<PAGE> 1
RULE 497(e)
33-500; 811-4418
Prospectus
October 1, 1996
CALIFORNIA INVESTMENT TRUST FUND GROUP
S&P SMALLCAP INDEX FUND
44 Montgomery Street, Suite 2100
San Francisco, California 94104
For Information Call: (415) 398-2727
For Shareholder Servicing Call: (800) 225-8778
or FAX: (415) 421-2019
http:/www.caltrust.com
Shares of the S&P SmallCap Index Fund (the "Fund") are offered in this
Prospectus.
The Fund has no sales charges, redemption fees, dividend reinvestment charges or
12b-1 fees.
INVESTMENT OBJECTIVE
The S&P SmallCap Index Fund is a series of California Investment Trust II, an
open-end diversified investment company. The Fund seeks to provide investment
results that correspond to the total return of publicly traded common stocks of
small sized companies, as represented by the Standard & Poor's ("S&P) 600
SmallCap Index.
About this prospectus
This Prospectus is designed to provide you with basic information before
investing. You should read and retain this document for future reference. A
Statement of Additional Information about the Fund dated October 1, 1996, as may
be revised from time to time, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. A copy is available without
charge from the Funds by calling (800) 225-8778.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Fees and expenses of the Fund................................................ 2
What is the California Investment Trust Fund Group?.......................... 3
Investment Objective and Policies of the Fund................................ 4
Portfolio transactions....................................................... 8
Dividends, distributions and taxes........................................... 9
About our Management......................................................... 11
<PAGE> 2
Opening an account.......................................................... 13
How to buy shares .......................................................... 13
Shareholder services........................................................ 15
Administrative information.................................................. 17
Miscellaneous information................................................... 22
FEES AND EXPENSES OF THE FUND
The following table of fees and expenses is provided to assist investors in
understanding the various costs and expenses which the Fund estimates may be
borne directly or indirectly by an investment in the Fund:
SHAREHOLDER TRANSACTION EXPENSES
Sales Charges imposed on purchases .............................. None
Sales Charges imposed on reinvested dividends.................... None
Deferred Sales Charge............................................ None
Redemption Fees+................................................. None
Exchange Fees....................................................
ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
Management Fees*................................................ 0.00%
12b-1 Fees...................................................... None
Other Expenses*................................................. 0.65%
Total Fund Operating Expenses
(after fee reduction)*...................................... 0.65%
A $7.50 fee is charged for redemptions made by wire.
The management fee represents the net amount expected to be received by the
Manager from the Fund after fee waivers during the fiscal year ending August 31,
1997. The "Other Expense" information for the Fund is estimated and actual
expenses may vary. The Manager agrees to reimburse or absorb expenses of the
Fund to limit the expenses to shareholders to 0.65% through August 31, 1997.
Absent the fees waiver and reimbursements, total Fund operating expenses are
expected to be approximately 1.85%, which includes .5% for the management fee.
Example of Fund Expenses
Let's say that the Fund's annual return is 5% and that its operating expenses
are as described. For a $1,000 investment, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
S&P SmallCap Index Fund ..................... $7 $21
</TABLE>
<PAGE> 3
THIS EXAMPLE ILLUSTRATES THE EFFECT OF EXPENSES, BUT IS NOT MEANT TO SUGGEST
ACTUAL OR EXPECTED COSTS OR RETURNS, ALL OF WHICH WILL VARY.
MANAGER'S NOTE: WE BELIEVE OUR ANNUAL FUND OPERATING EXPENSES ARE AMONG THE
LOWEST AVAILABLE. IN OUR OPINION, ALL OTHER THINGS BEING EQUAL, LOW COST NO-LOAD
FUNDS WILL PROVIDE INVESTMENT RESULTS THAT ARE BETTER THAN FUNDS HAVING SALES
COMMISSIONS, REDEMPTION FEES AND HIGHER EXPENSES.
WHAT IS THE CALIFORNIA INVESTMENT TRUST FUND GROUP?
The California Investment Trust Fund Group (the "Trusts" or "Funds") presently
consists of two diversified, open-end management investment companies, both
organized as Massachusetts business trusts in September 1985. As part of
California Investment Trust II, we currently offer through this Prospectus
shares of the S&P SmallCap Index Fund (the "Fund").
CCM Partners, a California Limited Partnership (the "Manager") is the investment
manager of the Fund. The Manager has retained Bank of America NT&SA (Bank of
America Capital Management, Inc.) (the "Sub-Adviser"), a wholly owned subsidiary
of BankAmerica Corporation, to manage the Fund on a day-to-day basis. Bank of
America NT&SA is also the Sub-Adviser to the Equity Income Fund, the S&P 500
Index Fund and the S&P MidCap Index Fund, also managed by CCM Partners.
MANAGER'S NOTE: THE TERM NO-LOAD MEANS THAT YOU DO NOT PAY COMMISSIONS TO BUY OR
SELL YOUR SHARES. IN OUR OPINION, ALL OTHER THINGS BEING EQUAL, LOW COST,
NO-LOAD FUNDS WILL PROVIDE INVESTMENT RESULTS THAT ARE BETTER THAN FUNDS HAVING
SALES COMMISSIONS, REDEMPTION FEES AND HIGHER EXPENSES. IF YOU HAVE ANY
QUESTIONS ABOUT THE FUNDS, PLEASE CALL US AT (800) 225-8778 AND SPEAK TO ONE OF
OUR CUSTOMER SERVICE REPRESENTATIVES.
You may purchase shares of the Fund through your securities dealer or broker or
from us directly. (See "How to Buy Shares" on page 13.) We charge no commissions
for your purchases or sales of our shares. Accordingly, more of your money will
go to work for you immediately upon investment.
For example, a $10,000 investment in a mutual fund with a 4% sales charge
results in only $9,600 being invested in that fund because $400 of the
investor's money goes toward payment of the sales commission. As a result, there
is a negative cumulative effect on the total return over the time of the
investment because the original investment is $9,600, not $10,000.
All other things being equal, a load fund having a portfolio yield of 5.00%
would only provide an effective net yield to the investor of less than 1% in the
first year if there is a 4% sales charge. Many service organizations that report
mutual fund performance results do not deduct sales charges when reporting these
figures to many publications. This is because the sales charge is an expense
borne by the investor, not the fund. Thus, load funds often are measured as if
they were no-load funds. This favorably distorts the reported performance of
many load funds in comparison to no-load funds.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund is a series of California Investment Trust II, an open-end diversified
investment company. The Fund seeks to provide investment results that correspond
to the total return of publicly traded common stocks of small sized companies,
as represented by the S&P SmallCap 600 Index.*
The Investment Objective of the Fund is fundamental and cannot be changed
without the approval of a
<PAGE> 4
majority of the Fund's shareholders.
As of June 19, 1996, the S&P SmallCap 600 Index (the "SmallCap Index" or the
"Index"), representing about 4% of the market value of all common stocks
publicly traded in the United States, was composed of 600 selected domestic
companies with market capitalizations between $48 million and $2.7 billion. The
median market capitalization of the stocks in the SmallCap Index was $364
million.
The Fund is not managed according to traditional methods of "active" management,
which involve the buying and selling of securities based upon economic,
financial, and market analysis and investment judgement. Instead the Fund,
utilizing "passive" or "indexing" investment approach, attempts to replicate the
performance of the SmallCap Index. The Fund is designed to keep transaction
costs and other expenses low. There is no assurance that the Fund will meet its
investment objective.
The Fund is intended for long-term investors. It is for investors seeking
investment results which correspond to the total return of publicly traded
common stocks of small-sized domestic companies, as represented by the SmallCap
Index.
* "Standard & Poor's", "S&P", and "Standard & Poor's SmallCap 600 Index" are
service marks of Standard & Poor's Corporation and have been licensed for use by
the Fund. The Fund is not sponsored, endorsed, sold or promoted by S&P and S&P
makes no representation regarding the advisability of investing in the Fund.
Experience has shown that the longer the period of investment, the more likely
the investor is to have a profitable result. If you anticipate an investment
period of less than three to five years, we suggest you consider one of our
money market or bond funds (see page 24 for a list of Funds offered).
Under normal conditions, the Fund will invest at least 80% of its total assets
(65% if the Fund's asset level is below $25 million) in the common stocks of
companies whose shares comprise the SmallCap Index. In seeking to replicate the
performance of the SmallCap Index, the Sub-Adviser will, over time, attempt to
allocate the Fund's portfolio among common stocks in approximately the same
weightings as the SmallCap Index, beginning with the heaviest-weighted stocks
that make up a larger portion of the Index's value. Over the long term, the
Sub-Adviser will seek a correlation between the performance of the Fund and that
of the Index of at least 95% (or between 85%-95% if the Fund's assets are below
$25 million). A figure of 100% would indicate perfect correlation. In the
unlikely event that the high correlation sought by the Sub-Adviser is not
achieved, the Board of Trustees of the Trust will consider alternative
arrangements.
The Sub-Adviser generally will seek to match the composition of the SmallCap
Index to the maximum extent, but may not always invest the Fund's stock
portfolio to mirror the Index exactly. Because of the difficulty and expense of
executing relatively small stock transactions, the Fund may not always be
invested in the less heavily weighted stocks comprising the SmallCap Index, and
may at times have its portfolio weighted differently from the Index,
particularly when the Fund has total assets of less than $25 million. The
Sub-Adviser anticipates that the Fund will be able to mirror the performance of
the Index with little variance at asset levels of $25 million or more. The Fund
may omit or remove an Index stock from the portfolio if, following objective
criteria, the Sub-Adviser judges the stock to be insufficiently liquid or
believes the merit of the investment has been substantially impaired by
extraordinary events or financial conditions.
Although the Sub-Adviser will attempt to invest as much of the Fund's assets as
is practical in stocks comprising the SmallCap Index, the Fund also will
maintain a reasonable position in high quality, short-term debt securities and
money market instruments to meet redemption requests and other needs for liquid
assets. If the Sub-Adviser believes that market conditions warrant a temporary
defensive posture (as an example, extreme market volatility), the Fund may
invest without limit in high-quality, short-term debt securities and money
market instruments (including shares in money market mutual funds). These
<PAGE> 5
securities and money market instruments may include domestic and foreign
commercial paper, certificates of deposit, banker's acceptances and time
deposits, U.S. Government securities and repurchase agreements.
MANAGER'S NOTE: WE BELIEVE THAT INVESTING IN INDEX FUNDS THAT REPRESENT A BROAD
SEGMENT OF THE MARKET, WITH DIVIDENDS REINVESTED AND COMPOUNDED, WILL PROVIDE
VERY COMPETITIVE LONG-TERM INVESTMENT RESULTS.
The composition of the SmallCap Index may be changed from time to time. The
composition is determined by Standard & Poor's Corporation ("S&P") and is based,
among other things, on such factors as the market capitalization and trading
activity of each stock and the extent to which each stock is representative of
stocks in a particular industry. The weighting of stocks in the SmallCap Index
will be based on the relative market capitalization of each stock constituting
the Index; that is, its market price per share times the number of shares
outstanding. Inclusion of a stock in the SmallCap Index in no way implies an
opinion by S&P as to its attractiveness as an investment.
The ability of the Fund to meet its objective depends to some extent on the cash
flow experienced by the Fund because investments and redemptions by shareholders
will generally require the Fund to purchase or sell portfolio securities. The
Sub-Adviser will make investment changes to accommodate cash flow in an attempt
to maintain the similarity of the Fund's portfolio to the SmallCap Index. You
also should be aware that the SmallCap Index is an unmanaged index and its
performance does not take into account management fees, brokerage commissions
and other costs of investing that the Fund must bear. Finally, because the Fund
seeks to track the Index, it is not managed for growth or income in the same
manner as actively managed mutual funds, and the Sub-Adviser generally will not
attempt to judge the merits of any particular stock as an investment.
Accordingly, you should not expect to achieve results that are potentially
greater than the total return for the Fund's benchmark index.
Because of the weighting of stocks in the SmallCap Index, as of June 17, 1996,
the 50 largest companies in the S&P 600 comprised 24.6% of the Index. The Index
is comprised of the following broad sectors in approximate proportions: Business
equipment and services: 8.99%, Capital goods: 7.22%, Consumer durables: 3.66%,
Consumer non-durables: 7.39%, Consumer services: 4.10%, Energy: 6.06%, Financial
services: 15.61%, Healthcare: 13.35%, Raw materials: 3.83%, Retail: 6.48%,
Shelter: 2.45%, Technology: 14.04%, Transportations: 2.45%, and Utilities:
4.37%. Of the companies in the SmallCap Index, approximately 49% are listed on
the New York Stock Exchange ("NYSE"); 48% are quoted on the National Association
of Securities Dealers Automated Quotation System; and 3% are listed on the
American Stock Exchange. It is anticipated that the percentage of the Fund's
assets invested in each stock in the Fund will be approximately the same
percentage it represents in the SmallCap Index.
