As filed with the Securities and Exchange Commission on December 23, 1997
File Nos. 33-499 and 811-4417
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement Under the Securities Act of 1933
Post-Effective Amendment No. 18 [X]
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 20 [X]
--------------
CALIFORNIA INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Charter)
44 Montgomery Street, Suite 2100, San Francisco, California 94104
(Address of Principal Executive Office)
Registrants Telephone Number: (415) 398-2727
RICHARD F. SHELTON
44 Montgomery Street, Suite 2100, San Francisco, California 94104
(Name and Address of Agent for Service)
--------------
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on December 31, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] on ______________ pursuant to Rule 485(a)
--------------
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933. The Registrant's Notice required by Rule 24f-2 for its
fiscal year ended August 31, 1997 was filed on or about October 24, 1997.
-------------
Please Send Copy of Communications to:
JULIE ALLECTA, ESQ.
OMAR BILLAWALA
Paul, Hastings, Janofsky & Walker LLP
345 California Street - 29th Floor
San Francisco, California 94104
Telephone: (415) 835-1600
<PAGE>
CALIFORNIA INVESTMENT TRUST
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
N-1A Location in
Item No. Item Registration Statement
- -------- ---- ----------------------
Part A: Information Required in Prospectus
------------------------------------------
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Fees and Expenses of the Funds"
3. Condensed Financial Information "Financial Highlights," "Cumulative Dividend
Reinvestment Performance," "Discussion of Bond
Funds' Performances"
4. General Description of Registrant "What Is California Investment Trust Fund Group?,"
"What Are the Investment Objectives and Policies
of our Tax-Free Funds?," "Miscellaneous
Information"
5. Management of the Fund "About Our Management," back page of Prospectus,
"Miscellaneous Information," "What are the
Investment Objectives and Policies of our Tax-Free
Funds?," "Portfolio Transactions"
5A. Management Discussion and Analysis "Discussion of Bond Funds' Performances"
6. Capital Stock and Other Securities Cover page, "California Tax-Free Income Fund,"
"California Insured Intermediate Fund,"
"California Tax-Free Money Market Fund," "What Are
the Investment Objectives and Policies of our
Tax-Free Funds?--General Policies," "How Are
Distributions and Taxes Handled?," "Opening an
Account," "Miscellaneous Information"
7. Purchase of Securities Being Offered "How To Buy Shares," "Shareholder Services,"
"Administrative Information"
8. Redemption or Repurchase "How to Redeem Shares"
9. Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part B: Information Required in
Statement of Additional Information
-----------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents "Contents"
12. General Information and History "About the California Investment Trust Fund Group,"
"Miscellaneous Information"
13. Investment Objectives and Policies "The Tax-Free Funds' Investment Objectives and
Policies," "Description of Investment Securities and
Portfolio Techniques," "Investment Restrictions,"
"Appendix"
14. Management of the Registrant "Trustees and Officers," "Investment Management and
Other Services"
15. Control Persons and Principal Holders "Trustees and Officers," "Miscellaneous Information"
of Securities
16. Investment Advisory and Other Services "Investment Management and Other Services"
17. Brokerage Allocation "The Trusts' Policies Regarding Broker-Dealers Used
for Portfolio Transactions"
18. Capital Stock and Other Securities "About the California Investment Trust Fund Group,"
"Miscellaneous Information"
19. Purchase, Redemptions and Pricing of "Additional Information Regarding Purchases and
Securities Being Offered Redemptions of Fund Shares"
20. Tax Status "Taxation," "Miscellaneous Information"
21. Underwriters "Investment Management and Other Services--Principal
Underwriter"
22. Calculation of Performance Data "Yield Disclosure and Performance Information"
23. Financial Statements "Financial Statements"
</TABLE>
<PAGE>
CALIFORNIA INVESTMENT TRUST
FORM N-1A
----------------------------
PART A
PROSPECTUS
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
----------------------------
<PAGE>
Prospectus
January 1, 1998
CALIFORNIA INVESTMENT TRUST FUND GROUP
44 Montgomery Street, Suite 2100
San Francisco, California 94104
For Information Call: (415) 398-2727
For Shareholder Servicing Call: (800) 225-8778
or FAX: (415) 421-2019
The following nine mutual funds (individually, a "Fund" and collectively, the
"Funds") are offered in this Prospectus:
o California Tax-Free Income Fund o S&P 500 Index Fund
o California Insured Intermediate Fund o S&P MidCap Index Fund
o California Tax-Free Money Market Fund o S&P SmallCap Index Fund
o U.S. Government Securities Fund o Equity Income Fund
o The United States Treasury Trust
Our Funds have no sales charges, redemption fees, dividend reinvestment charges
or 12b-1 fees.
Each Fund has its own investment objectives and policies. As is the case for all
mutual funds, attainment of each Fund's investment objective cannot be assured.
This Prospectus is designed to provide you with basic information before
investing. You should read and retain this document for future reference. A
Statement of Additional Information about the Funds, which are part of
California Investment Trust and California Investment Trust II, dated January 1,
1998, as may be revised from time to time, has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. A copy is
available without charge from the Funds by calling 1(800) 225-8778.
AN INVESTMENT IN THE CALIFORNIA TAX-FREE MONEY MARKET FUND OR THE UNITED STATES
TREASURY TRUST IS NEITHER INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, AND
THERE CAN BE NO ASSURANCE THAT THESE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
$1.00 SHARE PRICE. THE CALIFORNIA TAX-FREE MONEY MARKET FUND MAY INVEST A
SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER AND THEREFORE AN
INVESTMENT IN IT MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF MONEY
MARKET FUNDS.
Like all mutual funds, these securities have not been approved or dissapproved
by the Securities and Exchange Commission or any state securities commission nor
has the Securities and Exchange Commission or any state commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated by
reference and other related information.
<PAGE>
CALIFORNIA INVESTMENT TRUST FUND GROUP
The investment objectives and policies of each Fund are described below:
The Tax-Free Funds:
California Tax-Free Income Fund ("Income Fund") seeks as high a level of income
exempt from federal and California personal income taxes as is consistent with
prudent investment management and safety of capital. This Fund will usually
invest in intermediate and long-term municipal bonds and will invest only in
securities in the four highest rating categories.
California Insured Intermediate Fund ("Insured Fund") seeks as high a level of
income exempt from federal and California personal income taxes as is consistent
with prudent investment management and safety of capital. This Fund invests
primarily in intermediate and long-term municipal securities that are covered by
insurance guaranteeing the timely payment of principal and interest and will
invest only in securities in the two highest rating categories. Previously
called: California Insured Tax-Free Income Fund.
California Tax-Free Money Market Fund ("Money Fund") has the objectives of
capital preservation, liquidity, and the highest achievable current income
exempt from both federal and California personal income taxes consistent with
safety. This Fund invests in short-term securities rated in the two highest
rating categories.
The Stock Funds:
The S&P MidCap Index Fund ("MidCap Fund") is a diversified mutual fund that
seeks to provide investment results that correspond to the total return of
publicly traded common stocks of medium-size domestic companies, as represented
by the Standard & Poor's MidCap 400 Index ("S&P MidCap Index").
The S&P 500 Index Fund ("500 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 Index ("S&P500 Index").
The S&P SmallCap Index Fund ("SmallCap 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
Standard &Poor's S&P SmallCap 600 Index ("S&P SmallCap Index").
The Equity Income Fund ("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&P500 Index. Because of our strategies, we expect that the
Fund will have less price volatility that the S&P 500 Index.
2
<PAGE>
The Stock Funds are all designed for long term investments. Short-term trading,
which could adversely impact the Funds and their shareholders, is discouraged.
The Funds impose no sales or redemption fees.
The Government Fund:
U.S. Government Securities Fund ("Government Fund") seeks liquidity, safety from
credit risk, and as high a level of income as is consistent with these
objectives by investment in full faith and credit obligations of the U.S.
Government and its agencies or instrumentalities, primarily Government National
Mortgage Association ("GNMA") Certificates. A portion of its income may be
exempt from California and other states' personal income taxes.
The Treasury Trust:
The United States Treasury Trust ("Treasury Trust") seeks preservation of
capital, safety, liquidity, and, consistent with these objectives, the highest
attainable current income exempt from state income taxes. The Treasury Trust
will invest its assets only in short-term U.S. Treasury securities and its
income will be exempt from California (and most other states') personal income
taxes.
CALIFORNIA INVESTMENT TRUST FUND GROUP(TM)
CONTENTS Page
Fees and Expenses of the Funds ............................................. 4
Financial Highlights ....................................................... 6
Comparison of Fund Expenses ................................................ 12
Discussion of Bond Fund Performances ....................................... 12
Discussion of Stock Funds' Performances .................................... 16
What is California Investment Trust Fund Group ............................. 19
What are the Investment Objectives and Policies
of the Tax-Free Funds ................................................... 20
What are the Investment Objectives and Policies
of the Government Fund .................................................. 27
What are the Investment Objectives and Policies
of the Treasury Trust ................................................... 28
What are the Investment Objectives and Policies
of the Stock Funds ...................................................... 29
Portfolio Transactions ..................................................... 37
How are Dividends, Distributions and Taxes Handled? ........................ 38
About Our Management ....................................................... 41
Opening an Account ......................................................... 44
How to Buy Shares .......................................................... 44
Shareholder Services ....................................................... 46
Administrative Information ................................................. 48
How to Redeem Shares ....................................................... 51
Miscellaneous Information .................................................. 54
Glossary ................................................................... 55
3
<PAGE>
FEES AND EXPENSES OF THE FUNDS
The following table of fees and expenses is provided to assist investors in
understanding the various costs and expenses which may be borne directly or
indirectly by an investment in each Fund:
<TABLE>
<CAPTION>
California
Tax-Free California California
Money Tax-Free Insured
Market Income Intermediate
Fund Fund Fund
---- ---- ----
Shareholder Transaction Expenses
- --------------------------------
<S> <C> <C> <C>
Sales Charges imposed on purchases ............ None None None
Sales Charges imposed on reinvested dividends . None None None
Deferred Sales Charges ........................ None None None
Redemption Fees ............................... None None None
Exchange Fees ................................. None None None
Estimated Annual Fund Operating Expenses
- ----------------------------------------
Management Fee +............................... 0.29% 0.48% 0.35%
12b-1 Fees..................................... None None None
Other Expenses................................. 0.11% 0.11% 0.20%
Total Fund Operating Expenses
(after fee reduction)*...................... 0.40% 0.59% 0.55%
Account Maintenance Fee (per account)
</TABLE>
<TABLE>
<CAPTION>
U.S. The S&P S&P S&P
Government United States 500 MidCap SmallCap Equity
Securities Treasury Index Index Index Income
Fund Trust Fund Fund Fund Fund
---- ----- ---- ---- ---- ----
Shareholder Transaction Expenses
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales Charges imposed on purchases ............ None None None None None None
Sales Charges imposed on reinvested dividends . None None None None None None
Deferred Sales Charges ........................ None None None None None None
Redemption Fees ............................... None None None None None None
Exchange Fees ................................. None None None None None None
Estimated Annual Fund Operating Expenses
- ----------------------------------------
Management Fee +............................... 0.46% 0.26% 0.01% 0.18% 0.14% 0.33%
12b-1 Fees..................................... None None None None None None
Other Expenses................................. 0.19% 0.14% 0.19% 0.22% 0.51% 0.47%
Total Fund Operating Expenses
(after fee reduction)*...................... 0.65% 0.40% 0.20% 0.40% 0.65% 0.80%
Account Maintenance Fee (per account) $10.00 $10.00
</TABLE>
Example of Fund Expenses
Let's say that a Fund's annual return is 5% and that its operating expenses are
as described. For every $1,000 invested, here's how much you would pay in total
expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
California
Tax-Free California California United S&P S&P S&P
Money Tax-Free Insured Government States 500 MidCap SmallCap Equity
Market Income Intermediate Securities Treasury Index Index Index Income
Fund Fund Fund Fund Trust Fund Fund Fund Fund
---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year...................... $4 $6 $6 $7 $4 $12 $14 $7 $8
3 Years..................... $13 $19 $18 $21 $13 $36 $43 $21 $26
5 Years..................... $22 $33 $31 $36 $22 $61 $72 $36 $44
10 Years.................... $51 $74 $69 $81 $51 $126 $151 $81 $99
- --------------------------------------------------------------------------------
</TABLE>
These examples illustrate the effect of expenses, but are not meant to suggest
actual or expected costs or returns, all of which may vary.
- -------------------------
* A $10.00 fee is charged for redemptions made by wire.
+ The management fee represents the net amount expected to be received by the
Manager from each Fund after fee waivers and reimbursements during the fiscal
year ended August 31, 1998. The expense information for the Funds has been
restated to reflect management fees and estimated operating expenses after
planned fee waivers and expense reimbursements by the Manager to the Funds.
For the fiscal year ending August 31, 1997, the total fund operating expenses
for the Money Fund, the Income Fund, the Insured Fund, the Government Fund,
the Treasury Trust, the 500 Fund, the MidCap Fund, the SmallCap Fund, and the
Equity Income Fund as a percentage of their average net assets after
reimbursements, were 0.40%, 0.59%, 0.55%, 0.65%, 0.40%, 0.20%, 0.40%, 0.65%
and 0.76% respectively. If no waivers or reimbursements had been made, the
total fund operating expenses for the Funds during that period would have
been 0.61%, 0.59%, 0.70%, 0.69%, 0.64%, 0.46%, 0.61%, 2.32%, and 1.55%
respectively.
4 and 5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The Financial Highlights for the prior five years have been selected from the
Funds' financial statements, which have been examined by Tait, Weller &Baker,
independent certified public accountants, whose unqualified report thereon
appears in the Funds' Annual Report to Shareholders for the year ended August
31, 1997, and are incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------------------------------------------
California Tax-Free Money Market Fund 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.031 0.032 0.032 0.022 0.022 0.031 0.046 0.056 0.059 0.047
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.031) (0.032) (0.032) (0.022) (0.022) (0.031) (0.046) (0.056) (0.059) (0.047)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return ............................. 3.09% 3.26% 3.27% 2.18% 2.27% 3.18% 4.62% 5.77% 6.04% 4.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) ..... $92,818 $103,402 $80,412 $85,935 $58,754 $92,913 $75,316 $85,910 $81,577 $59,870
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.61% 0.61% 0.66% 0.68% 0.39% 0.15% 0.32% 0.67% 0.69% 0.70%
After expense reimbursements ....... 0.40% 0.40% 0.40% 0.35% 0.24% 0.15% 0.21% 0.27% 0.18% 0.26%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 2.86% 2.90% 2.97% 1.83% 2.10% 3.05% 4.44% 5.17% 5.41% 4.30%
After expense reimbursements ....... 3.07% 3.11% 3.23% 2.16% 2.25% 3.05% 4.55% 5.57% 5.92% 4.74%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------------------------------------------
California Tax-Free Income Fund 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $12.31 $12.22 $12.17 $13.39 $12.42 $11.85 $11.30 $11.44 $11.06 $11.25
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.60 0.62 0.61 0.65 0.69 0.73 0.75 0.77 0.80 0.82
Net gain (loss) on securities
(both realized and unrealized) ...... 0.54 0.09 0.30 (0.92) 1.04 0.57 0.55 (0.13) 0.39 (0.20)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ... 1.14 0.71 0.91 (0.27) 1.73 1.30 1.30 0.64 1.19 0.62
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income... (0.59) (0.62) (0.66) (0.66) (0.68) (0.73) (0.75) (0.78) (0.81) (0.81)
Distribution from capital gains ....... --- --- (0.20) (0.29) (0.08) --- --- --- --- ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions................. (0.59) (0.62) (0.86) (0.95) (0.76) (0.73) (0.75) (0.78) (0.81) (0.81)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ............. $12.86 $12.31 $12.22 $12.17 $13.39 $12.42 $11.85 $11.30 $11.44 $11.06
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return ............................. 9.48% 5.40% 8.01% (2.15)% 14.55% 11.29% 11.87% 5.69% 11.20% 5.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) .....$212,198 $194,926 $196,046 $225,087 $274,325 $217,321 $136,594 $85,461 $70,248 $39,329
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.59% 0.60% 0.62% 0.60% 0.60% 0.60% 0.67% 0.69% 0.73% 0.80%
After expense reimbursements ....... 0.59% 0.60% 0.62% 0.60% 0.60% 0.60% 0.60% 0.59% 0.60% 0.61%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 4.75% 4.96% 5.13% 5.09% 5.41% 5.98% 6.36% 6.57% 6.93% 7.24%
After expense reimbursements ....... 4.75% 4.96% 5.13% 5.09% 5.41% 5.98% 6.43% 6.67% 7.06% 7.43%
Portfolio Turnover ....................... 34.96% 10.34% 32.21% 31.27% 25.42% 45.43% 44.12% 42.24% 47.59% 102.35%
</TABLE>
7
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)-cont.
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------------------------------------------------
U.S. Government Securities Fund 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $10.15 $10.66 $10.30 $11.76 $10.52 $9.80 $9.41 $9.57 $9.46 $9.62
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.64 0.66 0.70 0.67 0.71 0.72 0.83 0.82 0.87 0.88
Net gain (loss) on securities
(both realized and unrealized) ....... 0.36 (0.51) 0.41 (1.40) 1.29 0.73 0.39 (0.15) 0.11 (0.17)
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
Total from investment operations .. 1.00 0.15 1.11 (0.73) 2.00 1.45 1.22 0.67 0.98 0.71
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.63) (0.66) (0.75) (0.67) (0.71) (0.73) (0.83) (.083) (0.87) (0.87)
Distribution from capital gains ....... (0.14) --- --- (0.06) (0.05) --- --- --- --- ---
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
Total distributions ................ (0.77) (0.66) (0.75) (0.73) (0.76) (0.73) (0.83) (0.83) (0.87) (0.87)
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
Net asset value, end of year ............. $10.38 $10.15 $10.66 $10.30 $11.76 $10.52 $9.80 $9.41 $9.57 $9.46
====== ====== ====== ====== ====== ====== ===== ===== ===== =====
Total return ............................. 10.00% 1.26% 11.42% (6.44)% 20.09% 15.46% 13.55% 7.24% 10.78% 7.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) ..... $31,277 $29,088 $29,884 $30,228 $35,787 $79,858 $21,188 $11,809 $11,181 $10,406
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.69% 0.71% 0.75% 0.73% 0.75% 0.63% 0.85% 0.81% 0.96% 1.04%
After expense reimbursements ....... 0.65% 0.65% 0.64% 0.62% 0.52% 0.38% 0.60% 0.60% 0.61% 0.59%
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 6.00% 6.10% 6.72% 5.99% 6.32% 6.87% 8.48% 8.43% 8.83% 8.79%
After expense reimbursements ....... 6.04% 6.16% 6.83% 6.10% 6.55% 7.12% 8.73% 8.64% 9.18% 9.24%
Portfolio Turnover .................... 170.76% 89.11% 169.83% 129.06% 52.30% 122.14% 53.00% 78.32% 78.29% 109.64%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
April 26,
1989* to
Year Ended August 31, August 31,
------------------------------------------------------------------------------
The United States Treasury Trust 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.048 0.050 0.050 0.031 0.028 0.041 0.064 0.077 0.029
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.048) (0.050) (0.050) (0.031) (0.028) (0.041) (0.064) (0.077) (0.029)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ======
Total return ............................. 4.92% 5.11% 5.10% 3.11% 2.86% 4.18% 6.59% 8.02% 8.49%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) .....$104,509 $37,903 $29,797 $19,268 $28,449 $16,799 $23,460 $19,168 $1,848
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.64% 0.66% 0.72% 0.75% 0.65% 0.73% 0.73% 0.70% 2.71%**
After expense reimbursements ....... 0.40% 0.43% 0.50% 0.52% 0.32% 0.25% 0.26% 0.25% 0.00%**
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 4.58% 4.60% 4.75% 2.62% 2.43% 3.66% 5.88% 7.31% 5.60%**
After expense reimbursements ..... 4.82% 4.83% 4.97% 2.85% 2.76% 4.14% 6.35% 7.76% 8.31%**
</TABLE>
* Commencement of operations
** Annualized
9
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)-cont.
