Statement of Additional Information
September 27, 1996, as amended January 31, 1997
This Statement is not a prospectus and should be read in conjunction
with the Prospectus dated September 27, 1996, as may be amended from
time to time. A copy of the current Prospectus can be obtained by
calling (800) 223-7010, or by writing Citizens Investment Trust
(hereafter Citizens Trust), One Harbour Place, Portsmouth, NH 03801.
This Statement and the Citizen Trust Prospectus may be supplemented
from time to time.
Citizens Investment Trust
E[bullet]fund
Working Assets Money Market Portfolio
Citizens Income Portfolio
Citizens Emerging Growth Portfolio
Citizens Global Equity Portfolio
Citizens Index Portfolio
Muir California Tax-Free Income Portfolio
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Table of Contents Page
The Fund 2
Investment Objective and Policies 2
Other Investment Techniques 9
Factors that Affect the Value of Our Investments 14
Turnover and Portfolio Transactions 14
The Value of Our Shares 15
Information About Our Yield and Total Return 17
Dividends and Distributions 20
Federal Taxes 21
Redemption Information 24
Trustees and Officers 25
Additional Information Regarding the Management Company 27
Investment Advisory and Other Services 28
Additional Information 31
Voting Rights 31
Shareholder and Trustee Liability 31
Custodian 32
Auditors 32
Legal Counsel 32
Financial Statements 32
Appendix: Description of Ratings 33
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The Fund
Citizens Investment Trust (the "Fund" or "Citizens Trust") presently
consists of seven separate portfolios: Working Assets Money Market Portfolio
(inception date 8/30/83), Citizens Income Portfolio (inception date 6/10/92),
Citizens Emerging Growth Portfolio (inception date 2/8/94), Citizens Global
Equity Portfolio (inception date 2/8/94), Muir National Tax-Free Income
Portfolio (inception date 4/ /97), Citizens Index Portfolio (inception date
3/3/95), and the E[bullet]fund (inception date 7/1/95). On May 28, 1992 the
Fund, which had operated as a money market fund since 1983, changed its name
from Working Assets Money Fund. On October 5, 1995 the Fund changed its name
from Working Assets Common Holdings to Citizens Investment Trust.
This Statement of Additional Information relates to the Retail Shares for
the Working Assets Money Market Portfolio and the Citizens Index Portfolio.
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Investment Objectives and Policies
The following are fundamental investment policies followed by each of the
current portfolios of the Fund (each a "Portfolio," and collectively, the
"Portfolios") which supplement those listed in the Prospectus. Any policy
identified as a fundamental investment policy of a Portfolio may be amended only
with approval of the holders of a majority of the outstanding shares of that
Portfolio as defined by the Investment Company Act of 1940, as amended (the
"1940 Act").
Each Portfolio (with the exception of the Muir California Tax-Free Income
Portfolio):
1. May not buy the securities of any company if the Portfolio would then
own more than 10% of the total value of all of the company's outstanding
voting securities, or if the Fund as a whole would then own more than 10%
of the total value of all of the company's outstanding voting securities. A
Portfolio may not concentrate its investments by buying the securities of
companies in any one industry if more than 25% of the value of total assets
would then be invested in that industry; however, obligations issued or
guaranteed by the U. S. Government, its agencies and instrumentalities, and
obligations of domestic branches of domestic banks, are not included in
this limit.
2. Will not invest in limited partnerships, including those which own
commodities, real estate and oil, gas and mineral leases.
3. May not make loans other than pursuant to repurchase agreements. When we
buy money market instruments or loan participation interests, we are
investing, not making a loan.
4. May not invest for the purpose of exercising control or management of
other companies.
5. May not buy or continue to hold securities if our Trustees, officers or
the Directors or officers of Citizens Advisers, Inc. (the "Adviser") own
more than certain limits of these securities. If all of these people who
own more than 1/2 of 1% of the shares of a company together own more than
5% of the company's shares, we cannot buy, or continue to own, that
company's shares.
6. May not participate with others on a joint, or a joint and several,
basis in any trading account in any securities.
7. May not underwrite securities, which means we may not sell securities
for others.
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8. May borrow only under special circumstances. We do not normally borrow
money, but for temporary purposes a Portfolio may borrow from banks up to
10% of the Portfolio's total assets. If we borrow, we can pledge our assets
up to the amount borrowed. A Portfolio cannot borrow to purchase securities
or to increase its income, but can borrow to pay for shares being redeemed
so that we do not have to sell securities we do not want to sell. Thus, a
Portfolio will not purchase any securities while the Portfolio has
borrowings above 5% of assets outstanding. The interest paid on our
borrowings would reduce our net income.
9. Subject to the provisions of our Declaration of Trust which provides
that we may issue several classes of shares in any one portfolio, we may
not issue senior securities. We may not issue securities that have priority
over others in dividends, redemption rights, or have other privileges. We
must limit our involvement in "illiquid instruments," that is, repurchase
agreements that have a term of more than seven days, and securities that
have restrictions on resale or lack readily available market quotations, to
10% of the total value of a Portfolio's net assets and we will buy no such
securities for a Portfolio unless the assets in the Portfolio exceed $10
million at the time of purchase. Private Placements which may be traded
pursuant to Rule 144A under the Securities Act of 1933 will not be subject
to these limitations, if our Board of Trustees finds that a liquid trading
market exists for these securities. Our Trustees will review on an ongoing
basis any determination by the Adviser to treat a restricted security as a
liquid security, including the Adviser's assessment of current trading
activity and the availability of reliable price information. In determining
whether a privately placed security is properly considered a liquid
security, the Adviser and our Trustees will take into account the following
factors: (i) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer); (ii) dealer undertakings
to make a market in the security; and (iii) the number of dealers willing
to purchase or sell the security and the number of other potential
purchasers. To the extent the Portfolio invests in restricted securities
that are deemed liquid, the general level of illiquidity in the Portfolio
may be increased if qualified institutional buyers become uninterested in
purchasing these securities or the market for these securities contracts.
Acquisitions of such liquid restricted securities will be made from a list
approved by our Trustees.
10. There is a limit on a Portfolio's ability to loan portfolio securities.
If a Portfolio loans securities, then it must maintain collateral at 100%
of the value of the securities and any collateral must be marketable on an
exchange.
The following is a fundamental policy for Working Assets Money Market
Portfolio, the E[bullet]fund, Citizens Income Portfolio, Citizens Global Equity
Portfolio and Citizens Index Portfolio and do not apply to the Citizens Emerging
Growth Portfolio and the Muir California Tax-Free Income Portfolio.
A Portfolio may place only 5% of its total assets in companies which have
been in operation, including operations of predecessors, for less than three
years.
As a general policy, none of the Portfolios will invest in real estate
assets or interests therein, excluding readily marketable securities.
The Muir California Tax-Free Income Portfolio may not:
1. Make loans to others, except (a) through the purchase of debt securities
in accordance with our investment objectives and policies, and (b) to the
extent the entry into a repurchase agreement is deemed to be a loan.
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2. Borrow money, except temporarily for extraordinary or emergency (not
leveraging) purposes from a bank and then not in excess of 5% of our total
assets (at the lower of cost or fair market value).
3. Purchase securities on margin, sell securities short, participate on a
joint or joint and several basis in any securities trading account, or
underwrite securities except insofar as we may be technically deemed an
underwriter under the federal securities laws in connection with the
disposition of portfolio securities. (This is an operating restriction and
does not preclude us from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities.)
4. Buy or sell interests in commodities or commodity contracts, oil, gas or
mineral exploration or development programs, or real estate, provided that
this limitation shall not prohibit the purchase of municipal and other debt
securities secured by real estate or interests therein.
5. Invest more than 10% of our net assets in illiquid securities, a term
which means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which we have
valued our securities, and includes, among other things, (i) repurchase
agreements maturing in more than seven days, and (ii) municipal
lease/purchase agreements, VRDNs (as defined below) and Participating VRDNs
(as defined below) which the sub-adviser has determined are illiquid
because there is an inefficient or thin trading market.
6. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit us from (a) entering into
permitted borrowings, mortgages or pledges, (b) purchasing securities on a
when-issued or delayed-delivery basis or (c) entering into repurchase
transactions.
As an operation policy, the Muir California Tax-Free Income Portfolio may
not:
1. Purchase or sell common stocks, preferred stocks, warrants or other
equity securities, or futures contracts, or purchase or write put, call,
straddle or spread options, except that we may purchase, hold and dispose
of "obligations with puts attached" in accordance with our investment
policies as described in the Prospectus.
2. Invest in securities of other investment companies (except as they may
be acquired as part of a merger, consolidation or acquisition of assets)
which would result in our (i) owning more than 3% of the total outstanding
voting stock of another registered investment company; (ii) investing more
than 5% of our total assets in the securities of a single registered
investment company; or (iii) investing more than 10% or our total assets
in the securities (other than treasury stock) of registered investment
companies. Within these limitations, we may invest in other investment
companies.
3. Invest in any issuer for purposes of exercising control or management.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in
values or assets will not constitute a violation of that restriction.
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The Portfolios
The following discussion elaborates on the description of each Portfolio's
investment objectives and policies as contained in the Prospectus, including any
fundamental investment policies of a Portfolio that supplement the fundamental
policies of the Portfolios and in the Prospectus.
Working Assets Money Market Portfolio and the E[bullet]fund
Working Assets Money Market Portfolio ("Money Market Portfolio") and the
E[bullet]fund, as a fundamental investment policy of each Portfolio, may not buy
any securities other than money market securities. Thus, each Portfolio cannot
buy any commodities or commodity futures contracts, any mineral programs or
leases, any shares of other investment companies or any warrants, puts, calls or
combinations of these. Each Portfolio may not buy real estate, or real estate
loans, but may buy money market securities even though the issuer invests in
real estate or interests in real estate.
The following are also the present policies of each Portfolio, but may be
changed by our Trustees without a vote of the shareholders of the Portfolios:
1. Each Portfolio may invest in variable amount master demand notes, which
are obligations that permit us to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between us and the
borrower, subject to the 10% limitation referred to in paragraph 3 below.
The interest rates and amounts involved may change daily. We have the right
to increase the amount under the note at any time up to the full amount
provided by the note agreement, or to decrease the amount; and the borrower
may repay up to the full amount of the note without penalty. Because these
types of notes are direct lending arrangements between us and the borrower,
they generally will not be traded and there is no active secondary market
for these notes. However, they are redeemable on demand, and thus
immediately repayable by the borrower, at face value plus accrued interest
at any time. Our right to redeem is dependent on the borrower's ability to
pay principal and interest on demand. Accordingly, our Adviser will
consider and continuously monitor the earning power, cash flow and other
liquidity ratios of the borrower to assess its ability to meet its
obligations on demand. We will invest in these notes only if the Board of
Trustees or its designee determines that they present minimal credit risks
and are of comparable quality to commercial paper having the highest rating
of Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Corporation ("Standard & Poor's").
2. Each Portfolio may not invest more than 10% of its assets in time
deposits maturing in more than two business days but less than seven
business days.
3. Each Portfolio will not enter into a repurchase agreement if it would
cause more than 10% of its assets to be subject to repurchase agreements
having a maturity of more than seven days; included in this 10% limitation
would be any illiquid securities (as described below). See "Other
Investment Techniques--Money Market Instruments and Repurchase Agreements."
4. Each Portfolio will not invest more than 10% of its net assets in
illiquid securities. Generally an illiquid security is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which the Portfolio has valued the instrument.
Subject to this limitation, our Trustees have authorized the Portfolio to
invest in restricted securities, specifically privately placed commercial
paper, where such investment is consistent with each Portfolio's investment
objective, and has authorized such securities to be considered to be liquid
to the extent the Adviser determines that there is a liquid institutional
or other daily market for such securities. For example, restricted
securities which may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and for which
a liquid institutional market has developed may be considered to be liquid
securities. See the discussion relating to the purchase of illiquid
securities in the section regarding the fundamental investment policies of
the Portfolios under "Investment Objective and Policies" above.
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5. The E[bullet]fund will not invest more than 5% of its assets in variable
rate securities.
Each Portfolio may not sell short or buy on margin and may not write put or
call options.
Portfolio Quality and Required Maturities. Because the Money Market
Portfolio and the E[bullet]fund each uses the amortized cost method of valuation
(see "The Value of Our Shares"), a Portfolio will not purchase any instruments
with a remaining maturity of more than 397 days (13 months), except for certain
exceptions permitted by rules under the 1940 Act. Obligations of U.S. Government
agencies and instrumentalities which have a variable rate of interest which is
adjusted no less frequently than every 762 days are considered to have a
maturity equal to the period remaining until the next adjustment date. A
variable rate instrument which permits us to demand payment of the principal
amount of the instrument at any time or at specified intervals of no more than
397 days (13 months), on no more than 30 days notice, is deemed to have a
maturity of the longer of the period remaining until the interest rate is
adjusted or the period remaining until the principal amount will be paid to us
on demand. A variable rate instrument maturing in 397 days (13 months) or less
is deemed to have a maturity equal to the period remaining until the next
interest adjustment date. A floating rate instrument with a demand feature, and
which has its interest rate pegged to an identified market interest rate, is
deemed to have a maturity equal to the period of time remaining until the
principal amount will be paid to us on demand, provided that our Trustees
determine that the floating rate feature insures that the market value of the
instrument will always approximate par value and that the instrument is of high
quality. Our Trustees will review our holdings of variable rate instruments
quarterly to assure themselves that these instruments continue to be of high
quality. A repurchase agreement is considered to have a maturity equal to the
period remaining until the delivery date on resale. An instrument called for
redemption is considered as maturing on the date on which the redemption payment
must be made. The Money Market Portfolio and the E[bullet]fund will each
maintain a dollar-weighted average portfolio maturity that does not exceed 90
days.
The Money Market Portfolio and the E[bullet]fund each intends to comply
with Rule 2a-7 under the 1940 Act. Under that Rule, each Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except for U.S. Government agency securities. In addition, we may only invest in
securities which are rated within the top two rating categories (or, if unrated,
deemed by our Adviser to be of equivalent credit quality). We may not invest
more than 5% of each Portfolio's assets in securities which are not rated in the
highest rating category by at least two nationally recognized statistical rating
organizations ("NRSROs") (for single-rated securities, one rating organization
will suffice; for unrated securities, our Adviser may rely on its own credit
equivalency assessment based upon procedures approved by our Trustees). If we do
invest in securities which are not rated in (or, if unrated, not deemed
equivalent to) the highest rating category, we will limit such investments so
that no more than 1% of the total assets of each Portfolio is invested in
securities of any one issuer rated below the highest category. In addition,
pursuant to our own credit procedures, we will not invest in any unrated
security or in any security rated by only one rating organization unless such
security is on a list approved by our Trustees.
