As filed with the Securities and Exchange Commission on October 29, 1999
File Nos. 33-500
811-4418
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under the Securities Act of 1933
Post-Effective Amendment No. 26
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 28
-------------
CALIFORNIA INVESTMENT TRUST II
(Exact Name of Registrant as Specified in Charter)
44 Montgomery Street, Suite 2100
San Francisco, California 94104
(Address of Principal Executive Office)
(415) 398-2727
(Registrant's Telephone Number)
STEPHEN C. ROGERS
44 Montgomery Street, Suite 2100
San Francisco, California 94104
(Name and Address of Agent for Service)
--------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
___ on December 31, 1998 pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)(1)
___ 75 days after filing pursuant to Rule 485(a)(2)
_x_ on December 31, 1999 pursuant to Rule 485(a)
-------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, California 94104
(415) 835-1600
<PAGE>
CALIFORNIA INVESTMENT TRUST II
CONTENTS OF POST-EFFECTIVE AMENDMENT
This post-effective amendment to the registration statement of the Registrant
contains the following documents:
Facing Sheet
Contents of Post-Effective Amendment
Part A - Prospectus for shares of the following funds:
U.S GOVERNMENT SECURITIES FUND
THE UNITED STATES TREASURY TRUST
S&P 500 INDEX FUND
S&P MIDCAP INDEX FUND
EQUITY INCOME FUND
S&P SMALLCAP INDEX FUND
Part B - Statement of Additional Information for shares of the following
funds:
U.S GOVERNMENT SECURITIES FUND
THE UNITED STATES TREASURY TRUST
S&P 500 INDEX FUND
S&P MIDCAP INDEX FUND
EQUITY INCOME FUND
S&P SMALLCAP INDEX FUND
Part C - Other Information
Signature page
Exhibit
2
<PAGE>
CALIFORNIA INVESTMENT TRUST II
FORM N-1A
-------------------------------
PART A
PROSPECTUS
U.S. Government Securities Fund
The United States Treasury Trust
S&P 500 Index Fund
S&P MidCap Index Fund
Equity Income Fund
S&P SmallCap Index Fund
-------------------------------
<PAGE>
PROSPECTUS
January 1, 2000
ABOUT THE FUNDS
California Tax-Free Income Fund 1
California Insured Intermediate Fund 5
California Tax-Free Money Market Fund 9
S&P 500 Index Fund 13
S&P MidCap Index Fund 17
S&P SmallCap Index Fund 21
Equity Income Fund 25
U.S. Government Securities Fund 29
The United States Treasury Trust 33
INVESTING IN THE FUNDS
Buying Shares 39
Selling and Exchanging Shares 42
Other Policies 46
Dividends and taxes 47
Our funds have no
sales charges
redemption fees
dividend reinvestment charges
12b-1 fees.
The Funds are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution or government entity such as the Federal Deposit
Insurance Corporation (FDIC).
As with all mutual funds, the Securities and Exchange Commission has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a criminal offense.
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND
Ticker Symbol: CFNTX
- --------------------------------------------------------------------------------
GOAL
High current tax-free income for California residents.
STRATEGY
The manager will invest in municipal bonds issued by the State of California and
various municipalities located within the state. Generally, the bonds will be
rated in one of the four highest ratings (investment grade). In some cases,
securities are not rated by independent agencies. The manager will generally
purchase an unrated security only if it believes the security is of the similar
quality to an investment grade issue. Generally, the interest on municipal bonds
is not subject to federal and State of California personal income taxes. The
fund maintains an duration portfolio maturity from 3 to 12 years.
WHAT IS THE MANAGER'S APPROACH?
The funds' investment manager tries to select securities that it believes will
provide the best balance between risk and return within the fund's range of
allowable investments. The manager considers a number of factors, including
general market and economic conditions and the credit quality of the issuer. To
provide tax-free income to shareholders, the Manager purchases municipal bonds
that are not subject to federal and State of California personal income taxes.
Typically, a buy and hold strategy is used. This means the Fund holds securities
for income purposes rather than trading securities for capital gains. The
Manager may sell a security at any time, however, when it believes doing so
could benefit the Fund and its shareholders. While income is the most important
part of return over time, the total return from a municipal security includes
both income and price gains or losses. The fund's focus on income does not mean
it invests only in the highest-yielding securities available, or that it can
avoid losses of principal.
FORMAL INVESTMENT OBJECTIVE
The California Tax-Free Income Fund seeks as high a level of income exempt from
regular Federal income taxes and California personal income taxes as is
consistent with prudent investment management and safety of capital. The Income
Fund invests in intermediate and long-term municipal bonds.
1
<PAGE>
MAIN RISKS
The fund is subject to several risks, any of which could cause the fund to lose
money. The Fund is considered non-diversified which means it may invest a large
percentage of its assets in the securities of particular issuers as compared
with other types of funds. Accordingly, the chance exists that the Fund's
performance may be hurt disproportionately by poor performance of relatively few
securities. The Fund is also subject to:
Interest rate risk, which is the chance that bond prices overall will decline
over short and long-term periods due to rising interest rates. The Manager will
generally maintain a longer maturity in this fund relative to our other
municipal bond fund. Thus, the interest rate risk is higher in this fund than
the California Insured Intermediate Fund. The California Insured Intermediate
Fund is discussed in detail on page 5.
State Specific Risk, which the chance that the fund is more vulnerable to
economic and political unfavorable developments that impact the State of
California than municipal funds that invest in many different sates.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the fund.
IS THIS FUND RIGHT FOR YOU?
If you are looking for tax-free income and are comfortable with the moderate
volatility of a long-term bond fund, this may be the right investment for you.
Generally, this fund will fluctuate more than our other tax-free funds, but will
pay a higher rate of dividends.
OTHER RISKS OF THE FUND
Call risk, which is the chance that during declining interest rates, a bond
issuer will call or prepay a high-yielding bond before the bonds maturity date.
This would force the fund to purchase lower yielding bonds which would reduce
the income generated from the portfolio and could potentially result in capital
gains paid out by the fund.
Credit Risk, which it the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. The manager
attempts to minimize this risk by investing in investment grade bonds.
Manager risk, which is the chance that poor security selection will cause the
Fund to under perform funds with similar investment objectives.
2
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance. These figures
assume that all distributions are reinvested. It is important to remember that
past performance does not accurately predict future performance.
[GRAPHIC OMITTED]
1986 22.65%
1987 -1.23%
1988 11.34%
1989 9.92%
1990 6.73%
1991 12.11%
1992 8.81%
1993 14.77%
1994 -8.63%
1995 20.55%
1996 3.10%
1997 9.29%
1998 6.32%
1999 -2.64%
Best Quarter: 11.11%
Worst Quarter: -7.42%
Year to date performance as of 9/30/99: -2.64%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR 5 YEARS INCEPTION
------ ------- ---------
California Tax-Free Income Fund -1.1% 6.1% 7.1%
Lehman Municpal Bond Index 0.5% 6.5% 7.2%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.47%
12b-1 fees none
other expenses 0.14%
-----
NET OPERATING EXPENSE 0.61%
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $63 $196 $341 $764
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 13.18 $ 12.86 $ 12.31 $ 12.22 $ 12.17 $ 13.39
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.56 0.58 0.60 0.62 0.61 0.65
Net gain (loss) on securities
(both realized and unrealized) ..... (0.68) 0.51 0.54 0.09 0.30 (0.92)
--------- --------- --------- --------- --------- ---------
Total from investment operations (0.12) 1.09 1.14 0.71 0.91 (0.27)
--------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.57) (0.58) (0.59) (0.62) (0.66) (0.66)
Distribution from capital gains ....... (0.09) (0.19) .--- .--- (0.20) (0.29)
--------- --------- --------- --------- --------- ---------
Total distributions ............. (0.66) (0.77) (0.59) (0.62) (0.86) (0.95)
--------- --------- --------- --------- --------- ---------
Net asset value, end of year ............. $ 12.40 $ 13.18 $ 12.86 $ 12.31 $ 12.22 $ 12.17
========= ========= ========= ========= ========= =========
Total return ............................. (1.07)% 8.75% 9.48% 5.40% 8.01% (2.15)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $ 200,946 $ 225,507 $ 212,198 $ 194,926 $ 196,046 $ 225,087
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.61% 0.61% 0.59% 0.60% 0.62% 0.60%
After expense reimbursements ....... 0.61% 0.61% 0.59% 0.60% 0.62% 0.60%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 4.33% 4.47% 4.75% 4.96% 5.13% 5.09%
After expense reimbursements ....... 4.33% 4.47% 4.75% 4.96% 5.13% 5.09%
Portfolio Turnover ................. 16.36% 20.95% 34.96% 10.34% 32.21% 31.27%
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE FUND
Ticker Symbol: CATFX
- --------------------------------------------------------------------------------
GOAL
High Current tax-free income for California Residents.
STRATEGY
The manager will invest in municipal bonds issued by the State of California and
various municipalities located with in the state. Generally the securities will
be rated AAA (the highest rating) and be insured by an independent insurance
company. Some securities are not rated by independent agencies but are
considered AAA because of the insurance on the bond. The insurance guarantees
the timely principal and interest payments of the bond, but does not insure the
Fund. The interest on the municipal bonds is generally not subject to federal
and State of California personal income taxes. The fund can maintain a portfolio
maturity from 3 to 12 years, but generally maintains an intermediate-term
maturity to reduce the volatility of the share price.
WHAT IS THE MANAGER'S APPROACH?
The funds' investment manager tries to select securities that it believes will
provide the best balance between risk and return within the fund's range of
allowable investments. The manager considers a number of factors, including
general market and economic conditions and the credit quality of the issuer. To
provide tax-free income to shareholders, the manager purchases municipal bonds
that are not subject to federal and state of California personal income taxes.
Typically, a buy and hold strategy is used. This means the Fund holds securities
for income purposes, rather than trading securities for capital gains. The
manager may sell a security at any time, however, when it believes doing so
could benefit the Fund and its shareholders. While income is the most important
part of return over time, the total return from a municipal security includes
both income and price gains or losses. The fund's focus on income does not mean
it invests only in the highest-yielding securities available, or that it can
avoid losses of principal.
FORMAL INVESTMENT OBJECTIVE
The California Insured Intermediate Fund seeks as high a level of income exempt
from regular Federal income taxes and California personal income taxes as is
consistent with prudent investment management and safety of capital. The Insured
Fund invests primarily in municipal securities that are covered by insurance
guaranteeing the timely payment of principal and interest.
5
<PAGE>
MAIN RISKS
The fund is subject to several risks, any of which could cause the fund to lose
money. The Fund is considered non-diversified which means it may invest a large
percentage of its assets in the securities of particular issuers as compared
with other fund. Accordingly, the chance exists that the Fund's performance may
be hurt disproportionately by poor performance of relatively few securities. The
Fund is also subject to:
State Specific Risk, which the chance that the fund is more vulnerable to
economic and political unfavorable developments that impact the State of
California than municipal funds that invest in many different sates.
Interest rate risk, which is the chance that bond prices overall will decline
over short and long-term periods due to rising interest rates. Interest rate
risk is usually moderate for intermediate-term bonds. We also offer the
California Tax-Free Income Fund for investors who want tax-free income and are
more comfortable with interest rate risk. This prospectus discusses this fund in
more detail on page 1.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the fund. Income risk is generally moderate for
intermediate-term bonds.
IS IT RIGHT FOR YOU?
If you are looking for tax-free income and are comfortable with the moderate
volatility of a intermediate-term bond fund, this may be the right investment
for you. Generally, this fund will fluctuate lass than our other tax-free bond
fund, but will pay a lower rate of dividends.
OTHER RISKS OF THE FUND
Call risk, which is the chance that during declining interest rates, the bond
issuer will call or prepay a high-yielding bond before the bonds maturity date.
This would force the fund to purchase lower yielding bonds which would reduce
the income generated from the portfolio and could potentially result in capital
gains paid out by the fund.
Credit Risk, which it the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. This risk is
moderated by the bond insurance which guarantees timely payment of principal
and.
Manager risk, which is the chance that poor security selection will cause the
Fund to under perform funds with similar investment objectives.
6
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance. These figures
assume that all distributions are reinvested. It is important to remember that
past performance does not accurately predict future performance.
[GRAPHIC OMITTED]
1992 1.16%
1993 11.63%
1994 -4.99%
1995 14.37%
1996 3.89%
1997 6.39%
1998 5.97%
1999 0.19%
Best Quarter: 5.64%
Worst Quarter: -4.85%
Year to date performance as of 9/30/99: 0.19%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR 5 YEARS INCEPTION
------ ------- ---------
California Insured Intermediate Fund 1.5% 5.3% 5.4%
Lehman 5 Year Municipal Bond Index 2.2% 5.4% 5.1%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.50%
12b-1 fees none
other expenses 0.16%
-----
Total Annual operating expenses 0.66%
Expense reduction* 0.11%
-----
NET OPERATING EXPENSE 0.55%
The manager has agreed to limited the fund's expenses at 0.55%. this limitation
is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $56 $212 $369 $825
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE FUND 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $ 10.92 $ 10.72 $ 10.42 $ 10.49 $ 10.23
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.43 0.44 0.45 0.46 0.44
Net gain (loss) on securities
(both realized and unrealized) ... (0.26) 0.25 0.30 (0.07) 0.30
-------- -------- -------- -------- --------
Total from investment operations ...... 0.17 0.69 0.75 0.39 0.74
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.43) (0.44) (0.45) (0.46) (0.48)
Distributions from capital gains ...... (0.12) (0.05) .--- .--- .---
-------- -------- -------- -------- --------
Total distributions ............. (0.55) (0.49) (0.45) (0.46) (0.48)
-------- -------- -------- -------- --------
Net asset value, end of period ........... $ 10.54 $ 10.92 $ 10.72 $ 10.42 $ 10.49
======== ======== ======== ======== ========
Total return ............................. 1.51% 6.64% 7.34% 3.75% 7.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) .. $ 24,175 $ 23,572 $ 24,390 $ 24,207 $ 23,515
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.66% 0.70% 0.70% 0.70% 0.76%
After expense reimbursements ....... 0.55% 0.55% 0.55% 0.55% 0.60%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 3.85% 3.94% 4.12% 4.22% 4.19%
After expense reimbursements ....... 3.96% 4.09% 4.27% 4.37% 4.35%
Portfolio turnover ....................... 8.38% 26.76% 32.11% 36.08% 43.56%
</TABLE>
Commencement of operations
** Annualized
8
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
Ticker Symbol: CAXXX
- --------------------------------------------------------------------------------
GOAL
High current tax-free income for California residents while trying to maintain a
stable $1.00 share price.
STRATEGY
The manager invests in high-quality, short-term municipal securities whose
interest is not subject to federal and California personal income taxes.
WHAT IS THE MANAGER'S APPROACH?
The Fund invests at least 80% of its assets in a variety of high-quality,
short-term California municipal securities. The Fund seeks to provide a stable
net asset value of $1.00 per share by investing in securities with an effective
maturity of 13 months or less, and by maintaining an average weighted maturity
of 90 days or less. To be considered high-quality, a security is generally rated
in one of the two highest credit quality categories for short-term securities by
at least two nationally recognized rating services (or by one, if only one
credit service has rated the security). If unrated, the security must be
determined by the manager to be of quality equivalent to those in the two
highest credit-quality categories. For more information on credit quality, see
the SAI.
FORMAL INVESTMENT OBJECTIVE
California Tax-Free Money Market Fund has the objectives of capital
preservation, liquidity, and the highest achievable current income, exempt from
regular Federal income taxes and California personal income taxes consistent
with safety. This fund invests in short-term securities and attempts to maintain
a constant net asset value of $1.00 per share.
9
<PAGE>
MAIN RISKS
The fund is subject to several risks, any of which could cause the fund to lose
money. The Fund is considered non-diversified which means it may invest a large
percentage of its assets in the securities of particular issuers as compared
with other fund. Accordingly, the chance exists that the Fund's performance may
be hurt disproportionately by poor performance of relatively few securities. The
Fund is also subject to:
State Specific Risk, which the chance that the fund is more vulnerable to
economic and political unfavorable developments that impact the State of
California than municipal funds that invest in many different sates. Interest
rate risk, which is the chance that bond prices overall will decline over short
and long-term periods due to rising interest rates. Interest rate risk is
usually moderate for intermediate term bonds.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the fund. Income risk is generally moderate for
intermediate-term bonds.
Credit Risk, which it the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. This risk is
moderated by the bond insurance purchased to protect investors from credit risk.
Manager risk, which is the chance that poor security selection will cause the
Fund to under perform funds with similar investment objectives.
IS IT RIGHT FOR YOU?
If you are looking for a broadly diversified stock fund, we feel this fund may
be right for you. You should be comfortable with the changing values of the
stock market and the risk that your investment could decline in value. You
investment time frame should be long-term in nature. This Fund is designed as a
passive investment, meaning that you are not trying to time movements in the
market. Since trading increases the costs of the fund, it is strongly
discouraged.
OTHER RISKS OF THE FUND
An investment in the Fund is not insured or Guaranteed by the Federal Deposit
insurance Corporation for any other government agency. Although the fund seeks
to preserve the $1.00 share price, it is possible to loose money by investing in
the fund.
10
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance. These figures
assume that all distributions are reinvested. It is important to remember that
past performance does not accurately predict future performance.