The Fund is responsible for voting the shares of all securities it holds. At the
Manager's option, these responsibilities can be assigned to a third party.
Securities may be sold whenever the Sub-Adviser believes it is appropriate,
regardless of how long the securities have been held. The annual portfolio
turnover for the Fund is expected to be less than 100%.
INVESTMENT RISKS
As a mutual fund investing primarily in equity securities, the Fund is subject
to market risk, i.e., the possibility that stock prices in general will decline
over short or even extended periods. The stock market tends to be cyclical, with
periods when stock prices generally rise and periods when stock prices generally
decline.
INVESTMENT LIMITATIONS
<PAGE> 6
The investment objective and status of the Fund as a diversified mutual fund are
fundamental features, and may not be changed without shareholder approval. The
following summarizes certain other of the Fund's principal investment
limitations. A complete listing is contained in the Statement of Additional
Information.
MANAGER'S NOTE: WHILE THE FUND SEEKS TO DUPLICATE THE PERFORMANCE OF THE
SMALLCAP INDEX THE STOCK PORTFOLIOS MAY NOT MATCH THE INDEX PERFECTLY. THE
INVESTMENT OBJECTIVE AND CERTAIN POLICIES OF THE FUND ARE FUNDAMENTAL, MEANING
THAT THEY CAN ONLY BE CHANGED BY VOTE OF THE SHAREHOLDERS.
The Fund may borrow money from a bank, but only for temporary or emergency
purposes. The Fund may also borrow money by engaging in reverse repurchase
agreements, whereby the Fund would sell securities and agree to buy them back at
a later date.
The Fund may borrow up to a maximum aggregate amount equal to 15% of the market
value of its assets, determined at the time of borrowing. The Fund will borrow
money only to meet redemption requests prior to the settlement of securities
already sold or in the process of being sold by the Fund. To the extent that the
Fund borrows money prior to selling securities, the Fund may be leveraged; at
such times, the total value of the Fund may appreciate or depreciate more
rapidly than its benchmark index. Prior to purchasing portfolio securities, the
Fund will repay any money borrowed in excess of 5% of the market value of its
total assets.
The Fund may lend its investment securities to qualified institutional investors
for the purpose of realizing income, although it is not currently expected that
the Fund will do so. As collateral for the loaned securities, the Fund will
receive cash, letters of credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities. Loans of securities, in the
aggregate, will be limited to 10% of the Fund's total assets, determined at the
time of lending. This is a fundamental limitation, and may not be changed at any
time without shareholder approval.
Stock Index Futures
The Fund may buy and sell stock index futures contracts (a) provided that not
more than 5% of the Fund's assets (determined at the time of the transaction)
are required as futures contracts deposits, and (b) only to the extent that
these futures obligations would represent not more than 20% of the Fund's total
assets (35% if total assets are below $25 million). The Fund may engage in
futures transactions for several reasons: to maintain cash reserves while
remaining fully invested, to facilitate trading, to reduce transaction costs,
and to seek higher investment returns when a futures contract is priced more
attractively than the underlying equity security or index. The Fund cannot use
futures contracts to leverage its assets.
The primary risks associated with the use of future contracts are: (i) imperfect
correlation between the change in market value of the stocks held by the Fund
and the prices of futures contracts; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a
futures position when desired. The risk of imperfect correlation may be reduced
by investing only in those contracts whose behavior is expected to resemble that
of the Fund's underlying securities. The risk that the Fund will be unable to
close out a futures position will be minimized by entering into such
transactions on a national exchange or board of trade with an active and liquid
secondary market.
To the extent the Fund purchases or sells futures contracts, the Sub-Adviser
currently intends to use
<PAGE> 7
futures contracts on the Russell 2000. The Fund may, depending upon liquidity
and other considerations, use future contracts on various other indices
including, but not limited to, the S&P 500 Index and S&P MidCap 400 Stock Index.
PORTFOLIO TRANSACTIONS
Our Sub-Adviser may consider a number of factors in determining which brokers or
dealers to use for our portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors may include,
but are not limited to, the reasonableness of commissions or markups, the
quality of services and executions, and the sale of shares of any of the Trust's
Funds by broker-dealers.
The Sub-Adviser uses various brokerage firms to carry out the Fund's portfolio
transactions. Since the Sub-Adviser places a large number of transactions, the
Fund pays commissions lower than those paid by individual investors. Also, the
Fund incurs lower costs than those incurred by individuals when purchasing debt
securities. Higher commissions may be paid to firms that provide research
services to the extent permitted by law. The Sub-Adviser may use this research
information in managing the Fund's assets, as well as the assets of other
clients.
Securities owned by the Fund may be owned by other clients for which the
Sub-Adviser acts as an adviser. If purchases or sales of securities for the Fund
and the other clients for which the Sub-Adviser acts as investment adviser arise
for consideration at or about the same time, transactions in such securities
will be made, insofar as feasible, in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Sub-Adviser
during the same period may increase the demand for securities being purchased or
the supply of securities being sold, there may be an adverse effect on price or
volume.
MANAGER'S NOTE: THE FREQUENCY OF PORTFOLIO TRANSACTIONS WILL VARY FROM YEAR TO
YEAR DEPENDING ON MARKET CONDITIONS.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund ordinarily pays dividends from net investment income quarterly and
distributes net realized capital gains, if any, annually, but may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), and
in all events in a manner consistent with the provisions of the Investment
Company Act of 1940 Act, as amended (the "1940 act"). On the last business day
of March, June, September and December the Fund distributes dividends to
shareholders of the Fund substantially equal to all the net investment income
earned by the Fund during the prior three months, payable to shareholders of
record as of the second to the last business day of March, June, September and
December, respectively.
MANAGER'S NOTE: WE AUTOMATICALLY REINVEST YOUR DIVIDENDS AND DISTRIBUTIONS IN
SHARES OF THE FUND UNLESS YOU TELL US OTHERWISE.
Unless you otherwise indicate on your account application or notify our
Shareholder Servicing Agent in writing later that you wish to receive cash, we
will automatically reinvest all income dividends and capital gains distributions
in additional shares of the Fund from which they were paid at no cost to you.
Distributions are treated in the same manner for tax purposes whether paid in
cash or reinvested in additional shares.
The Fund will not make distributions from net realized securities gains unless
capital loss carryovers, if any, have been utilized by the Fund or have expired.
All expenses are accrued daily and deducted before declaration of dividends to
investors.
The Fund intends to qualify and elect to be treated as a regulated investment
company under the code. By doing so, the Fund will not be liable for federal
income tax or excise tax based on income for amounts
<PAGE> 8
distributed to its shareholders. For tax purposes, the Fund is treated as a
separate taxable entity. Thus, any distributions of capital gains are on a per
fund basis rather than aggregated for the Trust as a whole. Any dividend capital
gain distributions you may receive on your investment in the Fund are taxable.
One annual payment from net realized capital gains (after offsetting any
available capital loss carryovers) of the Fund, if any, will be distributed for
the 12-month period ending October 31. When these distributions represent the
Fund's long-term capital gains, the Code treats them that way for you, whether
you take them in cash or reinvest them in additional shares, and regardless of
how long you have been a shareholder. The determining factor is how long the
Fund held the securities that produced the gains. You also may receive
distributions of short-term capital gains, which will be taxed as ordinary
income. The current maximum federal individual tax rate applicable to ordinary
income is 39.6%, and the current maximum federal individual tax rate applicable
to net long-term capital gains is 28%. Any dividend or distribution declared in
October, November or December as of a record date in such months and paid in the
following January will be treated as received on December 31 for federal income
tax purposes. Shareholders will be informed after the close of each calendar
year as to the federal income tax consequences of distributions made each year.
You may also realize a gain or a loss in any year in which you redeem (sell)
shares since the net asset value of the Fund fluctuates. The tax treatment will
depend, of course, on how long you owned your shares and on your individual tax
position. Any loss on the sale or exchange of a share of the Fund held for six
months or less will be treated as a long-term capital loss to the extent that
distributions on the share were treated as long-term capital gain. All or a
portion of any loss will be disallowed to the extent other shares of the Fund
are acquired (including by reinvestment of dividends) within 30 days before or
after such redemption. Dividends and distributions from net investment income
and from net realized short term securities gains paid or credited to accounts
maintained by U.S. nonresident shareholders also may be subject to U.S.
nonresident withholding taxes.
We use the accounting practice called equalization for the Fund in order to
avoid the dilution of the dividends payable to existing shareholders. Under this
procedure, that portion of the net asset value per share of the Fund which is
attributable to undistributed income is allocated as a credit to undistributed
income in connection with the purchase of shares or a debit to undistributed
income in connection with the redemption of shares. Thus, after every
distribution, the value of a share drops by the amount of the distribution. If
you purchase shares of the Fund before the record date of a distribution (the
next to the last business day of the month) and elect to have distributions paid
to you in cash, you will pay the full price for the shares and then receive some
portion of that price back in the form of a taxable distribution.
MANAGER'S NOTE: NOTICE AS TO THE TAX STATUS OF YOUR DIVIDENDS AND DISTRIBUTIONS
IS MAILED TO YOU ANNUALLY. WE WILL SEND YOU A STATEMENT OF YOUR ACCOUNT AT LEAST
QUARTERLY AND AFTER EVERY TRANSACTION THAT AFFECTS YOUR SHARE BALANCE OR
REGISTRATION.
We are required by federal law to withhold 31% of reportable payments, which may
include redemptions, capital gains distributions and other taxable
distributions, if any, paid to certain accounts the holders of which have not
complied with Treasury regulations. In connection with this withholding
requirement, you will be asked to certify on our application that the social
security or taxpayer identification number you provide is correct and that you
are not subject to 31% back-up withholding for previous underreporting to the
Internal Revenue Service ("IRS") or that you are an exempt recipient. For most
kinds of accounts, the Fund will report the proceeds of your redemptions to you
and the IRS annually. However, because the tax treatment also depends on your
purchase price and your personal tax position, you should keep your regular
account statements to use in determining your tax. Notice as to the tax status
of your dividends and
<PAGE> 9
distributions is mailed to you annually. You also will receive periodic
summaries of your account which will include information as to dividends and
distributions from securities gains, if any, paid during the year. Depending on
the composition of the Fund's income, a portion of the dividends from net
investment income may qualify for the dividends received deduction allowable to
certain U.S. corporations.
Our discussions in this Prospectus are general by nature, and you are advised to
consult your tax adviser for more complete information about federal, state, and
local tax issues. Heller, Ehrman, White & McAuliffe has expressed no opinion in
respect thereof.
ABOUT OUR MANAGEMENT
MANAGER'S NOTE: OUR BOARD OF TRUSTEES HAS EXTENSIVE BUSINESS, INVESTMENT, AND
MONEY MANAGEMENT EXPERIENCE. THE TRUSTEES SUPERVISE OUR ACTIVITIES AND REVIEW
CONTRACTUAL ARRANGEMENTS WITH COMPANIES WHICH PROVIDE US SERVICES. THE OFFICERS
OF THE MANAGER HAVE EXTENSIVE EXPERIENCE IN THE INVESTMENT AND SECURITIES
BUSINESS.
Our Trustees and Officers are: Richard F. Shelton, President and Trustee; John
R. Hill, Vice President, Secretary and Trustee; Phillip W. McClanahan, Vice
President, Treasurer and Trustee; Stephen C. Rogers, Administrative Officer;
Harry Holmes, Trustee, Harry Holmes & Associates Consulting and formerly with
Aspen Skiing Company and Pebble Beach Company; and John B. Sias, Trustee,
President and CEO, Chronicle Publishing Company, formerly President ABC
Television Network Group, and Director, Capital Cities/ABC Inc.
The Manager, CCM Partners, which is a California limited partnership, and the
Trusts were founded in 1985. The general partner of the Manager is RFS Partners,
which is a California limited partnership controlled by Richard F. Shelton, our
President. In addition, the Manager has a number of limited partners with
extensive business and investment backgrounds, including the following
individuals: Hamilton W. Budge, of counsel to the law firm of Brobeck, Phleger &
Harrison; Doris F. Fisher, co-founder of The Gap, Inc.; Robin Quist Gates,
Trustee of the San Francisco Museum of Modern Art; Brooks Walker, Jr., Trustee
of the San Francisco Museum of Modern Art, and Brayton Wilbur, Jr., President of
Wilbur-Ellis, Inc.