<TABLE>
<CAPTION>
S&P 500 Index Fund
April .20,1992*
Year Ended August 31, to August 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..... $14.81 $13.31 $11.38 $11.25 $10.09 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.38 0.36 0.39 0.30 0.30 0.10
Net gain on securities
(both realized and unrealized) ..... 5.44 2.05 1.94 0.26 1.16 0.03
------ ------ ------ ------ ------ ------
Total from investment operations . 5.82 2.41 2.33 0.56 1.46 0.13
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.37) (0.37) (0.37) (0.30) (0.30) (0.04)
Distribution from capital gains ...... (0.28) (0.54) (0.03) (0.13) --- ---
------ ------ ------ ------ ------ ------
Total distributions .............. (0.65) (0.91) (0.40) (0.43) (0.30) (0.04)
------ ------ ------ ------ ------ ------
Net asset value, end of year ........... $19.98 $14.81 $13.31 $11.38 $11.25 $10.09
====== ====== ====== ====== ====== ======
Total return ........................... 40.19% 18.63% 21.06% 5.17% 14.77% 3.66%**
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) .... $71,860 $43,849 $21,800 $14,830 $11,352 $4,380
Ratio of expenses to average net
assets
Before expense reimbursements ..... 0.46% 0.57% 1.04% 1.01% 1.41% 2.71%**
After expense reimbursements ...... 0.20% 0.20% 0.20% 0.20% 0.09% 0.00%**
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements ..... 1.85% 2.13% 2.40% 1.95% 1.54% 0.94%**
After expense reimbursements ...... 2.11% 2.50% 3.24% 2.76% 2.86% 3.65%**
Portfolio turnover ..................... 2.10% 1.87% 3.68% 1.22% 8.46% ---
Average commission rate paid (1) ....... $0.0300 $0.0284
</TABLE>
<TABLE>
<CAPTION>
S&P MidCap Index Fund
April .20,1992*
Year Ended August 31, to August 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..... $14.45 $13.82 $12.21 $12.23 $10.12 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ................ 0.22 0.24 0.26 0.22 0.25 0.09
Net gain on securities
(both realized and unrealized) ..... 4.85 1.33 2.04 0.22 2.11 0.07
------ ------ ------ ------ ------ ------
Total from investment operations . 5.07 1.57 2.30 0.44 2.36 0.16
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................. (0.22) (0.25) (0.25) (0.22) (0.25) (0.04)
------ ------ ------ ------ ------ ------
Distribution from capital gains ...... (0.73) (0.69) (0.44) (0.24) --- ---
Total distributions .............. (0.95) (0.94) (0.69) (0.46) (0.25) (0.04)
------ ------ ------ ------ ------ ------
Net asset value, end of year ........... $18.57 $14.45 $13.82 $12.21 $12.23 $10.12
====== ====== ====== ====== ====== ======
Total return ........................... 36.63% 11.77% 20.24% 3.75% 23.64% 4.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(in 000's) .... $46,271 $33,559 $26,168 $21,789 $16,243 $3,279
Ratio of expenses to average net
assets
Before expense reimbursements ..... 0.61% 0.71% 0.80% 0.97% 1.36% 3.74%**
After expense reimbursements ...... 0.40% 0.40% 0.40% 0.40% 0.17% 0.00%**
Ratio of net investment income (loss) to
average net assets
Before expense reimbursements ..... 1.19% 1.38% 1.70% 1.30% 0.97% (0.46%)**
After expense reimbursements ...... 1.40% 1.69% 2.10% 1.87% 2.16% 3.28%**
Portfolio turnover ..................... 17.80% 18.18% 11.71% 15.01% 8.16% 0.87%
Average commission rate paid (1) ....... $0.0266 $0.0214
</TABLE>
* Commencement of operations
** Annualized
(1) not required prior to August 31, 1995
10
<PAGE>
<TABLE>
<CAPTION>
California Insured
Intermediate Fund S&PSmallCap Equity
Index Fund Income Fund
October 20 October 2, September 4,
Year Ended August 31, 1992* to 1996* to 1996* to
--------------------------------------- August 31, August 31, August 31,
1997 1996 1995 1994 1993 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $10.42 $10.49 $10.23 $10.65 $10.00 $10.00 $10.00
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. 0.45 0.46 0.44 0.44 0.40 0.23 0.39
Net gain (loss) on securities
(both realized and unrealized) ....... 0.30 (0.07) 0.30 (0.42) 0.61 2.22 2.84
------ ------ ------ ------ ------ ------ ------
Total from investment operations ...... 0.75 0.39 0.74 0.02 1.01 2.45 3.23
------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income .. (0.45) (0.46) (0.48) (0.44) (0.36) (0.20) (0.32)
Distributions from capital gains ...... --- --- --- --- --- --- (0.27)
------ ------ ------ ------ ------ ------ ------
Total distributions ................ (0.45) (0.46) (0.48) (0.44) (0.36) (0.20) (0.59)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ........... $10.72 $10.42 $10.49 $10.23 $10.65 $12.25 $12.64
====== ====== ====== ====== ====== ====== ======
Total return ............................. 7.34% 3.75% 7.46% 0.23% 11.91%** 24.86% 33.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(in 000's) ... $24,390 $24,207 $23,515 $21,800 $11,145 $5,933 $9,747
Ratio of expenses to average net assets
Before expense reimbursements ...... 0.70% 0.70% 0.76% 0.88% 2.00%** 2.32%** 1.55%**
After expense reimbursements ....... 0.55% 0.55% 0.60% 0.46% 0.16%** 0.65%** 0.76%**
Ratio of net investment income
to average net assets
Before expense reimbursements ...... 4.12% 4.22% 4.19% 3.77% 2.75%** 0.27%** 2.48%**
After expense reimbursements ....... 4.27% 4.37% 4.35% 4.19% 4.59%** 1.94%** 3.27%**
Portfolio turnover ....................... 32.11% 36.08% 43.56% 8.91% --- 19.99%** 2.80%**
Average commission rate paid ............. --- --- --- --- --- $0.1219 $0.0300
</TABLE>
* Commencement of operations
** Annualized
11
<PAGE>
COMPARISON OF FUND EXPENSES
Below is a table comparing the Funds' total fund operating expenses with average
total fund operating expenses as reported by Lipper Analytical Services, Inc. on
September 30, 1997 for several categories of mutual funds comparable to the
Funds.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Lipper Analytical Services CIT
-------------------------- ---
CA Tax Exempt Money Funds 0.60%* Money Fund 0.40%*
CA Insured Municipal Funds 1.09%* Insured Fund 0.55%*
CA General Municipal Funds 1.04%* Income Fund 0.59%
General U.S. Government Funds 1.21%* Government Fund 0.65%*
U.S. Treasury Money Funds 0.74%* Treasury Trust 0.40%*
Growth & Income 1.28%** 500 Fund 0.20%*
Equity Income Fund 0.80%*
Growth 1.50%** MidCap Fund 0.40%*
SmallCap Fund 0.65%*
* After fee waivers and expense reimbursements.
** These figures are for actively managed funds which typically have higher
operating expenses.
Manager's Note: We believe our annual fund operating expenses are among the
lowest available. In our opinion, all other things being equal, low cost
no-load funds will provide investment results that are better than funds
having sales commissions, redemption fees and higher expenses.
DISCUSSION OF BOND FUNDS' PERFORMANCES
On the following pages are line graphs comparing the performances of the Income
Fund, Insured Fund and the Government Fund to comparable broad based securities
market indices from the inception of the respective Fund through the fiscal year
ended August 31, 1997.
Manager's Note: The objective of the graphs is to permit you to compare the
performances of the Funds with the market that prevailed over those time
periods and to give perspective to market conditions, and investment
strategies and techniques pursued by the Funds' investment manager that
materially affected the performance of the Funds. The Lehman Brothers
Indexes reflect reinvestment of "dividends" but not the expenses of the
Funds.
12
<PAGE>
All graphs assume a $10,000 hypothetical initial investment. Below the graphs
are tables presenting each of these Funds' average annual total returns for the
one-year, five-year and ten year periods (or from inception) through August 31,
1997. Past performance is not predictive of future performance.
The objective of the graphs is to permit you to compare the performances of the
Funds with the market that prevailed over those time periods and to give
perspective to market conditions, investment strategies and techniques pursued
by the Funds' investment manager that materially affected the performance of the
Funds.
[GRAPH]
The following data replaces a graph that represented a comparison between the
California Tax-Free Income Fund and the Lehman Brothers Municipal Bond Index:
Fund LBMI
--------- ---------
12/4/85 10,000.00 10,000.00
12/31/86 12,767.79 12,023.98
12/31/87 12,611.18 12,208.98
12/31/88 14,040.90 13,443.02
12/31/89 15,433.13 14,882.41
12/31/90 16,471.41 15,962.76
12/31/91 18,465.26 17,898.41
12/31/92 20,091.86 19,290.51
12/31/93 23,060.20 21,646.69
12/30/94 21,069.08 20,527.35
12/31/95 25,399.62 24,028.09
12/31/96 26,187.05 25,094.54
8/31/97 27,477.83 26,366.46
Average Annual Total Returns
Fiscal Year Five Years Ten Years
Ended Ended Ended
Aug. 31, 1997 Aug. 31, 1997 Aug. 31, 1997
------------- ------------- -------------
CIT California Tax-Free Income Fund 9.47% 7.00% 8.05%
Lehman Brothers Municipal Bond Index 9.25% 6.97% 8.07%
13
<PAGE>
[GRAPH]
The following data replaces a graph that represented a comparison between the
CIT California Insured Intermediate Fund and the Lehman Brothers Five Year
Municipal Bond Index:
Fund Lehman 5 yr
--------- -----------
10/20/92 10,000.00 10,000.00
12/31/92 10,116.16 10,142.31
12/31/93 11,293.14 11,026.98
12/31/94 10,729.02 10,727.39
12/31/95 12,270.46 11,965.23
12/31/96 12,747.90 12,472.49
8/31/97 13,233.20 12,931.35
Average Annual Total Returns
Fiscal Year From Inception
Ended (Oct. 20,1992)
Aug. 31, 1997 to Aug. 31, 1997
------------- ----------------
CIT California Insured Intermediate Fund........ 7.34% 5.93%
Lehman Brothers Five Year Municipal Bond Index.. 6.60% 5.43%
During the fiscal year, the economy had shown persisting strength in demand,
with an accompanying decline in unemployment and rising capacity utilization.
This led to progressively increasing concerns about the risk of inflationary
imbalances in the economy despite reports of falling levels of inflation. This
combination of circumstances produced alternating cycles of falling and rising
interest rates, with the overall level of long-term interest rates dropping by
about one-half of one percent. Given these conditions, the primary investment
strategy of the Funds' investment manager was to maintain a high average coupon
while shortening each portfolios' average maturity in order to
14
<PAGE>
moderate portfolio price movements. The Income Fund emphasized the purchase of
seven to twelve year high-quality bonds. The Insured Fund purchased five to
seven year maturities. GNMA pass through securities continued to be emphasized
in the Government Fund. The investment manager's strategy, coupled with the
cyclical movement of interest rates, were the primary factors producing the past
year's performance results.
[GRAPH]
The following data replaces a graph that represented a comparison between the
CIT U.S. Government Securities Fund, the Lehman Brothers Composite Treasury
Index and The Lehman Brothers GNMA Treasury Index:
Fund Lehman GNMA Treasury
--------- ----------- ---------
12/4/85 10,000.00 10,000.00 10,000.00
12/31/86 11,202.16 11,565.86 11,920.38
12/31/87 11,342.73 12,067.43 12,157.73
12/31/88 12,166.00 13,131.01 13,005.67
12/31/89 13,806.89 15,189.41 14,876.49
12/31/90 14,992.66 16,794.49 16,147.88
12/31/91 17,614.55 19,488.17 18,619.51
12/31/92 19,087.00 20,934.63 19,966.18
12/31/93 22,100.13 22,310.10 22,100.14
12/31/94 20,554.93 20,979.71 21,124.01
12/31/95 25,354.84 24,555.10 25,008.67
12/31/96 25,233.40 25,911.97 25,681.52
8/31/97 25,944.00 27,935.59 26,822.86
<TABLE>
<CAPTION>
Average Annual Total Returns
Fiscal Year Five Years Ten Years
Ended Ended Ended
Aug. 31, 1997 Aug. 31, 1997 Aug. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
CIT U.S. Government Securities Fund..... 10.00% 6.87% 8.89%
Lehman Brothers Composite Treasury Index 9.23% 6.39% 8.62%
Lehman Brothers GNMATreasury Index...... 12.84% 6.33% 9.13%
</TABLE>
15
<PAGE>
DISCUSSION OF STOCK FUNDS' PERFORMANCES
On the following pages are line graphs comparing each of the Stock Funds'
performance to a comparable broad based securities market index from the
inception of each Stock Fund through the fiscal year ended August 31, 1997. The
graphs assume a $10,000 hypothetical initial investment. The objective of the
graph is to permit you to compare the performance of the funds with the current
market and to give you perspective to market conditions and investment
strategies and techniques that materially affected the performance of the fund.
Below each graph is a table presenting each of the respective funds' average
annual total returns for the one-year, five-year, and/or from inception period
through August 31, 1997. Past performance is not predictive of future
performance.
Manager's Note: The Standard & Poor's Indexes reflect reinvestment of
"dividends" but not the expenses of the Funds.
[GRAPH]
The following data replaces a graph that represented a comparison between the
CIT S&P 500 Index Fund and the S&P 500 Composite Stock Price Index:
CIT S&P
500 Fund 500 Index
---------- ----------
04/20/92 $10,000.00 $10,000.00
12/31/92 $10,763.23 $10,855.98
12/31/93 $11,814.35 $11,948.54
12/30/94 $11,937.27 $12,106.16
12/31/95 $16,378.47 $16,655.09
12/31/96 $20,085.72 $20,478.44
08/31/97 $24,623.82 $25,170.91
Average Annual Total Returns
Fiscal Year Five Years From Inception
Ended Ended (Apr. 20, 1992)
Aug. 31, 1997 Aug. 31, 1997 to Aug. 31, 1997
------------- ------------- ----------------
CIT S&P 500 Index Fund.......... 40.16% 19.43% 18.29%
S&P 500 Index................... 40.66% 19.76% 18.78%
16
<PAGE>
The primary strategy of the Index Funds' investment manager during the past
fiscal year was to invest in those stocks represented by the respective S&P
index in a manner that effectively replicated the index. Portfolio turnover is
kept to a minimum to reduce taxable capital gains to shareholders.
Manager's Note: The S&P 500, MidCap and SmallCap represent approximately
72%, 8%, and 4% respectively of the market value of all common stocks
publicly traded in the United States. Approximately 30% of the earnings of
the S&P 500 Index are from foreign sources so the investor has a global
exposure to earnings, without the currency risks involved in direct
investments in foreign securities. The Index Funds are managed to produce a
minimum in taxable recognized capital gains. Under tax law, ordinary income
for high bracket tax payers is taxed at a higher rate than long-term capital
gains.
[GRAPH]
The following data replaces a graph that represents a comparison between the CIT
S&P MidCap Index Fund and S&P MidCap 400 Index:
CIT MidCap
Fund Index
---------- ----------
04/20/92 $10,000.00 $10,000.00
12/31/92 $11,495.22 $11,611.16
12/31/93 $12,976.24 $13,230.88
12/30/94 $12,461.85 $12,755.82
12/31/95 $16,277.11 $16,698.51
12/31/96 $19,344.81 $0.00
08/31/97 $23,941.27 $0.00
Average Annual Total Returns
Fiscal Year Five Years From Inception
Ended Ended (Apr. 20, 1992)
Aug. 31, 1997 Aug. 31, 1997 to Aug. 31, 1997
------------- ------------- ----------------
CIT S&P MidCap Index Fund..... 36.63% 18.69% 17.67%
S&P MidCap Index.............. 37.26% 19.21% 18.33%
17
<PAGE>
[GRAPH]
The following data replaces a graph that represented a comparison between the
CIT S&P SmallCap Index Fund and the S&P SmallCap Index:
SmallCap SmallCap
Fund Index
---------- ----------
10/02/96 $10,000.00 $10,000.00
10/31/96 $9,850.00 $9,865.00
11/30/96 $10,240.00 $10,378.97
12/31/96 $10,372.50 $10,414.25
01/31/97 $10,635.09 $10,587.13
02/28/97 $10,382.60 $10,367.98
03/31/97 $9,839.13 $9,836.10
04/30/97 $10,001.76 $9,956.10
05/31/97 $11,109.68 $11,125.94
06/30/97 $11,578.46 $11,617.71
07/31/97 $12,200.19 $12,348.46
08/31/97 $12,485.57 $12,659.64
Average Annual Total Returns
From Inception
(Oct. 2, 1996)
to Aug. 31, 1997
----------------
CIT S&P SmallCap Index Fund............... 24.85%
S&P SmallCap Index........................ 26.60%
The performance of the Equity Income Fund benefited from the overall rise in the
U.S. equity markets as well as the relative gain in the financial and energy
sectors.
Combined, the financial and energy sectors represented about 43% of the
portfolio holdings at the end of the current fiscal year. Productivity gains
were a driving factor as banks continued to reengineer themselves. For this
reason, gains in bank profits outpaced those of the overall market. The energy
sector benefited from an increased level of global economic growth. During this
period, OPEC countries kept daily output relatively unchanged. The resulting
increase in oil prices resulted in profit growth for the oil companies held by
the Fund.
The fund holds stocks from other sectors to diversify the portfolio and maintain
a high yield. The Sub-Advisor feels that despite the stock market's large
increases over the last three years, there will be stocks available that offer a
good dividend yield and an opportunity for price appreciation. .
18
<PAGE>
[GRAPH]
The following data replaces a graph that represented a comparison between the
CIT Equity Income Fund, the S&P 500 Composite Stock Price Index, and the S&P
BARRA/Value Index:
Equity S&P 500 Barra Value
Fund Index Index
---------- --------- ----------
09/04/97 $10,000.00 10,000.00 $10,000.00
09/30/96 $10,206.90 10,500.00 $10,428.00
10/31/96 $10,527.75 10,789.80 $10,809.66
11/30/96 $11,208.65 11,605.51 $11,636.60
12/31/96 $11,096.97 11,375.72 $11,456.24
01/31/97 $11,574.49 12,086.70 $11,984.37
02/28/97 $11,667.91 12,180.98 $12,071.86
03/31/97 $11,245.42 11,680.34 $11,659.00
04/30/97 $11,737.08 12,377.66 $12,096.21
05/31/97 $12,354.27 13,131.46 $12,854.64
06/30/97 $12,801.36 13,719.75 $13,345.69
07/31/97 $13,824.21 14,811.84 $14,413.35
08/31/97 $13,328.60 13,982.37 $13,761.86
Average Annual Total Returns
From Inception
(Sept. 4, 1996)
to Aug. 31, 1997
----------------
CIT Equity Income Fund.................... 33.28%
S&P 500 Index............................. 39.82%
S&P BARRA/Value .......................... 37.62%
WHAT IS CALIFORNIA INVESTMENT TRUST FUND GROUP?
The California Investment Trust Fund Group (the "Trusts" or "Funds") presently
consists of two diversified, open-end management investment companies, both
organized as Massachusetts business trusts in September 1985. As part of
California Investment Trust, we currently offer through this Prospectus the
Income Fund, Insured Fund and the Money Fund. As part of California Investment
Trust II, we currently offer through this Prospectus the Government Fund and the
Treasury Trust. Also part of this trust are the 500 Fund, the MidCap Fund, the
SmallCap Fund (together, the "Index Funds"), and the Equity Income Fund
(together with the Index Funds, the "Stock Funds").
CCM Partners, a California Limited Partnership (the "Manager"), is the
investment manager of the Funds. The Manager has retained Bank of America NT&SA
(Bank of America Capital Management, Inc.) (the "Sub-Adviser"), a wholly-owned
subsidiary of BankAmerica Corporation, to manage the Stock Funds on a day-to-day
basis.
19
<PAGE>
Manager's Note: The term no-load means that you do not pay commissions to
buy or sell your shares. In our opinion, all other things being equal, low
cost, no-load funds will provide investment results that are better than
funds having sales commissions, redemption fees and higher expenses. If you
have any questions about the Funds, please call us at 1(800) 225-8778 and
speak to one of our customer service representatives.
You may purchase shares of any Fund through your securities dealer or broker or
directly from us. (See "How to Buy Shares" on page 44.) We charge no commissions
for your purchases or sales of our shares. Accordingly, more of your money will
go to work for you immediately upon investment.
For example, a $10,000 investment in a mutual fund with a 4% sales charge
results in only $9,600 being invested in that fund because $400 of the
investor's money goes toward payment of the sales commission. As a result, there
is a negative cumulative effect on the total return over the time of the
investment because the original investment is $9,600, not $10,000.
All other things being equal, a load fund having a portfolio yield of 5.00%
would only provide an effective net yield to the investor of 0.8% in the first
year if there is a 4% sales charge. Many service organizations that report
mutual fund performance results do not deduct sales charges when reporting these
figures to many publications. This is because the sales charge is an expense
borne by the investor, not the fund. Thus, load funds often are measured as if
they were no-load funds. This favorably distorts the reported performance of
many load funds in comparison to no-load funds.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF OUR TAX-FREE FUNDS?
In general, the Tax-Free Funds seek as high a level of income, which is exempt
from federal income taxes and California personal income taxes, as is consistent
with each Fund's objectives, investment characteristics, and policies.
Manager's Note: The Income Fund, the Insured Fund and the Money Fund are
called the "Tax-Free Funds."
California Tax-Free Income Fund -seeks as high a level of income exempt from
federal and California personal income taxes as is consistent with prudent
investment management and safety of capital. We seek to reduce, to the extent
possible, the credit risks of our 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 S&P
Corporation S&P, Moody's Investors Service ("Moody's"), or Fitch Investors
Service, Inc. ("Fitch"). These are considered to be "investment grade"
securities, although bonds rated Baa 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. The Income Fund does not invest in derivative securities. The
Income Fund will not invest more than 20% of its total assets in securities
rated in the fourth
20
<PAGE>
highest category. If the rating on an issue held in the Income Fund's portfolio
is downgraded from investment grade, our Manager will consider such event in its
evaluation of the overall investment merits of that security but such
consideration will not necessarily result in an automatic sale of the security.
When the Income Fund invests in securities not rated by S&P, Moody's, or Fitch,
it is the responsibility of our Manager to evaluate them and determine that they
have the same quality and characteristics as those described by S&P, Moody's or
Fitch for their ratings. An Appendix to the Statement of Additional Information
contains a description of the ratings of S&P, Moody's, and Fitch.
Manager's Note: Investments by the Income Fund will be made in securities
considered to be "investment grade."
The Income Fund normally invests in intermediate and long-term bonds and its
average portfolio maturity generally is five years or more. If our Manager
determines that market conditions warrant a shorter average maturity, the Income
Fund's portfolio will be adjusted accordingly. Since the value of debt
obligations typically varies inversely with changes in interest rates, the net
asset value per share of the Income Fund will also fluctuate in this manner. The
Income Fund, under normal market conditions, 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 exempt from federal income taxes
and California personal income taxes. Thus, it is possible, although not
anticipated, that under normal market conditions up to 20% of the Income Fund's
net assets could be in municipal obligations from another state, in taxable U.S.
Treasury obligations, in repurchase agreements secured by such securities, or in
obligations the interest on which is subject to the federal alternative minimum
tax.
Manager's Note: The Income Fund is intended for investors who can accept the
probability of principal fluctuations.
For temporary defensive purposes only, the Income Fund may invest (i) more than
20% of its assets (which could be up to 100%) in obligations issued or
guaranteed by the full faith and credit of the U.S. Government, the interest on
which is subject to federal and may be subject to California income taxes and
(ii) more than 20% of the value of its net assets (which could be up to 100%) in
instruments the interest on which is exempt from federal income taxes but not
California personal income taxes, such as municipal obligations issued by other
states and their agencies and instrumentalities.
California Insured Intermediate Fund seeks as high a level of income exempt from
federal income taxes and California personal income taxes as is consistent with
prudent investment management and safety of capital. The Insured Fund seeks to
reduce, to the extent possible, the credit risks of its portfolio by investing
in California municipal securities that are insured under an insurance policy
obtained by the issuer or underwriters of such securities at the time of their
original issuance or are insured under an insurance policy purchased by the
Insured Fund.
21
<PAGE>
The Manager determines appropriate purchases for the Insured Fund based on
credit analysis, including consideration of creditworthiness and insurance. The
Insured Fund does not invest in derivative securities. Insurance covering the
timely payment of interest and principal on the municipal securities in which
the Insured Fund invests is obtained from recognized insurers. Such insurance
does not guarantee the market value of the municipal securities in which the
Insured Fund invests or the value of the shares of the Insured Fund. Issuer
insurance remains with the security and thereby enhances its resale value. The
Insured Fund may invest more than 25% of its assets in securities insured by the
same insurance company.
Manager's Note: The Insured Fund will attempt to limit the price volatility
of its shares by investing a portion of its assets in intermediate term
municipal securities and by the use of other investment strategies. There is
no guarantee that these strategies will be successful.
The Insured Fund also may invest in uninsured California municipal securities
having at the time of purchase the top two ratings or, if unrated, being of
similar quality to the top two ratings (AAA or AA) of S&P, (Aaa or Aa) of
Moody's, (AAA or AA) of Fitch. Securities having these credit ratings are
considered to be "high quality." Under normal market conditions, the Insured
Fund's investment in uninsured obligations may not exceed 20% of its portfolio
assets. If the rating on an issue held in the Insured Fund's portfolio is
downgraded, our Manager will consider such event in its evaluation of the
overall investment merits of that security but such consideration will not
necessarily result in an automatic sale of the security. When the Insured Fund
invests in securities not rated by S&P, Moody's, or Fitch, it is the
responsibility of our Manager to evaluate them and determine that they have the
same quality and characteristics as those described by S&P, Moody's or Fitch for
their ratings. An Appendix to the Statement of Additional Information contains a
description of the ratings of S&P, Moody's, and Fitch.
