California
INVESTMENT TRUST
------------------
F U N D G R O U P
Prospectus
January 1, 2000
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
S&P 500 Index Fund
S&P MidCap Index Fund
S&P SmallCap Index Fund
Equity Income Fund
U.S. Government Securities Fund
The United States Treasury Trust
(800) 225-8778
www.caltrust.com
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.
email us at [email protected]
<PAGE>
California
INVESTMENT TRUST
------------------
F U N D G R O U P
Prospectus
January 1, 2000
TABLE OF CONTENTS
- -----------------
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 18
S&P SmallCap Index Fund 23
Equity Income Fund 28
U.S. Government Securities Fund 32
The United States Treasury Trust 36
INVESTING IN THE FUNDS
Buying Shares 41
Selling and Exchanging Shares 44
Other Policies 46
Dividends and taxes 47
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE INCOME FUND
Ticker Symbol: CFNTX
- --------------------------------------------------------------------------------
GOAL
Seek high current tax-free income for California residents.
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 Fund
invests in intermediate and long-term municipal bonds.
STRATEGY
The manager will invest in municipal bonds issued by the State of California and
various municipalities located within the state. Generally, these bonds are
rated in one of the four highest ratings (investment grade) by an independent
rating organization like Standard & Poor's, Moody's or Fitch. 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 similar
quality to an investment-grade issue. Generally, the interest on municipal bonds
is not subject to federal and California personal income taxes. Under normal
circumstances, it is the Fund's policy to invest at least 80% of its total
assets in California municipal bonds, but as a general rule the percentage is
much higher. The Fund maintains an average maturity between 3 and 12 years.
WHAT IS THE MANAGER'S APPROACH?
The 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 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 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.
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 a particular issuer as compared
with other types of mutual funds. Accordingly, the chance exists that the Fund's
performance may be hurt disproportionately by poor performance of a relatively
few number of 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 the California
Insured Intermediate Fund (our other municipal bond fund). Thus, the interest
rate risk is higher in this Fund than the other fund. The California Insured
Intermediate Fund is discussed in detail on page 5.
State Specific Risk, which is the chance that the Fund is more vulnerable to
unfavorable economic and political developments that impact the State of
California than funds that diversify across many states.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the Fund.
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 bond's 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 other mutual funds with similar investment objectives.
IS THIS FUND RIGHT FOR YOU?
This Fund is intended primarily for residents of California but may be held by
residents of other states. 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.
2
<PAGE>
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. These
figures assume that all distributions are reinvested. It is important to
remember that past performance does not accurately predict future performance.
[GRAPHIC OMITTED]
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%
Best Quarter:
(Q1, 1986) 11.11%
Worst Quarter:
(Q1, 1994) -7.42%
Year to date performance as of 11/30/99: -2.69%
Average Annual returns as of 12/31/98
- -------------------------------------
1 year 5 years 10 years
------ ------- --------
California Tax-Free Income Fund 6.32% 5.70% 8.04%
Lehman Municpal Bond Index 6.48% 6.22% 8.22%
Date of inception: 12/4/85
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.47%
Distribution (12b-1 fees) fees none
Other expenses 0.14%
-----
TOTAL ANNUAL FUND OPERATING EXPENSE 0.61%
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
3
<PAGE>
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $62 $196 $341 $764
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...... $ 13.18 $ 12.86 $ 12.31 $ 12.22 $ 12.17
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................. 0.56 0.58 0.60 0.62 0.61
Net gain (loss) on securities
(both realized and unrealized) ...... (0.68) 0.51 0.54 0.09 0.30
---------- ---------- ---------- ---------- ----------
Total from investment operations .. (0.12) 1.09 1.14 0.71 0.91
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.57) (0.58) (0.59) (0.62) (0.66)
Distribution from capital gains ....... (0.09) (0.19) .--- .--- (0.20)
---------- ---------- ---------- ---------- ----------
Total distributions ............... (0.66) (0.77) (0.59) (0.62) (0.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ............ $ 12.40 $ 13.18 $ 12.86 $ 12.31 $ 12.22
========== ========== ========== ========== ==========
Total return ............................ (1.07)% 8.75% 9.48% 5.40% 8.01%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .... $ 200,946 $ 225,507 $ 212,198 $ 194,926 $ 196,046
Ratio of expenses to average net assets
Before expense reimbursements ....... 0.61% 0.61% 0.59% 0.60% 0.62%
After expense reimbursements ........ 0.61% 0.61% 0.59% 0.60% 0.62%
Ratio of net investment income
to average net assets
Before expense reimbursements ....... 4.33% 4.47% 4.75% 4.96% 5.13%
After expense reimbursements ........ 4.33% 4.47% 4.75% 4.96% 5.13%
Portfolio Turnover ...................... 16.36% 20.95% 34.96% 10.34% 32.21%
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA INSURED INTERMEDIATE FUND
Ticker Symbol: CATFX
- --------------------------------------------------------------------------------
GOAL
Seek high current tax-free income for California residents.
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 Fund
invests primarily in municipal securities that are covered by insurance
guaranteeing the timely payment of principal and interest.
STRATEGY
The manager will invest in municipal bonds issued by the State of California and
various municipalities located within the state. Generally, these bonds are
rated AAA (the highest rating) by an independent rating organization like
Standard & Poor's, Moody's or Fitch; and are 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 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 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 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 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. Under normal circumstances, it is the Fund's policy to invest at least
80% of its total assets in California municipal bonds, but as a general rule the
percentage is much higher. 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.
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 a particular issuer as compared
with other types of mutual funds. Accordingly, the chance exists that the Fund's
performance may be hurt disproportionately by poor performance of a relatively
few number of 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. 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. The California Tax-Free Income Fund is
discussed in detail on page 1.
State Specific Risk, which is the chance that the Fund is more vulnerable to
unfavorable economic and political developments that impact the State of
California than mutual funds that diversify across many states.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the Fund.
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 bond's 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
interest. It is important to note that the insurance protects the Fund's
holdings, not the Fund itself.
Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other mutual funds with similar investment objectives.
IS IT RIGHT FOR YOU?
This Fund is intended primarily for residents of California. 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 less than our other tax-free bond fund, but
will pay a lower rate of dividends.
6
<PAGE>
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. 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%
Best Quarter: (Q1 1995) 5.64%
Worst Quarter: (Q1 1994) -4.85%
Year to date performance as of 11/30/99: 0.13%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year 5 years Inception
------ ------- ---------
California Insured Intermediate Fund 5.97% 4.94% 6.02%
Lehman 5 Year Muni Bond Index 5.84% 5.28% 5.90%
date of inception: 10/20/92
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distribution (12b-1) fees none
other expenses 0.16%
-----
Total Annual operating expenses 0.66%
Expense reimbursement* 0.11%
TOTAL ANNUAL FUND OPERATING EXPENSE* 0.55%
*The manager has agreed to limit the Fund's expenses at 0.55%. This limitation
is guaranteed though 12/31/00.