Phillip W. McClanahan is Director of Investments for the Manager. He has been
involved in the day-to-day operations of the Income Fund, the Government Fund,
the Money Fund, the Treasury Trust and the Insured Fund since their inception in
1985, 1989 (Treasury Trust) and 1992 (Insured Fund). He served as Vice President
and Portfolio Manager at Transamerica Investment Services from 1984 to 1985.
From 1966 to 1984 he was Vice President and Portfolio Manager at Fireman's Fund
Insurance Company and Amfire, Inc. For more information on Mr. McClanahan's
business experience, please see "Trustees and Officers" in the Statement of
Additional Information.
MANAGER'S NOTE: SEE PAGE 24 FOR INFORMATION REGARDING OTHER FUNDS.
James P. Conn, Jr., joined the Manager in September 1993. He serves as a
Municipal Bond Analyst for the Money Fund, Income Fund and Insured Fund, and as
a Portfolio Manager of the Money Fund. From November 1991 to August 1993 he
served as an underwriter of municipal bonds at George K. Baum, a regional
investment banking firm. He was a Senior Municipal Bond Analyst at Franklin
Resources from July 1987 to November 1991.
Bank of America NT&SA (Bank of America Capital Management, Inc.) is the
Sub-Adviser for the S&P 500 Index Fund, the MidCap Index Fund, the Equity Income
Fund, and the Fund. The Sub-Adviser is a wholly owned subsidiary of BankAmerica
Corporation, and currently has approximately $46 billion of assets under
management. The Sub-Adviser, together with its affiliates, serves as investment
adviser to 16 mutual funds with total assets of approximately $11 billion. The
Sub-Adviser currently manages approximately $2 billion in indexed assets.
For managing its investments and business affairs, the Fund pays the Manager a
monthly fee, less
<PAGE> 10
reimbursements as noted below, based on the following annualized percentages of
average daily net assets of the Fund throughout the month: 0.50% of the first
$500 million of net assets, plus 0.45% on net assets from $500 million to $1
billion, and 0.40% of net assets above $1 billion.
Pursuant to the Sub-Advisory Agreement between the Manager and the Sub-Adviser,
and subject to the overall policies, control, direction, and review of the Board
of Trustees and to the instructions and supervision of the Manager, the
Sub-Adviser is responsible for providing the Fund with investment advice on
buying and selling specific securities and managing its portfolio investments,
including the placement of orders for portfolio transactions. For its services,
the Sub-Adviser will receive from the Manager a monthly fee, calculated at the
annual rate of 0.10% of average daily net assets of the Fund, pursuant to a
Sub-Advisory Agreement with the Manger. The Sub-Adviser's fee is not an
additional expense of the Fund.
Pursuant to the Management Agreement with the Manager, the Fund is responsible
for its own operating expenses including, but not limited to, the Manager's fee;
taxes, if any; transfer agent, custodian, legal, and auditing fees; fees and
expenses of Trustees who are not members of, affiliated with, or interested
persons of the Manager; salaries of any personnel not affiliated with the
Manager; periodic insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of the Fund's net assets and of
bookkeeping and recordkeeping functions; printing and other expenses relating to
the Fund's operations; plus any extraordinary and non-recurring expenses which
are not expressly assumed by the Manager.
MANAGER'S NOTE: WE BELIEVE OUR ANNUAL FUND OPERATING EXPENSES ARE AMONG THE
LOWEST AVAILABLE FOR THIS TYPE OF FUND.
The Fund's annual operating expenses, excluding extraordinary items, are limited
by the Manager to 1% of its average daily net assets, and the Manager has
voluntarily agreed to further limitations. The Manager has agreed to waive its
fees and absorb expenses to the extent necessary to limit total fund operating
expenses through August 31, 1997 to the annual rate of 0.65% of average net
assets of the Fund. The operating expenses, including the management fee and all
other expenses, incurred by the Fund in excess of this expense ratio limitation
will be reimbursed to the Fund by the Manager out of the management fee. The
Manager paid for all of the Trusts' organization expenses.
Other Services: Firstar Trust Company ("Firstar") serves as the custodian of the
portfolio securities and other assets of the Fund. Firstar also performs
dividend-paying functions, maintains shareholder records, and acts as transfer
agent for the Fund. For its services, Firstar is paid a monthly fee based upon a
maintenance fee for each account in the Fund, plus charges for Fund and
shareholder transactions. For an additional fee, Firstar also performs our
portfolio and net asset valuation and the bookkeeping and recordkeeping required
by the 1940 Act.
OPENING AN ACCOUNT
MANAGER'S NOTE: WE REQUIRE A COMPLETED AND SIGNED APPLICATION FOR EACH NEW
ACCOUNT YOU OPEN, REGARDLESS OF THE METHOD YOU CHOOSE FOR MAKING YOUR INITIAL
INVESTMENT.
You'll find all the necessary application materials included in the packet
accompanying this Prospectus. Additional paperwork may be required from
corporations, associations, and certain other fiduciaries. In order to open an
account in the Fund, your initial investment must be at least $5,000. Subsequent
investments must be $250 or more. We may change the minimum investment amount at
any time or waive it at our discretion. To protect against fraud, it is the
policy of the Fund not to accept third party checks for the purposes of opening
new accounts or purchasing additional shares.
<PAGE> 11
If you have any questions concerning the application materials, wire transfers,
or our yields and net asset values, please call us, toll-free at (800) 225-8778.
If you have any questions about our investment policies and objectives, please
call us at (415) 398-2727 or (800) 225-8778.
HOW TO BUY SHARES
Investing by Mail--If you wish to purchase shares directly from the Fund, you
should:
Initial Purchase--Make your check payable to the S&P SmallCap Index Fund and
mail it with the application to the address indicated on the application. The
minimum initial investment is $5,000.
Purchasing Additional Shares--Make your check payable to the S&P SmallCap Index
Fund , write your account number on the check, and mail your check with your
confirmation stub to the address printed on your account statement. There is a
$250 minimum for subsequent investments.
MANAGER'S NOTE: THERE ARE NO MINIMUM INITIAL INVESTMENTS ON RETIREMENT ACCOUNTS.
FOR ALL OPTIONS BELOW, PLEASE CALL THE FUND AT
(800) 225-8778
Purchasing by Exchange--You may purchase shares in the Fund by exchanging shares
from an account in one of our related Funds. Such exchanges must meet the
minimum amounts required for initial or subsequent investments described above.
When opening an account by exchange, your new account must be established with
the same registration as your other California Investment Trust Fund Group
account and an exchange authorization must be in effect.
By Wire--
Federal funds should be wired to:
Firstar Bank
ABA # 075000022
For: Firstar Trust Company
Account # 112-952-137
For further credit to:
S&P SmallCap Index Fund
Registered name of account:
----------------------------
Account number:
----------------------------
If you are opening a new account or wire, you must first call California
Investment Trust Fund Group at (800) 225-8778 to obtain an account number.
In order to make your order effective, we must have federal funds available to
us at our bank. Accordingly, your purchase will be processed at the net asset
value next calculated after your investment has been converted to federal funds.
If you invest by check or non-federal funds wire, allow two business days for
conversion into federal funds. If you wire money in the form of federal funds,
your money will be invested at the share price next determined after receipt of
the wire. You will begin to earn dividends as of
<PAGE> 12
the first business day following the day of your purchase.
All your purchases must be made in U.S. dollars and checks must be drawn on
banks located in the U.S. We reserve the right to limit the number of investment
checks processed at one time. If the check does not clear, we will cancel your
purchase, and you will be liable for any losses or fees incurred.
When you purchase by check, redemption proceeds will not be sent until we are
satisfied that the investment has been collected (confirmation of clearance will
take up to 12 days). To protect against fraud it is the policy of the Funds not
to accept third party checks. Payments transmitted by check or other negotiable
bank draft will normally be effective within two business days for checks drawn
on a member bank of the Federal Reserve System and longer for most other checks.
Wiring your money to us will reduce the time you must wait before receiving
redemption proceeds or exchanging shares. You can wire federal funds from your
bank or broker, which may charge you a fee.
You may, if you wish, buy shares of the Fund through selected brokers and
financial advisers. These intermediaries are responsible for the transmission of
your order to Firstar and may charge you a fee for their services. If you
purchase shares through a financial service, your money will be invested at the
share price next determined after receipt by our Shareholder Servicing Agent and
conversion to federal funds.
If you wish, you also may deliver your investment checks (and application, for
new accounts) to the Trust's office. However, if you do so, please note that
your purchase will not be deemed received, nor will it be processed, until we
have forwarded it on your behalf to Firstar which, in turn, will deposit your
checks at the Bank for conversion to federal funds.
You may wish to use dollar-cost averaging as a means of making investments of a
fixed dollar amount at regular intervals into the Fund. Dollar-cost averaging is
based on the assumption that investors cannot regularly outguess the ups and
downs of the market. It is a method of investing that turns the ups and downs of
the market to the advantage of the long-term investor. Instead of trying to time
the highs and lows, you invest the same amount of money in mutual funds at
regular intervals over a long period of time. The objective of dollar-cost
averaging is to buy more when the price is low and less when the price is high.
Although dollar-cost averaging cannot guarantee a profit (no system can give a
gain to investors who have to sell at the bottom of the market), dollar-cost
averaging allows you to take advantage of market swings by purchasing larger
quantities of shares when prices are low. For example, if you invest $1,000 at
$10 per share, you receive 100 shares. If, at the time of your next purchase,
the market has dropped and the price of shares of the fund has gone down to $5
per share, you will receive 200 shares for your $1,000 purchase.
We reserve the right to suspend the offering of shares of the Fund for a period
of time and to reject any specific purchase order in whole or in part.
SHAREHOLDER SERVICES
Free Exchange Privilege
MANAGER'S NOTE: THE FREE EXCHANGE PRIVILEGE IS A CONVENIENT WAY TO SELL AND TO
BUY SHARES IN OUR FUNDS IN ORDER TO RESPOND TO CHANGES IN YOUR GOALS.
Our Funds have a variety of investment objectives as discussed in the back of
this Prospectus. Before you make an exchange please note the following:
Read this Prospectus.
Complete and sign an exchange authorization (if not previously done). Exchanges
<PAGE> 13
may be made only among designated accounts registered in the same name(s).
Taxes: Each exchange actually represents the sale of shares of one fund and the
purchase of shares in another, which may produce a gain or loss for tax
purposes. We will confirm each exchange transaction to you by mail.
Proceeds of redemption from shares of the fund exchanged are used to purchase
the other fund on the day the exchange is authorized (which must be prior to
4:00 p.m., Eastern time).
Exchange by telephone: call the appropriate fund at 800-225-8778. Give the
names of the funds, the exact name in which your accounts in the funds are
registered, your account numbers, the dollar amount that you wish to exchange
and the required identification number.
Telecommunications device for the deaf ("TDD") services for hearing impaired
shareholders are available for telephone exchanges by calling (800) 864-3416.
MANAGER'S NOTE: PLEASE CALL US FOR INFORMATION AT: (800) 225-8778.
Unless you submit an account application that indicates that you have declined
telephone exchange privileges, you agree, by signing your account application,
to authorize and direct the Fund to accept and act upon telephone, telex, fax,
or telegraph instructions for exchanges involving your account or any other
account with the same registration. The Fund employs reasonable procedures in an
effort to confirm the authenticity of telephone instructions, such as requiring
the caller to give a special authorization number. Provided these procedures are
followed, you further agree that neither the Fund nor the Transfer Agent will be
responsible for any loss, damage, cost or expense arising out of any telephone
instructions received for an account and to hold harmless Firstar and the Fund,
any of their affiliates or mutual funds managed by such affiliates, and each of
their respective directors, trustees, officers, employees and agents from any
losses, expenses, costs or liabilities (including attorneys' fees) that may be
incurred in connection with these instructions or the exercise of the telephone
exchange privilege.
You should realize that by electing the telephone exchange option, you may be
giving up a measure of security that you might otherwise have if you were to
exchange your shares in writing. For reasons involving the security of your
account, the telephone transaction may be tape recorded.
Exchange privileges may be modified or suspended by the Fund upon 60-days prior
notice to shareholders.
AUTOMATIC SHARE ACCUMULATION PLAN
Under the Funds' Automatic Share Accumulation Plan, an investor may arrange to
make additional purchases (minimum $250) of Fund shares automatically on a
monthly basis by electronic funds transferred from the shareholder's checking
account if the bank which maintains the account is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's bank
account. A shareholder may, of course, terminate the program at any time.