[GRAPHIC OMITTED]
1986 4.42%
1987 4.33%
1988 3.58%
1989 6.11%
1990 4.33%
1991 5.54%
1992 1.74%
1993 5.15%
1994 2.45%
1995 3.34%
1996 2.07%
1997 3.11%
1998 2.85%
1999
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.50%
12b-1 fees none
other expenses 0.11%
-----
Total Annual operating expenses 0.61%
Expense reduction* 0.21%
-----
NET OPERATING EXPENSE 0.40%
The manager has limited the fund's expenses at 0.40% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $41 $196 $341 $764
11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.026 0.030 0.031 0.032 0.032
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.026) (0.030) (0.031) (0.032) (0.032)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total return ............................. 2.61% 3.09% 3.09% 3.26% 3.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $105,606 $ 88,236 $ 92,818 $103,402 $ 80,412
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.61% 0.61% 0.61% 0.61% 0.66%
After expense reimbursements ....... 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 2.33% 2.77% 2.86% 2.90% 2.97%
After expense reimbursements ....... 2.54% 2.98% 3.07% 3.11% 3.23%
Year Ended August 31,
--------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND .... 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.022 0.022 0.031 0.046 0.056
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.022) (0.022) (0.031) (0.046) (0.056)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total return ............................. 2.18% 2.27% 3.18% 4.62% 5.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $ 85,935 $ 58,754 $ 92,913 $ 75,316 $ 85,910
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.68% 0.39% 0.15% 0.32% 0.67%
After expense reimbursements ....... 0.35% 0.24% 0.15% 0.21% 0.27%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 1.83% 2.10% 3.05% 4.44% 5.17%
After expense reimbursements ....... 2.16% 2.25% 3.05% 4.55% 5.57%
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
S&P 500 INDEX FUND
Ticker Symbol: SPFIX
- --------------------------------------------------------------------------------
GOAL
This fund will attempt to replicate the performance of the U.S. leading 500
companies measured by the S&P500 Composite Stock Index.
INDEX
The S&P 500 Index includes the common stocks of 500 leading U.S. companies from
a broad range of industries. Standard &Poor's, the company that maintains the
index, makes all determinations regarding the inclusion of stocks in the index.
Each stock is weighted in proportion to its total market value.
STRATEGY
In order to meet the investment goal, the fund invests primarily in the stocks
made up of the index. The fund attempts to duplicate the weight ratios of all
securities so that they are generally the same as the index. Under normal
circumstances, it is the fund's policy to invest 80% of its total assets in the
500 represented stocks. As a rule of thumb, the percentage is generally higher.
Like many index funds, the fund may invest in futures contracts and lend
securities to minimize the performance variation between the fund and the
underlying index. This performance gap occurs because, unlike the index, the
fund must pay operating expenses and contend with the flow of cash in and out of
the portfolio. While we expect the Fund's performance to closely represent the
underlying index, the fund will generally underperform the actual index.
FORMAL INVESTMENT OBJECTIVE
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.
SECTOR BREAKDOWNS
INDUSTRY % OF INDEX
Capital good 5.2%
Consumer cyclical 6.0%
Consumer non-durable 21.6%
Banking & financial service 12.9%
Utility 9.3%
Service 0.7%
Transportation 0.9%
Manufacturing 4.9%
Technology 20.0%
Energy 5.6%
LARGECAP STOCKS
The stocks that are represented in the S&P 500 Index make-up about 77% of the
total market value of publicly traded stocks in the United States. For many
investors, the S&P 500 Index functions as the standard for the entire stock
market. The individual stocks that make up the index have market values ranging
in size from $403 million to $358 Billion. The median market value is $7.6
billion.
The index is made up of stocks from many diverse industries. The following
industry table gives you a general idea of the exposure to specific sectors.
13
<PAGE>
MAIN RISKS
The stock markets go up and down every day. As with any investment whose
performance is linked to these markets, the value of your investment in the fund
will change. If the fund's value drops during the period in which you hold the
fund, you could lose money.
The fund is primarily invested in the U.S. stock market and is designed to track
the overall performance of the LargeCap sector, regardless of success or failure
of the Index. In an attempt to accurately represent the S&P 500 Index, the fund
will not take steps to reduce its market exposure in a declining market.
Many factors will affect the performance of the markets. Two major factors that
may have both a positive and negative affect on the markets are economic and
political news. These affects may be short term by causing a change in the
market that is corrected in a year or less; or they may have long term impacts
which cause changes in the market that last years. Some factors may affect a
change in one sector of the economy or one stock, but don't have an impact on
the overall market. The particular sector of the economy or the individual stock
may be affected for a short or long term.
The S&P 500 Index Fund invests in leading companies from many sectors. In doing
so, the fund is not as sensitive to the movements of a single company's stock or
a single sector. However, during periods where alternative investments such as
MidCap stocks, SmallCap stocks, Bonds and money market instruments out perform
largeCap stocks, we expect the performance of the S&P 500 Index to underperform
funds that invest in these categories.
IS IT RIGHT FOR YOU?
If you are looking for a broadly diversified stock fund, this fund may be right
for you. As an investor, you should be comfortable with the continuous changing
net asset values of the stock market and the risk that your investment could
significantly decline in value. You investment time-frame should be long-term in
nature. This Fund is designed as a passive investment, meaning that you are not
trying to time movements in the market. Since trading increases the costs of the
funds operating expenses, it is strongly discouraged.
OTHER RISKS OF THE FUND
Although the funds primary risks are associated with changes in the stock
market, there are other risks associated with the fund. These risks generally
apply to how well the Fund tracks the underlying index. For example, the Fund
invests in futures contracts to the extent that it holds cash in the portfolio.
If the futures owned by the fund do not track the index, the fund's performance
relative to the index will change.
Some funds are able to lend portfolio securities in order to offset expenses.
The S&P 500 has never engaged in this strategy, however, in the event that it
did, there is a risk that the practice could negatively impact the net asset
value of the fund.
- ---------------
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500" and "500" are
service marks of Standard and Poor's Corporation and have been licensed for use
by the Funds. The Funds are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
Funds.
14
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAPHIC OMITTED]
1992 7.63%
1993 9.77%
1994 1.04%
1995 37.20%
1996 22.63%
1997 32.99%
1998 28.75%
1999 5.23%
Best Quarter: 21.50%
Worst Quarter: -9.86%
Year to date performance as of 9/30/99: 5.23%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR 5 YEARS INCEPTION
------ ------- ---------
CIT S&P 500 Index Fund 39.8% 24.9% 19.5%
S&P Composite Stock Price Index 39.8% 25.1% 19.9%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.25%
12b-1 fees none
other expenses 0.12%
-----
Total Annual operating expenses 0.37%
Expense reduction* 0.17%
-----
NET OPERATING EXPENSE 0.20%
Annual account fee $10.00
The manager has limited the fund's expenses at 0.20% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $31 $149 $258 $567
15
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------
S&P 500 INDEX FUND 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..... $ 20.90 $ 19.98 $ 14.81 $ 13.31 $ 11.38
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.39 0.36 0.38 0.36 0.39
Net gain on securities
(both realized and unrealized) ..... 7.79 1.28 5.44 2.05 1.94
-------- -------- -------- -------- --------
Total from investment operations . 8.18 1.64 5.82 2.41 2.33
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.39) (0.34) (0.37) (0.37) (0.37)
Distribution from capital gains ...... (0.57) (0.38) (0.28) (0.54) (0.03)
-------- -------- -------- -------- --------
Total distributions .............. (0.96) (0.72) (0.65) (0.91) (0.40)
-------- -------- -------- -------- --------
Net asset value, end of year ........... $ 28.12 $ 20.90 $ 19.98 $ 14.81 $ 13.31
======== ======== ======== ======== ========
Total return ........................... 39.76% 8.14% 40.19% 18.63% 21.06%
RATIOS/SUPPLEMENTAL DATA ............... $142,276 $ 87,621 $ 71,860 $ 43,849 $ 21,800
Ratio of expenses to average net
assets
Before expense reimbursements .. 0.37% 0.40% 0.46% 0.57% 1.04%
After expense reimbursements ... 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements .. 1.33% 1.48% 1.85% 2.13% 2.40%
After expense reimbursements ... 1.50% 1.68% 2.11% 2.50% 3.24%
Portfolio turnover ..................... 9.76% 1.82% 2.10% 1.87% 3.68%
</TABLE>
* Commencement of operations
** Annualized
16
<PAGE>
- --------------------------------------------------------------------------------
S&P MIDCAP INDEX FUND
Ticker Symbol: SPMIX
- --------------------------------------------------------------------------------
GOAL
This fund will attempt to replicate the performance of medium sized U.S.
companies as measured by the S&PMidCap 400 Index.
INDEX
The S&P MidCap Index includes the common stocks of 400 medium-sized U.S.
companies from a broad range of industries. Standard &Poor's, the company that
maintains the index, makes all determinations regarding the inclusion of stocks
in the index. Each stock is weighted in proportion to its total market value.
STRATEGY
In order to meet the investment goal, the fund invests primarily in the stocks
that make up Index. The fund attempts to duplicate the weightings of all stocks
in the fund so that each one represents the same percentage of the portfolio as
it does in the index. Under normal circumstances, it is the fund's policy to
invest at least 80% of its total assets in the stocks that make up the
underlying Index, but generally, the percentage is higher.
Like many index funds, the fund may invest in futures contracts and lend
securities to minimize the performance variation between the fund and the
underlying index. This performance gap occurs because, unlike the index, the
fund must pay operating expenses and contend with the flow of cash in and out of
the portfolio. While we expect the fund's performance to closely represent the
underlying index, we will generally underperform the actual index.
FORMAL INVESTMENT OBJECTIVE
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 S&P MidCap 400
Index.
SECTOR BREAKDOWNS
INDUSTRY % OF INDEX
Capital good 4.5%
Consumer cyclical 6.3%
Consumer non-durable 19.4%
Banking & financial service 11.9%
Utility 9.4%
Service 3.6%
Transportation 2.4%
Manufacturing 9.4%
Technology 19.3%
Energy 5.9%
MIDCAP STOCKS
The stocks that are represented in the S&P 400 Index make-up roughly 8% of the
total market value of publicly traded stocks in the United States. For many
investors, the S&P 400 Index functions as the standard for medium sized
companies. The individual stocks that make-up the index have total market values
ranging in size from $148 million to $13 Billion. The median market value is
$1.6 billion.
The index is made up of stocks from many diverse industries. The following table
gives you a general idea of the exposure to specific sectors.
17
<PAGE>
MAIN RISKS
The stock markets go up and down every day. As with any investment whose
performance is linked to these markets, the value of your investment in the fund
will change. If the fund's value drops during the period in which you hold the
fund, you could lose money.
The fund is primarily invested in the U.S. stock market and is designed to track
the overall performance of the MidCap sector, regardless of success or failure
of the Index. In an attempt to accurately represent the S&P MidCap 400 Index,
the fund will not take steps to reduce its market exposure in a declining
market.
Many factors will affect the performance of the markets. Two major factors that
may have both a positive and negative affect on the markets are economic and
political news. These affects may be short term by causing a change in the
market that is corrected in a year or less; or they may have long term impacts
which cause changes in the market that last years. Some factors may affect
change in one sector of the economy or one stock, but don't have an impact on
the overall market. The particular sector of the economy or the individual stock
may be affected for a short or long term.
The S&P 400 Index Fund invests in medium sized companies from many sectors so
that it is not as sensitive to the movements of a single company's stock or a
single sector. However, during periods where alternative investments such as
MidCap stocks, SmallCap stocks, Bonds and money market instruments out perform
LargeCap stocks, we expect the performance of the S&P Midcap 400 Index to
underperform funds that invest in these categories.
IS IT RIGHT FOR YOU?
If you are looking for a broadly diversified stock fund, we feel this fund may
be right for you. You should be comfortable with the changing values of the
stock market and the risk that your investment could decline in value. You
investment time frame should be long-term in nature. This Fund is designed as a
passive investment, meaning that you are not trying to time movements in the
market. Since trading increases the costs of the fund, it is strongly
discouraged.
OTHER RISKS OF THE FUND
The funds primary risks are associated with changes in the stock market,however,
there are other risks associated with the fund. These risks generally apply to
how well the Fund tracks the underlying index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If the
futures owned by the fund do not track the index, the fund's performance
relative to the index will change.
Some funds are able to lend portfolio securities in order to offset expenses.
The S&P 400 has never engaged in this strategy, however, in the event that it
did, there is a risk that the practice could negatively impact the net assets
value of the fund.
- ---------------
"Standard & Poor's", "S&P", and "Standard and Poor's Midcap 400 Index" are
service marks of Standard and Poor's Corporation and have been licensed for use
by the Funds. The Funds are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
Funds.
18
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAPHIC OMITTED]
1992 14.95%
1993 12.88%
1994 -3.96%
1995 30.62%
1996 18.85%
1997 31.89%
1998 18.49%
1999 -1.81%
Best Quarter: 27.54%
Worst Quarter: -14.55
Year to date performance as of 9/30/99: -1.81%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR 5 YEARS INCEPTION
------ ------- ---------
CIT S&P MidCap Index Fund 41.1% 18.6% 16.4%
S&P MidCap 400 Index 41.6% 18.9% 16.9%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.25%
12b-1 fees none
other expenses 0.32%
-----
Total Annual operating expenses 0.57%
Expense reduction* 0.17%
-----
NET OPERATING EXPENSE 0.40%
Annual account fee $10.00
The manager has limited the fund's expenses at 0.40% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $51 $213 $368 $812
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------
S&P MIDCAP INDEX FUND 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..... $ 15.41 $ 18.57 $ 14.45 $ 13.82 $ 12.21
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.20 0.23 0.22 0.24 0.26
Net gain on securities
(both realized and unrealized) ..... 5.80 (1.76) 4.85 1.33 2.04
-------- -------- -------- -------- --------
Total from investment operations . 6.00 (1.53) 5.07 1.57 2.30
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.20) (0.23) (0.22) (0.25) (0.25)
Distribution from capital gains ...... (2.51) (1.40) (0.73) (0.69) (0.44)
-------- -------- -------- -------- --------
Total distributions .............. (2.71) (1.63) (0.95) (0.94) (0.69)
-------- -------- -------- -------- --------
Net asset value, end of year ........... $ 18.70 $ 15.41 $ 18.57 $ 14.45 $ 13.82
======== ======== ======== ======== ========
Total return ........................... 41.13% (9.37)% 36.63% 11.77% 20.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) ... $ 57,164 $ 39,855 $ 46,271 $ 33,559 $ 26,168
Ratio of expenses to average net
assets
Before expense reimbursements .. 0.57% 0.56% 0.61% 0.71% 0.80%
After expense reimbursements ........... 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements .. 0.90% 1.04% 1.19% 1.38% 1.70%
After expense reimbursements ... 1.07% 1.20% 1.40% 1.69% 2.10%
Portfolio turnover ..................... 42.98% 19.35% 17.80% 18.18% 11.71%
</TABLE>
* Commencement of operations
** Annualized
20
<PAGE>
- --------------------------------------------------------------------------------
S&P SMALLCAP INDEX FUND
Ticker Symbol: SMCIX
- --------------------------------------------------------------------------------
GOAL
This fund will attempt to replicate the performance of small-sized U.S.
companies as measured by the S&PSmallCap 600 Stock Index.
INDEX
The S&P 600 SmallCap Index includes common stocks of 600 small U.S. companies
from a broad range of industries. Standard &Poor's, the company that maintains
the index, makes all determinations regarding the inclusion of stocks in the
index. Each stock is weighted in proportion to its total market value.
STRATEGY
In order to meet the investment goal, the Fund invests primarily in the stocks
that make up Index. The fund attempts to duplicate the weight ratios of all
securities so that they are the same as the index. Under normal circumstances,
it is the fund's policy to invest at least 80% (65% if assets are below $25
million) of its total assets in the represented stocks, but generally, the
percentage is higher.
Like many index funds, the Fund may invest in futures contracts and lend
securities to minimize the performance variation between the fund and the
underlying index. This performance gap occurs because, unlike the index, the
fund must pay operating expenses and contend with the flow of cash in and out of
the portfolio. While we expect the Fund's performance to closely represent the
underlying index, the fund will generally underperform the actual index.
FORMAL INVESTMENT OBJECTIVE
S&P SmallCap 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 small-sized companies, as represented by the S&P SmallCap 600 Index.
SECTOR BREAKDOWNS
INDUSTRY % OF INDEX
Capital good 5.4%
Consumer cyclical 8.1%
Consumer non-durable 17.4%
Banking & financial service 11.3%
Utility 3.3%
Service 3.5%
Transportation 2.5%
Manufacturing 12.9%
Technology 11.8%
Energy 3.2%
SMALLCAP STOCKS
The stocks that are represented in the S&P 600 Index make-up about 3% of the
total market value of publicly traded stocks in the United States. The
individual stocks that make-up the index have market values ranging in size from
$37 million to $3.4 billion.
Historically, the performance of SmallCap stocks has not always paralleled that
of LargeCap stocks. For this reason, some investors use them to diversify a
portfolio that invest in larger stocks.
21
<PAGE>
MAIN RISKS
The stock markets go up and down every day. As with any investment whose
performance is linked to these markets, the value of your investment in the fund
will change. If the fund's value drops during the period in which you hold the
fund, you could lose money.
The Fund is fully invested in the U.S. stock market and is designed to track the
overall performance of the SmallCap sector, regardless of success or failure of
the Index. In an attempt to accurately represent the S&P 600 Index, the fund
will not take steps to reduce its market exposure in a declining market.
Many factors will affect the performance of the markets. Two major factors that
may have both a positive and negative affect on the market are economic and
political news. These effects may be short term by causing a change in the
market that is corrected in a year or less; or they may have long term impacts
which cause changes in the market that could last years. Some factors may affect
a change in one sector of the economy or one stock, but don't have an impact on
the overall market. The particular sector of the economy or the individual stock
may be affected for a short or long- term.
Historically, SmallCap stocks have been riskier than the LargeCap and MidCap
stocks. Stock prices of smaller companies may be based in substantial part on
future expectations rather than current achievements, and may move sharply,
especially during market upturns and downturn. In addition, during any period
when SmallCap stocks perform poorly compared to LargeCap or MidCap stocks, the
fund may underperform funds that invest in theses categories.
IS IT RIGHT FOR YOU?
If you are looking for a broadly diversified stock fund, we feel this fund may
be right for you. You should be comfortable with the changing values of the
stock market and the risk that your investment could decline in value. Your
investment time-frame should be long-term in nature. This Fund is designed as a
passive investment, meaning that you are not trying to time movements in the
market. Since trading increases the costs of the fund, it is strongly
discouraged.
OTHER RISKS OF THE FUND
The Fund's primary risks are associated with changes in the stock market,
however, there are other risks associated with the fund. These risks generally
apply to how well the Fund tracks the underlying index. For example, the Fund
invests in futures contracts to the extent that it holds cash in the portfolio.
If the futures owned by the fund do not track the index, the fund's performance
relative to the index will change.