Although Rule 2a-7 allows that 5% may be invested in second tier
securities, each Portfolio's policy is to invest 100% in first tier securities
only.
Citizens Income Portfolio
The objective of Citizens Income Portfolio is to provide as high a level of
current income as we believe to be consistent with prudent investment risk. We
invest in bonds and other debt securities which meet our financial and social
criteria. We intend to purchase primarily intermediate- and long- term
securities and to maintain a weighted average maturity of 5-15 years. However,
at times, we may have a longer or shorter weighted average maturity if we
believe it will help us meet our investment objective.
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We plan to invest at least 65% of the value of the Citizens Income
Portfolio's assets in debt securities that are rated BBB or better by a NRSRO
such as Standard & Poor's or Moody's; unrated securities which we believe are
comparable in credit quality to securities rated BBB or better as described
above; obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities; mortgages and other asset backed securities; other debt
securities or cash and cash equivalents. Up to 35% of the Citizens Income
Portfolio's total assets may be invested in debt securities which do not have
the investment characteristics described above. Such debt securities could
include convertible debt securities, convertible preferred and preferred stocks
or other securities.
In pursuit of our investment objective we will sometimes purchase
securities that have warrants attached to them. These warrants are typically
held on our books at a zero value, as the value of the warrants can only be
realized upon their exercise (see "Other Investment Techniques--Warrants"). From
time to time, we will also purchase options to buy or sell securities in the
future at values determined by the performance of financial bench marks or
indexes. The use of options can add risk to the Portfolio because the portfolio
manager may determine that exercise of the option will not benefit the Portfolio
and therefore, the amount invested to acquire the option will be lost. We may
also purchase "structured securities," such as interest-only strips or similar
vehicles where one or more of the rights within the underlying securities has
been traded through the financial markets for a different right or series of
rights. The risk associated with "interest-only strips" is that the security may
prepay or default and our ability to collect interest payments will end.
The Citizens Income Portfolio is authorized to purchase the securities
described above from both U.S. and non-U.S. issuers (see "Other Investment
Techniques--Foreign Securities").
Citizens Emerging Growth Portfolio
The objective of the Citizens Emerging Growth Portfolio is aggressive
growth through investment in small and medium sized companies. Up to 100% of
this Portfolio's assets will be invested in companies in the common and
preferred stock of companies with capitalization in the range of $75 million to
$4 billion. While many of these companies will have already demonstrated their
strength, some will be still unseasoned, and therefore may have some speculative
characteristics.
The net asset value of this Portfolio is subject to significant
fluctuation. Smaller companies have the potential for a much higher reward, as
well as significantly more risk. To moderate this risk we plan to typically hold
between 30-50 companies in the Portfolio, under normal conditions.
At times we will also buy short-term fixed income securities for the
Citizens Emerging Growth Portfolio. Since most of the companies we will purchase
are relatively new, we expect dividend income to be negligible to accomplishing
the Portfolio's objective.
Citizens Global Equity Portfolio
The objective of the Citizens Global Equity Portfolio is capital
appreciation by investing in both foreign and U.S. markets. Investing in foreign
companies and on international exchanges may entail greater risk than investing
solely in the United States (see "Other Investment Techniques--Foreign
Securities").
In the Citizens Global Equity Portfolio we buy primarily common stocks of
U.S. domestic and foreign companies. From time to time, we may also buy other
securities such as convertible or preferred stocks and short-term debt
securities. We plan to allocate over half our assets to foreign markets in most
circumstances in a minimum of three countries.
To moderate these risks as well as gain potential benefits we use a number
of investment techniques. The first of these is country selection. We restrict
our investments in emerging nations (those not included in Morgan Stanley's
World Index) to no more than 25% of the assets of Citizens Global Equity
Portfolio.
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When we invest on foreign exchanges we buy securities in the currency of
the local country. Often the local currency will fluctuate vs. the dollar. To
moderate this risk we engage in currency "hedging" when we feel it is
appropriate to protect the value of our portfolio. We do this by entering into
arrangements to buy or sell a particular currency, security, or securities index
for a stated value at a given point in time. Hedging strategies, if successful,
can reduce the risk of loss by wholly or partially offsetting the negative
effect of unfavorable price movements in the investment being hedged. While
there is a cost involved in hedging, we believe it allows us to moderate the
risk of currency exchange. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments (see "Other Investment Techniques--Options
Transactions").
Citizens Index Portfolio
The objective of the Citizens Index Portfolio is capital appreciation by
investing in a specially designed index of 300 socially responsible companies.
The Citizens Index Portfolio invests primarily in a market weighted index
of companies included in the Standard & Poor's Composite Index of 500 Stocks
("S&P 500") that have passed Citizens' social screens in addition to companies
that are not part of the S&P 500 but which pass our social and financial
screens. Companies outside the S&P 500 are used in the Citizens Index Portfolio
to add industry diversity and other financial characteristics that we believe
will enable the Portfolio to track the returns of the S&P 500 as a whole.
Securities will be purchased in a proportion equal to the weight of each
company to the total index. At times we will also buy short-term fixed income
securities for the Citizens Index Portfolio. Under normal circumstances these
short-term investments will amount to no more than 5% of the Portfolio. Our
investment results will usually lag the performance of the underlying index due
to short-term cash investments and the deduction of portfolio expenses and
transaction costs.
Muir California Tax-Free Income Portfolio
Our objective is to provide a high level of current income exempt from both
federal and California state personal income tax. We seek to achieve this
objective by investing primarily in securities which our Trustees believe will
provide social, environmental and economic benefits.
We Will Not Compromise the Quality of Our Portfolio. While we place a high
premium on the economic and social benefit of our investments, we do not
sacrifice the quality of our portfolio to achieve our social, environmental and
economic agenda. Our securities portfolio contains only Tax-Exempt Securities
(as defined below) which have been rated "investment grade." Investment grade
securities are securities which, at the time of purchase, have been rated in one
of the four highest rating categories (i.e., "Baa" or higher) by Moody's,
Standard & Poor's or Fitch Investors Service, Inc. or if not rated, are
determined by our sub-adviser to be at least of equivalent quality.
We do not invest in "junk bonds" (i.e. securities rated below investment
grade). However, Tax-Exempt securities rated in the fourth highest rating
category (the lowest rating category in which we may invest) have speculative
characteristics. With respect to these securities, 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 rated
Tax-Exempt Securities. If we invest in any Tax-Exempt Security the rating of
which subsequently drops below investment grade, our Board of Trustees will be
notified and shall promptly determine on a case by case basis whether the
security should be retained or sold. We maintain an operating policy that no
more than 5% of our securities portfolio may consist of securities which,
although rated investment grade when purchased, subsequently drop below
investment grade.
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Many Tax-Exempt Securities are not rated by any credit rating agency.
Although we are permitted to invest up to 10% of our total assets in unrated
Tax-Exempt Securities, we currently do not invest in any such unrated securities
and do not intend to do so in the foreseeable future. If we were to invest in
unrated securities, the sub-adviser first would determine that these unrated
Tax-Exempt Securities meet our credit quality standards by performing an
independent credit analysis of the issuer of the security (and any institution
giving a credit enhancement to the security) in accordance with procedures
adopted by our Board of Trustees and reviewed by the Adviser.
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Other Investment Techniques
Money Market Instruments and Repurchase Agreements
During periods of unusual market conditions, or for liquidity purposes or
pending the investment of the proceeds of the sale of its shares, we may invest
all or a portion of assets of the Citizens Income Portfolio, Citizens Emerging
Growth Portfolio, Citizens Global Equity Portfolio, Citizens Index Portfolio,
the E[bullet]fund and Money Market Portfolio in money market instruments,
including: obligations of agencies and instrumentalities of the U.S. Government;
certificates of deposit of banks; and commercial paper or other corporate notes
of investment grade quality. We may also buy such securities subject to
repurchase agreements with primary dealers or banks which are members of the
Federal Reserve, secured by instruments issued or guaranteed by the agencies or
instrumentalities of the U.S. Government, the values including accrued interest,
or which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Portfolio, or the purchase and repurchase prices
may be the same, with interest at a standard rate due to the Portfolio together
with the repurchase price on repurchase. In either case, the income to the
Portfolio is unrelated to the interest rate on securities collateralizing the
repurchase. In the event of bankruptcy or other default by the vendor of a
repurchase agreement, there may be possible delays and expenses in liquidating
the resold securities, decline in the value of the resold securities and loss of
principal or interest. However, in the opinion of management, these risks are
not material; upon default, the resold securities constitute collateral for the
repurchase obligation.
Options Transactions
Each Portfolio, other than Money Market Portfolio and E[bullet]fund, may
from time to time buy and write (sell) call and put options on securities,
security indices, and foreign currencies that are traded on recognized
securities exchanges and over-the-counter markets. A call option gives the
holder (buyer) the right to purchase a security or currency at a specified price
(the exercise price) at any time until or on a certain date (the expiration
date). A put option gives the purchaser of the option the right to sell, and the
writer (seller) the obligation to buy, the underlying security or currency at
the exercise price at any time until or on the expiration date. The premium that
a Portfolio receives for buying or writing a call or put option is deemed to
constitute the market value of an option. Aggregate premiums paid for put and
call options will not exceed 5% of the Portfolio's total assets at the time of
each purchase. The premium that a Portfolio will receive from writing a call
option will reflect, among other things, the current market price of the
underlying investment, the relationship of the exercise price to such market
price, the historical price volatility of the underlying investment, and the
length of the option period. These instruments are often referred to as
"derivatives" which may be defined as financial instruments whose performance is
derived, at least in part, from the performance of another asset (such as a
security, currency or an index of securities). The Portfolios may use these
techniques to hedge against changes in interest rates, foreign currency exchange
rates, changes in securities prices or other factors affecting the value of
their investments, or as part of their overall investment strategies. Each
Portfolio will maintain segregated accounts consisting of liquid assets (or, as
permitted by applicable regulations, enter into certain offsetting positions to
cover its obligations under derivatives transactions) to avoid "leveraging" the
Portfolio.
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Risks in the use of these derivative securities depends on the Adviser's
ability to predict correctly the direction of interest rates, securities prices
or other factors. Risks include: a) the risk that interest rates, securities
prices or other factors do not move in the directions being hedged against, in
which case the Portfolio will have incurred the cost of the derivative (either
its purchase price or, by writing an option, losing the opportunity to profit
from increases in the value of the securities covered) with no tangible
benefits; b) an imperfect correlation between the price of derivatives and the
movements of the securities prices, interest rates or currency exchange rates
being hedged; c) the possible absence of a liquid secondary market for any
particular derivative at any time; d) the potential loss if the counterparty to
the transaction does not perform as promised; and e) the possible need to defer
closing out certain positions to avoid adverse tax consequences.
Warrants
Citizens Income Portfolio may invest in warrants. Warrants are instruments
which entitle the holder to buy underlying equity securities at a specific price
for a specific period of time. A warrant tends to be more volatile than its
underlying securities and ceases to have value if it is not exercised prior to
its expiration date. In addition, changes in the value of a warrant do not
necessarily correspond to changes in the value of the underlying securities.
Foreign Securities
Each Portfolio, other than the E[bullet]fund, may invest in foreign
securities which meet our social and financial criteria. As discussed in the
Prospectus, investing in foreign securities generally presents a greater degree
of risk than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As a
result of its investments in foreign securities, a Portfolio may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
Under certain circumstances, such as where we believe that the applicable
exchange rate is unfavorable at the time the currencies are received or we
anticipate, for any other reason, that the exchange rate will improve, a
Portfolio may hold such currencies for an indefinite period of time. A Portfolio
may also hold foreign currency in anticipation of purchasing foreign securities.
While the holding of currencies will permit the Portfolio to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Portfolio to risk of loss if exchange rates move in a direction adverse to
the Portfolio's position. Such losses could reduce any profits or increase any
losses sustained by the Portfolio from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
When-Issued Securities
Each Portfolio, other than the Money Market Portfolio and the
E[bullet]fund, may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, in many cases, a Portfolio purchasing
securities on a when-issued basis, will take delivery of such securities. When a
Portfolio commits to purchase a security on a when-issued or on a forward
delivery basis, it will set up procedures consistent with current policies of
the Securities and Exchange Commission (the "SEC") concerning such purchases.
Since that policy currently recommends that an amount of a fund's assets equal
to the amount of the purchase be held aside or segregated to be used to pay for
the commitment, we intend that a Portfolio will always have cash, short-term
money market instruments or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although we do not intend
to make such purchases for speculative purposes and we intend to adhere to
current regulatory policies with respect to such purchases, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, we may have to sell assets which have been set aside to cover our
commitments in order to meet redemptions. Also, if we were to determine that it
is necessary to sell the when-issued or forward delivery securities before
delivery to a Portfolio, the Portfolio may incur a loss because of market
fluctuations since the time the commitment to purchase such securities was made.
When the time comes to pay for when-issued or forward delivery securities, a
Portfolio will meet its obligations from the then-available cash flow on the
sale of securities, or,
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although it would not normally expect to do so, from the sale of the when-issued
or forward delivery securities themselves (which may have a value greater or
less than the Portfolio's payment obligation).
Special Considerations Regarding Tax-Exempt Securities; Muir California
Tax-Free Income Portfolio
"Tax-Exempt Securities," as this term is used in this Statement of
Additional Information, includes debt obligations issued by the State of
California, its political subdivisions, authorities and corporations, the
interest on which is, in the opinion of bond counsel to the issuer, exempt from
federal and State of California personal income taxes. Tax-Exempt Securities are
generally issued to obtain funds for various public purposes. An inverse
relationship exists between the value of debt obligations, including Tax-Exempt
Securities, and interest rates (i.e., when interest rates decline, the value of
debt obligations generally will tend to increase and when interest rates
increase, the value of debt obligations generally will tend to decline).
Municipal Notes. We may invest in different types of municipal notes
including (i) tax anticipation notes; (ii) revenue anticipation notes; (iii)
bond anticipation notes; (iv) construction loan notes; (v) short-term discount
notes; and (vi) variable rate demand notes.
Tax anticipation notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer secured by the issuer's taxing power for the payment
of principal and interest. Revenue anticipation notes are issued in expectation
of receipt of other kinds of revenue, such as federal revenues available under
the federal Revenue Sharing Program. They also are usually general obligations
of the issuer.
Bond anticipation notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
Construction loan notes are sold to provide construction financing for
specific projects. After successful completing and acceptance, many projects
receive permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.
Short-term discount notes (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their cash
flow.