Manager's Note: Under normal market circumstances, the Insured Fund will
invest at least 80% of its net assets in insured California Municipal
Securities. These are generally rated AAA by Standard & Poor's Corporation,
Aaa by Moody's Investors Service or AAA by Fitch Investors Service, Inc.
For temporary defensive purposes only, the Insured Fund may invest (i) more than
20% of its assets (which could be up to 100%) in obligations issued or
guaranteed by the full faith and credit of the U.S. Government, the interest on
which is subject to federal and may be subject to California income taxes and
(ii) more than 20% of the value of its net assets (which could be up to 100%) in
instruments the interest on which is exempt from federal income taxes but not
California's personal income taxes, such as municipal obligations issued by
other states and their agencies and instrumentalities.
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California Tax-Free Money Market Fund has the objectives of capital
preservation, liquidity, and the highest achievable current income exempt from
federal and California personal income taxes as is consistent with safety.
Although no assurances can be given, the Money Fund attempts to maintain a
constant net asset value of $1.00 per share.
The Money Fund seeks to achieve its investment objectives through investments
limited to U.S. dollar-denominated money market instruments. The Money Fund does
not invest in derivative securities. All investments by the Money Fund (i.e.,
100% of the Money Fund's investments) will mature or will be deemed to mature
within 397 days from the date of acquisition and the average maturity of the
investments held by the Money Fund (on a dollar-weighted basis) will be 90 days
or less. The maturities of variable rate demand instruments held by the Money
Fund will be deemed to be the longer of the period remaining until the next
interest rate adjustment, or the period remaining until the principal amount can
be recovered through demand, although the stated maturities may be exceed of 397
days. All investments by the Money Fund, including variable rate demand
instruments and participation certificates, are determined by or on behalf of
the California Investment Trust's Board of Trustees to present minimal credit
risks and are of "high quality" as determined by a major rating service or, in
the case of an investment which is not rated, are of comparable quality as
determined by or on behalf of the California Investment Trust's Board of
Trustees. However, investments in high quality, short-term instruments may, in
many circumstances, result in a lower yield than would be available from
investments in instruments of a lower quality or with a longer term.
Manager's Note: We have many investors who are uncertain of the investment
period for their funds and who allocate some of their assets to one of our
Money Funds and some to one or more of our Bond Funds, thereby achieving
their desired flexibility.
The Money Fund invests primarily in fixed rate and variable rate obligations
issued by or on behalf of the State of California, other states, territories and
possessions of the United States, and their authorities, agencies,
instrumentalities and political subdivisions, the interest on which is exempt
from federal income taxes ("Municipal Obligations"). The Money Fund invests in
certain Municipal Obligations the interest on which, in the opinion of bond
counsel, is exempt in the opinion of bond counsel from federal and California
personal income taxes ("California Municipal Obligations"). To the extent
suitable California Municipal Obligations are not available for investment by
the Money Fund, the Money Fund may purchase Municipal Obligations issued by
other states, their agencies and instrumentalities, the interest income on which
will be exempt from federal income tax but will be subject to California
personal income taxes.
The Money Fund intends to invest, under normal circumstances, 100% of its assets
in California Municipal Obligations. Except when acceptable securities are
unavailable for investment by the Money Fund as determined by the Manager, the
Money Fund will invest at least 65% of its assets in California Municipal
Obligations, although the exact amount of the Money Fund's assets
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invested in such securities will vary from time to time. As a fundamental
policy, the Money Fund will invest, under normal circumstances, at least 80% of
its assets in Municipal Obligations and, as an operating policy, will invest at
least 80% of its assets in Municipal Obligations not subject to the federal
alternative minimum tax. The Money Fund may, for temporary or defensive
purposes, invest up to 20% of its total assets in securities the interest on
which is subject to federal and California personal income tax or to the federal
alternative minimum tax. The Money Fund's investments may include "when-issued"
Municipal Obligations, and stand-by commitments.
The Money Fund makes its investments primarily in: (1) municipal bonds with
remaining maturities of one year or less that at the date of purchase are rated
Aaa or Aa by Moody's or AAA or AA by S&P; (2) municipal notes with remaining
maturities of one year or less that at the date of purchase are rated MIG 1 or
MIG 2 by Moody's or SP-1 or SP-2 by S&P; and (3) municipal commercial paper that
is rated Prime-1 or Prime-2 by Moody's or A-1+, A-1 or A-2 by S&P. If any of
these securities are not rated, they may be acquired if they are of comparable
quality as determined by or on behalf of the Board of Trustees of the California
Investment Trust.
Manager's Note: We require a minimum investment of $10,000 to open an
account in any of our Bond or Money Market Funds. Subsequent investments
must be $250 or more.
General Policies: Each Tax-Free Fund may borrow from banks for temporary or
emergency purposes and pledge its assets therefor, up to 10% of its total
assets. (No securities will be purchased by a Fund while any outstanding
borrowings exceed 5% of its total assets.) Each Fund may also make loans of its
portfolio securities provided 100% collateral in the form of cash or U.S.
Government securities is pledged and maintained with the Fund by the borrower.
Each Tax-Free Fund also may enter into repurchase agreements with U.S.
Government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Generally, a repurchase agreement is
an agreement under which a Fund acquires a U.S. Government security subject to
resale to a bank or dealer at an agreed upon time and price which reflects a net
interest gain for the Fund. A default by the other party could cause a Fund to
lose the interest factor; however, the agreement is collateralized by the U.S.
Government security and its value is marked to market daily in order to minimize
a Fund's risks. No more than 10% of the Income Fund's or the Money Fund's total
assets or more than 15% of the Insured Fund's total assets will be invested in
repurchase agreements with maturities in excess of seven days. (See the
Statement of Additional Information for more information.)
Manager's Note: Short-term municipal obligations are issued by state and
local governments and public authorities as interim financings in
anticipation of tax collections, revenue receipts or bond sales.
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Municipal bonds may be issued to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to obtain funding for privately operated
facilities. The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are backed by the
taxing power of the issuing municipality and are considered the safest type of
municipal bond. Revenue bonds are backed by the revenues of a project or
facility (tolls from a toll-bridge, for example). Industrial development revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user and therefore investments in these bonds have more potential risk.
Under the Internal Revenue Code of 1986, as amended (the "Code"), there are
certain restrictions on the use of tax-exempt bond financing for
non-governmental business activities, such as industrial development bonds.
Accordingly, interest on certain types of non-essential or private activity
bonds may not be exempt from federal income tax, while interest on other types
of non-essential or private activity bonds, although exempt from regular federal
income tax, is treated as a tax preference for taxpayers subject to the
alternative minimum income tax. To the extent a Tax-Free Fund holds such bonds,
the burden of the alternative minimum income tax treatment would be passed on to
the shareholders as dividends are paid.
Accordingly, the Tax-Free Funds attempt to minimize their investments in such
bonds, and no more than 20% of a Tax-Free Fund's net assets will be invested in
bonds whose interest is treated as a tax preference item under the federal
alternative minimum tax. However, interest on any tax-exempt obligation that is
paid to a corporate shareholder will be included in the calculation of its
alternative minimum tax liability, if any.
Manager's Note: Under normal circumstances, the Tax-Free Funds do not intend
to invest in municipal bonds subject to the alternative minimum tax.
Each of the Tax-Free Funds may purchase a right to sell a security held by the
Fund back to the issuer of the security or another party at an agreed upon price
at any time during a stated period or on a certain date. These rights may be
referred to as "demand features" or "puts." In addition, a Tax-Free Fund may
also hold floating or variable rate obligations, including certificates of
participation. Generally, we utilize the types of securities described in this
paragraph (and in more detail in the Glossary) to improve the investment
position of a Tax-Free Fund by enhancing its yield or liquidity, by shortening
or lengthening its average portfolio maturity, or by a combination thereof.
Also, other tax-exempt instruments which may become available in the future may
be purchased as long as the Manager believes their quality is equivalent to a
Tax-Free Fund's quality standards.
Manager's Note: The investment objectives and certain policies of the Income
Fund, the Insured Fund and the Money Fund are fundamental, meaning that they
can only be changed by vote of the shareholders.
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Limiting Investment Risks: The ability of each Tax-Free Fund to meet its
objectives is affected by the ability of municipal issuers to meet their payment
obligations. Since each of the Tax-Free Funds invests primarily in obligations
of California issuers, the marketability and market value of these obligations
may be affected by certain California constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter initiatives
that could adversely affect the various California issuers' ability to meet
their financial obligations. There are additional risks associated with an
investment which concentrates in issues of one state. As a result, the value of
each Tax-Free Fund's shares may fluctuate more widely than the value of shares
of a portfolio investing in securities relating to a number of different states.
The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. An expanded discussion of
risks associated with California tax-exempt securities is contained in the
Statement of Additional Information.
In recent years "Proposition 13" and similar California constitutional and
statutory amendments and initiatives have restricted the ability of California
taxing entities to increase real property tax revenues. Other initiative
measures approved by California voters, through limiting various other taxes,
have resulted in a substantial reduction in state revenues. Decreased state
revenues may result in reductions in allocations of state revenues to local
governments. It is not possible to determine the impact of these initiatives on
the ability of California issuers to pay interest or repay principal on their
obligations. There is no assurance that any California issuer will make full
payments of principal and interest or remain solvent. For example, in December
1994, Orange County filed for bankruptcy. In addition, from time to time,
federal legislative proposals have threatened the tax-exempt status or use of
municipal securities. (An expanded discussion of the risks associated with
municipal securities and California issuers is contained in the Statement of
Additional Information.)
Manager's Note: While an investment in the Tax-Free Funds is not without
risk, the Manager follows certain policies in managing our portfolios, which
may help to reduce your risk.
In addition to prudently managing our investments in California and other
securities, we have adopted certain policies to limit the credit risks of
concentrating in California municipal obligations. Thus, each Tax-Free Fund will
not purchase a security, if as a result: (a) with respect to 75% of its assets,
more than 5% of its assets would be in the securities of any single issuer,
except for the U.S. Government and its agencies or instrumentalities, and except
that the Insured Fund may invest more than 25% of its assets in securities
insured by the same insurance company; (b) more than 5% of its assets would be
in industrial development revenue bonds where the payment of principal and
interest are the responsibility of a company with less than three years'
operating history; and (c) 25% or more of its assets would be in industrial
development revenue bonds where payment of principal and interest is the
ultimate responsibility of issuers in the same industry, although we may invest
25% or more of a Tax-Free Fund's assets in the aggregate in different industrial
development revenue bonds. Since we may invest up to 25% of a Tax-Free Fund's
assets
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in a single issuer, changes in the financial condition or market assessment of
such issuer may cause greater fluctuations in the per share price of the Income
Fund and in the yield of the Money Fund. However, we will attempt to limit price
volatility of the Income Fund and the Insured Fund by investing a portion of
those Funds' assets in intermediate term municipal securities.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF OUR GOVERNMENT FUND?
Manager's Note: We offer two Funds to meet the needs of both long-term and
short-term investors seeking income from investment grade U.S. Government
securities. Our Government Fund is offered for investors seeking the credit
safety and income of GNMA and other U.S. Government securities. The Treasury
Trust invests the short-term U.S. Treasury securities exempt from California
(and most other states') personal income taxes.
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 investment in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities, primarily Government National Mortgage Association ("GNMA")
Certificates. Such obligations include U.S. Treasury bills, notes, strips and
bonds and GNMA Certificates. No GNMA derivatives are included in the portfolio.
The Fund may not always be able to achieve its objectives.
GNMA's: Since the Government Fund began operation it has invested, and plans to
continue to invest, primarily in GNMA Certificates (including variable rate
certificates), popularly called "Ginnie Mae's." GNMA Certificates are GNMA
mortgage-backed securities representing part ownership of a pool of mortgage
loans on real property. GNMA is a U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA Certificates differ from bonds 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 purchases "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 Fund also may purchase "variable rate" GNMA
Certificates or any other type which may be issued with GNMA's guarantee.
GNMA's 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.
Generally, GNMA Certificates bear a nominal "coupon rate" which represents the
effective Federal Housing Administration Veterans Administration mortgage rates
for the underlying pool of mortgages, less GNMA and issuer's fees. Payments to
holders of GNMA Certificates, such as the Government Fund, consist of the
monthly distributions of interest and principal less the GNMA and issuer's fees.
The actual yield to be earned by a holder is calculated by dividing such
payments by the purchase price paid for the GNMA Certificate.
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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.
Manager's Note: We have many investors who are uncertain of the investment
period for their funds and who allocate some of their assets to one of our
Money Funds and some to one or more of our Bond Funds, thereby achieving
their desired average maturity.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments. The assumed average life of pools of mortgages
having terms of under 30 years is less than 12 years, but typically not less
than 5 years. A pool's expected life may be shortened, however, by prepayments
of principal and interest on the underlying mortgages. Such prepayments result
from a number of factors, including interest rate levels, general economic
conditions, foreclosure rates, location and age of mortgages, and other social
and demographic conditions. In periods of falling interest rates, the rate of
prepayment tends to increase, which shortens the actual average life of a
mortgage pool. The converse generally occurs during periods of rising interest
rates. Any prepayments are passed through to the Government Fund and become
available for reinvestment by the Fund at the then current yields. When interest
rates have fallen, reinvestment of prepayments will generally be at lower
yields.
Manager's Note: The Government Fund's investment objectives and certain
policies are fundamental, meaning that they can only be changed by a vote of
its shareholders.
General Policies: The Government Fund, under normal market conditions, attempts
to invest 100% and, as a matter of fundamental policy, invests at least 80% of
the value of its net assets in securities issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities.
The Government Fund may borrow from banks for temporary or emergency purposes
and pledge for such borrowings up to 10% of its total assets. (No securities
will be purchased by the Fund while the value of outstanding borrowings exceed
5% of its total assets.) The Government Fund may also loan its portfolio
securities provided 100% collateral in the form of cash or U.S. Government
securities is pledged and maintained with the Fund by the borrower. The Fund
also may enter into repurchase agreements with Government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System. We will invest no more than 10% of the Government Fund's total
assets in repurchase agreements with maturities in excess of seven days. (See
the above discussion of repurchase agreements for the Tax-Free Funds, and the
Statement of Additional Information for more information.)
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF OUR TREASURY TRUST?
The United States Treasury Trust seeks preservation of capital, safety,
liquidity and consistent with these objectives, the highest attainable current
income exempt from state income taxes, by investing exclusively in U.S. Treasury
securities, namely bills, notes or bonds which are direct obligations
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of the U.S. Government. The Treasury Trust does not invest in derivative
securities. The Treasury Trust's net assets will at the time of investment have
remaining maturities of 397 days or less. The dollar weighted average maturity
of its portfolio will be 90 days or less, and it will attempt to maintain a
constant net asset value of $1.00 per share.
Manager's Note: The Treasury Trust invests short-term in the safest
securities available: U.S. Treasury Obligations.
Under California law, dividends paid by a mutual fund, or a series thereof,
which are derived from interest income on direct obligations of the U.S.
Government (provided that the fund's federal and California tax-exempt
obligations constitute at least 50% of the fund's total assets at the end of
each quarter of its taxable year) will be exempt from California personal income
tax. Most other states have similar provisions. Accordingly, as a matter of
fundamental policy, the Treasury Trust will invest 100% of its net assets in
direct obligations of the U.S. Government so that all of its dividends will be
exempt from California (and most other states') personal income tax. Prospective
investors should consult their own tax advisers for more information.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF OUR STOCK FUNDS?
S&P 500 Index Fund 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 72% of the market value of
all common stocks publicly traded in the United States. Companies included in
the Index range from 549 million to 211 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 $6.4 billion.
S&P MidCap Index Fund The investment objective of the MidCap Fund is to seek
investment results that correspond to the total return (i.e., the combination of
capital changes and income) of publicly traded common stocks of medium-size
domestic companies, as represented by the Standard & Poor's MidCap 400 Index
(the "MidCap Index"). The MidCap Index, representing approximately 8% of the
market value of all common stocks publicly traded in the United States, is
composed of 400 selected common stocks of medium-size domestic companies with
market capitalizations between $236 million and $11 billion. The median market
capitalization of the stocks in the MidCap Index is approximately $1.7 billion.
S&P SmallCap Index Fund 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 November 18, 1997, the SmallCap Index,
representing about 4% of the market value of all common stocks publicly traded
in the United States, was composed of 600 selected domestic companies with
market capitalizations between $39 million and $2.7 billion. The median market
capitalization of the stocks in the SmallCap Index was $500.8 million.
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The Index Funds are not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial, and market analysis and investment judgment. Instead,
each Index Fund, utilizing a "passive" or "indexing" investment approach,
attempts to replicate the performance of S&P 500, MidCap Index or the SmallCap
Index, respectively. The Index Funds are designed to keep transaction costs and
other expenses low. There is no assurance that the Index Funds will achieve
their investment objectives.
Manager's Note: The 500 Fund, MidCap Fund and the S&P SmallCap are called
the "Index Funds."
Each Index Fund is intended for long-term investors. The 500 Fund is intend ed
for investors seeking investment results that correspond to the total return of
publicly traded U.S. common stocks, as represented by the S&P 500*. The MidCap
Fund is intended for investors seeking investment results that correspond to the
total return of publicly traded common stocks of medium-sized domestic
companies, as represented by the MidCap Index. The SmallCap Fund is for
investors seeking investment results that correspond to the total return of
publicly traded common stocks of small sized companies, as represented by the
SmallCap Index. Experience has shown that the longer the period of investment,
the more likely the investor is to have a profitable result. If you anticipate
an investment period of less than three to five years, we suggest you consider
one of our money market or bond funds.
Under normal conditions, each Index Fund will invest at least 80% of its assets
(65% if an Index Fund's asset level is below $25 million) in equity securities
of companies that compose the relevant index. In seeking to replicate the
performance of the S&P 500, the MidCap and the SmallCap Index, respectively, the
Sub-Adviser will, over time, attempt to allocate each Index Fund's portfolio
among common stocks in approximately the same weightings as the relevant index,
beginning with the heaviest-weighted stocks that make up a larger portion of
each index's value. Over the long term, the Sub-Adviser will seek a correlation
between the performance of each Index Fund and that of the relevant index of at
least 95% (or between 85%-95% if an Index Fund's assets are below $25 million).
A figure of 100% would indicate perfect correlation. In the unlikely event that
the high correlation sought by the Sub-Adviser is not achieved, the Board of
Trustees of the California Investment Trust II will consider alternative
arrangements.
The Sub-Adviser generally will seek to match the composition of the relevant
index to the maximum extent, but may not always invest an Index Fund's stock
portfolio to mirror such index exactly. Because of the difficulty and expense of
executing relatively small stock transactions, an Index Fund may not always be
invested in the less heavily weighted stocks comprising its relevant index, and
may at times have its portfolio weighted differently from the relevant index,
particularly when an Index Fund has total assets of less than $25 million. The
Sub-Adviser anticipates that each Index Fund will be able to mirror
- -------------------------
*"Standard & Poor's", "S&P", "S&P500, "Standard &Poor's 500", "500", "Standard
and Poor's MidCap 400 Index", and "Standard and Poor's SmallCap 600 Index" are
service marks of Standard and Poor's Corporation and have been licensed for use
by the Funds. The Funds are not sponsored, endorsed, sold or promoted by S&P and
S&P makes no representation regarding the advisability of investing in the
Funds.
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the performance of the relevant index with little variance at asset levels of
$25 million or more. Each Index Fund may omit or remove an index stock from the
portfolio if, following objective criteria, the Sub-Adviser judges the stock to
be insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Although the Sub-Adviser will attempt to invest as much of each Index Fund's
assets as is practical in stocks comprising the relevant index, each Index Fund
also will maintain a reasonable position in high quality, short-term debt
securities and money market instruments to meet redemption requests and other
needs for liquid assets. If the Sub-Adviser believes that market conditions
warrant a temporary defensive posture (as an example, extreme market
volatility), each Fund may invest without limit in high-quality, short-term debt
securities and money market instruments (including shares in money market mutual
funds). These securities and money market instruments may include domestic and
foreign commercial paper, certificates of deposit, banker's acceptances and time
deposits, U.S. Government securities, and repurchase agreements.
Manager's Note: We believe that investing in index funds that represent a
broad segment of the market, with dividends reinvested and compounded, will
provide very competitive long-term investment results.
S&P 500, MidCap and SmallCap Indexes-The composition of the S&P 500, MidCap
Index and the SmallCap Index may be changed from time to time. They are
determined by S&P and are based on such factors as the market capitalization and
trading activity of each stock and the extent to which each stock is
representative of stocks in a particular industry. The weighting of stocks in
each index is based on the relative market capitalization of each stock
constituting the index; that is, its market price per share times the number of
shares outstanding. Inclusion of a stock in the S&P 500 Index, S&P MidCap Index
or the S&P SmallCap Index in no way implies an opinion by S&P as to its
attractiveness as an investment.
The ability of each Index Fund to meet its objective depends to some extent on
the cash flow experienced by such Fund because investments and redemptions by
shareholders will generally require the Index Funds to purchase or sell
portfolio securities. The Sub-Adviser will make investment changes to
accommodate cash flow in an attempt to maintain the similarity of each Fund's
portfolio to the relevant index. You also should be aware that the S&P 500,
MidCap and the SmallCap Indices are all unmanaged indices and their performance
does not take into account management fees, brokerage commissions and other
costs of investing that the Index Funds must bear. Finally, because each Index
Fund seeks to track the relevant index, they are not managed for growth or
income in the same manner as other mutual funds, and the Sub-Adviser generally
will not attempt to judge the merits of any particular stock as an investment.
Accordingly, you should not expect to achieve results that are potentially
greater than the total return for each Index Fund's benchmark index.
Because of the weighting of stocks in the S&P 500 Index, as of November 17,
1997, the 50 largest companies in the S&P 500 Index comprised 48.9% of the 500
Fund. The 500 Fund is comprised of the following broad sectors in approximate
proportions: capital good 6.0%, consumer cyclical 7.8%, consumer non-durable
27.9%, banking & financial service 16.3%, utility 9.2%,
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service .02%, transportation 1.3%, manufacturing 8.0%, technology 14.1%, energy
9.1%. Of the companies in the S&P 500, approximately 90.8% are listed on the
NYSE; 9% are quoted on the National Association of Securities Dealers Automated
Quotation System; and 0.2% are listed on the American Stock Exchange. It is
anticipated that the percentage of the 500 Fund's assets invested in each stock
will be approximately the same percentage it represents in the S&P 500.
Because of the weighting of stocks in the S&P MidCap Index, as of November 17,
1997, the 50 largest companies in the S&P MidCap Index comprised 31.34% of the
MidCap Fund. The MidCap Index is comprised of the following broad sectors in
approximate proportions: capital good 6.3%, consumer cyclical 7.3%, consumer
non-durable 20.2%, banking & financial service 17.8%, utility 10.6%, service
3.1%, transportation 2.2%, manufacturing 9.7%, technology 14.9%, energy 8.0%. Of
the companies in the MidCap Index, approximately 75.6% are listed on the NYSE;
23% are quoted on the National Association of Securities Dealers Automated
Quotation System; and 1.4% are listed on the American Stock Exchange. It is
anticipated that the percentage of the MidCap Fund's assets invested in each
stock in the MidCap Index will be approximately the same as the percentage the
stock represents in the MidCap Index.