Some funds are able to lend portfolio securities in order to offset expenses.
The Fund has never engaged in this strategy, however, in the future, there is a
risk that the practice could negatively impact the net assets value of the fund.
- ---------------
"Standard & Poor's", "S&P", and "Standard and Poor's SmallCap 600 Index" are
service marks of Standard and Poor's Corporation and have been licensed for use
by the Funds. The Funds are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
Funds.
22
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAPHIC OMITTED]
1996 3.73%
1997 24.05%
1998 -2.91%
1999 -0.17%
Best Quarter: 17.68%
Worst Quarter: -20.77%
Year to date performance as of 9/30/99: -0.17%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR INCEPTION
------ ---------
CIT S&P SmallCap Index Fund 23.5% 7.7%
S&P SmallCap 600 Index 24.2% 9.7%
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.50%
12b-1 fees none
other expenses 0.55%
-----
Total Annual operating expenses 1.05%
Expense reduction* 0.40%
-----
NET OPERATING EXPENSE 0.65%
The manager has limited the fund's expenses at 0.65% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $66 $336 $582 $1,288
23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception on October 2, 1996. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Tait Weller & Baker, whose
report, along with the Fund's financial statements are included in the Annual
Report, which is available upon request.
Year Ended
August 31, October 2,
-------------------- 1996* to
S&P SMALLCAP INDEX FUND 1999 1998 August 31, 1997
- ------------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 9.46 $ 12.25 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.08 0.13 0.23
Net gain on securities
(both realized and unrealized) ..... 2.13 (2.39) 2.22
-------- -------- --------
Total from investment operations . 2.21 (2.26) 2.45
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.08) (0.14) (0.20)
Distribution from capital gains ...... (0.13) (0.39) .---
-------- -------- --------
Total distributions .............. (0.21) (0.53) (0.20)
-------- -------- --------
Net asset value, end of year ........... $ 11.46 $ 9.46 $ 12.25
======== ======== ========
Total return ........................... 23.53% (19.38)% 24.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) ... $ 10,881 $ 7,916 $ 5,933
Ratio of expenses to average net
assets
Before expense reimbursements .. 1.05% 1.10% 2.32%**
After expense reimbursements ... 0.65% 0.65% 0.65%**
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements .. 0.31% 0.57% 0.27%**
After expense reimbursements ... 0.71% 1.02% 1.94%**
Portfolio turnover ..................... 25.40% 24.58% 19.99%
* Commencement of operations
** Annualized
24
<PAGE>
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
Ticker Symbol: EQTIX
- --------------------------------------------------------------------------------
GOAL
This fund will attempt to achieve a high level of income by investing primarily
in income-producing U.S. equity securities.
STRATEGY
In order to meet the investment goal, the fund invests primarily in securities
which generate a relatively high level of dividend income and have potential for
capital appreciation. These securities will generally be stocks of high-quality
U.S. corporations. It is the fund's policy that under normal circumstances it
will invest at least 65% of its total assets in these stocks.
Although the Fund will attempt to invest as much of the assets as is practical
in income-producing stocks, the fund may maintain a reasonable position in
high-quality, short-term debt securities and money market instruments to meet
redemption requests and other needs for liquid cash.
FORMAL INVESTMENT OBJECTIVE
Equity Income Fund is a diversified mutual fund that seeks a high level of
current income by investing primarily in income producing equity securities. As
a secondary objective, the fund will also consider the potential for price
appreciation when consistent with seeking current income.
SECTOR BREAKDOWNS
INDUSTRY % OF INDEX
Capital good 5.4%
Consumer cyclical 4.6%
Consumer non-durable 13.3%
Banking & financial service 17.9%
Utility 8.8%
Service 0.2%
Transportation 0.5%
Manufacturing 7.5%
Technology 8.7%
Energy 6.8%
EQUITY STOCKS
The fund will attempt to manage the assets so that the average income yield of
the stocks held will be at least 50% greater than the yield of the S&) 500
Index. This should ensure a decrease in volatility compared to the S&P 500
Index.
The fund is made up of stocks from many diverse industries. The following table
gives you a general idea of the exposure to specific sectors.
25
<PAGE>
MAIN RISKS
The stock markets go up and down every day. As with any investment whose
performance is linked to these markets, the value of your investment in the fund
will change. If the fund's value drops during the period in which you hold the
fund, you could lose money.
The fund is fully invested in the market and is designed to track the overall
performance of the Equity Income sector. It will follow this sector whether it
goes up or down. The fund will not take steps to reduce its market exposure or
lessen the effects of a declining market.
Many factors will affect the performance of the markets. Economic and political
news have positive and negative effects on the equity markets. These effects may
be short term in that they cause a change in the market that is corrected in a
year or less. Or they may have long term impacts which cause changes in the
market that last years. Some changes affect only one sector of the economy or
one stock, but don't have an impact on the overall market. These may be short or
long-term too.
The Equity Income Fund invests in leading company stocks from many sectors so
that it is not as sensitive to the movements of a single company's stock or a
single sector. However, the fund is managed according to traditional methods of
"active" investment management, which involves the buying and selling of
securities based upon economic, financial and market analysis and investment
judgement. If the manager fails to achieve its stated objective, the fund may
underperform compared to Index funds.
IS IT RIGHT FOR YOU?
If you are looking for a broadly diversified stock fund, we feel this fund may
be right for you. You should be comfortable with the changing values of the
stock market and the risk that your investment could decline in value. Your
investment time frame should be long-term in nature. This Fund is designed as a
passive investment, meaning that you are not trying to time movements in the
market. Since trading increases the costs of the fund, it is strongly
discouraged.
OTHER RISKS OF THE FUND
The funds primary risks are associated with changes in the stock market,however,
there are other risks associated with the fund. These risks generally apply to
how well the Fund tracks the underlying index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If the
futures owned by the fund do not track the index, the fund's performance
relative to the index will change.
Some funds are able to lend portfolio securities in order to offset expenses.
The Equity Income Fund has never engaged in this strategy, however, in the event
that it did, there is a risk that the practice could negatively impact the net
assets value of the fund.
26
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAPHIC OMITTED]
1996 10.97%
1997 29.29%
1998 13.15%
1999 -3.40%
Best Quarter: 17.08%
Worst Quarter:-14.56%
Year to date performance as of 9/30/99: -3.40%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR INCEPTION
------ ---------
CIT Equity Income Fund 22.9% 18.1%
S&P/BARRA Value Index 34.0% 22.5%
S&P SmallCap 500 Composite Index 39.8% 28.4%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.50%
12b-1 fees none
other expenses 0.36%
-----
Total Annual operating expenses 0.86%
Expense reduction* 0.06%
-----
NET OPERATING EXPENSE 0.80%
The manager has limited the fund's expenses at 0.80% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $82 $275 $479 $1,064
27
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since the Fund's inception on September 4, 1996. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Tait Weller & Baker, whose
report, along with the Fund's financial statements are included in the Annual
Report, which is available upon request.
Year Ended
August 31, September 4,
-------------------- 1996* to
EQUITY INCOME FUND 1999 1998 1997
- ----------------------------------------------------------------------------
Net asset value, beginning of year ..... $ 11.98 $ 12.64 $ 10.00
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.32 0.37 0.39
Net gain on securities
(both realized and unrealized) ..... 2.41 (0.25) 2.84
-------- -------- --------
Total from investment operations . 2.73 0.12 3.23
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.33) (0.37) (0.32)
Distribution from capital gains ...... (0.41) (0.27)
-------- -------- --------
Total distributions .............. (0.33) (0.78) (0.59)
-------- -------- --------
Net asset value, end of year ........... $ 14.38 $ 11.98 $ 12.64
======== ======== ========
Total return ........................... 22.89% 0.46% 33.28%
RATIOS/SUPPLEMENTAL DATA ............... $ 13,716 $ 12,080 $ 9,747
Ratio of expenses to average net
assets
Before expense reimbursements .. 0.86% 0.91% 1.55%**
After expense reimbursements ... 0.80% 0.78% 0.76%**
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements .. 2.09% 2.56% 2.48%**
After expense reimbursements ... 2.15% 2.69% 3.27%**
Portfolio turnover ..................... 25.40% 41.23% 2.80%
- ---------------
* Commencement of operations
** Annualized
28
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
Ticker Symbol: CAUSX
- --------------------------------------------------------------------------------
GOAL
Maximize current income for investors.
STRATEGY
The Fund invests primarily in high-quality bonds whose interest is guaranteed by
the full faith and credit of the United States Government.
WHAT IS THE MANAGER'S APPROACH?
The fund's manager will select securities that it believes will provide the best
balance between risk and return within the Fund's range of allowable
investments. Generally, the manager will select a balance between treasury bonds
and GNMA securities in an attempt to maximize the overall performance of the
Fund. The manager considers a number of factors, including general market and
economic conditions to balance the portfolio. While income is the most important
part of return over time, the total return from a bond includes both income and
price gains or losses. The fund's focus on income does not mean it invests only
in the highest-yielding securities available, or that it can avoid losses of
principal.
FORMAL INVESTMENT OBJECTIVE
U.S. Government Securities Fund seeks liquidity, safety from credit risk and as
high a level of income as is consistent with these objectives by investing in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities, primarily Government National Mortgage Association
Certificates ("GNMA").
29
<PAGE>
MAIN RISKS
The fund is subject to several risks, any of which could cause the fund to lose
money. These include:
Interest rate risk, which is the chance that bond prices overall will decline
over short and long-term periods due to rising interest rates.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the fund. Income risk is generally moderate for
intermediate-term bonds.
Call risk, which is the chance that during declining interest rates, the bond
issuer will call or prepay a high-yielding bond before the bonds maturity date.
This would force the fund to purchase lower yielding bonds which would reduce
the income generated from the portfolio and could potentially result in capital
gains paid out by the fund.
Manager risk, which is the chance that poor security selection will cause the
Fund to under perform funds with similar investment objectives.
IS IT RIGHT FOR YOU?
We recommend that investors in this fund have a long-term investment horizon.
The fund may be appropriate for investors in regular accounts and retirement
accounts who want to avoid credit risk but are comfortable with some volatility
of the share price.
OTHER RISKS OF THE FUND
The funds primary risks are associated with changes in the stock market,however,
there are other risks associated with the fund. These risks generally apply to
how well the Fund tracks the underlying index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If the
futures owned by the fund do not track the index, the fund's performance
relative to the index will change.
Some funds are able to lend portfolio securities in order to offset expenses.
The S&P 500 has never engaged in this strategy, however, in the event that it
did, there is a risk that the practice could negatively impact the net assets
value of the fund.
30
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAPHIC OMITTED]
1986 22.65%
1987 -1.23%
1988 11.34%
1989 9.92%
1990 6.73%
1991 12.11%
1992 8.81%
1993 14.77%
1994 -8.63%
1995 20.55%
1996 3.10%
1997 9.29%
1998 6.32%
1999 -2.64%
Best Quarter: 2.89%
Worst Quarter: -2.68%
Year to date performance as of 9/30/99: -3.98%
AVERAGE ANNUAL RETURNS AS OF 8/31/99 SINCE*
- ------------------------------------ 1 YEAR 5 YEARS INCEPTION
------ ------- ---------
US Govt. Securities Fund -2.4% 7.0% 8.3%
Lehman Brothers Treasury Index 0.1% 7.2% 7.8%
Lehman Brothers GNMA Treasury Index 2.0% 7.9% 7.9%
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.50%
12b-1 fees none
other expenses 0.16%
-----
Total Annual operating expenses 0.66%
Expense reduction* 0.01%
-----
NET OPERATING EXPENSE 0.65%
The manager has limited the fund's expenses at 0.65% since the Fund's inception.
This limitation is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $66 $212 $369 $825
31
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 11.30 $ 10.38 $ 10.15 $ 10.66 $ 10.30
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.56 0.59 0.64 0.66 0.70
Net gain (loss) on securities
(both realized and unrealized) ..... (0.80) 1.01 0.36 (0.51) 0.41
-------- -------- -------- -------- --------
Total from investment operations . (0.24) 1.60 1.00 0.15 1.11
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.56) (0.61) (0.63) (0.66) (0.75)
Distribution from capital gains ....... (0.26) (0.07) (0.14) .--- .---
-------- -------- -------- -------- --------
Total distributions .............. (0.82) (0.68) (0.77) (0.66) (0.75)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 10.24 $ 11.30 $ 10.38 $ 10.15 $ 10.66
======== ======== ======== ======== ========
Total return ............................. (2.42)% 15.88% 10.00% 1.26% 11.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $ 30,950 $ 36,063 $ 31,277 $ 29,088 $ 29,884
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.66% 0.68% 0.69% 0.71% 0.75%
After expense reimbursements ....... 0.65% 0.65% 0.65% 0.65% 0.64%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 5.11% 5.46% 6.00% 6.10% 6.72%
After expense reimbursements ....... 5.12% 5.49% 6.04% 6.16% 6.83%
Portfolio Turnover .................... 139.00% 65.27% 170.76% 89.11% 169.83%
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
THE UNITED STATES TREASURY TRUST
Ticker Symbol: USTXX
- --------------------------------------------------------------------------------
GOAL
Maximize current income for investors and maintain a stable $1.00 share price.
STRATEGY
The Fund primarily invests its assets in high-quality, short-term treasuries
whose interest is guaranteed by the full faith and credit of the United States
Government. The securities in the fund must maturity in less than 13 months and
the fund's weighted average maturity will be less than 90 days.
WHAT IS THE MANAGER'S APPROACH?
The funds' investment manager selects securities that it believes will attain
the highest possible yield and maintain the $1.00 share price. The manager
generally purchases only U.S Treasury Bills, notes and bonds, but may invest in
other securities from time to time.
FORMAL INVESTMENT OBJECTIVE
The United States Treasury Trust seeks capital preservation, safety, liquidity,
and, consistent with these objectives, the highest attainable current income
exempt from state income taxes. This fund 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.
33
<PAGE>
MAIN RISKS
The fund is subject to several risks, any of which could cause the fund to lose
money. It is important to remember that this fund is not a FDIC insured money
market account. The risks include:
Interest rate risk, which is the chance that short-term security prices overall
will decline due to rising interest rates.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the fund.
Manager risk, which is the chance that poor security selection will cause the
Fund to under perform funds with similar investment objectives.
IS IT RIGHT FOR YOU?
The fund may be appropriate for very conservative investors and those who wish
to protect some or all their investments from volatile markets. It may be used
in retirement accounts such as 401ks and IRAs. Lastly, The fund's dividends are
generally not subject to state personal income taxes. Thus, investors who pay a
high rate of state income taxes may benefit from this feature.
OTHER RISKS OF THE FUND
An investment in the Fund is not insured or Guaranteed by the Federal Deposit
insurance Corporation for any other government agency. Although the fund seeks
to preserve the $1.00 share price, it is possible to loose money by investing in
the fund.
34
<PAGE>
PERFORMANCE
Below are a chart and a table showing the Fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions are
reinvested. It is important to remember that past performance does not
accurately predict future performance.
[GRAHPIC OMITTED]
1989 5.67%
1990 7.61%
1991 5.42%
1992 2.14%
1993 2.78%
1994 3.63%
1995 5.23%
1996 3.27%
1997 4.82%
1998 4.50%
1999
FUND FEES & EXPENSES
The following table describes what you would expect to pay as a fund investor.
The funds annual operating expenses are paid from the fund's assets while the
annual account fee is paid directly by you.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES (as a % of net assets)
Management fees 0.40%
12b-1 fees none
other expenses 0.23%
-----
Total Annual operating expenses 0.63%
Expense reduction* 0.23%
-----
NET OPERATING EXPENSE 0.40%
The manager has agreed to limited the fund's expenses at 0.40%. This limitation
is guaranteed though 12/31/00.
- --------------------------------------------------------------------------------
Use this table as a comparison tool for fund expenses. All mutual funds use the
same assumptions of a $10,000 investment and a 5% return each year. The table is
based on Net operating expenses of the fund and the fees are not affected by
liquidating your investment at the end of the period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
FUND $41 $202 $352 $788
35
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait Weller & Baker, whose report, along with
the Fund's financial statements are included in the Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------
THE UNITED STATES TREASURY TRUST 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.042 0.051 0.048 0.050 0.050
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.042) (0.051) (0.048) (0.050) (0.050)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total return ............................. 4.22% 5.21% 4.92% 5.11% 5.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $ 50,517 $ 44,341 $104,509 $ 37,903 $ 29,797
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.63% 0.64% 0.64% 0.66% 0.72%
After expense reimbursements ....... 0.41% 0.40% 0.40% 0.43% 0.50%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 3.92% 4.54% 4.58% 4.60% 4.75%
After expense reimbursements ....... 4.14% 4.78% 4.82% 4.83% 4.97%
</TABLE>
36
<PAGE>
FUND MANAGEMENT
The Portfolio Manager for the Funds is CCMPartners, 44 Montgomery Street, Suite
2100, San Francisco, CA94104. As the Portfolio Manager, CCMPartners oversees the
asset management and administration of the Funds. As compensation for these
services, CCMPartners receives a management fee from each Fund. For the period
ended 8/31/99 the fees were 0.48% for the California Tax-Free income Fund; 0.35%
for the California Insured Intermediate Fund; 0.29% for the California Tax-Free
Money Market Fund; 0.05% for the S&P 500 Index Fund; 0.24% for the S&PMidCap
Index Fund; 0.05% for the S&PSmallCap Index Fund and 0.39% for the Equity Income
Fund; 0.47% for the U.S. Government Securities Fund and 0.26% for the United
States Treasury Trust.
Phillip W. McClanahan is the portfolio Manager for the California Tax-Free
Income Fund, the California Insured Intermediate Fund, the U.S.Government
Securities Fund and The United States Treasury Trust. He joined the firm in 1985
and has over 35 years of investment experience. Mr. McClanahan graduated from
the University of Kansas in 1958 and earned his MBA from the University of
Pennsylvania, Wharton School in 1966.
Roderick G. Baldwin is the portfolio manager for the S&P 500 Index Fund,
S&PMidCap Index Fund, S&PSmallCap Index Fund and the Equity Income Fund. He
joined CCM Partners in 1999. Prior to his employment with CCM Partners, he was
Vice President of Index Investing at Bank of America Capital Management. Mr.