Investors may obtain more information concerning this program, including the
application form, from the Fund. The Manager reserves the right to reject
purchases of this nature for any reason or change the minimum amounts at its
discretion.
The market value of shares of the Fund is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
TAX-SAVING RETIREMENT PLANS
MANAGER'S NOTE: RETIREMENT PLANS ARE AMONG THE BEST TAX BREAKS AVAILABLE TO
INDIVIDUALS. ONE OF OUR PLANS MAY FIT YOUR NEEDS. THERE ARE NO MINIMUM INITIAL
INVESTMENTS ON RETIREMENT PLANS
<PAGE> 14
We can set up your new account in the Fund under one of several tax-sheltered
plans. These plans let you save for your retirement and shelter your investment
earnings from current taxes.
Individual Retirement Accounts (IRA): open to anyone who works. You can also
make investments in the name of your spouse, if your spouse has no earned
income. Each Fund is subject to an annual bank maintenance fee, currently $12.50
with a maximum annual charge of $25.00 per social security number. This fee is
assessed annually in September.
Profit-Sharing and Money-Purchase Plans (Keogh): open to corporations,
self-employed people and their partners, to benefit themselves and their
employees.
403(b) Plans. Open to eligible employees of certain states and non-profit
organizations.
We can provide you with complete information on any of these plans which
discusses benefits, provisions and fees.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares of the Fund with a value of $10,000 or more, you may establish
a Systematic Withdrawal Plan. You may receive monthly or quarterly payments in
amounts of not less than $100 per payment. Details of this Plan may be obtained
by calling the Fund.
ADMINISTRATIVE INFORMATION
CASH DISTRIBUTIONS
Unless you otherwise indicate on the account application, we will reinvest all
dividends and capital gains distributions as applicable for your account in
additional shares of the Fund from which they are distributed. On the
application you may indicate by checking the appropriate box that you wish to
receive either income dividends or capital gains distributions in cash. EFT is
available to those investors who would like their dividends electronically
transferred to their personal accounts. For those investors who do not request
this feature, dividend checks will be mailed via regular mail. If you elect to
receive distributions by mail and the U.S. Postal Service cannot deliver your
checks, we will void such checks and reinvest your money in your account at the
then current net asset value and reinvest your subsequent distributions.
STATEMENT AND REPORTS
Investors will receive statements at least quarterly and after every transaction
that affects their share balance and/or account registration. A statement with
tax information will be mailed to you by January 31 of each year, a copy of
which will be filed with the IRS if it reflects any taxable distributions. Twice
a year you will receive our financial statements, at least one of which will be
audited.
MANAGER'S NOTE: KEEP STATEMENTS YOU RECEIVE AFTER YOU BUY OR SELL SHARES TO
ASSIST IN RECORDKEEPING AND TAX CALCULATIONS.
The account statements you receive will show the total number of shares of the
Fund owned by you. You may rely on these statements in lieu of share
certificates which are not necessary and will not be issued.
We pay for regular reporting services, but not for special services, such as a
request for an historical transcript of an account. You may be required to pay a
separate fee for these special services.
<PAGE> 15
CONSOLIDATED MAILINGS
In an effort to reduce mailing costs, consolidated statements will be sent to
each registrant. Consolidated statements include a summary of all Funds held by
each registrant as identified by the first line of registration, social security
number and address zip code. Consolidated statements offer convenience to
investors by summarizing account information and reducing unnecessary mail. If
you do not wish this consolidation to apply to your account(s), please notify
the Fund of this in writing at the address on the cover page of this Prospectus.
OUR SHARE PRICES
MANAGER'S NOTE: THE NUMBER OF SHARES YOUR MONEY BUYS REFLECTS THE PER SHARE
PRICE OF THE FUND YOU ARE BUYING ON THE DAY YOUR TRANSACTION TAKES PLACE.
The net asset value of the Fund is computed by adding all of its portfolio
holdings and other assets, deducting its liabilities, and then dividing the
result by the number of shares outstanding in the Fund. Our Shareholder
Servicing Agent normally calculates this value for the Fund at 4:00 p.m. Eastern
or 1:00 p.m. Pacific Time on each day that the NYSE is open. Futures contracts
held by the Fund will be valued based on the close of their respective markets,
generally at 4:15 pm Eastern Standard Time.
The share prices of the Fund will vary over time as interest rates and the value
of its securities vary. Portfolio securities of the Fund that are listed on a
national exchange are valued at the last reported sale price. U.S. Treasury
Bills and securities with remaining maturities of 60 days or less are valued on
the amortized cost basis as reflecting fair value. All other securities are
valued at their fair value as determined in good faith by the Boards of
Trustees.
PERFORMANCE INFORMATION
All performance information published in advertisements, sales literature and
communications to investors, including various expressions of current yield,
effective yield, tax equivalent yield, total return and distribution rate, is
calculated and presented in accordance with the rules prescribed by the
Securities and Exchange Commission. Current yield refers to the income generated
by an investment in the Fund over the specified period which is then annualized
(i.e., the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment). Effective yield is calculated in a similar
manner, but, when annualized, the income earned by the investment is assumed to
be reinvested; effective yield will differ from current yield because of the
compounding effect of this assumed reinvestment.
Yield information for the Fund will be accompanied by total return information
on the Fund. Total return information will state the Fund's average annual
compounded rates of return over the most recent four calendar quarters and over
the life of the Fund, based upon the value of shares acquired through a
hypothetical $10,000 investment at the beginning of the specified period and the
net asset value of such shares at the end of the period assuming reinvestment of
all distributions at net asset value. The Fund also may advertise aggregate and
average total return information over different periods of time. Aggregate total
return information is calculated in a manner similar to average annual total
return, except that the results are not annualized.
The Fund also may publish a distribution rate in investor communications
preceded or accompanied by a
<PAGE> 16
copy of this Prospectus. The current distribution rate for the Fund is
calculated by dividing the annualization of the total distributions made by the
Fund during a stated period by the net asset value per share at the end of such
period. The distribution rate for the Fund may differ from its yield because the
distribution rate may be calculated for a different period of time and may
contain items of income that are not reflected in the Fund's yield.
In each case, performance information will be based on past performance and will
reflect all recurring charges against Fund income. Performance information,
because it is based on historical data, is not intended to indicate future
performance of any Fund. See the Statement of Additional Information for a more
detailed explanation of calculations of the Fund's yield for the 7-day or 30-day
period (as appropriate).
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day that the NYSE
is open. Your shares will be redeemed at the net asset value next calculated
after we have received your redemption request in proper form (see page 21).
Remember that we may hold payment until we are satisfied that we have collected
investments which were made by check. To avoid these possible delays, which
could be up to 12 calendar days, you should consider making your investment by
wire, following the instructions on page 13.
BY MAIL:
To: California Investment Trust Fund Group
44 Montgomery Street
Suite 2100
San Francisco, CA 94104
Send a "letter of instruction" specifying the name of the Fund, the number of
shares to be sold, your name, your account number, and the additional
requirements listed below that apply to your particular account.
TYPE OF REGISTRATION
Requirements
Individual, Joint Tenants, Tenants In Common, Sole Proprietorship, Custodial
Uniform Gifts to Minors Act, General Partners
Letter of instruction signed by all person(s) required to sign for the account,
exactly as it is registered, accompanied by signature guarantee(s).
Corporation, Association
Letter of instruction and a corporate resolution, signed by person(s) required
to sign for the account, accompanied by signature guarantee(s).
Trust
A letter of instruction signed by the Trustee(s), with a signature guarantee.
(If the Trustee's name is not registered on your account, also provide a copy of
the trust document, certified within the last 60 days.)
If you do not fall into any of these registration categories (e.g., Executors,
Administrators, Conservators, Guardians, etc.), please call the Fund for further
instructions.
<PAGE> 17
Firstar requires that signature(s) be guaranteed by an eligible signature
guarantor such as a commercial bank, broker-dealer, credit union, securities
exchange or association, clearing agency or savings association.
FOR ALL OPTIONS BELOW,
PLEASE CALL THE FUND AT (800) 225-8778
BY EXCHANGE
You must meet the minimum investment requirement of the other fund. You can only
exchange between accounts with identical registration. Exchanges are accepted
until 4:00 p.m., Eastern time (1:00 p.m., Pacific Time).
BY WIRE
You must have applied for the wire feature on your account. We will notify you
that this feature is active and you may then make wire redemptions by calling
the Fund before 1:00 p.m., Pacific time. This means your money will be wired to
your bank the next business day. There is a charge for each wire (currently
$7.50).
BY TELEPHONE
Call the Fund at (800) 225-8778. Give the name of the Fund, the exact name in
which your account is registered, your account number, the required
identification number and the number of shares or dollar amount that you wish to
redeem. TDD services for hearing impaired shareholders are available for
telephone redemptions by calling (800) 864-3416.
See the discussion of limitation of liability under "SHAREHOLDER SERVICES";
"Free Exchange Privilege."
Retirement Plan shareholders should complete a Rollover-Distribution Election
Form.
REDEMPTION REQUIREMENTS TO REMEMBER
Before you redeem any shares in your account, please review the following
information:
The share prices of the Fund will fluctuate and you may receive more or less
than your original investment when you redeem. The redemption of shares may
result in a gain or loss for federal income tax purposes.
Any redemption request we receive from you must be in proper form, which means,
among other things, that we must have a properly completed account application
on file for you, you must properly sign your request, follow the instructions
above, and if you are a corporation or another entity, we may require current
corporate resolutions and other documents and information. Once your shares are
redeemed, we will normally send you the proceeds within one day but not later
than within seven days. When the NYSE is closed (or when trading is restricted)
for any reason other than its customary weekend or holiday closings, or under
any emergency circumstances as determined by the Securities and Exchange
Commission to merit such action, we may suspend redemption or postpone payment
dates. If you want to keep your account(s) open, please be sure that the value
of your account in the Fund does not fall below $1,000 because of redemptions.
Otherwise, we may close it and mail you the proceeds at the address we have in
our records. We will give you 30 days' written notice that your account(s) will
be closed unless you make an investment to increase your aggregated account
balance to the $1,000 minimum. If you close
<PAGE> 18
your account, any accrued dividends will be paid as part of your redemption
proceeds which due to the accounting practice of equalization will be included
in the share price (see page 10 for an explanation of Equalization).
MISCELLANEOUS INFORMATION
The Trust was organized as Massachusetts business trust on September 11, 1985.
The Agreement and Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series (called Funds). Such
shares will have no preemptive, conversion, or sinking rights. You have equal
and exclusive rights to dividends and distributions declared by your Fund and to
the net assets of your Fund upon liquidation or dissolution.
As business trusts, we are not required, nor do we intend, to hold annual
shareholder meetings. However, we may hold special meetings for a specific Fund
or a Trust as a whole for purposes such as electing Trustees, changing
fundamental policies, or approving an investment management agreement. You also
have equal rights as to voting and vote separately by Fund as to issues
affecting only your Fund (such as changes in fundamental investment policies and
objectives). Your voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in any election of Trustees can, if they choose to
do so, elect all of the Trustees. Meetings of shareholders may be called by the
Trustees in their discretion or upon demand of the holders of 10% or more of the
outstanding shares of any Fund for the purpose of electing or removing Trustees.
Our Board of Trustees may from time to time offer other Funds of either Trust,
the assets and liabilities of which will likewise be separate and distinct from
any other Fund of either Trust. Although this offering of shares of each of our
Funds constitutes a separate and distinct offering of such shares, it is
possible that a Fund might become liable for any mis-statements or omissions
from the Prospectus or the Statement of Additional Information about one of the
other Funds. The Board of Trustees of each Trust has considered this factor with
respect to each Trust in approving the use of a single, combined Prospectus and
a joint Statement of Additional Information for all of the Funds. This Fund will
be included in such a prospectus as of January 1, 1997.
The following have been appointed by the Board of Trustees to serve the Trusts
and the Funds: Investment Manager: CCM Partners, a California Limited
Partnership, 44 Montgomery Street, Suite 2100, San Francisco, California 94104
Custodian Bank, Shareholder Servicing and Transfer Agent: Firstar Trust Company,
615 East Michigan Street, Milwaukee, Wisconsin 53202.
Legal Counsel: The validity of the shares of beneficial interest offered hereby
will be passed upon by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San
Francisco, California 94104.
Auditors: Tait, Weller & Baker, Two Penn Center Plaza, Suite 700, Philadelphia,
Pennsylvania 19102-1707.
Distributor: RFS Partners, 44 Montgomery Street, Suite 2100, San Francisco,
California 94104.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus or in the Statement of Additional
Information.