We may also invest up to 5% of our total assets in variable or floating
rate demand notes ("VRDNs"). VRDNs are tax-exempt securities that contain a
floating or variable interest rate adjustable formula and an unconditional right
of demand to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period prior to specified dates, either from the
issuer or by drawing on a bank letter of credit, a guarantee or insurance issued
with respect to such instrument. The interest rate on a VRDN is adjusted
periodically based on a specific external rate (e.g., bank prime rate) to
maintain the VRDN's market value at approximately par. We decide which VRDNs to
purchase in accordance with procedures prescribed by our Board of Trustees,
which are intended to minimize credit risks. These procedures include, among
other things, both a credit analysis of any financial institution that is giving
credit support and a requirement that a VRDN be investment grade, as determined
in accordance with procedures adopted by the Board of Trustees with respect to
both its long-term and short-term aspects; (except that where credit support for
the instrument is provided even in the event of default on the underlying
security, we may rely only on the investment grade character of the short-term
aspect of the VRDN, i.e., the demand feature.) VRDNs which are unrated must have
quality characteristics similar to rated VRDNs in accordance with procedures
adopted by our Board of Trustees.
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We may also invest in participation interests ("Participating VRDNs") in
variable or floating rate tax-exempt obligations held by a financial
institution, typically a commercial bank ("institution"). Participating VRDNs
provide us with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDNs from the institution upon a
specified number of days notice. In addition, the Participating VRDN is backed
by an irrevocable letter of credit or guarantee of the institution. The
institution typically retains fees out of the interest paid on the obligation
for servicing the obligation, providing the letter of credit and issuing the
repurchase commitment. Our sub-adviser performs a credit analysis of the
institution involved, following procedures adopted by our Board of Trustees.
Municipal Bonds. Municipal bonds meet longer-term capital needs and
generally have maturities of more than one year when issued. Municipal bonds
have three principal classifications: (i) general obligation bonds; (ii) revenue
bonds; and (iii) industrial development bonds.
General obligation bonds are issued by states, counties, cities, towns,
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects, including construction or improvement of schools,
and water and sewer systems. The basic security behind general obligation bonds
is the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. The taxes that can be levied for the payment
of debt service may be limited or unlimited as to the rate or amount of special
assessments.
Revenue bonds are not secured by the full faith, credit and taxing power of
their issuer. Rather, the principal security for revenue bonds is generally the
net revenue derived from a particular facility, group of facilities, or, in some
cases, the proceeds of a special excise tax or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or the net revenues from housing
or other public projects. Some authorities are provided further security in the
form of a state's assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Industrial development bonds are in most cases revenue bonds and are issued
by or on behalf of public authorities to raise money to finance various
privately-operated facilities for business, manufacturing, housing, sports, and
pollution control. These bonds are also used to finance public facilities such
as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payment. Tax-exempt
industrial development bonds, in most cases, are revenue bonds and generally do
not carry the pledge of the credit of the issuing municipality, but generally
are guaranteed by the corporate entity on whose behalf they are issued. The
social performance of any such corporate guarantor will be considered in
accordance with procedures adopted by our Board of Trustees before we make an
investment decision with respect to any guaranteed securities. We will not
purchase industrial development bonds to the extent that the interest paid by
particular bonds is not excluded from gross income for federal regular income
tax purposes. We will not invest 25% or more of our total assets in industrial
development bonds.
Tax-Exempt Securities include municipal lease/purchase agreements which are
similar to installment purchase contracts for property or equipment issued by
municipalities. Our investment in municipal lease/purchase agreements will not
exceed 5% of our total assets.
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While we may invest in Tax-Exempt Securities with maturities of any length,
securities with longer maturities typically exhibit more fluctuation in market
value and therefore the inclusion of such securities in our portfolio may
increase the fluctuation of our net asset value. We invest in Tax-Exempt
Securities with maturities of up to 30 years depending upon our assessment of
the relative yield on securities of different maturities and our expectations of
future changes in interest rates.
There may, of course, be other types of municipal securities, similar to
the foregoing described municipal securities, which may become available and
could be included in our investment portfolio.
In the event that desirable Tax-Exempt Securities issued by California
governmental entities are not available, we may invest in other types of
securities (meeting, to the extent possible, the social responsibility criteria
outlined above) which are exempt from federal and California state personal
income tax. These securities may include U.S. Territorial obligations including
obligations of Puerto Rico, Guam and the Virgin Islands and the obligations of
the U.S. Government and agencies, instrumentalities or authorities of the U.S.
Government authorized by federal law to issue obligations exempt from any
state's personal income tax.
It is also possible, although not anticipated, that under normal market
conditions up to 20% of our net assets could be invested in state and municipal
obligations of other states (which would generate income exempt from federal
income tax but not exempt from California state personal income taxes), other
securities on which the interest is a tax preference item under the federal
alternative minimum tax, U.S. Treasury obligations, high quality commercial
paper, obligations of U.S. banks (including commercial banks and savings
institutions insured by the Federal Deposit Insurance Corporation ("FDIC") with
assets of $1 billion or more, and repurchase agreements secured by U.S.
Government securities. Some of the foregoing investments generate income that
would be subject to California and possibly federal personal income taxes when
distributed to our shareholders.
For temporary defensive purposes only, we may invest up to 100% of our
assets in (i) obligations issued or guaranteed by the full faith and credit of
the U.S. Government, its agencies, instrumentalities or authorities, highest
rated commercial paper, certificates of deposits of domestic banks with assets
of $1 billion or more and repurchase agreements (subject to the limitations
described below) the interest on which is subject to federal tax and may be
subject to California state personal income taxes; and (ii) securities the
interest on which is exempt from regular federal income taxes but not
California's personal income taxes, such as tax-exempt municipal securities
issued by other states and their agencies and instrumentalities.
We may purchase shares of no-load, open-end investment companies which
invest in Tax-Exempt Securities with remaining maturities of one year or less
(commonly known as "money market funds"). We will invest in such tax-exempt
money market funds only as a short-term measure if our Adviser or sub-adviser
determines that such money market funds provide a better combination of yield
and liquidity than direct investment in short-term, Tax-Exempt Securities. Our
Adviser will waive its management fee on any portion of our assets invested in
such money market funds. We will not invest more than 10% of our total assets in
shares issued by money market funds nor will we invest more than 5% of our total
assets in a single money market fund.
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Factors That Affect the Value of Our Investment
Money Market Instruments and Fixed Income Securities
The value of the fixed income securities in which we invest will fluctuate
depending in large part on changes in prevailing interest rates. Fixed income
securities comprise all assets in the Money Market Portfolio, the E[bullet]fund,
Citizens Income Portfolio and Muir California Tax-Free Income Portfolio and a
portion of assets in the Citizens Emerging Growth Portfolio, Citizens Index
Portfolio and Citizens Global Equity Portfolio under normal conditions. If these
rates go up after we buy a security, its value may go down. On the other hand,
if the rates go down, the security's value may go up. Changes in value and yield
based on changes in interest rate may have different effects on short-term
obligations than on long-term obligations. Long-term obligations, which often
have higher yields, may fluctuate in value more than short-term ones. We do not
expect changes in interest rates to significantly affect the value of our shares
in the Money Market Portfolio and the E[bullet]fund, since we use the amortized
cost method, which is described in the section "The Value of Our Shares."
However, changes in interest rates can have a significant effect on the value of
non-money market fixed income securities.
The value of equity securities held in the Citizens Emerging Growth, Global
Equity and Index Portfolios will fluctuate based upon market conditions and
issues specific to the issuer. These include changes in the management and
fundamental financial condition of the issuing company, prevailing economic and
competitive conditions in the industry sectors in which the company does
business and other factors which affect individual securities and the equity
market as a whole.
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Turnover and Portfolio Transactions
With regard to the Money Market Portfolio and the E[bullet]fund, we
generally purchase investments and hold them until they mature. Historically,
securities of U.S. Government agencies or instrumentalities have involved
minimal risk when they have been held by investors to maturity. However, we may
from time to time sell securities and purchase others to attempt to take
advantage of short-term market variations. We may also sell securities prior to
maturity to meet redemptions or as a result of a revised evaluation of the
issuer by our Adviser.
For the Citizens Income Portfolio and Muir California Tax-Free Income
Portfolio we purchase fixed income securities and for Citizens Emerging Growth
Portfolio, Citizens Global Equity Portfolio and the Citizens Index Portfolio, we
may purchase both equity and fixed income securities and hold them until such
time as we believe it is advisable to sell them in order to realize a gain or
loss whereupon we reinvest these assets in other securities.
The Citizens Index Portfolio seeks to have a turnover of less than 25% per year.
The Global Equity Portfolio is expected to have a portfolio turnover rate of
200%. Higher portfolio turnover rate increases transaction costs and may
increase taxable gains.
Our Adviser seeks to obtain for us the best net price and the most
favorable execution of orders. Purchases are made from issuers, underwriters,
dealers or brokers, and banks who specialize in the types of securities we buy.
Purchases from underwriters include a commission or concession paid by the
issuer to the underwriters. Purchases from dealers include the spread between
the bid and asked prices and purchase from brokers include commissions paid to
the broker based upon the transaction size. If the execution and price offered
by more than one dealer are comparable, the order may be given to a dealer who
has provided research advice, quotations on portfolio securities or other
services. Our Adviser will comply with Rule 17e-1 under the 1940 Act in regards
to brokerage transactions with affiliates, to assure that commissions will be
fair and reasonable to the shareholders.
Our Adviser may allocate transactions to broker/dealers in exchange for
services. By allocating transactions to obtain services, the Adviser is able to
supplement its own efforts. While it is not
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possible to place a dollar value on these services, it is the opinion of the
Adviser that the receipt of these services does not materially reduce the
Adviser's overall expenses. These services may or may not be useful to us or to
our Adviser and its affiliates which engage in securities activities. For the
fiscal years ended June 30, 1993, 1994, 1995 and 1996, all portfolio purchases,
as described above, were made directly from issuers or from dealers, and we paid
commissions in aggregate as follows: 1993-$79,300, 1994-$329,000, 1995-$250,000
and 1996-$171,957.
It is the policy of Citizens Advisers and the Trust to seek to obtain the
benefit of "soft dollar" payments for a Portfolio when consistent with obtaining
best execution and the best execution policy and when doing so is within the
"safe harbor" created by Section 28(e) of the Securities Exchange Act of 1934.
To that end, Citizens Advisers will maintain an account for each Portfolio with
one or more broker-dealers which agree to provide or pay for third-party
research which benefits the Portfolio. Sub-advisers will be informed in writing
of the name of the broker-dealer and provided with account information to allow
the execution of trades through that broker-dealer. In the event that best
execution of an equity transaction is available through a broker-dealer which
has been so identified, a sub-adviser shall place the transaction with that
broker-dealer. No transactions shall be placed with such broker-dealer other
than on an agency basis.
Any "soft dollars" generated in this fashion shall be used solely to
purchase research, within the meaning of Section 28(e), which benefits the
Portfolio on whose behalf the transaction is made. For these purposes, research
means that which provides assistance to Citizens Advisers, or a sub-adviser, in
the performance of decision making responsibilities. If a product or service
serves non-research as well as research functions, "soft dollars" shall be used
to pay for the product or service only to the extent that it constitutes
research.
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The Value of Our Shares
The value of our shares is expressed as net asset value. The net asset
value per share is computed by subtracting total liabilities from total assets
and dividing that number by the total number of our outstanding shares. All
expenses are accrued daily and taken into account in determining net asset
value.
We attempt to keep the net asset value of our Money Market Portfolio and
the E[bullet]fund fixed at $1.00 per share, while we expect the net asset value
per share in our other Portfolios to fluctuate.
The value of our shares for each Portfolio, other than the Money Market
Portfolio and the E[bullet]fund, is determined at 4:00 p.m. Eastern Time on each
day on which the New York Stock Exchange is open for regular trading and at such
other times as we feel may be necessary or appropriate.
The value of our shares for the Money Market Portfolio and the
E[bullet]fund is determined at 4:00 p.m. Eastern Time on each day that the
Portfolios are open. The Portfolios are currently open on each day, Monday
through Friday, except New Year's Day, Martin Luther King, Jr's. Birthday
(observed), Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day.
Money Market Portfolio and the E[bullet]fund
Our Trustees have determined that it is appropriate for us to value our
Money Market Portfolio and the E[bullet]fund using the amortized cost method and
that this method represents the fair value of each Portfolio's shares. This
method values a security at the time of its purchase at cost and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the security. This method does not take into account unrealized gains and
losses.
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While the amortized cost method provides certainty in valuation, there may
be periods during which value, as determined by the amortized cost method, is
higher or lower than the price we would receive if we sold the instrument.
During periods of declining interest rates, the daily yield on our shares may
tend to be higher than a like computation made by a fund with identical
investments which uses a method of valuation based on market prices and which
reflects capital changes in its dividends. Thus, if the use of amortized cost by
us resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in our shares would be able to obtain a somewhat higher
yield from us than he would from investment in the other fund, and existing
investors in our shares would receive less investment income. The converse would
apply in a period of rising interest rates.
To use the amortized cost method, our Board of Trustees must establish
procedures designed to stabilize the net asset value of the Money Market
Portfolio and the E[bullet]fund at $1.00 per share, to the extent reasonably
possible. These procedures must include review of the portfolio by the Board at
intervals it deems appropriate and reasonable in the light of market conditions
to determine how much the net asset value using available market quotations
deviates from the net asset value based on amortized cost. For this purpose,
when market quotations are available, securities are valued at bid price. If
market quotations are not available, investments are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of our Board of Trustees, including being
valued at prices based on market quotations for investments of similar type,
yield and maturity.
Under the procedures which our Trustees have adopted in connection with
valuation of our securities at amortized cost, our dividend policy will change
under certain circumstances. If on any day there is a deviation of more than
3/10th of 1% between the net asset value of a share computed on the amortized
cost basis and that computed on an available market price basis, the amount of
the deviation in excess of $0.003 will be added to or subtracted from the
dividend for that day in order to reduce the deviation to within $0.003. If on
any day the dividend is not large enough to absorb any such reduction and the
deviation is more than $0.005, our Board will be required, under a rule of the
SEC, to consider taking other action. Such action could include the sale of
portfolio securities, reducing or eliminating dividends or establishing a net
asset value per share based on market quotations.
To use the amortized cost method, we must also limit our portfolio
investments, including repurchase agreements, to those U.S. dollar denominated
instruments which our Board of Trustees determines present minimal credit risks
and which are of "high quality," e.g., portfolio investments rated in one of the
top two rating categories by at least two rating organizations or, if not rated
or created by only one rating agency, are of comparable quality in the judgment
of our Adviser and Trustees. A rated instrument that is subject to some external
agreement (such as a bank letter of credit), which agreement was not considered
in rating the instrument, is considered unrated and the Board of Trustees and
our Adviser will determine whether the external agreement makes the instrument
of comparable quality.