Because of the weighting of stocks in the S&P SmallCap Index, as of November 17,
1997, the 50 largest companies in the S&P SmallCap Index comprised 22.23% of the
SmallCap Fund. The SmallCap Index is comprised of the following broad sectors in
approximate proportions: capital good 5.3%, consumer cyclical 11.4%, consumer
non-durable 22.6%, banking & financial service 17.1%, utility 3.8%, service
2.8%, transportation 2.9%, manufacturing 12.2%, technology 15.1%, energy 6.7%.
Of the companies in the SmallCap Index, approximately 53% are listed on the
NYSE; 43% are quoted on the National Association of Securities Dealers Automated
Quotation System; and 3% are listed on the American Stock Exchange. It is
anticipated that the percentage of the Fund's assets invested in each stock in
the Fund will be approximately the same percentage the stock represents in the
S&P SmallCap Index.
Because some of the stocks that comprise the S&P MidCap Index and S&P SmallCap
Index may be thinly traded, comparatively small investments could cause
relatively volatile price fluctuations.
Equity Income Fund seeks a high level of current income by investing primarily
in income producing equity securities. As a secondary objective, the Equity
Income Fund will also consider the potential for price appreciation when
consistent with seeking current income.
The Sub-Adviser 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 than the yield of the S&P500 Index. Because of these
strategies, we expect that the Equity Income Fund will have less price
volatility than the S&P500 Index. There is no assurance that the Equity Income
Fund will achieve its stated objective.
Under normal conditions, the Equity Income Fund must invest 65% and will attempt
to invest at least 80% of its total assets in income-producing common
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stocks. Except for necessary cash reserves, the Equity Income Fund will
typically invest all of its assets in an effort to meet its investment
objectives. The Equity Income Fund intends to invest in securities which
generate a relatively high level of dividend income and have potential for
capital appreciation. These securities will generally be stocks of high-quality
U.S. corporations; however, as deemed appropriate by the Manager, the Equity
Income Fund may invest in preferred stocks, equity securities which are
convertible into common stocks, American Depository Receipts, Real Estate
Investment Trusts, and futures contracts based on the S&PBARRA/Value Index, the
S&P500 Index, and the S&PMidCap Index. The Equity Income Fund seeks to diversify
its investments over a carefully selected list in order to moderate the risks
inherent in investing in equity investments.
Manager's Note: Under normal market conditions, the Sub-Adviser intends the
Equity Income Fund to be fully invested at all times by using various cash
management strategies outlined here and in the Statement of Additional
Information. It is our belief that by being fully invested, the Fund
increases the possibility of meeting the investment goals of its investors.
The Equity Income Fund invests in a company following an analysis of the issuing
company. Acomputer program proprietary to the Sub-Adviser will be used and
includes, among other things, tests for dividend payout ratio and positive
growth of dividends. Over time, dividend income has proved to be an important
component of total return. Also, dividend income tends to be a more stable
source of total return than does capital appreciation. While the price of a
company's stock can be significantly affected by market fluctuations and other
short-term factors, its dividend rate usually has greater stability. For this
reason, securities which pay a high level of dividend income are generally less
volatile in price than securities which pay a low level of dividend income.
Although the Sub-Adviser will attempt to invest as much of the Equity Income
Fund's assets as is practical in income-producing stocks, the Fund may maintain
a reasonable position in high-quality, short-term debt securities and money
market instruments to meet redemption requests and other needs for liquid
assets. These securities and money market instruments may include domestic and
foreign commercial paper, certificates of deposit, banker's acceptances and time
deposits, U.S. Government obligations, money market mutual funds, and repurchase
agreements.
If the Sub-Adviser believes that market conditions warrant a temporary defensive
posture (as an example, extreme market volatility) the Equity Income Fund may
invest without limitation in high-quality, short-term debt securities and money
market instruments (including shares in money market mutual funds).
These policies are not fundamental so they may be changed by the Board of
Directors without shareholder approval. However, the Equity Income Fund will
notify shareholders before any material change is made in the Fund's policies.
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Investment risks
The Money Fund invests primarily in securities of issuers within the State of
California and therefore an investment in the Fund may be riskier than an
investment in other types of money market funds.
Mutual funds investing primarily in equity securities are subject to market
risk, i.e., the possibility that stock prices in general will decline over short
or even extended periods. The stock market tends to be cyclical, with periods
when stock prices generally rise and periods when stock prices generally
decline.
All Funds except the Index Funds are managed according to traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgement. The Index Funds are managed passively, but attempt to replicate the
performance of the applicable index. Therefore, all Funds are subject to manager
risk. Manager risk refers to the possibility that the Fund's manager may fail to
execute the Fund's investment strategy effectively. As a result, a Fund may fail
to achieve its stated objective.
The table below shows the actual performance of the MidCap Index for 1990
through 1996 and its reconstructed performance for the years 1987 through 1989.
The reconstructed performance utilizes the prices of the 400 companies
comprising the MidCap Index as of May 24, 1989, the date S&P introduced the
MidCap Index. The information shown for the years 1987 through 1989 does not
represent actual performance results and is intended to illustrate what the
approximate performance of the MidCap Index would have been in those years. The
table should not be viewed as representative of the income or capital gain or
loss that the MidCap Index may generate in the future, nor should this table be
considered representative of the future performance of the MidCap Fund.
[BAR CHART]
The following data replaces a bar chart that represented the performance of the
S&P 400 MidCap Index*:
1987 -2.04%
1988 20.87%
1989 35.55%
1990 -5.12%
1991 50.11%
1992 11.91%
1993 13.96%
1994 -3.58%
1995 30.93%
1996 19.23%
*SOURCE: Standard & Poor's Corporation. No attempt was made to adjust the
reconstructed MidCap Index regarding companies that did not exist throughout the
period. The reconstructed information does not, therefore, contain data for 400
companies throughout the time period.
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The table below shows the performance of the S&P 500 for the ten years from 1987
through 1997. Stock prices fluctuated widely during this period but were higher
at the end than at the beginning. The results shown should not be viewed as
representative of the income or capital gain or loss that the S&P 500 may
generate in the future, nor should this be considered representative of the
future performance of the 500 Fund.
[BAR CHART]
The following data replaces a bar chart that represents the performance of the
S&P 500 Index*:
1987 5.10%
1988 16.61%
1989 31.69%
1990 -3.10%
1991 30.47%
1992 7.62%
1993 10.08%
1994 1.32%
1995 37.58%
1996 22.96%
*SOURCE: Standard & Poor's Corporation. Total Returns for the S&P 500 include
the change in price of S&P 500 stocks and assume reinvestment of all dividends
paid by S&P 500 stocks.
Manager's Note: While the Index Funds seek to duplicate the performance of
the S&P 500 and MidCap Index and SmallCap index respectively, the stock
portfolios may not match the indexes perfectly. The investment objectives
and certain policies of the Index Funds are fundamental, meaning that they
can only be changed by vote of the shareholders.
Investment Limitations
The investment objective and status of each Stock Fund as a diversified mutual
fund are fundamental features, and may not be changed without shareholder
approval. The following summarizes certain other of each Stock Fund's principal
investment limitations. A complete listing is contained in the Statement of
Additional Information.
Each Stock Fund may borrow money from a bank, but only for temporary or
emergency purposes. Each Stock Fund may also borrow money by engaging in reverse
repurchase agreements, whereby such Fund would sell securities and agree to buy
them back at a later date. Each Stock Fund may borrow up to a maximum aggregate
amount equal to 15% of the market value of its assets, determined at the time of
borrowing. Each Stock Fund would borrow money only to meet redemption requests
prior to the settlement of securities already sold or in the process of being
sold by such Stock Fund. To the extent that a Stock Fund borrows money prior to
selling securities, the Stock Fund may be
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leveraged; at such times, the total value of the Stock Fund may appreciate or
depreciate more rapidly than its benchmark index. Prior to purchasing additional
portfolio securities, each Stock Fund will repay any money borrowed in excess of
5% of the market value of its total assets.
Each Stock Fund may lend its investment securities to qualified institutional
investors for the purpose of realizing additional income, although it is not
currently expected that any Stock Fund will do so. As collateral for the loaned
securities, the Stock Fund will receive cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned securities. Loans
of securities, in the aggregate, will be limited to 10% of each Stock Fund's
total assets, determined at the time of lending. This is a non-fundamental
limitation, and may be changed at any time without shareholder approval.
Stock Index Futures
Each Stock Fund may buy and sell stock index futures contracts (a) provided that
not more than 5% of a Stock Fund's assets (determined at the time of the
transaction) are required as futures contracts deposits, and (b) only to the
extent that these futures obligations would represent not more than 20% of a
Stock Fund's total assets (35% if total assets are below $25 million). Each
Stock Fund may engage in futures transactions for several reasons: to maintain
cash reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, to seek higher investment returns when a futures contract is
priced more attractively than the underlying equity security or index, or, in
the case of the Equity Income Fund, for bonafide hedging purposes. The Stock
Funds may not use futures contracts to leverage its assets.
The primary risks associated with the use of future contracts are: (i) imperfect
correlation between the change in market value of the stocks held by a stock
Fund and the prices of futures contracts; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a
futures position when desired. The risk of imperfect correlation may be reduced
by investing only in those contracts whose behavior is expected to resemble that
of a stock Fund's underlying securities. The risk that a stock Fund will be
unable to close out a futures position will be minimized by entering into such
transactions on a national exchange or board of trade with an active and liquid
secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in the pricing of futures contracts. As a result, a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (as well as gain) to the investor. To minimize this risk,
when investing in futures contracts, a stock Fund will maintain cash or cash
equivalents in the amount of the underlying obligation, less the value of the
initial margin.
To the extent the MidCap Fund purchases or sells futures contracts, the
Sub-Adviser currently intends to use futures contracts on the MidCap Index. The
MidCap Fund may, depending upon liquidity and other considerations, use future
contracts on various other indices including: the NYSE, Composite
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Index, Value Line Composite Index, S&P 500, and Standard & Poor's 100 Stock
Index. To the extent the SmallCap Fund purchases or sells futures contracts, the
Sub-Adviser currently intends to use futures contracts on the Russell 2000. The
SmallCap Fund may, depending upon liquidity and other considerations, use future
contracts on various other indices including, but not limited to, the S&P 500
Index and S&PMidCap Index.
PORTFOLIO TRANSACTIONS
GNMA Certificates and new issues of municipal obligations are often sold on a
"when-issued" or "delayed delivery" basis. While we have ownership rights to the
obligations, we do not have to pay for them until they are delivered to us,
normally 15 to 45 days later. To meet that payment promise, we set aside (in a
separate account at our Custodian bank for the acquiring Fund) cash or
securities equal to the payment that will be due. Depending on market
conditions, we could experience greater fluctuations in the share prices or net
asset values of the Income Fund and the Government Fund as a result of
when-issued purchases. In our Manager's opinion, such purchases do not under
normal circumstances affect our ability to maintain the Money Fund's or the
Treasury Trust's net asset value at $1.00 per share.
Manager's Note: Our Manager chooses dealers by judging professional ability,
quality of services, and reasonableness of mark-ups.
Our Manager may consider a number of factors in determining which brokers or
dealers to use for our portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors may include,
but are not limited to, the reasonableness of commissions or markups, the
quality of services and executions, and the sale of shares of any Fund by
broker-dealers.
The Sub-Adviser uses various brokerage firms to carry out the Stock Funds'
portfolio transactions. Since the Sub-Adviser places a large number of
transactions, each Stock Fund pays commissions lower than those paid by
individual investors. Also, the Stock Funds incur lower costs than those
incurred by individuals when purchasing debt securities. Higher commissions may
be paid to firms that provide research services to the extent permitted by law.
The Sub-Adviser may use this research information in managing each Stock Fund's
assets, as well as the assets of other clients.
Securities owned by one of the Stock Funds may be owned by other clients for
which the Sub-Adviser acts as an adviser. If purchases or sales of securities
for a Stock Fund and the other clients for which the Sub-Adviser acts as
investment adviser arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Sub-Adviser during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price or volume.
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Manager's Note: The frequency of portfolio transactions will vary from year
to year depending on market conditions.
The majority of portfolio transactions in the Index Funds (other than those made
in response to shareholder activity) will be made to adjust such Fund's
portfolio to track the relevant index or to reflect occasional changes in such
index's composition.
HOW ARE DIVIDENDS, DISTRIBUTIONS AND TAXES HANDLED?
To the extent a Tax-Free Fund invests in California Municipal Obligations and
meets certain requirements of federal income tax and California personal income
tax law, the income received by the Fund is paid to you in the form of dividends
by the Fund which are exempt from regular federal income taxes and California
personal income tax. Distributions of income from certain stripped tax-exempt
obligations and coupons, repurchase agreements, securities loans, or other
taxable investments (if any) will not be exempt from federal or California
income tax. Since inception of the Income Fund, Money Fund and Insured Fund
(December 4, 1985 for the Income Fund and Money Fund and October 20, 1992 for
the Insured Fund) 100% of the dividends paid by these Funds were exempt from
federal and California personal income taxes. The Government Fund and the
Treasury Trust also pay their net interest income to you as dividends. Dividends
paid by the Treasury Trust are expected to be subject to federal income tax but
exempt from California personal income tax. Dividends paid by the Government
Fund are expected to be subject to federal income tax and a portion of such
dividends are expected to be subject to California personal income tax.
Manager's Note: The Money Fund and the Treasury Trust declare and credit
dividends to your account daily and reinvest them or pay them out in cash
monthly.
Each business day, we credit Money Fund and Treasury Trust shareholder accounts
with a dividend consisting of substantially all of the net investment income
earned by the Money Fund and the Treasury Trust since the last dividend. Such
dividends are then paid on the last business day of each month. If you redeem
all shares in your Money Fund or Treasury Trust account at any time during a
month, all dividends credited to your account are paid to you along with the
proceeds of redemption. On the last business day of the month (payment date), we
will distribute dividends to Income Fund, Insured Fund and Government Fund
shareholders substantially equal to all the net investment income earned by each
Fund during that month. Shareholders eligible for the dividend are those who
hold shares as of the date of record, which is the next to the last business day
of that month.
Manager's Note: We automatically reinvest your dividends and distributions
unless you tell us otherwise.
Shareholders who reinvest their dividends will have their dividends reinvested
on the payment date of that month, at that day's closing price. We will mail
div-
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idends to shareholders typically on the next business day following the payment
date. Investors who select our Electronic Funds Transfer ("EFT") option will
have their personal accounts credited normally within two business days
following the payment date.
Each Stock Fund ordinarily pays dividends from net investment income quarterly
and distributes net realized securities gains, if any, annually, but may make
distributions on a more frequent basis to comply with the distribution
requirements of the "Code", and in all events in a manner consistent with the
provisions of the 1940 Act. On the last business day of March, June, September
and December we distribute dividends to shareholders of each Stock Fund
substantially equal to all the net investment income earned by each Stock Fund
during the prior three months payable to shareholders of record as of the second
to the last business day of March, June, September and December, respectively.
Unless you otherwise indicate on your account application or notify our
Shareholder Servicing Agent in writing later that you wish to receive cash, we
will automatically reinvest all income dividends and capital gains distributions
in additional shares of the Fund from which they were paid at no cost to you.
Distributions are treated in the same manner for tax purposes whether paid in
cash or reinvested in additional shares.
Manager's Note: The 500 Fund and the MidCapFund assess an annual maintenance
fee of $10.00 per account to offset the costs of maintaining shareholder
accounts. The fee is deducted from each Fund's dividend at a rate of $2.50
per quarter.
The Funds will not make distributions from net realized securities gains unless
capital loss carryovers, if any, have been utilized by each Fund or have
expired. All expenses are accrued daily and deducted before declaration of
dividends to investors.
For tax purposes, each Fund is treated as a separate taxable entity. Thus, any
distributions of capital gains are on a per Fund basis rather than aggregated
for the Trust as a whole. Any capital gains you may receive on your investment
in the Funds are taxable (unless you are a tax-exempt organization that has not
borrowed money to purchase shares). One annual payment from net realized capital
gains (after offsetting any available capital loss carryovers) of each Fund, if
any, will be distributed for the 12-month period ending October 31. When these
distributions represent a Fund's long-term capital gains, the Code treats them
that way for you, whether you take them in cash or reinvest them in additional
shares, and regardless of how long you have been a shareholder. The determining
factor is how long the Fund held the securities that produced the gains. You
also may receive distributions of short-term capital gains, which will be taxed
as ordinary income. Any dividend or distribution declared in October, November
or December as of a record date in such months and paid in the following January
will be treated as received on December 31 for federal tax purposes.
Shareholders will be informed after the close of each calendar year as to the
federal income tax consequences of distributions made each year.
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With respect to the Income Fund, the Insured Fund, the Government Fund and the
Stock Funds, you may also realize a gain or a loss in any year in which you
redeem (sell) shares since the net asset value of the Funds fluctuate. The tax
treatment will depend, of course, on how long you owned your shares and on your
individual tax position. Any loss realized upon the redemption of shares within
six months from the date of their purchase will be disallowed to the extent of
tax-exempt dividends received during such period or will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gains during such six-month period. In addition, all or a
portion of any such loss will be disallowed to the extent other shares of the
same Fund are acquired (including by reinvestment of dividends) within 30 days
before or after such redemption.
We use the accounting practice called equalization for the Income Fund, the
Insured Fund, the Government Fund and the Stock Funds in order to avoid the
dilution of the dividends payable to existing shareholders. Under this
procedure, that portion of the net asset value per share of the Fund which is
attributable to undistributed income is allocated as a credit to undistributed
income in connection with the purchase of shares or a debit to undistributed
income in connection with the redemption of shares. Thus, after every
distribution, the value of a share drops by the amount of the distribution. If
you purchase shares of one of these Funds before the record date of a
distribution (the next to the last business day of the month) and elect to have
distributions paid to you in cash, you will pay the full price for the shares
and then receive some portion of that price back in the form of a taxable
distribution. Dividends and distributions from net realized short-term
securities gains paid or credited to accounts maintained by U.S. nonresident
shareholders also may be subject to U.S. nonresident withholding taxes.
Any tax-exempt income accrued by the Income Fund or the Insured Fund prior to
payment by it as a dividend will lose its tax-free status if you redeem your
shares prior to the dividend record date, and instead will be included as part
of the proceeds of such redemption. Accordingly, rather than being received as a
tax-exempt dividend, it may be subject to federal and state income tax. You may
redeem shares of the Income Fund or the Insured Fund with the least adverse tax
consequences on the last business day of the month on which date the dividend
representing substantially all the net income previously accrued for the month
is declared. The percentage of income designated as tax-exempt by such Fund will
be determined after the close of the Fund's fiscal year and will be applied
uniformly to all distributions made by it during each fiscal year and may differ
from the actual tax-exempt percentage for any particular month.
Manager's Note: Notice as to the tax status of your dividends and
distributions is mailed to you annually. We will send you a statement of
your account at least quarterly and after every transaction that affects
your share balance or registration.
We are required by federal law to withhold 31% of reportable payments, which may
include redemptions (except redemptions of Money Fund and Treasury
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Trust shares), capital gains distributions and other taxable distributions, if
any, paid to certain accounts the holders of which have not complied with
Internal Revenue Service ("IRS") regulations. In connection with this
withholding requirement, you will be asked to certify on our application that
the social security or taxpayer identification number you provide is correct and
that you are not subject to 31% back-up withholding for previous underreporting
to the IRS or that you are an exempt recipient. Shareholders are also required
to disclose on their federal income tax returns their receipt of tax-exempt
income, including tax-exempt distributions from the Tax-Free Funds, even though
such distributions are not included in taxable income. For most kinds of
accounts, each Fund will report the proceeds of your redemptions to you and the
IRS annually. However, because the tax treatment also depends on your purchase
price and your personal tax position, you should keep your regular account
statements to use in determining your tax. Notice as to the tax status of your
dividends and distributions is mailed to you annually. You also will receive
periodic summaries of your account which will include information as to
dividends and distributions from securities gains, if any, paid during the year.
Depending on the composition of a Fund's income, a portion of the dividends from
net investment income may qualify for the dividends received deduction allowable
to certain U.S. corporations.
Our discussions in this Prospectus are general by nature, and you are advised to
consult your tax advisor for more complete information about federal, state, and
local tax issues. Paul, Hastings, Janofsky & Walker has expressed no opinion in
respect thereof. For example, shareholders subject to taxation in states other
than California may be taxed in such states on dividends they receive that are
exempt under the California personal income tax law.
ABOUT OUR MANAGEMENT
Our Trustees and Officers are: Richard F. Shelton, President and Trustee; John
Robert Hill, Vice President, Secretary and Trustee; Phillip W. McClanahan, Vice
President, Treasurer and Trustee; Stephen C. Rogers, Accounting and Compliance
Officer; Harry Holmes, Trustee, with Harry Holmes & Associates Consulting and
formerly with Aspen Skiing Company and Pebble Beach Company; and John B. Sias,
Trustee, President and CEO, Chronicle Publishing Company, formerly President ABC
Television Network Group, and Director, Capital Cities/ABC Inc. The Manager, CCM
Partners, which is a California limited partnership, and the Trusts were founded
in 1985. The general partner of the Manager is RFS Partners, which is a
California limited partnership controlled by Richard F. Shelton, our President.
In addition, the Manager has a number of limited partners with extensive
business and investment backgrounds, including the following individuals:
Hamilton W. Budge, of counsel to the law firm of Brobeck, Phleger & Harrison;
Doris F. Fisher, co-founder of The Gap, Inc.; Robin Quist Gates, Trustee of the
San Francisco Museum of Modern Art; Brooks Walker, Jr., Trustee of the San
Francisco Museum of Modern Art, and Brayton Wilbur, Jr., President of
Wilbur-Ellis, Inc.
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Manager's Note: Our Board of Trustees has extensive business, investment,
and money management experience. The Trustees supervise our activities and
review contractual arrangements with companies which provide us services.
The officers of the Manager have extensive experience in the investment and
securities business.
Phillip W. McClanahan is Director of Investments for the Manager. He has been
involved in the day-to-day operations of the Income Fund, the Government Fund,
the Money Fund, the Treasury Trust and the Insured Fund since their inception in
1985, 1989 (Treasury Trust) and 1992 (Insured Fund). He served as Vice President
and Portfolio Manager at Transamerica Investment Services from 1984 to 1985.