7
<PAGE>
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $56 $200 $357 $812
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
8
<PAGE>
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET FUND
Ticker Symbol: CAXXX
- --------------------------------------------------------------------------------
GOAL
Seek high current tax-free income for California residents while maintaining a
stable $1.00 share price.
The 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.
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 must generally be
rated in one of the two highest credit quality categories for short-term
securities by at least two nationally recognized rating services like Standard &
Poor's, Moody's or Fitch (or by one, if only one credit rating service has rated
the security). If unrated, the security must be determined by the manager to be
of a equivalent quality to those in the two highest credit-quality ratings.
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 mutual funds. Accordingly, the chance exists that the Fund's
performance may be hurt disproportionately by poor performance of a relatively
few number of securities. The Fund is also subject to:
State Specific Risk, which is the chance that the Fund is more vulnerable to
unfavorable economic and political developments that impact the State of
California than funds that diversify across many states.
9
<PAGE>
Interest rate risk, which is the chance that interest rates will decline and the
Fund will produce less income. There is a chance that dramatic interest rate
movements could lower the share price to a value less than one dollar.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid 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 purchased to protect investors from credit risk
of the issuers.
Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other mutual funds with similar investment objectives.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the $1.00 share price, it is possible to lose money by investing in the
Fund.
IS IT RIGHT FOR YOU?
This Fund is intended primarily for residents of California. If you are looking
for tax-free income and want to avoid share price fluctuation, this Fund may be
right for you. Investors in this Fund do not pay personal income tax on the
dividends paid. Your investment time frame may be short or long-term in nature.
This Fund is designed as a cash management account and offers a free
checkwriting feature.
PERFORMANCE
Below are a chart and a table showing the variability of 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]
1989 6.23%
1990 4.23%
1991 5.63%
1992 2.69%
1993 2.17%
1994 2.46%
1995 3.38%
1996 3.07%
1997 3.13%
1998 2.87%
10
<PAGE>
Best Quarter:
(Q2 1989) 1.67%
Worst Quarter:
(Q3 1994) 0.48%
Year to date performance as of 11/30/99: 2.32%
Average Annual returns as of 12/31/98
- -------------------------------------
1 year 5 years 10 years
------ ------- --------
California Tax-Free Money Market Fund 2.87% 2.98% 3.58%
Date if inception: 12/4/85
Seven day yield as of 11/30/99: 3.06%
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder fees
Sales and redemption charges none
Annual Operating Expenses
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distributtion (12b-1) fees none
other expenses 0.11%
Total Annual operating expenses 0.61%
Expense reimbursement* 0.21%
Total annual fund 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.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $41 $174 $319 $742
11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
CALIFORNIA TAX-FREE MONEY MARKET FUND Year Ended August 31,
----------------------------------------------------------------------
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%
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
S&P 500 INDEX FUND
Ticker Symbol: SPFIX
- --------------------------------------------------------------------------------
GOAL
Replicate the total return of the U.S. stock market as measured by the S&P 500
Composite Stock Index.
The 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.
STRATEGY
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.
In order to meet the investment goal, the Fund is passively managed. It invests
primarily in the stocks that make up of the index so that the weighting of each
stock in the portfolio approximates the index. The manager's goal is to maintain
a return correlation of at least .95 to the S&P 500 Index (a return correlation
of 1.0 is perfect). Under normal circumstances, it is the Fund's policy to
invest at least 80% of its total assets in the underlying stocks of the index.
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 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
index, the Fund will generally underperform the index.
------------------------------------
SECTOR BREAKDOWNS
as of December 1999
Industry % of Fund
Capital good 6.0 %
Consumer cyclical 7.5 %
Consumer non-durable 22.0 %
Banking & financial service 13.6 %
Utility 10.3 %
Service 0.8 %
Transportation 0.9 %
Manufacturing 6.1 %
Technology 27.0 %
Energy 5.8 %
------------------------------------
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 benchmark for the entire stock
market. The individual stocks that make up the index have market values ranging
in size from $387 million to $559 Billion. The median market value is $7.8
billion.
The index is made up of stocks from many diverse industries. The industry table
above gives you a general idea of the exposure to specific sectors.
13
<PAGE>
MAIN RISKS
The stock market goes up and down every day. As with any investment whose
performance is linked to these markets, the value of the Fund will change.
During a declining stock market, an investment in this Fund would lose money.
The Fund is primarily invested in the U.S. stock market and is designed to
passively track the performance of the LargeCap sector. In an attempt to
accurately track the performance of the S&P 500 Index, the Fund does not intend
to take steps to reduce its market exposure in any market.
Many factors will affect the performance of the stock market. Two major factors
are economic and political news. The impact of positive or negative events could
be short-term (by causing a change in the market that is corrected in a year or
less) or long-term (by causing a change in the market that lasts for many
years). Events may affect one sector of the economy or a single stock, but may
not have a significant impact on the overall market.
The Fund invests in large 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
economic sector. However, during periods where alternative investments such as
MidCap stocks, SmallCap stocks, bonds and money market instruments outperform
LargeCap stocks, we expect the performance of the Fund to underperform other
mutual funds that invest in these alternative categories.
The S&P 500 Index is a capitalization weighted index, meaning companies are
weighted based on their size. Thus, poor performance of the largest companies
could result in negative performance of the index and the Fund.
Although the Fund's 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 index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If these
futures contracts do not track the index, the Fund's performance relative to the
index will change.
Some mutual funds lend portfolio securities in order to offset expenses. The
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 share price of the
Fund.
OTHER RISKS OF THE FUND
Under normal circumstances the Fund may follow a number of investment policies
to achieve its objective. The Fund may invest in stock futures. Losses (or
gains) involving futures can sometimes be substantial - in part because a
relatively small price movement in a futures contract may result in an immediate
and
14
<PAGE>
substantial loss (or gain) for the Fund. In an effort to minimize this risk, the
Fund usually will not use futures for speculative purposes or as leverage. It is
the Fund's policy to hold cash deposits equal or greater than the total market
value of any futures position. The value of all futures and options contracts in
which the Fund acquires an interest will not exceed 20% of current total assets.
IS IT RIGHT FOR YOU?
If you are looking for a diversified stock fund, this Fund may be right for you.
You should be comfortable with the volatility 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 should not try to use the Fund to time movements in the overall stock
market. Since trading can increase the Fund's operating expenses, it is strongly
discouraged.