Baldwin graduated from Hamilton College in 1968 and earned his MBA from the
University of Pennsylvania, Wharton School in 1970. He has approximately 30
years of experience with equity fund management.
Michael J. Conn is the portfolio manager for the California Tax-Free Money
Market Fund. Mr. Conn joined CCM Partners in 1996 and prior to his joining the
firm, spent several years working for Gruntal & Co. specializing in trading and
institutional sales of various fixed income securities. Mr. Conn graduated from
the Leavy School of Business at Santa Clara University.
ADDITIONAL INVESTMENT RELATED RISKS
PORTFOLIO TURNOVER
Except for the money market Funds, the Funds generally intend to purchase
securities for long-term investments rather than short-term gains. However, a
security may be held for a shorter than expected period of time if, among other
things, the Manager needs to raise cash or feels that it is appropriate to do
so. Portfolio holdings may also be sold sooner than anticipated due to
unexpected changes in the markets. Buying and selling securities may involve
incurring some expense to a Fund, such as commissions paid to brokers and other
transaction costs. By selling a security, a Fund may realize taxable capital
gains that it will subsequently distribute to shareholders. Generally speaking,
the higher a Fund's annual portfolio turnover, the greater its brokerage costs
and the greater likelihood that it will realize taxable capital gains. Increased
brokerage costs may affect a Fund's performance. Also, unless you
37
<PAGE>
are a tax-exempt investor or you purchase shares through a tax-deferred account,
the distributions of capital gains may affect your after-tax return. For some
types of Funds, annual portfolio turnover of 100% or more is considered high.
OPENING AN ACCOUNT
Shares of the Funds may be purchased through the Funds' distributor or through
other third party distributors, brokerage firms and retirement plans. The
following information is specific to buying directly from the Funds'
distributor. If you invest through a third party distributor, many of the
policies, options and fees charged for the transaction may be different. You
should contact them directly for information regarding how to invest or redeem
through them.
You'll find all the necessary application materials included in the packet
accompanying this Prospectus or you may download an investment kit by accessing
our Web site at www.caltrust.com. Additional paperwork may be required from
corporations, associations, and certain other fiduciaries. The minimum initial
investments and subsequent investments for each Fund are listed below.
Minimum Minimum
initial subsequent IRA
Fund investment investment Minimum
---- ---------- ---------- -------
Income Fund $10,000 $250 none
Insured Fund $10,000 $250 none
Money Fund $10,000 $250 none
Government Fund $10,000 $250 none
Treasury Trust $10,000 $250 none
500 Fund $ 5,000 $250 none
MidCap Fund $ 5,000 $250 none
SmallCap Fund $ 5,000 $250 none
Equity Income Fund $ 5,000 $250 none
The Fund's distributor may change the minimum investment amounts at any time or
waive them at its discretion. To protect against fraud, it is the policy of the
Funds not to accept third party checks for the purposes of opening new accounts
or purchasing additional shares. 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.
BUYING &SELLINGSHARES
If you need an account application call us at (800) 225-8778 or down load an
investment kit from our web site at www.caltrust.com. Keep in mind the following
important policies:
A Fund may take up to 7 days to pay proceeds.
If your shares were recently purchased by check, the Fund will not release
your proceeds until payment of the check can be verified which may take up
to 15 days.
38
<PAGE>
Exchange purchases must meet minimum investment amounts of the Fund you are
purchasing.
You must obtain and read the prospectus for the Fund you are buying prior
to making the exchange.
If you have not selected the convenient exchange privileges on your
original account application, you must provide a signature guarantee letter
of instruction to the Fund, directing any changes in your account.
The Manager may refuse any purchase or exchange purchase transaction for
any reason.
HOW TO BUY SHARES
INITIAL PURCHASE - Make your check payable to the name of Fund in which you are
investing and mail it with the application to the address indicated. Please note
the minimum initial investments listed above.
CALIFORNIA INVESTMENT TRUST FUND GROUP
44 MONTGOMERY STREET SUITE 2100
SAN FRANCISCO, CA 94104-9635
PURCHASING BY EXCHANGE - You may purchase shares in a Fund by exchanging shares
from an account in one of our other Funds. Such exchanges must meet the minimum
amounts required for initial or subsequent investments described above. When
opening an account by exchanging shares, 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. If you have an existing
account with us, call (800) 225-8778 during normal business hours (8 AMto 5 PM,
PST) to exchange shares. You may also exchange shares by accessing our Web site
at www.caltrust.com.
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
market close, normally at 4:00 p.m., eastern time).
39
<PAGE>
WIRE INSTRUCTIONS:
Federal funds should be wired to:
Firstar Bank Milwaukee, NA
ABA # 075000022
For: Firstar Mutual Fund Services. LLC
Account # 112-952-137
For further credit to:
Fund: ____________________________________________
Account Registration: _____________________________
Account Number: ___________________________________
If you are opening a new account by 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 approximately 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 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 and 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 may
take up to 15 days). Payments by check or other negotiable bank deposit will
normally be effective within two business days for checks drawn on a member of
the Federal Reserve System and longer for most other checks. Wiring your money
to us will reduce the time you must wait before redeeming or exchanging shares.
You can wire federal funds from your bank, which may charge you a fee.
You may buy shares of a Fund through selected securities brokers. Your broker is
responsible for the transmission of your order to Firstar, the Fund's custodian,
and may charge you a fee. You will generally receive the share price next
determined after your order is placed with your broker, in accordance with your
broker's agreed upon procedures with the Fund. Your broker can advise you of
specific details.
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If you wish, you may also 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.
The Funds do not consider the U.S. Postal Service or other independent delivery
service to be their agents. Therefore, deposit in the mail or with such delivery
services does not constitute receipt by Firstar or the Funds.
PURCHASING ADDITIONAL SHARES - Make your check payable to the name of the Fund
in which you are investing, 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.
AUTOMATIC SHARE ACCUMULATION PLAN
Under the Funds' Automatic Share Accumulation Plan (ASAP), you may arrange to
make additional purchases (minimum $250) of Fund shares automatically on a
monthly basis by electronic funds transferred from your checking account if the
bank which maintains the account is a member of the Automated Clearing House, or
by preauthorized checks drawn on your bank account. You may, of course,
terminate the program at any time. There is no fee to participate in this
program. However, a service fee of $20.00 will be deducted from your Fund
account for any ASAP purchase that does not clear due to insufficient funds, or
if prior to notifying the Fund in writing or by telephone to terminate the plan,
you close your bank account or in any manner that prevents withdrawal of the
funds from the designated checking or NOW account. Investors may obtain more
information concerning this program, including the application form, from the
Funds.
The market value of shares of the Funds 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.
We reserve the right to suspend the offering of shares of any of the Funds for a
period of time and to reject any specific purchase order in whole or in part.
Subsequent investments should be payable to the Fund and list your account
number in the memo portion of your check. Please note that orders to buy sell or
exchange become irrevocable when they are mailed to the Funds. After setting up
your online account, you may obtain a history of transactions for your account
(s) by accessing our Web site at www.caltrust.com.
HOW FUND SHARES ARE PRICED
The Funds are open for business every day that both the New York Stock Exchange
(NYSE) and the Federal Reserve Bank of New York are open. The net asset value of
each Fund is
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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
that Fund. Our Shareholder Servicing Agent usually calculates this value at
market close, normally 4:00 p.m. eastern time or 1:00 p.m. pacific time, on each
day that the NYSE is open. 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.
Orders that are received in good order are executed at the next share price to
be calculated. The Federal Fund's net asset value will not be calculated nor
transactions processed on certain holidays observed by national banks and/or our
Shareholder Servicing Agent (Martin Luther King's Birthday, Presidents Day,
Columbus Day and Veterans Day) in addition to those days on which the NYSE is
closed.
The share prices of the Income Fund, the Insured Fund, the Government Fund and
the Stock Funds will vary over time as interest rates and the value of their
securities vary. Portfolio securities of the Stock Funds that are listed on a
national exchange are valued at the last reported sale price. U.S. Treasury
Bills are valued at amortized cost, which approximates market value. Portfolio
securities of the Income Fund, the Insured Fund and the Government Fund are
valued by an independent pricing service that uses market quotations
representing the latest available bid price, prices provided by market makers,
or estimates of market values obtained from yield data relating to instruments
or securities with similar characteristics. 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 respective Boards of Trustees.
The share price of the Funds are reported by the National Association of
Securities Dealers, Inc. in the mutual funds section of most newspapers after
the heading "California Trust".
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.
In each case, performance information will be based on past performance and will
reflect all recurring charges against Fund income. Performance information is
based on historical data and does not indicate the future performance of any
Fund.
HOW TO SELL SHARES
BY MAIL
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 below).
Remember that we may hold redemption proceeds until we are satisfied that we
have collected the funds which were made by check. To avoid these possible
delays, which could be up to 15 days, you should consider making your investment
by wire, following the instructions on page _____.
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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 to the address
noted above.
Type of Registration Requirements
Individual Letter of instruction signed by all person(s)
Joint Tenants Required to sign for the account, exactly as it
Tenants In Common Is registered, accompanied by signature guarantee(s).
Sole Proprietorship
Custodial Uniform Gifts to Minors Act
General Partners
Corporation Letter of instruction and a corporate resolution, signed
Association 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 us for further
instructions.
The Custodian 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.
BY CHECK
With checkwriting, our most convenient redemption procedure, your investment
will continue to earn income until the check clears your account. You must apply
for the checkwriting feature for your account. You may redeem by check provided
that the proper signatures you designated are on the check. The minimum amount
is $500. There is no charge for this service and you may write an unlimited
number of checks. You should not attempt to close your account by check, since
you cannot be sure of the number of shares and value of your account. Use the
wire redemption or mail redemption feature to close your account. The
checkwriting feature is not available for The Nasdaq-100 or the European Growth
& Income Funds. Please note a $20.00 fee will be charged to your account for any
returned check.
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BY EXCHANGE
You must meet the minimum investment requirement of the Fund into which you are
exchanging shares. You can only exchange between accounts with identical
registration. Same day exchanges are accepted until market close, normally 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 us
before 4:00 p.m. eastern time (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 $12.00).
ONLINE
You can sell shares in a regular account by accessing our Web site at
www.caltrust.com. You may not buy or sell shares in an IRA account using our
online feature.
BY ELECTRONIC FUNDS TRANSFER
You must have applied for the EFT withdrawal feature on your account. Typically,
money sent by EFT will be sent to your bank within three business days after the
sales of your securities. There is no fee for this service.
BY TELEPHONE
Call the Funds at (800) 225-8778. Give the name of the Fund in which you are
redeeming shares, 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. Telecommunications Device for the Deaf
(TDD) services for hearing impaired shareholders are available for telephone
redemptions by calling (800) 864-3416.
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 Funds 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 Funds employ 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 a 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 the Custodian and the
Funds, 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 or the internet
access options, 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, telephone transactions may be tape
recorded.
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Retirement Plan shareholders should complete a Rollover-Distribution Election
Form.
SYSTEMATIC WITHDRAWAL PLAN
If you own shares of a 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 Funds.
OTHER REDEMPTION POLICIES
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 Funds does not fall below
$5,000 ($1,000 in the case of Stock Funds) because of redemptions. the Manager
may elect to close an account and mail you the proceeds to the address we have
on record. We will give you 30 days' written notice that your account(s) will be
closed unless you make an investment to increase your account balance(s) to the
$5,000 minimum ($1,000 in the case of the Stock Funds). If you close your
account, any accrued dividends will be paid as part of your redemption proceeds.
The share prices of the Funds will fluctuate and you may receive more or less
than your original investment when you redeem.
THE FUNDS AND THE MANAGER RESERVE CERTAIN RIGHTS, INCLUDING THE FOLLOWING:
To automatically redeem your shares if your account balance falls below $5,000
due to the sale of shares.
To modify or terminate the exchange privilege on 60 days written notice.
To refuse any purchase or exchange order.
To change or waive a funds minimums.
To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
To withdraw or suspend any part of the offering made by this prospectus.
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OTHER POLICIES
TAX-SAVING RETIREMENT PLANS
We can set up your new account in a Fund under one of several tax-sheltered
plans. The following plans let you save for your retirement and shelter your
investment earnings from current taxes:
IRAs/Roth IRAs: 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 of each year.
SIMPLE, SEP, 401(k)/Profit-Sharing and Money-Purchase Plans (Keogh): Open to
corporations, self-employed people and partnerships, 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.
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.
Electronic Funds Transfer (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. The United States Treasury Trust does not expect to
pay any capital gains.
STATEMENT AND REPORTS
Shareholders of the Funds will receive statements at least monthly 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.
The account statements you receive will show the total number of shares of a
Fund owned by you. You may rely on these statements in lieu of share
certificates which are not necessary and will not be issued. You should keep
statements you receive after you
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buy or sell shares to assist in recordkeeping and tax calculations.
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. After setting up your online account,
you may also obtain a transaction history for your account (s) by accessing our
Web site at www.caltrust.com.
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 Funds of this in writing.
DIVIDEND & TAXES
Any investment in the funds typically involves several tax considerations. the
information below is meant as a general summary for UScitizens and residents.
Because your situation may be different, it is important that you consult your
tax advisor about the tax implications of you investment in any of the Funds.
As a shareholder, you are entitled to your share of the dividends your fund
earns. The S&P 500 Index Fund, S&PMidCap Index Fund, S&PSmallCap Index Fund and
the Equity Income Fund distribute substantially all the dividends quarterly. All
other Funds distribute substantially all the dividends monthly. Each Fund pays
its dividends on the last business day of the month. In the case of the Funds
that pay quarterly dividends, the dividends would be paid on the last business
day of the quarter. To be eligible for the dividend, you must be a shareholder
of record on the record date, which is the second to last business day of the
month, or quarter, as applicable. Capital gains are generally paid on the last
day of November, to shareholders of record on the second to last business day of
November of each year. The United States Treasury Trust and the California
Tax-Free Money Market Fund do not expect to pay capital gains.
At the beginning of each year, shareholders are provided with information
detailing the tax status of any dividend the funds have paid during the previous
year.
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TO LEARN MORE
This prospectus contains important information on the Funds and should be read
and kept for future reference. You can also get more information from the
following sources:
ANNUAL AND SEMI-ANNUAL REPORTS
These are automatically mailed to all shareholders without change. In the Annual
Report, you will find a discussion of market conditions and investment
strategies that significantly affected each Fund's performance during its most
recent fiscal year. You may request a copy by contacting the Funds.
STATEMENT OF ADDITIONAL INFORMATION
This includes more details about the Funds, including a detailed discussion of
the risks associated with the various investments. The SAIis incorporated by
reference into this prospectus, making it a legal part of the prospectus.
You can obtain a free copy of these documents by calling the Funds at (800)
225-8778, visiting our web site at www.caltrust.com, or by contacting the SEC.
The SEC may charge you a duplication fee. You can also review these documents in
person at the SEC's Public Reference Room, or by visiting the SEC's Internet
Site at www.sec.gov.
CALIFORNIA INVESTMENT TRUST FUND GROUP
44 MONTGOMERY STREET SUITE 2100
SAN FRANCISCO CA 94104
(800) 225-8778
www.caltrust.com
Securities and Exchange Commission
Washington DC 20549-6009
(800) SEC-0330 (Public Reference Section)
www.sec.gov
SEC File Number 811-5049
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CALIFORNIA INVESTMENT TRUST II
FORM N-1A
-------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
U.S. Government Securities Fund
The United States Treasury Trust
S&P 500 Index Fund
S&P MidCap Index Fund
Equity Income Fund
S&P SmallCap Index Fund
-------------------------------
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CALIFORNIA INVESTMENT TRUST FUND GROUP
44 Montgomery Street, Suite 2100
San Francisco, California 94104
(800) 225-8778
Statement of Additional Information - January 1, 2000
The California Investment Trust Fund Group (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"), 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.
This Statement of Additional Information relates to all funds of the
Trusts. These funds are sometimes referred to herein collectively as the "Funds"
and individually as a "Fund."
THE COMBINED PROSPECTUS FOR THE FUNDS DATED JANUARY 1, 2000, AS MAY BE
AMENDED FROM TIME TO TIME, PROVIDES THE BASIC INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN A FUND, AND MAY BE OBTAINED WITHOUT CHARGE FROM THE FUNDS 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 EACH FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
California Tax-Free Income Fund and California Insured Intermediate Fund both
seek as high a level of income exempt from regular Federal income taxes and
California personal income taxes as is consistent with prudent investment
management and safety of capital. The Income Fund invests in intermediate and
long-term municipal bonds. The Insured Fund invests primarily in municipal
securities that are covered by insurance guaranteeing the timely payment of
principal and interest.
California Tax-Free Money Market Fund has the objectives of capital
preservation, liquidity, and the highest achievable current income, exempt from
regular Federal income taxes and California personal income taxes consistent
with safety. This fund invests in short-term securities and attempts to maintain
a constant net asset value of $1.00 per share.
U.S. Government Securities Fund seeks liquidity, safety from credit risk and as
high a level of income as is consistent with these objectives by investing in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities, primarily Government National Mortgage Association
Certificates ("GNMA").
The United States Treasury Trust seeks capital preservation, safety, liquidity,
and, consistent with these objectives, the highest attainable current income
exempt from state income taxes. This fund 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.
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 (S&P) 500 Composite
Stock Price Index (the "S&P 500").
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 S&P MidCap 400
Index (the "MidCap Index").
S&P SmallCap 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 small-sized companies, as represented by the S&P SmallCap 600 Index
(the "SmallCap Index").
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Equity Income Fund is a diversified mutual fund that seeks a high level of
current income by investing primarily in income producing equity securities. As
a secondary objective, the fund will also consider the potential for price
appreciation when consistent with seeking current income.
We will attempt to manage the Equity Income Fund so that the average income
yield of the common stocks held by the fund will be at least 50% greater than
the yield of the S&P 500. Because of our strategies, we expect that the Fund
will have less price volatility than the S&P 500.