Citizens Income Portfolio, Citizens Emerging Growth Portfolio, Citizens
Global Equity Portfolio, the Citizens Index Portfolio and the Muir
California Tax-Free Income Portfolio
As described in the Prospectus, the Citizens Income Portfolio, Citizens
Emerging Growth Portfolio, Citizens Global Equity Portfolio, the Citizens Index
Portfolio and the Muir California Tax-Free Income Portfolio are generally valued
on the basis of market values. Equity securities, if any, in a Portfolio are
valued at the last sales price on the exchange on which they are primarily
traded or on the NASDAQ system for unlisted national market issues, or at the
last quoted bid price for listed securities in which there were no sales during
the day or for unlisted securities not reported on the NASDAQ system. Debt
securities are generally valued at their most recent closing sale prices, or, if
there is no closing sale price, at the bid price, in the principal market in
which such securities are normally traded. Fixed income securities maturing
within 60 days are normally valued at cost, plus or minus any amortized discount
or premium. Securities and other assets for which market quotations are not
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readily available (including restricted securities, if any) are appraised at
their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Fund's Board of Trustees.
Securities may also be valued on the basis of valuations furnished by a
pricing service that uses both dealer supplied valuations and evaluation based
upon expert analysis of market data or other factors if such valuations are
believed to reflect more accurately the fair value of such securities.
Use of a pricing service has been approved by the Fund's Board of Trustees.
There are a number of pricing services available, and the Trustees and officers
of the Fund acting on behalf of the Trustees, may use or discontinue the use of
any pricing service now, or in the future, employed.
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Information About Our Yield and Total Return
We report the investment performance of each Portfolio in several ways. All
performance reported in advertisements is historical and not intended to
indicate future returns.
Yield
From time to time the "yield" and "compounded effective yield" of the
Portfolios may be published in advertisements and sales material. For the Money
Market Portfolio and the E[bullet]fund, the yield is usually quoted for a seven
day period. For the Citizens Income Portfolio and the Muir California Tax-Free
Income Portfolio we usually report for a 30 day period.
Current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price per share
on the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base period.
Our yield is calculated by using the SEC formula:
Yield = 2[ (a-b + 1)6 - 1]
cd
where:
a = 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 income distributions.
d = the maximum offering price per share on the last day of the period.
Compounded effective yield, which we may also quote, is determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding.
The formula for effective yield is:
[ (base period return + 1) 365/7 - 1]
In addition, we may also quote a tax equivalent yield for the Muir
California Tax-Free Income Portfolio which demonstrates the taxable yield
necessary to produce an after-tax yield equivalent to that of a fund which
invests in tax-exempt obligations. Such yield is computed by dividing that
portion of our yield (computed as indicated above) that is tax-exempt by one
minus the highest applicable income tax rate and adding the product to that
portion of our yield that is not tax-exempt.
Current yield, effective yield and tax equivalent yield which are
calculated according to a formula prescribed by the SEC are not indicative of
the amounts that actually may be paid to our shareholders. Amounts paid to
shareholders are reflected in the quoted current distribution rate or taxable
equivalent
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distribution rate. The current distribution rate is computed by dividing the
total amount of dividends per share we paid during the past twelve months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate equivalent to our current
distribution rate (calculated as indicated above). Under certain circumstances,
such as when there has been a change in the amount of dividend payout, or a
fundamental change in investment policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends during the past twelve months. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from additional sources (i.e., sources other than dividends and
interest, such as short-term capital gains), and is calculated over a different
period of time.
The following table sets forth various measures of performance for the
Portfolios as of June 30, 1996:
Compounded
Effective
Portfolio 7-Day Yield Yield 30-Day Yield
--------- ----------- ----- ------------
Working Assets Money Market 4.02% 4.10% NA
Portfolio
E[bullet]fund 5.24% 5.91% NA
Citizens Income Portfolio NA NA 6.42%
Muir California Tax-Free Income NA NA 3.42%
Portfolio
The current yield of the Money Market Portfolio and the E[bullet]fund for a
specific period of time is calculated based on a hypothetical account containing
exactly one share at the beginning of the period. The net change in the value of
the account during the period is determined by subtracting this beginning value
from the value of the account at the end of the period including a hypothetical
charge reflecting deductions from shareholder accounts. Capital changes (i.e.,
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation) are excluded from the calculation. Because the
change will not reflect any capital changes, the dividends used in the yield
computation may not be the same as the dividends actually declared. The
dividends used in the yield calculation will be those which would have been
declared if there had been no capital changes included in our actual dividends.
The net change in the account value is then divided by the value of the account
at the beginning of the period and the resulting figure is called the "base
period return." The base period return is then multiplied by (365/7) for a seven
day effective yield with the resulting yield figure carried to the nearest
hundredth of one percent.
The "compounded effective yield" for the Money Market Portfolio and the
E[bullet]fund is determined by annualizing the base period return and assuming
that dividends earned are reinvested daily. Compounded effective yield is
calculated by adding 1 to the base period return (which is derived in the same
manner as discussed above) raising the sum to a power equal to 365 divided by 7
and subtracting 1 from the result.
Compounded effective yield information is useful to investors in reviewing
the performance of our Money Market Portfolio and the E[bullet]fund since the
yield is calculated on the same basis as those of other money market funds.
However, shareholders should take a number of factors into account in using our
yield information as a basis for comparison with other investments.
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Since our Money Market Portfolio and the E[bullet]fund are invested in
short-term money market instruments, our yield will fluctuate with money market
rates. Therefore, the compounded effective yield is not an indication of future
yields. Other investment alternatives such as savings certificates provide a
fixed yield if held full term, but there may be penalties if redeemed before
maturity, whereas there is no penalty for withdrawal at any time in the case of
our Portfolios.
The yield quotation for the Citizens Income Portfolio and the Muir
California Tax-Free Income Portfolio is based on the annualized net investment
income per share of a Portfolio over a 30 day period. The yield is calculated by
dividing the net investment income per share of a Portfolio earned during the
period by the public offering price per share of the Portfolio on the last day
of that period. The resulting figure is then annualized. Net investment income
per share is determined by dividing (i) the dividends and interest earned by a
Portfolio during the period, minus accrued expenses for the period, by (ii) the
average number of the Portfolio's shares entitled to receive dividends during
the period multiplied by the public offering price per share on the last day of
the period. Income is calculated for the purposes of yield calculations in
accordance with standardized methods applicable to all stock and bond funds. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses are
generally excluded from the calculation as these are reflected in each
Portfolio's net asset value per share.
Total Return and Other Quotations
We also can express the investment results in terms of "total return." We
do this for the Citizens Income Portfolio, Citizens Emerging Growth Portfolio,
Citizens Global Equity Portfolio, Citizens Index Portfolio and Muir California
Tax-Free Income Portfolio to take account of fluctuations in share value in
addition to income from interest and dividends. Total return refers to the total
change in value of an investment in the Portfolio over a specified period, while
the yield calculation only reflects the income component.
We compute total return by taking the total number of shares purchased by
a hypothetical $1,000 investment after deducting any applicable sales charge,
adding all additional shares purchased within the period with reinvested
dividends and distributions, calculating the value of these shares at the end of
the period, and dividing the result by the initial $1,000 investment. For
periods of more than one year, we adjust the cumulative total return to
calculate average annual total return during that period.
These figures will be calculated according to the SEC formula:
P(1 + T)n = ERV where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods
We also calculate an annual total return for the E[bullet]fund on a daily
basis. This number is the true reflection of what the E[bullet]fund returns to
you. We calculate total return for the E[bullet]fund by adding the net
investment income together with the Portfolio's other income, including income
from debit card transactions, and other income and capital changes, if any.
19
<PAGE>
For the fiscal year ended June 30, 1996 the Portfolios had the following
performance:
<TABLE>
<CAPTION>
Annualized Hypothetical Investment
Total Return Return on $1,000 for
Portfolio 1 Year Total Return Since Inception the 1 Year Period
--------- ------------------- --------------- -----------------
<S> <C> <C> <C>
Citizens Income Portfolio 5.48% 6.54% $1,054.80
Citizens Emerging Growth 42.53% 26.19% $1,425.30
Portfolio
Citizens Global Equity 12.64% 8.36% $1,126.40
Portfolio
Citizens Index Portfolio 23.79% 25.58% $1,237.90
Muir California Tax-Free 4.71% 6.22% $1,047.90
Income Portfolio
</TABLE>
When we quote each Portfolio's yield or total return we are referring to
its past results and not predicting our future performance. We quote total
return for the most recent one year period as well as average annual total
return for the most recent five- and ten-year periods, or from the time when we
first offered shares, whichever is shorter. Sometimes we advertise our actual
return quotations for annual or quarterly periods or quote cumulative return for
various periods. When we do this, we also always present the standardized total
return quotations at the same time.
When we quote our investment results we sometimes will compare them to
unmanaged market indices such as the Dow Jones Industrial Average and the S&P
500, and other data and rankings from recognized independent publishers, sources
such as Bank Rate Monitor, Money Magazine, Morningstar, Forbes Magazine, Lipper
Analytical Services and others.
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Dividends and Distributions
Money Market Portfolio and the E[bullet]fund
As described in the Prospectus, net income is determined and accrued daily
and paid monthly. This dividend is payable to everyone who was a shareholder at
4:00 p.m. Eastern time on the day the dividend is declared. Accordingly, when
shares are purchased dividends begin to accrue on the day the Transfer Agent
receives payment for the shares, provided that the payment is received by 4:00
p.m. Eastern time. When shares are redeemed, the shares are entitled to the
dividend declared on the day the redemption request is received by the Transfer
Agent, provided that the request is received after 4:00 p.m. Eastern time.
Dividends are automatically reinvested in shares, at net asset value, unless a
shareholder otherwise instructs the Transfer Agent in writing. Shareholders so
requesting will be mailed checks in the amount of the accumulated dividends. For
the purpose of calculating dividends, our daily net investment income consists
of: (a) all interest income accrued on investments (including any discount or
premium ratably amortized to the date of maturity or determined in such other
manner as the Trustees may determine); and (b) minus all liabilities accrued,
including interest, taxes and other expense items, amounts determined and
declared as dividends or distributions and reserves for contingent or
undetermined liabilities, all determined in accordance with generally accepted
accounting principles; and (c) plus or minus all realized and unrealized gains
or losses on investments.
20
<PAGE>
Citizens Income Portfolio
The Citizens Income Portfolio distributes to its shareholders monthly
dividends substantially equal to all of its net investment income. The
Portfolio's net investment income consists of non-capital gain income less
expenses. Net realized short-term capital gains, if any, and net realized
long-term capital gains, if any, will be distributed by the Portfolio at least
annually. Dividends and capital gains distributions are automatically reinvested
at net asset value in additional shares, unless a shareholder elects cash
distributions. Cash distributions will be paid at the close of the appropriate
monthly or annual period.
Muir California Tax-Free Income Portfolio
The Portfolio intends to declare a dividend daily, payable monthly, equal
to substantially all of its net investment income and to distribute
substantially all net realized long-term capital gains (and any short-term
capital gains) at least once each calendar year. Dividends and capital gains are
automatically reinvested in additional shares at net asset value per share on
the reinvestment date unless the shareholder has previously requested in writing
that the payment be made in cash.
Citizens Emerging Growth Portfolio, Citizens Global Equity Portfolio and
Citizens Index Portfolio
The Citizens Emerging Growth Portfolio, Citizens Global Equity Portfolio
and the Citizens Index Portfolio normally declare and pay dividends
substantially equal to all net investment income annually. Net investment income
consists of non-capital gain income less expenses. Net realized short-term
capital gains, if any, and net realized long-term capital gains, if any, will be
distributed by the Portfolios at least annually. Dividends and capital gains
distributions are automatically reinvested at net asset value in additional
shares, unless a shareholder elects cash distributions. Cash distributions will
be paid annually.
- --------------------------------------------------------------------------------
Federal Taxes
Status as a "Regulated Investment Company"
Each of the Portfolios intends to qualify as a "Regulated Investment
Company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). We plan to continue this election in the future for all Portfolios
of the Fund.
To qualify for the tax treatment afforded a "regulated investment company"
under the Code, a Portfolio must annually distribute at least 90% of its net
investment income and net short-term capital gains and meet certain requirements
with respect to sources of income, diversification of assets, and distributions
to shareholders. If a Portfolio elects and qualifies for such tax treatment, the
Portfolio will not be subject to federal income tax with respect to amounts
distributed. Under current law, in order to qualify, a Portfolio must (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock or
securities, and income from certain other sources; (b) derive less than 30% of
its gross income from the sale or other disposition of stock, or securities and
certain other investment held less than three months; and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the fund's assets is represented by cash, U.S. Government
securities, and other securities, limited, in respect of any one issuer, to an
amount not greater than 5% of the fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities). Options that are held by a Portfolio at the end of its
taxable year are subject to section 1256 of the Code and will be deemed to have
been sold at market value for federal income tax purposes. Sixty percent of any
net gain or loss recognized on these deemed sales, and 60% of any net gain or
loss realized from any actual sales of Section 1256 Contracts, will be treated
as long-term capital gain or loss, and the balance will be treated as short-term
capital gain or loss.
21
<PAGE>
A Portfolio that qualifies as a "qualified investment company," may
nonetheless be subject to certain federal excise taxes unless the Portfolio
meets certain additional distribution requirements. Under the Code, a
nondeductible excise tax of 4% is imposed on the excess of a regulated
investment company's "required distribution" for the calendar year ending within
the regulated investment company's taxable year over the "distributed amount"
for such calendar year. The term "required distribution" means the sum of (i)
98% of ordinary income (generally net investment income) for the calendar year,
(ii) 98% of capital gain net income (both long-term and short-term) for the
one-year period ending on October 31 (as though the one-year period ending on
October 31 were the regulated investment company's taxable year), and (iii) the
excess, if any, of the sum of the taxable income of the regulated investment
company for the previous calendar year plus all amounts from previous years that
were not distributed over the amount actually distributed for such preceding
calendar year. The term "distributed amount" generally means the sum of (i)
amounts actually distributed by a Portfolio from the Portfolio's current year's
ordinary income and capital gain net income and (ii) any amount on which the
Portfolio pays income tax for the year. We intend to meet these distribution
requirements, to avoid the excise tax liability, with respect to each of the
Portfolios. As long as a Portfolio maintains its status as a regulated
investment company and distribute all of its income, the Portfolio will not be
subject to any Massachusetts or California income or excise tax.