From 1966 to 1984 he was Vice President and Portfolio Manager at Fireman's Fund
Insurance Company and Amfire, Inc. For more information on Mr. McClanahan's
business experience, please see "Trustees and Officers" in the Statement of
Additional Information. Bank of America NT&SA (Bank of America Capital
Management, Inc.) is the Sub-Adviser for all of the Equity Funds. The
Sub-Adviser is a wholly owned subsidiary of BankAmerica Corporation, and
currently has approximately $60.3 billion of assets under management. The
Sub-Adviser, together with its affiliates, serves as investment adviser to
thirty two mutual funds with total assets of approximately $16.8 billion. The
Sub-Adviser currently manages approximately $2.9 billion in indexed assets.
For managing the investments and business affairs, the Income Fund, Insured
Fund, Money Fund, Treasury Trust and Government Fund pays the Manager a monthly
fee, less reimbursements as noted below, based on the following annualized
percentages of average daily net assets of the Fund throughout the month: 0.50%
of the first $100 million of net assets, plus 0.45% on net assets from $100
million to $500 million, and 0.40% of net assets above $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 0.40% of the value of its average daily net
assets. The Manager is also entitled to a monthly fee from the S&P500 Index Fund
computed at the annual rate of 0.25% of the value of its average daily net
assets. For managing the investments and business affairs, the SmallCap Fund and
the Equity Income Fund pay the Manager a monthly fee, less reimbursements as
noted below, based on the following annualized percentages of average daily net
assets of the Fund throughout the month: 0.50% of the first $500 million of net
assets, plus 0.45% on net assets from $500 million to $1 billion, and 0.40% of
net assets above $1 billion.
Pursuant to the Sub-Advisory Agreement between the Manager and the Sub-Adviser,
and subject to the overall policies, control, direction, and review of the Board
of Trustees and to the instructions and supervision of the Manager, the
Sub-Adviser is responsible for providing each Index Fund and the Equity Income
Fund with investment advice on buying and selling specific securities and
managing our portfolio investments, including the placement of orders for
portfolio transactions. For its services, the Sub-Adviser will receive from the
Manager a monthly fee, calculated at the annual rate of 0.10% of average daily
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net assets of the Index Funds, and 0.15% of average daily net assets of the
Equity Income Fund, pursuant to a Sub-Advisory Agreement with the Manager. The
Sub-Adviser's fee is not an additional expense of the Stock Funds. In the case
of the 500 Fund and MidCap Fund, for the fiscal year ending August 31, 1998, the
Sub-Adviser is voluntarily reducing its fee to 0.05% of the average daily net
assets for amounts in excess of $50 million. After August 31, 1998, the
Sub-Adviser may terminate this voluntary fee reduction at any time.
Pursuant to the Management Agreements with the Manager, each Fund is responsible
for its own operating expenses including, but not limited to, the Manager's fee;
taxes, if any; transfer agent, custodian, legal, and auditing fees; fees and
expenses of Trustees who are not members of, affiliated with, or interested
persons of the Manager; salaries of any personnel not affiliated with the
Manager; periodic insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of each Fund's net assets and of
bookkeeping and recordkeeping functions; printing and other expenses relating to
each Fund's operations; plus any extraordinary and non-recurring expenses which
are not expressly assumed by the Manager.
Manager's Note: We believe our annual fund operating expenses are among the
lowest available.
Annual operating expenses of each Fund, excluding extraordinary items, are
limited by the Manager to 1% of its average daily net assets, and the Manager
has voluntarily agreed to further limitations. The Manager has agreed to waive
its fees and absorb expenses to the extent necessary to limit total fund
operating expenses through August 31, 1998 to the following annual rates of
average net assets of each Fund: Money Fund-0.40%; Income Fund-0.65%; Insured
Fund-0.55%; Government Fund-0.65%; Treasury Trust-0.40%; 500 Fund-0.20%; MidCap
Fund-0.40%; SmallCap Fund-0.65%; and the Equity Income Fund-0.80%. The operating
expenses, including the management fee and all other expenses (excluding
extraordinary expenses), incurred by a Fund in excess of this expense ratio
limitation will be reimbursed to that Fund by the Manager out of the management
fee. The Manager paid for all of the Trusts' organization expenses and for
substantially all of the Funds' operating expenses during the initial fiscal
period ended August 31, 1986. During the fiscal years ended since then, the
Manager has reimbursed each Fund and assumed certain Fund expenses to lower the
net expenses of each Fund as set forth in their respective Financial Highlights
on pages 6 through 11. The net management fee paid by each Fund during its last
fiscal year ended August 31, 1997 as an annual percentage of average daily net
assets was: 0.48% for the Income Fund, 0.35% for the Insured Fund, 0.46% for the
Government Fund, 0.26% for the Treasury Trust, 0.29% for the Money Fund, 0.0%
for the 500 Fund, 0.19% for the MidCap Fund, 0.0% for the SmallCap and 0.0% for
the Equity Income Fund.
Manager's Note: We require a completed and signed application for each new
account you open, regardless of the method you choose for making your
initial investment.
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Other Services - Firstar Trust Company ("Firstar") serves as the custodian of
the portfolio securities and other assets of the Funds. Firstar also performs
dividend-paying functions, maintains shareholder records, and acts as transfer
agent for the Funds. For its services, Firstar is paid a monthly fee based upon
a maintenance fee for each account in the Funds, plus charges for Fund and
shareholder transactions. For an additional fee, Firstar also performs our
portfolio and net asset valuation and the bookkeeping and recordkeeping required
by the Investment Company Act of 1940, as amended.
OPENING AN ACCOUNT
You'll find all the necessary application materials included in the packet
accompanying this Prospectus. Additional paperwork may be required from
corporations, associations, and certain other fiduciaries. The minimum initial
investments and subsequent investments for each Fund is listed below.
Minimum Minimum
initial subsequent
Fund investment investment
---- ---------- ----------
Income Fund $10,000 $250
Insured Fund $10,000 $250
Money Fund $10,000 $250
Government Fund $10,000 $250
Treasury Trust $10,000 $250
500 Fund $5,000 $250
MidCap Fund $5,000 $250
SmallCap Fund $5,000 $250
Equity Income Fund $5,000 $250
We may change this minimum investment amount at any time or waive it at our
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.
HOW TO BUY SHARES
Investing by Mail - If you wish to purchase shares directly from the Funds, you
should:
o Initial Purchase -Make your check payable to the name of Fund in which you
are investing and mail it with the application to the address indicated on
the application. Please note the minimum initial investments listed above.
o 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.
Manager's Note: Purchases are effective the day we receive federal funds
(i.e., funds available at a Federal Reserve Bank).
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<PAGE>
Purchasing by Exchange - You may purchase shares in a Fund by exchanging shares
from an account in one of our related Funds. Such exchanges must meet the
minimum amounts required for initial or subsequent investments described above.
When opening an account by exchange, your new account must be established with
the same registration as your other California Investment Trust Fund Group
account and an exchange authorization must be in effect.
Purchase By Wire--
Federal funds should be wired to:
Firstar Bank
ABA # 075000022
For: Firstar Trust Company
Account # 112-952-137
For further credit to: (include the particular Fund name, the name in which
the account is registered, and the account number).
If you are opening a new account by wire, you must first call California
Investment Trust Fund Group at (800) 225-8778 to obtain an account number.
In order to make your order effective, we must have federal funds available to
us at our Bank. Accordingly, your purchase will be processed at the net asset
value next calculated after your investment has been converted to federal funds.
If you invest by check, or non-federal funds wire, allow approximately two
business days for conversion into federal funds. If you wire money in the form
of federal funds, your money will be invested at the share price next determined
after receipt of the wire. You will begin to earn dividends as of the first
business day following the day of your purchase.
All your purchases must be made in U.S. dollars and checks must be drawn on
banks located in the U.S. We reserve the right to limit the number of investment
checks processed at one time. If the check does not clear, we will cancel your
purchase, and you will be liable for any losses and fees incurred.
When you purchase by check, redemption proceeds will not be sent until we are
satisfied that the investment has been collected (confirmation of clearance will
take up to 12 days). To protect against fraud it is the policy of the Funds not
to accept third party checks. Payments by check or other negotiable bank deposit
will normally be effective within two business days for checks drawn on a member
of the Federal Reserve System and longer for most other checks. Wiring your
money to us will reduce the time you must wait before redeeming or exchanging
shares. You can wire federal funds from your bank, which may charge you a fee.
You may buy shares of a Fund through a selected securities broker. Your broker
is responsible for the transmission of your order to Firstar 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
proceedures with the Fund. Your broker can advise you of specific details.
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If you wish, you also may deliver your investment checks (and application, for
new accounts) to the Trust's office. However, if you do so, please note that
your purchase will not be deemed received, nor will it be processed, until we
have forwarded it on your behalf to Firstar which, in turn, will deposit your
checks at the Bank for conversion to federal funds.
The Funds do not consider the U.S. Postal Service or other independent delivery
service to be its agents. Therefore, deposit in the mail or with such services,
or receipt by Firstar Trust Company's Post Office Box of purchase applications
or redemption requests does not not constitute receipt by Firstar Trust Company
or the Funds.
You may wish to use dollar-cost averaging as a means of making investments of a
fixed dollar amount at regular intervals into the Funds. Dollar-cost averaging
is based on the assumption that investors cannot regularly outguess the ups and
downs of the market. It is a method of investing that turns the ups and downs of
the market to the advantage of the long-term investor. Instead of trying to time
the highs and lows, you invest the same amount of money in mutual funds at
regular intervals over a long period of time. The objective of dollar-cost
averaging is to buy more when the price is low and less when the price is high.
Although dollar-cost averaging cannot guarantee a profit (no system can give a
gain to investors who have to sell at the bottom of the market), dollar-cost
averaging allows you to take advantage of market swings by purchasing larger
quantities of shares when prices are low. For example, if you invest $1000 at
$10 per share, you receive 100 shares. If, at the time of your next purchase,
the market has dropped and the price of shares of the fund has gone down to $5
per share, you will receive 200 shares for your $1000 purchase.
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.
SHAREHOLDER SERVICES
Manager's Note: The free exchange privilege is a convenient way to sell and
to buy shares in our Funds in order to respond to changes in your goals.
Free Exchange Privilege
Our Funds have a variety of investment objectives as discussed elsewhere in this
Prospectus. Before you make an exchange please note the following:
o Read this Prospectus.
o Complete and sign an exchange authorization (if not previously done).
Exchanges may be made only among designated accounts registered in the same
name(s).
o Taxes: Each exchange actually represents the sale of shares of one Fund and
the purchase of shares in another, which may produce a gain or loss for tax
purposes. We will confirm each exchange transaction to you by mail.
o Proceeds of redemption from shares of the Fund exchanged are used to
purchase the other Fund on the day the exchange is authorized (which must be
prior to market close, normally at 4:00 p.m., Eastern time).
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o Exchange by telephone: call the appropriate Fund at 800-225-8778. Give the
names of the Funds, the exact name in which your accounts in the Funds are
registered, your account numbers, the dollar amount that you wish to
exchange and the required identification number. Telecommunications device
for the deaf ("TDD") services for hearing impaired shareholders are
available for telephone exchanges by calling (800) 864-3416.
Unless you submit an account application that indicates that you have declined
telephone exchange privileges, you agree, by signing your account application,
to authorize and direct the Funds to accept and act upon telephone, telex, fax,
or telegraph instructions for exchanges involving your account or any other
account with the same registration. The Funds employ reasonable procedures in an
effort to confirm the authenticity of telephone instructions, such as requiring
the caller to give a special authorization number. Provided these procedures are
followed, you further agree that neither a Fund nor the Transfer Agent will be
responsible for any loss, damage, cost or expense arising out of any telephone
instructions received for an account and to hold harmless Firstar and the Funds,
any of their affiliates or mutual funds managed by such affiliates, and each of
their respective directors, trustees, officers, employees and agents from any
losses, expenses, costs or liabilities (including attorneys' fees) that may be
incurred in connection with these instructions or the exercise of the telephone
exchange privilege.
You should realize that by electing the telephone exchange option, you may be
giving up a measure of security that you might otherwise have if you were to
exchange your shares in writing. For reasons involving the security of your
account, telephone transactions may be tape recorded.
Automatic Share Accumulation Plan
Under the Funds' Automatic Share Accumulation Plan, an investor may arrange to
make additional purchases (minimum $250) of Fund shares automatically on a
monthly basis by electronic funds transferred from the shareholder's checking
account if the bank which maintains the account is a member of the Automated
Clearing House, or by preauthorized checks drawn on the shareholder's bank
account. A shareholder may, of course, terminate the program at any time. There
is no fee to participate in this program. However, a service fee of $20.00 will
be deducted from your Fund account for any AIP purchase that does not clear due
to insufficient funds, or if prior to notifying the Fund in writing or by
telephone to terminate the plan, you close your bank account or in any manner
prevent withdrawal of the funds from the designated checking or NOW account.
Investors may obtain more information concerning this program, including the
application form, from the Funds.
The market value of shares of the Funds, except the Money Fund and the Treasury
Trust, is subject to fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a program does not assure
a profit or protect against a loss.
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Tax-Saving Retirement Plans
Manager's Note: Retirement plans are among the best tax breaks available to
individuals. One of our Plans may fit your needs.
We can set up your new account in a Fund under one of several tax-sheltered
plans. The following plans let you save for your retirement and shelter your
investment earnings from current taxes.
o Individual Retirement Accounts (IRA): You can also make investments in the
name of your spouse, if your spouse has no earned income. Each Fund is
subject to an annual bank maintenance fee, currently $12.50 with a maximum
annual charge of $25.00 per social security number. This fee is assessed
annually in September.
o 401(k), Profit-Sharing and Money-Purchase Plans (Keogh): open to
corporations, self-employed people and their partners, to benefit themselves
and their employees.
o 403(b) Plans. Open to eligible employees of certain states and non-profit
organizations.
We can provide you with complete information on any of these plans which
discusses benefits, provisions and fees.
Systematic Withdrawal Plan
If you own shares of 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.
ADMINISTRATIVE INFORMATION
Cash Distributions
Unless you otherwise indicate on the account application, we will reinvest all
dividends and capital gains distributions as applicable for your account in
additional shares of the Fund from which they are distributed. On the
application you may indicate by checking the appropriate box that you wish to
receive either income dividends or capital gains distributions in cash. EFT is
available to those investors who would like their dividends electronically
transferred to their personal accounts. For those investors who do not request
this feature, dividend checks will be mailed via regular mail. If you elect to
receive distributions by mail and the U.S. Postal Service cannot deliver your
checks, we will void such checks and reinvest your money in your account at the
then current net asset value and reinvest your subsequent distributions.
Statement and Reports
Investors who own solely Stock Fund shares will receive statements at least
quarterly and after every transaction that affects their share balance and/or
account registration. A statement with tax information will be mailed to you
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<PAGE>
by January 31 of each year, a copy of which will be filed with the IRS if it
reflects any taxable distributions. Twice a year you will receive our financial
statements, at least one of which will be audited.
Manager's Note: Keep statements you receive after you buy or sell shares to
assist in recordkeeping and tax calculations.
The account statements you receive will show the total number of shares of a
Fund owned by you. You may rely on these statements in lieu of share
certificates which are not necessary and will not be issued.
Manager's Note: If you are a shareholder of the Income Fund, Insured Fund,
Government Fund, Money Fund or Treasury Trust, we will send a statement of
your account at least once a month and after every transaction that affects
your share balance and/or account registration.
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.
Consolidated Mailings
In an effort to reduce mailing costs, consolidated statements will be sent to
each registrant. Consolidated statements include a summary of all Funds held by
each registrant as identified by the first line of registration, social security
number and address zip code. Consolidated statements offer convenience to
investors by summarizing account information and reducing unnecessary mail. If
you do not wish this consolidation to apply to your account(s), please notify
the Fund of this in writing at the address on the cover page of this Prospectus.
Our Share Prices
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 normally calculates this value at market close, normally 4:00
p.m. Eastern Time or 1:00 p.m. Pacific Time on each day that the NYSE is open.
The Money Fund's or Treasury Trust's net asset value will not be calculated nor
transactions processed on certain holidays observed by national banks and/or our
Shareholder Servicing Agent (Martin Luther King's Birthday, Presidents Day,
Columbus Day and Veterans Day) in addition to those days on which the NYSE is
closed.
Manager's Note: The number of shares your money buys reflects the per share
price of the Fund you are buying on the day your transaction takes place.
The share prices of the Income Fund, the Insured Fund, the Government Fund and
the Stock Funds will vary over time as interest rates and the value of their
securities vary. Portfolio securities of the Stock Funds that are listed on a
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national exchange are valued at the last reported sale price. U.S. Treasury
Bills are valued at amortized cost, which approximates market value. Portfolio
securities of the Income Fund, the Insured Fund and the Government Fund are
valued by an independent pricing service that uses market quotations
representing the latest available bid price, prices provided by market makers,
or estimates of market values obtained from yield data relating to instruments
or securities with similar characteristics. Securities with remaining maturities
of 60 days or less are valued on the amortized cost basis as reflecting fair
value. All other securities are valued at their fair value as determined in good
faith by the respective Boards of Trustees.
The share price of the Government Fund, Income Fund, Insured Fund and Stock
Funds are reported by the National Association of Securities Dealers, Inc. in
the mutual funds section of most newspapers after the heading "California
Trust"; The Government fund Nasdaq symbol is "CAUSX." The symbol for the Income
Fund is "CFNTX." The symbol for the 500 Fund is "SPFIX". The symbol for the
MidCap Fund is "SPMIX." The symbol for the Insured Fund is "CATFX". The symbol
for the SmallCap Fund is SMCIX. The symbol for the Equity Income Fund is EQTIX.
We attempt to maintain the Money Fund's and the Treasury Trust's price at $1.00
per share. Securities owned by the Money Fund and by the Treasury Trust are
valued on the basis of their amortized cost, which allocates evenly the income
earned from the date of purchase of a security until its maturity instead of
looking at actual changes in its market value. Calculations are made to compare
the value of these Funds' investments using the amortized cost method with
market values. Market valuations are obtained by using actual quotations
provided by independent pricing services, market makers, estimates of market
value, or values obtained from yield data relating to comparable classes of
money market instruments published by reputable sources. Securities for which
market valuations are not readily available or which are illiquid will be valued
at their fair values as determined in good faith by the respective Boards of
Trustees.
Performance Information
All performance information published in advertisements, sales literature and
communications to investors, including various expressions of current yield,
effective yield, tax equivalent yield, total return and distribution rate, is
calculated and presented in accordance with the rules prescribed by the
Securities and Exchange Commission.
The Money Fund and the Treasury Trust may publish both a current yield and an
effective yield for specified 7-day periods. Current yield refers to the income
generated by an investment in the Fund over the specified period which is then
annualized (i.e., the amount of income generated by the investments during that
week is assumed to be generated each week over a 52-week period and is shown as
a percentage of the investment). Effective yield is calculated in a similar
manner, but, when annualized, the income earned by the investment is assumed to
be reinvested; effective yield will differ from current yield because of the
compounding effect of this assumed reinvestment. The Money Fund may also publish
tax equivalent versions of these yields, as described below.
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It is our current practice to reflect changes in the portfolio values, if any,
of the Money Fund and the Treasury Trust in their daily dividend, and, for the
purpose of calculating their yield, any realized gains and losses or unrealized
appreciation or depreciation is not included in their daily net investment
income.
The Income Fund, the Insured Fund, Government Fund and Equity Income Fund may
publish a current yield over specified 30-day periods reflecting the income per
share earned by each respective Fund's investments. Current yield for these
Funds is calculated by dividing each Fund's annualized net investment income per
share during the specified period by the net asset value per share at the end of
such period. The Money Fund, the Income Fund and the Insured Fund also may
publish a tax equivalent yield demonstrating the yield from a taxable investment
necessary to produce an after-tax yield equivalent to the yields generated by
these Funds, which invest principally in tax-exempt obligations. Tax equivalent
yield is computed by dividing the tax exempt portion of each respective Fund's
current (or effective) yield, calculated as indicated above, by one minus the
stated income tax rate and adding the product to that portion (if any) of the
Fund's yield that is not tax exempt.
From time to time each Fund may publish its total return. Yield information for
the Income Fund, the Insured Fund and the Government Fund will be accompanied by
total return information on these Funds. Total return information will state
each Fund's average annual compounded rates of return over the most recent four
calendar quarters and over the life of the Fund, based upon the value of shares
acquired through a hypothetical $10,000 investment at the beginning of the
specified period and the net asset value of such shares at the end of the period
assuming reinvestment of all distributions at net asset value. Each Fund
(including the Money Fund and the Treasury Trust) also may advertise aggregate
and average total return information over different periods of time. Aggregate
total return information is calculated in a manner similar to average annual
total return, except that the results are not annualized.
Each Fund also may publish a distribution rate in investor communications
preceded or accompanied by a copy of this Prospectus. The current distribution
rate for each Fund is calculated by dividing the annualization of the total
distributions made by the Fund during a stated period by the net asset value per
share at the end of such period. The distribution rate for a Fund may differ
from its yield because the distribution rate may be calculated for a different
period of time and may contain items of income that are not reflected in a
Fund's yield.
In each case, performance information will be based on past performance and will
reflect all recurring charges against Fund income. Performance information is
based on historical data and does not indicate the future performance of any
Fund. See the Statement of Additional Information for a more detailed
explanation and actual calculations of each Fund's yield for the 7-day or 30-day
period (as appropriate) ended August 31, 1997.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day that the NYSE
is open. Your shares will be redeemed at the net asset value next calculated
after we have received your redemption request in proper form (see
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below). Remember that we may hold redemption proceeds until we are satisfied
that we have collected investments which were made by check. To avoid these
possible delays, which could be up to 12 calendar days, you should consider
making your investment by wire, following the instructions on page 44.
By Mail: To:
California Investment Trust Fund Group
44 Montgomery Street, Suite 2100
San Francisco, CA 94104
Send a "letter of instruction" specifying the name of the Fund, the number of
shares to be sold, your name, your account number, and the additional
requirements listed below that apply to your particular account.
<TABLE>
<CAPTION>
Type of Registration Requirements
- -------------------- ------------
<S> <C>
Individual Letter of instruction signed by all person(s)
Joint Tenants required to sign for the account, exactly as it
Tenants In Common is registered, accompanied by signature guarantee(s).
Sole Proprietorship
Custodial Uniform Gifts to Minors Act
General Partners
Corporation Letter of instruction and a corporate resolution, signed
Association by person(s) required to sign for the account,
accompanied by signature guarantee(s).
Trust A letter of instruction signed by the Trustee(s), with a
signature guarantee. (If the Trustee's name is not regis-
tered on your account, also provide a copy of the trust
document, certified within the last 60 days.)
</TABLE>
If you do not fall into any of these registration categories (e.g., Executors,
Administrators, Conservators, Guardians, etc.), please call the Fund for further
instructions.
Firstar requires that signature(s) be guaranteed by an eligible signature
guarantor such as a commercial bank, broker-dealer, credit union, securities
exchange or association, clearing agency or savings association.
Manager's Note: With checkwriting, our most convenient redemption procedure,
your investment will continue to earn income until the check clears your
account. This checkwriting feature is not available for the Stock Funds.
By Check (except Stock Funds, minimum $500).
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. (There is no charge for this service and you may write an unlimited
number of checks). The checkwriting feature is not available for the Stock
Funds. Please note, a $20.00 fee will be charged to your account for any
bounced check.