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. 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%
Best Quarter: (Q4 1998) 21.50%
Worst Quarter: (Q3 1998) -9.86%
Year to date performance as of 11/30/99: 14.13%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year 5 years Inception
------ ------- ---------
CIT S&P 500 Index Fund 28.75% 23.82% 20.25%
S&P 500 Composite Stock Price Index 28.58% 24.03% 20.44%
Date of inception: 4/20/92
15
<PAGE>
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.25%
Distribution (12b-1) fees none
other expenses 0.12%
-----
Total Annual operating expenses 0.37%
Expense reimbursement* 0.17%
-----
TOTAL ANNUAL FUND 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.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $30 $132 $241 $551
"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 Fund. The Fund is not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
Funds.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
S&P 500 INDEX FUND Year Ended August 31,
----------------------------------------------------------------------
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>
17
<PAGE>
- --------------------------------------------------------------------------------
S&P MIDCAP INDEX FUND
Ticker Symbol: SPMIX
- --------------------------------------------------------------------------------
GOAL
Replicate the performance of medium-sized U.S. companies as measured by the S&P
MidCap 400 Index.
The 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.
STRATEGY
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.
In order to meet the investment goal, the Fund is passively managed. It invests
primarily in the stocks that make up the S&P MidCap Index so that the weighting
of each stock in the portfolio approximates the index. The manager's goal is to
maintain a return correlation of at least .95 to the S&P MidCap Index (a return
correlation of 1.0 is perfect).Under normal circumstances, it is the Fund's
policy to invest at least 80% of its total assets in the underlying stocks of
the index. 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 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
index, the Fund will generally underperform the index.
----------------------------------------
Sector Breakdowns
as of December 1999
Industry % of index
Capital good 3.5 %
Consumer cyclical 6.1 %
Consumer non-durable 22.6 %
Banking & financial service 12.6 %
Utility 10.2 %
Service 3.9 %
Transportation 2.3 %
Manufacturing 8.7 %
Technology 25.1 %
Energy 5.0 %
----------------------------------------
MIDCAP STOCKS
The stocks that are represented in the S&P MidCap 400 Index make-up roughly 6%
of the total market value of publicly traded stocks in the United States. The
S&P MidCap 400 Index was designed to track the overall performance of the MidCap
sector. The individual stocks that make up the index have total market values
ranging in size from $173 million to $18 billion. The median market value is
$1.5 billion.
The index is made up of stocks from many diverse industries. The industry table
above gives you a general idea of the exposure to specific sectors.
18
<PAGE>
MAIN RISKS
The stock market goes up and down every day. As with any investment whose
performance is linked to these markets, the value of the Fund will change.
During a declining stock market, an investment in this Fund would lose money.
The Fund is primarily invested in the U.S. stock market and is designed to
passively track the performance of the MidCap sector. In an attempt to
accurately track the performance of the S&P MidCap 400 Index, the Fund does not
intend to take steps to reduce its market exposure in any market.
Many factors will affect the performance of the stock market. Two major factors
are economic and political news. The impact of positive or negative events could
be short-term (by causing a change in the market that is corrected in a year or
less) or long-term (by causing a change in the market that lasts for many
years). Events may affect one sector of the economy or a single stock, but may
not have a significant impact on the overall market.
The Fund invests in medium-sized 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 economic sector. However, during periods where alternative investments
such as LargeCap stocks, SmallCap stocks, bonds and money market instruments
out-perform MidCap stocks, we expect the performance of the Fund to underperform
other mutual funds that invest in these alternative categories.
The S&P MidCap Index is a capitalization weighted index, meaning companies are
weighted based on their size. Thus, poor performance of the largest companies
could result in negative performance of the index and the Fund.
Although the Fund's 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 index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If these
futures contracts do not track the index, the Fund's performance relative to the
index will change.
Some mutual funds lend portfolio securities in order to offset expenses. The
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 share price of the
Fund.
OTHER RISKS OF THE FUND
Under normal circumstances the Fund may follow a number of investment policies
to achieve its objective. The Fund may invest in stock futures. Losses (or
gains) involving futures can sometimes be substantial - in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for the Fund. In an effort to minimize this risk,
the Fund
19
<PAGE>
usually will not use futures for speculative purposes or as leverage. It is the
Fund's policy to hold cash deposits equal or greater than the total market value
of any futures position. The value of all futures and options contracts in which
the Fund acquires an interest will not exceed 20% (35% if under 25 million in
total net assets) of current total assets.
IS IT RIGHT FOR YOU?
If you are looking for a diversified stock fund, this Fund may be right for you.
You should be comfortable with the volatility 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 should not try to use the Fund to time movements in the overall stock
market. Since trading can increase the Fund's operating expenses, it is strongly
discouraged.
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. 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%
Best Quarter: (Q4 1998) 27.54%
Worst Quarter: (Q3 1998) -14.55
Year to date performance as of 11/30/99: 8.47%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year 5 years Inception
------ ------- ---------
CIT S&P MidCap Index Fund 18.49% 18.43% 17.96%
S&P MidCap 400 Index 19.09% 18.82% 17.83%
date of inception: 4/20/92
20
<PAGE>
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.40%
Distributtion (12b-1) fees none
other expenses 0.17%
-----
Total Annual operating expenses 0.57%
Expense reimbursement* 0.17%
-----
TOTAL ANNUAL FUND 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.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $51 $196 $351 $797
"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 Fund. The Fund is not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the Fund.
21
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
S&P MIDCAP INDEX FUND Year Ended August 31,
----------------------------------------------------------------------
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>
22
<PAGE>
- --------------------------------------------------------------------------------
S&P SMALLCAP INDEX FUND
Ticker Symbol: SMCIX
- --------------------------------------------------------------------------------
GOAL
Replicate the performance of small-sized U.S. companies as measured by the S&P
SmallCap 600 Stock Index.
The 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.
STRATEGY
The S&P SmallCap 600 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.
In order to meet the investment goal, the Fund is passively managed. It invests
primarily in the stocks that make up of the S&P SmallCap Index so that the
weighting of each stock in the portfolio approximates the index. The manager's
goal is to maintain a return correlation of at least .95 to the S&P SmallCap
Index (a return correlation of 1.0 is perfect). Under normal circumstances, it
is the Fund's policy to invest at least 80% of its total assets (65% if assets
are less than $25 million) in the underlying 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 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
index, the fund will generally underperform the index.
----------------------------------------
Sector Breakdowns
as of December 1999
Industry % of index
Capital good 7.0 %
Consumer cyclical 9.6 %
Consumer non-durable 20.1 %
Banking & financial service 12.0 %
Utility 3.6 %
Service 4.7 %
Transportation 3.4 %
Manufacturing 15.8 %
Technology 20.2 %
Energy 3.6 %
----------------------------------------
SMALLCAP STOCKS
The stocks that are represented in the S&P 600 SmallCap 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
$24 million to $3.5 billion. The median market value is $438 million.