OTHER FUNDS OFFERED BY THE
CALIFORNIA INVESTMENT TRUST FUND GROUP
AND THEIR INVESTMENT OBJECTIVES
California Tax-Free Income Fund seeks as high a level of income exempt from
federal and California personal income taxes as is consistent with prudent
investment management and safety of capital. This Fund will usually invest in
intermediate and long-term municipal bonds and will invest only in securities in
<PAGE> 19
the four highest rating categories.
California Insured Intermediate Fund seeks as high a level of income exempt from
federal and California income taxes as is consistent with prudent investment
management and safety of capital. This Fund invests primarily in intermediate
and long-term municipal securities that are covered by insurance guaranteeing
the timely payment of principal and interest and will invest only in securities
in the two highest rating categories. Previously called: California Insured
Tax-Free Income Fund.
California Tax-Free Money Market Fund has the objectives of capital
preservation, liquidity, and the highest achievable current income exempt from
both federal and California personal income taxes consistent with safety. This
Fund invests in short-term securities rated in the two highest rating
categories.
S&P MidCap Index Fund is a diversified mutual fund that seeks to provide
investment results that correspond to the total return of publicly traded common
stocks of medium-size domestic companies, as represented by the Standard &
Poor's MidCap 400 Index.
S&P 500 Index Fund is a diversified mutual fund that seeks to provide investment
results that correspond to the total return of common stocks publicly traded in
the United States, as represented by the Standard & Poor's 500 Composite Stock
Price Index.
U.S. Government Securities Fund seeks safety from credit risk, liquidity, and as
high a level of income as is consistent with these objectives by investment in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities, primarily GNMA Certificates. A portion of its income may be
exempt from California and other states' personal income taxes.
The United States Treasury Trust seeks preservation of capital, safety,
liquidity, and, consistent with these objectives, the highest attainable current
income exempt from state income taxes. The Treasury Trust will invest its assets
only in short-term U.S. Treasury securities and its income will be exempt from
California (and most other states') personal income taxes.
The Equity Income Fund seeks a high level of current income by investing
primarily in dividend-paying equity securities. In the selection of these
securities, the Fund will also consider the potential for price appreciation.
SHARES OF THESE FUNDS ARE NOT BEING OFFERED THROUGH THIS PROSPECTUS. CALL THE
FUND AT (800) 225-8778 FOR A PROSPECTUS.
DESCRIBING THESE FUNDS IN MORE DETAIL.
<PAGE> 20
CALIFORNIA INVESTMENT TRUST FUND GROUP(TM)
S&P SMALLCAP INDEX FUND
44 Montgomery Street, Suite 2100
San Francisco, California 94104
(415) 398-2727
STATEMENT OF ADDITIONAL INFORMATION - OCTOBER 1, 1996
The California Investment Trust Fund Group(TM) (the "Trusts") presently
consists of nine separate funds which are part of California Investment Trust
and California Investment Trust II (collectively, the "Trusts"): California
Tax-Free Income Fund (the "Income Fund"), the California Insured Intermediate
Fund (the "Insured Fund"), California Tax-Free Money Market Fund (the "Money
Fund"), U.S. Government Securities Fund (the "Government Fund"), The United
States Treasury Trust (the "Treasury Trust"), the S&P 500 Index Fund (the "500
Fund"), the S&P MidCap Index Fund (the "MidCap Fund"), the S&P SmallCap Index
Fund (the "SmallCap Fund") and the Equity Income Fund (the "Equity Income
Fund").
This Statement of Additional Information relates to the SmallCap Fund,
which is sometimes referred to herein as the "Fund."
The SmallCap Fund seeks to provide investment results that correspond to the
total return of publicly traded common stocks of small-sized companies, as
represented by the S&P 600 SmallCap Index.
The Prospectus for the Fund dated October 1, 1996, as may be amended
from time to time, provides the basic information you should know before
investing in the Fund, and may be obtained without charge from the Fund at the
above address. This Statement of Additional Information is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This Statement is intended to provide you with additional
information regarding the activities and operations of the Trusts and the Fund,
and should be read in conjunction with the Prospectus.
CONTENTS Page
About the California Investment Trust Fund Group B-2
Investment Objective and Policies of the Fund B-2
Description of Investment Securities and Portfolio Techniques B-2
Investment Restrictions B-6
Trustees and Officers B-9
Investment Management and Other Services B-10
The Trusts' Policies Regarding Broker-Dealers
Used for Portfolio Transactions B-12
Additional Information Regarding Purchases and
Redemptions of Fund Shares B-13
Taxation B-15
Yield Disclosure and Performance Information B-17
Miscellaneous Information B-20
ABOUT THE CALIFORNIA INVESTMENT TRUST FUND GROUP
The California Investment Trust Fund Group currently consists of two
diversified, open-end management investment companies, commonly called "mutual
funds": California Investment Trust ("CIT") and California Investment Trust II
("CIT II"). Each Trust issues its shares of beneficial interest
<PAGE> 21
with no par value in different series, each known as a "Fund." Currently, CIT
has three separate funds, each of which maintains a completely separate
investment portfolio: the Income Fund, the Money Fund, and the Insured Fund. CIT
II currently has six Funds, the Government Fund, the Treasury Trust, the 500
Fund, the MidCap Fund, the SmallCap Fund and the Equity Income Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE S&P SMALLCAP INDEX FUND
The following information supplements the Fund's investment objective
and basic policies as set forth in the Prospectus.
The Fund is a diversified series of the CIT II. The achievement of the
Fund's investment objective will depend upon market conditions generally and on
Bank of America NT&SA's (Bank of America Capital Management, Inc.) (the "Sub
Adviser") analytical and portfolio management skills.
As stated in the Prospectus, the investment objective of the S&P
SmallCap Index Fund is to seek to provide investment results that correspond to
the total return of publicly traded common stocks of small sized companies, as
represented by the Standard & Poor's 600 SmallCap Index (the "S&P 600 Index or
the "Index"). The S&P SmallCap 600 Index, representing approximately 4% of the
market value of all stocks traded publicly in the United States, is comprised of
600 stocks of small-sized domestic companies with market capitalizations between
$48 million and $2.7 billion. The median market capitalization of the stocks of
the index is approximately $364 million.
DESCRIPTION OF INVESTMENT SECURITIES AND PORTFOLIO TECHNIQUES
The Fund invests primarily in equity securities, but may invest a small portion
of its assets in other types of securities.
U.S. Government Obligations. The Fund may purchase U.S. Government
obligations. U.S. Treasury obligations are issued by the Treasury and include
Treasury bills (maturing within one year of the date they are issued),
certificates of indebtedness, notes and bonds (issued with maturities longer
than one year). Such obligations are backed by the full faith and credit pledge
of the U.S. Government. Agencies and instrumentalities of the U.S. Government
are established under the authority of an act of Congress and include, but are
not limited to, the Government National Mortgage Association, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmer's Home Administration,
Federal Home Loan Banks, the Federal Housing Administration, Federal
Intermediate Credit Banks, Federal Land Banks and the Federal National Mortgage
Association. Obligations are issued by such agencies or instrumentalities in a
range of maturities and may be either (1) backed by the full faith and credit
pledge of the U.S. Government, or (2) backed only by the rights of the issuer to
borrow from the U.S. Treasury. The Fund will not invest in obligations issued by
agencies and instrumentalities of the U.S. Government unless the Sub-Adviser
determines that the agency's or instrumentality's credit risk makes it a
suitable investment for the Fund.
Repurchase Transactions. The Fund may enter into repurchase agreements
with government securities dealers recognized by the Federal Reserve Board or
with member banks of the Federal Reserve System. Such a transaction is an
agreement in which the seller of U.S. Government securities to the Fund agrees
to repurchase the securities sold to the Fund at a mutually agreed upon time and
price. It may also be viewed as the loan of money by the Fund to the seller. The
resale price normally is in excess of the purchase price, reflecting an agreed
upon interest rate. The rate is effective for the period of time in the
agreement and is not related to the coupon rate on the underlying securities.
The period of these repurchase agreements is usually short, from overnight to
one week. The U.S. Government securities which are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The Fund always receives as
collateral U.S. Government securities whose market value, including accrued
interest, is at least equal to 100% of the dollar amount invested by the Fund in
each agreement, and the Fund makes payment for such securities only upon
<PAGE> 22
physical delivery or evidence of book entry transfer to the account of its
custodian. If the seller defaults, the Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. The Fund may
not enter into a repurchase agreement with more than seven days to maturity if,
as a result, more than 10% of the market value of the Fund's total assets would
be invested in such repurchase agreements. The current policy of the Fund is to
limit repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by the Sub-Adviser subject to the oversight of
CCM Partners (the "Manager") and the Board of Trustees of CIT II.
Lending Portfolio Securities. As indicated in the Prospectus, although
the Fund does not intend to do so within the current year, the Fund may lend up
to 10% of its portfolio securities to qualified non-affiliated brokers, dealers
and financial institutions provided that cash, letters of credit or U.S.
Government securities equal to 100% of the market value of the securities loaned
is deposited by the borrower with the Fund and is maintained each business day.
While such securities are on loan, the borrower will pay the Fund any income
accruing thereon, and the Fund may invest or reinvest the collateral (depending
on whether the collateral is cash, letters of credit or U.S. Government
securities) in portfolio securities, thereby earning additional income. The Fund
will not lend its portfolio securities if such loans are not permitted by the
laws or regulations of any state in which its shares are qualified for sale.
Loans are typically subject to termination by the Fund in the normal settlement
time, currently three business days after notice, or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to the Fund and its shareholders. The Fund
may pay reasonable finders', borrowers', administrative, and custodial fees in
connection with a loan of its securities. The Sub-Adviser will review and
monitor the creditworthiness of such borrowers on an ongoing basis.
Additional Issues
Stock Index Futures Contracts. The Fund may enter into agreements to
"buy" or "sell" a stock index at a fixed price at a specified date. No stock
actually changes hands under these contracts; instead, changes in the underlying
index's value are settled in cash. The cash settlement amounts are based on the
difference between the index's current value and the value contemplated by the
contract. An option on a stock index futures contract is an agreement to buy or
sell an index futures contract; that is, exercise of the option results in
ownership of a position in a futures contract. Most stock index futures are
based on broad-based common stock indices, such as the Russell 2000 Index,
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500") and the S&P
MidCap 400 Stock Price Index (the "MidCap Index"); the latter two are registered
trademarks of Standard & Poor's Corporation. Other broad-based indices include
the New York Stock Exchange Composite Index, Value Line Composite Index and
Standard & Poor's 100 Stock Index. The Fund may invest in other stock indices
should the Sub-Adviser believe that such index will help the Fund meet its
investment objective.
The Sub-Adviser expects that futures transactions for the Fund will
typically involve the Russell 2000 Index. Because the value of index futures
depends primarily on the value of their underlying indices, the performance of
broad-based contracts will generally reflect broad changes in common stock
prices. The Fund's investments may be more or less heavily weighted in
securities of particular types of issuers, or securities of issuers in
particular industries, than the indices underlying its index futures positions.
Therefore, while the Fund's index futures positions should provide exposure to
changes in value of the underlying indices (or protection against declines in
their value in the case of hedging transactions), it is likely that, in the case
of hedging transactions, the price changes of the Fund's index futures positions
will not match the price changes of the Fund's other investments.
Futures Margin Payments. Both the purchaser and seller of a futures
contract are required to deposit "initial margin" with a futures broker (known
as a "futures commission merchant," or "FCM") when the contract is entered into.
Initial margin deposits are equal to a percentage of the contract's value,
<PAGE> 23
as set by the exchange where the contract is traded, and may be maintained in
cash or high quality liquid securities. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments are similar to good faith deposits or performance
bonds, unlike margin extended by a securities broker, and initial and variation
margin payments do not constitute purchasing securities on margin for purposes
of the Fund's investment limitations. In the event of the bankruptcy of a FCM
that holds margin on behalf of the Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser will attempt to minimize this risk by monitoring the
creditworthiness of the FCMs with which the Fund does business.
Limitations on Stock Index Futures Transactions. The Fund has filed a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the Commodity Futures Trading Commission (the "CFTC") and
the National Futures Association, which regulate trading in the futures markets.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
Fund may use futures contracts for bona fide hedging purposes within the meaning
of CFTC regulations; provided, however, that, with respect to positions in
futures contracts which are not used for bona fide hedging purposes within the
meaning of CFTC regulations, the aggregate initial margin required to establish
such position will not exceed five percent of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any such contracts into which the Fund has entered.
