fractional shares of the respective
Fund unless and until the shareholder notifies the transfer agent in writing
requesting payments in cash.
4
<PAGE>
The Equity Investment Fund and Balanced Fund declare and pay dividends (other
than net capital gains) quarterly. The Intermediate Fixed Income Fund and Fixed
Income Fund declare and pay dividends (other than net capital gains) monthly.
Principal Preservation Fund's net investment income is declared daily and paid
monthly. See "Dividends and Taxes" on page 26.
Management of the Funds
McMorgan & Company, One Bush Street, Suite 800, San Francisco, California 94104,
a California corporation and registered investment advisor, is the Funds'
investment advisor. As of June 30, 1995, the Advisor managed approximately $13
billion in assets primarily for employee benefit plans such as retirement plans
and health and welfare funds. Fund/Plan Broker Services, Inc., 2 W. Elm Street,
Conshohocken, Pennsylvania 19428 serves as the Funds' underwriter. Citibank,
N.A., 111 Wall Street, New York, New York 10005 serves as the custodian of the
Funds' assets. Fund/Plan Services, Inc., 2 W. Elm Street, Conshohocken,
Pennsylvania 19428 serves as the Funds' administrator, transfer agent and fund
accounting agent.
5
<PAGE>
EXPENSE INFORMATION
- ------------------------------------------------------------------------------
Shareholder Transaction Expenses for Each Fund:
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) .................... 0.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price) ......... 0.00%
Deferred Sales Load (as a percentage of original purchase price)................................ 0.00%
Redemption Fees (as a percentage of amount redeemed)............................................ 0.00%
</TABLE>
If you want to redeem shares by wire transfer, the Funds' transfer agent
charges a fee (currently $9.00) for each wire redemption.
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Equity Fixed
Investment Balanced Income
Fund Fund Fund
---------- --------- ------
<S> <C> <C> <C>
Management Fees (after fee waiver): 0.00% 0.00% 0.00%
Other Expenses
(after expense reimbursement): 0.75% 0.60% 0.50%
Total Fund Operating
Expenses (after expense
reimbursement): 0.75% 0.60% 0.50%
===== ===== =====
</TABLE>
Intermediate Principal
Fixed Income Preservation
Fund Fund
------------ ------------
Management Fees (after fee waiver): 0.00% 0.00%
Other Expenses
(after expense reimbursement): 0.50% 0.30%
Total Fund Operating
Expenses (after expense
reimbursement): 0.50% 0.30%
===== =====
Pursuant to the terms of the investment advisory agreements between the Advisor
and the Equity Investment Fund, Balanced Fund, Fixed Income Fund, Intermediate
Fixed Income Fund and Principal Preservation Fund, the Advisor is to receive a
monthly fee at an annual rate of 0.50%, 0.45%, 0.35%, 0.35% and 0.25%,
respectively, of the respective Fund's average daily net assets. The above table
reflects the Advisor's voluntary undertaking to waive its fees and reimburse
expenses so that the Total Operating Expenses for the Equity Investment Fund,
6
<PAGE>
Balanced Fund, Fixed Income Fund, Intermediate Fixed Income Fund and Principal
Preservation Fund will not exceed 0.75%, 0.60%, 0.50%, 0.50% and 0.30%,
respectively. Had the Advisor not agreed to this fee waiver and reimbursement,
Total Fund Operating Expenses would have been 8.48%, 8.41%, 7.29%, 1.72% and
2.77%, respectively.
Example
Based on the level of expenses listed above, the total expenses relating to an
investment of $1,000 would be as follows, assuming a 5% annual return and
redemption at the end of each time period.
<TABLE>
<CAPTION>
Name of Fund 1 Year 3 Years 5 Years 10 Years
------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity Investment Fund $ 8 $ 24 $ 42 $ 93
Balanced Fund $ 6 $ 19 $ 33 $ 75
Fixed Income Fund $ 5 $ 16 $ 28 $ 63
Intermediate Fixed Income Fund $ 5 $ 16 $ 28 $ 63
Principal Preservation Fund $ 3 $ 10 $ 17 $ 38
</TABLE>
The foregoing tables are designed to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or indirectly.
While the example assumes a 5% annual return, the Funds' actual performance will
vary and may result in actual returns greater or less than 5%. The example
should not be considered a representation of past or future expenses and actual
expenses or returns may be greater or less than those shown, and may change if
expense reimbursements change.
FINANCIAL HIGHLIGHTS
The following financial highlights for the fiscal year ended June 30, 1995 were
derived from the Funds' financial statements dated June 30, 1995, which were
audited by Tait, Weller & Baker, independent auditors, whose unqualified report
thereon may be found in the Funds' Statement of Additional Information. The
Funds' Statement of Additional Information may be obtained without charge and is
incorporated by reference into this Prospectus.
The tables below set forth financial data for a share of beneficial interest
outstanding throughout the period presented.
<TABLE>
<CAPTION>
For the Period Ended June 30, 1995
McM
McM McM Intermediate McM
Equity McM Fixed Fixed Principal
Investment Balanced Income Income Preservation
Fund* Fund* Fund* Fund* Fund**
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00 $1.00
-------- -------- -------- -------- -------
Income from investment operations
Net investment income.......................... 0.19 0.36 0.55 0.54 0.05
Net realized and unrealized gain
on investment.................................. 1.94 1.33 0.56 0.34 0.00
-------- -------- -------- -------- -------
Total from investment operations 2.13 1.69 1.11 0.88 0.05
-------- -------- -------- -------- -------
Less Distributions:
From net investment income..................... (0.18) (0.34) (0.53) (0.51) (0.05)
-------- -------- -------- -------- -------
Total distributions.......................... (0.18) (0.34) (0.53) (0.51) (0.05)
-------- -------- -------- -------- -------
Net Asset Value, end of period.................. $11.95 $11.35 $10.58 $10.37 $1.00
======== ======== ========= ======== =======
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total return ........................................... 21.57% 17.31% 11.55% 9.19% 5.10%
Ratios/Supplemental Data
Net assets, end of period (in 000's) .................. $4,866 $3,070 $6,599 $29,936 $11,813
Ratio of expenses to average net assets before
reimbursement of expenses by Advisor ................. 8.48% 8.41% 7.29% 1.72% 2.77%
Ratio of expenses to average net assets after
reimbursement of expenses by Advisor ................. 0.75% 0.60% 0.50% 0.50% 0.30%
Ratio of net investment income to average net assets
before reimbursement of expenses by Advisor .......... -5.50% -3.54% -0.47% 5.01% 2.91%
Ratio of net investment income to average net assets
after reimbursement of expenses by Advisor ........... 2.24% 4.28% 6.33% 6.24% 5.38%
Portfolio turnover..................................... 1.81% 81.05% 150.77% 227.09%
.....................................................N/A
</TABLE>
* McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income Fund and
McM Intermediate Fixed Income Fund commenced investment operations on
July 14, 1994.
** McM Principal Preservation Fund commenced investment operations on July 13,
1994.
INVESTMENT PHILOSOPHIES
Portfolio Management
Investment decisions for the Funds are made by an investment management team at
McMorgan & Company. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases.
Equity Philosophy
The Advisor uses a market oriented "top-down" multi-factor approach to control
the risk at the portfolio level, quantifying and controlling the risk parameters
that affect the investment return of particular issues, while using a
"bottom-up" issue selection process. "Bottom-up" refers to an analytical
approach to securities selection which first focuses on the company and
company-related matters. The Advisor monitors many risk factors including Beta,
market capitalization, yield, historic growth, expected growth, balance sheet
strength, and industry and economic sector. While the Advisor uses the
"top-down" approach to control risk, it uses a "bottom-up" approach to select
specific securities.
Particular securities are selected for addition to the portfolio when they
contribute positively to total portfolio characteristics and the "Risk Adjusted
Expected Return" premium in excess of the market. The Advisor starts with
financial community consensus of earnings expectations and uses a dividend
discount model to determine a "Risk Adjusted Expected Return," selecting issues
that, collectively, have a "Risk Adjusted Expected Return" premium compared to
the market. The "Risk Adjusted Expected Return" of the portfolio is the
difference between the absolute expected return of the portfolio and the market,
plus or minus an amount computed to compensate for the degree to which the
historical volatility of the portfolio has exceeded or fallen short of the
overall market.
An issue will be added or increased to balance or rebalance any of the factors
determined at the portfolio level. If an individual security's "Risk Adjusted
Expected Return" has decreased significantly, either through price appreciation,
or other dynamic factors, its position may be reduced or eliminated, and other
securities with a higher "Risk Adjusted Expected Return" may be purchased.
Purchases and sales will also be made to maintain the desired portfolio
characteristics.
8
<PAGE>
Fixed Income Philosophy
The Advisor uses a risk-control process to analyze the possible changes in value
caused by interest rate fluctuations. For the fixed income funds, a market
target risk level is established. Adjustments to this target risk level are made
based on the expected real return of the fixed-income investments. As the
expected real rate of return in fixed-income investments rises, duration (a
measure of risk) may be increased; and as the expected return decreases,
duration may be decreased on a gradual basis. Interest rate anticipation is kept
to low levels.
After the portfolio duration is established, issue selection is addressed to
purchase an "efficient group" of bonds, purchasing a diversified portfolio of
securities that have the following attributes: good quality, inefficiently
priced, yield advantage versus the market and protection against call risk.
Transactions will occur in a portfolio for two major reasons: (1) assets will be
sold and replaced with another if call protection, quality or yield can be
increased without sacrificing any of the other factors; (2) assets will also be
sold or purchased to maintain the targeted portfolio duration, without
diminishing any of the four major factors.
INVESTMENT OBJECTIVES
The investment objective of each Fund is fundamental and may not be changed
without a vote of the holders of the majority of the voting securities of the
Fund. Unless otherwise stated in this Prospectus, each Fund's investment
policies are not fundamental and may be changed without shareholder approval.
While a non-fundamental policy or restriction may be changed by the Trustees of
the Company without shareholder approval, the Funds intend to notify
shareholders before making any such material change. Fundamental policies may
not be changed without shareholder approval. Additional investment policies and
restrictions are described in the Statement of Additional Information.
When in the opinion of the Advisor a defensive investment posture is warranted,
the Funds are permitted to invest temporarily and without limitation in U.S.
Government obligations, money market instruments (such as U.S. Treasury bills,
commercial paper, certificates of deposit and bankers' acceptances) and
repurchase agreements. The Funds are permitted to enter into repurchase
agreements with respect to U.S. Government securities, to purchase portfolio
securities on a when-issued basis and to purchase or sell portfolio securities
for delayed delivery. See INVESTMENT STRATEGIES.
EQUITY INVESTMENT FUND
The Equity Investment Fund seeks to achieve above-average total return over a
market cycle of three to five years consistent with reasonable risk. The Fund
invests primarily in common stocks of companies which are deemed by the Advisor
to have earnings growth, dividend growth and capital appreciation potential.
Above-average total return may be difficult to achieve in all market conditions.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in equity securities. Up to 35% of the Fund's assets may be invested in
U.S. Government securities, short-term money market instruments (such as U.S.
Treasury bills, commercial paper, certificates of deposit and bankers'
acceptances) and repurchase agreements.
The Advisor intends to select portfolio securities using what is sometimes
referred to as a "bottom-up" approach. The Advisor will monitor risk factors
using a "top-down" approach. See "Equity Philosophy" under INVESTMENT
PHILOSOPHIES.
The Fund's investment strategy will emphasize companies that, in the opinion of
the portfolio management team, offer prospects for capital growth and growth of
earnings and dividends. The Fund expects to invest primarily in securities of
any size company in any industry currently paying dividends although it may buy
securities that are not paying dividends but offer prospects for growth of
capital or future income. The equity securities in which the Fund invests will
be traded on a national securities exchange or traded in the over-the-counter
market. Up to 15% of the Fund's net assets may be invested in foreign securities
in the form of American Depository Receipts ("ADRs") or European Depository
Receipts ("EDRs"). The Fund does not expect to invest in unsponsored ADRs and
9
<PAGE>
EDRs (that is, ADRs and EDRs where the depositor has no agreement with the
issuer and, among other things, may receive less information from the issuer).
The Advisor expects the Fund's net asset value to exhibit fluctuation similar to
the stock market in general, as measured by the S&P 500, and thus, the Fund may
or may not be suitable for all investors. The Fund is designed for long-term
investors who can accept the risk entailed in these investment policies and is
not meant to provide a vehicle for playing short-term swings in the stock
market.
The Fund may write (sell) covered call options to enhance investment returns and
may both purchase and sell options on stock indices for hedging purposes. The
Fund may also enter into futures contracts and options on futures contracts, as
described under INVESTMENT STRATEGIES.
BALANCED FUND
The Balanced Fund seeks to achieve a balance of capital appreciation, income and
preservation of capital over a market cycle of three to five years. The Fund
invests in a diversified portfolio of common stocks and fixed-income securities.
This Fund may be appropriate for investors willing to accept the risks
associated with a combination of investments in equity and fixed-income
securities.
In seeking capital appreciation, the Fund may invest in common stocks of a broad
range of capitalized companies believed to have a potential for long-term
capital growth, with an emphasis on dividend paying common stocks. The equity
securities in which the Fund invests will be traded on a national securities
exchange or traded in the over-the-counter market. The Fund will have a
strategic target allocation of equity positions between 50% and 70% of net
assets, but for temporary defensive purposes the Fund may reduce the actual
equity commitment to 25% of net assets. The Advisor may alter the actual
percentage of equities invested within the targeted equity ranges in 5%
increments. The change is determined by developing an expected return on
equities. Once the expected return on equities is determined, it is compared
against the expected return on short-term cash, cash equivalents and
fixed-income investments. If equities are relatively more attractive, the
percentage invested in equities will be increased. If fixed-income and cash
equivalent securities are relatively more attractive, the equity position will
be reduced.
The changes in equity commitment will usually be cumulative in nature and based
on risk-reward factors and not market-timing factors. The Advisor will usually
not make a commitment that is anticipated to change over the near term. The
commitment is based on a four to eight quarter outlook.
The Advisor believes that common stocks will generally offer the greatest
potential for growth of capital and preservation of purchasing power. The "top
down" analysis described under "Equity Philosophy" above is developed to assist
in identifying specific business sectors for emphasis or deemphasis.
In seeking income, at least 25% of the Balanced Fund's assets will be invested
at all times in fixed-income securities. The fixed-income portion of the
portfolio will be comprised of U.S. Government securities, investment grade debt
securities, preferred stock and securities convertible into common stock. To the
extent that the Fund invests in convertible issues, only that portion of their
value attributable to their fixed-income characteristics will be used in
calculating the 25% fixed-income allocation. There are no maturity restrictions
on the fixed-income securities in which the Fund will invest. The fixed-income
portion of the Balanced Fund will consist of the same type of securities that
may form the portfolio for the Fixed Income Fund. For information on these
securities, see "Investment Objectives - Fixed Income Fund." For a discussion of
investment grade debt securities see "Investment Policies Applicable to the
Balanced Fund, Fixed Income Fund and Intermediate Fixed Income Fund." Also see
"Risk Factors of Fixed Income Investing."
The Fund may write (sell) covered call options to enhance investment returns and
may both purchase and sell options on stock indices for hedging purposes. The
Fund may also enter into futures contracts and options on futures contracts, as
described under INVESTMENT STRATEGIES.
10
<PAGE>
FIXED INCOME FUND
The Fixed Income Fund seeks to achieve above average total return consistent
with low risk to principal and liquidity over a market cycle of three to five
years. The Fund primarily invests in a broad range of intermediate and long-term
debt securities and the portfolio will normally contain between fifty and one
hundred securities. While the Fund may purchase securities with maturities of
average lives of up to thirty years, during normal market conditions its average
weighted portfolio is expected to be between three and fifteen years.
Specific emphasis is placed on finding lower coupon mortgage-backed and
asset-backed securities to create incremental returns, while government bonds
may be used extensively to control portfolio duration. See "Collateralized
Mortgage Obligations" under INVESTMENT STRATEGIES.
See "Investment Policies Applicable to the Balanced Fund, Fixed Income Fund and
Intermediate Fixed Income Fund."
INTERMEDIATE FIXED INCOME FUND
The Intermediate Fixed Income Fund seeks to achieve above-average total return
consistent with low risk to principal and liquidity over a market cycle of three
to five years. The Fund primarily invests in a broad range of short to
intermediate-term bonds and other debt securities. While the Fund may purchase
securities with average remaining maturities of up to fifteen years, during
normal market conditions its average weighted portfolio maturity is expected to
be between three and ten years.
Specific emphasis is placed on finding lower coupon mortgage-backed and
asset-backed bonds to create incremental returns, while government coupon bonds
may be used extensively to control portfolio duration. See "Collateralized
Mortgage Obligations" under INVESTMENT STRATEGIES.
See "Investment Policies Applicable to the Balanced Fund, Fixed Income Fund and
Intermediate Fixed Income Fund."
INVESTMENT POLICIES APPLICABLE TO THE BALANCED FUND, FIXED INCOME FUND AND
INTERMEDIATE FIXED INCOME FUND
In pursuing their respective investment objectives, the Balanced Fund, Fixed
Income Fund and Intermediate Fixed Income Fund invest in a broad range of
investment grade debt securities in any industry. These securities include fixed
and variable rate bonds, debentures, notes, and securities convertible into or
exchangeable for common stock, collateralized mortgage obligations and other
mortgage related securities and other asset-backed securities. Investment grade
debt securities are considered to be those which at the time of investment are
rated Baa or higher by Moody's Investors Service ("Moody's"), rated BBB or
higher by Standard & Poor's Corporation ("S&P") or are unrated, but believed by
the Advisor to be equivalent to securities with those ratings. Although bonds
rated Baa by Moody's or BBB by S&P are believed to have adequate capacity to pay
principal and interest, they have speculative characteristics because they lack
certain protective elements and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. In addition, the
prices of bonds rated Baa by Moody's or BBB by S&P may be more sensitive to
adverse economic changes or individual corporate developments than bonds with a
higher investment rating.
In the event a security held by the Balanced Fund, Fixed Income Fund or
Intermediate Fixed Income Fund is downgraded below a BBB or Baa after its
purchase, the Advisor shall promptly reassess the risks involved and take such
actions as it determines is in the best interests of the respective Fund and its
shareholders.
While the Fixed Income Fund may purchase securities with maturities of average
lives of up to thirty years, during normal market conditions, its average
weighted portfolio is expected to be between three and fifteen years. The
Intermediate Fixed Income Fund may purchase securities with average remaining
maturities of up to fifteen years, during normal market conditions, and its
average weighted portfolio maturity is expected to be between three and ten
years.
11
<PAGE>
In pursuing their respective investment objectives, the Balanced Fund, Fixed
Income Fund and Intermediate Fixed Income Fund may invest in the following
securities: (i) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, (ii) corporate, bank and commercial obligations,
(iii) mortgage-backed securities, and (iv) securities representing interests in
pools of assets such as motor vehicle installment purchase obligations and
credit card receivables. Investments include fixed and variable rate bonds, zero
coupon bonds, debentures, and various types of demand instruments. Obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
may include mortgage backed securities, as well as "stripped securities" (both
interest-only and principal-only). Each Fund may also invest in high quality
short-term obligations issued by state and local government issuers which carry
yields that are competitive with those of other types of high quality money
market instruments. For more information on (iii) and (iv) above, see
"Mortgage-Backed Securities" and "Asset-Backed Securities" under INVESTMENT
STRATEGIES.
The Fixed Income Fund and Intermediate Fixed Income Fund invest at least 65% of
the total value of their assets in fixed-income securities, including
mortgage-backed securities, which are investment grade or are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Up to 35%
of each of the Fund's assets may be invested in U.S. Government securities,
short-term money market instruments (including repurchase agreements) or cash.
The Funds may also enter into futures contracts and options on futures
contracts, as described under INVESTMENT STRATEGIES. Any gain derived by the
Funds from the use of such instruments will be treated as a combination of
short-term and long-term capital gain and, if not offset by realized capital
losses incurred by the Fund, will be distributed to shareholders and may be
taxable to shareholders as a combination of ordinary income and long-term
capital gain. The Funds may invest in interest rate swaps for hedging purposes,
which could subject the Funds to increased risks (See INVESTMENT STRATEGIES).
The Advisor manages the Intermediate Fixed Income Fund, Fixed Income Fund and
fixed-income portion of the Balanced Fund based primarily on returns and
minimally on anticipated interest rate changes. See "Fixed Income Philosophy."
Risk Factors of Fixed Income Investing
Securities held by the Balanced Fund, Fixed Income Fund and Intermediate Fixed
Income Fund may be subject to several types of investment risk. Market or
interest rate risk relates to the change in market value caused by fluctuations
in prevailing interest rates, while credit risk relates to the ability of the
issuer to make timely interest payments and to repay the principal upon
maturity. Call or income risk relates to corporate bonds during periods of
falling interest rates, and involves the possibility that securities with high
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund may also be exposed to event risk, which is the possibility that
corporate fixed-income securities held by a Fund may suffer a substantial
decline in credit quality and market value due to a corporate restructuring.
The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. In an effort to maximize income consistent
with its investment objective, the Funds may, at times, change the average
remaining maturity of their investment portfolio, consistent with their
respective weighted average maturity ranges. This can be done by investing a
larger portion of assets in relatively longer term obligations when periods of
declining interest rates are anticipated and, conversely, emphasizing shorter
and intermediate term maturities when a rise in interest rates is indicated.
12
<PAGE>
PRINCIPAL PRESERVATION FUND
The Principal Preservation Fund is a money market fund which seeks to earn a
rate of return equal to short-term interest rates while maintaining liquidity
and stability of principal. The Fund will seek to achieve its objective by
investing in a diversified portfolio of high quality debt instruments having a
remaining maturity of 397 days or less. It is the policy of the Fund to maintain
a net asset value of $1.00 per share for purposes of purchases and redemptions,
although there can be no assurance that it will do so. The dollar weighted
average maturity of the portfolio can be no greater than 90 days. The Fund's
shares are neither insured nor guaranteed by the U.S. Government.
The securities in which the Fund may invest include, but are not limited to: (1)
certificates of deposit of banks and federal savings banks, (2) bankers'
acceptances, (3) commercial paper, (4) U.S. Government and agency securities and
(5) repurchase agreements and variable or floating rate securities with respect
to any of the foregoing securities. The Fund may not invest more than 5% of its
total assets in the securities of a single issuer, except U.S. Government
securities. The Fund's portfolio of investment securities must be denominated in
United States dollars and must present minimal credit risks in accordance with
standards established by the Funds' Trustees. At least 95% of the Fund's assets
must be invested in either U.S. Government securities or First-Tier Securities.