CONTENTS Page
About the California Investment Trust Fund Group ................. B-3
Investment Objectives and Policies of the Tax-Free Funds' ....... B-3
Investment Objectives and Policies of the Government
Fund and the Treasury Trust ................................... B-4
Investment Objectives and Policies of the Stock Funds ............ B-6
Description of Investment Securities and
Portfolio Techniques .......................................... B-6
Investment Restrictions .......................................... B-14
Trustees and Officers ............................................ B-17
Investment Management and Other Services ......................... B-18
The Trusts' Policies Regarding Broker-Dealers
Used for Portfolio Transactions ................................ B-22
Additional Information Regarding Purchases and
Redemptions of Fund Shares ..................................... B-23
Taxation ......................................................... B-25
Yield Disclosure and Performance Information ..................... B-27
Miscellaneous Information ........................................ B-31
Financial Statements ............................................. B-33
Appendix ......................................................... B-33
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ABOUT THE CALIFORNIA INVESTMENT TRUST FUND GROUP
The California Investment Trust Fund Group currently consists of two
diversified, open-end management investment companies: California Investment
Trust ("CIT") and California Investment Trust II ("CIT II"). Each Trust issues
its shares of beneficial interest with no par value in different series, each
known as a "fund." Currently, CIT has three separate funds, each of which
maintains a totally 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. The Income Fund, the Money Fund and the Insured Fund are
also referred to herein as the "Tax-Free Funds." The 500 Fund, the MidCap Fund
and the SmallCap Fund are also referred to herein as the "Index Funds." The
Index Funds, combined with the Equity Income Fund, are referred to as the "Stock
Funds".
INVESTMENT OBJECTIVES AND POLICIES OF THE TAX-FREE FUNDS
The following information supplements each Tax-Free Fund's investment
objectives and basic policies as set forth in the Prospectus.
As noted in the Prospectus, each Tax-Free Fund seeks to provide investors
with income exempt from Federal income taxes and from California personal income
tax. The Tax-Free Funds generally are as fully invested as practicable in
municipal securities. However, because the Tax-Free Funds do not presently
intend to invest in taxable obligations, there may be occasions when, as a
result of maturities of portfolio securities or sales of fund shares, or in
order to meet anticipated redemption requests, a fund may hold cash which is not
earning income.
Under California law, a mutual fund, or series thereof, must have at least
50% of its total assets invested in obligations that produce interest that is
exempt from California personal income tax if received by an individual
(including California state and local obligations, direct obligations of the
U.S. Government and obligations of certain U.S. territories and possessions) at
the end of each quarter of its taxable year in order to be eligible to pay
dividends to California residents which will be exempt from California personal
income tax. Accordingly, as described in the funds' prospectus, under normal
market conditions, each Tax-Free Fund attempts to invest 100% and, as a matter
of fundamental policy, invests at least 80% of the value of its net assets in
securities, the interest on which is, in the opinion of bond counsel, exempt
from regular Federal income taxes and from California personal income tax, and
is not a separate tax preference item subject to the Federal alternative minimum
tax. Thus, it is possible, although not anticipated, that up to 20% of a
Tax-Free Fund's assets could be invested in municipal securities from another
state and/or in taxable obligations.
The Income Fund and the Insured Fund both seek as high a level of income
exempt from Federal and California personal income tax as is consistent with
prudent investment management and safety of capital. The Income Fund seeks to
reduce, to the extent possible, the credit risks of its portfolio by investing
in California municipal securities having at the time of purchase one of the top
four ratings, or if unrated, being of similar quality to one of the top four
ratings, of Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's"), or Fitch Investors Service, Inc. ("Fitch"). These are considered to
be "investment grade" securities, although securities rated BBB, Baa, BBB by
S&P, Moody's and Fitch, respectively, in the fourth highest category are
regarded as having an adequate capacity to pay principal and interest but with
greater vulnerability to adverse economic conditions and to have some
speculative characteristics. No more than 20% of the Income Fund's total assets
will be invested in securities in the fourth highest category.
The Insured Fund seeks to reduce the credit risks of its portfolio by
investing in California municipal securities that are insured as to the timely
payment of principal and interest under an insurance policy obtained by the
issuer. The Insured Fund also may invest up to 20% of its total assets in
uninsured California municipal securities in one of the top two ratings
categories or if unrated of similar quality to securities in one of the top two
ratings.
If the rating on an issue held in either the Income or the Insured Fund's
portfolio is downgraded, CCM Partners (the "Manager") will consider such event
in its evaluation of the overall investment merits of that security but such
consideration will not necessarily result in the automatic sale of the security.
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When the Income or the Insured Fund invests in securities not rated by S&P,
Moody's, or Fitch, it is the responsibility of our Manager to evaluate them and
reasonably determine that they are of at least equal quality to securities rated
in the four highest categories.
The Money Fund invests in high-quality securities, whether rated or
unrated. Such issues include those rated, at the time of purchase, not lower
than Aa (applicable to municipal bonds), MIG-2 (applicable to municipal notes),
or P-1 (applicable to commercial paper) by Moody's; AA (bonds), SP-1 (notes), or
A-1 (commercial paper) by S&P; or AA (bonds), FIN-1+ (notes), or Fitch-2
(commercial paper) by Fitch. Generally, all of the instruments held by the Money
Fund are offered on the basis of a quoted yield to maturity and the price of the
security is adjusted so that relative to the stated rate of interest, it will
return the quoted rate to the purchaser.
Subsequent to its purchase by the Income Fund, the Insured Fund or the
Money Fund, a municipal security may be assigned a lower rating or cease to be
rated. Such an event would not necessarily require the elimination of the issue
from the portfolio, but CCM Partners ("the Manager") will consider such an event
in determining whether the Income, the Insured Fund or the Money Fund should
continue to hold the security in its portfolio. In addition to considering
ratings assigned by the rating services in its selection of portfolio securities
for the Income Fund or the Money Fund, the Manager considers, among other
things, information concerning the financial history and condition of the issuer
and its revenue and expense prospects and, in the case of revenue bonds, the
financial history and condition of the source of revenue to service the debt
securities.
INVESTMENT OBJECTIVES AND POLICIES OF THE
GOVERNMENT FUND AND THE TREASURY TRUST
The following information supplements the investment objectives and basic
policies of the Government Fund and the Treasury Trust as set forth in the
Prospectus.
The Government Fund seeks to provide liquidity, safety from credit risk and
as high a level of income as is consistent with such objectives by investing in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities. To achieve its objective, the fund currently invests
primarily in "GNMA Certificates" (popularly called "GNMA's" or "Ginnie Mae's").
GNMA's are Government National Mortgage Association mortgage-backed securities
representing part ownership of a pool of mortgage loans on real property.
A GNMA Certificate differs from a bond in that principal is scheduled to be
paid back by the borrower over the length of the loan rather than returned in a
lump sum at maturity. The Government Fund will purchase "modified pass-through"
type GNMA Certificates for which the payment of principal and interest on a
timely basis is guaranteed, rather than the "straight-pass through" Certificates
for which such guarantee is not available. The Government Fund may also purchase
"variable rate" GNMA Certificates or any other type which may be issued with
GNMA's guarantee. The balance of the Government Fund's assets is invested in
other securities issued or guaranteed by the U.S. Government, including U.S.
Treasury bills, notes, and bonds.
Securities of the type to be included in the Government Fund have
historically involved little risk of principal if held to maturity. However, due
to fluctuations in interest rates, the market value of such securities may vary
during the period of a shareholder's investment in the Government Fund.
GNMA Certificates are created by an "issuer," which is a Federal Housing
Administration ("FHA") approved lender, such as mortgage bankers, commercial
banks and savings and loan associations, who also meet criteria imposed by GNMA.
The issuer assembles a specific pool of mortgages insured by either the FHA or
the Farmers Home Administration or guaranteed by the Veterans Administration.
Upon application by the issuer, and after approval by GNMA of the pool, GNMA
provides its commitment to guarantee timely payment of principal and interest on
the GNMA Certificates secured by the mortgages included in the pool. The GNMA
Certificates, endorsed by GNMA, are then sold by the issuer through securities
dealers.
The GNMA guarantee of timely payment of principal and interest on GNMA
Certificates is backed by the full faith and credit of the United States. GNMA
may borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee.
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When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagees or by result of foreclosure, such principal payments are passed
through to the Certificate holders (such as the Government Fund). Accordingly,
the life of the GNMA Certificate is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayment rights, it is not possible to predict the life of a
particular GNMA Certificate, but FHA statistics indicate that 25 to 30 year
single-family dwelling mortgages have an average life of approximately 12 years.
Generally, GNMA Certificates bear a nominal "coupon rate" which represents
the effective FHA-Veterans Administration mortgage rates for the underlying pool
of mortgages, less GNMA and issuer's fees. Payments to holders of GNMA
Certificates consist of the monthly distributions of interest and principal less
the GNMA and issuer's fees. The actual yield to be earned by the holder of a
GNMA Certificate is calculated by dividing such payments by the purchase price
paid for the GNMA Certificate (which may be at a premium or a discount from the
face value of the Certificate). Monthly distributions of interest, as contrasted
to semi-annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising the effective
annual yield earned on GNMA Certificates.
The portion of the payments received by the Government Fund as a holder of
the GNMA Certificates which constitutes a return of principal is added to the
Government Fund's cash available for investment in additional GNMA Certificates
or other U.S. Government guaranteed securities. The interest portion received by
the Government Fund is distributed as net investment income to the Fund's
shareholders.
The Manager continually monitors the Government Fund's investments, and
changes are made as market conditions warrant. However, the Government Fund does
not engage in the trading of securities for the purpose of realizing short-term
profits.
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The Treasury Trust seeks capital preservation, safety, liquidity, and,
consistent with these objectives, the highest attainable current income exempt
from state income taxes, by investing exclusively in U.S. Treasury securities,
namely bills, notes or bonds which are direct obligations of the U.S.
Government. The Treasury Trust's net assets will at the time of investment have
remaining maturities of 397 days or less. The dollar weighted average maturity
of its portfolio will generally be 90 days or less and it will attempt to
maintain a constant net asset value of $1.00 per share.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
As stated in the Prospectus, the investment objective of the 500 Fund is to
seek investment results that correspond to the total return (i.e., the
combination of capital changes and income) of common stocks publicly traded in
the United States, as represented by the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). The S&P 500 is a well-known stock market index that
includes common stocks of companies representing approximately 77% of the market
value of all common stocks publicly traded in the United States. Companies
included in the Index range from $384 million to $462 billion in market
capitalization. The Manager believes that the performance of the S&P 500 is
representative of the performance of publicly traded common stocks in general.
The median market capitalization of the stocks in the S&P 500 Index is
approximately $7.98 billion.
The investment objective of the MidCap Fund is to seek investment results
that correspond to the total return (i.e., the combination of capital changes
and income) of publicly traded common stocks of medium-size domestic companies,
as represented by the Standard & Poor's MidCap 400 Index (the "MidCap Index").
The MidCap Index, representing approximately 8% of the market value of all
common stocks publicly traded in the United States, is composed of 400 selected
common stocks of medium-size domestic companies with market capitalizations
between $201 million and $17 billion. The median market capitalization of the
stocks in the MidCap Index is approximately $1.74 billion.
The investment objective of the SmallCap Fund is to seek 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 "SmallCap
Index").* As of December 23, 1999, the SmallCap Index, representing about 3% 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
$40 million and $3.90 billion. The median market capitalization of the stocks in
the SmallCap Index was $481 million.
The Equity Income Fund is a diversified mutual fund that seeks a high level
of current income by investing primarily in income producing equity securities.
As a secondary objective, the Fund will also consider the potential for price
appreciation when consistent with seeking current income.
The Manager will attempt to manage the Equity Income Fund so that the
average income yield of the common stocks held by the Equity Income Fund will be
at least 50% greater that the yield of the S&P 500 Index. Because of these
strategies, the Manager expects that the Fund will have less price volatility
that the S&P 500 Index.
DESCRIPTION OF INVESTMENT SECURITIES AND PORTFOLIO TECHNIQUES
Municipal Securities
Discussed below are the major attributes of the various municipal and other
securities in which each of the Tax-Free Funds may invest and of the portfolio
techniques the Income Fund or the Money Fund may utilize.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the issuer's taxing power for the payment
of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under the Federal Revenue
Sharing Program. They also are usually general obligations of the issuer.
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Bond Anticipation Notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the Federal National Mortgage
Association or the Government National Mortgage Association.
Project Notes are instruments sold by the Department of Housing and Urban
Development but issued by a state or local housing agency to provide financing
for a variety of programs. They are backed by the full faith and credit of the
U.S. Government, and generally are for periods of one year or less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (397
days or less) promissory notes issued by municipalities to supplement their cash
flow.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund which may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
are provided further security in the form of a state's assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds which pay tax-exempt interest are in most
cases revenue bonds and are issued by or on behalf of public authorities to
raise money to finance various privately operated facilities for business
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of the real and personal property so financed as
security for such payment. As a result of 1986 federal tax legislation,
industrial revenue bonds may no longer be issued on a tax-exempt basis for
certain previously permissible purposes, including sports and pollution control
facilities.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Tax-Free Funds may invest.
Variable Rate Demand Notes ("VRDN's") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period prior to specified dates,
generally at 30, 60, 90, 180, or 365 day intervals. The interest rates are
adjustable at intervals ranging from daily to six months. Adjustment formulas
are designed to maintain the market value of the VRDN at approximately the par
value of the VRDN upon the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.
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The Tax-Free Funds may also invest in VRDN's in the form of participation
interests ("Participating VRDN's") in variable rate tax-exempt obligations held
by a financial institution, typically a commercial bank ("institution").
Participating VRDN's provide the Tax-Free Funds with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDN's from the institution upon a specified number of days'
notice, not to exceed seven days. In addition, the Participating VRDN is backed
by an irrevocable letter of credit or guaranty of the institution. The Tax-Free
Funds have an undivided interest in the underlying obligation and thus
participate on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation, providing the letter of credit and
issuing the repurchase commitment.
VRDN's may be unrated or rated and their creditworthiness may be a function
of the creditworthiness of the issuer, the institution furnishing the
irrevocable letter of credit, or both. Accordingly, a Tax-Free Fund may invest
in such VRDN's the issuers or underlying institutions of which the Manager
believes are creditworthy and satisfy the quality requirements of each Tax-Free
Fund. The Manager will continuously monitor the creditworthiness of the issuer
of such securities and the underlying institution.
Periods of high inflation and periods of economic slowdown, together with
the fiscal measures adopted to attempt to deal with them, have caused wide
fluctuations in interest rates. While the value of the underlying VRDN may
change with changes in interest rates generally, the variable rate nature of the
underlying VRDN should tend to reduce changes in the value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed income securities. The Tax-Free Funds may
invest in VRDN's on which stated minimum or maximum rates, or maximum rates set
by state law, limit the degree to which interest on such VRDN's may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Because the adjustment of interest
rates on the VRDN's is made in relation to movements of various interest rate
adjustment indices, the VRDN's are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
For purposes of determining whether a VRDN held by a Tax-Free Fund matures
within one year from the date of its acquisition, the maturity of the instrument
will be deemed to be the longer of (1) the demand period required before the
Tax-Free Fund is entitled to receive payment of the principal amount of the
instrument, or (2) the period remaining until the instrument's next interest
rate adjustment. The maturity of a VRDN will be determined in the same manner
for purposes of computing a Tax-Free Fund's dollar-weighted average portfolio
maturity.
Obligations with Puts Attached. Each Tax-Free Fund may purchase municipal
securities together with the right to resell the securities to the seller at an
agreed upon price or yield within a specified period prior to the maturity date
of the securities. Although it is not a put option in the usual sense, such a
right to resell is commonly known as a "put" and is also referred to as a
"stand-by commitment." The Tax-Free Funds will use such puts in accordance with
regulations issued by the Securities and Exchange Commission ("SEC"). The
Manager understands that the Internal Revenue Service (the "IRS") has issued a
revenue ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain taxpayers (which do not serve as precedent for other taxpayers) to
the effect that tax-exempt interest received by a regulated investment company
with respect to such obligations will be tax-exempt in the hands of the company
and may be distributed to its shareholders as exempt-interest dividends. The IRS
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each Tax-Free Fund intends to
take the position that it is the owner of any municipal obligations acquired
subject to a stand-by commitment or similar put right and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
its hands. There is no assurance that stand-by commitments will be available to
the Tax-Free Funds nor have the Tax-Free Funds assumed that such commitments
would continue to be available under all market conditions.
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U.S. Government Obligations, Other Securities and Portfolio Techniques
U.S. Government Obligations. U.S. Treasury obligations are issued by the
U.S. Treasury and include U.S. 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 FHA, 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 Funds may only invest in obligations backed
by the U.S. Government's full faith and credit.
Repurchase Transactions. The Tax-Free Funds, the Government Fund and the
Stock Funds 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 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 security. The period of these repurchase
agreements is usually short, from overnight to one week, and in particular, at
no time will the Money Fund invest in repurchase agreements with a term of more
than one year. 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. A 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 such fund makes payment for such securities only upon 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. A 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. With respect to the Tax-Free Funds and the
Government Fund, the Manager on an ongoing basis will review and monitor the
creditworthiness of institutions with which it has entered into repurchase
agreements. The current policy of the Stock Funds is to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Manager.
When-Issued Purchases and Forward Commitments. New issues of Government
securities and municipal securities may be offered on a when-issued basis.
Accordingly, the Tax-Free Funds and the Government Fund may purchase securities
on a when-issued or forward commitment basis. When-issued purchases and forward
commitments involve a commitment by the funds to purchase securities at a future
date. The price of the underlying securities (usually expressed in terms of
yield) and the date when the securities will be delivered and paid for (the
settlement date) are fixed at the time the transaction is negotiated.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining a fund's net asset value starting
on the day the fund agrees to purchase the securities. Therefore, if a fund
remains substantially fully invested at the same time that it has committed to
purchase securities on a when-issued or forward commitment basis, its net asset
value per share may be subject to greater price fluctuation. A fund does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. Settlement of when-issued purchases
and forward commitments generally takes place within two months of the date of
the transaction, but delayed settlements beyond two months may be negotiated.
The funds make commitments to purchase securities on a when-issued or
forward commitment basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, each fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the fund on the settlement date. In these cases a fund may realize a capital
gain or loss.