The Sub-Adviser also intends to follow certain other limitations on the
Fund's futures activities. Under normal conditions, the Fund will not enter into
any futures contract if, as a result, the sum of (i) the current value of assets
hedged in the case of strategies involving the sale of securities, plus (ii) the
current value of the indexes or other instruments underlying the Fund's other
futures positions would exceed 20% of the Fund's total assets (35% if total
assets are below $25 million). In addition, the Fund does not intend to enter
into futures contracts that are not traded on exchanges or boards of trade.
The above limitations on the Fund's investments in futures contracts,
and the Fund's policies regarding futures contracts discussed elsewhere in this
Statement of Additional Information, are not fundamental policies and may be
changed as regulatory agencies permit.
Various exchanges and regulatory authorities have undertaken reviews of
futures trading in light of market volatility. Among the possible actions that
have been presented are proposals to adopt new or more stringent daily price
fluctuation limits for futures transactions, and proposals to increase the
margin requirements for various types of strategies. It is impossible to predict
what actions, if any, will result from these reviews at this time.
The Fund may purchase index futures contracts in order to attempt to
remain fully invested in the stock market. For example, if the Fund had cash and
short-term securities on hand that it wished to invest in common stocks, but at
the same time wished to maintain a highly liquid position in order to be
prepared to meet redemption requests or other obligations, it could purchase an
index futures contract in order to approximate the activity of the index with
that portion of its portfolio. The Fund may also purchase futures contracts as
an alternative to purchasing actual securities. Under normal market conditions,
however, the Fund must invest at least 80% of its total assets (65% if total
assets are less than $25 million) in the common stocks that comprise the S&P
SmallCap Index. For example, if the Fund intended to purchase stocks but had not
yet done so, it could purchase a futures contract in order to participate in the
index's activity while deciding on particular investments. This strategy is
sometimes known as an anticipatory hedge. In these strategies the Fund would use
futures contracts to attempt to achieve an overall return -- whether positive or
negative -- similar to the return from the stocks included in the underlying
index, while taking advantage of the potentially greater liquidity that futures
contracts may offer. Although the Fund would hold cash and liquid debt
securities in a segregated account with a value sufficient to cover its open
future obligations, the segregated assets would be available to the Fund
immediately upon closing out the futures position, while settlement of
securities transactions can take
<PAGE> 24
several days.
When the Fund wishes to sell securities, it may sell stock index
futures contracts to hedge against stock market declines until the sale can be
completed. For example, if the Sub-Adviser anticipated a decline in common stock
prices at a time when the Fund anticipated selling common stocks, it could sell
a futures contract in order to lock in current market prices. If stock prices
subsequently fell, the futures contract's value would be expected to rise and
offset all or a portion of the anticipated loss in the common stocks the Fund
had hedged in anticipation of selling them. Of course, if prices subsequently
rose, the futures contract's value could be expected to fall and offset all or a
portion of any gains from those securities. The success of this type of strategy
depends to a great extent on the degree of correlation between the index futures
contract and the securities hedged.
Asset Coverage for Futures Positions. The Fund will comply with
guidelines established by the Securities and Exchange Commission (the "SEC")
with respect to coverage of futures strategies by mutual funds, and if the
guidelines so require will set aside cash and appropriate liquid assets (e.g.,
U.S. Government securities or other high grade debt obligations) in a segregated
custodial account in the amount prescribed. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Stock index futures prices can also diverge from the prices of their
underlying indexes. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
index, and the time remaining until expiration of the contract, which may not
affect security prices the same way. Imperfect correlation may also result from
differing levels of demand in the futures markets and the securities markets,
from structural differences in how futures and securities are traded, or from
imposition of daily price fluctuation limits for futures contracts. The Fund may
sell futures contracts with a greater or lesser value than the securities it
wishes to hedge in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases.
Liquidity of Futures Contracts. Because futures contracts are generally
settled within a day from the date they are closed out in many cases the futures
markets can provide liquidity superior to the securities markets in many cases.
Nevertheless, there is no assurance a liquid secondary market will exist for any
particular futures contract at any particular time. In addition, futures
exchanges may establish daily price fluctuation limits for futures contracts,
and may halt trading if a contract's price moves upward or downward more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached, it may be impossible for a Fund to enter into new positions or
close out existing positions. Trading in index futures can also be halted if
trading in the underlying index stocks is halted. If the secondary market for a
futures contract is not liquid because of price fluctuation limits or otherwise,
it would prevent prompt liquidation of unfavorable futures positions, and could
require the Fund to continue to hold a futures position until the delivery date
regardless of potential consequences. If the Fund must continue to hold a
futures position, its access to other assets held to cover the position could
also be impaired.
Puts and Calls
Although the Sub-Adviser does not plan to do so in the current year, the Fund
may hedge a cash position by entering into a put or call transaction in an
effort to remain fully invested. The Sub-Adviser may implement such a strategy
when it is deemed by the Sub-Adviser that a transaction of this nature appears
to offer the Fund a better opportunity to meet its investment objective than
other alternatives.
INVESTMENT RESTRICTIONS
<PAGE> 25
Except as noted, the Fund has adopted the following restrictions as
additional fundamental policies of the Fund, which means that they may not be
changed without the approval of a majority of the outstanding voting securities
of the Fund. Under the Investment Company Act of 1940, as amended (the "1940
Act"), a "vote of a majority of the outstanding voting securities" of the Trust
or of a particular Fund means the affirmative vote of the lesser of (l) more
than 50% of the outstanding shares of the Trust or of such Fund, or (2) 67% or
more of the shares of the Trust or of such Fund present at a meeting of
shareholders if more than 50% of the outstanding shares of the Trust or of such
Fund are represented at the meeting in person or by proxy. The Fund may not:
Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefor) for temporary or emergency purposes
may be made from banks in any amount up to 15% of the Fund's total asset value.
However, the Fund will not purchase securities while the amount of its
outstanding borrowings exceeds 5% of its total assets. Secured temporary
borrowings may take the form of a reverse repurchase agreement, pursuant to
which the Fund would sell portfolio securities for cash and simultaneously agree
to repurchase them at a specified date for the same amount of cash plus an
interest component. (As a matter of operating policy, the Fund does not intend
to utilize reverse repurchase agreements within the current year, but may do so
in the future.)
Except as required in connection with permissible futures contracts,
buy any securities on "margin" or sell any securities "short," except that it
may use such short-term credits as are necessary for the clearance of
transactions.
Make loans, except (a) through the purchase of debt securities which
are either publicly distributed or customarily purchased by institutional
investors, (b) to the extent the entry into a repurchase agreement may be deemed
a loan, or (c) to lend portfolio securities to broker-dealers or other
institutional investors if at least 100% collateral, in the form of cash or
securities of the U.S. Government or its agencies and instrumentalities, is
pledged and maintained by the borrower.
Act as underwriter of securities issued by other persons except
insofar as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
With respect to 75% of its total assets, purchase the securities of
any one issuer (except securities issued or guaranteed by the U.S. Government
and its agencies or instrumentalities, as to which there are no percentage
limits or restrictions) if immediately after and as a result of such purchase
(a) the value of the holdings of the Fund in the securities of such issuer
exceeds 5% of the value of the Fund's total assets, or (b) the Fund would own
more than 10% of the voting securities of any such issuer.
Purchase securities from or sell securities to the Trust's officers
and Trustees, or any firm of which any officer or Trustee is a member, as
principal, or retain securities of any issuer if, to the knowledge of the Trust,
one or more of the Trust's officers, Trustees, or investment adviser own
beneficially more than 1/2 of 1% of the securities of such issuer and all such
officers and Trustees together own beneficially more than 5% of such securities
(this restriction is non-fundamental).
Acquire, lease or hold real estate, except as may be necessary or
advisable for the maintenance of its offices, and provided that this limitation
shall not prohibit the purchase of securities secured by real estate or
interests therein.
Invest in commodities and commodity contracts, or interests in oil,
gas, or other mineral exploration or development programs; provided, however,
that the Fund may invest in futures contracts as described in the Prospectus and
in this Statement of Additional Information.
Invest in companies for the purpose of exercising control or
management.
<PAGE> 26
Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and as such securities may be acquired in
connection with a merger, consolidation, acquisition, or reorganization.
Purchase illiquid securities, including (under current SEC
interpretations) securities that are not readily marketable, and repurchase
agreements with more than seven days to maturity if, as a result, more than 10%
of the total assets of the Fund would be invested in such illiquid securities.
Invest 25% or more of its assets in securities of any one industry
except as required to replicate the performance of the Index. For purposes of
this limitation, obligations of the U.S. Government and its agencies or
instrumentalities are not considered to be part of any industry.
In addition, the Fund has adopted the following restrictions as
operating policies, which are not fundamental policies, and may be changed
without shareholder approval in accordance with applicable regulations. The Fund
may not:
1. Engage in short sales of securities.
2. Invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets. Included in such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants that are not
listed on the New York Stock Exchange (the "NYSE") or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value.
3. Enter into a futures contract or option on a futures contract, if,
as a result thereof, more than 5% of the Fund's total assets (taken at market
value at the time of entering into the contract) would be committed to initial
deposits and premiums on open futures contracts and options on such contracts.
4. Invest more than 5% of its total assets in the securities of
companies (including predecessors) that have been in continuous operation for a
period of less than three years.
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 the
values of assets will not constitute a violation of that restriction, except
that no more then 10% of the Fund's assets will be invested in illiquid
securities, and as otherwise noted.
<PAGE> 27
TRUSTEES AND OFFICERS
The Trustees of each Trust have the responsibility for the overall
management of the Trust, including general supervision and review of its funds'
investment activities. The Trustees elect the officers of each Trust who are
responsible for administering the day-to-day operations of such Trust and its
funds. The affiliations of the officers and Trustees and their principal
occupations for the past five years are listed below. The Trustees and officers
of each Trust are identical. Trustees who are deemed to be "interested person"
of the Trust, as defined in the 1940 Act, are indicated by an asterisk (*).
<TABLE>
<CAPTION>
Name and Address Age Positions and offices Principal Occupation
with the trust within the past 5 years
<S> <C> <C> <C>
Richard F. Shelton, 67 President and Trustee Chief Executive Officer, CCM Partners;
44 Montgomery Street 1982-1984: General Partner, Senior Vice
Suite 2100 President, and Director, Hambrecht &
San Francisco, CA 94104 Quist and President and Director,
Hambrecht & Quist Management
Corporation; 1963-1982: Resident
Manager, General Partner, Senior Vice
President and Director,
Paine Webber Jackson & Curtis.
*John R. Hill 55 Vice President, Director of Marketing, CCM Partners;
44 Montgomery Street Secretary and Trustee 1975-1985: President and Director,
Suite 2100 The Great American Seed Company, Inc.
San Francisco, CA 94104
*Phillip W. McClanahan 60 Vice President, Director of Investments, CCM Partners:
44 Montgomery Street Treasurer and 1984-1985: Vice President and Portfolio
Suite 2100 Trustee Manager, Transamerica Investment
San Francisco, CA 94104 Services: 1966-1984: Vice President and
Portfolio Manager, Fireman's Fund
Insurance Company and Amfire, Inc.
Harry Holmes 70 Trustee Principal, Harry Holmes & Associates
Del Ciervo at Midwood (consulting); 1982-1984: President and
Pebble Beach, CA 93953 Chief Executive Officer, Aspen Skiing
Company; 1973-1984: President and
Chief Executive Officer, Pebble Beach
Company (property management).
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C> <C>
John B. Sias 69 Trustee President and CEO, Chronicle
c/o Chronicle Publishing Publishing Company, 1993 to present; Company
901 Mission Street formerly, Director and Executive Vice
San Francisco, CA 94103 President, Capital Cities/ABC Inc.
and President, ABC Network T.V. Group.
Stephen C. Rogers 30 Accounting and Administrative Officer, CCM Partners;
44 Montgomery Street Compliance Officer 1992 to 1993: Marketing Representative,
Suite 2100 CCM Partners; 1990 to 1992: Marketing
San Francisco, CA 94104 Representative, Xerox Corporation.
</TABLE>
As shown on the following table the Fund pays the fees of the Trustees
who are not affiliated with the Manager, which are currently $2,500 per quarter
and $500 for each meeting attended. The table provides information regarding all
series of the California Investment Trust as of July 31, 1996. As of July 31,
The Trustees and Officers as a group, owned less than 1% of the outstanding
shares of each Fund, except the Treasury Trust and the MidCap Fund. As of July
31, 1996, the Trustees and officers of the trust, as a group, owned
approximately 6.7% of the Treasury Trust and 2% of the MidCap Fund.