First-Tier Securities are securities that are rated (or a comparable security of
the same issuer is rated) by at least two nationally recognized statistical
rating agencies within the highest rating assigned to short-term debt securities
or, if not rated or rated by only one agency, is determined to be of comparable
quality. The remaining 5% must be invested in either First-Tier or Second-Tier
Securities. A Second-Tier Security is a security that is rated (or a comparable
security by the same issuer is rated) by at least two such agencies within the
two highest ratings assigned to short-term debt securities or, if not rated or
rated by only one agency, is determined to be of comparable quality. Although
the Fund may invest in securities that are determined to be of comparable
quality to other First and Second-Tier securities, no more than 20% of the
Fund's assets may be invested in unrated securities (any Second-Tier Securities,
whether or not rated, are counted in this 20%). The purchase of unrated and
single-rated securities by the Fund must be ratified by the Board of Trustees.
Determinations of comparable quality shall be made in accordance with procedures
established by the Board of Trustees.
Because of the high quality and short maturity of the Fund's investments, the
Fund's yield may be lower than that of funds that invest in lower rated
securities and securities of longer maturities.
Money market instruments are generally described as short-term debt obligations
having maturities of one year or less. The yield on such instruments is very
sensitive to short-term lending conditions. In addition, there is an element of
risk in such money market instruments since an issuer may become insolvent and
default in meeting interest and principal payments. A repurchase agreement
results in a fixed rate of return during a specified period. Thus, during
periods of rising interest rates, the rate of return on such agreements could be
less than that which could be obtained by direct purchases of the underlying
securities. In addition, the Fund could experience some delay in obtaining
direct ownership of the underlying collateral in the event of failure of the
executing bank or securities dealer.
INVESTMENT STRATEGIES
Shareholders should understand that all investments involve risk and that there
can be no guarantee against loss resulting from an investment in the Funds, nor
can there be any assurance that the Funds' investment objectives will be
attained.
To the extent consistent with the respective Fund's stated investment objectives
and policies, it is likely that the respective Funds may include the following
in their portfolio of investments:
13
<PAGE>
Asset-Backed Securities (all Funds except Principal Preservation Fund):
Asset-backed securities represent interests in, or are secured by and payable
from, pools of government, government-related and private organizations' assets,
such as consumer loans, credit card receivable securities and installment loan
contracts. Although these securities may be supported by letters of credit or
other credit enhancements, payment of interest and principal ultimately depends
upon individuals paying the underlying loans. The risk that recovery on
repossessed collateral might be unavailable or inadequate to support payments on
asset-backed securities is greater than in the case for mortgage-backed
securities. Falling interest rates generally result in an increase in the rate
of prepayments of mortgage loans while rising interest rates generally decrease
the rate of prepayments. An acceleration of prepayments in response to sharply
falling interest rates will shorten the security's average maturity and limit
the potential appreciation in the security's value relative to a conventional
debt security.
Collateralized Mortgage Obligations ("CMOs") (all Funds except Principal
Preservation Fund): CMOs are debt obligations issued generally by finance
subsidiaries or trusts that are secured by mortgage-backed certificates,
including, in many cases, certificates issued by government-related guarantors,
such as GNMA, FNMA and FHLMC, together with certain funds and other collateral.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure the CMOs may be guaranteed by a U.S. Government
agency or instrumentality, such as the Federal Home Loan Mortgage Corporation,
the CMOs represent obligations solely of the CMO issuer and are not insured or
guaranteed by a U.S. Government agency or instrumentality. The issuers of CMOs
typically have no significant assets other than those pledged as collateral for
the obligations. The Funds will not invest in any new types of collateralized
mortgage obligations without prior disclosure to the shareholders.
Government Obligations (all Funds): Each Fund may purchase obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. These
obligations, including those issued by the U.S. Treasury, may be fixed or
floating rate obligations. Obligations of certain agencies and instrumentalities
of the U.S. Government, such as the Government National Mortgage Association,
are backed by the full faith and credit of the U.S. Treasury. Others are backed
by the right of the issuer to borrow from the U.S. Treasury (such as obligations
of the Federal Home Loan Bank), by the discretionary authority of the U.S.
Government to purchase the agency's obligations (such as obligations of the
Federal National Mortgage Association), or only by the credit of the agency or
instrumentality issuing the obligation (such as the Student Loan Marketing
Association). Securities issued or guaranteed by the U.S. Government and its
agencies and instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
Government would provide financial support to any agency or instrumentality if
it is not obligated to do so.
Money Market Securities (all Funds): The Funds may invest from time to time in
money market instruments, a term that includes, among other things, bank
obligations, commercial paper and corporate bonds with remaining maturities of
13 months or less.
Bank obligations include bankers' acceptances and negotiable certificates of
deposit issued by a U.S. bank, savings bank or savings association that is a
member of the Federal Reserve System or insured by the Federal Deposit Insurance
Corporation. Investments in bank obligations are limited to the obligations of
financial institutions having $1 billion or more in total assets at the time of
purchase.
Investments by the Funds in commercial paper will consist of issues that are
rated "A-1" or better by S&P or "Prime-1" by Moody's, and regarding up to 20% of
the Principal Preservation Fund, commercial paper rated "A-2" by S&P or
"Prime-2" by Moody's. In addition, the Funds may acquire unrated commercial
paper that is determined by the Advisor at the time of purchase to be of
comparable quality to rated instruments that may be acquired by the Funds.
Commercial paper may include variable and floating rate instruments. While there
may be no active secondary market with respect to a particular variable or
floating rate instrument purchased by the Funds, the Funds may, from time to
time as specified in the instrument, demand payment of the principal or may
resell the instrument to a third party. The absence of an active secondary
market, however, could make it difficult for the Funds to dispose of an
instrument if the issuer defaulted on its payment obligation or during periods
that the Funds are not entitled to exercise their demand rights, and the Funds
could, for these or other reasons, suffer a loss. Substantial holdings of
variable and floating rate instruments could reduce portfolio liquidity.
14
<PAGE>
Mortgage-Backed Securities (all Funds except Principal Preservation Fund).
Mortgage-backed securities represent interests in, or are secured by and payable
from, pools of mortgage loans, including collateralized mortgage obligations
(See "Collateralized Mortgage Obligations" above). These securities may be U.S.
Government mortgage-backed securities, which are issued or guaranteed by a U.S.
Government agency or instrumentality (though not necessarily backed by the full
faith and credit of the United States), such as GNMA, FNMA, and FHLMC
certificates. Other mortgage-backed securities are issued by private issuers
such as commercial banks, savings and loan institutions, mortgage bankers and
private mortgage insurance companies. These private mortgage-backed securities
may be supported by U.S. Government mortgage-backed securities or some form of
non-governmental credit enhancement. Mortgage-backed securities have either
fixed or adjustable interest rates. The rate of return on mortgage-backed
securities may be affected by prepayments of principal on the underlying loans,
which generally increase as interest rates decline; as a result, when interest
rates decline, holders of these securities normally do not benefit from
appreciation in market value to the same extent as holders of other non-callable
debt securities. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
Portfolio Turnover Rates: It is currently estimated that under normal market
conditions the annual portfolio turnover rate for the Equity Investment Fund
will not exceed 50%. The portfolio turnover rate for the equity portion of the
Balanced Fund is not expected to exceed 50%, while the turnover rate for the
fixed-income portion is not expected to exceed 60%. The portfolio turnover rates
for the Intermediate Fixed Income Fund and Fixed Income Fund are not expected to
exceed 60%. Portfolio turnover rates may vary greatly from year to year as well
as within a particular year. High portfolio turnover rates (i.e. over 100%) will
generally result in higher transaction costs to a Fund and also may result in a
higher level of taxable gain for a shareholder.
Repurchase Agreements (all Funds): Each Fund may enter into repurchase
agreements to earn income. The Funds may only enter into repurchase agreements
with financial institutions that are deemed to be creditworthy by the Advisor,
pursuant to guidelines established by the Funds' Board of Trustees. During the
term of any repurchase agreement, the Advisor will continue to monitor the
creditworthiness of the seller. Repurchase agreements are considered under the
Investment Company Act of 1940, as amended (the"Act"), to be collateralized
loans by a Fund to the seller secured by the securities transferred to the Fund.
Repurchase agreements under the Act will be fully collateralized by securities
in which the Fund may invest directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its right to realize upon the
security and, in addition, may incur a loss if the value of the security should
decline, as well as disposition costs in liquidating the security. No more than
10% of each of the Funds' net assets will be invested in illiquid securities,
including repurchase agreements that have a maturity of longer than seven days.
The Funds must treat each repurchase agreement as a security for tax
diversification purposes and not as cash, a cash equivalent or receivable.
Reverse Repurchase Agreements (all Funds): Each Fund may obtain funds for
temporary purposes by entering into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by a Fund of
portfolio assets concurrently with an agreement by that Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities. During the time a reverse repurchase agreement is
outstanding, the Fund will maintain a segregated custodial account consisting of
cash, U.S. Government securities or other high-grade liquid debt obligations
having a value at least equal to the repurchase price. Reverse repurchase
agreements are considered borrowings by the Fund, and as such are subject to the
investment limitations discussed above in the section entitled "Borrowing."
Securities of Other Investment Companies (all Funds): Each of the Funds may
invest in securities issued by other investment companies which invest in
securities in which the Fund is permitted to invest. In addition, each Fund may
invest in securities of other investment companies within the limits prescribed
by the Act, which include limits to its investments in securities issued by
other investment companies so that, as determined immediately after a purchase
of such securities is made: (i) not more than 5% of the value of the Fund's
total assets will be invested in the securities of any one investment company;
(ii) not more than 10% of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (iii) not more than 3% of the
15
<PAGE>
outstanding voting stock of any one investment company will be owned by the Fund
or Funds as a whole. As a shareholder of another investment company, each Fund
would bear along with other shareholders its pro rata portion of the investment
company's expenses, including advisory fees. In accordance with applicable state
regulatory provisions, the Advisor has agreed to waive its management fee with
respect to the portion of any Fund's assets invested in shares of other open-end
investment companies. In the case of closed-end investment companies, these
expenses would be in addition to the advisory and other expenses that the Funds
bear directly in connection with their own operations.
Short-Term Trading (Intermediate Fixed Income Fund and Fixed Income Fund):
Intermediate Fixed Income Fund and Fixed Income Fund may engage in short-term
trading. Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship between
the two securities. Such trading may be expected to increase the Fund's
portfolio turnover rate and the expenses incurred in connection with such
trading. (See "Portfolio Turnover Rates").
Stripped Mortgage Backed Securities (all Funds except Principal Preservation
Fund): These Funds may purchase participations in trusts that hold U.S. Treasury
and agency securities and may also purchase zero coupon U.S. Treasury
obligations, Treasury receipts and other stripped mortgage backed securities
that evidence ownership in either the future interest payments or the future
principal payments on U.S. Government obligations. These participations are
issued at a discount to their face value and may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors. The Advisor will consider
liquidity needs of a Fund when any investment in zero coupon obligations is
made. A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose a Fund to a lower rate of return upon
reinvestment. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Funds may fail to fully recoup their
initial investment in these securities even if the securities are rated in the
highest rating categories. Although stripped mortgage backed securities are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, these securities were only recently
developed. As a result, established trading markets have not yet been fully
developed and, accordingly, these securities may generally be illiquid. Until
further clarification of this matter is provided by the staff of the Securities
and Exchange Commission, the Funds' investment in stripped mortgage backed
securities will be treated as illiquid and will, together with any other
illiquid investments, not exceed 10% of a Fund's net assets.
While the identified Funds are authorized to purchase or enter into certain
investments, the Funds do not have the current intention to purchase or enter
into any of the following investments in the foreseeable future:
Borrowing (all Funds except Principal Preservation Fund): Each of the Funds has
a fundamental policy that it may not borrow money, except that it may (1) borrow
money from banks for temporary or emergency purposes and not for leveraging or
investment and (2) enter into reverse repurchase agreements for any purpose, so
long as the aggregate amount of borrowings and reverse repurchase agreements
does not exceed one-third of the Fund's total assets less liabilities (other
than borrowings). No Fund will purchase securities while borrowings in excess of
5% of its total assets are outstanding.
Foreign Securities (all Funds except Principal Preservation Fund): The Funds may
only invest indirectly in foreign securities through American Depository
Receipts and European Depository Receipts ("ADR's and EDR's"). For many foreign
securities, there are United States dollar denominated ADR's, which are bought
and sold in the United States and are issued by domestic banks. ADR's represent
the right to receive securities of foreign issuers deposited in the domestic
bank or a correspondent bank. In general, there is a large, liquid market in the
United States for most ADR's. The Funds may also invest in EDR's which are
receipts evidencing an arrangement with a European bank similar to that for
ADR's and are designed for use in the European securities markets. EDR's are not
necessarily denominated in the currency of the underlying security. The Funds do
not invest in unsponsored ADR's and EDR's.
16
<PAGE>
Investments made in foreign securities, whether made directly or indirectly,
involve certain inherent risks, such as those related to future political and
economic developments, the possible imposition of foreign withholding tax on the
interest or dividend income payable on such instruments, the possible
establishment of foreign controls, the possible seizure or nationalization of
foreign deposits or assets, or the adoption of other foreign government
restrictions that might adversely affect the foreign securities held by the
Funds.
Forward Commitments, When-Issued Securities and Delayed Delivery Transactions
(all Funds except Principal Preservation Fund): The Funds may purchase or sell
securities on a when-issued or delayed-delivery basis and make contracts to
purchase or sell securities for a fixed price at a future date beyond customary
settlement time. Debt securities are often issued on this basis. No income will
accrue on securities purchased on a when-issued or delayed-delivery basis until
the securities are delivered. Each Fund will establish a segregated account in
which it will maintain cash and U.S. Government securities or other high-grade
debt obligations at least equal in value to commitments for when-issued
securities. Securities purchased or sold on a when-issued, delayed-delivery or
forward commitment basis involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date. Although the Funds would
generally purchase securities on a when-issued, delayed-delivery or a forward
commitment basis with the intention of acquiring the securities, the Funds may
dispose of such securities prior to settlement if the Advisor deemed it
appropriate to do so.
Futures Contracts and Related Options (all Funds except Principal Preservation
Fund): A Fund may invest in futures contracts and options on futures contracts
for hedging purposes or to maintain liquidity. However, a Fund may not purchase
or sell a futures contract unless immediately after any such transaction the sum
of the aggregate amount of margin deposits on its existing futures positions and
the amount of premiums paid for related options is 20% or less of its total
assets.
At maturity, a futures contract obligates a Fund to take or make delivery of
certain securities or the cash value of a securities index. A Fund may sell a
futures contract in order to offset a decrease in the market value of its
portfolio securities that might otherwise result from a market decline. A Fund
may do so either to hedge the value of its portfolio of securities as a whole,
or to protect against declines, occurring prior to sales of securities, in the
value of the securities to be sold. Conversely, a Fund may purchase a futures
contract in anticipation of purchases of securities. In addition, a Fund may
utilize futures contracts in anticipation of changes in the composition of its
portfolio holdings.
A Fund may purchase and sell call and put options on futures contracts traded on
an exchange or board of trade. When a Fund purchases an option on a futures
contract, it has the right to assume a position as a purchaser or seller of a
futures contract at a specified exercise price at any time during the option
period. When a Fund sells an option on a futures contract, it becomes obligated
to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, a Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which a Fund intends to purchase.
Similarly, if the market is expected to decline, a Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts. In connection with a Fund's position in a futures contract or option
thereon, a Fund will create a segregated account of liquid assets, such as cash,
U.S. Government securities or other liquid high-grade debt obligations, or will
otherwise cover its position in accordance with applicable requirements of the
Securities and Exchange Commission.
Risk Factors of Options, Futures and Forward Contracts (all Funds except
Principal Preservation Fund): The primary risks associated with the use of
futures contracts and options are: (i) imperfect correlation between the change
in market value of the securities held by a Fund and the price of futures
contracts and options; (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures contract when
desired; (iii) losses, which are potentially unlimited, due to unanticipated
market movements; and (iv) the Advisor's ability to predict correctly the
direction of security prices, interest rates and other economic factors. For
further discussion, see "Additional Investment Information" in the Statement of
Additional Information.
17
<PAGE>
Illiquid Securities (all Funds): The Funds will not invest more than 10% of the
value of their net assets in securities that are illiquid because of
restrictions on transferability or other reasons. Repurchase agreements with
deemed maturities in excess of seven days and securities that are not registered
under the Securities Act of 1933, as amended, (the "Securities Act") but that
may be purchased by institutional buyers pursuant to Rule 144A under the
Securities Act are subject to this 10% limit (unless such securities are
variable amount master demand notes with maturities of nine months or less or
unless the Board determines that a liquid trading market exists). Rule 144A
allows for a broader institutional trading market for securities otherwise
subject to restriction on resale to the general public by establishing a "safe
harbor" from the registration requirements of the Securities Act for resales of
certain securities to qualified institutional buyers.
Interest Rate Swaps (Balanced Fund, Intermediate Fixed Income Fund and Fixed
Income Fund): To help enhance the value of its portfolio or manage its exposure
to different types of investments, each of these Funds may enter into interest
rate, currency, and mortgage swap agreements and may purchase and sell interest
rate "caps", "floors", and "collars". The potential loss from investing in swap
agreements is much greater than the amount initially invested. In a typical
interest rate swap agreement, one party agrees to make regular payments equal to
a floating interest rate on a specified amount in return for payments equal to a
fixed interest rate on the same amount for a specified period. Swaps involve the
exchange between a Fund and another party of its respective rights to receive
interest, such as an exchange of fixed rate payments for floating rate payments.
For example, if a Fund holds an interest-paying security with an interest rate
which is reset once a year, it may swap the right to receive interest at this
fixed rate for the right to receive interest at a rate that is reset daily. Such
a swap position would offset changes in the value of the underlying security
because of subsequent changes in interest rates. This would protect a Fund from
a decline in the value of the underlying security due to rising rates, but would
also limit its ability to benefit from falling interest rates. A Fund will enter
into interest rate swaps only on a net basis (i.e. the two payment streams will
be netted out, with the Fund receiving or paying as the case may be, only the
net amount of the two payments). The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate
swap, will be accrued on a daily basis and an amount of cash or liquid
high-grade debt securities having an aggregate value at least equal to the
accrued excess, will be maintained in a segregated account by the Company's
custodian bank. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Thus, if the other party to an interest
rate swap defaults, a Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive.
Options (all Funds except Principal Preservation Fund): The Funds may purchase
put and call options listed on a national securities exchange and issued by the
Options Clearing Corporation to the extent that premiums paid on all outstanding
call options do not exceed 20% of a Fund's total assets. Purchasing options is a
specialized investment technique that entails a substantial risk of a complete
loss of the amounts paid as premiums to the writer of the option.
A call option enables the purchaser, in return for the premium paid, to purchase
securities from the writer of the option at an agreed-upon price during the
option period. The advantage is that the purchaser may hedge against an increase
in the price of securities it ultimately wishes to buy or may take advantage of
a rise in a particular index. A Fund will only write call options on a covered
basis (options on securities owned by a Fund). A Fund will receive premium
income from writing call options, which may offset the cost of purchasing put
options and may also contribute to a Fund's total return. A Fund may lose
potential market appreciation if the Advisor's judgment is incorrect with
respect to interest rates, security prices or the movement of indices.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period, and the writer of the option has the obligation
to purchase the security from the purchaser of the option. The advantage is that
the purchaser can be protected should the market value of the security decline
or should a particular index decline. A Fund will only write put options on a
covered basis. A Fund will receive premium income from writing put options,
although it may be required, when the put is exercised, to purchase securities
at higher prices than the current market price.
18
<PAGE>
An option on a securities index gives the purchaser of the option, in return for
the premium paid, the right to receive cash from the seller equal to the
difference between the closing price of the index and the exercise price of the
option.
Closing transactions essentially let a Fund offset put options or call options
prior to exercise or expiration. If a Fund cannot effect a closing transaction,
it may have to hold a security it would otherwise sell or deliver a security it
might want to hold.
A Fund may use options traded on U.S. exchanges, and to the extent permitted by
law, options traded over-the-counter. It is the position of the Securities and
Exchange Commission that over-the-counter options are illiquid. Accordingly, a
Fund will invest in such options only to the extent consistent with its 10%
limit on investments in illiquid securities.
Securities Lending (all Funds except Principal Preservation Fund): To increase
return on portfolio securities, the Funds may lend their portfolio securities on
a short-term basis to banks, broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. The Funds will not lend portfolio securities in excess of
one-third of the value of their respective total assets. There may be risks of
delay in receiving additional collateral or in recovering the securities loaned
or even a loss of rights in the collateral should the borrower of the securities
fail financially. However, loans are made only to borrowers deemed by the
Advisor to be of good standing and when, in their judgment, the income to be
earned from the loan justifies the attendant risks.
MANAGEMENT OF THE FUNDS
The Board of Trustees
The Company has a Board of Trustees that establishes each Fund's policies and
supervises and reviews the management of each Fund. The day-to-day operations of
the Funds are administered by the officers of the Company and by the Advisor
pursuant to the terms of the Investment Advisory Agreement with each Fund. The
Statement of Additional information contains the name of each Trustee and
background information regarding the Trustees.
The Advisor
McMorgan & Company, which has its offices at One Bush Street, Suite 800, San
Francisco, California 94104, serves as investment advisor for each of the Funds
and is an investment advisor registered as such under the Investment Advisers
Act of 1940, as amended. The Advisor advises private accounts as well as the
Funds. McMorgan & Company managed approximately $13 billion in assets at June
30, 1995 consisting primarily of retirement plans and health and welfare funds
for jointly trusteed funds. McMorgan & Company was organized in 1969.
Pursuant to an investment advisory agreement with the Company, McMorgan &
Company provides the Funds with advice on buying and selling securities in
accordance with each Fund's respective investment policies, limitations and
restrictions. McMorgan & Company also furnishes the Funds with office space and
certain administrative services, and provides the personnel needed by the Funds
with respect to the Advisor's responsibilities under the investment advisory
agreement.
For providing investment advisory services, each Fund pays McMorgan & Company a
monthly fee at the following annual rates based on each Fund's average daily net
assets before any fee waiver as follows: Equity Investment Fund - 0.50%,
Balanced Fund - 0.45%, Intermediate Fixed Income Fund - 0.35%, Fixed Income Fund
- - 0.35% and Principal Preservation Fund - 0.25%. The Advisor has voluntarily
undertaken to reduce some or all of its management fee to keep total annual
operating expenses at or below the following percentages of each Fund's average
net assets: Equity Investment Fund (0.75%), Balanced Fund (0.60%), Intermediate
Fixed Income Fund (0.50%), Fixed Income Fund (0.50%) and Principal Preservation
Fund (0.30%). Such fee reimbursements may be terminated at any time at the
discretion of the Advisor. The Advisor has agreed to waive that portion of its
19
<PAGE>
advisory fee equal to the total expenses of a Fund for any fiscal year which
exceeds the permissible limits applicable to a Fund in any state in which its
shares are then qualified for sale. Any fee reductions or expense reimbursements
made by the Advisor in its fees are subject to reimbursement by that Fund within
the following three years provided the Fund is able to effect such reimbursement
and remain in compliance with applicable expense limitations.