Over long periods of time, SmallCap stocks have generally outperformed other
segments of the market. In doing so, they also have more volatility in share
price. While many investors believe SmallCap stocks are the best choice for
long-term holdings, there can be no assuarance that this trend will continue.
23
<PAGE>
MAIN RISKS
The stock market goes up and down every day. As with any investment whose
performance is linked to these markets, the value of the Fund will change.
During a declining stock market, an investment in this Fund would lose money.
The Fund is primarily invested in the U.S. stock market and is designed to
passively track the performance of the MidCap sector. In an attempt to
accurately track the performance of the S&P SmallCap 600 Index, the Fund does
not intend to take steps to reduce its market exposure in any market.
Many factors will affect the performance of the stock market. Two major factors
are economic and political news. The impact of positive or negative events could
be short-term (by causing a change in the market that is corrected in a year or
less) or long-term (by causing a change in the market that lasts for many
years). Events may affect one sector of the economy or a single stock, but may
not have a significant impact on the overall market.
The Fund invests in small-sized 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 economic sector. However, during periods where alternative investments
such as LargeCap stocks, MidCap stocks, bonds and money market instruments
outperform SmallCap stocks, we expect the performance of the Fund to
underperform other mutual funds that invest in these alternative categories.
The S&P SmallCap Index is a capitalization weighted index, meaning companies are
weighted based on their size. Thus, poor performance of the largest companies
could result in negative performance of the index and the Fund.
Although the Fund's 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 index. For example, the Fund invests in
futures contracts to the extent that it holds cash in the portfolio. If these
futures contracts do not track the index, the Fund's performance relative to the
index will change.
Some funds lend portfolio securities in order to offset expenses. The 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 share price of the Fund.
OTHER RISKS OF THE FUND
Under normal circumstances the Fund may follow a number of investment policies
to achieve its objective. The Fund may invest in stock futures. Losses (or
gains) involving futures can sometimes be substantial - in part because a
relatively small price movement
24
<PAGE>
in a futures contract may result in an immediate and substantial loss (or gain)
for the Fund. In an effort to minimize this risk, the Fund usually will not use
futures for speculative purposes or as leverage. It is the Fund's policy to hold
cash deposits equal or greater than the total market value of any futures
position. The value of all futures and options contracts in which the Fund
acquires an interest will not exceed 20% (35% if under 25 million in total net
assets) of current total assets.
IS IT RIGHT FOR YOU?
If you are looking for a diversified stock fund, this Fund may be right for you.
You should be comfortable with the volatility 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 should not try to use the Fund to time movements in the overall market.
Since trading can increase the Fund's operating expenses, it is strongly
discouraged.
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. 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%
Best Quarter: (Q2 1997) 17.68%
Worst Quarter: (Q3 1998) -20.77%
Year to date performance as of 11/30/99: 4.15%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year Inception
------ ---------
CIT S&P SmallCap Index Fund -2.91% 10.18%
S&P SmallCap 600 Index -1.32% 12.40%
date of inception: 10/2/96
25
<PAGE>
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distribution (12b-1) fees none
other expenses 0.55%
-----
Total Annual operating expenses 1.05%
Expense reimbursement* 0.40%
-----
TOTAL ANNUAL FUND OPERATING EXPENSE 0.65%
*The manager has limited the fund's expenses at 0.650% since the Fund's
inception. This limitation is guaranteed though 12/31/00.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $66 $294 $540 $1,245
"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 Fund. The Fund is not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the Fund.
26
<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.
<TABLE>
<CAPTION>
Year Ended October 2,
S&P SmallCap Index Fund August 31, 1996* to
1999 1998 August 31, 1997
-------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
- ------------------
* Commencement of operations
** Annualized
27
<PAGE>
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
Ticker Symbol: EQTIX
- --------------------------------------------------------------------------------
GOAL
Achieve a high level of income and capital appreciation (when consistent with
high income) by investing primarily in income-producing U.S. equity securities.
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.
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 medium and
large U.S. corporations. It is the Fund's policy that under normal circumstances
it will invest at least 80% of its total assets (65% if total assets are less
than $25 million) in 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 liquidity needs.
The Fund will invest in futures contracts when the manager wants to remain fully
invested in the market. Utilizing futures allows the manager to maintain a high
percentage of the portfolio in the market while maintaining cash for liquidity
needs.
----------------------------------------
Sector Breakdowns
as of December 1999
Industry % of index
Capital good 7.6 %
Consumer cyclical 4.1 %
Consumer non-durable 14.1 %
Banking & financial service 24.8 %
Utility 11.5 %
Service 0.6 %
Transportation 0.6 %
Manufacturing 11.3 %
Technology 16.7 %
Energy 8.7 %
----------------------------------------
VALUE STOCKS
The fund invests primarily in value stocks. It will attempt to manage the assets
so that the average dividend yield of the stocks held will be at least 50%
greater than the yield of the S&P 500 Index. "Value stock" is a term used to
describe a stock that pays a higher dividend. Over long periods of time, value
stocks have demonstrated lower volatility as compared to the overall market.
The Fund is made up of stocks from many diverse industries. The table above
gives you a general idea of the exposure to specific sectors.
28
<PAGE>
MAIN RISKS
The stock market goes up and down every day. As with any investment whose
performance is linked to these markets, the value of the Fund will change.
During a declining stock market, an investment in this Fund would lose money.
The Fund is primarily invested in U.S. value stocks and is designed to provide a
dividend yield as well as potential for capital appreciation.
Many factors will affect the performance of the stock market. Two major factors
are economic and political news. The impact of positive or negative events could
be short-term (by causing a change in the market that is corrected in a year or
less) or long-term (by causing a change in the market that lasts for many
years). Events may affect one sector of the economy or a single stock, but may
not have a significant impact on the overall market.
The Fund invests in large and medium-sized 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 economic sector. However, during periods where alternative investments
such as growth stocks, SmallCap stocks, bonds and money market instruments
out-perform value stocks, we expect the performance of the Fund to underperform
other mutual funds that invest in these alternative categories.
The Fund's primary risks are associated with changes in the stock market,
however, there are other risks associated with the Fund. For example, the Fund
may invest in futures contracts to the extent that it holds cash in the
portfolio. If these futures contracts owned by the Fund do not perform well, the
Fund's performance will be impacted
Some mutual funds are able to lend portfolio securities in order to offset
expenses. The 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.
OTHER RISKS OF THE FUND
Under normal circumstances the Fund may follow a number of investment policies
to achieve its objective. The Fund may invest in stock futures. Losses (or
gains) involving futures can sometimes be substantial - in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for the Fund. In an effort to minimize this risk,
the Fund usually will not use futures for speculative purposes or as leverage.
It is the Fund's policy to hold cash deposits equal or greater than the total
market value of any futures position. The value of all futures and options
contracts in which the Fund acquires an interest will not exceed 20% (35% if
under 25 million in total net assets) of current total assets.