<TABLE>
<CAPTION>
Pension or Total Compensation
retirement Benefits Estimated Annual respecting registrant
Aggregate accrued as part of Benefits upon and Fund Complex
Name/position compensation Fund Expenses retirement paid to Trustees
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard F. Shelton None None None None
President, Trustee
John R. Hill None None None None
Secretary, Trustee
Phillip W. McClanahan None None None None
Treasurer, Trustee
Harry Holmes $1,000 None None $12,000
Trustee
John B. Sias $1,000 None None $12,000
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Management Services
CCM Partners, a California Limited Partnership (the "Manager"), is the
Manager of the Fund under an Investment Management Agreement dated July 9, 1996
(the "Agreement"). Pursuant to the Agreement, the Manager supplies investment
research and portfolio management, including the selection of securities for the
Fund to purchase, hold, or sell and the selection of brokers or dealers through
whom the portfolio transactions of the Fund are executed. The Manager intends to
delegate these latter functions to the Sub-Adviser (see below). The Manager's
activities are subject to review and supervision by the Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, also furnishes the Trusts with executive and
administrative personnel, office space and facilities, and pays certain
additional administrative expenses incurred in connection with the operation of
the Fund.
The Fund pays for its own operating expenses and for its share of its
Trust's expenses not assumed by the Manager, including, but not limited to,
costs of custodian services, brokerage fees, taxes, interest, costs of reports
and notices to shareholders, costs of dividend disbursing and shareholder
record-keeping services (including telephone costs), auditing and legal fees,
the fees of the independent Trustees and the salaries of any officers or
employees who are not affiliated with the Manager, and its pro
rata portion of premiums on the fidelity bond covering the Fund.
For the Manager's services, the Fund pays a monthly fee computed at the
annual rate of 1/2 of 1% (0.50%) of the value of the average daily net assets of
each Fund up to and including assets of $500 million; plus 45/100 of 1% (0.45%)
per annum of average net assets over $500 million up to and including $1
billion; and 4/10 of 1% (0.40%) per annum of average net assets over $1 billion.
The Agreement provides that the Manager is obligated to reimburse the
Fund monthly (through a reduction of its management fees and otherwise) for all
expenses (except for extraordinary expenses such as litigation), in excess of
1.00% of the Fund's average daily net assets. The Manager may also, and has to
date, reduce its fees in excess of its obligations under the Agreement. In the
event the operating expenses of the Fund (including the fees payable to the
Manager, but excluding taxes, interest, brokerage, and extraordinary expenses)
for any fiscal year exceed the expense limitations applicable to the Fund
imposed by state securities laws or any regulations thereunder, the Manager will
reduce its fee by the extent of such excess and, if required pursuant to any
such laws or regulations, will reimburse the Fund in the amount of such excess.
At present, the most restrictive expense limitation would require the Manager to
reimburse the Fund in the event that during any fiscal year of its ordinary
operating expenses were to exceed 2.5% of the Fund's first $30 million of
average net assets, 2.0% of the next $70 million of average net assets, and 1.5%
of the remaining average net assets. The Manager is legally obligated to refund
some or all of its management fee if such expenses exceed this expense
limitation. The payment of the management fee at the end of any month is reduced
so that there is no accrued but unpaid liability under these expense
limitations.
The Manager has retained Bank of America NT&SA (Bank of America Capital
Management, Inc.) to act as Sub-Adviser to the Fund, subject to supervision by
the Manager and the Trust's Board of Trustees. Under the Sub-Advisory Agreement,
the Sub-Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Sub-Adviser. The Sub-Adviser provides the
portfolio managers for the Fund, who make the necessary investment decisions and
place transactions accordingly. The Manager compensates the Sub-Adviser at the
annual rate of 1/10 of 1% (0.10%) of the value of the average daily net assets
of the Fund.
The Agreement and Sub-Advisory Agreement for the Fund is currently in
effect until December 31, 1996. The Agreement and the Sub-Advisory Agreement
will be in effect thereafter only if they are renewed for the Fund for
successive periods not exceeding one year by (i) the Board of Trustees of the
Trust or a vote of a majority of the outstanding voting securities of the Fund,
and (ii) a vote of a majority of such Trustees who are not parties to said
Agreement nor an interested person of any such party (other than as a Trustee),
cast in person at a meeting called for the purpose of voting on such Agreement.
The Agreement and the Sub-Advisory Agreement may be terminated without
penalty at any time by CIT II with respect to the Fund (either by the Board of
Trustees or by a majority vote of the terminating Fund's outstanding shares) or
by the Manager on 60-days' written notice, and will automatically terminate in
the event of its assignment as defined in the 1940 Act.
Principal Underwriter
RFS Partners, a California limited partnership, is currently the
principal underwriter of the Fund's shares under an underwriting agreement with
the Fund, pursuant to which RFS Partners agrees to act as the Fund's
distribution agent. The Fund's shares are sold to the public on a best efforts
basis in a continuous offering without a sales load or other commission. RFS
Partners is the general partner of the Funds' Manager. The general partner of
RFS Partners is Richard F. Shelton, Inc., a corporation that is controlled by
Richard F. Shelton, who is a Trustee and the President of the Trust. Mr. Hill
and Mr. McClanahan are limited partners of RFS Partners. While the shares of the
Fund are offered directly to the public with no sales charge, RFS Partners may,
out of its own monies, compensate brokers who assist in
<PAGE> 29
the sale of a Fund's shares.
Other Services
Firstar Trust Company is the shareholder servicing agent for the Trust
and acts as the Trust's transfer and dividend-paying agent. In such capacities
it performs many services, including portfolio and net asset valuation,
bookkeeping, and shareholder record-keeping.
Firstar Trust Company (the "Custodian") acts as custodian of the
securities and other assets of the Trust. The Custodian does not participate in
decisions relating to the purchase and sale of portfolio securities.
Tait, Weller & Baker, Two Penn Center Plaza, Suite 700, Philadelphia,
Pennsylvania 19102-1707, are the independent auditors for the Trust.
The validity of shares of beneficial interest offered hereby will be
passed on by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104.
THE TRUSTS' POLICIES REGARDING BROKER-DEALERS
USED FOR PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund, assignment of its
portfolio business, and negotiation of commission rates and prices are made by
the Manager or the Sub-Adviser subject to the supervision of the Manager, as
applicable, whose policy is to obtain the "best execution" (prompt and reliable
execution at the most favorable price) available. Purchases of portfolio
securities from underwriters may include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and asked price.
When a broker-dealer is used for portfolio transactions, the Manager or
the Sub-Adviser, as applicable, will seek to determine that the amount of
commissions paid is reasonable in relation to the value of the brokerage and
research services and information provided, viewed in terms of either that
particular transaction or its overall responsibilities with respect to the Fund.
In selecting broker-dealers and in negotiating commissions, the Manager or the
Sub-Adviser, as applicable, considers the broker-dealer's reliability, the
quality of its execution services on a continuing basis, the financial condition
of the firm, and the research services provided, which include furnishing advice
as to the value of securities, the advisability of purchasing or selling
specific securities and furnishing analysis and reports concerning state and
local governments, securities, and economic factors and trends, and portfolio
strategy. The Manager or the Sub-Adviser, as applicable, considers such
information, which is in addition to and not in lieu of the services required to
be performed by the Sub-Adviser and the Manager under the Management and
Sub-Advisory Agreements, to be useful in varying degrees, but of indeterminable
value.
The Fund may pay brokerage commissions in an amount higher than the
lowest available rate for brokerage and research services as authorized, under
certain circumstances, by the Securities Exchange Act of 1934, as amended. Where
commissions paid reflect research services and information furnished in addition
to execution, the Manager and the Sub-Adviser each believes that such services
were bona fide and rendered for the benefit of its clients.
Provided that the best execution is obtained, the sale of shares of the
Fund may also be considered as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions. No affiliates of the Fund or of the
Manager or of the Sub-Adviser will receive commissions for business arising
directly or indirectly out of portfolio transactions of the Fund.
<PAGE> 30
If purchases or sales of securities of the Fund are considered at or
about the same time as purchases and sales for other funds, transactions in such
securities will be allocated among the several funds in a manner deemed
equitable to all by the Manager, taking into account the respective sizes of the
funds, and the amount of securities to be purchased or sold. It is recognized
that it is possible that in some cases this procedure could have a detrimental
effect on the price or volume of the security so far as the Fund is concerned.
In other cases, however, it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions or net prices
will be beneficial to the Fund.
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES
Purchase Orders
The purchase price for shares of the Fund is the net asset value of
such shares next determined after receipt and acceptance of a purchase order in
proper form. Many of the types of instruments in which the Fund invests must be
paid for in "Federal funds," which are monies held by the Custodian on deposit
at a Federal Reserve Bank. Therefore, the monies paid by an investor for the
shares of the Fund generally cannot be invested by the Fund until they are
converted into and are available to the Fund in Federal funds, which may take up
to two business days. In such cases, purchases by investors will not be
considered in proper form and effective until such conversion and availability.
However, in the event the Fund is able to make investments immediately (within
one business day), it may accept a purchase order with payment otherwise than in
Federal funds; in such event shares of the Fund will be purchased at the net
asset value next determined after receipt of the order and payment. Once shares
of the Fund are purchased, they begin earning income immediately, and income
dividends will start being credited to the investor's account on the day
following the effective date of purchase and continue through the day the shares
in the account are redeemed.
Payments transmitted by wire and received by Firstar Trust Company
prior to 4:00 p.m. Eastern time (1:00 PM. Pacific time) on any business day are
normally effective on the same day as received. Wire payments received by the
Custodian after that time will normally be effective on the next business day.
Payments transmitted by check or other negotiable bank draft will normally be
effective within two business days for checks drawn on a member bank of the
Federal Reserve System and longer for most other checks. All checks are accepted
subject to collection at full face value in U.S. funds and must be drawn in U.S.
dollars on a U.S. bank. Checks drawn in U.S. funds on foreign banks will not be
credited to the shareholder's account and dividends will not begin accruing
until the proceeds are collected, which can take a long period of time.
Shareholder Accounting
All purchases of Fund shares will be credited to the shareholder in
full and fractional shares of the Fund (rounded to the nearest 1/1000 of a
share) in an account maintained for the shareholder by the Trusts' transfer
agent. Share certificates will not be issued to the shareholders of the Fund..
To open an account in the name of a corporation, a resolution of the
corporation's Board of Directors will be required. Other evidence of corporate
status or the authority of account signatories may be required.
CIT II reserves the right to reject any order for the purchase of
shares of the Fund, in whole or in part. In addition, the offering of shares of
the Fund may be suspended by CIT II at any time and resumed at any time
thereafter.
Shareholder Redemptions
All requests for redemption, all share certificates, and all share
assignments should be sent to the
<PAGE> 31
Fund, 44 Montgomery Street, Suite 2100, San Francisco, California 94104, or, for
telephone redemptions, by calling the Fund at (800) 225-8778.
Redemptions will be made in cash at the net asset value per share next
determined after receipt by the transfer agent of a redemption request in proper
form, including all share assignments, signature guarantees, and other
documentation as may be required by the transfer agent. The amount received upon
redemption may be more or less than the shareholder's original investment.
CIT II will attempt to make payment for all redemptions within one
business day, but in no event later than seven days, after receipt of such
redemption request in proper form. However, the CIT II reserves the right to
suspend redemptions or postpone the date of payment (1) for any periods during
which the NYSE is closed (other than for the customary weekend and holiday
closings), (2) when trading in the markets the Trust usually utilizes is
restricted or an emergency exists, as determined by the SEC so that disposal of
the CIT II's investments or the determination of the Fund's net asset value is
not reasonably practicable, or (3) for such other periods as the SEC by order
may permit for the protection of the CIT II's shareholders. Also, CIT II will
not mail redemption proceeds until checks used for the purchase of the shares
have cleared.
As of the date of this Statement of Additional Information, CIT II
understands that the New York Stock Exchange is closed on the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas. CIT II has been
advised that the Custodian is also closed on Martin Luther King's Birthday.
Due to the relatively high cost of handling small investments, CIT II
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose accounts in CIT II have an aggregate value of less than
$1,000, but only where the value of such accounts has been reduced by such
shareholder's prior voluntary redemption of shares. In any event, before CIT II
redeems such shares and sends the proceeds to the shareholder, it will notify
the shareholder that the value of the shares in that shareholder's account is
less than the minimum amount and allow that shareholder 30 days to make an
additional investment in an amount which will increase the aggregate value of
that shareholder's account to at least $1,000.