The terms of the Funds' investment advisory agreement permit the Advisor, at its
own expense, to obtain statistical and other factual information and advice as
it deems necessary or desirable to fulfill its investment responsibilities under
the contract.
Expenses
Each Fund is responsible for its own operating expenses, including, but not
limited to: management fees; printing and mailing of prospectuses and reports to
shareholders; brokerage fees and commissions; fees for the registration or
qualification of Fund shares under federal or state securities laws; expenses of
the organization of the Trust or of additional Funds; transfer agent, custodian,
administrator, legal and auditing fees; the expenses of obtaining quotations of
portfolio securities and of pricing the Funds' shares; trade association dues;
all costs associated with shareholder meetings and the preparation and
dissemination of proxy materials; and other expenses relating to that Fund's
operations; costs of liability insurance and fidelity bonds; and any
extraordinary and nonrecurring expenses which are not expressly assumed by the
Advisor. General expenses which are not associated directly with any particular
Fund within the Company (e.g., insurance premiums, directors fees, expenses of
maintaining the Company's legal existence and of shareholders' meetings, and
fees and expenses of industry organizations) are allocated between the various
Funds based upon an equitable basis.
The Underwriter
Fund/Plan Broker Services, Inc. ("FPBS"), 2 W. Elm Street, Conshohocken, PA
19428-0874, was engaged pursuant to an Underwriting Agreement for the limited
purpose of acting as underwriter to facilitate the registration of shares of
each of the Funds under state securities laws and to assist in the sale of
shares.
The Administrator
The Company, on behalf of the Funds, has entered into an Administrative Services
Agreement with Fund/Plan Services, Inc. ("Fund/Plan"), 2 W. Elm Street,
Conshohocken, PA 19428-0874. The services Fund/Plan provides to the Funds
include: the coordination and monitoring of any third parties furnishing
services to the Funds; providing the necessary office space, equipment and
personnel to perform administrative and clerical functions for the Funds;
preparing, filing and distributing proxy materials, periodic reports to
shareholders, registration statements and other documents; and responding to
shareholder inquiries.
The Custodian, Transfer Agent and Fund Accounting/Pricing Agent
Citibank, N.A., 111 Wall Street, New York, New York 10005 is custodian for the
securities and cash of each Fund.
Fund/Plan serves as each Fund's transfer agent. As transfer agent, it maintains
the records of each shareholder's account, answers shareholder inquiries
concerning accounts, processes purchases and redemptions of the Funds' shares,
acts as dividend and distribution disbursing agent and performs other
shareholder service functions. Shareholder inquiries should be addressed to the
transfer agent, Fund/Plan Services, Inc., 2 W. Elm Street, Conshohocken, PA
19428-0874, (800) 831-1146.
As fund accounting agent, Fund/Plan performs certain accounting and pricing
services for the Company, including the daily calculation of the Funds' net
asset values.
20
<PAGE>
HOW TO INVEST IN THE FUNDS
The Funds' shares are offered directly to the public at their respective net
asset values next determined after receipt of the order in proper form by the
transfer agent. There is no sales load or charge in connection with the purchase
of shares. The Funds' shares are offered for sale by Fund/Plan Broker Services,
Inc., the Funds' underwriter, 2 W. Elm Street, Conshohocken, PA 19428, (800)
831-1146.
The minimum initial investment in each Fund is $5,000, including investments for
individual investors, IRAs, 403(b)(7) plans and other retirement plans.
Subsequent investments for all Funds must be at least $250. Each Fund reserves
the right to vary the initial and additional investment minimums. In addition,
the Advisor may waive the minimum initial investment requirement for any
investor. The Company reserves the right to reject any purchase order and to
suspend the offering of shares of any Fund.
Purchase orders for shares of a Fund that are received by Fund/Plan in proper
form by 4:00 p.m., New York time, on any day that the New York Stock Exchange
(NYSE) is open for trading, will be purchased at the Fund's next determined net
asset value. Orders and payment for the Principal Preservation Fund must be
received by 1:00 p.m. New York time. Orders for Fund shares received after 4:00
p.m. New York time, and for the Principal Preservation Fund after 1:00 p.m. New
York time, will be purchased at the next-determined net asset value determined
the business day following receipt of the order. Shares of the Principal
Preservation Fund may only be purchased on days when banks are open for
business.
At the discretion of the Funds, investors may be permitted to purchase a Fund's
shares by transferring securities to the Fund that meet the Fund's investment
objectives and policies. Securities transferred to a Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such acceptance.
Shares issued by a Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities shall become the property of the Fund
and must be delivered to the Fund by the investor upon receipt from the issuer.
Investors who are permitted to transfer such securities will be required to
recognize a gain or loss on such transfer and pay tax thereon, if applicable,
measured by the difference between the fair market value of the securities and
the investor's basis therein. Securities will not be accepted in exchange for
shares of a Fund unless: (1) such securities are, at the time of the exchange,
eligible to be included in the Fund's portfolio and current market quotations
are readily available for such securities; (2) the investor represents and
warrants that all securities offered to be exchanged are not subject to any
restrictions upon their sale by the Fund under the Securities Act; and (3) the
value of any such security, (except U.S. Government securities), being exchanged
together with other securities of the same issuer owned by the Fund, will not
exceed 5% of the Fund's net assets immediately after the transaction.
Each Fund, except the Principal Preservation Fund, may accept telephone orders
from brokers, financial institutions or service organizations which have been
previously approved by that Fund. It is the responsibility of such brokers,
financial institutions or service organizations to promptly forward purchase
orders and payments for same to the Company. Shares of a Fund may be purchased
through brokers, financial institutions, service organizations, banks, and bank
trust departments, each of which may charge the investor a transaction fee or
other fee for its services at the time of purchase. Such fees would not
otherwise be charged if the shares were purchased directly from the Company.
Purchases may be made in one of the following ways:
Purchases by Mail
Shares of each Fund may be purchased initially by completing the application
accompanying this Prospectus and mailing it to the transfer agent, together with
a check payable to the respective Fund, c/o Fund/Plan Services, Inc., 2 W. Elm
Street, P.O. Box 874, Conshohocken, PA 19428-0874.
21
<PAGE>
Subsequent investments in an existing account in the Funds may be made at any
time by sending a check payable to the respective Fund c/o Fund/Plan Services,
Inc., P.O. Box 412797, Kansas City, MO 64141-2797. Please enclose the stub of
your account statement and include the amount of the investment, the name of the
account for which the investment is to be made and the account number.
Purchases by Wire
Investors who wish to purchase shares of any of the Funds by federal funds wire
should first call the transfer agent at (800) 831-1146 to advise the transfer
agent that you intend to make an initial investment by wire and to receive an
account number. You must also furnish the Fund with your social security number
or other tax identification number. Following notification to the transfer
agent, request your bank to transmit immediately available funds by wire to the
transfer agent's affiliated bank as follows:
UNITED MISSOURI BANK KC NA
ABA # 10-10-00695
FOR: FUND/PLAN SERVICES, INC.
A/C 98-7037-071-9
FBO "McM Funds (Name of Fund)"
"SHAREHOLDER NAME AND ACCOUNT NUMBER"
A completed application with signature(s) of registrant(s) must be mailed to the
transfer agent immediately subsequent to the initial wire. Investors should be
aware that banks generally impose a wire service fee. The Funds will not be
responsible for the consequence of delays, including delays in the banking or
Federal Reserve wire systems.
Subsequent Investments
Once an account has been opened, subsequent purchases may be made by mail, bank
wire, exchange, direct deposit or automatic investing. The minimum for
subsequent investments is $250 for all Funds.
When making additional investments by mail, simply return the remittance portion
of a previous confirmation with your investment in the envelope provided with
each confirmation statement. Your check should be made payable to the particular
Fund in which you wish to invest and mailed to the Fund c/o Fund/Plan Services,
Inc., P.O. Box 412797, Kansas City, MO 64141-2797. Orders to purchase shares are
effective on the day Fund/Plan receives your check or money order.
If an order, together with payment in proper form, is received by Fund/Plan by
4:00 p.m. New York time, on any day that the NYSE is open for trading, Fund
shares, except the Principal Preservation Fund, will be purchased at each Fund's
next determined net asset value. The orders and payment for the Principal
Preservation Fund must be received by 1:00 p.m. New York time for same day
transactions. Orders for Fund shares received after 4:00 p.m. New York time, and
for Principal Preservation Fund after 1:00 p.m. New York time, will be purchased
at the net asset value determined on the business day following receipt of the
order.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the United States. A charge
(minimum of $20) will be imposed if any check used for the purchase of shares is
returned. The Funds and Fund/Plan each reserve the right to reject any purchase
order in whole or in part.
22
<PAGE>
EXCHANGE OF SHARES
Shares of any of the Funds within the Company may be exchanged for shares of any
of the other Funds within the Company, provided such other shares may be sold
legally in the state of the investor's residence. The Company currently consists
of the following Funds: Equity Investment Fund, Balanced Fund, Intermediate
Fixed Income Fund, Fixed Income Fund and Principal Preservation Fund.
Exchanges are subject to the minimum initial investment requirement. Requests
for telephone exchanges must be received by Fund/Plan by the close of regular
trading on the NYSE (currently 4:00 p.m. New York time) on any day that the NYSE
is open for regular trading; providing that, for the Principal Preservation
Fund, it is also not a national bank holiday. Shares may be exchanged by: (1)
written request; or (2) telephone, if a special authorization form has been
completed and is on file with the transfer agent in advance.
The exchange privilege is a convenient way to respond to changes in your
investment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. You may make
exchanges by mail or by telephone if you have previously signed a telephone
authorization on the application form. The telephone exchange privilege may be
difficult to implement during times of drastic economic or market changes. The
purchase of shares for any Fund through an exchange transaction is accepted
immediately. You should keep in mind that for tax purposes an exchange is
treated as a redemption, which may result in taxable gain or loss, and a new
purchase, each at net asset value of the appropriate Fund. The Funds and
Fund/Plan reserve the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege on 60 days' prior written notice to
shareholders.
HOW TO REDEEM SHARES
Shareholders may redeem shares of their respective Fund without charge on any
business day that the New York Stock Exchange is open for business; providing
that, for the Principal Preservation Fund, it is also not a national bank
holiday. Redemptions will be effective at the net asset value per share next
determined after the receipt by the transfer agent of a redemption request
meeting the requirements described below. Each Fund normally sends redemption
proceeds on the next business day, but in any event redemption proceeds are sent
within seven calendar days of receipt of a redemption request in proper form.
Payment may also be made by wire directly to any bank previously designated by
the shareholder on a shareholder account application. There is a $9 charge for
redemptions made by wire. Please note that the shareholder's bank may also
impose a fee for wire service. There may be fees for redemptions made through
brokers, financial institutions and service organizations.
Except as noted below, redemption requests received in proper form by the
transfer agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates its per share net asset value are
effective that day. Redemption requests after the close of the NYSE will be
effected at the net asset value per share determined on the next business day
following receipt. No redemption will be processed until the transfer agent has
received a completed application with respect to the account.
The Funds will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Board of
Trustees, result in the necessity of a Fund to sell assets under disadvantageous
conditions or to the detriment of the remaining shareholders of the Fund.
Pursuant to the Company's Declaration of Trust, payment for shares redeemed may
be made either in cash or in kind, or partly in cash and partly in-kind.
However, the Company has elected, pursuant to Rule 18f-1 under the Act to redeem
its shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund, during any 90-day period for any one shareholder. Payments in
excess of this limit will also be made wholly in cash unless the Board of
Trustees believes that economic conditions exist which would make such a
practice detrimental to the best interests of any of the Funds. Any portfolio
securities paid or distributed in-kind would be valued as described under "Net
Asset Value." In the event that an in-kind distribution is made, a shareholder
23
<PAGE>
may incur additional expenses, such as the payment of brokerage commissions, on
the sale or other disposition of the securities received from a Fund. In-kind
payments need not constitute a cross-section of the Fund's portfolio. Where a
shareholder has requested redemption of all or a part of the shareholder's
investment, and where the Fund completes such redemption in-kind, the Fund will
not recognize gain or loss for federal tax purposes, on the securities used to
complete the redemption but the shareholder will recognize gain or loss equal to
the difference between the fair market value of the securities received and the
shareholder's basis in the Fund shares redeemed.
The Funds may suspend the right of redemption or postpone the date of payment
for more than seven days during any period when (1) trading on the NYSE is
restricted or the NYSE is closed, other than customary weekend and holiday
closings; (2) the Securities and Exchange Commission has by order permitted such
suspension; (3) an emergency, as defined by rules of the Securities and Exchange
Commission, exists making disposal of portfolio investments or determination of
the value of the net assets of the Funds not reasonably practicable.
Minimum Balances
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to make involuntary redemption of shares in any account for
their then-current net asset value (which will be promptly paid to the
shareholder) if at any time the total investment does not have a value of at
least $500 due to market fluctuations or redemptions. The shareholder will be
notified that the value of his or her account is less than the required minimum
and will be allowed at least 60 days to bring the value of the account up to at
least $500 before the redemption is processed.
Shares may be redeemed in one of the following ways:
Redemption by Mail
Shares may be redeemed by submitting a written request for redemption to
Fund/Plan Services, Inc. 2 W. Elm Street, P.O. Box 874, Conshohocken, PA
19428-0874.
A written request must be in good order, which means that it must: (i) identify
the shareholder's account name; (ii) state the number of shares or dollar amount
to be redeemed; and (iii) be signed by each registered owner exactly as the
shares are registered. To prevent fraudulent redemptions, a signature guarantee
for the signature of each person in whose name the account is registered is
required on all written redemption requests over $10,000. A guarantee may be
obtained from any commercial bank, trust company, savings and loan association,
federal savings bank, broker-dealer, or a member firm of a national securities
exchange or other eligible financial institution. Credit unions must be
authorized to issue signature guarantees. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Notary public endorsement will not be accepted. The transfer agent may
require additional supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians and retirement plans.
A redemption request will not be deemed to be properly received until the
transfer agent receives all required documents in proper form. The Funds will
not mail redemption proceeds until checks (including certified checks or
cashier's checks) received for the shares purchased have cleared, which can be
as long as fifteen days. Questions with respect to the proper form for
redemption requests should be directed to the transfer agent at (800) 831-1146.
Redemption by Telephone
Shareholders who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the transfer
agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the transfer
agent with a signature guarantee at the address listed under "Redemption by
Mail."
24
<PAGE>
The Funds reserve the right to refuse a wire or telephone redemption if it is
believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by any of the Funds.
Neither the Funds nor any of their service contractors will be liable for any
loss or expense in acting upon telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Funds will use such procedures that are considered reasonable,
including requesting a shareholder to correctly state his or her Fund account
number, the name in which his or her account is registered, his or her social
security number, banking institution, bank account number and the name in which
his or her bank account is registered. To the extent that the Funds fail to use
reasonable procedures to verify the genuineness of telephone instructions, they
and/or their service contractors may be liable for any such instructions that
prove to be fraudulent or unauthorized.
Shares of the Funds may be redeemed through certain brokers, financial
institutions or service organizations who may charge the investor a transaction
fee or other fee for their services at the time of redemption. Such fees would
not otherwise be charged if the shares were redeemed from the Company.
Redemption by Automated Clearing House ("ACH")
A shareholder may elect to have redemption proceeds, cash distributions or
systematic cash withdrawal payments transferred to his or her bank, savings and
loan association or credit union that is an on-line member of the ACH system.
There are no fees associated with the use of the ACH service.
ACH redemption requests must be received by the Funds' transfer agent before
4:00 p.m. New York time to receive that day's closing net asset value. ACH
redemptions will be sent on the day following the shareholder's request. The
funds from the ACH redemption will normally be available two days after the
redemption has been processed.
ACCOUNT OPTIONS
The following special account options are available to shareholders. There are
no charges for the programs noted below, and an investor may change or stop
these plans at any time by written notice to the Funds.
Systematic Withdrawal Plan: The Systematic Withdrawal Program is another option
that may be utilized by an investor who wishes to withdraw funds from his or her
account on a regular basis. To participate in this option, an investor must
either own or purchase shares having a value of $10,000 or more. Automatic
payments by check will be mailed to the investor on either a monthly, quarterly,
semi-annual or annual basis in amounts of $100 or more. All withdrawals are
processed on the 25th of the month or, if such day is not a business day, on the
next business day and paid promptly thereafter. Please complete the appropriate
section on the New Account Application indicating the amount of the distribution
and the desired frequency.
Direct Deposit Program: This service enables a shareholder to purchase
additional shares by having certain payments from the Federal government ONLY
(i.e., federal salary, Social Security and certain veterans, military or other
payments) automatically deposited into the shareholder's account in the Fund.
The minimum investment under this program is $250.
To elect this privilege, a shareholder must complete a Direct Enrollment Form
for each type of payment desired. The form may be obtained by contacting the
Funds at (800) 831-1146. A shareholder may terminate his or her participation by
notifying, in writing, the appropriate federal agency. In addition, the Fund may
terminate participation upon 30 days' notice to the shareholder.
Automatic Investing: This service allows you to make regular investments once
your account is established. You simply authorize the automatic withdrawal of
funds from your bank account into the Fund of your choice. The minimum initial
and subsequent investment pursuant to this plan is $100 per month. Your initial
fund account must be opened first with the $5,000 minimum prior to participating
in this plan. Please complete the appropriate section on the New Account
Application indicating the amount of the automatic investment.
25
<PAGE>
Retirement Plans: The Funds are available for investment by pension and profit
sharing plans, including Individual Retirement Accounts, Defined Contribution
Plans, and 403(b)(7) Retirement Plans, through which investors may purchase Fund
shares. The Fund, however, does not sponsor Defined Contribution Plans and
403(b)(7) Retirement Plans. For details concerning any of the retirement plans,
please call the Funds at (800) 788-9485.
NET ASSET VALUE
The net asset value per share of each Fund is computed as of the close of
regular trading on the NYSE; provided that, for the Principal Preservation Fund,
it is also not a national bank holiday. The NYSE is currently closed on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas.
The net asset value per share is computed by adding the value of all securities
and other assets in the portfolio, deducting any liabilities (expenses and fees
are accrued daily) and dividing by the number of shares outstanding. The equity
securities of each Fund listed or traded on a stock exchange are valued at the
last sale price on its principal exchange. If no sale price is reported, the
mean of the last bid and asked prices is used. Securities traded
over-the-counter are priced at the mean of the last bid and asked prices. When
market quotations are not readily available, securities and other assets are
valued at fair value as determined in good faith by the Board of Trustees.
Fixed-income securities are valued through valuations obtained from a commercial
pricing service or at the most recent mean of the bid and asked prices provided
by investment dealers in accordance with procedures established by the Board of
Trustees. Options, futures and options on futures are valued at the price as
determined by the appropriate clearing corporation.
All securities held in the portfolio of the Principal Preservation Fund, and the
debt securities with maturities of 60 days or less held by the other Funds, are
valued at amortized cost. When a security is valued at amortized cost, it is
valued at its cost when purchased, and thereafter by assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
DIVIDENDS AND TAXES
Dividends
The Principal Preservation Fund's net investment income is declared daily and
paid monthly as a dividend to shareholders of record at the close of business on
the day of declaration. In order to receive the dividend for that day, the
shareholder's purchase of shares must be effective as of 1:00 p.m. (New York
time). Income dividends, when available, are declared and paid monthly for the
Intermediate Fixed Income Fund and Fixed Income Fund. Dividends from net
investment income will be declared and paid quarterly and at year end by the
Equity Investment Fund and Balanced Fund. Any net realized gains from the sale
of portfolio securities are distributed at least once each year unless they are
used to offset losses carried forward from prior years, in which case no such
gains will be distributed. Such income dividends and capital gain distributions
are reinvested automatically in additional shares at net asset value, unless a
shareholder elects to receive them in cash. Distribution options may be changed
at any time by requesting a change in writing.
Any check in payment of dividends or other distributions which cannot be
delivered by the Post Office or which remains uncashed for a period of more than
one year may be reinvested in the shareholder's account at the then current net
asset value and the dividend option may be changed from cash to reinvest.
Dividends are reinvested on the ex-dividend date (the "ex-date") at the net
asset value determined at the close of business on that date. Dividends and
distributions are treated the same for tax purposes whether received in cash or
reinvested in additional shares. Please note that dividends and distributions on
shares purchased shortly before the record date for a dividend or distribution
may have the effect of returning capital although such dividends and
distributions are subject to taxes.
26
<PAGE>
Taxes
Each Fund intends to qualify and elect to be treated as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for Federal income taxes to the
extent the Fund's earnings are distributed in accordance with the Code. Each
Fund is treated as a separate corporate entity for federal tax purposes.
An investment in the Funds has certain tax consequences, depending on the type
of account. Distributions are subject to federal income tax and may also be
subject to state and local income taxes. Distributions are generally taxable
when they are paid, whether in cash or by reinvestment in additional shares,
except that distributions declared in October, November or December and paid in
the following January are taxable as if they were paid on December 31. If you
have a qualified retirement account, taxes are generally deferred until
distributions are made from the retirement account.
For federal income tax purposes, income dividends and short-term capital gain
distributions are taxed as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gain over net short-term capital loss) are
usually taxed as long-term capital gains, regardless of how long a shareholder
has held the Fund's shares. The tax treatment of distributions of ordinary
income or capital gains will be the same whether the shareholder reinvests the
distributions or elects to receive them in cash.
Redemptions of Fund shares, and the exchange of shares between two Funds of the
Company, are taxable events and, accordingly, shareholders may realize capital
gains or losses on these transactions.
Shareholders may be subject to a 31 percent back-up withholding on reportable
dividend and redemption payments ("back-up withholding") if a certified taxpayer
identification number is not on file with the Fund, or if to the Fund's
knowledge, an incorrect number has been furnished. An individual's taxpayer
identification number is his/her social security number.
Shareholders will be advised annually of the source and tax status of all
distributions for federal income tax purposes. Information accompanying a
shareholder's statement will show the portion of those distributions that are
not taxable in certain states. Further information regarding the tax
consequences of investing in the Funds is included in the Statement of
Additional Information. The above discussion is intended for general information
only. Investors should consult their own tax advisers for more specific
information on the tax consequences of particular types of distributions.
PERFORMANCE INFORMATION
Yield and total return information may be useful in reviewing the performance of
the Funds and for providing a basis for comparison with other investment
alternatives. However, since net investment return of these Funds changes in
response to fluctuations in market conditions, interest rates and Fund expenses,
any given performance quotation should not be considered representative of the
Fund's performance for any future period. The value of an investment in a Fund
will fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost. The Funds may compare their investment
performance to the following benchmarks: Equity Investment Fund and Balanced
Fund - S&P 500 and the Mutual Fund Aggregate Index; Intermediate Fixed Income
Fund - Mutual Fund Intermediate (1-10 year) Government/Corporate Index; Fixed
Income Fund - Mutual Fund Aggregate Index; and Principal Preservation Fund -
Merrill Lynch Index and the 90 day Treasury Index. The Funds may also be
compared to other market indices such as the S&P 500 and to appropriate mutual
fund indices. The Funds may also advertise their ranking compared to other
27
<PAGE>
similar mutual funds as reported by industry analysts such as Lipper Analytical
Services, Inc. You can obtain current performance information about each Fund by
calling the Funds at (800) 788-9485.