The Code permits the character of tax-exempt interest received by a
regulated investment company to flow through as tax-exempt dividends when
distributed to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations, the interest on which is exempt under Section
103 (a) of the Code. We intend to satisfy this 50% requirement in order to
permit our distributions of tax-exempt interest to be treated as such for
federal income tax purposes in the hands of our shareholders. Distributions to
shareholders of tax-exempt interest earned by us for the taxable year are
therefore not subject to federal income tax, although such distributions may be
subject to the individual and corporate alternative minimum taxes described
below. A portion of original issue discount relating to stripped municipal bonds
and their coupons may be treated as taxable income under certain circumstances.
Distributions of Net Investment Income
Dividends derived from net investment income and any excess of net
short-term capital gains over net long-term capital losses will be taxable to
shareholders as ordinary income. For each of the Portfolios other than Money
Market Portfolio, the E[bullet]fund, Citizens Income Portfolio and Muir
California Tax-Free Income Portfolio, a portion of these ordinary income
dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualified for that deduction with
respect to its holding of a Portfolio's shares. Availability of the deduction to
particular corporate shareholders is subject to certain limitations and
deductible amounts may be subject to the alternative minimum tax and result in
certain basis adjustments. Since the investment income of the Money Market
Portfolio, the E[bullet]fund, Citizens Income Portfolio and Muir California
Tax-Free Income Portfolio is derived from interest rather than dividends, no
portion of the dividends received from these Portfolios will be eligible for the
dividends received deduction. Moreover, to the extent that a Portfolio derives
investment income from sources within foreign countries, such Portfolio's
dividends and distributions will not qualify for such deduction.
Shareholders will be taxed for federal income tax purposes on dividends in
the same manner whether such dividends are received as shares or in cash.
Distributions from the Portfolios will also be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
Any dividend or distribution (except for dividends of net investment income
declared by the Money Market Portfolio and the E[bullet]fund) will have the
effect of reducing the per share net asset value of shares in a Portfolio by the
amount of the dividend or distribution. Shareholders purchasing shares in any of
the Portfolios shortly before the record date of any taxable dividend or other
distribution may thus pay
22
<PAGE>
the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
Any loss realized upon a redemption of the shares in a Portfolio held for
six months or less will be treated as a long-term capital loss to the extent of
any distributions of net capital gain made with respect to those shares. Any
loss realized upon redemption of shares may also be disallowed under the rules
relating to wash sales.
The exemption of the tax-exempt interest component of our dividends for
federal or California state personal income tax purposes does not necessarily
result in exemption under other federal or California tax laws or the income or
other tax laws of any other state or local taxing authority. You should bear in
mind that you may be subject to such other taxes.
If we acquire securities that produce taxable income, we will be able to
designate only a portion of our dividends as tax-exempt to you. We will
designate the tax-exempt percentage on an actual earned basis and will notify
you of the percentage by January 31st of the following year. Under this
designation method, the percentage designated as tax-exempt for any particular
distribution may be substantially different from the percentage of our income
that was tax-exempt during the period covered by the distribution.
Section 147 (a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed by such obligations. We have not
undertaken any investigations as to the users of the facilities financed by
tax-exempt bonds in its portfolio.
Special tax considerations apply with respect to foreign investments of
those Portfolios which permit such investments. For example, foreign exchange
gains and losses realized by a Portfolio generally will be treated as ordinary
income or losses. In addition, investment income received by a Portfolio from
sources within foreign countries may be subject to foreign income taxes withheld
at the source. The United States has entered into tax treaties with many foreign
countries which entitle a Portfolio to a reduced rate of tax or an exemption
from tax on such income.
Non-U.S. Shareholders
Distributions of net investment income to non-resident aliens and foreign
corporations will be subject to U.S. tax. For shareholders who are not engaged
in a trade or business in the U.S. to which the distribution is effectively
connected, this tax is withheld at the rate of 30% upon the gross amount of the
distribution in the absence of a Tax Treaty providing for a reduced rate or
exemption from U.S. taxation. However, if the distribution is effectively
connected with the conduct of the shareholder's trade or business within the
United States, the distribution will be included in the net income of the
shareholder and subject to U.S. income tax at the applicable marginal rate.
The foregoing is limited to a discussion of federal taxation. It should not
be viewed as a comprehensive discussion of the items referred to nor as covering
all provisions relevant to investors. Dividends and distributions may also be
subject to state or local taxes. Shareholders should consult their own tax
advisers for additional details on their particular tax status.
State Taxation; Muir California Tax-Free Income Portfolio
The portion of our exempt-interest dividends equal to the proportion which
the interest on our California municipal bonds bears to all of our tax-exempt
interest will be exempt from California personal income taxes if, at the close
of each quarter of our taxable year, at least 50% of the value of our total
assets consists of California municipal bonds. We intend to invest as least 50%
of our assets in California municipal bonds at all times.
23
<PAGE>
Shareholders not subject to California taxation do not benefit from the
fact that dividends distributed by us are exempt from taxation in California.
Most states other than California will not treat our dividends as tax-free.
Accordingly, if you are taxable in a state other than California, your after-tax
rate of return from our shares may be lower. Residents of New York,
Pennsylvania, Michigan and the District of Columbia may purchase shares of the
fund and the dividends will be free from federal taxation. Dividends will also
be free from District of Columbia taxation. We will inform shareholders annually
regarding the portion of our distributions which constitutes "exempt-interest
dividends" and which is exempt from California income taxes.
Unlike federal law, the Portfolio's exempt-interest dividends will not
constitute a tax preference item for California personal income tax purposes.
Moreover, an individual's Social Security benefits are not subject to California
personal income tax, so that the receipt of exempt-interest dividends will have
no effect on the California personal income taxation of Social Security
benefits. If you receive Social Security benefits, you must take all
distributions including tax-exempt dividends from us into account in determining
whether your total income exceeds the income level at which Social Security
benefits are partially taxable for federal personal income tax purposes. In
addition, for California personal income tax purposes the shareholders of the
Portfolio will not be subject to tax, or receive a credit for tax paid by the
Portfolio, on any undistributed capital gains of the Portfolio.
A small portion of our assets may from time to time be temporarily invested
in fixed-income obligations, the interest on which, when distributed to our
shareholders, will be subject to federal and California income taxes. We may
purchase so-called "non-essential" or "private activity" bonds the interest on
which would constitute a preference item for shareholders in determining their
federal alternative minimum tax. We may invest up to 20% of our assets in
private activity bonds.
Distributions from investment income and capital gains, including
exempt-interest dividends, may be subject (a) to California state franchise tax;
(b) to state taxes in states other than California; or (c) to local taxes in
cities other than those in California. Accordingly, our investors, including
corporate investors which may be subject to California franchise tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Portfolio dividends and as to their California tax situation in
general.
After the end of each calendar year, each shareholder receives information
for tax purposes on the dividends and distributions for that year, including any
portion taxable as ordinary income, any portion taxable as capital gains, any
portion representing a return of capital, any amount of dividends eligible for
the dividends-received deduction for corporations. Shareholders of the Muir
California Tax-Free Income Portfolio will also receive information regarding the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which we have designated
as tax-exempt, and the percentage of such tax-exempt distributions treated as a
tax-preference item for purposes of the alternative minimum tax.
- --------------------------------------------------------------------------------
Redemption Information
The redemption information below supplements the information contained in
the Prospectus. We pay redemption proceeds within five business days after we
receive a proper redemption request. Our obligation to pay for redemptions can
be suspended when the New York Stock Exchange is closed other than for weekends
or holidays or under certain emergency conditions determined by the SEC. The
holidays on which the New York Stock Exchange is closed currently are: New
Year's Day, Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition, to
the above mentioned holidays, Money Market Portfolio and the E[bullet]fund are
also closed on Martin Luther King, Jr's. Birthday (observed), Columbus Day and
Veterans Day. We pay redemption proceeds in cash, except that our Board of
Trustees has the power to decide that conditions exist which would make cash
payments undesirable. In that case, we could send redemption
24
<PAGE>
payments in securities from our portfolio, valued in the same method as we used
to determine our net asset value. There might then be brokerage or other costs
to the shareholder in selling these securities. We have elected to be governed
by Rule 18f-1 under the 1940 Act, which requires us to redeem shares solely in
cash up to the lesser of $250,000 or 1% of our total net assets during any 90
day period for any one shareholder. Your redemption proceeds may be more or less
than your cost, depending on the value or our shares.
If any of the shares being redeemed were recently purchased by check or
electronic funds transfer, we may delay sending the redemption proceeds for up
to ten business days while we determine whether the check or electronic funds
transfer used to purchase the shares has been honored by the bank on which it
was drawn or made. You can eliminate any possible delay by making your
investment by wire.
We have the right to compel the redemption of shares of each Portfolio,
other than the E[bullet]fund, held in an amount if the aggregate net asset value
of the shares in the account is less than $2,500. If our Adviser decides to do
this, we will advise shareholders who would be affected to increase the size of
their accounts to the $2,500 minimum.
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Trustees and Officers
We have a Board of Trustees which provides broad supervision over our
affairs. Our officers are elected by the Board and are responsible for day to
day operations. The Trustees and officers are listed below, together with their
date of birth and principal occupations during at least the past five years.
(Their titles may have varied during that period.) The address of each, except
where an address is indicated, is One Harbour Place, Portsmouth, New Hampshire
03801.
The Trustees who are "interested persons" as defined in the 1940 Act
("Interested Trustees") are indicated by an asterisk.
William D. Glenn, II (9/9/48), Co-Chair of the Board and Trustee, has been
a shareholder of Citizens Trust since 1983. He is a psychotherapist and the
Executive Director of Continuum HIV Day Services in San Francisco. He is a past
President of the San Francisco AIDS Foundation and former member of the Board of
Directors of the Gay Rights Chapter of the Northern California American Civil
Liberties Union. From 1981 to 1988, Mr. Glenn was the Assistant Principal and
Dean of Students at Mercy High School in San Francisco. He currently serves on
the boards of San Francisco's KQED and the 18th St. Services Chemical Dependency
Recovery Center. Address: 915 Las Ovejas, San Rafael, California 94903
Sophia Collier* (3/13/56), President, Treasurer and Trustee, is President
and Principal owner of Citizens Advisers. She also serves in an advisory
capacity to RhumbLine Advisers. Please see the section entitled "Additional
Information Regarding The Management Company" for more information regarding Ms.
Collier.
Juliana Eades (2/2/53), Trustee, has served as Executive Director of the $4
million New Hampshire Community Loan Fund since its inception in 1984. In this
capacity she has been a leading force in the creation of jobs and affordable
housing in New Hampshire. Prior to accepting her position at the Loan Fund, Ms.
Eades was Program Manager at the N.H. Governor's Council on Energy. In other
community activities, Ms. Eades is a member of the Campaign for Rate Payers'
Rights and the Society for the Protection of New Hampshire Forests. Address: 79
South State Street, Concord, New Hampshire 03301.
25
<PAGE>
Lokelani Devone (4/8/57), Trustee, is the Assistant General Counsel at DFS
Group Limited, an international retail business group where she has worked since
1989. Address: 525 Market Street, 33rd floor, San Francisco, California 94105.
Azie Taylor Morton (2/1/36), Co-Chair of the Board, Audit Committee Chair
and Trustee, was Treasurer of the United States during the Carter
Administration. From 1984 - 1989, she owned and operated the Stami Corporation,
a franchisee of Wendy's Old Fashioned Hamburgers. Her 30 year career began as a
teacher at the State School for Girls in Crockett, Texas. She went on to work at
the AFL-CIO, the White House Conference on Civil Rights and U.S. Equal
Employment Opportunity Commission. She has served as the Commissioner of the
Virginia Department of Labor and Industry as well as Executive Director of the
Human Rights Project, Inc. In 1990 - 92 she was Director of Resource
Coordination at Reading is Fundamental, Inc. She is currently an investment
adviser. Address: 10910 Medfield Court, Austin, Texas 78739.
J.D. Nelson* (3/28/38), Trustee, is the founder and C.E.O. of RhumbLine
Advisers Corp., a minority-owned investment firm specializing in the management
of institutional pension assets using indexed and quantitative techniques. Mr.
Nelson was formerly Senior Vice President and Director of Public Funds Services
at State Street Bank and Trust Company in Boston. Prior to his twelve years at
State Street, he was the Administrator of the Democratic National Committee. He
currently serves on the Board of the City of Boston's Economic Development
Industrial Corporation. He is a former Chairman of the Roxbury MultiService
Center (Mass.), a past director of the United Way and has taught at the School
of Banking at Williams College. Address: RhumbLine Advisers, 50 Rowes Wharf,
Boston, Massachusetts 02110.
Ada Sanchez (8/17/52), Trustee, is the former Director of the Public
Service and Social Change Program at Hampshire College. From 1985 - 1987 she was
the National Toxic Waste Campaign Coordinator for Greenpeace USA. Prior to that
Ms. Sanchez was involved with a number of activist organizations including;
Western States Field Consultant for the Disarmament Program for the National
Fellowship of Reconciliation, co-director and founder of Viewpoint Syndicate,
lecturer for Progressive Foundation Speakers Bureau, national coordinator for
Supporters of Silkwood and outreach coordinator for Coalition for Non-Nuclear
World. Address: 16119 Oak Manor Drive, Tampa, Florida 33624
Our Board of Trustees functions with a Nominating Committee comprised of
the whole Board, but pursuant to our Distribution Plan (see "Our Distributor")
below, we have agreed that Trustees who are not "interested persons" of the
Fund, as defined in the 1940 Act, and who have no direct or indirect financial
interest in the operation of the Distribution Plan or any agreement relating to
the Plan ("Qualified Trustees") shall have primary responsibility for the
selection and nomination of other Qualified Trustees. This agreement will
continue for so long as our Distribution Plan is in effect.
The following compensation table disclosed the aggregate compensation from the
Fund for services provided through June 30, 1996.
26
<PAGE>
CITIZENS INVESTMENT TRUST - COMPENSATION TABLE
================================================================================
Name of Person and Position Aggregate Compensation Total Compensation
from The Fund Paid to Trustees
Azie Taylor Morton $4,000 $4,000
Juliana Eades $4,000 $4,000
William D. Glenn, Jr. $6,500 $6,500
Ada Sanchez $4,000 $2,000
Lokelani Devone $ 750 $ 750
Sophia Collier* 0 0
J.D. Nelson* 0 0
================================================================================
* Sophia Collier is an Interested Trustee and received no compensation from
Citizens Trust. J.D. Nelson did not become an Interested Trustee until March
1995 and received compensation from the Fund prior to his change in status to an
interested trustee.