IS IT RIGHT FOR YOU?
If you are looking for a conservative, value oriented stock Fund, this fund may
be right for you. You should be comfortable with the changing values of the
stock market and
29
<PAGE>
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 should not try to use the Fund to time movements in the overall
market. Since trading can increase the Fund's operating expenses, it is strongly
discouraged.
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark index. 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%
Best Quarter: (Q4 1998) 17.08%
Worst Quarter:(Q3 1998) -14.56%
Year to date performance
as of 11/30/99: 0.12%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year Inception
------ ---------
CIT Equity Income Fund 13.15% 23.19%
S&P/BARRA Value Index 14.67% 25.22%
date of inception: 9/4/96
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distribution (12b-1) fees none
other expenses 0.36%
-----
Total Annual operating expenses 0.86%
Expense reimbursement* 0.06%
-----
TOTAL ANNUAL FUND 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.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
30
<PAGE>
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $82 $268 $471 $1,055
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.
<TABLE>
<CAPTION>
Year Ended September 4,
EQUITY INCOME FUND August 31, 1996* to
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 ....................... 54.03% 41.23% 2.80%
</TABLE>
- ----------------------
* Commencement of operations
** Annualized
31
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND
Ticker Symbol: CAUSX
- --------------------------------------------------------------------------------
GOAL
Maximize current income for investors.
The 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").
STRATEGY
The Fund invests primarily in high-quality bonds whose interest is guaranteed by
the full faith and credit of the United States government and its agencies or
instrumentalities.
WHAT IS THE MANAGER'S APPROACH?
The 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 for a bond fund includes both income
and price gains or losses. Under normal circumstances, it is the Fund's policy
to invest at least 65% of its total assets in securities issued by the U.S.
government and its agencies or instrumentalities, but as a general rule the
percentage is much higher. 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.
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. This is the
primary risk of this Fund.
Income risk, which is the chance that declining interest rates will reduce the
amount of income paid by the Fund over long periods of time.
32
<PAGE>
Prepayment risk is similar to call risk. In the case of GNMA securities,
payments to the Fund are based on payments from the underlying mortgages. During
periods where homeowners refinance their martgages, these securities are paid
off and the Fund may have to reinvest the principal in lower yielding
securities. This would reduce the income generated from the portfolio.
Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other mutual funds with similar investment objectives.
The Fund invests in intermediate and long-term fixed income securities. During
periods where alternative investments such as stocks and money market
instruments out perform bonds, we expect the performance of the Fund to
underperform other mutual funds that invest in these alternative categories.
IS IT RIGHT FOR YOU?
If you are looking for a conservative income fund, this Fund may be right for
you. You should be comfortable with the changing values of the bond market and
the risk that your investment could decline in value. Your investment time frame
should be long-term in nature. This Fund is better used as a passive investment,
meaning that you should not try to use the Fund to time movements in the overall
market.
PERFORMANCE
Below are a chart and a table showing the variability of the Fund's performance.
The table compares the performance of the Fund with a benchmark 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]
1989 13.49%
1990 8.59%
1991 17.49%
1992 8.36%
1993 15.79%
1994 -6.99%
1995 23.35%
1996 -0.48%
1997 9.33%
1998 12.08%
Best Quarter: (Q2 1989) 7.33%
Worst Quarter: (Q1 1996) -5.89%
Year to date performance as of 11/30/99: -4.26%
Average Annual returns as of 12/31/98
- ------------------------------------- 1 year 5 years 10 years
------ ------- --------
US Government Securities Fund 12.08% 6.95% 9.78%
Lehman Brothers Treasury Index 10.03% 7.20% 9.17%
Lehman Brothers GNMA Treasury Index 1.96% 7.90% 9.24%
Date of inception: 12/5/85
33
<PAGE>
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
Annual Operating Expenses
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distributtion (12b-1) fees none
other expenses 0.16%
-----
Total Annual operating expenses 0.66%
Expense reimbursement* 0.01%
-----
TOTAL ANNUAL FUND 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.
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $66 $210 $367 $822
34
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
35
<PAGE>
- --------------------------------------------------------------------------------
THE UNITED STATES TREASURY TRUST
Ticker Symbol: USTXX
- --------------------------------------------------------------------------------
GOAL
Maximize current income for investors and maintain a stable $1.00 share price.
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.
STRATEGY
The Fund primarily invests its assets in high-quality, short-term Treasury bills
whose interest is guaranteed by the full faith and credit of the United States
government. The Fund generally buys only securities that mature in 13 months or
less. The Fund's weighted average maturity will generally be less than 90 days.
WHAT IS THE MANAGER'S APPROACH?
The 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.
MAIN RISKS
The Fund is subject to some risks 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. In an extreme case, a short-term
movement could potentially change the Fund's share price to something other than
the $1.00 target.
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 other mutual funds with similar investment objectives.
The securities that the Fund holds are backed by the full faith and credit of
the United States federal government and are those that the manager believes do
not represent credit risk to the Fund. It is important to note that the U.S.
government backs the securities held by the Fund, but not the Fund itself.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. Although the Fund seeks
to preserve the $1.00 share price, it is possible to lose money by investing in
the Fund.
36
<PAGE>
IS IT RIGHT FOR YOU?
The Fund may be appropriate for those seeking a cash management account and very
conservative investors who wish to protect their investment 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.
PERFORMANCE
Below are a chart and a table showing the variability of 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]
1989 5.67%
1990 7.80%
1991 5.82%
1992 3.48%
1993 2.81%
1994 3.70%
1995 5.32%
1996 4.90%
1997 3.30%
1998 4.74%
Best Quarter:
(Q2 1993) 0.68%
Worst Quarter:
(Q3 1989) 2.07%
Year to date performance as of 11/30/99:
- -3.98%
Average Annual returns as of 12/31/98 Since
- ------------------------------------- 1 year 5 years Inception
------ ------- ---------
The United States Treasury Trust 4.74% 4.71% 5.07%
Date of inception: 4/26/89
Seven day yield as of 11/30/99: 4.64%
FUND FEES & EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
Sales and redemption charges none
Annual Operating Expenses
(expenses that are deducted from Fund assets)
Management fees 0.50%
Distribution (12b-1) fees none
other expenses 0.13%
-----
Total Annual operating expenses 0.63%
Expense reimbursement* 0.23%
-----
TOTAL ANNUAL FUND OPERATING EXPENSE 0.40%
*The manager has agreed to limit the fund's expenses at 0.40% . This limitation
is guaranteed though 12/31/00.