Total Return. Total Return is defined as the change in value of an investment in
a Fund over a particular period, assuming that all distributions have been
reinvested. Thus, total return reflects not only income earned, but also
variations in share prices at the beginning and end of the period. Average
annual return reflects the average percentage change per year in the value of an
investment in a particular fund. Aggregate total return reflects the total
percentage change over the stated period.
Yield. Yield refers to the net investment income generated by an investment over
a particular period of time, which is annualized (assumed to have been generated
for one year) and expressed as an annual percentage rate. Effective yield is
yield assuming that all distributions are reinvested. Effective yield will be
slightly higher than the yield because of the compounding effect of the assumed
investment. Yield for Principal Preservation Fund over a seven-day period is
called current yield. For Intermediate Fixed Income Fund and Fixed Income Fund,
yield is calculated by dividing the net investment income per share earned
during a 30-day period by the maximum offering price per share on the last day
of the period, and annualizing the result.
GENERAL INFORMATION
Organization: Each Fund is a separate series of McM Funds, a Delaware business
trust organized pursuant to a Trust Instrument dated February 3, 1994. The Trust
is registered under the Act as a diversified, open-end management investment
company, commonly known as a mutual fund. The Trustees of the Company may
establish additional series or classes of shares without the approval of
shareholders. The assets of each series belong only to that series, and the
liabilities of each series are borne solely by that series and no other.
Trustees and Officers: The Trustees of the Company have overall responsibility
for the operations of each Fund. The Statement of Additional Information
contains general background information about each Trustee and officer of the
Company. The officers of the Company who are employees or officers of McMorgan &
Company serve without compensation from the Funds.
Description of Shares: Each Fund is authorized to issue an unlimited number of
shares of beneficial interest with a par value of $0.001. Shares of each Fund
represent equal proportionate interests in the assets of that Fund only and have
identical voting, dividend, redemption, liquidation, and other rights. All
shares issued are fully paid and non-assessable, and shareholders have no
preemptive or other right to subscribe to any additional shares. Currently,
there is only one class of shares issued by the Company. The validity of shares
of beneficial interest offered by this prospectus has been passed on by Heller,
Ehrman, White & McAuliffe, 333 Bush Street, San Francisco, California 94104.
Voting Rights: Each issued and outstanding full and fractional share is entitled
to one full and fractional vote and all shares of each Fund participate equally
in regard to dividends, distributions, and liquidations with respect to that
Fund. Shareholders do not have preemptive, conversion or cumulative voting
rights. On any matter submitted to a vote of shareholders, shares of each Fund
will vote separately except when a vote of shareholders in the aggregate is
required by law, or when the Trustees have determined that the matter affects
the interests of more than one Fund, in which case the shareholders of all such
Funds shall be entitled to vote thereon.
Pursuant to the definitions set forth in the Act, as of September 29, 1995, the
following persons are deemed "control persons" by nature of their significant
holdings in the respective Funds listed below. This does not mean, however, that
these persons manage the affairs of the Company. The Advisor maintains sole
responsibility over the affairs of the Company pursuant to its Advisory
Agreement with the Company. Industrial Carpenters Pension Fund and Industrial
Carpenters and Precast Industry Pension Fund - McM Fixed Income Fund.
28
<PAGE>
Shareholder Meetings: The Trustees of the Company do not intend to hold annual
meetings of shareholders of the Funds. The Trustees have undertaken to the
Securities and Exchange Commission, however, that they will promptly call a
meeting for the purpose of voting upon the question of removal of any Trustees
when requested to do so by not less than 10% of the outstanding shareholders of
the respective Fund. In addition, subject to certain conditions, shareholders of
each Fund may apply to the Fund to communicate with other shareholders to
request a shareholders' meeting to vote upon the removal of a Trustee or
Trustees.
Certain Provisions of Trust Instrument: Under Delaware law, the shareholders of
the Funds will not be personally liable for the obligations of any Fund; a
shareholder is entitled to the same limitation of personal liability extended to
shareholders of corporations.
Shareholder Reports and Inquiries: Shareholders will receive annual financial
statements which are examined by the Funds' independent accounts, as well as
unaudited semiannual financial statements. Shareholder inquiries should be
addressed to the Fund c/o McM Funds, One Bush Street, Suite 800, San Francisco,
CA 94104, (800) 788-9485.
29
<PAGE>
INVESTMENT ADVISOR
McMorgan & Company
One Bush Street, Suite 800
San Francisco, CA 94104
(800) 788-9485
UNDERWRITER
Fund/Plan Broker Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
SHAREHOLDER SERVICES
Fund/Plan Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
CUSTODIAN
Citibank, N.A.
111 Wall Street
New York, New York 10005
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, CA 94104-2878
AUDITORS
Tait, Weller & Baker
2 Penn Center Plaza, Suite 700
Philadelphia, PA 19102-1707
For Additional Information about McM Funds call:
(800) 788-9485
30
<PAGE>
Filed Pursuant to Rule
497(e) under the
Securities Act of 1933.
Registration No. 33-75708
McM Funds
Supplement dated June 14, 1996
to the Statement of Additional Information
dated October 27, 1995
- -------------------------------------------------------------------------------
This Supplement provides new and additional information beyond that contained in
the Statement of Additional Information and should be read in conjunction with
such Statement of Additional Information.
CUSTODIAN
Effective April 29, 1996, The Bank of New York, New York, N.Y., replaced
Citibank, N.A., New York, N.Y., to serve as custodian for the securities and
cash of each Fund.
TRUSTEES AND OFFICERS
Effective March 4, 1996, Gregory L. Watson and Mark R. Tyler were elected by the
Board of Trustees of McM Funds to fill the vacancies created by the resignations
of Melvin W. Petersen and Thomas A. Morton as trustees of McM Funds.
<TABLE>
<CAPTION>
Name, Position(s) Held Principal Occupation(s)
Address and Age with the Registrant During Past Five Years
- --------------- ------------------- -----------------------
<S> <C> <C> <C>
Gregory L. Watson 50 Trustee Senior Vice President,
McMorgan & Company McMorgan & Company
One Bush Street
Suite 800
San Francisco, CA
Mark R. Taylor 37 Trustee Vice President,
McMorgan & Company McMorgan & Company
One Bush Street
Suite 800
San Francisco, CA
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 27, 1995
- -------------------------------------------------------------------------------
McM FUNDS
- -------------------------------------------------------------------------------
MONEY MARKET FUND BALANCED FUND
Principal Preservation Fund Balanced Fund
FIXED INCOME FUNDS STOCK FUND
Intermediate Fixed Income Fund Equity Investment Fund
Fixed Income Fund
- -------------------------------------------------------------------------------
This Statement of Additional Information dated October 27, 1995 is not a
prospectus but should be read in conjunction with the Prospectus for the McM
Funds dated October 27, 1995, as may be amended or supplemented from time to
time. No investment in shares should be made without first reading the
Prospectus. A copy of the Prospectus may be obtained without charge from the
Company at the addresses and telephone numbers below.
Underwriter: Advisor:
Fund/Plan Broker Services, Inc. McMorgan & Company
2 W. Elm Street One Bush Street, Suite 800
Conshohocken, PA 19428 San Francisco, CA 94104
(800) 831-1146 (800) 788-9485
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information
or in the Prospectus in connection with the offering made by the
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or its
distributor. The Prospectus does not constitute an offering by the
Company or by the distributor in any jurisdiction in which such offering
may not lawfully be made.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
McM Funds................................................................................3
Investment Policies
Futures.............................................................................3
Loans of Portfolio Securities.......................................................4
Options.............................................................................5
Repurchase Agreements...............................................................5
Reverse Repurchase Agreements.......................................................6
Securities of Other Investment Companies............................................6
Purchasing Call Options.............................................................6
Covered Call Writing................................................................6
Purchasing Put Options..............................................................7
Writing Put Options.................................................................8
Forward Commitments, When-Issued Securities and Delayed Delivery Transactions.......8
Variable and Floating Rate Instruments..............................................8
Mortgage-backed Securities..........................................................8
Collateralized Mortgage Obligations, Real Estate Mortgage Investment Conduits
and Multi-Class Pass-Throughs.....................................................9
Resets.............................................................................10
Caps and Floors....................................................................10
Stripped Mortgage-Backed Securities................................................10
Risks of Mortgage-Backed Securities................................................11
Other Mortgage-Backed Securities...................................................11
Asset-Backed Securities............................................................12
Interest Rate Swaps................................................................12
Restricted Securities..............................................................12
Rule 144A Securities...............................................................12
Convertible Securities.............................................................13
Loans Participations...............................................................13
Money Market Instruments...........................................................13
Other Investments..................................................................13
Investment Restrictions.................................................................13
Trustees and Officers...................................................................15
Control Persons and Principal Holders of Securities.....................................16
Investment Advisory and Other Services
Investment Advisory Agreement......................................................18
Administrator......................................................................19
Underwriter........................................................................20
Portfolio Transactions and Brokerage Commissions........................................20
Portfolio Turnover......................................................................21
Taxes...................................................................................21
Performance Information
General............................................................................23
Total Return Calculations..........................................................23
Yield of Principal Preservation Fund...............................................24
Yields of Intermediate Fixed Income Fund and Fixed Income Fund.....................24
Other Information.......................................................................25
APPENDIX
Financial Statements -- Appendix A......................................................27
</TABLE>
2
<PAGE>
McM FUNDS
McM Funds, One Bush Street, Suite 800, San Francisco, CA 94104, is a no-load,
open-end management investment company, which currently offers five diversified
series of common stock representing separate portfolios of investments: Equity
Investment Fund, Balanced Fund, Intermediate Fixed Income Fund, Fixed Income
Fund, and Principal Preservation Fund (collectively referred to as "Funds" or
individually as a "Fund").
INVESTMENT POLICIES
The following supplements the information contained in the Prospectus concerning
the investment policies of the Funds. The Prospectus specifies which Funds may
invest in the portfolio investments included in this section.
The investment practices described below, except for the discussion of portfolio
loan transactions, are not fundamental and may be changed by the Board of
Trustees without the approval of the shareholders.
Futures
The Funds (all Funds except Principal Preservation Fund) may enter into
contracts for the purchase or sale for future delivery of securities, including
index contracts. While futures contracts provide for the delivery of securities,
deliveries usually do not occur. Contracts are generally terminated by entering
into offsetting transactions.
The Funds may enter into such futures contracts to protect against the adverse
effects of fluctuations in security prices or interest rates without actually
buying or selling the securities underlying the contract. For example, if
interest rates are expected to increase, a Fund might enter into futures
contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the Fund.
If interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the futures contracts to the Fund
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have. Similarly,
when it is expected that interest rates may decline, futures contracts may be
purchased to hedge in anticipation of subsequent purchases of securities at
higher prices. Since the fluctuations in the value of futures contracts should
be similar to those of debt securities, the Fund could take advantage of the
anticipated rise in value of debt securities without actually buying them until
the market had stabilized. At that time, the futures contracts could be
liquidated and the Fund could then buy debt securities on the cash market.
A stock index futures contract obligates the seller to deliver, and the
purchaser to receive an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement was made.
Open futures contracts are valued on a daily basis and a Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in the
future.
With respect to options on futures contracts, when a Fund is temporarily not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. 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 price of the futures contract upon which it is based, or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Fund is not fully invested, it may
purchase a call option on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial hedge
against the declining price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
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 value of the Fund's portfolio holdings.
3
<PAGE>
The writing of a put option on a futures contract constitutes a partial hedge
against the increasing price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
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 securities which the Fund intends to purchase.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to purchase or sell stock at a specified
price, options on a stock index future give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the futures contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing price of the futures contract on the expiration date.
If a put or call option which a Fund has written is exercised, the Fund may
incur a loss which will be reduced by the amount of the premium it received.
Depending upon the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The purchase of a
put option on a futures contract is similar in some respects to the purchase of
protective puts on portfolio securities, and for federal tax purposes will be
considered a "short sale". For example, a Fund will purchase a put option on a
futures contract to hedge the Fund's portfolio against the risk of rising
interest rates.
To the extent that market prices move in an unexpected direction, a Fund may not
achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize a loss. For example, if the Fund is hedged against the
possibility of an increase in interest rates that would adversely affect the
price of securities held in its portfolio and interest rates decrease instead,
the Fund would lose part or all of the benefit of the increased value that it
has because it would have offsetting losses in its futures position. In
addition, in such situations, if the Fund had insufficient cash, it may be
required to sell securities from its portfolio to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market. A Fund may be required to sell
securities at a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, a Fund may seek to close
out an option position by writing or buying an offsetting position covering the
same securities or contracts and have the same exercise price and expiration
date. The ability to establish and close out positions on options will be
subject to the maintenance of a liquid secondary market, which cannot be
assured.
Loans of Portfolio Securities
The Funds (all Funds except Principal Preservation Fund) may lend portfolio
securities to broker-dealers and financial institutions provided: (1) the loan
is secured continuously by collateral marked-to-market daily and maintained in
an amount at least equal to the current market value of the securities loaned;
(2) a Fund may call the loan at any time and receive the securities loaned; (3)
a Fund will receive any interest or dividends paid on the loaned securities; and
(4) the aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of each Fund.
Collateral will consist of U.S. Government securities, cash equivalents or
irrevocable letters of credit. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to maintain the proper
amount of collateral. Therefore, a Fund will only enter into portfolio loans
after a review of all pertinent facts by the McMorgan & Company (the "Advisor"),
under the supervision of the Board of Trustees, including the creditworthiness
of the borrower. Such reviews will be monitored on an ongoing basis.
4
<PAGE>
Options
The Funds (all Funds except Principal Preservation Fund) may buy put and call
options and write covered call and secured put options. Such options may relate
to particular securities, stock indices, or financial instruments and may or may
not be listed on a national securities exchange and issued by the Options
Clearing Corporation. Options trading is a highly specialized activity that
entails greater than ordinary investment risk. Options on particular securities
may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than a direct investment in the underlying securities.
The Funds will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if a Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, liquid assets, such as cash, U.S. Government
securities or other liquid high-grade debt obligations, in such amount as are
held in a segregated account by its custodian) upon conversion or exchange of
other securities held by it. For a call option on an index, the option is
covered if a Fund maintains with its custodian a diversified stock portfolio, or
liquid assets equal to the contract value. A call option is also covered if a
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written; or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets such as cash,
U.S. Government securities and other high-grade debt obligations in a segregated
account with its custodian. The Funds will write put options only if they are
"secured" by liquid assets maintained in a segregated account by the Funds'
custodian in an amount not less than the exercise price of the option at all
times during the option period.
A Fund's obligation to sell a security subject to a covered call option written
by it, or to purchase a security subject to a secured put option written by it,
may be terminated prior to the expiration date of the option by the Fund's
execution of a closing purchase transaction, which is effected by purchasing on
an exchange an option of the same series as the previously written option. Such
a purchase does not result in the ownership of an option. A closing purchase
transaction will ordinarily be effected to realize a profit on an outstanding
option, to prevent an underlying security from being called, to permit the sale
of the underlying security or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. There is no assurance that a liquid secondary market will exist for
any particular option. An option writer, unable to effect a closing purchase
transaction, will not be able to sell the underlying security (in the case of a
covered call option) or liquidate the segregated account (in the case of a
secured put option) until the option expires or the optioned security is
delivered upon exercise with the result that the writer in such circumstances
will be subject to the risk of market decline or appreciation in the security
during such period.
Repurchase Agreements
The repurchase price under the repurchase agreements described in the Prospectus
generally equals the price paid by a Fund plus interest negotiated on the basis
of current short-term rates (which may be more or less than the rate on the
securities underlying the repurchase agreement). Repurchase agreements may be
considered to be loans by a Fund under the Investment Company Act of 1940, as
amended (the "Act").
The financial institutions with which a Fund may enter into repurchase
agreements are banks and non-bank dealers of U.S. Government securities that are
listed on the Federal Reserve Bank of New York's list of reporting dealers and
banks, if such banks and non-bank dealers are deemed creditworthy by the
Advisor. The Advisor will continue to monitor the creditworthiness of the seller
under a repurchase agreement, and will require the seller to maintain during the
term of the agreement the value of the securities subject to the agreement at
not less than the repurchase price.
Each Fund will only enter into a repurchase agreement where the market value of
the underlying security, including interest accrued, will at all times be equal
to or exceed the value of the repurchase agreement. The securities held subject
to a repurchase agreement by Principal Preservation Fund may have stated
maturities exceeding 13 months, provided the repurchase agreement itself matures
in less than 13 months.
5
<PAGE>
Reverse Repurchase Agreements
Reverse repurchase agreements involve the sale of securities held by a Fund
pursuant to a Fund's agreement to repurchase the securities at an agreed-upon
price, date and rate of interest. Such agreements are considered to be
borrowings under the Act, and may be entered into only for temporary or
emergency purposes. While reverse repurchase transactions are outstanding, a
Fund will maintain in a segregated account cash, U.S. Government securities or
other liquid, high-grade debt securities in an amount at least equal to the
market value of the securities, plus accrued interest, subject to the agreement.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase.
Securities of Other Investment Companies
Each Fund currently intends to limit its investments in securities issued by
other investment companies so that, as determined immediately after a purchase
of such securities is made: (i) not more than 5% of the value of the Fund's
total assets will be invested in the securities of any one investment company;
(ii) not more than 10% of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the Fund
or Funds as a whole.
Purchasing Call Options
The Funds (all Funds except Principal Preservation Fund) may purchase call
options to the extent that premiums paid by a Fund do not aggregate more than
20% of that Fund's total assets. When a Fund purchases a call option, in return
for a premium paid by the Fund to the writer of the option, the Fund obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that a Fund may
alter portfolio characteristics and modify portfolio maturities without
incurring the cost associated with transactions.
A Fund may, following the purchase of a call option, liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an option
of the same series as the option previously purchased. The Fund will realize a
profit from a closing sale transaction if the price received on the transaction
is more than the premium paid to purchase the original call option; the Fund
will realize a loss from a closing sale transaction if the price received on the
transaction is less than the premium paid to purchase the original call option.
Although the Funds will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an Exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an Exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by a Fund may expire without any value to the Fund, in which event the
Fund would realize a capital loss that would be characterized as short-term
unless the option was held for more than one year.
Covered Call Writing
The Funds (all Funds except Principal Preservation Fund) may write covered call
options from time to time on such portions of their portfolios, without limit,
as the Advisor determines is appropriate in seeking to obtain a Fund's
investment objective. The advantage to a Fund of writing covered calls is that
the Fund receives a premium that is additional income. However, if the security
rises in value, the Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
6
<PAGE>
or upon entering a closing purchase transaction. A closing purchase transaction,
in which a Fund, as writer of an option, terminates its obligation by purchasing
an option of the same series as the option previously written, cannot be
effected with respect to an option once the option writer has received an
exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable a Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. A Fund may realize a net gain or loss from a
closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term capital
gain in the amount of the premium on the option less the commission paid. Such a
gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised, a
Fund will realize a gain or loss from the sale of the underlying security equal
to the difference between the cost of the underlying security and the proceeds
of the sale of the security plus the amount of the premium on the option less
the commission paid.
The Funds will write call options only on a covered basis, which means that a
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Fund would be required to continue to hold a security which it might otherwise
wish to sell or deliver a security it would want to hold. The exercise price of
a call option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
Purchasing Put Options
The Funds (all Funds except Principal Preservation Fund) may invest up to 20% of
their total assets in the purchase of put options. A Fund will, at all times
during which it holds a put option, own the security covered by such option. The
purchase of the put on substantially identical securities held will constitute a
short sale for tax purposes, the effect of which is to create short-term capital
gain on the sale of the security and to suspend running of its holding period
(and treat it as commencing on the date of the closing of the short sale) or
that of a security acquired to cover the same if at the time the put was
acquired, the security had not been held for more than one year.
A put option purchased by a Fund gives it the right to sell one of its
securities for an agreed-upon price up to an agreed date. The Funds intend to
purchase put options in order to protect against a decline in the market value
of the underlying security below the exercise price less the premium paid for
the option ("protective puts"). The ability to purchase put options will allow
the Funds to protect unrealized gains in an appreciated security in their
portfolios without actually selling the security. If the security does not drop
in value, a Fund will lose the value of the premium paid. A Fund may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option. Such sale will result in a net gain or loss depending
upon whether the amount received on the sale is more or less than the premium
and other transaction costs paid on the put option which is sold.
The Funds may sell a put option purchased on individual portfolio securities.
Additionally, the Funds may enter into closing sale transactions. A closing sale
transaction is one in which a Fund, when it is the holder of an outstanding
option, liquidates its position by selling an option of the same series as the
option previously purchased.
7
<PAGE>
Writing Put Options
The Funds (all Funds except Principal Preservation Fund) may also write put
options on a secured basis which means that a Fund will maintain in a segregated
account with its custodian, cash or U.S. Government securities in an amount not
less than the exercise price of the option at all times during the option
period. The amount of cash or U.S. Government securities held in the segregated
account will be adjusted on a daily basis to reflect changes in the market value
of the securities covered by the put option written by the Fund. Secured put
options will generally be written in circumstances where the Advisor wishes to
purchase the underlying security for a Fund's portfolio at a price lower than
the current market price of the security. In such event, that Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. With regard to the
writing of put options, each Fund will limit the aggregate value of the
obligations underlying such put options to 50% of its total net assets.
Following the writing of a put option, a Fund may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
Forward Commitments, When-Issued Securities and Delayed Delivery Transactions
The Funds (all Funds except Principal Preservation Fund) may dispose of or
negotiate a when-issued or forward commitment. The Funds will normally realize a
capital gain or loss in connection with these transactions. For purposes of
determining a Fund's average dollar-weighted maturity, the maturity of
when-issued or forward commitment securities will be calculated from the
commitment date.
When a Fund purchases securities on a when-issued, delayed delivery or forward
commitment basis, the Fund's custodian will maintain in a segregated account
cash, U.S. Government securities or other high-grade liquid debt obligations
having a value (determined daily) at least equal to the amount of the Fund's
purchase commitments. In the case of a forward commitment to sell portfolio
securities, the custodian will hold the portfolio securities in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued purchases, forward commitments and delayed
delivery transactions.