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When a fund enters into a when-issued purchase or a forward commitment to
purchase securities, the Funds' Custodian, Firstar Trust Company (the
"Custodian") will establish, and maintain on a daily basis, a separate account
of the fund consisting of cash or portfolio securities having a value at least
equal to the amount of the Fund's purchase commitments. These procedures are
designed to insure that the Fund maintains sufficient assets at all times to
cover its obligations under when-issued purchases and forward commitments.
Lending Portfolio Securities. Each of the Tax-Free Funds and the Government
Fund may lend up to 100% of its portfolio securities to non- affiliated brokers,
dealers, and financial institutions provided that cash or U.S. Government
securities equal to 100% of the market value of the securities loaned is
deposited by the borrower with the lending fund and is maintained each business
day. As indicated in the Prospectus, although the Stock Funds have no current
intention to do so, each Stock Fund may lend up to 10% of its portfolio
securities to non-affiliated brokers, dealers and financial institutions
provided that cash or U.S. Government securities equal to 100% of the market
value of the securities loaned is deposited by the borrower with the lending
fund and is maintained each business day. While such securities are on loan, the
borrower will pay such fund any income accruing thereon, and the fund may invest
or reinvest the collateral (depending on whether the collateral is cash or U.S.
Government securities) in portfolio securities, thereby earning additional
income. Each 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 five 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 lending fund and its
shareholders. A fund may pay reasonable finders', borrowers', administrative,
and custodial fees in connection with a loan of its securities. The Manager will
review and monitor the creditworthiness of such borrowers on an ongoing basis.
Special Considerations Affecting Investment in California Municipal
Obligations. The Money Fund invests a high proportion of its assets in
California municipal securities. The Income Fund and the Insured Fund also
invest primarily in California municipal securities. Payment of interest and
preservation of principal is dependent upon the continuing ability of California
issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. In addition to general
economic pressures, certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could adversely affect a California issuer's ability to raise revenues to meet
its financial obligations. The following is not an exhaustive list, constitutes
only a brief summary, does not purport to be a complete description, and is
based on information drawn from official statements and prospectuses relating to
securities offerings of the State of California that have come to the attention
of the Tax-Free Funds and were available before the date of this Statement of
Additional Information. The Tax-Free Funds have not independently verified such
information.
As used below, "California Tax-Exempt Securities" includes issues secured
by a direct payment obligation of the State and obligations of other issuers
that rely in whole or in part on State revenues to pay their obligations, the
interest on which is, in the opinion on bond counsel, exempt from federal income
tax and California personal income tax. Property tax revenues and part of the
State's General Fund surplus are distributed to counties, cities and their
various taxing entities; whether and to what extent a portion of the State's
General Fund will be so distributed in the future is unclear.
State Budgetary Considerations
Overview. After suffering through a severe recession, since the start of
1994 California's economy has been on a steady recovery. Employment has grown by
over 500,000 in 1994 and 1995, and the pre-recession employment level is
expected to be matched in 1996. The strongest growth has been in export-related
industries, business services, electronics, entertainment, and tourism, which
has offset the recession-related losses which were heaviest in aerospace and
defense-related industries, finance and insurance. This recession seriously
affected State tax revenues, which basically mirror economic conditions, and
increased expenditures for health and welfare programs. As a result, from the
late 1980's until 1992-93, the State experienced recurring budget deficits. A
further consequence of the largest
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budget imbalance was to significantly reduce the State's available cash
resources and require it to use a series of external borrowings to meet its cash
needs.
The State's accumulated budget deficit approached $2.8 billion at its peak
on June 30, 1993. Because of the deterioration in the State's financial
condition, the State's credit ratings had been reduced. Since October 1992,
three major nationally recognized statistical rating organizations had lowered
the State's general obligation bond rating from the highest rating of "AAA" to
"A+" by S&P, "A1" by Moody's, and "A+" by Fitch.
The State's financial condition improved markedly during the fiscal years
1995-99. This was a result of a combination of factors, most notably: better
than expected revenues, a slowdown in growth of social welfare programs, and
continued spending restraint based on the actions taken in earlier years. This
economic improvement caused two of the three nationally recognized statistical
rating organizations to raise the State's general obligation bond rating.
Moody's raise it's rating from "A1" to "Aa3"and Fitch went from "A+" to "AA-",
while S&P remained at an "A+".
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96. $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than
were initially planned when the budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and to
make up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $639.8 Million as of June 30, 1997 and $1.782 billion at June
30, 1998.
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit imposed by its Constitution on
"proceeds of taxes". Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
Issues Affecting Local Governments and Special Districts
Proposition 13. Certain California Tax-Exempt Securities may be obligations
of issuers that rely in whole or in part on ad valorem real property taxes for
revenue. In 1978, California voters approved Proposition 13, which amended the
State Constitution to limit ad valorem real property taxes and restrict the
ability of taxing entities to increase property tax and other revenues. With
certain exceptions, the maximum ad valorem real property tax is limited to 1% of
the value of real property. The value of real property may be adjusted annually
for inflation at a rate not exceeding 2% per year, or reduced to reflect
declining value, and may also be adjusted when there is a change in ownership or
new construction with respect to the property. Constitutional challenges to
Proposition 13 to date have been unsuccessful.
The State, in response to the significant reduction in local property tax
revenues as a result of the passage of Proposition 13, enacted legislation to
provide local government with increased expenditures from the General Fund. This
post-Proposition 13 fiscal relief has, however, ended.
Proposition 62. This initiative placed further restrictions on the ability
of local governments to raise taxes and allocate approved tax revenues. Several
recent decisions of the California Courts of Appeal have held parts of
Proposition 62 unconstitutional. Recently, however, the California Supreme Court
upheld a requirement imposed by Proposition 62 that "special taxes" be approved
by two-thirds of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been imposed by local governments
in California and make it more difficult for local governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State appropriations
limit and State funding of public education below the university level by
guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives also require that the State establish a prudent reserve fund for
public education.
Proposition 218. Passed in November 1996, this initiative places additional
limitations on the ability of California local governments to increase general
taxes and impose special assessments. Taxes, assessments and fees have a grace
period of up to two years from November 1996 to receive voter approval.
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Appropriations Limit. Local governmental entities are also subject to
annual appropriations limits. If a local government's revenues in any year
exceed the limit, the excess must be returned to the public through a revision
of tax rates or fee schedules over the following two years.
Conclusion. The effect of these Constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend upon whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). The Tax-Free Funds'
concentration in California tax-exempt securities provides a greater level of
risk than a fund that is diversified across numerous state and municipal
entities.
Additional Issues
Mortgages and Deeds of Trust. The Tax-Free Funds may invest in issues that
are secured in whole or in part by mortgages or deeds of trust on real property.
California law limits the remedies of a creditor secured by a mortgage or a deed
of trust, which may result in delays in the flow of revenues to, and debt
service paid by, an issuer.
Lease Financing. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financing are debt that requires voter approval.
Seismic Risk. It is impossible to predict the time, location, or magnitude
of a major earthquake or its effect on the California economy. In January 1994,
a major earthquake struck Los Angeles, causing significant damage to structures
and facilities in a four-county area. The possibility exists that another such
earthquake could create a major dislocation of the California economy.
Stock Index Futures Contracts. The Stock Funds 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 stocks, such as the S&P 500 and the MidCap Index,
both registered trademarks of Standard & Poor's Corporation. Other broad-based
indices include the New York Stock Exchange Composite Index, S&P BARRA/Value,
Russell 2000, Value Line Composite Index and Standard & Poor's 100 Stock Index.
The Manager expects that futures transactions for the 500 Fund, the MidCap
Fund, the SmallCap Fund and the Equity income Fund will typically involve the
S&P 500, the MidCap Index, the Russell 2000 and the S&P 500 Index, respectively.
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. Each 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 indexes underlying its
index futures positions. Therefore, while a fund's index futures positions
should provide exposure to changes in value of the underlying indexes (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 a
Fund's index futures positions will not match the price changes of the fund's
other investments. Other factors that could affect the correlation of a fund's
index futures positions with its other investments are discussed below.
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,
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
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<PAGE>
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 a 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 Manager will attempt to minimize this
risk by monitoring the creditworthiness of the FCMs with which the Stock Funds
do business.
Limitations on Stock Index Futures Transactions. Each Stock 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,
each 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
each fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts into which the fund has entered.
The Manager also intends to follow certain other limitations on each of the
Stock Fund's futures activities. Under normal conditions, a 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, and
(ii) the current value of the indexes or other instruments underlying the Fund's
other futures positions would exceed 20% of such fund's total assets (35% if
total assets are below $25 million). In addition, each fund does not intend to
enter into futures contracts that are not traded on exchanges or boards of
trade.
The above limitations on the Stock Funds' investments in futures contracts,
and these funds' 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.
Each Stock Fund may purchase index futures contracts in order to attempt to
remain fully invested in the stock market. For example, if a fund had cash and
short-term securities on hand that it wished to invest in common stocks, but at
the same time it 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. Each Stock Fund may also purchase futures
contracts as an alternative to purchasing actual securities. For example, if a
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 a 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 potentially greater liquidity than futures contracts may offer. Although a
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 several days.
When a 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 Manager anticipated a decline in common stock
prices at a time when a 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.
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<PAGE>
Asset Coverage for Futures Positions. Each Stock Fund will comply with
guidelines established by the SEC with respect to coverage of futures strategies
by mutual funds, and if the guidelines so require will set aside cash and or
other appropriate liquid assets (e.g., U.S. Equities, 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 a fund's assets could impede portfolio management or such
fund's ability to meet redemption requests or other current obligations.
Correlation of Price Changes. As noted above, price changes of a Fund's
futures positions may not be well correlated with price changes of its other
investments because of differences between the underlying indexes and the types
of securities the Fund invests in. For example, if a fund sold a broad-based
index futures contract to hedge against a stock market decline while the fund
completed a sale of specific securities in its portfolio, it is possible that
the price of the securities could move differently from the broad market average
represented by the index futures contract, resulting in an imperfect hedge which
could affect the correlation between the fund's return and that of the
respective benchmark index. In the case of an index futures contract purchased
by the fund either in anticipation of actual stock purchases or in an effort to
be fully invested, failure of the contract to track its index accurately could
hinder such fund in the achievement of its objective.
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. A 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, compared with a
settlement period of seven days for some types of securities, 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
potentially could require a fund to continue to hold a futures position until
the delivery date regardless of potential consequences. If a fund must continue
to hold a futures position, its access to other assets held to cover the
position could also be impaired.
INVESTMENT RESTRICTIONS
Except as noted with respect to any fund, each trust has adopted the
following restrictions as additional fundamental policies of its Funds, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of that fund. Under the Investment Company Act of
1940, as amended, ("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. A
fund may not:
1. 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 10% (15% in the case of the Stock
Funds) of the fund's total asset value. However, a fund will not purchase
14
<PAGE>
additional securities while the value 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 a 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 funds currently do not intend to utilize reverse repurchase
agreements, but may do so in the future.)
2. Except as required in connection with permissible futures contracts
(Stock Funds only), 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.
3. 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 instrumentality's, is pledged and maintained
by the borrower.
4. 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.
5. 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 instrumentality's, 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 would exceed
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 (both the issuer of the
municipal obligation as well as the financial institution/ intermediary shall be
considered issuers of a participation certificate), except that the Insured Fund
may invest more than 25% of its assets in securities insured by the same
insurance company.
6. Purchase securities from or sell 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 (non-fundamental for
the Stock Funds).
7. Acquire, lease or hold real estate, except such 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.
8. (a) Invest in commodities and commodity contracts, or interests in
oil, gas, or other mineral exploration or development programs; provided,
however, that a fund may invest in futures contracts as described in the
Prospectus and in this Statement of Additional Information (Stock Funds only).
(b) Invest in commodities and commodity contracts, puts, calls,
straddles, spreads, or any combination thereof, or interests in oil, gas, or
other mineral exploration or development programs, except that the Government
Fund may purchase, hold, and dispose of "obligations with puts attached" in
accordance with its investment policies (all Funds except the Stock Funds).
9. Invest in companies for the purpose of exercising control or management.
10. (a) 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 (the
Stock Funds only).
(b) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization (all
funds except the Stock Funds).
11. 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,
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<PAGE>
more than 10% of the total assets of the Fund would be invested in such illiquid
securities.
12. Invest 25% or more of its assets in securities of any one industry,
although for purposes of this limitation, tax-exempt securities and obligations
of the U.S. Government and its agencies or instrumentalities are not considered
to be part of any industry (both the industry of the issuer of the municipal
obligation as well as the industry of the financial institution/intermediary
shall be considered in the case of a participation certificate), except that the
Insured Fund may invest more than 25% of its assets in securities insured by the
same insurance company.
In addition, each Stock 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. Each
Stock 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 a 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 a 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.
5. Invest in puts, calls, straddles or spread options, or any combination
thereof.
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 as
otherwise noted.
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<PAGE>
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 an "interested
person" of the Trust, as defined in the 1940 Act, are indicated by an asterisk
(*).
<TABLE>
<CAPTION>
Position and Offices Principal Occupation
Name and Address Age with the Trusts within the Past 5 years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Stephen C. Rogers 32 President & Trustee Chief Executive Officer, CCM Partners
44 Montgomery Street 1999 to present; Chief Operating
Suite 2100 Officer, CCM Partners 1998 to 1999;
San Francisco, CA 94104 Administrative Officer, CCM Partners
1993-1998; Marketing Representative, CCM
Partners, 1992 to 1993.
*Phillip W. McClanahan 63 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 73 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).
John B. Sias 70 Trustee President and CEO, Chronicle Publishing
C/O Chronicle Publishing Company, 1993 to Present; Company
901 Mission Street formerly, Director and Executive Vice
San Francisco, CA 94105 President, Capital Cities/ABC Inc. and
President, ABC Network T.V. Group.
Guy Rounsaville, Jr. 53 Trustee Partner, Allen, Matkins, Leck, Gamble &
333 Bush Street, #1700 Mallory LLP: General Counsel, Wells
San Francisco, CA 94104 Fargo Bank; 1977-1999: Corporate
Secretary, Wells Fargo & Company;
1978-1999.
</TABLE>
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<PAGE>
As shown on the following table the funds pay 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 October 28, 1999. As of October
28, 1999 Trustees and Officers as a group owned less than 1% of the outstanding
shares of the Money Fund, the Treasury Trust, the Insured Fund, the Government
Fund, and the 500 Fund. As of October 28, 1999 the Trustees and Officers of the
Trust as a group owned approximately 1.1% of the Income Fund, 2.0% of the MidCap
Fund, 2.7% of the SmallCap Fund and 1.25% of the Equity Income Fund.
<TABLE>
<CAPTION>
Pension or Estimated Total compensation
retirement benefits annual respecting registrant
Aggregate accrued as Fund benefits upon and Fund complex
Name/Position compensation Expenses retirement paid to Trustees
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen C. Rogers None None None None
CEO, Trustee
Phillip W. McClanahan None None None None
Treasurer, Trustee
Harry Holmes $12,000 None None $12,000
Trustee
John B. Sias $12,000 None None $12,000
Trustee
Guy Rounsaville, Jr. $12,000 None None $12,000
Trustee
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Management Services
CCM Partners, a California Limited Partnership (the "Manager"), is the
Manager of the funds under Investment Management Agreements dated December 27,
1985, October 15, 1992, December 31, 1985 and April 13, 1992. (Such Investment
Management Agreements are collectively referred to as the "Agreements.")
Pursuant to the Agreements, the manager supplies investment research and
portfolio management, including the selection of securities for the funds to
purchase, hold, or sell and the selection of brokers or dealers through whom the
portfolio transactions of each fund are executed. The Manager's activities are
subject to review and supervision by the Trustees to whom the Manager renders
periodic reports of the funds' 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 each fund.
Each Fund pays for its own operating expenses and for its share of its
respective 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, each Fund (except the Stock Funds) 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 $100
million; plus 45/100 of 1% (0.45%) per annum of average net assets over $100
million up to and including $500 million; and 4/10 of 1% (0.40%) per annum of
average net assets over $500 million. For the Manager's services, the Manager is
entitled to a monthly fee from the MidCap Fund computed at the annual rate of
4/10 of 1% (0.40%) of the value of its average daily net assets. The Manager is
entitled to a monthly fee from the 500 Fund computed at the annual rate of
25/100 of 1% (0.25%) of the value of its average daily net assets. For the
SmallCap Fund and the Equity Income Fund, the Manager is compensated at a rate
of 1/2 of 1% (0.50%) per annum of the value of average daily net
18
<PAGE>
assets of these Funds up to and including $500 million; plus 45/100 of 1% (.45%)
per annum of the value of assets up to and including $1 billion, and 40/100 of
1% (0.40%) per annum of average net assets above 1 billion.
The Agreements provide that the Manager is obligated to reimburse each of
the other Funds 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 each Fund's average daily net assets. The
Manager may also, and has to date, reduced its fees in excess of its obligations
under the Agreements.
For the fiscal year ended August 31, 1996, the Manager received a fee of
$462,785 from the Money Fund and reimbursed that Fund $196,188, which resulted
in a net management fee of $266,597; the Manager received a management fee of
$953,158 from the Income Fund, and did not make any reimbursements; the Manager
received a fee of $152,331 from the Government Fund and reimbursed that Fund
$20,327 which resulted in a net management fee of $132,004; the Manager received
a fee of $194,340 from the Treasury Trust and reimbursed that Fund $89,737,
which resulted in a net management fee of $104,603; the Manager received a fee
of $117,306 from the Insured Fund and reimbursed that Fund $33,648 which
resulted in a net management fee of $83,658.
For the fiscal year ended August 31, 1997, the Manager received a fee of
$479,264 from the Money Fund and reimbursed that Fund $200,511, which resulted
in a net management fee of $278,753; the Manager received a management fee of
$961,291 from the Income Fund, and did not make any reimbursements; the Manager
received a fee of $150,067 from the Government Fund and reimbursed that Fund
$13,522 which resulted in a net management fee of $136,545; the Manager received
a fee of $210,368 from the Treasury Trust and reimbursed that Fund $100,556,
which resulted in a net management fee of $109,812; the Manager received a fee
of $126,291 from the Insured Fund and reimbursed that Fund $38,590 which
resulted in a net management fee of $87,701.