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By Exchange
You must meet the minimum investment requirement of the other Fund. You can
only exchange between accounts with identical registration. Same day
exchanges are accepted until market close, normally 4:00 p.m., Eastern time
(1:00 p.m., Pacific Time).
By Wire
You must have applied for the wire feature on your account. We will notify
you that this feature is active and you may then make wire redemptions by
calling the Fund before 1:00 p.m., Pacific time. This means your money will
be wired to your bank the next business day. There is a charge for each wire
(currently $10.00).
By EFT
You must have applied for the EFT withdrawal feature on your account.
Typically, money sent by EFT will be sent to your bank within three business
days after the sales of your securities. There is no fee for this service.
By Telephone
Call the Fund at (800) 225-8778. Give the name of the Fund, the exact name
in which your account is registered, your account number, the required
identification number and the number of shares or dollar amount that you
wish to redeem. TDD services for hearing impaired shareholders are available
for telephone redemptions by calling (800) 864-3416. See the discussion of
limitation of liability under "Shareholder Services" - "Free Exchange
Privilege."
Retirement Plan shareholders should complete a Rollover-Distribution Election
Form.
Redemption Requirements to Remember
Before you redeem any shares in your account, please review the following
information:
Manager's Note: You should not attempt to close your account by check, since
you cannot be sure of the number of shares and value of your account. Use
the wire redemption or mail redemption feature to close your account.
Any redemption request we receive from you must be in proper form, which means,
among other things, that we must have a properly completed account application
on file for you, you must properly sign your request, and if you are a
corporation or another entity, we may require current corporate resolutions and
other documents and information. Once your shares are redeemed, we will normally
send you the proceeds within one day but not later than within seven days. When
the NYSE is closed (or when trading is restricted) for any reason other than its
customary weekend or holiday closings, or under any emergency circumstances as
determined by the Securities and Exchange Commission to merit such action, we
may suspend redemption or postpone payment dates. If you want to keep your
account(s) open, please be sure that the value of all of your accounts in the
Funds combined does not fall below $5,000 ($1,000 in the case of the Stock
Funds) because of redemptions. Otherwise, we may close them and mail you the
proceeds at the address we
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have in our records. We will give you 30 days' written notice that your
account(s) will be closed unless you make an investment to increase your
aggregated account balance(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 Income Fund, the Insured Fund, the Government Fund and
the Stock Funds will fluctuate and you may receive more or less than your
original investment when you redeem. If you are an Income Fund, an Insured Fund
or a Government Fund shareholder, you should not attempt to draw a check for
more than 80% of the value of the shares in your account due to their potential
fluctuations. If you are a Money Fund or Treasury Trust shareholder, you should
not write a check on your account for more than the amount of money which is in
your account. In any Fund, if the amount of your check is greater than the value
of your account, your check will be returned to you unpaid and you may be
subject to extra charges and penalties. The Bank currently charges you $20 for
each check rejected because of an insufficient balance, and the bank where your
check is deposited may charge the account in which the check was deposited an
additional amount.
Shareholder inquiries should be directed to the Funds at:
44 Montgomery Street, Suite 2100, SanFrancisco, CA 94104; or
by calling the Funds at (800) 225-8778.
MISCELLANEOUS INFORMATION
The Trusts were organized as Massachusetts business trusts on September 11,
1985. The Agreement and Declaration of Trust for each Trust permits the Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest without par value, which may be issued in any number of series (called
Funds). Such shares have no preemptive, conversion, or sinking rights. You have
equal and exclusive rights to dividends and distributions declared by your Fund
and to the net assets of your Fund upon liquidation or dissolution.
As business trusts, we are not required, nor do we intend, to hold annual
shareholder meetings. However, we may hold special meetings for a specific Fund
or a Trust as a whole for purposes such as electing Trustees, changing
fundamental policies, or approving an investment management agreement. You also
have equal rights as to voting and vote separately by Fund as to issues
affecting only your Fund (such as changes in fundamental investment policies and
objectives). Your voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in any election of Trustees can, if they choose to
do so, elect all of the Trustees. Meetings of shareholders may be called by the
Trustees in their discretion or upon demand of the holders of 10% or more of the
outstanding shares of any Fund for the purpose of electing or removing Trustees.
Our Board of Trustees may from time to time offer other Funds of either Trust,
the assets and liabilities of which will likewise be separate and distinct from
any other Fund of either Trust. Although this offering of shares of each of our
Funds constitutes a separate and distinct offering of such shares, it is
possible that a Fund might become liable for any misstatements or omissions from
this
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Prospectus or the Statement of Additional Information about one of the other
Funds. The Board of Trustees of each Trust has considered this factor with
respect to each Trust in approving the use of a single, combined Prospectus and
a joint Statement of Additional Information for all of the Funds.
The following have been appointed by the Board of Trustees to serve the Trusts
and the Funds:
Investment Manager: CCM Partners, a California limited Partnership, 44
Montgomery Street, Suite 2100, San Francisco, California 94104.
Custodian Bank, Shareholder Servicing and Transfer Agent: Firstar Trust Company,
615 East Michigan Street, Milwaukee, Wisconsin 53202.
Legal Counsel: The validity of the shares of beneficial interest offered hereby
will be passed upon by Paul, Hastings, Janofsky & Walker, 345 California Street,
29th Floor, San Francisco, California 94104.
Auditors: Tait, Weller & Baker, Eight Penn Center Plaza, Suite 800,
Philadelphia, Pennsylvania 19102-1707. Distributor: RFS Partners, 44 Montgomery
Street, Suite 2100, San Francisco, California 94104.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus or in the Statement of Additional
Information.
GLOSSARY
Tax Anticipation Notes are issued to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenue,
to be payable from these specific future taxes.
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.
Bond Anticipation Notes are normally 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. After
successful completion and acceptance, many projects receive permanent financing
through the Federal Housing Administration under FNMA (the Federal National
Mortgage Association) or GNMA (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.
Short-Term Discount Notes (tax-exempt commercial paper) are promissory notes
issued by municipalities to supplement their cash flow. The ratings A-1 and
Prime-1 are the highest commercial paper ratings assigned by S&P and Moody's.
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Variable rate obligations provide for adjustment in interest rates (which are
set as a percentage of a designated base rate such as the prime rate of a bank
or the 90-day U.S. Treasury Bill rate) on specific dates, while floating rate
obligations have an interest rate which changes whenever there is a change in a
designated base rate. Their relationship to the designated base rate means they
are less subject to fluctuations in value. Our investment in these obligations
will normally involve industrial development revenue bonds.
Certificates of participation represent an undivided interest in municipal
obligations which are generally owned by a financial institution (primarily
banks) and provide for ownership in proportion to a Fund's interest compared to
the total principal amount of the underlying obligation. Each certificate of
participation is backed by an irrevocable letter of credit or guaranty of a
bank. We generally have the right to sell the instrument back to the issuing
bank or draw on the letter of credit on demand (after seven days' notice, at
most).
Demand Feature and Puts. The variable and floating rate obligations described
above may have a "demand feature" which means a Fund can demand payment at par
plus accrued interest from the issuer or another party on short notice
(generally not to exceed seven days) prior to specified notice dates. We will
consider the maturities of these adjustable rate demand instruments to be the
longer of the specified notice periods or the periods remaining until the next
rate adjustment, even though the stated maturity of the instrument may be
longer. Some of these instruments may be secured by letters of credit or another
credit support arrangement provided by banks. In addition, we may purchase
certain instruments (which may or may not have adjustable rates) which are
payable on demand only on a specified date or series of dates; in any such case
the next demand date will be treated as the maturity of the instrument. Purchase
of these securities with these demand features normally results in a yield to
maturity lower than that available on comparable securities without a demand
feature.
Each Fund may acquire a right to sell a security back to the issuer or to
another party in order to enhance liquidity. Such a right entitles the Fund to
"put" securities back to the issuer or to another party within a specified
period of time or on a date certain at an agreed upon price. The maturity of an
obligation on which we have purchased a put will be the earliest date certain on
which we can require payment.
In all cases receipt of payment for a security subject to a demand feature or a
put depends on the ability of the other party to pay for the security when
requested. We will limit these transactions to institutions which the Manager
believes present minimal credit risks.
(See the Statement of Additional Information of the Trusts for further
information on these investment practices.
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CALIFORNIA INVESTMENT TRUST
FORM N-1A
---------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
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CALIFORNIA INVESTMENT TRUST FUND GROUP
44 Montgomery Street, Suite 2100
San Francisco, California 94104
(415) 398-2727
Statement of Additional Information - January 1, 1998
The California Investment Trust Fund Group (the "Trusts") presently
consists of nine separate funds which are part of California Investment Trust
and California Investment Trust II (collectively the "Trusts"): California
Tax-Free Income Fund (the "Income Fund"), California Insured Intermediate Fund
(the "Insured Fund"), California Tax-Free Money Market Fund (the "Money Fund"),
U.S. Government Securities Fund (the "Government Fund"), The United States
Treasury Trust (the "Treasury Trust"), the S&P 500 Index Fund (the "500 Fund"),
the S&P MidCap Index Fund (the "MidCap Fund"), the S&P SmallCap Index Fund (the
"SmallCap Fund"), and the Equity Income Fund.
This Statement of Additional Information relates to all funds of the
Trusts. These funds are sometimes referred to herein collectively as the "Funds"
and individually as a "Fund."
THE COMBINED PROSPECTUS FOR THE FUNDS DATED JANUARY 1, 1998, AS MAY BE
AMENDED FROM TIME TO TIME, PROVIDES THE BASIC INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN A FUND, AND MAY BE OBTAINED WITHOUT CHARGE FROM THE FUNDS AT THE
ABOVE ADDRESS. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUS. THIS STATEMENT IS INTENDED TO PROVIDE YOU WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUSTS AND EACH FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
California Tax-Free Income Fund and California Insured Intermediate Fund both
seek as high a level of income exempt from regular Federal income taxes and
California personal income taxes as is consistent with prudent investment
management and safety of capital. The Income Fund invests in intermediate and
long-term municipal bonds. The Insured Fund invests primarily in municipal
securities that are covered by insurance guaranteeing the timely payment of
principal and interest.
California Tax-Free Money Market Fund has the objectives of capital
preservation, liquidity, and the highest achievable current income, exempt from
regular Federal income taxes and California personal income taxes consistent
with safety. This fund invests in short-term securities and attempts to maintain
a constant net asset value of $1.00 per share.
U.S. Government Securities Fund seeks liquidity, safety from credit risk and as
high a level of income as is consistent with these objectives by investing in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities, primarily Government National Mortgage Association
Certificates ("GNMA").
The United States Treasury Trust seeks capital preservation, safety, liquidity,
and, consistent with these objectives, the highest attainable current income
exempt from state income taxes. This fund will invest its assets only in
short-term U.S. Treasury securities and its income will be exempt from
California (and most other states') personal income taxes.
S&P 500 Index Fund is a diversified mutual fund that seeks to provide investment
results that correspond to the total return of common stocks publicly traded in
the United States, as represented by the Standard & Poor's (S&P) 500 Composite
Stock Price Index (the "S&P 500").
S&P MidCap Index Fund is a diversified mutual fund that seeks to provide
investment results that correspond to the total return of publicly traded common
stocks of medium-size domestic companies, as represented by the S&P MidCap 400
Index (the "MidCap Index").
S&P SmallCap Index Fund is a diversified mutual fund that seeks to provide
investment results that correspond to the total return of publicly traded common
stocks of small-sized companies, as represented by the S&P 600 SmallCap Index.
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.
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CONTENTS Page
About the California Investment Trust Fund Group .................... B-2
The Tax-Free Funds' Investment Objectives and Policies .............. B-2
Investment Objectives and Policies of the Government
Fund and the Treasury Trust ...................................... B-3
Investment Objectives and Policies of the Stock Fund ................ B-4
Description of Investment Securities and
Portfolio Techniques ............................................. B-4
Investment Restrictions ............................................. B-13
Trustees and Officers ............................................... B-16
Investment Management and Other Services ............................ B-17
The Trusts' Policies Regarding Broker-Dealers
Used for Portfolio Transactions ................................... B-20
Additional Information Regarding Purchases and
Redemptions of Fund Shares ........................................ B-21
Taxation ............................................................ B-23
Yield Disclosure and Performance Information ........................ B-26
Miscellaneous Information ........................................... B-29
Financial Statements ................................................ B-31
Appendix ............................................................ B-31
ABOUT THE CALIFORNIA INVESTMENT TRUST FUND GROUP
The California Investment Trust Fund Group currently consists of two
diversified, open-end management investment companies, commonly called "mutual
funds": California Investment Trust ("CIT") and California Investment Trust II
("CIT II"). Each Trust issues its shares of beneficial interest with no par
value in different series, each known as a "fund." Currently, CIT has three
separate funds, each of which maintains a totally separate investment portfolio:
the Income Fund, the Money Fund, and the Insured Fund. CIT II currently has six
Funds, the Government Fund, the Treasury Trust, the 500 Fund, the MidCap Fund,
the SmallCap Fund and the Equity Income Fund. The Income Fund, the Money Fund
and the Insured Fund are also referred to herein as the "Tax-Free Funds." The
500 Fund, the MidCap Fund and the SmallCap Fund are also referred to herein as
the "Index Funds." The Index Funds, combined with the Equity income Fund, are
referred to as the "Stock Funds". The Government Fund was originally named the
"California GNMA Fund."
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
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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 Baa 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 rating
categories or if unrated of similar quality to securities in one of the top two
ratings.
If the rating on an issue held in either the Income or the Insured Fund's
portfolio is downgraded, CCM Partners (the "Manager") will consider such event
in its evaluation of the overall investment merits of that security but such
consideration will not necessarily result in the automatic sale of the security.
When the Income or the Insured Fund invests in securities not rated by S&P,
Moody's, or Fitch, it is the responsibility of our Manager to evaluate them and
determine that they are of at least equal quality to rated securities.
The Money Fund invests in high-quality securities, whether rated or
unrated. Such issues include those rated, at the time of purchase, not lower
than Aa (applicable to municipal bonds), MIG-2 (applicable to municipal notes),
or P-1 (applicable to commercial paper) by Moody's; AA (bonds), SP-1 (notes), or
A-1 (commercial paper) by S&P; or AA (bonds), FIN-1+ (notes), or Fitch-2
(commercial paper) by Fitch. Generally, all of the instruments held by the Money
Fund are offered on the basis of a quoted yield to maturity and the price of the
security is adjusted so that relative to the stated rate of interest, it will
return the quoted rate to the purchaser.
Subsequent to its purchase by the Income Fund, the Insured Fund or the
Money Fund, a municipal security may be assigned a lower rating or cease to be
rated. Such an event would not necessarily require the elimination of the issue
from the portfolio, but CCM Partners ("the Manager") will consider such an event
in determining whether the Income, the Insured Fund or the Money Fund should
continue to hold the security in its portfolio. In addition to considering
ratings assigned by the rating services in its selection of portfolio securities
for the Income Fund or the Money Fund, the Manager considers, among other
things, information concerning the financial history and condition of the issuer
and its revenue and expense prospects and, in the case of revenue bonds, the
financial history and condition of the source of revenue to service the debt
securities.
INVESTMENT OBJECTIVES AND POLICIES OF THE
GOVERNMENT FUND AND THE TREASURY TRUST
The following information supplements the investment objectives and basic
policies of the Government Fund and the Treasury Trust as set forth in the
Prospectus.
The Government Fund seeks to provide liquidity, safety from credit risk and
as high a level of income as is consistent with such objectives by investing in
full faith and credit obligations of the U.S. Government and its agencies or
instrumentalities. To achieve its objective, the fund currently invests
primarily in "GNMA Certificates" (popularly called GNMA's or "Ginnie Mae's").
GNMA's are
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Government National Mortgage Association mortgage-backed securities representing
part ownership of a pool of mortgage loans on real property.
A GNMA Certificate differs from a bond in that principal is scheduled to be
paid back by the borrower over the length of the loan rather than returned in a
lump sum at maturity. The Government Fund will purchase "modified pass-through"
type GNMA Certificates for which the payment of principal and interest on a
timely basis is guaranteed, rather than the "straight-pass through" Certificates
for which such guarantee is not available. The Government Fund may also purchase
"variable rate" GNMA Certificates or any other type which may be issued with
GNMA's guarantee. The balance of the Government Fund's assets is invested in
other securities issued or guaranteed by the U.S. Government, including U.S.
Treasury bills, notes, and bonds.
Securities of the type to be included in the Government Fund have
historically involved little risk of principal if held to maturity. However, due
to fluctuations in interest rates, the market value of such securities may vary
during the period of a shareholder's investment in the Government Fund.
GNMA Certificates are created by an "issuer," which is a Federal Housing
Administration ("FHA") approved lender, such as mortgage bankers, commercial
banks and savings and loan associations, who also meet criteria imposed by GNMA.
The issuer assembles a specific pool of mortgages insured by either the FHA or
the Farmers Home Administration or guaranteed by the Veterans Administration.
Upon application by the issuer, and after approval by GNMA of the pool, GNMA
provides its commitment to guarantee timely payment of principal and interest on
the GNMA Certificates secured by the mortgages included in the pool. The GNMA
Certificates, endorsed by GNMA, are then sold by the issuer through securities
dealers.
The GNMA guarantee of timely payment of principal and interest on GNMA
Certificates is backed by the full faith and credit of the United States. GNMA
may borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee.
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagees or by result of foreclosure, such principal payments are passed
through to the Certificate holders (such as the Government Fund). Accordingly,
the life of the GNMA Certificate is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayment rights, it is not possible to predict the life of a
particular GNMA Certificate, but FHA statistics indicate that 25 to 30 year
single-family dwelling mortgages have an average life of approximately 12 years.
Generally, GNMA Certificates bear a nominal "coupon rate" which represents
the effective FHA-Veterans Administration mortgage rates for the underlying pool
of mortgages, less GNMA and issuer's fees. Payments to holders of GNMA
Certificates consist of the monthly distributions of interest and principal less
the GNMA and issuer's fees. The actual yield to be earned by the holder of a
GNMA Certificate is calculated by dividing such payments by the purchase price
paid for the GNMA Certificate (which may be at a premium or a discount from the
face value of the Certificate). Monthly distributions of interest, as contrasted
to semi-annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising the effective
annual yield earned on GNMA Certificates.
The portion of the payments received by the Government Fund as a holder of
the GNMA Certificates which constitutes a return of principal is added to the
Government Fund's cash available for investment in additional GNMA Certificates
or other U.S. Government guaranteed securities. The interest portion received by
the Government Fund is distributed as net investment income to the Fund's
shareholders.
The Manager continually monitors the Government Fund's investments, and
changes are made as market conditions warrant. However, the Fund does not engage
in the trading of securities for the purpose of realizing short-term profits.
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The Treasury Trust seeks capital preservation, safety, liquidity, and,
consistent with these objectives, the highest attainable current income exempt
from state income taxes, by investing exclusively in U.S. Treasury securities,
namely bills, notes or bonds which are direct obligations of the U.S.
Government. The Treasury Trust's net assets will at the time of investment have
remaining maturities of 397 days or less. The dollar weighted average maturity
of its portfolio will generally be 90 days or less and it will attempt to
maintain a constant net asset value of $1.00 per share.
INVESTMENT OBJECTIVES AND POLICIES OF THE STOCK FUNDS
As stated in the Prospectus, the investment objective of the 500 Fund is to
seek investment results that correspond to the total return (i.e., the
combination of capital changes and income) of common stocks publicly traded in
the United States, as represented by the S&P 500. The S&P 500 is a well-known
stock market index that includes common stocks of companies representing
approximately 72% of the market value of all common stocks publicly traded in
the United States. As of October 31, 1997, companies included in the Index range
from $549 million to $211 billion in market capitalization. The median market
capitalization of the stocks in the S&P 500 Index is approximately $6.4 billion.
The Manager believes that the performance of the S&P 500 is representative of
the performance of publicly traded common stocks in general.
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 MidCap Index. The MidCap Index, representing approximately
8% of the market value of all common stocks publicly traded in the United
States, is composed of 400 selected common stocks of medium-size domestic
companies with market capitalization's between $236 million and $11 billion (as
of October 31, 1997). The median market capitalization of the stocks in the
MidCap Index is approximately $1.7 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", The S&P SmallCap 600 Index is a registered trade mark of Standard &
Poor's). The SmallCap Index, representing about 4% of the market value of all
common stocks publicly traded in the United States, was composed of 600 selected
domestic companies with market capitalization's between $39 million and $2.7
billion. The median market capitalization of the stocks in the SmallCap Index
was $500.8 million (as of October 31, 1997).
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.
We 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 our strategies, we
expect that the Fund will have less price volatility that the S&P 500 Index.
DESCRIPTION OF INVESTMENT SECURITIES AND PORTFOLIO TECHNIQUES
Municipal Securities
The Prospectus and its Glossary briefly describe the general categories and
nature of municipal securities. Discussed below are the major attributes of the
various municipal and other securities in which each of the Tax-Free Funds may
invest and of the portfolio techniques the Income Fund or the Money Fund may
utilize.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the issuer's taxing power for the payment
of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under the Federal Revenue
Sharing Program. They also are usually general obligations of the issuer.
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Bond Anticipation Notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the Federal National Mortgage
Association or the Government National Mortgage Association.
Project Notes are instruments sold by the Department of Housing and Urban
Development but issued by a state or local housing agency to provide financing
for a variety of programs. They are backed by the full faith and credit of the
U.S. Government, and generally are for periods of one year or less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (397
days or less) promissory notes issued by municipalities to supplement their cash
flow.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects including: electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund which may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
are provided further security in the form of a state's assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds which pay tax-exempt interest are in most
cases revenue bonds and are issued by or on behalf of public authorities to
raise money to finance various privately operated facilities for business
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports, and
parking. The payment of the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of the real and personal property so financed as
security for such payment. As a result of 1986 federal tax legislation,
industrial revenue bonds may no longer be issued on a tax-exempt basis for
certain previously permissible purposes, including sports and pollution control
facilities.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities in
which the Tax-Free Funds may invest.
Variable Rate Demand Notes ("VRDN's") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period prior to specified dates,
generally at 30, 60, 90, 180, or 365 day intervals. The interest rates are
adjustable at intervals ranging from daily to six months. Adjustment formulas
are designed to maintain the market value of the VRDN at approximately the par
value of the VRDN upon the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.
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
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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 reduce changes in the value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed income securities. The Tax-Free Funds may
invest in VRDN's on which stated minimum or maximum rates, or maximum rates set
by state law, limit the degree to which interest on such VRDN's may fluctuate;
to the extent it does, increases or decreases in value may be somewhat greater
than would be the case without such limits. Because the adjustment of interest
rates on the VRDN's is made in relation to movements of various interest rate
adjustment indices, the VRDN's are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
For purposes of determining whether a VRDN held by a Tax-Free Fund matures
within one year from the date of its acquisition, the maturity of the instrument
will be deemed to be the longer of (1) the demand period required before the
Tax-Free Fund is entitled to receive payment of the principal amount of the
instrument, or (2) the period remaining until the instrument's next interest
rate adjustment. The maturity of a VRDN will be determined in the same manner
for purposes of computing a Tax-Free Fund's dollar-weighted average portfolio
maturity.