Variable and Floating Rate Instruments
With respect to the variable and floating rate instruments that may be acquired
by Intermediate Fixed Income Fund and Fixed Income Fund, the Advisor will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such instruments and, if the instruments are subject to demand
features, will monitor their financial status to meet payment on demand. Where
necessary to ensure that a variable or floating rate instrument meets the Funds'
quality requirements, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Funds (all Funds except Principal Preservation Fund) may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations as further described below. The Funds may also invest in
debt securities which are secured with collateral consisting of mortgage-backed
securities (see "Collateralized Mortgage Obligations").
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. Also,
securities issued by GNMA and other mortgage-backed securities may be purchased
at a premium over the maturity value of the underlying mortgages. This premium
is not guaranteed and would be lost if prepayment occurs. Mortgage-backed
securities issued by U.S. Government agencies or instrumentalities other than
GNMA are not "full faith and credit" obligations. Certain obligations, such as
8
<PAGE>
those issued by the Federal Home Loan Bank, are supported by the issuer's right
to borrow from the U.S. Treasury; while others, such as those issued by the
Federal National Mortgage Association, are supported only by the credit of the
issuer. Unscheduled or early payments on the underlying mortgages may shorten
the securities' effective maturities and reduce returns. The Funds may agree to
purchase or sell these securities with payment and delivery taking place at a
future date.
For federal income tax purposes other than diversification under Subchapter M,
mortgage-backed securities are not considered to be separate securities but
rather "grantor trusts" conveying to the holder an individual interest in each
of the mortgages constituting the pool.
The mortgage securities which are issued or guaranteed by GNMA, FHLMC, or FNMA
("Certificates") are called pass-through Certificates because a pro-rata share
of both regular interest and principal payments (less GNMA's, FHLMC's, or FNMA's
fees and any applicable loan servicing fees), as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the portfolio). The yields provided by these
mortgage securities have historically exceeded the yields on other types of U.S.
Government securities with comparable maturities in large measure due to the
risks associated with prepayment features. (See "Risks of Mortgage Securities").
The Funds may also invest in pass-through certificates issued by
non-governmental issuers. Pools of conventional residential mortgage loans
created by such issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payment. Timely payment of interest and principal of
these pools is, however, generally supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government entities, private insurance
and the mortgage poolers. Such insurance and guarantees and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets the Fund's quality standards. The Fund may buy
mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers, the investment
manager determines that the securities meet the Fund's quality standards.
The Funds expect that governmental, government-related or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments the principal or
interest payments of which may vary or the terms to maturity of the mortgage
instruments may differ from customary long-term fixed-rate mortgages. As new
types of mortgage-related securities are developed and offered to investors, the
investment manager will, consistent with the relevant Fund's objective, policies
and quality standards, consider making investments in such new types of
securities.
The Funds will not invest in any new types of mortgage-related securities until
the Funds' registration statement has been revised to reflect such new
investment.
Collateralized Mortgage Obligations ("CMOs"), Real Estate Mortgage Investment
Conduits ("REMICs") and Multi-Class Pass-Throughs. The Funds (all Funds except
Principal Preservation Fund) may also invest in certain debt obligations which
are collateralized by mortgage loans or mortgage pass-through securities. Such
securities may be issued or guaranteed by U.S. Government agencies or issued by
certain financial institutions and other mortgage lenders. CMOs and REMICs are
debt instruments issued by special purpose entities which are secured by pools
or mortgage loans or other mortgage-backed securities. Multi-class pass-through
securities are equity interests in a trust composed of mortgage loans or other
mortgage-backed securities. Payments of principal and interest on underlying
collateral provides the funds to pay debt service on the CMO or REMIC or make
scheduled distributions on the multi-class pass-through securities. CMOs, REMICs
and multi-class pass-through securities (collectively CMOs unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the U.S.
Government or by private organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified coupon
rate or adjustable rate tranche (to be discussed in the next paragraph) and
9
<PAGE>
has a stated maturity or final distribution date. Principal prepayments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates. Interest is paid or
accrues on all classes of a CMO on a monthly, quarterly or semi-annual basis.
The principal and interest on the underlying mortgages may be allocated among
several classes of a series of a CMO in many ways. In a common structure,
payments of principal, including any principal prepayments, on the underlying
mortgages are applied to the classes of a series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of a CMO until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index such as the London Interbank Offered Rate
("LIBOR"). These adjustable rate tranches, known as "floating rate CMOs", will
be considered as ARMS by the Funds. Floating rate CMOs may be backed by
fixed-rate or adjustable rate mortgages; to date, fixed-rate mortgages have been
more commonly utilized for this purpose. Floating rate CMOs are typically issued
with lifetime "caps" on the coupon rate thereon. These "caps", similar to the
"caps" on adjustable rate mortgages, represent a ceiling beyond which the coupon
rate on a floating rate CMO may not be increased regardless of increases in the
interest rate index to which the floating rate CMO is geared.
REMICs are private entities formed for the purpose of holding a fixed pool of
mortgages secured by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities. As with CMOs, the mortgages
which collateralize the REMICs in which the Funds may invest include mortgages
backed by GNMA certificates or other mortgage pass-throughs issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately issued CMOs as described above have been historically higher
than the yields on CMOs issued or guaranteed by U.S. Government agencies.
However, the risk of loss due to default on such instruments is higher since
they are not guaranteed by the U.S. Government. The Funds will not invest in
subordinated privately issued CMOs.
Resets. The interest rates paid on the ARMS and CMOs in which the Funds may
invest generally are readjusted at intervals of one year or less to an increment
over some predetermined interest rate index. There are three main categories of
indices: those based on U.S. Treasury securities; those derived from a
calculated measure such as a cost of funds index; or moving average of mortgage
rates. Commonly utilized indices include the one-year, three-year and five-year
constant maturity Treasury rates, the three-month Treasury bill rate, the
six-month Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate, the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
Caps and Floors. The underlying mortgages which collateralize the ARMS and CMOs
in which the Funds invest will frequently have caps and floors that limit the
maximum amount by which the loan rate to the residential borrower may change up
or down (1) per reset or adjustment interval and (2) over the life of the loan.
Some residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization.
Stripped Mortgage-Backed Securities. The Funds (all Funds except Principal
Preservation Fund) may also invest in stripped mortgage-backed securities, which
are derivative multi-class mortgage securities. The stripped mortgage-backed
securities in which the Funds may invest will only be issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. Stripped mortgage-backed
securities have greater market volatility than other types of mortgage
securities in which the Funds invest.
10
<PAGE>
Stripped mortgage-backed securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage-backed security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the yield to maturity
of any such IOs held by the Fund. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund may fail to recoup
fully its initial investment in these securities even if the securities are
rated in the highest rating categories, AAA or Aaa, by S&P or Moody's,
respectively.
Although stripped mortgage-backed securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities may generally be illiquid. The staff of the Securities and
Exchange Commission has indicated that it views such securities as illiquid.
Until further clarification of this matter is provided by the staff, the Funds'
investment in stripped mortgage securities will be treated as illiquid and will,
together with any other illiquid investments, not exceed 10% of a Fund's net
assets.
Risks of Mortgage-Backed Securities. The mortgage-backed securities in which a
Fund invests differ from conventional bonds in that principal is paid back over
the life of the mortgage security rather than at maturity. As a result, the
holder of the mortgage-backed securities (i.e., the Fund) receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of principal
it receives, it may receive a rate of interest that is lower than the rate on
the existing mortgage securities. For this reason, mortgage-backed securities
may be less effective than other types of U.S. Government securities as a means
of "locking in" long-term interest rates.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose a Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by a
Fund, the prepayment right of mortgagors may decrease or limit the increase in
net asset value of the Fund because the value of the mortgage-backed securities
held by the Fund may decline more than or may not appreciate as much as the
price of noncallable debt securities. To the extent market interest rates
increase beyond the applicable cap or maximum rate on a mortgage security, the
market value of the mortgage-backed security would likely decline to the same
extent as a conventional fixed rate security.
In addition, to the extent mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may result
in some loss of the holder's principal investment to the extent of the premium
paid. On the other hand, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to shareholders, will be taxable
as ordinary income.
With respect to pass-through mortgage pools issued by non-governmental issuers,
there can be no assurance that the private insurers associated with such
securities can meet their obligations under the policies. Although the market
for such non-governmental issued or guaranteed mortgage securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The purchase of such securities is subject to each Fund's
limit with respect to investment in illiquid securities.
Other Mortgage-Backed Securities
The Advisor expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. The mortgages underlying these securities may include
11
<PAGE>
alternative mortgage instruments, that is, mortgage instruments the principal or
interest payments of which may vary or the terms to maturity of which may differ
from customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Advisor will, consistent
with a Fund's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities. The Funds
will not invest in any new types of mortgage-related securities without prior
disclosure to the shareholders of the respective Fund.
Asset-Backed Securities
Asset-backed securities are securities backed by installment contracts, credit
card and other receivables, or other assets of a financial character.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments. An asset-backed security's
stated maturity may be shortened, and the security's total return may be
difficult to predict precisely.
Interest Rate Swaps
The Intermediate Fixed Income Fund and Fixed Income Fund may enter into interest
rate swaps for hedging purposes and not for speculation. A Fund will typically
use interest rate swaps to preserve a return on a particular investment or
portion of its portfolio or to shorten the effective duration of its portfolio
investments. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest, such as an
exchange of fixed-rate payments for floating rate payments. The Funds will only
enter into interest rate swaps on a net basis, i.e. the two payment streams are
netted out, with a Fund receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these transactions are entered into for
good faith hedging purposes, the Fund and the Advisor believes that such
obligations do not constitute senior securities as defined in the Act and,
accordingly, will not treat them as being subject to the Funds' borrowing
restrictions. The net amount of the excess, if any, of the Funds' obligations
over their entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of liquid assets, such as cash, U.S. Government
securities or other liquid high grade debt securities, having an aggregate net
asset value at least equal to such accrued excess will be maintained in a
segregated account by the Fund's custodian.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed-upon level; the purchaser of an interest rate
floor has the right to receive payments to the extent a specified interest rate
falls below an agreed level. A collar entitles the purchaser to receive payments
to the extent a specified interest rate falls outside an agreed-upon range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on a Fund's performance.
Swap agreements involve risks depending upon the other party's creditworthiness
and ability to perform, as judged by the Advisor, as well as the Fund's ability
to terminate its swap agreements or reduce its exposure through offsetting
transactions.
Restricted Securities
Each Fund will limit investments in securities of issuers which the Fund is
restricted from selling to the public without registration under the Securities
Act of 1933, as amended (the "Securities Act"), to no more than 10% of the
Fund's total assets, excluding restricted securities eligible for resale
pursuant to Rule 144A that have been determined to be liquid by the Company's
Board of Trustees.
Rule 144A Securities
The Funds may purchase securities which are not registered under the Securities
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the Securities Act. In some cases, such securities are
classified as "illiquid securities", however, any such security will not be
considered illiquid so long as it is determined by the Advisor, under guidelines
12
<PAGE>
approved by the Company's Board of Trustees, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in the Funds during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop.
Convertible Securities
Common stock occupies the most junior position in a company's capital structure.
Convertible securities entitle the holder to exchange those securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to convert. The provisions of any convertible
security determine its ranking in a company's capital structure. In the case of
subordinated convertible debentures, the holder's claims on assets and earnings
are subordinated to the claims of other creditors, and are senior to the claims
of preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claims on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
Loan Participations ("LPs")
Loan participations are sold by the lending bank to an investor. The Loan
Participant borrower may be a company with highly rated commercial paper that
finds it can obtain cheaper funding through an LP than with commercial paper and
can also increase the company's name recognition in the capital markets. LP's
often generate greater yield than commercial paper.
Money Market Instruments
Money market instruments in which the Funds may invest include, but are not
limited to, the following: short-term corporate obligations, Letters of Credit
Backed Commercial Paper, Time Deposits, Loan Participations, Variable and
Floating Rate Notes and Master Demand Notes.
Time Deposits usually trade at a spread over Treasuries of the same maturity.
Investors regard such deposits as carrying some credit risk, which Treasuries do
not; also, investors regard time deposits as being sufficiently less liquid than
Treasuries; hence, investors demand some extra yield for buying time deposits
rather than Treasuries. The investor in a loan participation has a dual credit
risk to both the borrower and also the selling bank. The second risk arises
because it is the selling bank that collects interest and principal and sends it
to the investor.
Because Variable and Floating Rate Notes are direct lending arrangements between
the lender and the borrower, it is not contemplated that such instruments will
generally be traded, and there is generally no established secondary market for
these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand.
The same credit research must be done for Master Demand Notes as in accepted
names for potential commercial paper issuers to eliminate the chances of a
borrower getting into serious financial difficulties.
Other Investments
Subject to prior disclosure to shareholders, the Board of Trustees may, in the
future, authorize a Fund to invest in securities other than those listed here
and in the prospectus, provided that such investment would be consistent with
that Fund's investment objective and that it would not violate any fundamental
investment policies or restrictions applicable to that Fund.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies and may not
be changed as to a Fund without the approval of a majority of the outstanding
voting shares (as defined in the Act) of the Fund. Unless otherwise indicated,
all percentage limitations listed below apply to the Funds and apply only at the
time of the transaction. Accordingly, if a percentage restriction is adhered to
13
<PAGE>
at the time of investment, a later increase or decrease in the percentage that
results from a relative change in values or from a change in a Fund's total
assets will not be considered a violation.
Except as set forth under "Investment Objectives" and "Investment Strategies" in
the Prospectus, each Fund may not:
(1) As to 75% of its total assets, purchase the securities of any one
issuer (other than securities issued by the U.S. Government or its
agencies or instrumentalities) if immediately after such purchase more
than 5% of the value of the Fund's total assets would be invested in
securities of such issuer;
(2) Purchase or sell real estate (but this restriction shall not prevent
the Funds from investing directly or indirectly in portfolio
instruments secured by real estate or interests therein or acquiring
securities of real estate investment trusts or other issuers that deal
in real estate), interests in oil, gas and/or mineral exploration or
development programs or leases;
(3) Purchase or sell commodities or commodity contracts, except that a
Fund may enter into futures contracts and options thereon in
accordance with such Fund's investment objectives and policies;
(4) Make investments in securities for the purpose of exercising control;
(5) Purchase the securities of any one issuer if, immediately after such
purchase, a Fund would own more than 10% of the outstanding voting
securities of such issuer;
(6) Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of
transactions. For this purpose, the deposit or payment by a Fund for
initial or maintenance margin in connection with futures contracts is
not considered to be the purchase or sale of a security on margin;
(7) Make loans, except that this restriction shall not prohibit (a) the
purchase and holding of debt instruments in accordance with a Fund's
investment objectives and policies, (b) the lending of portfolio
securities, or (c) entry into repurchase agreements with banks or
broker-dealers;
(8) Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the total assets of the Fund at the
time of its borrowing. All borrowings will be done from a bank and
asset coverage of at least 300% is required. A Fund will not purchase
securities when borrowings exceed 5% of that Fund's total assets;
(9) Purchase the securities of issuers conducting their principal business
activities in the same industry (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities)
if immediately after such purchase the value of a Fund's investments
in such industry would exceed 25% of the value of the total assets of
the Fund;
(10) Act as an underwriter of securities, except that, in connection with
the disposition of a security, a Fund may be deemed to be an
"underwriter" as that term is defined in the Securities Act;
(11) Invest in puts, calls, straddles or combinations thereof except to
the extent disclosed in the Prospectus; and
(12) Invest more than 5% of its total assets in securities of companies
less than three years old. Such three- year period shall include the
operation of any predecessor company or companies.
14
<PAGE>
Although not considered fundamental, in order to comply with certain state "blue
sky" restrictions, the Funds will not invest: (1) more than 5% of their
respective net assets in warrants, including within that amount no more than 2%
in warrants which are not listed on the New York or American Stock Exchanges,
except warrants acquired as a result of their holdings of common stocks; and (2)
purchase or retain the securities of any issuer if, to the knowledge of the
Fund, any officer or director of the Fund or of its investment manager owns
beneficially more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers and directors of the Fund or of its investment manager who own
more than 1/2 of 1%, own in the aggregate, more than 5% of the outstanding
securities of such issuer.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and executive officers of the Company is
set forth below.
<TABLE>
<CAPTION>
Aggregate
Principal Compensation From Total Compensation
Position Occupation(s) Trust To Date for From Trust and
Name, Address Held with During Past Fiscal Year Ended Fund Complex Paid
and Age Registrant Five Years June 30, 1995 to Trustees
- ------------------------------- ---------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Thomas A. Morton* 71 Chairman of the N/A N/A
McMorgan & Company Chairman Board, McMorgan &
One Bush Street, Suite 800 of the Company.
San Francisco, CA 94104 Board and
President
Kenneth Rosenblum 54 Independent $4,600 $4,600
1299 Ocean Avenue Trustee Consultant; President
Suite 333 Chief Operations
Santa Monica, CA 90401 Officer, Dimension
Fund Advisors, Inc.
David B. McCleary 40 Partner, Comyns, $4,800 $4,800
Comyns, Smith, McCleary & Co. Trustee Smith, McCleary &
Certified Public Accountants Co.; Audit Director,
3470 Mt. Diablo Boulevard Deloitte & Touche.
Suite A-310
Lafayette, CA 94540
Walter B. Rose 48 Partner, McBain & $4,800 $4,800
McBain & Rose Partners Trustee Rose Partners.
355 S. Grand Avenue, Suite 4295
Los Angeles, CA 90071
Robert R. Barron* 50 Executive Vice N/A N/A
McMorgan & Company Trustee President, McMorgan
101 N. Brand Boulevard, #1220 & Company.
Glendale, CA 91203
Melvin W. Petersen, CPA* 59 Executive Vice N/A N/A
McMorgan & Company Trustee President, McMorgan
One Bush Street, Suite 800 & Company.
San Francisco, CA 94104
Terry A. O'Toole, CPA* 48 President and CEO, N/A N/A
McMorgan & Company Vice McMorgan &
One Bush Street, Suite 800 President, Company.
San Francisco, CA 94104 Treasurer
and Trustee
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Deane A. Nelson, CFA* 49 Vice President, N/A N/A
McMorgan & Company Vice McMorgan &
One Bush Street, Suite 800 President Company; Vice
San Francisco, CA 94104 and President, Security
Secretary Pacific Bank.
Robert M. Hirsch* 41 General Counsel, N/A N/A
McMorgan & Company Compliance McMorgan &
One Bush Street, Suite 800 Officer Company; Partner,
San Francisco, CA 94104 Van Bourg,
Weinberg, Roger &
Rosenfeld.
</TABLE>
* These Trustees and officers are considered "interested persons" of the Funds
as defined under the Act.
The Trustees of the Funds receive a fee of $4,000 per year, plus $200 per
meeting and expenses for each meeting of the Board of Trustees they attend.
However, no officer or employee of McMorgan & Company receives any compensation
from the Funds for acting as a Trustee of the Funds. The officers of the Funds
receive no compensation directly from the Funds for performing the duties of
their offices.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 29, 1995, the Trustees and officers as a group owned 32,058.129
(6.92%), 29,063.873 (8.75%), 17,308.663 (2.66%), 10,869.162 (0.24%) and
348,828.660 (2.03%) shares of the Equity Investment Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Principal Preservation Fund,
respectively. As a group, the Trustees and officers owned beneficially
438,128.487 (1.88%) shares of the Trust as of September 29, 1995.
As of September 29, 1995, the following persons owned of record or beneficially
more than 5% of the outstanding voting shares of the:
<TABLE>
<CAPTION>
McM EQUITY INVESTMENT FUND
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
<S> <C> <C>
Industrial Carpenters Pension Fund 110,465.592 23.85%
Oakland, CA
Trust Industrial Carpenter's & 94,835.446 20.48%
Precast Industry Pension Fund
Oakland, CA
Lathers Local No. 144L Pension Plan 61,041.182 13.18%
San Mateo, CA
Lathers Local No. 144 Pension Plan 27,240.218 5.88%
San Mateo, CA
McM BALANCED FUND
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
Trust UA 350 Supplemental Annuity Plan 60,623.161 18.26%
Los Angeles, CA
Intregra Trust Co. 29,273.475 8.82%
Pittsburgh, PA
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
<S> <C> <C>
Lathers Local No. 144 Pension Plan II 28,413.408 8.56%
San Mateo, CA
East Bay Auto Machinists 24,672.188 7.43%
Lodge 1546
Oakland, CA
Machinists Auto Trades 23,008.889 6.93%
District Lodge 190
Oakland, CA
McM FIXED INCOME FUND
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
Industrial Carpenters Pension Fund * 305,871.680 47.03%
Oakland, CA
Trust Industrial Carpenters & * 264,502.933 40.67%
Precast Industry Pension Fund
Oakland, CA
McM INTERMEDIATE FIXED INCOME FUND
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
Trust Stationary Engineers No.39 664,187.902 14.39%
Calabasas, CA
Cement Masons Health & Welfare 656,773.613 14.23%
Trust Fund
Suisun, CA
Northern California Pipe Trades 511,709.408 11.09%
Health & Welfare Trust Fund
San Francisco, CA
Trust Northern Nevada Operating Eng. 476,679.035 10.33%
Health & Welfare Trust Fund
Los Angeles, CA
Sheet Metal Production Workers of 303,804.815 6.58%
Northern California
San Francisco, CA
Operating Engineers Health 288,081.279 6.24%
& Welfare Trust Fund
Salt Lake City, UT
Office Employees Insurance Trust Fund 283,247.485 6.14%
Calabasas, CA
California Frozen Food Industrial 272,554.128 5.91%
Pension Trust
Dublin, CA
17
<PAGE>
Plastering Industry Welfare 269,511.443 5.84%
Trust Fund
Calabasas, CA
McM PRINCIPAL PRESERVATION FUND
Name & Address of Beneficial Owners Number of Shares Percentage
- ----------------------------------- ---------------- ----------
Trust UA 350 Supplemental Annuity 3,899,709.100 22.67%
Reno, NV
McMorgan & Company 3,688,469.360 21.44%
San Francisco, CA
Cement Masons Vacation Holiday 3,322,592.860 19.31%
Trust Fund
Suisun, CA
</TABLE>
* Controlling person as defined under the Act. Note that a controlling person
possesses the ability to control the outcome of matters submitted for
shareholder vote.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Agreement The advisory services provided by McMorgan &
Company (the "Advisor"), and the fees received by it for such services, are
described in the Prospectus. As stated in the Prospectus, the Advisor may from
time to time voluntarily waive its advisory fees with respect to any Fund. In
addition, if the total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Advisor will bear the amount of such excess to the extent required by such
regulations.
The Advisor has agreed to waive its advisory fee in an amount equal to the total
expenses of a Fund for any fiscal year which exceeds the permissible limits
applicable to that Fund in any state in which its shares are then qualified for
sale. At the present time, the most restrictive state expense limitation limits
a fund's annual expenses (excluding interest, taxes, distribution expense,
brokerage commissions and extraordinary expenses, and other expenses subject to
approval by state securities administrators) to 2.5% of the first $30 million of
its average daily net assets, 2.0% of the next $70 million of its average daily
net assets and 1.5% of its average daily net assets in excess of $100 million.