The Trustees who are not "interested persons" received aggregate fees from
us of $23,750 for services provided through June 30, 1996 and were also
reimbursed for out of pocket expenses. Our Trustees, officers and members of the
Board of Advisors as a group owned less than 1% of our outstanding shares as of
June 30, 1996.
Other Officers of The Fund
Christine Pratt (1/6/47), Secretary, is Senior Vice President of Citizens
Advisers and began working for Citizens Advisers in June of 1996. Prior to that
time, Ms. Pratt was employed by BayBanks, where she headed up the lending and
servicing division for BayBanks Consumer Lending and Mortgage subsidiaries.
Suzan Barron (9/5/64), Vice President, is Legal Counsel of Citizens
Advisers and joined the Adviser in January, 1997. From March, 1993 to October,
1996, Ms. Barron held the position of Legal Counsel with Signature Financial
Group, Inc., a mutual fund administrator and distributor. Prior to that time,
Ms. Barron was a Legal Administration Officer with The Boston Company.
- --------------------------------------------------------------------------------
Additional Information Regarding Citizens Advisers
Sophia Collier individually owns 60% of the outstanding stock of Citizens
Advisers, Inc. Ms. Collier is the founder of American Natural Beverage Corp.,
the maker of Soho Natural Soda, a company which Ms. Collier co-founded in her
Brooklyn kitchen when she was 21 years old and built up over the next 12 years
to an enterprise with 52 employees and retail sales of $25 million. Soho Soda
was the first natural soda in America and was created as an alternative to
unhealthful mass market sodas. Ms. Collier and her partners sold American
Natural Beverage Corp. in 1989.
Four other individuals own the remaining 40% of the outstanding stock of
Citizens Advisers, Inc., as follows: John F. Dunfey (12%); Robert J. Dunfey, Sr.
(12%); Gerald F. Dunfey (12%); and William B. Hart, Jr. (4%). John, Robert and
Gerald Dunfey, brothers, now serve as directors of the Dunfey Group, a venture
capital and investment company. The Dunfey family has been associated, over a
number of years, with progressive social and political causes and has actively
participated in organizations dedicated to world peace, human and civil rights,
and economic justice. The family founded and continues to sponsor New England
Circle, a forum for the "discussion of social, political, literary and
educational topics that can lead to constructive change in our lives, our nation
and our world."
27
<PAGE>
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Investment Advisory and Other Services
We are advised by Citizens Advisers, Inc. (the "Adviser") under a contract
known as the Management Agreement. The Adviser has offices at 111 Pine Street,
San Francisco, California 94111 and One Harbour Place, Portsmouth, New Hampshire
03801. The Adviser is a California corporation. Citizens Securities, Inc., a
wholly-owned subsidiary and a California corporation, serves as the Fund's
distributor.
The Management Agreement provides for the Adviser, which is subject to the
control of our Board of Trustees, to decide what securities will be bought and
sold, and when, and requires the Adviser to place purchase and sale orders. At
the Adviser's discretion and sole expense, these duties may be delegated to a
sub-adviser.
GMG/Seneca Capital Management, L.P.
Our sub-adviser for the Money Market, E[bullet]fund, Muir California
Tax-Free Income, Citizens Income and Emerging Growth Portfolios is GMG/Seneca
Capital Management, L.P., a registered investment adviser established in 1990.
It is a wholly owned subsidiary of GMG Capital Management, LLC, which manages
over $3 billion from their offices at 909 Montgomery Street, San Francisco,
California. Organized as a California limited partnership, GMG/Seneca Capital
Management, L.P. has two general partners, Gail Seneca and Genesis Merchant
Group, L.P., an Illinois Limited Partnership. Genesis Merchant Group, in turn,
has three general partners: William K. Weinstein, Gail Seneca and Philip C.
Stapleton. Prior to starting GMG/Seneca, Ms. Seneca was employed by Wells Fargo
Bank as a senior investment officer.
Clemente Capital, Inc.
Our sub-adviser for the Citizens Global Equity Portfolio, Clemente Capital,
Inc., is a registered investment adviser organized in 1979. It is majority owned
by Lilia Clemente with 61.15% ownership; Wilmington Trust of Wilmington,
Delaware with 24% and Diaz-Verson Capital Investments, Inc. of Columbus, Georgia
with 14.85%. Clemente also manages the First Philippine and Clemente Global
Growth Funds, two closed-end funds traded on the New York Stock Exchange. Its
headquarters are at Carnegie Hall Tower, 152 West 57th Street, New York, New
York.
RhumbLine Advisers, Inc.
The Citizens Index Portfolio is sub-advised by RhumbLine Advisers, a
registered investment adviser established in 1990 with offices at 30 Rowes
Wharf, Boston, Massachusetts. RhumbLine is owned in excess of 97% by J.D.
Nelson, who is also an interested trustee of the Trust.
The Adviser (or the sub-adviser) provides us, at the Adviser's expense,
with all office space and facilities and equipment and clerical personnel
necessary to carry out its duties under the Management Agreement. Some of our
Trustees and our officers are employees of our Adviser and receive their
compensation from the Adviser. Our custodian bank maintains, as part of its
services for which we pay a fee, many of the books and records as we are
required to have and computes our net assets value and dividends per share.
We pay the Adviser a fee for its services at a percentage of each
Portfolio's average annual net assets as follows:
Money Market Portfolio--0.35%; the E[bullet]fund--0.10%; Citizens Income
Portfolio--65%; Citizens Emerging Growth Portfolio--1.00%; Citizens Global
Equity Portfolio--1.00%; Citizens Index Portfolio--0.50%; and Muir California
Tax-Free Income Portfolio--0.65%. The fee is accrued daily and paid at least
monthly. The Adviser has agreed to limit our expenses each year. If expenses
exceed this limit, the Adviser will reduce its fee by, or refund, the amount of
the excess. The limit on our expenses, pursuant to the Management Agreement, is
as follows: Money Market Portfolio: 1.50% of the
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first $40 million or our average annual net assets and 1% thereafter; Citizens
Income Portfolio: 1.75% of the first $75 million of average net assets and 1.25%
thereafter; and Muir California Tax-Free Income Portfolio: 0.65% of the
Portfolio's average daily net assets.
There is no limit on expenses for the E[bullet]fund, Citizens Emerging
Growth Portfolio, Citizens Global Equity Portfolio and Citizens Index Portfolio.
Not all our expenses are subject to this limit. Interest expenses, taxes,
brokerage commissions, and extraordinary expenses, such as litigation, that do
not usually occur in the operations of a mutual fund are not included. We are
also subject to a statutory expense limitation imposed by the State of
California. This expense limitation requires the Adviser to reduce its fee to
the extent the aggregate annual expenses of a Portfolio exceed 2.50% of the
first $30 million of average net assets in the Portfolio, 2% of the next $70
million of average net assets, and 1.50% of the remaining average net assets in
a Portfolio in any fiscal year.
For the fiscal years ended June 30, 1994, 1995 and 1996, the Adviser
received the following fees: Money Market Portfolio, 1994-$619,206,
1995-$526,422, 1996-$423,731; Citizens Income Portfolio, 1994-$125,495,
1995-$167,280, 1996-$207,386; Citizens Emerging Growth Portfolio, 1994-$7,696,
1995-$67,908, 1996-$197,492; Citizens Global Equity Portfolio,
1994-$12,569,1995-$78,349, 1996-$118,662; Citizens Index Portfolio, 1994-$0,
1995-$760,572, 1996-$689,466; and Muir California Tax-Free Income Portfolio,
1994-$30,129, 1995-$105,984, 1996-$94,344. For the fiscal period ended June 30,
1996, the Adviser accrued expenses of $4,018 on behalf of the E[bullet]fund, all
of which was waived by the Adviser.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations, thereunder, the Adviser is not liable for any loss sustained by the
purchase, sale or retention of any security and permits the Adviser to act as
investment adviser and/or principal underwriter for any other person, firm or
corporation. The Management Agreement provides that we will indemnify the
Adviser to the full extent permitted under the Declaration of Trust. The
Management Agreement also states that it is agreed that the Adviser shall have
no responsibility or liability for the accuracy or completeness of our
Registration Statement under the Securities Act of 1933 and the 1940 Act except
for information supplied by the Adviser for inclusion therein.
There are similar provisions with respect to the liability of the
sub-adviser, and the obligation of the Fund to indemnify the sub-adviser.
Administrative Services Agreement
The Adviser has also entered into an Administrative Services Agreement with
Citizen Trust, whereby it provides the Trust with the following facilities and
services: 1. Receipt of calls from existing shareholders in a timely manner; 2.
Maintenance of a toll-free number; 3. Response to shareholder questions; 4.
Maintenance of computer interface with the Trust's transfer agent; 5. Execution
of appropriate shareholder requests. 6; Organizational services for any new
series, including, but not limited to the drafting of the prospectus and
statement of additional information, the filing of all required documents,
soliciting proxies, and clerical duties associated with the filing of any such
documents; and 7. Blue sky reporting services as required for the issuer of
securities in the states and territories. In addition to the fees paid pursuant
to the foregoing, the Trust has agreed to reimburse Citizens Advisers for out-of
pocket expenses, including but not limited to postage, forms, telephone, and
records storage and any other expenses incurred by Citizens Advisers at the
request or with the consent of the Trust. The Trust also pays to the Adviser
shareholder servicing fees at the following fixed rates: Citizens Income
Portfolio, Citizens Emerging Growth Portfolio, Citizens Global Equity Portfolio
and Muir California Tax-Free Income Portfolio, 0.10% of average assets; and
Citizens Index Portfolio, 0.65% of average assets.
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Distribution Plan
Citizens Securities, Inc. (the "Distributor"), a wholly owned subsidiary of
Citizens Advisers, Inc., acts as the distributor of our shares. There is no
sales charge imposed on any of the Portfolios of the Fund, either when you
purchase or redeem shares.
Broker-dealer and other organizations, known as Service Organizations,
which assist in the distribution of our shares may receive fees from us or our
Distributor . Our Board of Trustees has adopted a Distribution Plan under
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. In approving the Plan,
the Trustees determined, in the exercise of their business judgment and in light
of their fiduciary duties, that there is a reasonable likelihood that the Plan
will benefit us and our shareholders. Pursuant to this Plan, Service
Organizations that enter into written agreements with us and our Distributor may
receive, for administration, shareholder service and distribution assistance,
fees at rates determined by our Trustees. In addition, our Distributor is
authorized to purchase advertising, sales literature and other promotional
material and to pay its own salespeople. We will reimburse the Distributor for
these expenditures and for fees paid to Service Organizations, up to a limit of
0.25% on an annual basis of our average daily net assets. In addition, if and to
the extent that the fee we pay our Distributor as well as other payments we make
are considered as indirectly financing any activity which is primarily intended
to result in the sale of our shares, such payments are authorized under the
Plan.
The Plan was approved on July 5, 1983, by our Trustees, including a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) and who have no financial interest in the operation of the Plan or in
any agreement related to the Plan. These Trustees are known as "Qualified
Trustees." The Plan was approved by a majority of our shareholders at our annual
meeting on April 24, 1984, and has been continued from year to year thereafter
subject to annual approval by a majority vote of our Trustees, including a
majority of the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan was approved by the shareholders of the
Citizens Income Portfolio, on June 11, 1992. Agreements related to the Plan must
also be approved in the same manner by a vote of the Trustees and the Qualified
Trustees. These agreements will terminate automatically if assigned, and may be
terminated at any time, without payment of any penalty, by a vote of the
majority of the Qualified Trustees or a vote of our outstanding voting
securities on not more than 60 days notice.
Each Portfolio is responsible for the cost of preparing and setting in type
prospectuses and reports to shareholders and distributing copies of the
prospectuses and reports to shareholders. The Distributor pays the cost of
printing and distributing all other copies of prospectuses and reports, as well
as the costs of supplemental sales literature and advertising. The Fund pays all
of our other expenses not expressly assumed by the Adviser such as interest,
taxes, audit and legal fees and expenses, charges of our custodian, our
shareholder servicing, transfer and record-keeping agent costs, insurance
premiums, stock issuance and redemption costs, certain printing costs, costs of
registering our shares under federal and state laws, and dues and assessments of
the Investment Company Institute, as well as any non-recurring expenses,
including litigation.
The Plan provides that the Distributor shall provide and the Trustee shall
review quarterly reports setting forth the amounts, payments and the purpose for
which the amounts were expended. The Plan further provides that while it is in
effect the selection and nomination of the Trustees who are not interested
persons shall be committed to the discretion of the Qualified Trustees. The Plan
may not be amended to increase materially the amounts to be spent without
shareholder approval, as set forth above, and all amendments must be approved by
the Trustees, as described above. The Plan only permits reimbursement of actual
expenses and does not permit expenses to be carried forward from one fiscal
period to another. For the years ended June 30, the following fees were approved
and paid under this Plan, 1991-$474,900, 1992-$508,374, 1993-$ 606,018,
1994-$713,847, 1995-$783,111 and 1996-$683,515. The major categories of expenses
for 1996 were as follows: advertising, printing and mailing prospectuses to
other than current shareholders, compensation to broker/dealers, compensation to
sales personnel.
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Additional Information
Our Declaration of Trust permits our Trustees to issue an unlimited number
of full and fractional shares of beneficial interest and to divide or combine
the shares into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in the Fund. Each share represents an
interest in the Fund. Certificates representing our shares are not issued. In
the event of our liquidation, all shareholders would share pro rata in our net
assets available for distribution to shareholders. The Trustees also have the
power to designate "series" of the Fund which will function as separate
Portfolios, each having it's own assets and liabilities. They may also create
additional classes of shares which may differ from each other as to dividends.
Shares of each class are entitled to vote as a class or series only to the
extent required by the 1940 Act or as provided in our Declaration of Trust or as
permitted by our Trustees. Income and operating expenses are allocated fairly
among the series and classes by our Trustees. We intend to manage our Portfolios
in such a way as to be a "diversified" investment company, as defined in the
1940 Act. As of June 30, 1996, there were 108,006,752 outstanding shares of our
Common Stock, representing all the shares of all of the Citizens Trust
Portfolios. The following are the shareholders who owned beneficially or of
record 5% or more of the outstanding shares: Money Market Portfolio, the
E[bullet]fund, Muir California Tax-Free Income Portfolio and Citizens Income
Portfolio - no holders of 5% or more. Citizens Emerging Growth Portfolio -
Charles Schwab & Co, Inc., 9.0%. Citizens Global Equity Portfolio - Charles
Schwab & Co, Inc., 17.9%. Citizens Index Portfolio - Charles Schwab & Co, Inc.,
2.3%.