For the fiscal year ended August 31, 1998, the Manager received a fee of
$505,199 from the Money Fund and reimbursed that Fund $213,549, which resulted
in a net management fee of $219,650; the Manager received a management fee of
$1,032,319 from the Income Fund, and did not make any reimbursements; the
Manager received a fee of $168,159 from the Government Fund and reimbursed that
Fund $10,318 which resulted in a net management fee of $157,841; the Manager
received a fee of $238,447 from the Treasury Trust and reimbursed that Fund
$116,733, which resulted in a net management fee of $121,714; the Manager
received a fee of $116,198 from the Insured Fund and reimbursed that Fund
$34,788 which resulted in a net management fee of $81,410.
For the fiscal year ended August 31, 1999, the Manager received a fee of
$558,691 from the Money Fund and reimbursed that Fund $233,014, which resulted
in a net management fee of $325,677; the Manager received a management fee of
$1,043,156 from the Income Fund, and did not make any reimbursements; the
Manager received a fee of $174,183 from the Government Fund and reimbursed that
Fund $3,320 which resulted in a net management fee of $170,863; the Manager
received a fee of $253,658 from the Treasury Trust and reimbursed that Fund
$109,740, which resulted in a net management fee of $143,918; the Manager
received a fee of $123,678 from the Insured Fund and reimbursed that Fund
$27,698 which resulted in a net management fee of $95,982.
For the fiscal year ended August 31, 1996, the Manager received a fee of
$121,051 from the MidCap Fund and reimbursed that Fund $91,951 which resulted in
a net management fee of $29,100; the Manager received a fee of $83,907 from the
500 Fund and reimbursed that Fund $122,682, which resulted in a net amount to
the Fund of $38,775 to defray other expenses.
For the fiscal year ended August 31, 1997, the Manager received a fee of
$155,818 from the MidCap Fund and reimbursed that Fund $83,969 which resulted in
a net management fee of $71,849; the Manager received a fee of $143,433 from the
500 Fund and reimbursed that Fund $151,316, which resulted in a net amount to
the Fund of $7,883 to defray other expenses; the Manager received a fee of
$15,081 from the SmallCap Fund and reimbursed that Fund $50,827, which resulted
in a net amount to the Fund of $35,746 to defray other expenses; the Manager
received a fee of $22,205 from the Equity Income Fund and reimbursed that Fund
$35,391, which resulted in a net amount to the Fund of $13,186 to defray other
expenses.
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<PAGE>
For the fiscal year ended August 31, 1998, the Manager received a fee of
$203,446 from the MidCap Fund and reimbursed that Fund $80,984 which resulted in
a net management fee of $122,462; the Manager received a fee of $217,634 from
the 500 Fund and reimbursed that Fund $173,969, which resulted in a net
management fee of $43,665; the Manager received a fee of $48,850 from the
SmallCap Fund and reimbursed that Fund $43,596, which resulted in a net
management fee of $5,254; the Manager received a fee of $57,707 from the Equity
Income Fund and reimbursed that Fund $15,526, which resulted in a net amount to
the Fund of $42,181 to defray other expenses.
For the fiscal year ended August 31, 1999, the Manager received a fee of
$212,287 from the MidCap Fund and reimbursed that Fund $89,438 which resulted in
a net management fee of $122,849; the Manager received a fee of $313,194 from
the 500 Fund and reimbursed that Fund $218,960, which resulted in a net
management fee of $94,234; the Manager received a fee of $47,058 from the
SmallCap Fund and reimbursed that Fund $38,043, which resulted in a net
management fee of $9,015; the Manager received a fee of $67,107 from the Equity
Income Fund and reimbursed that Fund $8,051, which resulted in a net amount to
the Fund of $59,056 to defray other expenses.
The Agreements with respect to the Funds are currently in effect until
January 31, 2000. Each Agreement will be in effect thereafter only if it is
renewed for each Fund for successive periods not exceeding one year by (i) the
Board of Trustees of the Trusts or a vote of a majority of the outstanding
voting securities of each 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.
Management Agreements may be terminated without penalty at any time by the
applicable Trust with respect to one or more of the Funds to which the relevant
Agreement applies (either by the applicable 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 each Fund's shares under an underwriting agreement with each
Fund, pursuant to which RFS Partners agrees to act as each Fund's distribution
agent. Each Fund's shares are sold to the public on a best efforts basis in a
continuous offering without a sales load or other commission or compensation.
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 Trust. Mr. McClanahan is a limited partner of RFS Partners.
While the shares of each Fund are offered directly to the public with no sales
charge, RFS Partners may, out of its own monies, compensate brokers who assist
in the sale of a Fund's shares. In addition, the Manager may, out of its own
monies, make cash contributions to tax-exempt charitable organizations which
invest in the Government Fund or the Treasury Trust.
Other Services
Firstar Mutual Fund Services, LLC is the shareholder servicing agent for
the Trusts and acts as the Trusts' transfer and dividend-paying agent. In such
capacities it performs many services, including portfolio and net asset
valuation, bookkeeping, and shareholder record-keeping.
Firstar Bank Milwaukee (the "Custodian") acts as custodian of the
securities and other assets of the Trusts. The Custodian does not participate in
decisions relating to the purchase and sale of portfolio securities.
Tait, Weller & Baker, Eight Penn Center Plaza, Suite 800, Philadelphia,
Pennsylvania 19103, are the independent auditors for the Trusts.
The validity of shares of beneficial interest offered hereby will be passed
on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th Floor,
San Francisco, California 94104.
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THE TRUSTS' POLICIES REGARDING BROKER-DEALERS
USED FOR PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the funds, assignment of their
portfolio business, and negotiation of commission rates and prices are made by
the Manager, whose policy is to obtain the "best execution" (prompt and reliable
execution at the most favorable security price) available. Since it is
anticipated that most purchases made by the funds (other than the Stock Funds)
will be principal transactions at net prices, the Funds will incur few or no
brokerage costs. The funds will deal directly with the selling or purchasing
principal or market maker without incurring charges for the services of a
broker-dealer on its behalf unless it is determined that a better price or
execution may be obtained by utilizing the services of a broker-dealer.
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 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 funds for which it exercises investment
discretion. In selecting broker-dealers and in negotiating commissions, the
Manager 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
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Manager under the Management
Agreements, to be useful in varying degrees, but of indeterminable value.
The funds 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. Where commissions paid
reflect research services and information furnished in addition to execution,
the Manager believes that such services were bona fide and rendered for the
benefit of its clients. There were no brokerage commissions paid by any of the
funds during the fiscal years ended August 31, 1992, 1993 or 1994. For the
fiscal year ended August 31, 1995, the 500 Fund paid $4,694 in brokerage
commissions and the MidCap Fund paid $4,091 in brokerage commissions. For the
fiscal year ended August 31, 1996, the 500 Fund paid $634 in brokerage
commissions and the MidCap Fund paid $4,945 in brokerage commissions. For the
fiscal year ended August 31, 1997, the 500 Fund paid $842 in brokerage
commissions, the MidCap Fund paid $9,878 in brokerage commissions, the Equity
Income Fund paid $550 in brokerage commissions and the SmallCap Fund paid
$44,210 in brokerage commissions. For the fiscal year ended August 31, 1998, the
500 Fund paid $728 in brokerage commissions, the MidCap Fund paid $6,229 in
brokerage commissions, the Equity Income Fund paid $327 in brokerage commissions
and the SmallCap Fund paid $5,309 in brokerage commissions. For the fiscal year
ended August 31, 1999, the 500 Fund paid $2,512 in brokerage commissions, the
MidCap Fund paid $10,102 in brokerage commissions, the Equity Income Fund paid
$3,255 in brokerage commissions and the SmallCap Fund paid $3,033 in brokerage
commissions.
Provided that the best execution is obtained, the sale of shares of any of
the funds may also be considered as a factor in the selection of broker-dealers
to execute the funds' portfolio transactions. No affiliates of the Funds or of
the Manager will receive commissions for business arising directly or indirectly
out of portfolio transactions of the funds.
If purchases or sales of securities of the funds are considered at or about
the same time, 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 a 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 a fund.
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<PAGE>
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES
Purchase Orders
The purchase price for shares of the funds 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 funds invest 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 shares
of the funds generally cannot be invested by the funds until they are converted
into and are available to a 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 a 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 a fund will be purchased at the net asset value
next determined after receipt of the order and payment. Once shares of a 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 Bank Milwaukee prior
to the close of the New York Stock Exchange (the "NYSE"), normally at 4:00 p.m.
Eastern time (1:00 p.m. 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 and such purchases will
be made at the net asset value next calculated after receipt of that payment.
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 relevant 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 for any fund at any time. To open
an account in the name of a corporation, a resolution of that corporation's
Board of Directors will be required. Other evidence of corporate status or the
authority of account signatories may be required.
Each Trust reserves the right to reject any order for the purchase of
shares of any fund, in whole or in part. In addition, the offering of shares of
any fund may be suspended by the relevant Trust at any time and resumed at any
time thereafter.
Shareholder Redemptions
All requests for redemption and all share assignments should be sent to the
applicable 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 certificates, 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.
The Trusts 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, each Trust reserves the right to
suspend redemptions or postpone the date of payment (1) for any periods during
which the New York Stock Exchange is closed (other than for the customary
weekend and holiday closings), (2) when trading in the markets the Trusts
usually utilize is restricted or an emergency exists, as determined by the
Securities and Exchange Commission ("SEC"), so that disposal of the Trust's
investments or the
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<PAGE>
determination of a 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 a
Trust's shareholders. Also, each Trust 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, the Trusts
understand that the New York Stock Exchange is closed for the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas. The Trusts have
been advised that the Custodian is also closed on Martin Luther King's Birthday.
On holidays in which the Custodian is closed, any transactions will be processed
on the following business day.
Due to the relatively high cost of handling small investments, each Trust
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose accounts in the Trust have an aggregate value of less than
$5,000 ($1,000 in the case of the Stock Funds), but only where the value of such
accounts has been reduced by such shareholder's prior voluntary redemption of
shares. In any event, before a Trust 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 accounts to at least $5,000
before the redemption is processed ($1,000 in the case of the Stock Funds).
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 a fund's shareholders should, within a short period,
elect to redeem their shares of that 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 terminated or suspended by the Funds upon 60-days prior notice
to shareholders.
Redemptions in Kind
Each 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 applicable 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 from which the shareholder is
redeeming in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of that fund or the
Trust. In such circumstances, the securities distributed would be valued at the
price used to compute such fund's net asset value. Should a fund do so, a
shareholder would likely incur transaction fees in converting the securities to
cash.
Determination of Net Asset Value Per Share ("NAV")
The valuation of the portfolio securities of the Money Fund and the
Treasury Trust (including any securities held in the separate account maintained
for when-issued securities) is based upon their amortized cost, which does not
take into account unrealized capital gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price such funds would
receive if they sold the instrument. During periods of declining interest rates,
the daily yield on shares of the Money Fund and the Treasury Trust computed as
described above may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based upon market
prices. Thus, if the use of amortized cost by such funds resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in such
fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
such fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The use of amortized cost by the Money Fund and the Treasury Trust, and the
maintenance of each Fund's per share net asset value at $1.00 is permitted by
Rule 2a-7 under the 1940 Act, pursuant to which each fund must adhere to certain
conditions.
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The Money Fund and the Treasury Trust each maintain a dollar-weighted
average portfolio maturity of 90 days or less, only purchase instruments having
remaining maturities of 397 days or less, and only invest in securities
determined by the Trustees to be of high quality with minimal credit risks. The
Trustees have also established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether each Fund's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation is examined by the Trustees. If such
deviation exceeds 1/2 of 1%, the Trustees will promptly consider what action, if
any, will be initiated. In the event the Trustees determine that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, which may include the sale
of portfolio securities prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, adjusting or withholding of dividends,
redemptions of shares in kind, or establishing a net asset value per share by
using available market quotations.
The portfolio securities of the Stock Funds are generally valued at the
last reported sale price. Securities held by the Stock Funds that have no
reported last sale for any day that a 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. Portfolio securities held by the Income Fund,
the Insured Fund and the Government Fund 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 Trusts may also utilize a pricing service,
bank, or broker/dealer experienced in such matters to perform any of the pricing
functions.
TAXATION
Provided that, as anticipated, each Tax-Free Fund qualifies as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of each Tax-Free Fund consists of Municipal
Obligations, each Tax-Free Fund may designate and pay exempt-interest dividends
from interest earned on such obligations. Such exempt-interest dividends may be
excluded by shareholders of the Tax-Free Funds from their gross income for
federal income tax purposes. Corporate shareholders must take all
exempt-interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax. Each
Tax-Free Fund might purchase municipal obligations at a discount from the prices
at which they were originally issued, especially during periods of rising
interest rates. For federal income tax purposes, some or all of this market
discount may be included in the Tax-Free Funds' ordinary income and will be
taxable to shareholders as such when it is distributed. If, at the close of each
quarter of its taxable year, at least 50% of the value of the total assets of
each Tax-Free Fund consists of obligations that produce interest that is exempt
from California personal income tax if received by an individual, and if each
maintains its qualification as a regulated investment company, then such
Tax-Free Fund will be qualified to pay exempt-interest dividends to its
shareholders that, to the extent they are attributable to interest received by
such Tax-Free Fund on such obligations, are exempt from California personal
income tax. The total amount of exempt-interest dividends paid by a Tax-Free
Fund to its shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on tax-exempt
obligations less any expenses attributable to such interest.
Provided the Treasury Trust qualifies as a regulated investment company and
meets certain requirements of California tax law, including the requirement
that, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets is invested in direct obligations of the United States
(or other U.S. and California tax-exempt obligations), then the Treasury Trust
will be qualified to pay dividends to its shareholders that, to the extent they
are attributable to interest received by the Treasury Trust on such U.S.
Government obligations, will be exempt from California personal
24
<PAGE>
income tax. Because the GNMA certificates in which the Government Fund primarily
invests are not considered direct obligations of the United States for this
purpose, the Government Fund does not expect to meet the 50% requirement; as a
result, dividends paid by the Government Fund will be subject to California
personal income tax.
Exempt-interest dividends paid to Tax-Free Fund shareholders that are
corporations subject to California franchise or income tax will be taxed as
ordinary income to such shareholders. Moreover, no dividend paid by the Tax-Free
Funds will qualify for the corporate dividends-received deduction for federal
income tax purposes.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of a Tax-Free Fund is not deductible for federal income tax
purposes. Under regulations used by the Internal Revenue Service (the "IRS") for
determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares of a Fund. California
personal income tax law restricts the deductibility of interest on indebtedness
incurred by a shareholder to purchase or carry shares of a fund paying dividends
exempt from California personal income tax, as well as the allowance of losses
realized upon a sale or redemption of shares, in substantially the same manner
as federal tax law (which is described in the Prospectus). Further, a Tax-Free
Fund may not be an appropriate investment for persons who are "substantial
users" of facilities financed by industrial revenue bonds or are "related
persons" of such users. Such persons should consult their tax advisers before
investing in one of the Tax-Free Funds.
Up to 85% of Social Security or railroad retirement benefits may be
included in federal taxable income for benefit recipients whose adjusted gross
income (including income from tax-exempt sources such as tax-exempt bonds and
the Tax-Free Funds) plus 50% of their benefits exceeds certain base amounts.
Income from the Tax-Free Funds, and others like them, is included in the
calculation of whether a recipient's income exceeds certain established amounts
but is not taxable directly. California does not impose personal income tax on
Social Security or railroad retirement benefits.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It can be expected that similar proposals may
be introduced in the future. Proposals by members of state legislatures may also
be introduced which could affect the state tax treatment of the Tax-Free Funds'
distributions. If such proposals were enacted, the availability of Municipal
Obligations for investment by the Tax-Free Funds and the value of the Tax-Free
Funds' portfolios would be affected. In such event, the Tax-Free Funds would
reevaluate their investment objectives and policies.
General
Each Fund is treated as a separate entity and intends to continue to
qualify in each year to be treated as a separate "regulated investment company"
under the Code. Each of these Funds has elected such treatment and has so
qualified during its last fiscal period ended August 31, 1999. To continue to
qualify for the tax treatment afforded a regulated investment company under the
Code, a 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 a 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. Each 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.
Each Stock 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 a 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.
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Code Section 1092, which applies to certain "straddles", may affect the
taxation of a Stock Fund's transactions in futures contracts. Under Section
1092, a fund may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in futures.
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 a fund have been held. The current maximum federal individual tax rate
applicable to ordinary income is 39.6%. The current maximum federal individual
tax rate applicable to net long-term capital gains is 20% for investments held
longer than 12 months. Dividends declared by a 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 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 each Stock 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 a 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 a fund that
qualifies for the deduction generally will be less than 100%. Each Stock 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 Income Fund, the Insured Fund and
the Government Fund may affect the amount, timing and character of their
distributions to shareholders.
Each 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 (except
redemptions of Money Fund and Treasury Trust shares) 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. Such withholding is not required with
respect to the Tax-Free Funds' dividends qualifying as "exempt-interest
dividends" but will apply to the proceeds of redemption or repurchase of Fund
(except Money Fund and Treasury Trust) shares for which the correct taxpayer
identification number has not been furnished in the manner required or if
withholding is otherwise applicable. 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 Funds and their 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 federal, state, local, or foreign taxation. Paul,
Hastings, Janofsky & Walker LLP 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 a Fund at rates up
to 30% (subject to reduction under certain income tax treaties).
YIELD DISCLOSURE AND PERFORMANCE INFORMATION
As noted in the Prospectus, each 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 Funds will
be in compliance 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 a fund be accompanied by
certain standardized performance information computed as required by the SEC. An
explanation of the methods used by the Funds to compute or express performance
is discussed below.
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Total Return
Total return for the funds 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 Income Fund, the Insured Fund and the Government 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 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:
n
P(1+T) = 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
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.