Under the Advisory Agreement, the Advisor is not liable for any error of
judgment or mistake of law or for any loss suffered by the Company or a Fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard of its duties and
obligations thereunder.
The Advisory Agreement is terminable with respect to a Fund by vote of the Board
of Trustees or by the holders of a majority of the outstanding voting securities
of the Fund, at any time without penalty, on 60 days' written notice to the
Advisor. The Advisor may also terminate its advisory relationship with respect
to a Fund on 60 days' written notice to the Company. The Advisory Agreement
terminates automatically in the event of its assignment.
Under the Advisory Agreement, each Fund pays the following expenses: (1) the
fees and expenses of the Company's disinterested Trustees; (2) the salaries and
expenses of any of the Company's officers or employees who are not affiliated
with the Advisor; (3) interest expenses; (4) taxes and governmental fees; (5)
brokerage commissions and other expenses incurred in acquiring or disposing of
portfolio securities; (6) the expenses of registering and qualifying shares for
sale with the Securities and Exchange Commission and with various state
18
<PAGE>
securities commissions; (7) accounting and legal costs; (8) insurance premiums;
(9) fees and expenses of the Company's custodian, Administrative and Transfer
Agent and any related services; (10) expenses of obtaining quotations of the
Funds' portfolio securities and of pricing the Funds' shares; (11) expenses of
maintaining the Company's legal existence and of any legally mandated
shareholders' meetings; (12) expenses of preparation and distribution to
existing shareholders of reports, proxies and prospectuses; and (13) fees and
expenses of membership in industry organizations.
For the period July 14, 1994 (commencement of operations) through June 30, 1995,
advisory fees accrued by McMorgan & Company for Equity Investment Fund, Balanced
Fund, Fixed Income Fund and Intermediate Fixed Income Fund were $6,353, $5,636,
$4,631 and $26,243, respectively. Advisory fees accrued by McMorgan & Company
for Principal Preservation Fund, for the period July 13, 1994 (commencement of
operations) through June 30, 1995, were $10,541. However, the advisory fees were
waived by the Advisor.
In addition, with respect to the Equity Investment Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Principal Preservation Fund, for
the period July 14, 1994 and July 13, 1994 for the Principal Preservation Fund
(commencement of operations) through the period ended June 30, 1995, the Advisor
paid expenses of $100,321, $99,141, $92,388, $94,352 and $104,476, respectively.
General expenses of the Company (such as costs of maintaining corporate
existence, legal fees, insurance, etc.) will be allocated among the Funds in
proportion to their relative net assets. Expenses which relate exclusively to a
particular Fund, such as certain registration fees, brokerage commissions and
other portfolio expenses, will be borne directly by that Fund.
Administrator
- -------------
Fund/Plan Services, Inc., 2 W. Elm Street, Conshohocken, PA 19428 (the
"Administrator"), provides certain administrative services to the Company
pursuant to an Administrative Services Agreement. The Administrator receives a
fee at the annual rate of 0.08% of the first $100 million of average daily net
assets of the Company, 0.05% of the next $500 million of such average daily net
assets, and 0.03% on assets in excess of $600 million.
Under the Administrative Services Agreement, the Administrator: (1) coordinates
with the custodian and transfer agent and monitors the services they provide to
the Funds; (2) coordinates with and monitors any other third parties furnishing
services to the Funds; (3) provides the Funds with necessary office space,
telephones and other communications facilities and personnel competent to
perform administrative and clerical functions; (4) supervises the maintenance by
third parties of such books and records of the Funds as may be required by
applicable federal or state law; (5) prepares or supervises the preparation by
third parties of all federal, state and local tax returns and reports of the
Funds required by applicable law; (6) prepares and, after approval by the Funds,
files and arranges for the distribution of proxy materials and periodic reports
to shareholders of the Funds as required by applicable law; (7) prepares and,
after approval by the Company, arranges for the filing of such registration
statements and other documents with the Securities and Exchange Commission and
other federal and state regulatory authorities as may be required by applicable
law; (8) reviews and submits to the officers of the Company for their approval
invoices or other requests for payment of the Funds' expenses and instructs the
Custodian to issue checks in payment thereof; and (9) takes such other action
with respect to the Company or the Funds as may be necessary in the opinion of
the Administrator to perform its duties under the agreement.
As compensation for services performed under the Administrative Services
Agreement, the Administrator receives a fee payable monthly at an annual rate
(as described in the Prospectus) multiplied by the average daily net assets of
the Company.
Administration fees paid to Fund/Plan Services, Inc. for the period July 14,
1994 (commencement of operations) through June 30, 1995, for the Equity
Investment Fund, Balanced Fund, Fixed Income Fund and Intermediate Fixed Income
Fund were $16,787, $16,751, $16,732 and $16,705. For the period July 13, 1994
(commencement of operations) through June 30, 1995, the Principal Preservation
Fund paid $16,874 to Fund/Plan Services, Inc. for administration fees.
19
<PAGE>
Underwriter
- -----------
Fund/Plan Broker Services, Inc. ("FPBS"), 2 W. Elm Street, Conshohocken, PA
19428, acts as an underwriter of the Funds' shares for the purpose of
facilitating the registration of shares of the Funds under state securities laws
and to assist in sales of shares pursuant to an underwriting agreement (the
"Underwriting Agreement") approved by the Company's Trustees.
In this regard, FPBS has agreed at its own expense to qualify as a broker-dealer
under all applicable federal or state laws in those states which the Company
shall from time to time identify to FPBS as states in which it wishes to offer
its shares for sale, in order that state registrations may be maintained for the
Funds.
FPBS is a broker-dealer registered with the Securities and Exchange Commission
and a member in good standing of the National Association of Securities Dealers,
Inc.
For the services to be provided to the Company under the Underwriting Agreement,
FPBS is entitled to receive an annual fixed fee of $15,000. These fees are fixed
for a two (2) year period from the date of the Underwriting Agreement and may be
increased or decreased in future years by an amendment signed by both the
Company and FPBS.
The Underwriting Agreement may be terminated by either party upon 60 days' prior
written notice to the other party, and if so terminated, the pro-rata portion of
the unearned fee will be returned to the Advisor.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Advisor is responsible for decisions to buy and sell securities for each
Fund and for the placement of its portfolio business and the negotiation of
commissions, if any, paid on such transactions. Fixed-income securities in which
the Funds invest are traded in the over-the-counter market. These securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission. In over-the-counter transactions, orders
are placed directly with a principal market-maker unless a better price and
execution can be obtained by using a broker. Brokerage commissions are paid on
transactions in listed securities, futures contracts and options thereon. The
Advisor is responsible for effecting portfolio transactions and will do so in a
manner deemed fair and reasonable to the Funds. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting and monitoring broker-dealers and
negotiating commissions, the Advisor considers the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition.
The Advisor effects portfolio transactions for other investment companies and
advisory accounts. Research services furnished by dealers through whom the Funds
effect securities transactions may be used by the Advisor in servicing all of
its accounts; not all such services may be used in connection with the Funds. In
the opinion of the Advisor, it is not possible to measure separately the
benefits from research services to each of the accounts (including the Funds).
The Advisor will attempt to allocate equitably portfolio transactions among the
Funds and others whenever concurrent decisions are made to purchase or sell
securities by the Funds and other accounts. In making such allocations between
the Funds and others, the main factors to be considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Funds and the others. In some
cases, this procedure could have an adverse effect on the Funds. In the opinion
of the Advisor, however, the results of such procedures will, on the whole, be
in the best interests of each of the clients.
For the period ended June 30, 1995, Equity Investment Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Principal Preservation Fund
incurred brokerage commissions of $3,927, $1,956, $0, $0 and $0, respectively.
20
<PAGE>
Portfolio Turnover
- ------------------
The portfolio turnover rate for the Funds is calculated by dividing the lesser
of purchases or sales of portfolio investments for the reporting period by the
monthly average value of the portfolio investments owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment. It is currently estimated that under normal market conditions the
annual portfolio turnover rate for the Equity Investment Fund will not exceed
50%. The portfolio turnover rate for the equity portion of the Balanced Fund is
not expected to exceed 50%, while the turnover rate for the fixed-income portion
is not expected to exceed 60%. The portfolio turnover rates for the Intermediate
Fixed Income Fund and Fixed Income Fund are not expected to exceed 60%. A high
rate of portfolio turnover (i.e., over 100%) may result in the realization of
substantial capital gains and involves correspondingly greater transaction
costs.
For the period ended June 30, 1995, the Equity Investment Fund, Balanced Fund,
Fixed Income Fund and Intermediate Fixed Income Fund had portfolio turnover
rates of 1.81%, 81.05%, 150.77% and 227.09%, respectively.
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 to so qualify for any taxable year, a fund must, among other things,
(i) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, gains from the sale of securities or
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (ii) derive less than 30% of
its gross income from gains from the sale or other disposition of securities or
certain futures and options thereon held for less than three months; (iii)
distribute at least 90% of its dividend, interest and certain other taxable
income each year; and (iv) at the end of each fiscal quarter maintain at least
50% of the value of its total assets in cash, government securities, securities
of other regulated investment companies, and other securities of issuers which
represent, with respect to each issuer, no more than 5% of the value of a fund's
total assets and 10% of the outstanding voting securities of such issuer, and
have no more than 25% of its assets invested in the securities (other than those
of the 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 and businesses.
To the extent the Funds qualify for treatment as a regulated investment company,
they will not be subject to federal income tax on income paid to shareholders in
the form of dividends or capital gains distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of the
Funds' "required distributions" over actual distributions in any calendar year.
Generally, the "required distribution" is 98% of a fund's ordinary income for
the calendar year plus 98% of its capital gain net income recognized during the
one-year period ending on October 31 plus undistributed amounts from prior
years. The Funds intend to make distributions sufficient to avoid imposition of
the excise tax. For a distribution to qualify as such with respect to a calendar
year under the foregoing rules, it must be declared by the Funds during October,
November or December to shareholders of record during such month and paid by
January 31 of the following year. Such distributions will be taxable in the year
they are declared, rather than the year in which they are received.
When a Fund writes a call, or purchases a put option, an amount equal to the
premium received or paid by it is included in the Fund's accounts as an asset
and as an equivalent liability.
21
<PAGE>
In writing a call, the amount of the liability is subsequently
"marked-to-market" to reflect the current market value of the option written.
The current market value of a written option is the last sale price on the
principal exchange on which such option is traded or, in the absence of a sale,
the mean between the last bid and asked prices. If an option which a Fund has
written expires on its stipulated expiration date, the Fund recognizes a
short-term capital gain. If a Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund realizes a
short-term gain (or loss if the cost of the closing transaction exceeds the
premium received when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to such option is
extinguished. If a call option which a Fund has written is exercised, the Fund
realizes a capital gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
The premium paid by a Fund for the purchase of a put option is recorded in the
Fund's assets and liabilities as an investment and subsequently adjusted daily
to the current market value of the option. For example, if the current market
value of the option exceeds the premium paid, the excess would be unrealized
appreciation and, conversely, if the premium exceeds the current market value,
such excess would be unrealized depreciation. The current market value of a
purchased option is the last sale price on the principal exchange on which such
option is traded or, in the absence of a sale, the mean between the last bid and
asked prices. If an option which a Fund has purchased expires on the stipulated
expiration date, the Fund realizes a short-term or long-term capital loss for
federal income tax purposes in the amount of the cost of the option. If a Fund
exercises a put option, it realizes a capital gain or loss (long-term or
short-term, depending on the holding period of the underlying security) from the
sale which will be decreased by the premium originally paid.
Accounting for options on certain stock indices will be in accordance with
generally accepted accounting principles. The amount of any realized gain or
loss on closing out such a position will result in a realized gain or loss for
tax purposes. Such options held by a Fund at the end of each fiscal year on a
broad-based stock index will be required to be "marked-to-market" for federal
income tax purposes. Sixty percent of any net gain or loss recognized on such
deemed sales or on any actual sales will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss
("60/40 gain or loss"). Futures contracts and options on futures contracts
utilized by the Funds are also "Section 1256 contracts." Any gains or losses on
Section 1256 contracts held by a Fund at the end of each taxable year (and on
October 31 of each year for purposes of the 4% excise tax) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is treated as a
60/40 gain or loss.
Shareholders will be subject to federal income taxes on distributions made by
the Funds whether received in cash or additional shares of the Funds.
Distributions of net investment income and net short-term capital gains, if any,
will be taxable to shareholders as ordinary income. Distributions of net
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains, without regard to how long a shareholder has held shares of the
Funds. A loss on the sale of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gain dividend
paid to the shareholder with respect to such shares. Dividends paid by a Fund
may qualify in part for the 70% dividends received deduction for corporations,
provided, however, that those shares have been held for at least 45 days.
The Funds will notify shareholders each year of the amount of dividends and
distributions, including the amount of any distribution of long-term capital
gains, and the portion of its dividends which qualify for the 70% deduction.
The above discussion and the related discussion in the Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Funds. The law firm of Heller, Ehrman, White & McAuliffe
has expressed no opinion in respect thereof. Dividends and distributions also
may be subject to state and local taxes. Shareholders are urged to consult their
tax advisors regarding specific questions as to federal, state and local taxes.
The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S.
investors should consult their tax advisors concerning the tax consequences of
ownership of shares of the Funds, including the possibility that
22
<PAGE>
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
PERFORMANCE INFORMATION
General
- -------
From time to time, the Company may include general comparative information, such
as statistical data regarding inflation, securities indices or the features or
performance of alternative investments, in advertisements, sales literature and
reports to shareholders. The Company may also include calculations, such as
hypothetical compounding examples or tax-free compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any Fund.
From time to time, the yield and total return of a Fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
Total Return Calculations
- -------------------------
The Funds that compute their average annual total returns do so by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested to the ending redeemable value of such
investment. This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
1/n
Average Annual Total Return = [ (ERV) - 1 ]
----
P
Where: ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of
years.
The Funds that compute their aggregate total returns do so by determining the
aggregate compounded rate of return during specified period that likewise equate
the initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
Aggregate Total Return = [ (ERV) - 1 ]
---
P
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
23
<PAGE>
Based upon the foregoing calculations, the average annual total returns for the
Equity Investment Fund, Balanced Fund, Fixed Income Fund and Intermediate Fixed
Income Fund for the period July 14, 1994 (commencement of operations) through
the period ended June 30, 1995 were 22.52%, 18.07%, 12.04% and 9.57%,
respectively. The average annual total return for the Principal Preservation
Fund for the time period July 13, 1994 (commencement of operations) through the
period ended June 30, 1995 was 5.29%.
Since performance will fluctuate, performance data for the Funds should not be
used to compare an investment in the Funds' shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed-upon
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that performance is generally a function of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses and
market conditions.
Yield of Principal Preservation Fund
- ------------------------------------
As summarized in the Prospectus, the yield of the Principal Preservation Fund
for a seven-day period (the "base period") will be computed by determining the
net change in value (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by 365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the value
of additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments. Yield may also be calculated on a
compound basis (the "effective yield"), which assumes that net income is
reinvested in shares of the Fund at the same rate as net income is earned for
the base period.
The yield and effective yield of Principal Preservation Fund will vary in
response to fluctuations in interest rates and in the expenses of the Fund. For
comparative purposes the current and effective yields should be compared to
current and effective yields offered by competing financial institutions for the
same base period and calculated by the methods described above. For the seven
day period ended June 30, 1995, the Principal Preservation Fund had a yield of
5.68% and an effective yield of 5.83%.
Yields of Intermediate Fixed Income Fund and Fixed Income Fund
- --------------------------------------------------------------
The yield of each of these Funds is calculated by dividing the net investment
income per share (as described below) earned by the Fund during a 30-day (or
one-month) period by the maximum offering price per share on the last day of the
period and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. A Fund's net investment income per share
earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
YIELD = 2 [ ( a - b + 1)(6) - 1 ]
-------
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = maximum offering price per share on the last day of the period.
24
<PAGE>
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on any debt obligations held by a Fund is calculated by computing the
yield to maturity of each obligation held by that Fund based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of the month, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by that Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The date on which
the obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount premium. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by a Fund to all shareholder accounts in proportion to
the length of the base period and the Fund's mean (or median) account size.
Undeclared earned income will be subtracted from the offering price per capital
share (variable "d" in the formula).
The interest earned on tax-exempt obligations that are issued without original
issue discount and have a current market discount is calculated by using the
coupon rate of interest instead of the yield to maturity. In the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest
("pay-downs") (i) gain or loss attributable to actual monthly paydowns are
accounted for as an increase or decrease to interest income during the period
and (ii) each Fund may elect either (a) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average date is not available or
(b) not to amortize discount or premium on the remaining security.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the Securities
and Exchange Commission under the Securities Act with respect to the securities
offered by the Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of Additional Information
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the Securities and Exchange Commission in Washington,
D.C.
Statements contained in the Prospectus or in this Additional Statement as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement of which the
Prospectus and this Statement of Additional Information forms a part. Each such
statement is qualified in all respects by such reference.
Custodian. Citibank, N.A., 111 Wall Street, New York, New York 10005 is
custodian of the Company's assets pursuant to a custodian agreement. Under the
custodian agreement, Citibank, N.A. (i) maintains a separate account or accounts
in the name of each Fund (ii) holds and transfers portfolio securities on
account of each Fund,
25
<PAGE>
(iii) accepts receipts and make disbursements of money on behalf of each Fund,
(iv) collects and receives all income and other payments and distributions on
account of each Fund's securities and (v) makes periodic reports to the Board of
Trustees concerning each Fund's operations.
Reports to Shareholders. Shareholders will receive unaudited semi-annual reports
describing the Funds' investment operations and annual financial statements
audited by independent certified public accountants. Inquiries regarding the
Funds may be directed to the Advisor at (800) 788-9485.
26
<PAGE>
AUDITED FINANCIAL STATEMENTS
DATED JUNE 30, 1995
27
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Equity Investment Fund Shares Value
------- -----
COMMON STOCKS - 97.04%
Business Equipment & Service - 1.48%
Automatic Data Processing 700 $ 44,013
Dun & Bradstreet Corp 300 15,750
Flightsafety International, Inc 250 12,187
--------
71,950
--------
Capital Goods- 7.94%
Cooper Industries, Inc 700 27,650
Emerson Electric Co 700 50,050
General Electric Co 2,550 143,756
Illinois Tool Works, Inc 500 27,500
Ingersoll Rand Co 1,100 42,075
PPG Industries, Inc 1,100 47,300
Tyco International, Ltd 890 48,060
--------
386,391
--------
Consumer Durables- 2.06%
Ford Motor Co 1,950 58,013
General Motors Co 900 42,187
--------
100,200
--------
Consumer Non Durables - 8.62%
Anheuser Busch Cos., Inc 800 45,500
CPC International, Inc 750 46,312
Darden Restaurants, Inc 100 1,087
Eastman Kodak Co 550 33,344
General Mills, Inc 100 5,137
Pepsico, Inc 1,650 75,281
Philip Morris Cos., Inc 1,725 128,297
Procter & Gamble Co 500 35,938
Sara Lee Corp 1,700 48,450
--------
419,346
--------
Consumer Services - 2.55%
Walt Disney Co 500 27,813
Hilton Hotels Corp 300 21,075
Knight Ridder, Inc 600 34,125
TimeWarner,Inc 1,000 41,125
--------
124,138
--------
Energy - l1.04%
Amerada Hess Corp. 700 34,212
Amoco Corp 800 53,300
Atlantic Richfield Co. 100 10,975
Baker Hughes, Inc. 900 18,450
British Petroleum PLC 601 51,461
Burlington Resources, Inc. 700 25,812
Chevron Corp 1,120 52,220
Exxon Corp 1,000 70,625
Mobil Corp 600 57,600
Royal Dutch Petroleum 350 42,656
Schlumberger, Ltd. 350 21,744
Texaco, Inc. 1,100 72,187
Unocal Corp. 800 22,100
Valero Energy Corp. 200 4,050
--------
537,392
--------
See accompanying notes to financial staternents.
28
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Equity Investment Fund (continued) Shares Value
------- ---------
COMMON STOCKS (continued)
Financial Services - 12.57%
American Intenational Group, Inc 400 $ 45,600
Bank America Corp 1,612 84,832
Chase Manhattan Corp 1,030 48,410
Chemical Banking Corp 1,200 56,700
Chubb Corp 590 47,274
Citicorp 1,300 75,238
Federal National Mortgage Assn 1,300 122,687
First Bank System, Inc 1,100 45,100
General RE Corp 300 40,162
Morgan JP & Co., Inc 650 45,581
--------
611,584
-------
Health Care - 10.43%
Alza Corp 700 16,363
Bausch & Lomb, Inc 500 20,750
Baxter International, Inc 1,200 43,650
Bristol Myers Squibb Co 1,050 71,531
Columbia/HCA Healthcare Corp 400 17,300
Johnson & Johnson 700 47,337
Lilly Eli Co 680 53,380
Merck & Co., Inc 1,560 76,440
Schering Plough Corp 1,700 75,012
St. Jude Medical, Inc 350 17,544
United Healthcare Corp 500 20,687
Warner & Lambert Co 550 47,506
--------
507,500
-------
Multi-Industry - 0.86%
Minnesota Mining & Mfg. Co 730 41,793
--------
Raw Materials - 4.27%
Aluminum Co. of America 840 42,105
Dow Chemical Co 470 33,781
Dupont IEII De Nemours & Co 1,000 68,750
Monsanto Co 700 63,087
--------
207,723
-------
Retail - 7.64%
Albertsons, Inc. 2,500 74,375
Dillard Dept Stores, Inc.,CI.A 1,350 39,656
Limited, Inc. 700 15,400
May Department Stores Co. 1,150 47,869
Penney (JC), Inc. 1,000 48,000
Price/Costco, Inc.* 1,200 19,500
Toys R US, Inc. * 800 23,400
Wal Mart Stores, Inc. 2,650 70,888
Walgreen Co. 650 32,581
--------
371,669
-------
Shelter - 1.87%
Georgia Pacific Corp 800 69,400
Kimberly Clark Corp 360 21,555
--------
90,955
--------
See accompanying notes to financial statements.