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Voting Rights
Shareholders are entitled to one vote for each full shares held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. Voting is generally
by class and series except as otherwise provided by the provisions of the 1940
Act. The Trustees will call a meeting of shareholders to vote on the removal of
a Trustee upon the written request of the record holders of ten percent of our
shares. No amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of more than 50% of our outstanding shares. The
holders of shares have no preemptive or conversion rights. Shares when issued
are fully paid and non assessable, except as set forth under "Shareholder and
Trustee Liability" below. The Fund may be terminated upon the sale of its assets
to another issuer, if such sale is approved by the vote of the holders or more
than 50% of our outstanding shares, or upon liquidation and distribution of our
assets, if approved by the vote of the holders of more than 50% of our
outstanding shares. If not so terminated, the Fund will continue indefinitely.
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Shareholder and Trustee Liability
We are an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. Our Declaration of Trust contains an express disclaimer of shareholder
liability for our acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by us or our Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses by the relevant Portfolio out of
the Portfolio's property for any shareholder held personally liable for the
Portfolio's obligations. The Declaration of Trust also provides that we shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of ours and satisfy our judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholders liability
is highly unlikely and is limited to the relatively remote circumstances in
which we would be unable to meet our obligations.
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The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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Custodian
State Street Bank and Trust of Boston, Massachusetts, is the custodian of
the assets of the Fund. The custodian takes no part in determining the
investment policies of the Fund or in deciding which securities are purchased or
sold by the Fund. We, however, may invest in obligations of the custodian and
may purchase or sell securities from or to the custodian.
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Auditors
Tait, Weller & Baker of Philadelphia, Pennsylvania serves as our Fund's
independent auditors, providing audit services including (1) examination of the
annual financial statements and limited review of unaudited semi-annual
financial statements (2) assistance and consultation in connection with SEC
filings and (3) review of the federal and state income tax returns filed on our
behalf.
The financial statements of the Fund incorporated here by reference, have
been examined by Tait, Weller & Baker, independent auditors, as stated in their
report which is incorporated by reference, and have been so incorporated in
reliance upon such report given upon their authority as experts in accounting
and auditing.
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Legal Counsel
Bingham, Dana & Gould of Boston, Massachusetts.
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Financial Statements
The following financial statements of the Fund and the opinion of its
independent auditors, included in the Annual Report to the shareholders for the
year ended June 30, 1996, are incorporated herein by reference and is provided
to each person to whom the Statement of Additional Information is sent or given:
Statement of Investments - June 30, 1996
Statement of Assets and Liabilities - June 30,1996
Statement of Operations for the year ended - June 30, 1996
Statement of Changes in Net Assets for the years ended June 30, 1995 and 1996.
Notes to Financial Statements
Report of Independent Certified Public Accountants
Management Discussion
It is the policy of the Fund to provide a management discussion of the
strategy and performance of each portfolio in the annual report.
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APPENDIX A: Description of Ratings
Description of Bond Ratings
We use the ratings provided by national rating services as one of several
indicators of the investment quality of fixed income securities. The following
is a description of the ratings of the two services we use most frequently. When
considering any rating, it is important to remember that the ratings of Moody's
and Standard & Poor's represent their opinions as to the quality of various debt
instruments. It should be emphasized, however, that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments to the same
maturity and coupon with different ratings may have the same yield.
Moody's
"Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa granted they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A posses many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing."
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Conditional Ratings: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operations experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications. Suspension or withdrawal may occur if new and material
circumstances arise, the effects of which preclude satisfactory analysis; if
there is no longer available reasonable up-to-date data to permit a judgment
to be formed; if a bond is called for redemption; or for other reasons.
Standard & Poor's
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
BB, B, CCC, CC and C: Debt rated BB, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures for adverse
conditions.
BB: Debt rated BB has less near- term vulnerability to default than other
speculative issues. However, it faces major on- going uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The
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BB rating category also used for debt subordinated to senior debt that is
assigned as actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but has the capacity to
meet interest payments and principal repayments. Adverse business, financial or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBb or BB rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial or economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that it assigned an actual or implied
B or B rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Note: The Standard & Poor's ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.
Fitch Investors Service, Inc.:
AAA: (highest quality) The obligor has an extraordinary ability to pay interest
and repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA: (high quality) The obligor's ability to pay interest and repay principal,
while very strong, is somewhat less than for AAA rated securities or more
subject to possible change over the term of the issue.
A: (good quality) The obligor's ability to pay interest and repay principal is
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
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BBB: (satisfactory bonds) The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to weaken this ability than bonds
with higher ratings.
Municipal Notes
Moody's:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in short
term-borrowing, while various factors of the first importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used will be
as follows:
MIG-1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG-2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG-3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
Standard & Poor's:
SP-1: Issues carrying this designation have a strong or very strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's:
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment
P-2 (Prime-2): Strong capacity for repayment
P-3 (Prime-3) Acceptable capacity for repayment
Standard & Poor's:
Standard & Poor's ratings are a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Ratings
are graded into four categories, ranging from "A" for the highest quality
obligations to "D" for the lowest. Issues within the "A" category are delineated
with the numbers 1, 2 and 3 to indicate the relative safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
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A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of such information.
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Appendix B: Special Considerations Relating to California Municipal Obligations
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could result
in the adverse effects described below. The following information constitutes
only a brief summary, does not purport to be a complete description and is based
exclusively upon information drawn from official statements and prospectuses
relating to securities offerings of the State of California and various local
agencies in California that have come to our attention and were available as of
the date of this Statement of Additional Information. While we have not
independently verified such information, we have no reason to believe that such
information is not correct in all material respects.
Certain California Municipal Securities may be obligations of issuers which
rely in whole or in part on California state revenues for payment of these
obligations. Property tax revenues and a portion of the State's General Fund
surplus are distributed to counties, cities and their various taxing entities,
and the state assumes certain obligations theretofore paid out of local funds.
Whether and to what extent a portion of the state's General Fund will be
distributed in the future in counties, cities and their various entities, is
unclear.
State Budgetary Considerations
1990-91 Budget. The 1990-91 Budget Act projected General Fund expenditures
of approximately $42.0 billion and Special Fund Expenditures of approximately
$8.8 billion. However, revenues for the 1990-91 fiscal year were substantially
lower than the estimates made when the Budget Act was adopted. As a result of
new calculations of revenues and expenditures, the Governor has projected the
estimated budget gap at $14.3 billion.
The California State Controller has reported that the General Fund ended
the 1990-91 fiscal year with a negative fund balance of about $1.316 billion on
a budget basis. In order to pay necessary cash expenses through June 1991,
including payment of $4.1 billion 1990 Revenue Anticipation Notes which were due
June 28, 1991, the General Fund borrowed $1.390 billion from California's
Special Fund for Economic Uncertainties and $3.266 billion from other Special
Funds. Data on General Fund revenues for the 1990-91 fiscal year show that
revenues in all major categories (except insurance taxes) were lower than
receipts in 1989-90.
1991-92 Budget. The State Governor's Budget for the 1991-92 Fiscal Year,
submitted on January 10, 1991, indicated that the State's financial condition
deteriorated significantly since enactment of the 1990-91 Budget Act on July 31,
1990. The 1991-1992 Budget Act projected General Fund expenditures of $43.4
billion and Special Fund expenditures of $10.6 billion. The $14.3 billion
estimated budget gap between revenues over the two fiscal years 1990-91 and
1991-92 and established program needs based on existing laws, including
restoration of a prudent reserve for economic uncertainties, was closed through
a combination of temporary and permanent changes in laws and some one-time
budget adjustments. The California Department of Finance has estimated, as of
January 10, 1992, that General Fund expenditures for the 1991-92 fiscal year
exceeded revenues and transfers by about $85 million, increasing the deficit in
the General Fund to about $1.344 billion. The 1992/93 budget summary of
September 2, 1992 projects a 1991/92 year end deficit in the General Fund of
$2.191 billion. The Governor's Budget Summary for the 1993/94 fiscal year,
prepared by the State Department of Finance and issued on January 8, 1993,
projects a 1991-92 year-end deficit in the General Fund of $2.2 billion. In
order to meet a cash-flow deficit on June 30, 1992, the State issued short-term
registered reimbursement warrants in the amount of $475 million. The warrants
matured and were repaid on July 24, 1992.
The foregoing discussion of the 1991-92 fiscal year Budget is based on
estimates and projections of revenues and expenditures for that fiscal year and
should not be construed as a statement of fact. In
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addition, there have been strong indications that California's state budgetary
goals will not be met and that economic recovery will be more sluggish than
anticipated, with cash receipts significantly below projections.
1992-1993 Budget. The State Governor's Budget for the 1992/93 Fiscal year,
submitted on January 9,1992, indicates that the State's financial condition has
further deteriorated. The Governor's Budget forecast that the revenues for the
full 1991/92 Fiscal year would be $2.7 billion below budgeted levels. The
1992/93 Governor's Budget projects General Fund expenditures of $43.8 billion
and Special Fund expenditures of $12.5 billion. The 1992/93 Governor's Budget
eliminates the deficit from 1991/92 and estimates $105.4 million as a year-end
balance in the Special Fund for Economic Uncertainties, representing
approximately 0.2% of General Fund expenditures. On May 20, 1992, the State
Department of Finance issued its "May Revision," which estimated that General
Fund revenues and transfers in the 1991-92 fiscal year would be $1.6 billion
less than the January estimate, and expenditures would be $500 million higher.
These estimates, added to the estimated negative fund balance of $1.3 billion
from the Governor's proposed 1992-93 budget, resulted in a projected negative
fund balance of $1.3 billion from the Governor's proposed 1992-93 budget,
resulted in a projected negative fund balance at June 30, 1992 of about $3.4
billion. The May Revision further estimated that, in addition to the $5.2
billion of expenditure costs and increases in revenues projected in the
Governor's proposed 1992-93 budget, another $5.7 billion of budget actions would
be needed in order to end the 1992-93 fiscal year without a budget deficit.
The Commission on State Finance issued a report in May 1992 which, among
other things, estimated that if economic conditions led to a stagnant economy
through 1993 (the "pessimistic forecast") rather than slow recovery starting in
late 1992 (the "primary forecast"), there could be a negative impact on the
General Fund of approximately $2.1 billion. The Commission on State Finance
released an updated staff report on October 15, 1992, which forecasts that the
State's economy will remain stagnant through 1994. The report projects that as a
result the General Fund deficit for the 1992-93 fiscal year will be about $2.4
billion and the General Fund Deficit for the 1993-94 fiscal year will be about
$1.7 billion. The report projects that as the recession worsens the General Fund
deficit might exceed $7.4 billion for the two-year period. The California
Legislative Analyst recently predicted that the General Fund deficit might be
about $7.5 billion by June 30, 1994, and the State Treasury shortage as early as
next Spring, which would again necessitate the use of "registered warrants" to
pay certain State obligations.
The 1992/93 Fiscal Year began on July 1, 1992. The California Legislature
and State Governor were unable to agree upon a budget for the 1992/93 Fiscal
Year until September 2, 1992, however. As a result of the delay in adopting a
budget, the State of California issued about $3.8 billion of "registered
warrants" to pay many of its creditors, suppliers, and employees. Although most
banks honored these "registered warrants," in August 1992, several large
California banks stopped doing so. A United States District Court recently ruled
that the State violated federal labor law when it used "registered warrants " to
pay it employees. This ruling is not final, however, and the State might appeal
it.
The final 1992/93 budget projects 1992/93 General Fund revenues and
transfers of $43.421 billion, expenditures of $40.795 billion, and a year-end
reserve for economic uncertainties of $28 million. The 1991/92 year-end deficit
in the General Fund is projected to be eliminated. The final 1992/93 budget also
projects Special Fund expenditures of $12.631 billion.
The 1992-93 Budget Act, however, was based upon the assumption that a
modest recovery would begin in the state in late 1992. The Commission on State
Finance October 15, 1992 staff report forecasts that recovery will not begin in
1992 and, consequently, the state will end 1992-93 with a general fund deficit
of $2.4 billion. The Governor's Budget Summary for the 1993-94 fiscal year
projects a 1992-93 year-end deficit in the General Fund of $2.1 billion, a
decrease of $2.6 billion in the General Fund reserve from the Proposed 1992-93
Budget. On May 20, 1993, the California
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Department of Finance released its "May Revision" to the Governor's proposed
1993-94 budget, and projected that the 1992-94 year-end deficit in the general
fund would be about $2.229 billion.
The foregoing discussion of the 1992-93 fiscal year Budget is based on
estimates and projections of revenues and expenditures for that fiscal year and
should not be construed as a statement of fact.
1993-1994 Budget. On January 8, 1993, the Governor submitted to the
California Legislature his proposed budget for the 1993-94 fiscal year (the
"Proposed 1993-94 Budget"). The Proposed 1993-94 Budget indicates that the
California economy has not begun to recover, that the recession will likely be
prolonged through much of 1993 and that is could be early 1996 before California
employment is fully restored to its pre-recession level.
The Proposed 1993-94 Budget includes General Fund revenues and transfers of
$39.874 billion (down 2.6 percent from the 1992-93 level) and General Fund
expenditures of $37.333 billion (down 8.5 percent from the 1992-93 level), with
a year-end reserve of $31 million. The Proposed 1993-94 Budget would among other
things, end the post-Proposition 13 fiscal relief provided to local agencies by
shifting about $2.6 billion in property tax revenue from counties, cities,
special districts and redevelopment agencies. This shift would be accomplished
by (i) reducing property tax allocations to redevelopment agencies by $300
million, (ii) eliminating $150 million in property tax allocations to enterprise
special districts (primarily waste disposal and water utility districts),
excluding transit districts and hospital districts, (iii) shifting $2.075
billion in property tax revenue from cities, counties and special districts to
school and community college districts, which will necessitate major policy
decisions to allocate remaining local revenues, and (iv) making a one-time $70
million adjustment from certain counties to account for increases in certain
federal funding to those counties. The Proposed 1993-94 budget does not call for
increased taxes, and would also (i) allow a 1/2-cent temporary sales tax
increase to expire on June, 30 1993, resulting in a revenue loss of over $1
billion, (ii) require enactment of legislation to correct technical errors in
the 1992-93 school finance legislation, the failure of which would increase the
State's deficit by almost $3 billion, and (iii) be predicted upon the receipt of
$1.5 billion in additional federal assistance to fund federally-mandated
services to immigrants, refugees and their families. If that additional federal
assistance is not provided by May 15, 1993, severe reductions in non-federally
mandated services must be made. The recently proposed federal budget does not
include the entire $1.5 billion requested additional assistance. The Proposed
1993-94 Budget also would assure Proposition 98 funding at its current level.