37
<PAGE>
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Fund $41 $174 $328 $764
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 fiscal 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>
38
<PAGE>
FUND MANAGEMENT
The portfolio manager for the Funds is CCM Partners, 44 Montgomery Street, Suite
2100, San Francisco, CA 94104. CCM Partners manages $650 million in mutual fund
assets and has been managing mutual funds since 1985. CCM Partners is
responsible for managing the portfolios and handling the administrative duties
of the Funds. As compensation for these services, CCM Partners receives a
management fee from each Fund. For the period ended 8/31/99 the fees were 0.47%
for the California Tax-Free Income Fund; 0.39% for the California Insured
Intermediate Fund; 0.29% for the California Tax-Free Money Market Fund; 0.08%
for the S&P 500 Index Fund; 0.23% for the S&P MidCap Index Fund; 0.05% for the
S&P SmallCap Index Fund; 0.44% for the Equity Income Fund; 0.49% for the U.S.
Government Securities Fund and 0.27% 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&P
MidCap Index Fund, S&P SmallCap 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 3 years at Gruntal & Co. specializing in trading and institutional
sales of 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 California Tax-Free Money Market Fund and The Untited States
Treasury Trust, 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 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 funds, annual portfolio turnover of
39
<PAGE>
100% or more is considered high. The U.S. Government Securities Fund had
turnover in excess of 100% during its last fiscal year.
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 for
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
S&P 500 Index Fund $5,000 $250 none
S&P MidCap Index Fund $5,000 $250 none
S&P SmallCap Index 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 & SELLING SHARES
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:
o A Fund may take up to 7 days to pay redemption proceeds.
o If your shares were recently purchased by check, the Fund will not release
your redemption proceeds until payment of the check can be verified which
may take up to 15 days.
o Exchange purchases must meet the minimum investment amounts of the Fund you
are purchasing.
o You must obtain and read the prospectus for the Fund you are buying prior
to making the exchange.
40
<PAGE>
o 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.
o 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 agent of the Funds, Firstar Mutual Fund Services,
LLC, at the address indicated. Please note the minimum initial investments
previously listed.
Firstar Mutual Fund Services, LLC
PO Box 701
Milwaukee, WI 53201-0701
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 AM to 5 PM, PST) to
exchange shares.
You may also exchange shares by accessing our Web site at www.caltrust.com. You
must complete the on-line access agreement in order to access your account
on-line.
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.
All transactions are processed at the share price next calculated after
receiving the instructions in good form, normally at 4:00 p.m., eastern standard
time.
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:
Name of fund: _____________________________________
Account registration: _____________________________
Account number: ___________________________________
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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 your order in good form.
Accordingly, your purchase will be processed at the net asset value next
calculated after your order has been received by the Funds' agent. 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 or broker, 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 Funds' agent, 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 Funds. Your broker can advise you of specific
details.
If you wish, you may also deliver your investment checks (and application, for
new accounts) to the Funds' office. Your order will be forwarded promptly to the
Funds' agent for processing. You will receive the share price next determined
after your check has been received by the 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.
After setting up your on-line account, you may obtain a history of transactions
for your account (s) by accessing our Web site at www.caltrust.com.
AUTOMATIC SHARE ACCUMULATION PLAN
Using the Funds' Automatic Share Accumulation Plan (ASAP), you may arrange to
make additional purchases (minimum $250) automatically by electronic funds
transfer (EFT) from your checking or savings account. Your bank must be a member
of the
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Automated Clearing House. You can terminate the program with ten-day's written
notice. There is no fee to participate in this program, however, a service fee
of $20.00 will be deducted from your account for any ASAP purchase that does not
clear due to insufficient funds, or if prior to notifying the Funds 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 share prices of the Funds are subject to fluctuations. Before undertaking
any plan for systematic investment, you 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.
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 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 markets are open. The number of shares your money
buys is determined by the share price of the Fund on the day your transaction is
processed. Orders that are received in good form are executed at the net asset
value next calculated. The Funds' net asset value will not be calculated, nor
transactions processed, on certain holidays observed by national banks and/or
the NYSE.
The share prices of the Income Fund, the Insured Fund, the Government Fund and
the four Stock Funds (S&P 500 Index Fund, S&P MidCap Index Fund, S&P SmallCap
index Fund & the Equity Income Fund) 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 mean between the bid and ask 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 using 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.
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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
Funds are open. Your shares will be redeemed at the net asset value next
calculated after we have received your redemption request in good form. Remember
that we may hold redemption proceeds until we are satisfied that we have
collected the funds which were deposited 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 41.
If you have not elected telephone redemption or transfer privileges, you must
send a "signature-guaranteed letter of instruction" specifying the name of the
Fund, the number of shares to be sold, your name, and your account number to the
Funds' offices. If you have additional questions, please contact us at (800)
225-8778.
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. This policy is
designed to protect shareholders and their accounts.
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
redemption amount by check 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. You must use the phone,
on-line or mail redemption feature to close your account. The checkwriting
feature is not available for any of our Stock Funds. Please note that a $20.00
fee will be charged to your account for any returned check.
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
when 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).
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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.
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 a retirement account using
our on-line feature.
BY TELEPHONE
You must have this feature set up in advance on your account. 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 and/or online exchange privileges, you agree, by signing your account
application, to authorize and direct the Funds to accept and act upon telephone,
on-line, 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 your
instructions, such as requiring a seller to give a special authorization number.
Provided these procedures are followed, you further agree that neither a Fund
nor the Fund's agent will be responsible for any loss, damage, cost or expense
arising out of any instructions received for an account.
You should realize that by electing the telephone exchange or the on-line 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.
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 at (800) 225-8778.
OTHER REDEMPTION POLICIES
Retirement Plan shareholders should complete a Rollover-Distribution Election
Form in order to sell shares of the Funds so that the sale is treated properly
for tax purposes.
Once your shares are redeemed, we will normally mail you the proceeds on the
next business day, but no later than within seven days. When the markets are
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
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of your account 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 of 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 your shares.
The Funds and the manager reserve certain rights, including the following:
o To automatically redeem your shares if your account balance falls
below the minimum balance due to the sale of shares.
o To modify or terminate the exchange privilege on 60 days written
notice.
o To refuse any purchase or exchange purchase order.
o To change or waive a funds minimums.
o To suspend the right to sell shares back to the Fund, and delay
sending proceeds, during times when trading on the principal markets
for the Funds are restricted or halted, or otherwise as permitted by
the SEC.
o To withdraw or suspend any part of the offering made by this
Prospectus.
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 income 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 custodial 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, inluding
information that discusses benefits, provisions and fees.
CASH DISTRIBUTIONS
Unless you otherwise indicate on the account application, we will reinvest all
dividends and capital gains distributions back into your account. You may
indicate on the application 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 bank 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
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and the U.S. Postal Service cannot deliver your checks, we will void such checks
and reinvest your money in your account at the then current net asset value and
reinvest your subsequent distributions.