29
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Equity Investment Fund (continued)
Shares Value
------ -----
COMMON STOCKS - (continued)
Technology 13.22%
Airtouch Communications* 1,250 $ 35,625
AMP, Inc 1,300 54,925
Boeing Co 300 18,788
Compaq Computer Corp* 1,800 81,675
Hewlett Packard Co 800 59,600
Honeywell, Inc 1,260 54,338
Intel Corp 2,200 139,288
IBM Corp 650 62,400
Motorola, Inc 1,500 100,687
Seagate Technology* 300 11,775
Tandem Computers, Inc* 1,500 24,188
----------
643,289
----------
Transportation - 2.00%
AMR Corp 700 52,238
CSX Corp 600 45,075
----------
97,313
----------
Utilities - 10.49%
AT & T Corp 1,630 86,594
El Paso Natural Gas Co 1,200 34,200
GTE Corp 2,300 78,488
MCI Communications Corp 2,100 46,200
Pacific Gas & Electric Co 1,800 52,200
Pacific Telesis Group 1,500 40,125
Peco Energy Co 1,600 44,200
SBC Communications, Inc 1,200 57,150
SCE Corp 2,000 34,250
Unicom Corp 1,400 37,275
----------
510,682
----------
TOTAL COMMON STOCKS - 97.04% (Cost $4,333,906) 1 4,721,925
CASH AND OTHER ASSETS NET OF LIABILITIES - 2.96% 143,834
----------
NET ASSETS - 100.00% $4,865,759
==========
1 Aggregate cost for federal income tax purposes is $4,333,906 and net
unrealized appreciation is as follows:
Gross unrealized appreciation $ 398,763
Gross unrealized depreciation (10,744)
---------
Net unrealized appreciation $ 388,019
=========
* Non-dividend paying stock.
See accompanying notes to financial statements.
30
<PAGE>
McM Funds - Sehedule of Investments June 30, 1995
Balanced Fund
Shares Value
------ -----
COMMON STOCKS - 54.76%
Business Equipment & Service - 0.77%
Automatic Data Processing 250 $ 15,719
Dun & Bradstreet Corp 150 7,875
--------
23,594
--------
Capital Goods - 4.63%
Cooper Industries, Inc 300 11,850
Emerson Electric Co 250 17,875
General Electric Co 1,000 56,375
Illinois Tool Works, Inc 100 5,500
Ingersoll Rand Co 450 17,212
PPG Industries, Inc 400 17,200
Tyco International, Ltd 300 16,200
--------
142,212
--------
Consumer Durables- 1.13%
Ford Motor Co 700 20,825
General Motors Co 300 14,063
--------
34,888
--------
Consumer Non Durables - 5.05%
Anheuser Busch Cos., Inc 100 5,688
CPC Intemational, Inc 250 15,437
Darden Restaurants, Inc 200 2 ,175
Eastman Kodak Co 200 12,125
General Mills, Inc 200 10,275
Pepsico, Inc 750 34,219
Phillip Morris Cos., Inc 550 40,906
Procter & Gamble Co 200 14,375
Sara Lee Corp 700 19,950
--------
155,150
--------
Consumer Services - 1.39%
Walt Disney Co 250 13,906
Hilton Hotels Corp 100 7,025
Knight Ridder, Inc 200 11,375
Time Warner, Inc 250 10,281
--------
42,587
--------
Energy - 6.26%
Amerada Hess Corp 200 9,775
Amoco Corp 250 16,656
Atlantic Richfield Co 100 10,975
Baker Hughes, Inc 400 8,200
British Petroleum PLC 150 12,844
Burlington Resources Inc 250 9,219
Chevron Corp 400 18,650
Exxon Corp 450 31,781
Mobil Corp 150 14,400
Royal Dutch Petroleum 100 12,187
Schlumberger, Ltd 150 9,319
Texaco, Inc 350 22,969
Unocal Corp 400 11,050
Valero Energy Corp 200 4,050
--------
192,075
--------
See accompanying notes to financial statements.
31
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Balanced Fund (continued)
Shares Value
------ -----
COMMON STOCKS - (continued)
Financial Services - 7.07%
American International Goup Inc 150 $ 17,100
BankAmerica Corp 750 39,469
Chase Manhattan Corp 350 16,450
Chemical Banking Corp 350 16,537
Chubb Corp 150 12,019
Citicorp 550 31,831
Federal National Mortgage Assn 400 37,750
First Bank System, Inc 450 18,450
General RE Corp 100 13,388
Morgan JP & Co., Inc 200 14,025
--------
217,019
--------
Health Care - 6.35%
Alza Corp 300 7,012
Bausch & Lomb, Inc 150 6,225
Baxter International, Inc 450 16,369
Bristol-Myers Squibb Co 300 20,438
Columbia/HCA Healthcare Corp 200 8,650
Johnson & Johnson 300 20,287
Lilly Eli Co 250 19,625
Merck & Co., Inc. 800 39,200
Schering Plough Corp 600 26,475
St. Jude Medical,Inc 100 50,012
United Healthcare Corp 200 8,275
Warner & Lambert Co 200 17,275
--------
194,843
--------
Multi Industry - 0.56%
Minnesota Mining & Mfg. Co 300 17,175
--------
Raw Materials - 2.06%
Aluminum Co. of America 200 10,025
Dow Chemical Co 250 17,969
Dupont (EL) De Nemours & Co 250 17,188
Monsanto Co 200 18,025
--------
63, 207
--------
Retail - 4.56%
Albertsons, Inc 750 22,313
Dillard Dept. Stores, Inc. Cl. A 550 16,156
Limited, Inc 200 4,400
May Department Stores Co 450 18,731
Penney (JC), Inc 350 16,800
Price/Costco, Inc.* 500 8,125
Toys R US, Inc. * 300 8,775
WalMart Stores Inc 1,200 32,100
Walgreen Co 250 12,531
--------
139,931
--------
Shelter - 1.05%
Georgia Pacific Corp 200 17,350
Kimberly Clark Corp 250 14,969
--------
32,319
--------
See accompanying notes to finanical statements.
31
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Balanced Fund (continued)
Shares Value
------ -----
COMMON STOCKS (continued)
Technology - 7.19%
Airtouch Communications * 500 $ 14,250
AMP, Inc 350 14,788
Compaq Computer Corp A* 600 27,225
Hewlitt Packard Co 350 26,075
Honeywell, Inc 400 17,250
Intel Corp 800 50,650
IBM Corp 200 19,200
Motorola, Inc 550 36,919
Seagate Technology* 200 7,850
Tandem Computers, Inc * 400 6,450
----------
220,657
----------
Transportation - 1.10%
AMR Corp 250 18,656
CSX Corp 200 15,025
----------
33,681
----------
Utilities - 5.59%
AT & T Corp 700 37,188
El Paso Natural Gas Co 400 11,400
GTE Corp 950 32,419
MCI Communicatiion Corp 800 17,600
Pacific Gas & Electric Co 350 10,150
Pacific Telesis Group 300 8,025
Peco Energy Co 400 11,050
SBC Communications, Inc 450 21,431
SCE Corp 600 10,275
Unicom Corp 450 11,981
----------
171,519
----------
TOTAL COMMON STOCKS (Cost $1,496,562) 1,680,857
----------
Principal
Amount Value
------ -----
FIXED INCOME SECURITIES - 43.21%
U.S. Government Obligations - 14.17%
U.S. Treasury Notes
6.875%, 07/31/99 $ 42,000 43,309
7.750%, 02/15/01 155,000 167,603
11.625% 11/15/02 132,000 174,368
11.125% 08/15/03 38,000 49,733
----------
Total U.S. Government Obligations (Cost $421,938) 435,013
----------
Collateralized Mortgage Obligations - 23.59%
Federal Home Loan Mortgage Corp. - 14.00%
6.300%, 10/15/18 100,000 98,096
6.250%, 05/15/19 100,000 97,877
5.950%, 11/15/19 100,000 97,294
6.500%, 08/15/21 40,000 39,082
6.650%, 07/15/22 100,000 97,480
----------
429,829
----------
See accompanying notes to financial statements.
33
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Balanced Fund (continued)
Principal
Amount Value
------ -----
FIXED INCOME SECURITIES (continued)
Federal National Mortgage Association - 9.59%
6.000%, 09/25/18 $ 50,000 $ 48,204
6.250%, 01/25/20 100,000 97,662
6.850%, 10/25/20 50,000 49,690
6.750%, 05/25/21 100,000 98,848
----------
294,404
----------
Total Collateralized Mortgage Obligations
(Cost $702,654) 724,233
----------
Corporate Bonds - 5.45%
Finance - 3.75%
Beneficial Corp. , 9.470%, 03/09/01 30,000 33,750
Household Finance Corp. , 6.700%, 06/15/02 50,000 49,875
Transamerica Financial Group, 7.510%, 04/15/02 30,000 31,350
----------
114,975
Industrial - 1.70%
Smith Barney Holdings, Inc., 7.980%, 03/01/00 50,000 52,312
----------
Total Corporate Bonds (Cost $162,816) 167,287
----------
TOTAL FIXED INCOME SECURITIES (Cost $1,287,408) 1,326,533
----------
TOTAL INVESTMENTS - 97.97% (Cost $2,783,970) 1 3,007,390
----------
CASH AND OTHER ASSETS NET OF LIABILITIES - 2.03% 62,486
----------
NET ASSETS - 100.00% $3,069,876
==========
1 Aggregate cost for federal income tax purposes is $2,783,970 and net
unrealized appreciation is as follows:
Gross unrealized appreciation $ 227,985
Gross unrealized depreciation (14,565)
---------
Net unrealized appreciation $ 223,420
---------
* Non-dividend paying stock.
See accompanying notes to financial statements.
34
<PAGE>
McM Funds Schedule of Investments June 30, 1995
- -------------------------------------------------------------------------------
Fixed Income Fund
Principal
Amount Value
--------- ------------
FIXED INCOME SECURITIES - 98.48%
U.S. Government Obligations - 33.77%
U.S. Treasury Notes
7.000%, 09/30/96 ...........................$ 58,000 $ 58,843
6.500%, 09/30/96 ........................... 85,000 85,723
6.875%, 07/31/99 ........................... 76,000 78,369
7.875%, 08/15/01 .......................... 310,000 338,368
7.500%, 11/15/01 ........................... 168,000 180,420
6.375%, 08/15/02 ........................... 48,000 48,611
10.750%, 05/15/03 .......................... 149,000 190,576
11.875%, 11/15/03 .......................... 434,000 591,802
7.500%, 11/15/16 .......................... 532,000 579,917
8.875%, 08/15/17 ........................... 61,000 76,019
----------
Total U.S. Government Obligations
(Cost $2,141,978)........................... 2,228,648
----------
U.S. Government Agency Obligations - 6.85%
Federal Home Loan Bank
7.440%, 08/10/01 ........................... 150,000 156,459
7.780%, 10/19/01 ........................... 275,000 295,251
----------
U.S. Government Agency Obligations
(Cost $446,285)............................. 451,710
----------
Total Collateralized Mortgage Obligations
- 33.47%
Federal Home Loan Mortgage Corp. - 16.30%
6.250%, 11/15/18 ........................... 175,000 171,380
6.400%, 05/15/19 ........................... 150,000 147,927
6.250%, 05/15/19 ........................... 250,000 244,665
5.950%, 11/15/19 ........................... 200,000 194,589
6.500%, 06/25/20 ........................... 100,000 97,515
6.500%, 08/15/21 ........................... 75,000 73,279
6.650%, 07/15/22 ........................... 150,000 146,221
----------
1,075,576
----------
Federal National Mortgage Association - 17.17%
7.500%, 07/25/18 ........................... 42,323 42,892
6.000%, 09/25/18 ........................... 40,000 38,563
6.500%, 03/25/19 ........................... 150,000 148,403
6.500%, 04/25/19 ........................... 150,000 148,414
3.500%, 05/25/19 ........................... 125,000 105,155
6.500%, 09/25/19 ........................... 150,000 146,129
6.250%, 01/25/20 ........................... 220,000 214,856
6.850%, 10/25/20 ........................... 40,000 39,752
6.750%, 05/25/21 ........................... 200,000 197,696
0.000%, 03/25/22* .......................... 56,263 51,328
----------
1,133,188
----------
Total Collateralized Mortgage Obligations
(Cost $2,166,844)........................... 2,208,764
----------
Asset Backed Notes - 1.17%
CMO Trust, 8.650%, 03/01/03 .................. 17,638 18,262
Ford Credit Trust, 4.850%, 01/15/98 .......... 25,165 24,921
G.S. Trust, 9.450%, 10/27/03 ................. 20,669 21,604
Premier Auto Trust, 4.550%, 03/15/98 ......... 12,390 12,256
----------
Total Asset Backed Notes (Cost $76,298) ...... 77,043
----------
See accompanying notes to financial statements.
<PAGE>
McM Funds Schedule of Investments June 30, 1995
- --------------------------------------------------------------------------------
Fixed Income Fund (continued)
Principal
Amount Value
--------- ---------
Corporate Bonds - 23.22%
Electric Utility - 1.14%
Commonwealth Edison Co., 6.250%, 10/01/97 ....$ 50,000 $ 49,875
Long Island Lighting Co., 7.625%, 04/15/98 ... 25,000 25,469
----------
75,344
----------
Financial Services - 16.63%
American General Finance Corp.,
5.000%, 09/01/95............................ 50,000 49,930
Associates Corp. North America,
4.500%, 02/15/96............................ 50,000 49,561
BankAmerica Corp., 6.875%, 11/20/97 .......... 50,000 50,375
Beneficial Corp., 8.400%, 06/07/96 ........... 50,000 51,007
Beneficial Corp., 8.100%, 11/09/99 ........... 100,000 106,000
Beneficial Corp., 9.470%, 03/09/01 ........... 20,000 22,500
Chrysler Financial Corp., 6.500%, 06/15/98 ... 25,000 25,000
Commercial Credit Co., 6.375%, 01/01/96 ...... 50,000 50,134
Commercial Credit Co., 8.250%, 11/01/01 ...... 75,000 80,906
Ford Motor Credit Co., 8.900%, 06/03/96 ...... 50,000 51,341
General Motors Acceptance Corp.,
7.600%, 02/10/97............................ 50,000 51,125
Household Financial Corp., 6.760%, 01/22/98 .. 50,000 50,437
Household Financial Corp., 6.700%, 06/15/02 .. 75,000 74,812
Merrill Lynch & Co., 5.500%, 07/28/95 ........ 50,000 49,994
Morgan Stanley Group, Inc., 5.650%, 06/15/97 . 50,000 49,437
Morgan Stanley Group, Inc., 7.500%, 09/01/99 . 75,000 77,062
Norwest Financial Inc., 7.850%, 04/15/97 ..... 50,000 51,438
Transamerica Financial Group, 7.500%,
09/14/01.................................... 75,000 78,074
Transamerica Financial Group, 7.510%,
04/15/02.................................... 75,000 78,375
----------
1,097,508
----------
Industrial - 5.45%
IBM Corp., 6.375%, 06/15/00 .................. 75,000 74,813
Philip Morris Cos., Inc., 6.375%, 01/15/98 ... 50,000 49,938
Philip Morris Cos., Inc., 7.500%, 01/15/02 ... 75,000 77,906
Sears Roebuck & Co., 9.250%, 04/15/98 ........ 50,000 53,625
Tele Communications, 7.000%, 08/04/97 ........ 25,000 25,125
WMX Technologies, Inc., 8.125%, 02/01/98 ..... 75,000 78,188
----------
359,595
----------
Total Corporate Bonds (cost $1,519,715) ...... 1,532,447
----------
TOTAL FIXED INCOME SECURITIES - 98.48%
(Cost $6,351,120)(1)........................ 6,498,612
CASH AND OTHER ASSETS NET OF LIABILITIES
- 1.52%..................................... 100,027
----------
NET ASSETS 100.00% ........................... $6,598,639
==========
Aggregate cost for federal income tax purposes
is $6,351,120 and net unrealized appreciation
is as follows:
Gross unrealized appreciation ...........$ 152,085
Gross unrealized depreciation ........... (4,593)
----------
Net unrealized appreciation ..........$ 147,492
==========
* Zero income bond.
See accompanying notes to financial statements.
<PAGE>
McM Funds Schedule of Investments June 30, 1995
- -------------------------------------------------------------------------------
Intermediate Fixed Income Fund
Principal
Amount Value
----------- -----------
FIXED INCOME SECURITIES - 97.58%
U.S. Government Obligations - 43.71%
U.S. Treasury Notes
5.125%, 06/30/98 .........................$ 250,000 $ 244,755
5.125%, 11/30/98 ......................... 153,000 149,193
5.500%, 02/28/99 ......................... 790,000 779,169
5.875%, 03/31/99 ......................... 6,490,000 6,475,267
7.000%, 04/15/99 ......................... 424,000 438,831
6.750%, 05/31/99 ......................... 377,000 387,096
6.750%, 06/30/99 ......................... 133,000 136,635
6.875%, 07/31/99 ......................... 570,000 587,767
11.625%, 11/15/02 ........................ 1,105,000 1,459,672
11.875%, 11/15/03 ........................ 1,780,000 2,427,208
-----------
Total U.S. Government Obligations
(Cost $12,714,273)........................ 13,085,593
-----------
U.S. Government Agency Obligations - 2.25%
Federal National Mortgage Association
7.050%, 12/10/98 ......................... 50,000 51,263
Guaranteed Export Trust
6.280%, 06/15/04 ......................... 500,000 499,829
Tennessee Valley Authority
4.375%, 03/04/96 ......................... 125,000 123,906
-----------
U.S. Government Agency Obligations
(Cost $672,989)........................... 674,998
-----------
Collateralized Mortgage Obligations - 26.89%
Federal Home Loan Mortgage Corp. - 16.73%
5.500%, 12/15/12 ......................... 100,000 97,370
5.000%, 03/15/13 ......................... 200,000 194,760
5.500%, 04/15/13 ......................... 300,000 293,559
5.500%, 01/15/14 ......................... 225,000 219,969
6.500%, 08/15/14 ......................... 750,000 750,562
7.500%, 09/15/14 ......................... 100,000 101,867
5.750%, 02/15/15 ......................... 750,000 732,202
5.800%, 02/15/19 ......................... 1,000,000 968,698
6.050%, 05/15/19 ......................... 700,000 684,197
6.000%, 02/15/20 ......................... 1,000,000 964,216
-----------
5,007,400
-----------
Federal National Mortgage Association
- 10.16%
0.000%, 07/25/98* ........................ 193,839 169,952
0.000%, 09/25/99* ........................ 21,420 20,785
6.000%, 03/25/11 ......................... 111,848 111,276
5.600%, 10/25/13 ......................... 200,000 195,674
5.250%, 11/25/13 ......................... 525,000 504,377
5.750%, 02/25/15 ......................... 500,000 488,810
9.000%, 06/25/18 ......................... 88,857 94,275
5.500%, 02/25/19 ......................... 1,175,000 1,121,951
0.000%, 01/25/22* ........................ 119,726 103,616
0.000%, 03/25/22* ........................ 253,181 230,977
-----------
3,041,693
-----------
Total Collateralized Mortgage Obligations
(Cost $8,010,738)......................... 8,049,093
-----------
See accompanying notes to financial statements.
<PAGE>
McM Funds Schedule of Investments June 30, 1995
- -------------------------------------------------------------------------------
Intermediate Fixed Income Fund (continued)
Principal
Amount Value
----------- ---------
Asset Backed Notes - 1.25%
Ford Credit Trust 1993 A, 4.850%, 01/15/98 . $ 75,495 $ 74,763
GMAC 1991 C Grantor Trust, 5.700%, 12/15/96. 52,398 52,298
GMAC 1992 A Grantor Trust, 5.050%, 01/15/97. 3,478 3,472
GMAC 1992 D Grantor Trust, 5.550%, 05/15/97. 44,010 43,926
GMAC 1992 E Grantor Trust, 4.750%, 08/15/97. 62,268 61,839
Premier Auto Trust 1992, 5.900%, 11/15/97 .. 57,558 57,305
Premier Auto Trust 1992, 5.050%, 01/15/98 .. 37,102 36,512
Select Auto Receivables Trust 1991, 7.000%,
09/15/96 ................................. 18,792 18,820
Shearson Lehman, 8.750%, 08/27/17 .......... 24,560 24,827
-----------
Total Asset Backed Notes (Cost $373,003) ... 373,762
-----------
Corporate Bonds - 23.48%
Electric Utility - 1.01%
Commonwealth Edison Co., 6.000%, 03/15/98 . 150,000 148,500
Long Island Lighting Co., 8.750%, 02/15/97 . 50,000 51,500
Long Island Lighting Co., 7.625%, 04/15/98 . 100,000 101,875
-----------
301,875
-----------
Finance - 17.63%
American General Finance Corp.,
5.000%, 09/01/95.......................... 300,000 299,580
American General Finance Corp.,
6.860%, 09/01/97.......................... 50,000 50,688
Associates Corp. North America,
4.500%, 02/15/96.......................... 200,000 198,244
Associates Corp. North America,
7.500%, 10/15/96.......................... 100,000 101,727
Associates Corp. North America,
8.625%, 06/15/97.......................... 125,000 130,781
Associates Corp. North America,
6.750%, 07/15/97.......................... 50,000 50,625
BankAmerica Corp., 6.875%, 11/20/97 ........ 250,000 251,875
Beneficial Corp., 5.750%, 12/18/95 ......... 200,000 199,786
Beneficial Corp., 6.790%, 11/20/97 ......... 100,000 101,500
Beneficial Corp., 8.100%, 11/09/99 ......... 175,000 185,500
Beneficial Corp., 6.850%, 06/17/02 ......... 325,000 325,000
Caterpillar Financial Services,
7.375%, 11/10/95.......................... 300,000 302,037
Chrysler Financial Corp., 6.000%, 04/15/96 . 75,000 74,913
Chrysler Financial Corp., 5.080%, 01/27/97 . 75,000 73,687
Commercial Credit Co., 6.380%, 01/01/96 .... 250,000 250,672
Commercial Credit Co., 6.000%, 04/15/00 .... 50,000 48,937
Ford Motor Credit Corp., 6.125%, 12/01/95 .. 400,000 401,036
Ford Motor Credit Corp., 5.625%, 03/03/97 .. 25,000 24,844
General Motors Acceptance Corp.,
8.850%, 03/15/96.......................... 100,000 101,981
General Motors Acceptance Corp.,
7.375%, 01/15/97.......................... 50,000 50,937
General Motors Acceptance Corp.,
8.000%, 10/01/99.......................... 200,000 210,250
Household Finance Corp., 9.000%, 09/01/95 .. 100,000 100,516
Household Finance Corp., 6.700%, 06/15/02 .. 500,000 498,750
Morgan Stanley Group, Inc.,
5.650%, 06/15/97.......................... 50,000 49,437
Morgan Stanley Group, Inc.,
7.500%, 09/01/99.......................... 275,000 282,562
Norwest Financial, Inc., 7.850%, 04/15/97 .. 200,000 205,750
Transamerica Finance Corp.,
8.375%, 02/15/98.......................... 150,000 158,250
Transamerica Finance Group,
7.510%, 04/15/02.......................... 150,000 156,750
Transamerica Finance Series,
6.375%, 06/10/02.......................... 400,000 392,500
-----------
5,279,115
-----------
See accompanying notes to financial statements.