Use of the Exchange Privilege as described in the Prospectus in
conjunction with market timing services offered through numerous securities
dealers has become increasingly popular as a means of capital management. In the
event that a substantial portion of the Fund's shareholders should, within a
short period, elect to redeem their shares of the Fund pursuant to the Exchange
Privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. The
Exchange Privilege may be modified or suspended by the Fund upon 60-days prior
notice to the shareholders.
Redemptions in Kind
The Trust has committed itself to pay in cash all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the Trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund in case of an emergency, or if
the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund or the Trust. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net asset
value. Should the Fund do so, a shareholder would likely incur transaction fees
in converting the securities to cash.
<PAGE> 32
Determination of Net Asset Value Per Share
The portfolio securities of the Fund are generally valued at the last
reported sale price. Securities held by the Fund that have no reported last sale
for any day that the Fund's NAV is calculated and securities and other assets
for which market quotations are readily available are valued at the latest
available bid price. All other securities and assets are valued at their fair
value as determined in good faith by the Board of Trustees. Securities with
remaining maturities of 60 days or less are valued on the amortized cost basis
unless the Trustees determine that such valuation does not reflect fair value.
The Trust may also utilize a pricing service, bank, or broker/dealer experienced
in such matters to perform any of the pricing functions.
TAXATION
General
The Fund is treated as a separate entity and intends to elect and to
qualify in each year to be treated as a separate "regulated investment company"
under the Code. To continue to qualify for the tax treatment afforded a
regulated investment company under the Code, the Fund must distribute for each
fiscal year at least 90% of its taxable income (including net realized
short-term capital gains) and tax-exempt net investment income and meet certain
source of income, diversification of assets and other requirements of the Code.
Provided the Fund continues to qualify for such tax treatment, it will not be
subject to federal income tax on the part of its net investment income and its
net realized capital gains which it distributes to shareholders, nor will it be
subject to Massachusetts or California income or excise taxation. The Fund must
also meet certain Code requirements relating to the timing of its distributions,
which generally require the distribution of substantially all of its taxable
income and capital gains each calendar year, in order to avoid a 4% federal
excise tax on certain retained amounts.
The Fund may purchase or sell futures contracts. Such transactions are
subject to special tax rules which may affect the amount, timing and character
of distributions to shareholders. Unless the Fund is eligible to make and makes
a special election, such futures contracts that are "Section 1256 contracts"
(such as a futures contract the margin requirements for which are based on a
marked-to-market system and which is traded on a "qualified board or exchange")
will be "marked to market" for federal income tax purposes at the end of each
taxable year, i.e., each futures contract will be treated as sold for its fair
market value on the last day of the taxable year. In general, unless the special
election is made, gain or loss from transactions in such futures contracts will
be 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in futures contracts. Under Section 1092,
the Fund may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in futures.
One of the requirements for qualification as a regulated investment
company is that less than 30% of the Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, the Fund may be restricted in effecting closing
transactions within three months after entering into a futures contract.
Dividends of net investment income and realized net short-term capital
gains in excess of net long-term capital losses are taxable to shareholders as
ordinary income, whether such distributions are taken in cash or reinvested in
additional shares. Distributions of net long-term capital gains (i.e., the
excess of net long-term capital gains over net short-term capital losses), if
any, are taxable as long-term capital gains, whether such distributions are
taken in cash or reinvested in additional shares, and regardless of how long
shares of the Fund have been held. The maximum federal income tax rate on
long-term capital gains for individuals is currently 28% and the maximum
individual federal income tax rate on ordinary income is currently 39.6%.
Dividends declared by the Fund in October, November, or December of any calendar
year to shareholders of record as of a record date in such a month will be
treated for federal income tax
<PAGE> 33
purposes as having been received by shareholders on December 31 of that year if
they are paid during January of the following year.
A portion of the Fund's ordinary income dividends may qualify for the
dividends received deduction available to corporate shareholders under Code
Section 243 to the extent that the Fund's income is derived from qualifying
dividends. Availability of the deduction is subject to certain holding periods
and debt-financing limitations. Because the Fund may also earn other types of
income such as interest, income from securities loans, non-qualifying dividends,
and short-term capital gains, the percentage of dividends from the Fund that
qualifies for the deduction generally will be less than 100%. The Fund will
notify corporate shareholders annually of the percentage of Fund dividends that
qualifies for the dividends received deduction.
The use of equalization accounting by the Fund may affect the amount,
timing and character of its distributions to shareholders.
The Fund is required to file information reports with the IRS with
respect to taxable distributions and other reportable payments made to
shareholders. The Code requires backup withholding of tax at a rate of 31% on
redemptions and other reportable payments made to non-exempt shareholders if
they have not provided the Fund with their correct social security or other
taxpayer identification number and made the certifications required by the IRS
or if the IRS or a broker has given notification that the number furnished is
incorrect or that withholding applies as a result of previous underreporting.
Therefore, investors should make certain that their correct taxpayer
identification number and completed certifications are included in the
application form when opening an account.
The information above is only a summary of some of the tax
considerations generally affecting the Fund and its shareholders. No attempt has
been made to discuss individual tax consequences and this discussion should not
be construed as applicable to all shareholders' tax situations. Investors should
consult their own tax advisers to determine the suitability of a particular Fund
and the applicability of any state, local, or foreign taxation. Heller, Ehrman,
White & McAuliffe has expressed no opinion in respect thereof. Foreign
shareholders should consider, in particular, the possible application of U.S.
withholding taxes on certain taxable distributions from the Fund at rates up to
30% (subject to reduction under certain income tax treaties).
YIELD DISCLOSURE AND PERFORMANCE INFORMATION
As noted in the Prospectus, the Fund may from time to time quote
various performance figures in advertisements and investor communications to
illustrate the Fund's past performance. Performance information published by the
Fund will be in comply with rules adopted by the SEC. These rules require the
use of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods used by the Fund to compute or express performance is
discussed below.
Total Return
Total return for the Fund may be stated for any relevant period as
specified in the advertisement or communication. Any statements of total return
or other performance data for the Fund will be limited to or accompanied by
standardized information on the Fund's average annual compounded rate of return
over the most recent four calendar quarters and over the life of the Fund (i.e.,
the period from the Fund's inception of operations through the end of the most
recent calendar quarter).
The average annual compounded rate of return is determined by reference
to a hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period and assumes
<PAGE> 34
reinvestment (on the reinvestment date) of all distributions at net asset value
and redemption at the end of the stated period. It is calculated according to
the following standardized formula:
P(1+T)(n) = ERV
where:
P = a hypothetical initial purchase order of $1,000 from which the maximum sales
load is deducted,
T = average annual total return,
n = number of years, and
ERV = ending redeemable value of the hypothetical $1,000
purchase at the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized.
Yield
As stated in the Prospectus, the Fund may also quote its current yield
and, where appropriate, effective yield and tax equivalent yield in
advertisements and investor communications.
Distribution Rate
The Fund may also include a reference to its current distribution rate
in investor communications and sales literature preceded or accompanied by the
Prospectus, reflecting the amounts actually distributed to shareholders. All
calculations of the Fund's distribution rate are based on the distributions per
share which are declared, but not necessarily paid, during the fiscal year. The
distribution rate is determined by dividing the distributions declared during
the period by the net asset value per share on the last day of the period and
annualizing the resulting figure. In calculating its distribution rate, the Fund
uses the same assumptions that apply to its calculation of yield. The
distribution rate will differ from the Fund's yield because it may include
capital gains and other items of income not reflected in the Fund's yield, as
well as interest income received by the Fund and distributed to shareholders
which is reflected in the Fund's yield. The distribution rate does not reflect
capital appreciation or depreciation in the price of the Fund's shares and
should not be considered to be a complete indicator of the return to the
investor on his investment.
Comparisons
From time to time, advertisements and investor communications may
compare the Fund's performance to the performance of other investments as
reported in various indices or averages, in order to enable an investor better
to evaluate how an investment in the Fund might satisfy his investment
objectives. The Fund may also publish an indication of past performance as
measured by Lipper Analytical Services, Inc., a widely recognized independent
service which monitors the performance of mutual funds. The Lipper performance
analysis includes the reinvestment of dividends and capital gains distributions,
but does not take any sales charges into consideration and is prepared without
regard to tax consequences. In addition to Lipper, the Funds may publish an
indication of past performance as measured by other independent sources such as
**NoLOAD FUND*X, a mutual fund monitoring system, the
<PAGE> 35
American Association of Individual Investors, Weisenberger Investment Companies
Services, Donoghue's Money Fund Report, Barron's, Business Week, Financial
World, Money Magazine, Forbes, and The Wall Street Journal.
The Fund may compare its performance to the performance of the
S&P/BARRA Value Index, S&P 500 Index, and the Value Line Composite Index. The
S&P 500, the S&P/BARRA Index and the Value Line Composite Index are unmanaged
indexes of common stock prices. The performance of each index is based on
changes in the prices of stocks comprising such index and assumes the
reinvestment of all dividends paid on such stocks. Taxes, brokerage commissions
and other fees are disregarded in computing the level of each index.
The performance of the Fund may also be compared to compounded rates of
return regarding a hypothetical investment of $2,000 at the beginning of each
year, earning interest throughout the year at the compounding interest rates set
forth in the table below.
<TABLE>
<CAPTION>
YEAR ENDED 5.0% 7.5% 10.0%
<S> <C> <C> <C>
1 $2,100.00 $2,150.00 $2,200.00
2 $4,305.00 $4,461.25 $4,620.00
3 $6,620.25 $6,945.84 $7,282.00
4 $9,051.26 $9,616.78 $10,210.20
5 $11,603.83 $12,488.04 $13,431.22
6 $14,284.02 $15,574.64 $16,974.34
7 $17,098.22 $18,892.74 $20,871.78
8 $20,053.13 $22,459.70 $25,158.95
9 $23,155.79 $26,294.17 $29,874.85
10 $26,413.57 $30,416.24 $35,062.33
11 $29,834.25 $34,847.46 $40,768.57
12 $33,425.97 $39,611.02 $47,045.42
13 $37,197.26 $44,731.84 $53,949.97
14 $41,157.13 $50,236.73 $61,544.96
15 $45,314.98 $56,154.48 $69,899.46
16 $49,680.73 $62,516.07 $79,089.41
17 $54,264.77 $69,354.78 $89,198.35
18 $59,078.01 $76,706.38 $100,318.18
19 $64,131.91 $84,609.36 $112,550.00
20 $69,438.50 $93,105.06 $126,005.00
21 $75,010.43 $102,237.94 $140,805.50
22 $80,860.95 $112,055.79 $157,086.05
23 $87,004.00 $122,609.97 $174,994.65
24 $93,454.20 $133,955.72 $194,694.12
25 $100,226.91 $146,152.40 $216,363.53
26 $107,338.25 $159,263.83 $240,199.88
27 $114,805.17 $173,358.62 $266,419.87
28 $122,645.42 $188,510.52 $295,261.86
29 $130,877.70 $204,798.81 $326,988.05
30 $139,521.58 $222,308.72 $361,886.85
31 $148,597.66 $241,131.87 $400,275.53
32 $158,127.54 $261,366.76 $442,503.09
33 $168,133.92 $283,119.27 $488,953.40
34 $178,640.61 $306,503.21 $540,048.74
35 $189,672.65 $331,640.95 $596,253.61
36 $201,256.28 $358,664.02 $658,078.97
37 $213,419.09 $387,713.83 $726,086.87
</TABLE>
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
38 $226,190.05 $418,942.36 $800,895.56
39 $239,599.55 $452,513.04 $883.185.11
40 $253,679.53 $488,601.52 $973,703.62
41 $268,463.50 $527,396.63 $1,073,273.98
42 $283,986.68 $569,101.38 $1,182,801.38
43 $300,286.01 $613,933.98 $1,303,281.52
44 $317,400.31 $662,129.03 $1,435,809.67
45 $335,370.33 $713,938.71 $1,581,590.64
</TABLE>
In assessing any comparisons of total return or yield, an investor
should keep in mind that the composition of the investments in a reported
average is not identical to the Fund's portfolio, that such averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
total return or yield. In addition, there can be no assurance that the Fund will
continue its performance as compared to any such averages.
MISCELLANEOUS INFORMATION
Shareholders of the Fund who so request may have their dividends paid
out quarterly in cash.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. Each Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
relevant Trust. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of that Trust and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund(s) of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents to cover possible tort and other liabilities.
Furthermore, the activities of the Trust as investment companies as
distinguished from operating companies would not likely give rise to liabilities
in excess of a Fund's total assets. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and a Trust itself is unable to meet
its obligations.