STATEMENT AND REPORTS
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 you own
and a current market value. You may rely on these statements in lieu of share
certificates which are not necessary and are not issued. You should keep your
statements to assist in record keeping 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 on-line 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 prefer to have individual statements for your account(s), please call the
Funds' offices at (800) 225-8778.
DIVIDEND & TAXES
Any investment in the funds typically involves several tax considerations. the
information below is meant as a general summary for U.S. citizens and residents.
Because your situation may be different, it is important that you consult your
tax advisor about the tax implications of your 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&P MidCap Index Fund, S&P SmallCap Index Fund
and the Equity Income Fund distribute substantially all their dividends
quarterly. Shareholders of record on the second to last business day of the
quarter will receive the dividends.
The California Tax-Free Income Fund, California Insured Intermediate Fund,
California Tax-Free Money Market Fund, U.S. Government Securities Fund and The
United States Treasury Trust distribute substantially all their dividends
monthly. Shareholders of record on the second to last business day of the month
will receive the dividends.
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 any 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 charge. 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. The Annual Report is incorporated by reference into this
prospectus, making it a legal part of the prospectus.
STATEMENT OF ADDITIONAL INFORMATION
This includes more details about the Funds, including a detailed discussion of
the risks associated with the various investments. The SAI is incorporated by
reference into this prospectus, making it a legal part of the prospectus.
You may obtain a copy of these documents free of charge by calling the Funds at
(800) 225-8778, emailing the Funds at [email protected], or by contacting the
SEC at the address noted below or via e-mail at [email protected].. 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
202-942-8090 (Public Reference Section)
www.sec.gov
SEC File Number 811-5049
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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 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 OF ADDITIONAL INFORMATION 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 ("GNMA")
Certificates.
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." Shares of each Fund represent equal proportionate interest in
the assets of that Fund only, and have identical voting, dividend, redemption,
liquidation and other rights. Shareholders have no preemptive or other right to
subscribe to any additional shares and conversion rights. The Trusts are
organized as Massachusetts business trusts. 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.
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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.
When the Income or the Insured Fund invests in securities not rated by S&P,
Moody's, or Fitch, it is the responsibility of the 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 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 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.
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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.
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 GNMA 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.
Prepayment risk is the risk that principal of a GNMA will be unexpectedly
returned to the Fund. Under certain market conditions mortgages are more likely
to be pre-paid by the borrowers. This is most likely during periods where
interest rates are declining below recent market levels. By refinancing a
mortgage, a borrower pays off their existing balance and the payment is passed
through to the holder of the GNMA. Because of market circumstances, the Fund may
be forced to reinvest the returned principal in securities with lower yields.
This would ultimately reduce the income available to shareholders and could
potentially result in realized capital gains.
The Manager continually monitors the Government Fund's investments, and
changes are made as market conditions warrant.
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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 the Fund's portfolio will generally be 90 days or less and the manager will
attempt to maintain the net asset value at $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. As of December
1999, companies included in the Index range from $387 million to $559 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 $7.8 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").
As of December 15, 1999, the MidCap Index represented approximately 6% 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 $173 million and $18 billion. The median market
capitalization of the stocks in the MidCap Index is approximately $1.5 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 15, 1999, the SmallCap Index represented 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
$24 million and $3.5 billion. The median market capitalization of the stocks in
the SmallCap Index was $438 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.
General Obligation bonds are generally paid from a municipality's general
fund, so that the credit of the security is determined by the overall credit of
the issuer. Economic and political events that negatively impact the
municipality could also affect the value of the bonds issued by the
municipality.
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.
Revenue bonds are generally paid from revenues generated from facilities or
projects financed by the bond. Economic and political events which affect the
ability to generate revenue could potentially impact the value of a revenue
bond.
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.
The quality of an Industrial Development Bonds is in part based on the
corporation's ability to make payments of principal and interest. Unfavorable
developments that affect the ability or willingness for the corporation to make
the payments could have an impact on the value of the bond.
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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.
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
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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.
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. Thus, the
Fund bears the market risk of the security immediately following its commitment
to buy the security.
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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.
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. 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" include issues secured by
a direct payment obligation of the State of California and obligations of other
issuers that rely in whole or in part on
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California 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 state-wide recession,
California's economy has been on a steady recovery since the beginning of 1994.
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 state recession negatively affected State tax revenues (which
are correlated with state economic conditions) and resulted in 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 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 its 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, California 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.
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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.
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 Index, 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
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<PAGE>
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 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 a 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. Non-fundamental policies may be
changed without shareholder approval.
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
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<PAGE>
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.
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 up to five days for some types of securities, the futures
markets can provide superior liquidity 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.
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<PAGE>
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
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 instrumentalities, 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 instrumentalities, as to which there are no percentage limits or
restrictions) if immediately after and as a result of such purchase (a) the
value of the holdings of the Fund in the securities of such issuer 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).
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<PAGE>
(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, 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.
13. Issue senior securities, as defined in the Investment Company Act,
except that this restriction shall not be deemed to prohibit a fund from (a)
making any permitted borrowings, mortgages or pledges, and (b) entering into
permissible repurchase and futures transactions.
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 respective Trust, including general supervision and review of
the 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 33 President & Trustee Chief Executive Officer, CCM Partners
44 Montgomery Street 1999 to present; Chief Operating Officer,
Suite 2100 CCM Partners 1997 to 1999;
San Francisco, CA 94104 Administrative Officer, CCM Partners
1993-1997; Marketing epresentative,
CCM Partners, 1992 to 1993.
*Phillip W. McClanahan 63 Vice President, Director of Investments, CCM Partners:
44 Montgomery Street Treasurer and 1985-present 1984-1985: Vice President
Suite 2100 Trustee and Portfolio Manager, Transamerica
San Francisco, CA 94104 Investment Services: 1966-1984: Vice
President and Portfolio Manager,
Fireman's Fund Insurance Company and
Amfire, Inc.
Harry Holmes 74 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 73 Trustee President and CEO,
C/O Chronicle Publishing Chronicle Publishing Company, 1993 to
901 Mission Street Present; Company formerly, Director
and San Francisco, CA 94105
Executive Vice
President, Capital Cities/ABC Inc.
and President, ABC Network T.V. Group.
Guy Rounsaville, Jr. 56 Trustee Partner, Allen, Matkins, Leck, Gamble &
333 Bush Street, #1700 Mallory LLP: General Counsel, Wells Fargo
San Francisco, CA 94104 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
Aggregate retirement benefits annual respecting registrant
Fund group 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.") CCM
Partners is indirectly controlled by a privately held corporation, RFS, Inc.,
which in turn is controlled by a family partnership of which Mr. Stephen C.
Rogers is a co-trustee. 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
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<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.