The average annual compounded rates of return, or total return, for the Income
Fund, the Government Fund, the Insured Fund, the 500 Fund, the MidCap Fund, the
SmallCap Fund and the Equity Income Fund for the following periods were:
One Year Five Years Ten Years Period From
Ended Ended Ended Inception*
August 31, August 31, through August 31, August 31,
Fund 1999 1999 1999 1999
- ---- ----------------------------------------------------------
Income Fund -1.05% 6.14% 7.11% 8.21%
Government Fund -2.39% 7.03% 8.29% 8.15%
Insured Fund 1.54% 5.32% N/A 5.38%
500 Fund 39.76% 24.92% N/A 19.53%
MidCap Fund 41.13% 18.62% N/A 16.41%
SmallCap Fund 22.90% N/A N/A 18.13%
Equity Income Fund 23.53% N/A N/A 7.77%
Yield
As stated in the Prospectus, a fund may also quote its current yield and,
where appropriate, effective yield and tax equivalent yield in advertisements
and investor communications.
The current yield for the Income Fund, Insured Fund, Government Fund and
the Equity Income Fund is determined by dividing the net investment income per
share earned during a specified 30-day period by the net asset value per share
on the last day of the period and annualizing the resulting figure, according to
the following formula:
6
Yield = 2[(((a-b)/cd)+1) - 1)] where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on the last day of the period.
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The current yield for the Income Fund, the Government Fund and the Insured
Fund for the 30-day period ended August 31, 1999, was 4.41%, 5.627% and 4.03%,
respectively.
The current yield for the Money Fund and the Treasury Trust is computed in
accordance with a standardized method which involves determining the net change
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of a specified 7-day period, subtracting a hypothetical
charge reflecting deductions of expenses, and dividing the net change or
difference by the value of the account at the beginning of the period to obtain
the base period return, and annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account does not
include realized gains and losses or unrealized appreciation and depreciation.
The Money Fund and the Treasury Trust may also quote an effective yield.
Effective yield is calculated by compounding the base period return (calculated
as described above) by adding 1, raising that sum to a power equal to 365
divided by 7, and subtracting 1 from the result, according to the following
formula:
(365/7)
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1.
- ---------------
* December 4, 1985 for the Income Fund and the Government Fund; October 20,
1992 for the Insured Fund; April 20, 1992 for the 500 Fund and the MidCap
Fund; September 4, 1996 for the Equity Income Fund; October 2, 1996 for the
SmallCap Fund.
The current yield and effective yield for the 7-day period ended August 31,
1999 was 2.41% and 2.54%, respectively, for the Money Fund, and 4.27% and 4.28%,
respectively, for the Treasury Trust.
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A tax equivalent yield demonstrates the taxable yield necessary to produce
an after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. The tax equivalent yields for the Treasury Trust and the Tax-Free
Funds are computed by dividing that portion of the current yield (or effective
yield) of each fund (computed for each fund as discussed for the current yield
indicated above) which is tax-exempt by one minus a stated income tax rate and
adding the product to that portion (if any) of the yield of the fund that is not
tax-exempt. In calculating tax equivalent yields, the Tax-Free Funds assume an
effective tax rate beginning in 1999 (combining federal and California rates) of
45.2%. The effective rate used in determining such yield does not reflect the
tax costs resulting from the loss of the benefit of personal exemptions and
itemized deductions that may result from the receipt of additional taxable
income by taxpayers with adjusted gross incomes exceeding certain levels. The
tax equivalent yield may be higher than the rate stated for taxpayers subject to
the loss of these benefits. The tax equivalent yield for the Income Fund for the
30-day period ended August 31, 1999, was 7.81%. The tax equivalent yield for the
Money Fund for the 7-day period ended August 31, 1999 was 4.60%. The tax
equivalent yield for the Treasury Trust (using an effective California tax rate
of 9.3%) for the 7-day period ended August 31, 1999 was 4.74. The tax equivalent
yield for the Insured Fund for the 30-day period ended August 31, 1999 was
6.91%.
Distribution Rate
Each 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 a 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, each
fund uses the same assumptions that apply to its calculation of yield. The
distribution rate will differ from a 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 a
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 a particular fund might satisfy his investment objectives.
The funds 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*XR, a mutual fund monitoring system, the 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 Government Fund may also quote (among others) the following indices of
bond prices prepared by Salomon Brothers Inc. These indices are not managed for
any investment goal. Their composition may, however, be changed from time to
time by Salomon Brothers Inc.
The Mortgage Pass-Through Index is an index of approximately 200
mortgage-related securities, including GNMAs, FNMAs, Freddie Macs, conventional
pass-through securities, and FHA project pools.
The Long-Term Corporate Index is an index of all outstanding corporate
bonds with more than twelve years remaining until maturity which currently
includes approximately thirty securities.
The High-Grade Corporate Index is an index of approximately 800 triple-a or
double-a rated corporate bonds with more than twelve years remaining until
maturity.
29
<PAGE>
The MidCap Fund, 500 Fund and SmallCap Fund each may compare its
performance to the performance of the MidCap Index, S&P 500, SmallCap Index,
respectively. Each such fund may compare its performance to the Value Line
Composite Index, the Russell 2000 and/or other widely recognized market indices.
These indices are unmanaged indices 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 a 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 of
5%, 7.5% and 10%.
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 a 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 a fund will continue its
performance as compared to any such averages.
MISCELLANEOUS INFORMATION
Shareholders of funds other than the Stock Funds who so request may have
their dividends paid out monthly in cash. Shareholders of the Stock Funds who so
request may have their dividends paid out quarterly in cash. If a shareholder
withdraws the entire amount in his Money Fund or Treasury Trust account at any
time during the month, all daily dividends accrued with respect to his account
during the month to the time of withdrawal will be paid in the same manner and
at the same time as the proceeds of withdrawal.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, each Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the relevant 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. Each Declaration of Trust also provides that
a 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. Each Declaration of Trust further provides that each
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 Trusts 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.
30
<PAGE>
As of November 30, 1999, the following shareholders, to the Trusts'
knowledge, owned beneficially more than 5% of a Fund's outstanding shares, as
noted:
<TABLE>
<CAPTION>
<S> <C>
MONEY FUND
Donald Fisher & Doris Fisher (10.2%)
One Maritime Plaza #1300
San Francisco, CA 94111-3503
William S. Fisher Trust (6.6%)
One Maritime Plaza #1300
San Francisco, CA 94111-3503
INSURED FUND:
Northern Trust Co. (10.5%) Deborah Murray (7.2%)
P.O. Box 92956 27 Makin Grade
Chicago, IL 60675 Ross, CA 94957
John Larson (7.6%) The Harold Messmer Family Trust (5.5%)
1 Market Plaza 2884 Sand Hill Rd., Suite 200
San Francisco, CA 94105 Menlo Park, CA 94025
GOVERNMENT FUND
Blush & Co. (8.9%)
P.O. Box 976
New York, NY 10268
TREASURY TRUST
William Edwards (12.3%) Edwin Callan (6.4%)
3000 Sand Hill Rd 71 Stevenson Street #1300
Menlo Park, CA 94025 San Francisco, CA 94105
D & DF Foundation (6.1%) Doris F Fisher Trust (4.2%)
1 Maritime Plaza Suite 1300 1 Maritime Plaza Suite 1300
San Francisco, California 94111-3503 San Francisco, California 94111-3503
S&P 500 FUND:
State Street CA Inc., Custodian (13.7%) Charles Schwab & Co.(7.0%)
FBO Cal/STRS 101 Montgomery Street
1001 Marina Village PKWY FL 3 San Francisco, CA 94104
Alameda, CA 94501
MIDCAP FUND:
Donald Fisher & Doris Fisher, Trustees (10.1%) Charles Schwab & Co. (9.6%)
Donald G. Fisher 1991 101 Montgomery Street
Charitable Remainder Trust 1 San Francisco, CA 94104
c/o Pisces Inc.
1 Maritime Plaza Suite 1300
San Francisco, CA 94111-3503
EQUITY INCOME FUND:
Timothy Abel (12.2%) Susan Ballinger (10.9%)
1331 B St. #B 50 Makin Grade
Hayward, CA 94541 Kentfield, CA 94904
Richard F. Shelton Trust (6.3%)
44 Montgomery Street, Suite 2100
San Francisco, CA 94104
31
<PAGE>
SMALLCAP FUND:
Alexander D Calhoun & (6.2%) FBO Spieker 1991 Trust(6.0%)
Charles S Lafollette Trust Michael McAuliffe Trust
Thomas B Calhoun 1992 Trust 1 Market Plaza STE 210
1 Maritime Plaza, Suite 300 San Francisco, CA 94105
San Francisco, CA 94111
Richard F. Shelton Trust Charles Schwab & Co. Inc. (9.1%)
Richard F. Shelton Trustee (5.7%) Reinvest Account
44 Montgomery Street, Suite 2100 101 Montgomery Street
San Francisco, CA 94104 San Francisco, CA 94104
</TABLE>
Although each fund is offering only its own shares by this joint Statement
of Additional Information and joint Prospectus, it is possible that a fund might
become liable for any mis-statements in this statement or in the Prospectus
about one of the other funds. The Boards of Trustees of each Trust have
considered this possibility in approving the use of a joint Prospectus and
Statement of Additional Information.
FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended August 31, 1998
for the Income Fund, the Money Fund, the Government Fund, the Treasury Trust,
the Insured Fund, the 500 Fund, the MidCap Fund, SmallCap Fund and the Equity
Income Fund as contained in their combined Report to Shareholders for the fiscal
year ended August 31, 1999 (the "Report"), are incorporated herein by reference
to the Report which has been filed with the Securities and Exchange Commission.
Any person not receiving the Report with this Statement should call or write the
funds to obtain a free copy.
APPENDIX
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols of
municipal securities.
Municipal Bonds
Moody's Investors Service:
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
32
<PAGE>
Baa: Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Conditional Rating: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA: Municipal bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates, and hence provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch Investor's Service:
AAA: Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affect by reasonably foreseeable events.
AA: Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities, and more subject to possible change
over the term of the issue.
33
<PAGE>
A: Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB: Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
Municipal Notes
Moody's:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of first importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used will be
as follows:
MIG-1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG-2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG-3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG-4: Notes are of adequate quality, carrying specific risk but having
protection and not being distinctly or predominantly speculative.
Standard & Poor's:
Until June 29, 1984, Standard & Poor's used the same rating symbols for notes
and bonds. After June 29, 1984, for new municipal note issues due in three years
or less the ratings below usually will be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Fitch:
Fitch Investment Note Ratings are grouped into four categories with the
indicated symbols. The ratings reflect Fitch's current appraisal of the degree
of assurance of timely payment, whatever the source.
FIN-1+: Notes assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
FIN-1: Notes assigned this rating reflect an assurance of timely payment only
slightly less than the strongest issues.
FIN-2: Notes assigned this rating have a degree of assurance for timely payment
but with a lesser margin of safety than the prior two categories.
34
<PAGE>
FIN-3: Notes with this rating have speculative characteristics which suggest
that the degree of assurance for timely payment is minimal.
Commercial Paper
Moody's:
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
P-3 (Prime-3): Acceptable capacity for repayment.
Standard & Poor's:
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
Fitch:
Fitch-1: Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment.
Fitch-2: Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than the strongest issues.
Fitch-3: Commercial paper carrying this rating has a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as the two
higher categories.
Fitch-4: Issues carrying this rating have characteristics suggesting that the
degree of assurance for timely payment is minimal and is susceptible to near
term adverse change due to less favorable financial or economic conditions.
35
<PAGE>
CALIFORNIA INVESTMENT TRUST II
FORM N-1A
------------------------------
PART C
OTHER INFORMATION
-------------------------------
<PAGE>
CALIFORNIA INVESTMENT TRUST II
FORM N-1A
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits.
---------
(a) Amended and Restated Agreement and Declaration of Trust as
incorporated by reference to Post-Effective Amendment No. 1 as filed
on November 25, 1985.
(b) By-Laws is incorporated by reference to the original Registration
Statement filed on September 27, 1985.
(c) Instrument Defining Rights of Security Holder -- Not applicable
(d) Investment Advisory Contract is incorporated by reference
Post-Effective Amendment No. 1 as filed on November 25, 1985.
(e) Underwriting Contract is incorporated by reference Post-Effective
Amendment No. 12 as filed on February 11, 1992.
(f) Bonus or Profit Sharing Contracts -- Not applicable
(g) Custodian Agreement is incorporated by reference Post-Effective
Amendment No. 1 as filed on November 25, 1985.
(h) Other Material Contracts -- Not applicable.
(i) Opinion and Consent of Counsel -- Not applicable.
(j) Other Opinion: Independent Auditors' Consent -- Filed herewith.
(k) Omitted Financial Statements -- Not applicable.
(l) Initial Capital Agreement is incorporated by reference Post-Effective
Amendment No. 1 as filed on November 25, 1985.
(m) Rule 12b-1 Plan -- Not applicable.
(n) Financial Data Schedule -- Not applicable.
(o) 18f-3 Plan -- Not applicable
C-1
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
--------------------------------------------------------------
As of the date of this Post-Effective Amendment, to the knowledge of
the Registrant, the Registrant did not control any other person, nor was it
under common control with another person.
Item 25. Indemnification.
----------------
Please see Article VI of By-Laws (previously filed as Exhibit 2(A))
and Article VII, Section 3 of the Agreement and Declaration of Trust, as amended
(previously filed as Exhibit 1). Pursuant to Rule 484 under the Securities Act
of 1933, as amended, the Registrant furnishes the following undertaking:
"Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue."
Notwithstanding the provisions contained in the Registrant's By-Laws,
in the absence of authorization by the appropriate court on the merits pursuant
to Sections 4 and 5 of Article VI of said By-Laws, any indemnification under
said Article shall be made by Registrant only if authorized in the manner
provided in either subsection (a) or (b) of Section 6 of Article VI.
C-2
<PAGE>
Item 26. Business and Other Connections of Investment Adviser.
-----------------------------------------------------
A. The Manager. CCM Partners, a California Limited Partnership, is the
Registrant's investment adviser with respect to these Funds. CCM Partners has
been engaged during the past two fiscal years as investment adviser of the
California Investment Trust, a diversified, open-end management investment
company, which comprises the following series: California Tax-Free Income Fund,
California Tax-Free Money Market Fund (from December, 1990 through February 27,
1993, CCM Partners served only as the administrator and not as adviser for this
fund), and California Insured Tax-Free Income Fund. The principal business
address of California Investment Trust is 44 Montgomery Street, Suite 2100, San
Francisco, California 94104.
From December, 1990 through February 27, 1993, CCM Partners also
served as investment adviser of the California Tax-Free Money Trust, a
registered management investment company. The principal business address of
California Tax-Free Money Trust is 6 St. James Avenue, Boston, Massachusetts
02116.
The officers of CCM Partners are Phillip W. McClanahan and Stephen C.
Rogers. Phillip W. McClanahan has served as an officer and Trustees of the
Registrant and California Investment Trust during the past two fiscal years.
Stephen C. Rogers has also served as an officer of the Registrant and California
Investment Trust since October 1994. Stephen C. Rogers was elected to the Board
as Secretary and Trustee on August 4, 1998. On October 26, 1999, Stephen C.
Rogers was elected as Chairman of the Board. For additional information, please
see Part A of this Registration Statement.
C-3
<PAGE>
Item 27. Principal Underwriters.
-----------------------
RFS Partners is the principal underwriter, and in that capacity
distributes the shares of the Funds. RFS Partners also serves as principal
underwriter for the California Investment Trust. Certain limited partners of RFS
Partners also serve as officers and/or trustees of the Registrant.
Item 28. Locations of Accounts and Records.
----------------------------------
The accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are
kept by the Registrant's Shareholder Servicing and Transfer Agent, Firstar
Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Item 29. Management Services.
--------------------
All management-related service contracts are discussed in Part A or
Part B of this Form N-1A.
Item 30. Undertakings.
-------------
(a) not applicable
(b) not applicable
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last
Annual Report to Shareholders, upon request and without charge.
(d) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act of 1940, as amended, which requires the
prompt convening of a meeting of shareholders to elect trustees
to fill vacancies in the Registrant's Board of Trustees in the
event that less than a majority of the Trustees have been elected
to such position by shareholders. Registrant has also undertaken
promptly to call a meeting of shareholders for the purpose of
voting upon the question of removal of Trustee or Trustees when
requested in writing to do so by the record holders of not less
than 10% of the Registrant's outstanding shares and to assist its
shareholders in communicating with other shareholders in
accordance with the requirements of section 16(c) of the
Investment Company Act of 1940, as amended.
C-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, the State of California, on the 29th day of October, 1999.
CALIFORNIA INVESTMENT TRUST II
------------------------------
(Registrant)
By Stephen C. Rogers*
-----------------------------
Stephen C. Rogers, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Capacity Date
- --------- -------- ----
Stephen C. Rogers* Principal Executive October 29, 1999
- ---------------------- Officer, Secretary and Trustee
Stephen C. Rogers
Phillip W. McClanahan* Principal Financial October 29, 1999
- ---------------------- and Accounting Officer
Phillip W. McClanahan and Trustee
Harry Holmes* Trustee October 29, 1999
- ----------------------
Harry Holmes
John B. Sias* Trustee October 29, 1999
- ----------------------
John B. Sias
Guy Rounsaville, Jr.* Trustee October 29, 1999
- ----------------------
Guy Rounsaville, Jr.*
* By: /s/ Julie Allecta
----------------------------------------
Julie Allecta, Attorney-in-Fact Pursuant
to Power of Attorney previously filed.
C-5
CALIFORNIA INVESTMENT TRUST II
EXHIBIT NO. 23(j)
CONSENT OF INDEPENDENT ACCOUNTANTS
(Tait, Weller & Baker)
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective
Amendment to the Registration Statement on Form N-1A of California Investment
Trust II and to the use of our report dated September 30, 1999 on the financial
statements and financial highlights of U.S. Government Securities Fund, The
United States Treasury Trust, S&P 500 Index Fund, and S&P MidCap Index, Equity
Income Fund, and S&P SmallCap Index Fund, each a series of shares of California
Investment Trust II. Such financial statements and financial highlights appear
in the 1999 Annual Report to Shareholders which are incorporated by reference in
the Registration Statement and Prospectus.
/s/ TAIT, WELLER & BAKER
------------------------
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
October 29, 1999