<PAGE>
McM Funds Schedule of Investments June 30, 1995
- ------------------------------------------------------------------------------
Intermediate Fixed Income Fund (continued)
Principal
Amount Value
------------ --------------
Industrial - 4.84%
Aluminum Co. of America, 4.625%, 02/15/96 .. $ 50,000 $ 49,563
Philip Morris Cos., Inc., 6.375%, 01/15/98 . 100,000 99,875
Sara Lee Corp., 4.800%, 01/13/97 ........... 300,000 294,375
Sears Roebuck & Co., 5.210%, 02/18/97 ...... 125,000 123,125
Sears Roebuck & Co., 7.520%, 02/19/97 ...... 25,000 25,505
Sears Roebuck & Co., 9.250%, 08/01/97 ...... 150,000 158,813
Sears Roebuck & Co., 9.250%, 04/15/98 ...... 25,000 26,813
Smith Barney Holdings, Inc.,
7.980%, 03/01/00.......................... 125,000 130,781
Tele Communications, 7.000%, 08/04/97 ...... 175,000 175,875
Waste Management, Inc., 6.375%, 07/01/97 ... 50,000 50,125
WMX Technologies, Inc., 8.125%, 02/01/98 ... 300,000 312,750
-----------
1,447,600
-----------
Total Corporate Bonds (Cost $6,947,142) .... 7,028,589
-----------
TOTAL FIXED INCOME SECURITIES - 97.58%
(Cost $28,718,145) (1) 29,212,036
-----------
CASH AND OTHER ASSETS NET OF LIABILITIES - 2.42% 724,223
-----------
NET ASSETS 100.00% ......................... $ 29,936,259
============
(1) Aggregate cost for federal income tax
purposes is $28,718,145 and net
unrealized appreciation is as follows:
Gross unrealized appreciation ......... $ 534,802
Gross unrealized depreciation ......... (40,911)
-----------
Net unrealized appreciation ........ $ 493,891
===========
* Zero income bond.
See accompanying notes to financial statements.
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Principal Preservation Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------- -------
<S> <C> <C>
FIXED INCOME SECURITIES - 81.73%
U.S. Government Obligations - 5.72%
U.S. Treasury Notes
3.875%, 09/30/95 $ 600,000 $596,601
4.25%, 11/30/95 80,000 79,417
------
Total U.S. Government Obligations (Cost $676,018) 676,018
-------
U.S. Government Agency Notes - 76.01%
Federal Home Loan Mortgage Corp. Discount Note
5.910%, 07/05/95 325,000 324,787
Federal Home Loan Mortgage Corp. Discount Note
5.850%, 07/05/95 1,000,000 999,350
Federal Home Loan Mortgage Corp. Discount Note
5.850%, 07/12/95 1,750,000 1,746,872
Federal Home Loan Bank Discount Note
6.000%, 08/02/95 175,000 174,067
Federal Home Loan Bank Discount Note
5.870%, 08/21/95 400,000 396,674
Federal Home Loan Bank Discount Note
5.980%, 09/05/95 700,000 692,326
Federal Home Loan Mortgage Corp. Discount Note
5.720%, 09/07/95 375,000 370,948
Federal Home Loan Mortgage Corp. Discount Note
5.750%, 09/11/95 160,000 158,160
Federal Home Loan Mortgage Corp. Discount Note
5.780%, 09/15/95 500,000 493,899
Federal National Mortgage Assoc. Discount Note
6.060%, 09/20/95 200,000 197,275
Federal National Mortgage Assoc. Discount Note
5.930%, 09/20/95 200,000 197,331
Federal National Mortgage Assoc. Discount Note
5.900%, 09/26/95 300,000 295,722
Federal Home Loan Bank Discount Note
5.930%, 10/23/95 100,000 98,122
Federal National Mortgage Assoc. Discount Note
5.790%, 11/03/95 100,000 97,990
Federal Home Loan Bank Discount Note
5.860%, 11/27/95 300,000 292,724
Federal Home Loan Bank Discount Note
5.800%, 11/29/95 250,000 243,918
Federal National Mortgage Assoc. Discount Note
5.830%, 01/05/96 150,000 145,433
Federal Home Loan Mortgage Corp. Discount Note
5.780%, 02/01/96 710,000 685,491
Federal Home Loan Bank Discount Note
5.580%, 02/05/96 400,000 386,422
Federal Home Loan Mortgage Corp. Discount Note
5.460%, 03/01/96 520,000 500,757
Federal Farm Credit Discount Note
5.430%, 03/15/96 500,000 480,542
-------
Total U.S. Government Agency Notes (Cost $8,978,810) 8,978,810
---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
McM Funds - Schedule of Investments June 30, 1995
Principal Preservation Fund (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------- -----
<S> <C> <C>
COMMERCIAL PAPER - 1.67%
Chemical Bank
5.98%, 09/25/95 $200,000 $197,143
-----------
Total Commercial Paper (Cost $197,143) 197,143
-----------
REPURCHASE AGREEMENTS - 15.49%
Chemical Bank, U.S. Treasury Notes, $1,820,000 par, 6.250% coupon,
due 01/31/97, dated 06/30/95 to be sold on 07/03/95 at $1,830,923
6.050%, 07/03/95 1,830,000 1,830,000
---------
TOTAL REPURCHASE AGREEMENTS 1,830,000
---------
TOTAL INVESTMENTS** - 98.88% (Cost $11,681,971) 11,681,971
----------
CASH AND OTHER ASSETS NET OF LIABILITIES - 1.11% 130,974
-----------
NET ASSETS - 100.00% $11,812,945
===========
</TABLE>
** At June 30 1995, cost is identical for book and federal income tax purposes.
See accompanying notes to financial statements.
<PAGE>
Statement of Assets and Liabilities June 30, 1995
<TABLE>
<CAPTION>
McM
McM McM Intermediate McM
Equity McM Fixed Fixed Principal
Investment Balanced Income Income Preservation
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities at value (cost $4,333,906,
$2,783,970, $6,351,120, $28,718,145 and
$11,681,971, respectively) $ 4,721,925 $ 3,007,390 $ 6,498,612 $29,212,036 $11,681,971
Dividends and interest receivable 11,066 19,262 78,331 337,545 7,014
Receivable for fund shares sold 0 7,769 4,404 331,960 0
Receivable for maturities 0 0 278 0 0
Deferred organization costs (Note A) 15,374 15,374 15,374 15,374 15,374
Other assets 134,450 35,784 18,006 66,894 128,530
----------- ----------- ----------- ----------- -----------
Total assets 4,882,815 3,085,579 6,615,005 29,963,809 11,832,889
----------- ----------- ----------- ----------- -----------
Liabilities:
Exchange redemptions payable 0 0 0 0 1,085
Distributions payable 0 0 0 0 2,322
Accrued expenses 1,386 915 690 4,382 2,382
Payable to advisor, net 15,670 14,788 15,676 23,168 14,155
----------- ----------- ----------- ----------- -----------
Total liabilities 17,056 15,703 16,366 27,550 19,944
----------- ----------- ----------- ----------- -----------
Net Assets:
Applicable to 407,305, 270,583, 623,863,
2,887,830 and 11,812,940
shares outstanding, respectively $ 4,865,759 $ 3,069,876 $ 6,598,639 $29,936,259 $11,812,945
=========== =========== =========== =========== ===========
Net Assets Consist of:
Capital Paid-in $ 4,463,183 $ 2,815,796 $ 6,405,996 $29,118,637 $11,812,940
Accumulated undistributed net investment income 3,068 4,441 16,516 74,760 0
Accumulated net realized gain on investments 11,489 26,219 28,635 248,971 5
Net unrealized appreciation on investments 388,019 223,420 147,492 493,891 0
----------- ----------- ----------- ----------- -----------
$ 4,865,759 $ 3,069,876 $ 6,598,639 $29,936,259 $11,812,945
----------- ----------- ----------- ----------- -----------
Net asset Value and redemption price per share $11. 95 $ 11.35 $ 10.58 $ 10.37 $ 1.00
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Statement of Operations
For the period ended June 30, 1995
<TABLE>
<CAPTION>
McM
McM McM Intermediate McM
Equity McM Fixed Fixed Principal
Investment Balanced Income Income Preservation
Fund* Fund* Fund* Fund* Fund**
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends $34,493 $18,102 $0 $0 $0
Interest 4,052 43,712 92,629 515,522 240,421
Total investment income 38,545 61,814 92,629 515,522 240,421
Expenses:
Investment advisory fees (Note E) 6,353 5,636 4,631 26,243 10,541
Transfer agent fees 27,367 26,352 25,500 25,981 29,300
Administration fees 16,787 16,751 16,732 16,705 16,874
Accounting fees 24,000 24,206 24,584 25,941 24,023
Custodian fees 12,994 11,174 5,573 8,175 10,932
Insurance fees 11,696 11,696 11,696 11,696 11,696
Legal fees 2,747 2,738 2,749 3,140 3,290
Amortizetion of organization costs
(Note A) 2,680 2,680 2,680 2,680 2,680
Registration expenses 3,026 3,026 3,026 3,026 3,026
Trustees fees 1,812 1,998 1,554 4,668 3,968
Auditing fees 48 72 29 134 197
Miscellaneous expenses 341 326 250 596 598
Other expenses 0 0 0 2,857 0
-------- -------- ------- -------- --------
Total expenses 109,851 106,655 99,004 131,842 117,125
-------- -------- ------- -------- --------
Expenses reimbursed (Note E) (100,321) (99,141) (92,388) (94,352) (104,476)
--------- -------- -------- --------- --------
Net expenses 9,530 7,514 6,616 37,490 12,649
------ ------ ------ ------- --------
Net Investment Income 29,015 54,300 86,013 478,032 227,772
-------- ------- ------- -------- --------
Realized and Unrealized Gain on Investments:
Net realized gain on investments 11,489 26,219 28,635 248,988 5
Net change in unrealized
appreciation on investments 388,019 223,420 147,492 493,891 0
-------- ------- -------- ---------- ---------
Net realized and unrealized
gain on investments 399,508 249,639 176,127 742,879 5
-------- -------- -------- ---------- ---------
Increase in Net Assets from Operstions $428,523 $303,939 $262,140 $1,220,911 $227,777
======== ======== ======== ========== =========
</TABLE>
* McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income Fund and McM
Intermediate Fixed Income Fund commenced investment operations on July 14, 1994.
** McM Principal Preservation Fund commenced investment operations on July 13,
1994.
See accompanying notes to financial statements.
<PAGE>
Statement of Changes in Net Assets
For the period ended June 30, 1995
<TABLE>
<CAPTION>
McM
McM McM Intermediate McM
Equity McM Fixed Fixed Principal
Investment Balanced Income Income Preservation
Fund* Fund* Fund* Fund* Fund**
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Operations
Net investment income $29,015 $54,300 $86,013 $478,032 $227,772
Net realized gain on investments 11,489 26,219 28,635 248,988 5
Net change in unrealized appreciation
on investments 388,019 223,420 147,492 493,891 0
--------- -------- -------- ---------- --------
Increase in net assets 428,523 303,939 262,140 1,220,911 227,777
--------- -------- -------- ---------- --------
Dividends and Distributions to Shareholders:
From net investment income (25,947) (49,859) (69,497) (403,289) (227,772)
-------- -------- -------- --------- ---------
Total Distributions (25,947) (49,859) (69,497) (403,289) (227,772)
-------- -------- -------- --------- ---------
Capital Share Transactions - Note C 4,463,183 2,815,796 6,405,996 29,118,637 11,812,940
--------- ---------- ---------- ----------- -----------
Total increase in net assets 4,865,759 3,069,876 6,598,639 29,936,259 11,812,945
Net Assets
Beginning of period 0 0 0 0 0
--------- -------- -------- ---------- --------
End of period (including undistributed
net investment income of $3,068, $4,441,
$16,516, $74,760 and $0, respectively) $4,865,759 $3,069,876 $6,598,639 $29,936,259 $11,812,945
========== ========== ========== =========== ===========
</TABLE>
* McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income Fund and McM
Intermediate Fixed Income Fund commenced investment operations on July 14, 1994.
** McM Principal Preservation Fund commenced investment operations on July 13,
1994.
See accompanying notes to financial statements.
<PAGE>
McM FUNDS
Notes to Financial Statements June 30, 1995
Note (A) Significant Accounting Policies: McM Funds (the "Company")
operates as a series company currently issuing six series of shares of
beneficial interest (collectively, the "Funds"): McM Equity Investment Fund (the
"Equity Investment Fund"), McM Balanced Fund (the "Balanced Fund"), McM Fixed
Income Fund (the "Fixed Income Fund"), McM Intermediate Fixed Income Fund (the
"Intermediate Fixed Income Fund"), McM Principal Preservation Fund (the
"Principal Preservation Fund"), and McM Special Equity Fund (the "Special Equity
Fund"). The Company is a no-load, open-end management investment company which
is registered under the Investment Company Act of 1940 (the "Act"), as amended.
The Company was organized as a Delaware business trust on February 3, 1994. The
Equity Investment Fund, Balanced Fund, Fixed Income Fund, and Intermediate Fixed
Income Fund commenced investment operations on July 14, 1994. The Principal
Preservation Fund commenced investment operations on July 13, 1994. Investment
in the Principal Preservation Fund is neither insured nor guaranteed by the U.S.
Government, and there can be no assurance that the Principal Preservation Fund
will be able to maintain a stable net asset value of $1.00. No other series is
operational at June 30, 1995. Certain officers and trustees of the Funds are
also officers and directors of McMorgan and Company (the "Advisor"). No officer
or employee of the Advisor receives any compensation from the Funds for acting
as a trustee of the Funds. The officers of the Funds receive no compensation
directly from the Funds for performing the duties of their offices. All Company
officers serve without direct compensation from the Fund. The following is a
summary of the significant accounting policies consistently followed by each
Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
(1) Security Valuation: The net asset value per share of each Fund is
computed as of the close of regular trading on the NYSE. The net asset value per
share is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. The equity securities of each Fund
listed or traded on a stock exchange are valued at the last sale price on its
principal exchange. If no sale price is reported, the mean of the last bid and
asked prices is used. Securities traded over the counter are priced at the mean
of the last bid and asked prices. Fixed income securities are valued through
valuations obtained from a commercial pricing service or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
procedures established by the Board of Trustees. All securities held in the
portfolio of the Principal Preservation Fund, and the debt securities with
maturities of 60 days or less held by the other Funds, are valued at amortized
cost. When a security is valued at amortized cost, it is valued at its cost when
purchased, and thereafter by assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. When market quotations are not readily
available, securities and other assets are valued at fair value as determined in
good faith by the Board of Trustees.
(2) Repurchase Agreements: Each Fund may enter into repurchase
agreements to earn income. The Funds may only enter into repurchase agreements
with financial institutions that are deemed to be creditworthy by the Advisor,
pursuant to guidelines established by the Funds' Board of Trustees. During the
term of any repurchase agreement, the Advisor will continue to monitor the
creditworthiness of the seller. Repurchase agreements are considered under the
Act to be collateralized loans by a Fund to the seller secured by the securities
transferred to the Fund. Repurchase agreements under the Act will be fully
collateralized by securities in which the Fund may invest directly. Such
collateral will be marked to market daily. If the seller of the underlying
security under the repurchase agreement should default on its obligation to
repurchase the underlying security, a Fund may experience delay or difficulty in
exercising its right to realize upon the security and, in addition, may incur a
loss if the value of the security should decline, as well as disposition costs
in liquidating the security.
<PAGE>
McM FUNDS
Notes to Financial Statements (continued) June 30, 1995
(3) Investment Income and Securities Transactions: Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily. Securities
transactions are accounted for on the date securities are purchased or sold. The
cost of securities sold is determined using the first-in-first out method.
(4) Federal Income Taxes: The Funds have elected to be treated as
"regulated investment companies" under Sub-chapter M of the Internal Revenue
Code and to distribute substantially all of their respective net taxable income.
Accordingly, no provisions for Federal income taxes have been made in the
accompanying financial statements.
(5) Dividends and Distributions: Dividends and distributions to
shareholders are recorded on the ex-dividend date.
(6) Organization Costs: Organization costs are being amortized on a
straight line basis over five years.
Note (B) Dividends from Net Investment Income and Distributions of Capital
Gains: With respect to the Equity Investment Fund and the Balanced Fund,
dividends from net investment income are distributed quarterly and net realized
gains from investment transactions, if any, are distributed to shareholders
annually. The Fixed Income Fund and the Intermediate Fixed Income Fund
distribute their respective net investment income to shareholders monthly and
net capital gains, if any, are distributed annually. The Principal Preservation
Fund declares dividends daily from its net investment income. The Principal
Preservation Fund's dividends are payable monthly and are automatically
reinvested in additional Fund shares, at the month-end net asset value, for
those shareholders that have elected the reinvestment option.
Note (C) Capital Share Transactions: Each Fund is authorized to issue an
unlimited number of shares of beneficial interest with no par value.
Transactions in shares of beneficial interest from the commencement of
investment operations through June 30, 1995 were as follows:
<TABLE>
<CAPTION>
EQUITY INVESTMENT FUND BALANCED FUND
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 412,880 $ 4,521,599 267,068 $ 2,777,969
Shares issued through
reinvestment of dividends 2,306 25,947 3,518 37,857
Shares redeemed (7,881) (84,363) (3) (30)
------- ----------- ------- -----------
Net Increase 407,305 $ 4,463,183 270,583 $ 2,815,796
======= =========== ======= ==========
FIXED INCOME FUND INTERMEDIATE FIXED INCOME FUND
Shares Amount Shares Amount
Shares sold 620,161 $ 6,367,978 3,011,283 $ 30,365,363
Shares issued through
reinvestment of dividends 6,778 69,497 39,660 403,289
Shares redeemed (3,076) (31,479) (163,113) (1,650,015)
------- ----------- --------- ------------
Net Increase 623,863 $ 6,405,996 2,887.830 $ 29,118,637
======= ============ ========= ============
PRINCIPAL PRESERVATION FUND
Shares Amount
Shares sold 20,195,224 $ 20,195,224
Shares issued through
reinvestment of dividends 210,250 210,250
Shares redeemed (18,592,534) (18,592,534)
----------- ------------
Net increase 11,812,940 $ 11,812,940
========== ============
</TABLE>
<PAGE>
McM FUNDS
Notes to Financial Statements (continued) June 30, 1995
Note (D) Investment Transactions: Aggregate purchases and proceeds from sales of
investment securities (other than short term investments) from the commencement
of investment operations through June 30, 1995 were:
Aggregate Proceeds from
Purchases Sales
Equity Investment Fund $ 4,349,501 $ 15,595
Balanced Fund 3,859,929 1,098,054
Fixed Income Fund 8,738,718 2,397,759
Intermediate Fixed Income Fund 49,444,691 20,592,449
Note (E) Advisory, Administration and Distribution Services Agreements: Under
its Advisory Agreements with each of the Funds, the Advisor provides investment
advisory services to the Funds. The Funds will pay the Advisor at the following
annual percentage rates of the average daily net assets of each Fund: 0.50% for
the Equity Investment Fund; 0.45% for the Balanced Fund; 0.35% for the Fixed
Income Fund; 0.35% for the Intermediate Fixed Income Fund; and 0.25% for the
Principal Preservation Fund. These fees are accrued daily and paid monthly. The
Advisor has voluntarily undertaken to reimburse the Equity Investment Fund,
Balanced Fund, Fixed Income Fund, Intermediate Fixed Income Fund, and Principal
Preservation Fund for operating expenses which cause total expenses to exceed
0.75%, 0.60%, 0.50%, 0.50%, and 0.30%, respectively. For the period July 14,1994
(July 13, 1994 for the Principal Preservation Fund) through June 30, 1995, the
Advisor reimbursed, subject to repayment, expenses totaling $490,678; $100,321
for the Equity Investment Fund, $99,141 for the Balanced Fund, $92,388 for the
Fixed Income Fund, $94,352 for the Intermediate Fixed Income Fund, and $104,476
for the Principal Preservation Fund.
<PAGE>
Financial Highlights
For the Period Ended June 30, 1995
- -------------------------------------------------------------------------------
The tables below set forth financial data for a share of beneficial interest
outstanding throughout the period presented.
<TABLE>
<CAPTION>
McM
McM McM Intermediate McM
Equity McM Fixed Fixed Principal
Investment Balanced Income Income Preservation
Fund* Fund* Fund* Fund* Fund**
---------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period ....................... $10.00 $10.00 $10.00 $10.00 $1.00
------- ------- ------- ------- -------
Income from investment operations
Net investment income ..................................... 0.19 0.36 0.55 0.54 0.05
Net realized and unrealized gain on investment ............ 1.94 1.33 0.56 0.34 0.00
------- ------- ------- ------- -------
Total from investment operations ....................... 2.13 1.69 1.11 0.88 0.05
------- ------- ------- ------- -------
Less Distributions:
From net investment income ................................ (0.18) (0.34) (0.53) (0.51) (0.05)
------- ------- ------- ------- -------
Total distributions .................................... (0.18) (0.34) (0.53) (0.51) (0.05)
------- ------- ------- ------- -------
Net Asset Value, end of period ............................. $11.95 $11.35 $10.58 $10.37 $1.00
======= ======= ======= ======= =======
Total return ............................................... 21.57% 17.31% 11.55% 9.19% 5.10%
Ratios/Supplemental Data
Net assets, end of period (in 000's) ...................... $4,866 $3,070 $6,599 $29,936 $11,813
Ratio of expenses to average net assets
before reimbursement of expenses by Advisor ............ 8.48% 8.41% 7.29% 1.72% 2.77%
Ratio of expenses to average net assets
after reimbursement of expenses by Advisor ............. 0.75% 0.60% 0.50% 0.50% 0.30%
Ratio of net investment income to average net assets
before reimbursement of expenses by Advisor ............ -5.50% -3.54% -0.47% 5.01% 2.91%
Ratio of net investment income to average net assets
after reimbursement of expenses by Advisor ............. 2.24% 4.28% 6.33% 6.24% 5.38%
Portfolio turnover ........................................ 1.81% 81.05% 150.77% 227.09% N/A
</TABLE>
* McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income Fund and
McM Intermediate Fixed Income Fund commenced investment operations on July
14, 1994.
** McM Principal Preservation Fund commenced investment operations on July 13,
1994.
See accompanying notes to financial statements.
<PAGE>
McM FUNDS
Report of Independent Certified Public Accountants
To the Shareholders and Trustees of McM Funds:
We have audited the accompanying statements of assets and liabilities of
McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income Fund, McM
Intermediate Fixed Income Fund, and McM Principal Preservation Fund, each a
series of shares of beneficial interest of McM Funds, including the schedules of
investments, as of June 30, 1995 and the related statements of operations, the
statements of changes in net assets, and the financial highlights for the period
ended June 30,1995. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of McM Equity Investment Fund, McM Balanced Fund, McM Fixed Income
Fund, McM Intermediate Fixed Income Fund, and McM Principal Preservation Fund as
of June 30,1995, the results of their operations, the changes in their net
assets, and their financial highlights for the period ended June 30,1995, in
conformity with generally accepted accounting principles.
/s/ Tait, Weller & Baker
--------------------------
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 21, 1995