The following fees were paid to the manager:
For the fiscal year ended August 31, 1997:
Fund Fee Reimbursement Net to Manager
- --------------------------------------------------------------------------------
Money Fund $479,264 $200,511 $278,753
Income Fund $961,291 n/a $961,291
Government Fund $150,067 $13,522 $136,545
Treasury Trust $210,368 $100,556 $109,812
Insured Fund $126,291 $38,590 $87,701
S&P 500 $143,433 $151,316 ($7,883)
S&P MidCap $155,818 $83,969 $71,849
S&P SmallCap $15,081 $50,827 ($35,746)
Equity Income $22,205 $35,391 ($13,186)
For the fiscal year ended August 31, 1998:
Fund Fee Reimbursement Net to Manager
- --------------------------------------------------------------------------------
Money Fund $505,199 $213,549 $291,650
Income Fund $1,032,319 n/a $1,032,319
Government Fund $168,159 $10,318 $157,841
Treasury Trust $238,447 $116,733 $121,714
Insured Fund $116,198 $34,788 $81,410
S&P 500 $217,634 $173,969 $43,665
S&P MidCap $203,446 $80,984 $122,462
S&P SmallCap $48,850 $43,596 $5,254
Equity Income $57,707 $15,526 $42,181
For the fiscal year ended August 31, 1999:
Fund Fee Reimbursement Net to Manager
- --------------------------------------------------------------------------------
Money Fund $558,691 $233,014 $325,677
Income Fund $1,043,156 n/a $1,043,156
Government Fund $174,183 $3,320 $170,863
Treasury Trust $253,658 $109,740 $143,918
Insured Fund $123,678 $27,698 $95,982
S&P 500 $313,194 $218,960 $94,234
S&P MidCap $212,287 $89,438 $122,849
S&P SmallCap $47,058 $38,043 $9,015
Equity Income $67,107 $8,051 $59,056
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.
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<PAGE>
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. Under the
custodian agreement, the Custodian (i) maintains a separate account or accounts
in the name of each Fund, (ii) holds and transfers portfolio securities on
account of each Fund, (iii) accepts receipts and makes disbursements of money on
behalf of each Fund, (iv) collects and receives all income and other payments
and distribution on account of each Fund's securities and (v) makes periodic
reports to the Trustees of each Trust concerning each Fund's operations.
Tait, Weller & Baker (the "Auditors"), Eight Penn Center Plaza, Suite 800,
Philadelphia, Pennsylvania 19103, are the independent auditors for the Trusts.
The Auditors provide audit services and assistance and consultation with respect
to regulatory filings with the SEC. The Auditors also audit the books of each
Fund at least once each year.
The validity of shares of beneficial interest offered hereby has been
passed on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104.
20
<PAGE>
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, as amended. 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. 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. In some
cases, a broker may provide research services to the Manager. Such research is
paid for by the broker using soft dollars. Any research received by the Manager
is used for the exclusive benefit of the funds and their shareholders.
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.
21
<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 by the Funds' Custodian, Firstar Bank Milwaukee. 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. 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.
Payments transmitted by wire and received by the Custodian prior to the
close of the Funds, normally at 4:00 p.m. Eastern time (1:00 p.m. Pacific time)
on any business day are 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.
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, For
on-line redemptions, visit the Fund's web-site at www.caltrust.com.
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 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, which can take up to 15 days.
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.
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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-day's 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. There are policies that the Funds' Manager follows to regarding
2a-7. Under the amortized cost method, securities are valued at their
acquisition cost, as adjusted for amortization of premium or discount, rather
than at current market value. Calculations are made at least weekly to compare
the value of these Funds' investments valued at amortized cost with market
values.
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
23
<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
One Year Five Years Ten Years Period From
Ended Ended Ended Inception*
August 31, August 31, August 31, through August 31,
Fund 1999 1999 1999 1999
- ---- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
* 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.
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:
Yield = 2[(((a-b)/cd)+1)6 - 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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<PAGE>
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: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)] - 1.
- ------------------
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.
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
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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.
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.
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<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 (9.27%)
One Maritime Plaza #1400
San Francisco, CA 94111-3503
Robert J. Fisher (5.17%)
One Maritime Plaza #1400
San Francisco, CA 94111-3503
John J. Fisher (5.15%)
One Maritime Plaza #1400
San Francisco, CA 94111-3503
INSURED FUND:
Northern Trust Co. (10.20%) Deborah Murray (7.07%)
P.O. Box 92956 27 Makin Grade
Chicago, IL 60675 Ross, CA 94957
John Larson (7.47%) The Harold Messmer Family Trust (5.48%)
1 Market Plaza 2884 Sand Hill Rd., Suite 200
San Francisco, CA 94105 Menlo Park, CA 94025
GOVERNMENT FUND:
Blush & Co. (8.50%) Firstar Trust Company CUST (6.68%)
P.O. Box 976 David Vernon Thomas IRA
New York, NY 10268 1393 Oak Avenue
Los Altos Hills, CA 94024-5768
TREASURY TRUST:
William Edwards (23.35%) Edwin Callan (6.92%)
3000 Sand Hill Rd. 71 Stevenson Street, #1300
Menlo Park, CA 94025 San Francisco, CA 94105
D & DF Foundation (5.00%)
1 Maritime Plaza, Suite 1300
San Francisco, CA 94111-3503
S&P 500 FUND: Charles Schwab & Co. (7.13%)
State Street CA Inc., Custodian (14.52%) 101 Montgomery Street
FBO Cal/STRS San Francisco, CA 94104
1001 Marina Village PKWY FL 3
Alameda, CA 94501
MIDCAP FUND:
Donald Fisher & Doris Fisher, Trustees (12.22%) Charles Schwab & Co. (11.53%)
Donald G. Fisher 1991 101 Montgomery Street
Charitable Remainder Trust 1 San Francisco, CA 94104
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<PAGE>
EQUITY INCOME FUND:
Timothy Abel (12.01%) Susan Ballinger (10.05%)
1331 B St., #B 50 Makin Grade
Hayward, CA 94541 Kentfield, CA 94904
Richard F. Shelton Trust (6.25%)
1 Market
San Francisco, CA 94105
SMALLCAP FUND:
Alexander D. Calhoun & (6.60%) FBO Spieker 1991 Trust (5.26%)
Charles S. Lafollette Trust Michael McAuliffe Trust
Thomas B. Calhoun 1992 Trust 1 Market Plaza, Suite 2100
1 Maritime Plaza, Suite 300 San Francisco, CA 94105
San Francisco, CA 94111
Richard F. Shelton Trust Charles Schwab & Co. Inc. (9.94%)
Richard F. Shelton Trustee (6.12%) Reinvest Account
1 Market 101 Montgomery Street
San Francisco, CA 94105 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 of Additional Information
or in the Prospectus about one of the other funds. The Board of Trustees of each
Trust has 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, 1999
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.
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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.
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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.
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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.
34