Obligations with Puts Attached. Each Tax-Free Fund may purchase municipal
securities together with the right to resell the securities to the seller at an
agreed upon price or yield within a specified period prior to the maturity date
of the securities. Although it is not a put option in the usual sense, such a
right to resell is commonly known as a "put" and is also referred to as a
"stand-by commitment." The Tax-Free Funds will use such puts in accordance with
regulations issued by the Securities and Exchange Commission ("SEC"). The
Manager understands that the Internal Revenue Service (the "IRS") has issued a
revenue ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain taxpayers (which do not serve as precedent for other taxpayers) to
the effect that tax-exempt interest received by a regulated investment company
with respect to such obligations will be tax-exempt in the hands of the company
and may be distributed to its shareholders as exempt-interest dividends. The IRS
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each Tax-Free Fund intends to
take the position that it is the owner of any municipal obligations acquired
subject to a stand-by commitment or similar put right and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
its hands. There is no assurance that stand-by commitments will be available to
the Tax-Free Funds nor have the Tax-Free Funds assumed that such commitments
would continue to be available under all market conditions.
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U.S. Government Obligations, Other Securities and Portfolio Techniques
U.S. Government Obligations. U.S. Treasury obligations are issued by the
Treasury and include Treasury bills (maturing within one year of the date they
are issued), certificates of indebtedness, notes and bonds (issued with
maturities longer than one year). Such obligations are backed by the full faith
and credit pledge of the U.S. Government. Agencies and instrumentalities of the
U.S. Government are established under the authority of an act of Congress and
include, but are not limited to, the Government National Mortgage Association,
the Tennessee Valley Authority, the Bank for Cooperatives, the Farmer's Home
Administration, Federal Home Loan Banks, the 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 Bank of America NT&SA (Bank of America Capital Management,
Inc.), the Stock Funds' sub-adviser (the "Sub-Adviser"), subject to the
oversight of the Manager and the Board of Trustees of CIT II.
When-Issued Purchases and Forward Commitments. New issues of Government
securities and municipal securities may be offered on a when-issued basis.
Accordingly, the Tax-Free Funds and the Government Fund may purchase securities
on a when-issued or forward commitment basis. When-issued purchases and forward
commitments involve a commitment by the funds to purchase securities at a future
date. The price of the underlying securities (usually expressed in terms of
yield) and the date when the securities will be delivered and paid for (the
settlement date) are fixed at the time the transaction is negotiated.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining a fund's net asset value starting
on the day the fund agrees to purchase the securities. Therefore, if a fund
remains substantially fully invested at the same time that it has committed to
purchase securities on a when-issued or forward commitment basis, its net asset
value per share may be subject to greater price fluctuation. A fund does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. Settlement of when-issued purchases
and forward commitments generally takes place within two months of the date of
the transaction, but delayed settlements beyond two months may be negotiated.
The funds make commitments to purchase securities on a when-issued or
forward commitment basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, each fund may
dispose of or renegotiate a commitment after it is entered into, and may
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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. As indicated in the Prospectus, although the Stock Funds have no current
intention to do so, each Stock Fund may lend up to 10% of its portfolio
securities to non-affiliated brokers, dealers and financial institutions
provided that cash or U.S. Government securities equal to 100% of the market
value of the securities loaned is deposited by the borrower with the lending
fund and is maintained each business day. While such securities are on loan, the
borrower will pay such fund any income accruing thereon, and the fund may invest
or reinvest the collateral (depending on whether the collateral is cash or U.S.
Government securities) in portfolio securities, thereby earning additional
income. Each fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. Loans are typically subject to termination by the fund in
the normal settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the loan
is terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the lending fund and its
shareholders. A fund may pay reasonable finders', borrowers', administrative,
and custodial fees in connection with a loan of its securities. The Manager (the
Sub-Adviser in the case of the Stock Funds) 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
itse financial obligations. The following is not an exhaustive list, constitutes
only a brief summary, does not purport to be a complete description, and is
based on information drawn from official statements and prospectuses relating to
securities offerings of the State of California that have come to the attention
of the Tax-Free Funds and were available before the date of this Statement of
Additional Information. The Tax-Free Funds have not independently verified such
information.
As used below, "California Tax-Exempt Securities" includes issues secured
by a direct payment obligation of the State and obligations of other issuers
that rely in whole or in part on State revenues to pay their obligations, the
interest on which is, in the opinion on bond counsel, exempt from federal income
tax and California personal income tax. Property tax revenues and part of the
State's General Fund surplus are distributed to counties, cities and their
various taxing entities; whether and to what extent a portion of the State's
General Fund will be so distributed in the future is unclear. State Budgetary
Considerations
Overview. After suffering through a severe recession, since the start of
1994 California's economy has been on a steady recovery. Employment has grown by
over 500,000 in 1994 and 1995, and the pre-recession employment level is
expected to be matched in 1996. The strongest growth has been in export-related
industries, business services, electronics, entertainment, and tourism, which
has offset the recession-related losses which were heaviest in aerospace and
defense-related industries, finance and insurance. This recession seriously
affected State tax revenues, which basically mirror economic conditions, and
increased expenditures for health and welfare programs. As a result, from the
late 1980's until 1992-93, the State experienced recurring budget deficits. A
further consequence of the largest 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.
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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 have been reduced. Since October 1992,
three major nationally recognized statistical rating organizations have 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.
Due to the improved California economy, however, the State's finances have
improved. The 1995-96 fiscal year budget act projected that, after repaying the
last of the budget deficit carried over from prior fiscal years, there would be
a positive balance of 28 million in the budget reserve at June 30, 1996. In May
1996, the projections for the 1995-96 fiscal year were updated and it was then
estimated that there would be a small deficit of about 70 million in the budget
reserve at June, 30, 1996. Although the 1996-97 budget appropriated a budget
reserve of 305 million at June 30, 1997, this assumed savings of about 660
million in the State's health and welfare costs based on changes to federal law,
including welfare reform. The August 1996 federal welfare reform legislation is
projected to provide only about 360 million of the assumed 660 in savings,
however, (subject to further adjustment based on how the State implements
changes to its welfare system).
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit imposed by its Constitution on
"proceeds of taxes". Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
Issues Affecting Local Governments and Special Districts
Proposition 13. Certain California Tax-Exempt Securities may be obligations
of issuers that rely in whole or in part on ad valorem real property taxes for
revenue. In 1978, California voters approved Proposition 13, which amended the
State Constitution to limit ad valorem real property taxes and restrict the
ability of taxing entities to increase property tax and other revenues. With
certain exceptions, the maximum ad valorem real property tax is limited to 1% of
the value of real property. The value of real property may be adjusted annually
for inflation at a rate not exceeding 2% per year, or reduced to reflect
declining value, and may also be adjusted when there is a change in ownership or
new construction with respect to the property. Constitutional challenges to
Proposition 13 to date have been unsuccessful.
The State, in response to the significant reduction in local property tax
revenues as a result of the passage of Proposition 13, enacted legislation to
provide local government with increased expenditures from the General Fund. This
post-Proposition 13 fiscal relief has, however, ended.
Proposition 62. This initiative placed further restrictions on the ability
of local governments to raise taxes and allocate approved tax revenues. Several
recent decisions of the California Courts of Appeal have held parts of
Proposition 62 unconstitutional. Recently, however, the California Supreme Court
upheld a requirement imposed by Proposition 62 that "special taxes" be approved
by two-thirds of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been imposed by local governments
in California and make it more difficult for local governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State appropriations
limit and State funding of public education below the university level by
guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives also require that the State establish a prudent reserve fund for
public education.
Proposition 218. Passed in November 1996, this initiative places additional
limitations on the ability of California local governments to increase general
taxes and impose special assessments. Taxes, assessments and fees have a grace
period of up to two years from November 1996 to receive voter approval.
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
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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 Sub-Adviser expects that futures transactions for the 500 Fund, the
MidCap Fund, the SmallCap Fund and the Equity income Fund will typically involve
the S&P 500, the MidCap Index, the Russell 2000 and the S&P BARRA/Value Index,
respectively. Because the value of index futures depends primarily on the value
of their underlying indexes, the performance of broad-based contracts will
generally reflect broad changes in common stock prices. Each Fund's investments
may be more or less heavily weighted in securities of particular types of
issuers, or securities of issuers in particular industries, than the indexes
underlying its index futures positions. Therefore, while a fund's index futures
positions should provide exposure to changes in value of the underlying indexes
(or protection against declines in their value in the case of hedging
transactions), it is likely that, in the case of hedging transactions, the price
changes of a Fund's index futures positions will not match the price changes of
the fund's other investments. Other factors that could affect the correlation of
a fund's index futures positions with its other investments are discussed below.
Futures Margin Payments. Both the purchaser and seller of a futures
contract are required to deposit "initial margin" with a futures broker (known
as a "futures commission merchant," or "FCM"), when the contract is entered
into. Initial margin deposits are equal to a percentage of the contract's value,
as set by the exchange where the contract is traded, and may be maintained in
cash or high quality liquid securities. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. Initial and
variation margin payments are similar to good faith deposits or performance
bonds, unlike margin extended by a securities broker, and initial and variation
margin payments do not constitute purchasing securities on margin for purposes
of the fund's investment limitations. In the event of the bankruptcy of a FCM
that holds margin on behalf of a fund, the fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers. The Sub-Adviser 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
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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 Sub-Adviser also intends to follow certain other limitations on each of
the Stock Fund's futures activities. Under normal conditions, a fund will not
enter into any futures contract if, as a result, the sum of (i) the current
value of assets hedged in the case of strategies involving the sale of
securities, and (ii) the current value of the indexes or other instruments
underlying the Fund's other futures positions would exceed 20% of such fund's
total assets (35% if total assets are below $25 million). In addition, each fund
does not intend to enter into futures contracts that are not traded on exchanges
or boards of trade.
The above limitations on the Stock Funds' investments in futures contracts,
and these funds' policies regarding futures contracts discussed elsewhere in
this Statement of Additional Information, are not fundamental policies and may
be changed as regulatory agencies permit.
Various exchanges and regulatory authorities have undertaken reviews of
futures trading in light of market volatility. Among the possible actions that
have been presented are proposals to adopt new or more stringent daily price
fluctuation limits for futures transactions, and proposals to increase the
margin requirements for various types of strategies. It is impossible to predict
what actions, if any, will result from these reviews at this time.
Each Stock Fund may purchase index futures contracts in order to attempt to
remain fully invested in the stock market. For example, if a fund had cash and
short-term securities on hand that it wished to invest in common stocks, but at
the same time it wished to maintain a highly liquid position in order to be
prepared to meet redemption requests or other obligations, it could purchase an
index futures contract in order to approximate the activity of the index with
that portion of its portfolio. Each Stock Fund may also purchase futures
contracts as an alternative to purchasing actual securities. For example, if a
fund intended to purchase stocks but had not yet done so, it could purchase a
futures contract in order to participate in the index's activity while deciding
on particular investments. This strategy is sometimes known as an anticipatory
hedge. In these strategies a fund would use futures contracts to attempt to
achieve an overall return -- whether positive or negative -- similar to the
return from the stocks included in the underlying index, while taking advantage
of potentially greater liquidity than futures contracts may offer. Although a
fund would hold cash and liquid debt securities in a segregated account with a
value sufficient to cover its open future obligations, the segregated assets
would be available to the fund immediately upon closing out the futures
position, while settlement of securities transactions can take several days.
When a Fund wishes to sell securities, it may sell stock index futures
contracts to hedge against stock market declines until the sale can be
completed. For example, if the Sub-Adviser 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.
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Correlation of Price Changes. As noted above, price changes of a Fund's
futures positions may not be well correlated with price changes of its other
investments because of differences between the underlying indexes and the types
of securities the Fund invests in. For example, if a fund sold a broad-based
index futures contract to hedge against a stock market decline while the fund
completed a sale of specific securities in its portfolio, it is possible that
the price of the securities could move differently from the broad market average
represented by the index futures contract, resulting in an imperfect hedge which
could affect the correlation between the fund's return and that of the
respective benchmark index. In the case of an index futures contract purchased
by the fund either in anticipation of actual stock purchases or in an effort to
be fully invested, failure of the contract to track its index accurately could
hinder such fund in the achievement of its objective.
Stock index futures prices can also diverge from the prices of their
underlying indexes. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
index, and the time remaining until expiration of the contract, which may not
affect security prices the same way. Imperfect correlation may also result from
differing levels of demand in the futures markets and the securities markets,
from structural differences in how futures and securities are traded, or from
imposition of daily price fluctuation limits for futures contracts. A fund may
sell futures contracts with a greater or lesser value than the securities it
wishes to hedge in order to attempt to compensate for differences in historical
volatility between the futures contract and the securities, although this may
not be successful in all cases.
Liquidity of Futures Contracts. Because futures contracts are generally
settled within a day from the date they are closed out, compared with a
settlement period of seven days for some types of securities, the futures
markets can provide liquidity superior to the securities markets in many cases.
Nevertheless, there is no assurance a liquid secondary market will exist for any
particular futures contract at any particular time. In addition, futures
exchanges may establish daily price fluctuation limits for futures contracts,
and may halt trading if a contract's price moves upward or downward more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached, it may be impossible for a Fund to enter into new positions or
close out existing positions. Trading in index futures can also be halted if
trading in the underlying index stocks is halted. If the secondary market for a
futures contract is not liquid because of price fluctuation limits or otherwise,
it would prevent prompt liquidation of unfavorable futures positions, and
potentially could require a fund to continue to hold a futures position until
the delivery date regardless of potential consequences. If a fund must continue
to hold a futures position, its access to other assets held to cover the
position could also be impaired.
INVESTMENT RESTRICTIONS
Except as noted with respect to any fund, each trust has adopted the
following restrictions as additional fundamental policies of its Funds, which
means that they may not be changed without the approval of a majority of the
outstanding voting securities of that fund. Under the Investment Company Act of
1940, as amended, ("1940 Act"), a "vote of a majority of the outstanding voting
securities" of the Trust or of a particular Fund means the affirmative vote of
the lesser of (l) more than 50% of the outstanding shares of the trust or of
such fund, or (2) 67% or more of the shares of the trust or of such fund present
at a meeting of shareholders if more than 50% of the outstanding shares of the
trust or of such fund are represented at the meeting in person or by proxy. A
fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefor) for temporary or emergency purposes
may be made from banks in any amount up to 10% (15% in the case of the Stock
Funds) of the 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.
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3. Make loans, except (a) through the purchase of debt securities which are
either publicly distributed or customarily purchased by institutional investors,
(b) to the extent the entry into a repurchase agreement may be deemed a loan, or
(c) to lend portfolio securities to broker-dealers or other institutional
investors if at least 100% collateral, in the form of cash or securities of the
U.S. Government or its agencies and instrumentality's, is pledged and maintained
by the borrower.
4. Act as underwriter of securities issued by other persons except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. With respect to 75% of its total assets, purchase the securities of any
one issuer (except securities issued or guaranteed by the U.S. Government and
its agencies or instrumentality's, as to which there are no percentage limits or
restrictions) if immediately after and as a result of such purchase (a) the
value of the holdings of the Fund in the securities of such issuer would exceed
5% of the value of the Fund's total assets, or (b) the Fund would own more than
10% of the voting securities of any such issuer (both the issuer of the
municipal obligation as well as the financial institution/ intermediary shall be
considered issuers of a participation certificate), except that the Insured Fund
may invest more than 25% of its assets in securities insured by the same
insurance company.
6. Purchase securities from or sell to the Trust's officers and Trustees,
or any firm of which any officer or Trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, Trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and Trustees
together own beneficially more than 5% of such securities (non-fundamental for
the Stock Funds).
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices, and provided that this limitation
shall not prohibit the purchase of securities secured by real estate or
interests therein.
8. (a) Invest in commodities and commodity contracts, or interests in oil,
gas, or other mineral exploration or development programs; provided, however,
that a fund may invest in futures contracts as described in the Prospectus and
in this Statement of Additional Information (Stock Funds only).
(b) Invest in commodities and commodity contracts, puts, calls,
straddles, spreads, or any combination thereof, or interests in oil, gas, or
other mineral exploration or development programs, except that the Government
Fund may purchase, hold, and dispose of "obligations with puts attached" in
accordance with its investment policies (all Funds except the Stock Funds).
9. Invest in companies for the purpose of exercising control or management.
10. (a) Purchase securities of other investment companies, except to the
extent permitted by the 1940 Act and as such securities may be acquired in
connection with a merger, consolidation, acquisition, or reorganization (the
Stock Funds only).
(b) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization (all
funds except the Stock Funds).
11. Purchase illiquid securities, including (under current SEC
interpretations) securities that are not readily marketable, and repurchase
agreements with more than seven days to maturity if, as a result, more than 10%
of the total assets of the Fund would be invested in such illiquid securities.
12. Invest 25% or more of its assets in securities of any one industry,
although for purposes of this limitation, tax-exempt securities and obligations
of the U.S. Government and its agencies or instrumentalities are not considered
to be part of any industry (both the industry of the issuer of the municipal
obligation as well as the industry of the financial institution/intermediary
shall be considered in the case of a participation certificate), except that the
Insured Fund may invest more than 25% of its assets in securities insured by the
same insurance company.
In addition, each Stock Fund has adopted the following restrictions as
operating policies, which are not fundamental policies, and may be changed
without shareholder approval in accordance with applicable
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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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TRUSTEES AND OFFICERS
The Trustees of each Trust have the responsibility for the overall
management of the Trust, including general supervision and review of its Funds'
investment activities. The Trustees elect the officers of each Trust who are
responsible for administering the day-to-day operations of such Trust and its
funds. The affiliations of the officers and Trustees and their principal
occupations for the past five years are listed below. The Trustees and officers
of each Trust are identical. Trustees who are deemed to be an "interested
person" of the Trust, as defined in the 1940 Act, are indicated by an asterisk
(*).
<TABLE>
<CAPTION>
Position and Offices Principal Occupation
Name and Address Age with the Trusts within the Past 5 years
- ---------------- --- --------------- -----------------------
<S> <C> <C> <C>
*Richard F. Shelton, 68 President Chief Executive Officer, CCM Partners;
44 Montgomery Street 1982-1984: General Partner, Senior Vice
Suite 2100 President, and Director, Hambrecht &
San Francisco, CA 94104 Quist and President and Director,
Hambrecht & Quist Management
Corporation; 1963-1982: Resident
Manager, General Partner, Senior Vice
President and Director, PaineWebber
Jackson & Curtis.
*John R. Hill 56 Vice President, Director of Marketing, CCM Partners;
44 Montgomery Street Secretary and Trustee 1975-1985: President and Director,
Suite 2100 The Great American Seed Company, Inc.
San Francisco, CA 94104
*Phillip W. McClanahan 62 Vice President, Director of Investments, CCM Partners:
44 Montgomery Street Treasurer and 1984-1985: Vice President and Portfolio
Suite 2100 Trustee Manager, Transamerica Investment
San Francisco, CA 94104 Services: 1966-1984: Vice President and
Portfolio Manager, Fireman's Fund
Insurance Company and Amfire, Inc.
Harry Holmes 72 Trustee Principal, Harry Holmes & AssociatesDel
Ciervo at Midwood (consulting); 1982-1984: President and
Pebble Beach, CA 93953 Chief Executive Officer, Aspen Skiing
Company; 1973-1984: President and
Chief Executive Officer, Pebble Beach
Company (property management).
John B. Sias 70 Trustee President and CEO,
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.
Stephen C. Rogers 31 Accounting and Administrative Officer, CCM Partners;
44 Montgomery Street Compliance Officer 1992 to 1993: Marketing Representative,
Suite 2100 CCM Partners; 1990 to 1992: Marketing
San Francisco, CA 94104 Representative, Xerox Corporation.
</TABLE>
16
<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 November 30, 1997. As of
November 24, 1997 Trustees and Officers as a group owned less than 1% of the
outstanding shares of the Income Fund, the Money Fund, and the 500 Fund. As of
November 24, 1997, the Trustees and Officers of the Trust as a group owned
approximately 3.6% of the Insured Fund, 1.1% of the Government Fund, 2.4% of the
Treasury Trust, 2.3% of the MidCap Fund, 9.9% of the SmallCap Fund and 7.4% of
the Equity Income Fund.
<TABLE>
<CAPTION>
Pension or Estimated Total compensation
retirement benefits annual respecting registrant
Aggregate accrued as Fund benefits upon and Fund complex
Name/Position compensation Expenses retirement paid to Trustees
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard F. Shelton None None None None
President, Trustee
John R. Hill None None None None
Secretary, Trustee
Phillip W. McClanahan None None None None
Treasurer, Trustee
Harry Holmes $12,000 None None $12,000
Trustee
John B. Sias $12,000 None None $12,000
Trustee
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Management Services
CCM Partners, a California Limited Partnership (the "Manager"), is the
Manager of the funds under Investment Management Agreements dated December 27,
1985, October 15, 1992, December 31, 1985 and April 13, 1992. (Such Investment
Management Agreements are collectively referred to as the "Agreements.")
Pursuant to the Agreements, the manager supplies investment research and
portfolio management, including the selection of securities for the funds to
purchase, hold, or sell and the selection of brokers or dealers through whom the
portfolio transactions of each fund are executed. With respect to the Stock
Funds, the Manager intends to delegate these latter functions to the Sub-Adviser
(see below). The Manager's activities are subject to review and supervision by
the Trustees to whom the Manager renders periodic reports of the 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
17
<PAGE>
Manager is compensated at a rate of 1/2 of 1% (0.50%) per annum of the value of
average daily net assets of these Funds up to and including $500 million; plus
45/100 of 1% (.45%) per annum of the value of assets up to and including $1
billion, and 40/100 of 1% (0.40%) per annum of average net assets above 1
billion.
The Agreements provide that the Manager is obligated to reimburse each of
the other Funds monthly (through a reduction of its management fees and
otherwise) for all expenses (except for extraordinary expenses such as
litigation) in excess of 1.00% of each Fund's average daily net assets. The
Manager may also, and has to date, reduced its fees in excess of its obligations
under the Agreements.
For the fiscal year ended August 31, 1994, the Manager received a fee of
$392,554 from the Money Fund and reimbursed that Fund $257,901, which resulted
in a net management fee of $134,653; the Manager received a management fee of
$1,189,430 from the Income Fund, and did not make any reimbursements; the
Manager received a fee of $168,965 from the Government Fund and reimbursed that
Fund $35,484, which resulted in a net management fee of $133,481; the Manager
received a fee of $110,942 from the Treasury Trust and reimbursed that Fund
$52,550, which resulted in a net management fee of $58,392; the Manager received
a fee of $86,437 from the Insured Fund and reimbursed that Fund $72,401 which
resulted in a net gain to that Fund of $14,036 to defray other expenses.