A budget bill for the 1993-94 fiscal year was passed on June 30, 1993. The
budget bill and related legislation include many of the provisions included in
the proposed 1993-94 Budget, including the shift of about $2.6 billion in
property tax revenue from cities, counties and special school districts. The
budget bill and related legislation also extend the 1/2-cent temporary sales tax
increase to December 31, 1993. As of July 9, 1993, not all of the legislation
related to the 1993-94 budget bill had been enacted, however.
The foregoing discussion of the 1993-94 fiscal year budget is based on
estimates and projections of revenues and expenditures and should not be
construed as a statement of fact. The assumptions used to construct a budget may
be affected by numerous factors, including future economic conditions in
California and the nation, and there can be no assurance that the estimates will
be achieved.
1995-1996 Budget. On January 10, 1995, the Governor submitted to the
California Legislature his proposed budget for the 1995-1996 fiscal year (the
"Proposed 1995-96 Budget"). The Proposed 1995-96 Budget reflects Governor
Wilson's view that California's recession is over.
The Proposed 1995-96 Budget includes General Fund revenues and transfers
of $42.5 billion (up 2.8% from the 1994-95 level) and General Fund expenditures
of $41.7 billion (up 0.1% from the 1994-95 level), with an operating surplus of
$812 million.
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The Proposed 1995-96 Budget calls for the initial installment of a 15%
income tax cut (total savings of $225 million for individuals and corporations
in the first year), the first funding boost for education in four years (per
pupil increase of 2.2%), cuts to welfare ($1.3 billion), and a 1,200 worker
reduction (6%) at the Department of Transportation. The budget anticipates that
the state will receive $732 million from the federal government to "cover the
costs of illegal immigration" and also plans on sending $241 million less than
last year to the state's 58 counties. The Proposed 1995-96 Budget earmarks $2.2
billion to be spent constructing new prisons.
On July 1, 1995, California enters fiscal year 1995-96 without a spending
plan for the eighth time in the last nine years. Due to shortfalls in the
1994-95 budget and a projected shortfall between revenue and spending in fiscal
1995-96, the Legislative Analyst's Office is now predicting a deficit of just
under $2 billion. Finally, on August 2, 1995, Governor Wilson signs a $57.3
billion budget passed by the legislature. The final budget does not include the
tax cut originally proposed by the governor, but does include cuts to welfare
and increases in spending on education. The final budget also forecasts the
elimination of California's debt. Finance officials state that the new budget
seeks to pay off the $1 billion in debt that was rolled into the fiscal 1995-96
budget by Spring 1996.
Concerns remain, primarily due to the budget's tiny "emergency reserve" of
$28 million, its assumption of $518 million in federal reimbursements for
immigrant services (some think the feds will be less generous) and $394 million
in savings from welfare and disability grants (which require congressional
action or federal waivers--neither easy to come by), and pending court decisions
which could cost the state up to $1.7 billion.
Another factor for concern is the Orange County bankruptcy. While
apparently an isolated event, the fact that it took many by surprise has cast a
shadow over California municipal securities in general. The effect of this
investor concern remains undetermined.
1996-1997 Budget. The 1996 Budget Bill signed by the Governor on July 15,
1996 represents the positive growth in the state's economy and an improved state
fiscal condition.
Major elements in the budget include the required funding of proposition
98, reducing class sizes for K-12 education; a 5% reduction in the corporate tax
rate beginning January 1, 1997 reducing expected revenues by $85 million in
1996-97 ; and the continued spending on judiciary and criminal justice programs,
increasing 5.3% over 1995-96 expenditures.
The budget reflects an unanticipated increase in General Fund revenues in
the current year. Revised General Fund revenues for the current year are listed
as $45 billion. The forecast for FY '96-'97 is an increase of underlying General
Fund revenue growth of 3.3%. Expenditures are expected to grow by 4.0%. The
General Fund is expected to end 1996-97 with a reserve of about $300 million.
The economic outlook for the state, as reflected by the budget, forecasts
moderate growth and an improved General Fund outlook. Personal income is
expected to increase 5.7 percent in 1996 and 5.9 percent in 1997. Although not
as robust as last year, these numbers still reflect an expanding economy.
Business activity as measured by taxable sales is estimated at 5 to 5.5 percent,
another indicator of moderate growth.
Despite the growing economy, it is estimated that one million California
residents will be unable to find work during 1996. This will pressure state
social services. The budget forecasts an unemployment rate of 7.3 percent for
the current year, dropping to 6.9 percent in 1997.
Other concerns include the cut backs in some social services to fund tax
cuts and the budgeting of program reductions in advance of federal approval.
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California Property Tax Revenue
Certain California Tax-Exempt Securities may be obligations of issuers who
rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution know as Proposition 13, which added Article XIII A to
the California Constitution. The effect of Article XIII A is to limit ad valorem
taxes on real property, and to restrict the ability of taxing entities to
increase real property tax and other tax revenues.
Section 1 of Article XIII A limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected by
the countries and appointed according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessment to pay the interest and
redemption charges on (i) any assessments to pay the interest and redemption
charges on (i) any indebtedness approved by the voters prior to July 1, 1978, or
(ii) any bonded indebtedness for the acquisition or improvement of real property
approved on or after July 1, 1978, by two-thirds of the votes cast by the voters
voting on the proposition. Section 2 of Article XIII A defines "full cash value"
to mean "the county assessor's valuation of real property as shown on the
1975-76 tax bill under 'full cash value' or thereafter, the appraised value of
real property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment." The full cash value may be adjusted
annually to reflect inflation at a rate not to exceed 2% per year, or reduction
in the consumer price index or comparable local data, or reduced in the event of
declining property value caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article XIII
A provides that notwithstanding any other law, local agencies may not levy any
ad valorem property tax except to pay debt service on indebtedness approved by
the voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIII A of $4.00 per $100 assessed valuation (based on the
former practice of using 25%, instead of 100%, of full cash value as the
assessed value for tax purposed). The legislation further provides that, for the
1978/79 fiscal year only, the tax levied by each county was to be apportioned
among all taxing agencies within the county in proportion to their average share
of taxes levied in certain previous years. The apportionment of property taxes
for fiscal years after 1978/79 has been revised pursuant to Statutes of 1979,
Chapter 282 which provided relief funds from state monies beginning in fiscal
year 1979/80 and is designed to provide a permanent system for sharing state
taxes and budget funds with local agencies. Under Chapter 282, cities and
counties receive more of the remaining property tax revenues collected under
Proposition 13 instead of direct state aid. School districts receive a
correspondingly reduced amount of property taxes, but receive compensation
directly from the state and are given additional relief. As discussed above,
however, the 1993-94 budget would end the post-Proposition 13 fiscal relief.
The U.S. Supreme Court has struck down as a violation of equal protection
certain property tax assessment practices in West Virginia which had resulted in
vastly different assessments of similar properties. Because Proposition 13
provides that property may only be reassessed up to 2% per year, except upon
change of ownership or new construction, recent purchasers may pay substantially
higher property taxes than long-time owners of comparable property in the same
community. The U.S. Supreme Court in the West Virginia case expressly declined
to comment in any way on the constitutionality of Proposition 13. The United
States Supreme Court recently held, however, that notwithstanding the disparate
property tax burdens on comparable properties, those provisions of Proposition
13 do not violate the Equal Protection Clause of the United States Constitution.
It is not possible to predict the outcome of litigation or the ultimate
scope and impact of Article XIII A, and its implementing legislation. However,
the outcome of such litigation could substantially impact the ability of local
property governments and districts to make future payments on outstanding debt
obligations.
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On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIII B to
the California Constitution. Under Article XIII B, state and local governmental
entities have an annual "appropriations limit" and are not able to spend certain
monies, called "appropriations subject to limitation," in an amount higher than
their respective "appropriations limit." Article XIII B does not affect the
appropriation of monies which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is based on certain 1986/87 expenditures, and is adjusted annually to
reflect changes in consumer prices, population and certain services provided by
these entities. Article XII B also provides that if these entities' (other than
the state's) revenues in any year exceed the amounts permitted to be spent, the
excess would have to be returned (i) in the case of the state, 50% to the public
through a revision of tax rates or fee schedules over the subsequent two years
and 50% to the State School Fund for allocation to elementary school, high
school, and community colleges, and (ii) in the case of local governmental
entities, to the public through a revision of tax rates or fee schedules over
the subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98, and on June 5, 1990, California voters
approved Proposition 111. The initiatives amend Article XIII B to require that
(i) the California Legislature establish a prudent state reserve fund in an
amount as it shall deem reasonable and necessary and (ii) 50% of revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIII B by revision of tax rates or fee schedules, be
transferred and allocated to the State School Fund and be expended solely for
purposes of instructional improvement and accountability. Any excess revenues so
allocated are not added to the base when computing the minimum funding guarantee
in future years. Any funds allocated to the State School Fund shall cause the
appropriation limits established in Article X111 B to be annually increased for
any such allocation made in the prior year.
These initiatives also amended Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. State monies to support school districts and community college
districts shall equal or exceed the lesser of (i) an amount equaling the
percentage of state general fund revenue for school and community college
districts in fiscal year 1986/87 (40.3%), (ii) an amount equal to the prior
fiscal year's state general fund proceeds of taxes appropriated under Article
XIII B plus allocated proceeds of local taxes, after adjustment under Article
XIII B, or (iii) in any year in which the percentage growth in California per
capita state general fund revenues plus one-half of one percent, an amount equal
to the prior fiscal year's proceeds of taxes apportioned under Article XIII B
plus an additional one-half of one percent thereof, after adjustment under
Article XIII B. The initiatives generally permit the enactment of legislation,
by a two-thirds vote, to suspend the minimum funding requirement for one year.
Article XIII B, like Article XIII A, may require further interpretation by
both the Legislature and the courts to determine its applicability to specific
situations involving the state and local taxing authorities. Depending upon the
interpretation, Article XIII B may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
In June 1982 the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, a California death tax. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1, 1982,
the amount by which personal income tax brackets will be adjusted annually in an
effort to index tax brackets will be adjusted annually in an effort to index tax
brackets to account for the effects of inflation. The voters also passed an
initiative measure, subsequently amended, affecting for taxation purposes the
valuation of real property taken through eminent domain proceedings. Decreases
in state and local revenues in future fiscal years as a consequence of these
initiatives may result in reductions in allocations of state revenues to
California municipal issuers or in the ability of such California issuers to pay
their obligations.
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In the years immediately after enactment of Article XIII B , few California
government entities neared their appropriations limit. Now, however, many local
government entities are at or near the limits. The state exceeded its
appropriation limit for the fiscal year 1986-87. The excess, in the amount of
$1.138 billion, was largely returned to taxpayers as a tax rebate. The state was
below its appropriations limit for 1987-88. State revenues may equal or exceed
the spending limit for current periods. To the extent the state remains
contained by its appropriations limit, the absolute level, or the rate of
growth, of assistance to local governments may be reduced.
On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative requires that any tax for general
governmental purposes imposed buy local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity, (ii)
requires that any special tax (defined as taxes levied for specific purposed)
imposed by a local governmental entity be approved by a two-thirds vote of the
voters within that jurisdiction, (iii) restricts the use of revenues from a
special tax to the purposes or for the service for which the special tax is
imposed, (iv) prohibits the imposition of ad valorem taxes on real property by
local governments of transaction taxes and sales taxes on the sale of real
property, (vi) requires that any tax imposed by a local government on or after
August 1, 1985 and before November 4, 1986 be ratified by a majority vote of the
electorate within two years of the adoption of the initiative or be terminated
by November 15, 1988, (vii) requires that, in the event a local government fails
to comply with the provisions of this measure, a reduction in the amount of
property tax revenue allocated to such local government occurs in an amount
equal to the revenues received by such entity attributable to the tax levied in
violation of the initiative, and (viii) permits these provisions to be amended
exclusively by the voters of the State of California.
While several recent decisions of the California Courts of Appeal have held
that parts of Proposition 62 are unconstitutional, the California Supreme Court
has yet to decide on those matters. On December 19, 1991, the California Supreme
Court declared unconstitutional a 1988 San Diego County ballot measure that
raised sales taxes to construct criminal detention and courthouse facilities,
because it did not receive two-thirds voter approval. The court concluded that
the special tax violated Article XIII A because the agency established to
finance the facilities was a special district created to circumvent Article XIII
A. On March 3, 1992, however, a California Court of Appeal upheld a Los Angeles
County sales tax increase passed by majority vote in 1990, because the agency
entitled to collect the additional tax was not formed to circumvent Article XIII
A, and therefore the increased tax was not subject to the two-thirds voter
approval requirement. These decisions may continue to cast some doubt on their
projects around the state that may have been financed with sales tax increases
imposed without two-thirds voter approval.
Revenues of Health Care Institutions
Certain California tax-exempt securities may be obligations which are
payable solely from the revenues of health care institutions. Certain provisions
under California law may adversely affect such revenues and, consequently,
payment on those Municipal Obligations.
The federally-sponsored Medicare program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program..
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reduction or limitations may be imposed
on payment for services rendered to Medi-Cal beneficiaries in the future.
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Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefore.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital cure
inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations"("PPOs"), which offer financial incentives for
subscribers who use only the hospitals that contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payers limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO and PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
Such California Municipal Securities may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Securities, the state
treasurer will issue debentures payable out of a reserve fund established under
the insurance program or from unappropriated state funds. At the request of the
Office of statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983 to evaluate the adequacy of the reserve fund
established under the insurance program and, based on certain formulations and
assumptions, found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update for the study and concluded that
an additional 10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining the current
reserve calculation method.
Revenues Secured by Deeds of Trust
Certain California obligations may be obligations which are secured in
whole or in part by a mortgage or deed of trust on real property. California has
five statutory provisions which limit the remedies of a credit secured by a
mortgage or deed of trust. Two limit the creditor's right to obtain a deficiency
judgment, one limitation being based on the method of foreclosure and the other
on the type of debt secured. Under the former, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision
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gives the debtor the right to redeem the real property from any judicial
foreclosure sale as to which a deficiency judgment may be ordered against the
debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing a formal
notice of default, the debtor is entitled to reinstate the mortgage by making
any overdue payments. Under standard loan servicing procedures, the filing of
the formal notice of default does not occur unless at least three full monthly
payments have become due and remain unpaid. The power of sale is exercised by
posting and publishing a notice of sale for at least 20 days after expiration of
the three-month reinstatement period. Therefore, the effective minimum period
for foreclosing on a mortgage could be in excess of seven months after the
initial default.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a home mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
federal or state constitution, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities may be obligations which finance
the acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above, applicable to obligations secured by real property. Under
California anti-deficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, nonjudicial foreclosure.
Under California law, mortgage loans secured by single family,
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six months' advance interest on the amount prepaid in excess of
20% of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
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