For the fiscal year ended August 31, 1995, the Manager received a fee of
$420,624 from the Money Fund and reimbursed that Fund $214,505, which resulted
in a net management fee of $206,119; the Manager received a management fee of
$943,027 from the Income Fund, and did not make any reimbursements; the Manager
received a fee of $139,656 from the Government Fund and reimbursed that Fund
$30,584 which resulted in a net management fee of $109,072; the Manager received
a fee of $144,720 from the Treasury Trust and reimbursed that Fund $63,017,
which resulted in a net management fee of $81,703; the Manager received a fee of
$108,729 from the Insured Fund and reimbursed that Fund $34,227 which resulted
in a net management fee of $74,502.
For the fiscal year ended August 31, 1996, the Manager received a fee of
$462,785 from the Money Fund and reimbursed that Fund $196,188, which resulted
in a net management fee of $266,597; the Manager received a management fee of
$953,158 from the Income Fund, and did not make any reimbursements; the Manager
received a fee of $152,331 from the Government Fund and reimbursed that Fund
$20,327 which resulted in a net management fee of $132,004; the Manager received
a fee of $194,340 from the Treasury Trust and reimbursed that Fund $89,737,
which resulted in a net management fee of $104,603; the Manager received a fee
of $117,306 from the Insured Fund and reimbursed that Fund $33,648 which
resulted in a net management fee of $83,658.
For the fiscal year ended August 31, 1997, the Manager received a fee of
$479,264 from the Money Fund and reimbursed that Fund $200,511, which resulted
in a net management fee of $278,753; the Manager received a management fee of
$961,291 from the Income Fund, and did not make any reimbursements; the Manager
received a fee of $150,067 from the Government Fund and reimbursed that Fund
$13,522 which resulted in a net management fee of $136,545; the Manager received
a fee of $210,368 from the Treasury Trust and reimbursed that Fund $100,556,
which resulted in a net management fee of $109,812; the Manager received a fee
of $126,291 from the Insured Fund and reimbursed that Fund $38,590 which
resulted in a net management fee of $87,701.
For the fiscal year ended August 31, 1994, the Manager received a fee of
$77,415 from the MidCap Fund and reimbursed that Fund $110,314, which resulted
in a net amount to the Fund of $32,899 to defray other expenses; the Manager
received a fee of $32,897 from the 500 Fund and reimbursed that Fund $106,723,
which resulted in a net amount to the Fund of $73,826 to defray other expenses.
For the fiscal year ended August 31, 1995, the Manager received a fee of
$89,035 from the MidCap Fund and reimbursed that Fund $88,110 which resulted in
a net management fee of $925.00; the Manager received a fee of $41,579 from the
500 Fund and reimbursed that Fund $97,742, which resulted in a net amount to the
Fund of $56,163 to defray other expenses.
For the fiscal year ended August 31, 1996, the Manager received a fee of
$121,051 from the MidCap Fund and reimbursed that Fund $91,951 which resulted in
a net management fee of $29,100; the Manager received a fee of $83,907 from the
500 Fund and reimbursed that Fund $122,682, which resulted in a net amount to
the Fund of $38,775 to defray other expenses.
18
<PAGE>
For the fiscal year ended August 31, 1997, the Manager received a fee of
$155,818 from the MidCap Fund and reimbursed that Fund $83,969 which resulted in
a net management fee of $71,849; the Manager received a fee of $143,433 from the
500 Fund and reimbursed that Fund $151,316, which resulted in a net amount to
the Fund of $7,883 to defray other expenses; the Manager received a fee of
$15,081 from the SmallCap Fund and reimbursed that Fund $50,827, which resulted
in a net amount to the Fund of $35,746 to defray other expenses; the Manager
received a fee of $22,205 from the Equity Income Fund and reimbursed that Fund
$35,391, which resulted in a net amount to the Fund of $13,186 to defray other
expenses.
The Manager has retained Bank of America NT&SA (Bank of America Capital
Management, Inc.) to act as Sub-Adviser to the Stock Funds, subject to
supervision by the Manager and the Trust's Board of Trustees. Under the
Sub-Advisory Agreement, the Sub-Adviser is responsible for the actual management
of each Fund's portfolio. The responsibility for making decisions to buy, sell
or hold a particular security rests with the Sub-Adviser. The Sub-Adviser
provides the portfolio managers for each Fund, who make the necessary investment
decisions and place transactions accordingly. The Manager compensates the
Sub-Adviser at the annual rate of 1/10 of 1% (0.10%) of the value of the average
daily net assets up to $50 million and 1/20 (0.05% of the value of the average
net assets above $50 million. The Manager compensates the Sub-Adviser at the
annual rate of 1/10 of 1% (0.10%) of the value of the average daily net assets
of the SmallCap Fund and the annual rate of 15/100 of 1% (.15%) of the value of
the average daily net assets of the Equity Income Fund.
The Agreements with respect to the Income Fund, the Insured Fund and the
Money Fund are currently in effect until January 31, 1998. The Agreement with
respect to the Government Fund and the Treasury Trust is currently in effect
until January 31, 1998. The Agreement and Sub-Advisory Agreement with respect to
the Stock Funds are currently in effect until January 31, 1998. Each Agreement
and the Sub-Advisory 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.
Each Agreement and the Sub-Advisory Agreement may be terminated without
penalty at any time by the applicable Trust with respect to one or more of the
Funds to which the relevant Agreement applies (either by the applicable Board of
Trustees or by a majority vote of the terminating Fund's outstanding shares) or
by the Manager on 60-days' written notice, and will automatically terminate in
the event of its assignment as defined in the 1940 Act.
Principal Underwriter
RFS Partners, a California limited partnership, is currently the principal
underwriter of each Fund's shares under an underwriting agreement with each
Fund, pursuant to which RFS Partners agrees to act as each Fund's distribution
agent. Each Fund's shares are sold to the public on a best efforts basis in a
continuous offering without a sales load or other commission or compensation.
RFS Partners is the general partner of the Funds' Manager. The general partner
of RFS Partners is Richard F. Shelton, Inc., a corporation that is controlled by
Richard F. Shelton, who is a Trustee and the President of the Trust. Mr. Hill
and Mr. McClanahan are limited partners of RFS Partners. While the shares of
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 Trust Company 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.
19
<PAGE>
Firstar Trust Company (the "Custodian") acts as custodian of the securities
and other assets of the Trusts. The Custodian does not participate in decisions
relating to the purchase and sale of portfolio securities.
Tait, Weller & Baker, Eight Penn Center Plaza, Suite 800, Philadelphia,
Pennsylvania 19103, are the independent auditors for the Trusts.
The validity of shares of beneficial interest offered hereby will be passed
on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th Floor,
San Francisco, California 94104.
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 or the Sub-Adviser subject to the supervision of the Manager, as
applicable, whose policy is to obtain the "best execution" (prompt and reliable
execution at the most favorable 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 or the
Sub-Adviser, as applicable, will seek to determine that the amount of
commissions paid is reasonable in relation to the value of the brokerage and
research services and information provided, viewed in terms of either that
particular transaction or its overall responsibilities with respect to the funds
for which it exercises investment discretion. In selecting broker-dealers and in
negotiating commissions, the Manager or the Sub-Adviser, as applicable,
considers the broker-dealer's reliability, the quality of its execution services
on a continuing basis, the financial condition of the firm, and the research
services provided, which include furnishing advice as to the value of
securities, the advisability of purchasing or selling specific securities and
furnishing analysis and reports concerning state and local governments,
securities, and economic factors and trends, and portfolio strategy. The Manager
or the Sub-Adviser, as applicable, considers such information, which is in
addition to and not in lieu of the services required to be performed by the
Sub-Adviser and the Manager under the Management and Sub-Advisory Agreements, to
be useful in varying degrees, but of indeterminable value.
The funds may pay brokerage commissions in an amount higher than the lowest
available rate for brokerage and research services as authorized, under certain
circumstances, by the Securities Exchange Act of 1934. Where commissions paid
reflect research services and information furnished in addition to execution,
the Manager and the Sub-Advisor each believes that such services were bona fide
and rendered for the benefit of its clients. There were no brokerage commissions
paid by any of the funds during the fiscal years ended August 31, 1992, 1993 or
1994. For the fiscal year ended August 31, 1995, the 500 Fund paid $4,694 in
brokerage commissions and the MidCap Fund paid $4,091 in brokerage commissions.
For the fiscal year ended August 31, 1996, the 500 Fund paid $634 in brokerage
commissions and the MidCap Fund paid $4,945 in brokerage commissions. For the
fiscal year ended August 31, 1997, the 500 Fund paid $842 in brokerage
commissions, the MidCap Fund paid $9,878 in brokerage commissions, the Equity
Income Fund paid $550 in brokerage commissions and the SmallCap Fund paid
$44,210 in brokerage commissions.
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 or of the Sub-Adviser 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
20
<PAGE>
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.
ADDITIONAL INFORMATION REGARDING PURCHASES
AND REDEMPTIONS OF FUND SHARES
Purchase Orders
The purchase price for shares of the funds is the net asset value of such
shares next determined after receipt and acceptance of a purchase order in
proper form. Many of the types of instruments in which the funds invest must be
paid for in "Federal funds," which are monies held by the Custodian on deposit
at a Federal Reserve Bank. Therefore, the monies paid by an investor for shares
of the funds generally cannot be invested by the funds until they are converted
into and are available to a fund in Federal funds, which may take up to two
business days. In such cases, purchases by investors will not be considered in
proper form and effective until such conversion and availability. However, in
the event a fund is able to make investments immediately (within one business
day), it may accept a purchase order with payment otherwise than in Federal
funds; in such event shares of a fund will be purchased at the net asset value
next determined after receipt of the order and payment. Once shares of a fund
are purchased, they begin earning income immediately, and income dividends will
start being credited to the investor's account on the day following the
effective date of purchase and continue through the day the shares in the
account are redeemed.
Payments transmitted by wire and received by Firstar Trust Company prior to
the close of the New York Stock Exchange, normally at 4:00 p.m. Eastern time
(1:00 p.m. Pacific time) on any business day are normally effective on the same
day as received. Wire payments received by the Custodian after that time will
normally be effective on the next business day. Payments transmitted by check or
other negotiable bank draft will normally be effective within two business days
for checks drawn on a member bank of the Federal Reserve System and longer for
most other checks. All checks are accepted subject to collection at full face
value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Checks
drawn in U.S. funds on foreign banks will not be credited to the shareholder's
account and dividends will not begin accruing until the proceeds are collected,
which can take a long period of time.
Shareholder Accounting
All purchases of fund shares will be credited to the shareholder in full
and fractional shares of the relevant fund (rounded to the nearest 1/1000 of a
share) in an account maintained for the shareholder by the Trusts' transfer
agent. Share certificates will not be issued for any fund at any time. To open
an account in the name of a corporation, a resolution of the corporation's Board
of Directors will be required. Other evidence of corporate status or the
authority of account signatories may be required.
Each Trust reserves the right to reject any order for the purchase of
shares of any fund, in whole or in part. In addition, the offering of shares of
any fund may be suspended by the relevant Trust at any time and resumed at any
time thereafter.
Shareholder Redemptions
All requests for redemption and all share assignments should be sent to the
applicable fund, 44 Montgomery Street, Suite 2100, San Francisco, California
94104, or, for telephone redemptions, by calling the Fund at (800) 225-8778.
Redemptions will be made in cash at the net asset value per share next
determined after receipt by the transfer agent of a redemption request in proper
form, including all share certificates, share assignments, signature guarantees,
and other documentation as may be required by the transfer agent. The amount
received upon redemption may be more or less than the shareholder's original
investment.
The Trusts will attempt to make payment for all redemptions within one
business day, but in no event later than seven days after receipt of such
redemption request in proper form. However, each Trust reserves the right to
suspend redemptions or postpone the date of payment (1) for any periods during
which the New York Stock Exchange is closed (other than for the customary
weekend and holiday closings), (2)
21
<PAGE>
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.
As of the date of this Statement of Additional Information, the Trusts
understand that the New York Stock Exchange is closed on the following holidays:
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas. The Trusts have been advised that
the Custodian is also closed on Martin Luther King's Birthday. On holidays in
which the Custodian is closed, any transactions will be processed on the
following business day.
Due to the relatively high cost of handling small investments, each Trust
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose accounts in the Trust have an aggregate value of less than
$5,000 ($1,000 in the case of the Stock Funds), but only where the value of such
accounts has been reduced by such shareholder's prior voluntary redemption of
shares. In any event, before a Trust redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value of the shares
in that shareholder's account is less than the minimum amount and allow that
shareholder 30 days to make an additional investment in an amount which will
increase the aggregate value of that shareholder's accounts to at least $5,000
before the redemption is processed ($1,000 in the case of the Stock Funds).
Use of the Exchange Privilege as described in the Prospectus in conjunction
with market timing services offered through numerous securities dealers has
become increasingly popular as a means of capital management. In the event that
a substantial portion of a fund's shareholders should, within a short period,
elect to redeem their shares of that fund pursuant to the Exchange Privilege,
the fund might have to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions. The Exchange
Privilege may be terminated or suspended by the Funds upon 60-days prior notice
to shareholders.
Redemptions in Kind
Each Trust has committed itself to pay in cash all requests for redemption
by any shareholder of record, limited in amount, however, during any 90-day
period to the lesser of $250,000 or 1% of the value of the applicable Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the Trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of that fund or the
Trust. In such circumstances, the securities distributed would be valued at the
price used to compute such fund's net asset value. Should a fund do so, a
shareholder would likely incur transaction fees in converting the securities to
cash.
Determination of Net Asset Value Per Share ("NAV")
The valuation of the portfolio securities of the Money Fund and the
Treasury Trust (including any securities held in the separate account maintained
for when-issued securities) is based upon their amortized cost, which does not
take into account unrealized capital gains or losses. This involves valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price such funds would
receive if they sold the instrument. During periods of declining interest rates,
the daily yield on shares of the Money Fund and the Treasury Trust computed as
described above may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based upon market
prices. Thus, if the use of amortized cost by such funds resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in such
fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
such fund would receive less investment income. The converse would apply in a
period of rising interest rates.
22
<PAGE>
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.
The Money Fund and the Treasury Trust each maintain a dollar-weighted
average portfolio maturity of 90 days or less, only purchase instruments having
remaining maturities of 397 days or less, and only invest in securities
determined by the Trustees to be of high quality with minimal credit risks. The
Trustees have also established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether each Fund's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation is examined by the Trustees. If such
deviation exceeds 1/2 of 1%, the Trustees will promptly consider what action, if
any, will be initiated. In the event the Trustees determine that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, which may include the sale
of portfolio securities prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, adjusting or withholding of dividends,
redemptions of shares in kind, or establishing a net asset value per share by
using available market quotations.
The portfolio securities of the Stock Funds are generally valued at the
last reported sale price. Securities held by the Stock Funds that have no
reported last sale for any day that a fund's NAV is calculated and securities
and other assets for which market quotations are readily available are valued at
the latest available bid price. Portfolio securities held by the Income Fund,
the Insured Fund and the Government Fund for which market quotations are readily
available are valued at the latest available bid price. All other securities and
assets are valued at their fair value as determined in good faith by the Board
of Trustees. Securities with remaining maturities of 60 days or less are valued
on the amortized cost basis unless the Trustees determine that such valuation
does not reflect fair value. The Trusts may also utilize a pricing service,
bank, or broker/dealer experienced in such matters to perform any of the pricing
functions.
TAXATION
Provided that, as anticipated, each Tax-Free Fund qualifies as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), and, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of each Tax-Free Fund consists of Municipal
Obligations, each Tax-Free Fund may designate and pay exempt-interest dividends
from interest earned on such obligations. Such exempt-interest dividends may be
excluded by shareholders of the Tax-Free Funds from their gross income for
federal income tax purposes. Corporate shareholders must take all
exempt-interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax. Each
Tax-Free Fund might purchase municipal obligations at a discount from the prices
at which they were originally issued, especially during periods of rising
interest rates. For federal income tax purposes, some or all of this market
discount may be included in the Tax-Free Funds' ordinary income and will be
taxable to shareholders as such when it is distributed. If, at the close of each
quarter of its taxable year, at least 50% of the value of the total assets of
each Tax-Free Fund consists of obligations that produce interest that is exempt
from California personal income tax if received by an individual, and if each
maintains its qualification as a regulated investment company, then such
Tax-Free Fund will be qualified to pay exempt-interest dividends to its
shareholders that, to the extent they are attributable to interest received by
such Tax-Free Fund on such obligations, are exempt from California personal
income tax. The total amount of exempt-interest dividends paid by a Tax-Free
Fund to its shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on tax-exempt
obligations less any expenses attributable to such interest.
Provided the Treasury Trust qualifies as a regulated investment company and
meets certain requirements of California tax law, including the requirement
that, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets is invested in direct obligations of the United States
(or other U.S. and California tax-exempt obligations), then the Treasury Trust
will be qualified to pay dividends to its shareholders that, to the extent they
are attributable to interest received by the Treasury Trust on such U.S.
Government obligations, will be exempt from California personal income tax.
Because the GNMA certificates in which the Government Fund primarily invests are
not considered direct
23
<PAGE>
obligations of the United States for this purpose, the Government Fund does not
expect to meet the 50% requirement; as a result, dividends paid by the
Government Fund will be subject to California personal income tax.
Exempt-interest dividends paid to Tax-Free Fund shareholders that are
corporations subject to California franchise or income tax will be taxed as
ordinary income to such shareholders. Moreover, no dividend paid by the Tax-Free
Funds will qualify for the corporate dividends-received deduction for federal
income tax purposes.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of a Tax-Free Fund is not deductible for federal income tax
purposes. Under regulations used by the Internal Revenue Service ("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, 1997. 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.
24
<PAGE>
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.
A previous Federal requirement for qualification as a regulated investment
company was that less than 30% of a Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. As of the date of this printing, the state of California has not dropped
the requirement. Accordingly, a Stock Fund may be restricted in effecting
closing transactions within three months after entering into a futures contract.
Dividends of net investment income and realized net short-term capital
gains in excess of net long-term capital losses are taxable to shareholders as
ordinary income, whether such distributions are taken in cash or reinvested in
additional shares. Distributions of net long-term capital gains (i.e., the
excess of net long-term capital gains over net short-term capital losses), if
any, are taxable as long-term capital gains, whether such distributions are
taken in cash or reinvested in additional shares, and regardless of how long
shares of 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 18 months and 28% for investments held less than 18 months, but more
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 state, local, or foreign taxation. Paul, Hastings,
Janofsky & Walker 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).
25
<PAGE>
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.
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.
26
<PAGE>
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 1997 1997 1997 1997
- ---- -----------------------------------------------
<S> <C> <C> <C> <C>
Income Fund ................ 9.48% 7.01% 8.06% 8.99%
Government Fund ............ 10.00% 6.88% 8.89% 8.46%
Insured Fund ............... 7.34% N/A N/A 5.93%
500 Fund ................... 40.16% 19.43% N/A 18.29%
MidCap Fund ................ 36.63% 18.69% N/A 17.67%
SmallCap Fund .............. N/A N/A N/A 24.86%
Equity Income Fund ......... N/A N/A N/A 33.29%
</TABLE>
Yield
As stated in the Prospectus, a fund may also quote its current yield and,
where appropriate, effective yield and tax equivalent yield in advertisements
and investor communications.
The current yield for the Income Fund, Insured Fund, Government Fund and
the Equity Income Fund is determined by dividing the net investment income per
share earned during a specified 30-day period by the net asset value per share
on the last day of the period and annualizing the resulting figure, according to
the following formula:
6
Yield = 2 [(((a-b)/cd + 1)-1)]
where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on the last day of the period.
The current yield for the Income Fund, the Government Fund and the Insured
Fund for the 30-day period ended August 31, 1997 was 4.37%, 5.99% and 4.02%,
respectively.
The current yield for the Money Fund and the Treasury Trust is computed in
accordance with a standardized method which involves determining the net change
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of a specified 7-day period, subtracting a hypothetical
charge reflecting deductions of expenses, and dividing the net change or
difference by the value of the account at the beginning of the period to obtain
the base period return, and annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the account does not
include realized gains and losses or unrealized appreciation and depreciation.
The Money Fund and the Treasury Trust may also quote an effective yield.
Effective yield is calculated by compounding the base period return (calculated
as described above) by adding 1, raising that sum to a power equal to 365
divided by 7, and subtracting 1 from the result, according to the following
formula:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ] - 1.
- -------------------------
o 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.
27
<PAGE>
The current yield and effective yield for the 7-day period ended August 31,
1997 was 2.96% and 3.00%, respectively, for the Money Fund, and 4.91% and 5.03%,
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 1997 (combining federal and California rates) of
44.7%. 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, 1997, was 7.90%. The tax equivalent yield for the
Money Fund for the 7-day period ended August 31, 1997 was 5.35%; the tax
equivalent effective yield for this Fund for the same 7-day period was 5.42%.
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, 1997 was 5.41%; the tax
equivalent effective yield for this Fund for the same 7-day period was 5.54%.
The tax equivalent yield for the Insured Fund for the 30-day period ended August
31, 1997 was 7.27%.
Distribution Rate
Each fund may also include a reference to its current distribution rate in
investor communications and sales literature preceded or accompanied by the
Prospectus, reflecting the amounts actually distributed to shareholders. All
calculations of a fund's distribution rate are based on the distributions per
share which are declared, but not necessarily paid, during the fiscal year. The
distribution rate is determined by dividing the distributions declared during
the period by the net asset value per share on the last day of the period and
annualizing the resulting figure. In calculating its distribution rate, each
fund uses the same assumptions that apply to its calculation of yield. The
distribution rate will differ from a fund's yield because it may include capital
gains and other items of income not reflected in the fund's yield, as well as
interest income received by the fund and distributed to shareholders which is
reflected in the fund's yield. The distribution rate does not reflect capital
appreciation or depreciation in the price of the fund's shares and should not be
considered to be a complete indicator of the return to the investor on his
investment.
Comparisons
From time to time, advertisements and investor communications may compare a
fund's performance to the performance of other investments as reported in
various indices or averages, in order to enable an investor better to evaluate
how an investment in a particular fund might satisfy his investment objectives.
The funds may also publish an indication of past performance as measured by
Lipper Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds. The Lipper performance analysis
includes the reinvestment of dividends and capital gains distributions, but does
not take any sales charges into consideration and is prepared without regard to
tax consequences. In addition to Lipper, the funds may publish an indication of
past performance as measured by other independent sources such as **NoLOAD
FUND*XR, a mutual fund monitoring system, the American Association of Individual
Investors, Weisenberger Investment Companies Services, Donoghue's Money Fund
Report, Barron's, Business Week, Financial World, Money Magazine, Forbes, and
The Wall Street Journal.
The Government Fund may also quote (among others) the following indices
of bond prices prepared by Salomon Brothers Inc. These indices are not managed
for any investment goal. Their composition may, however, be changed from time to
time by Salomon Brothers Inc.
The Mortgage Pass-Through Index is an index of approximately 200
mortgage-related securities, including GNMAs, FNMAs, Freddie Macs, conventional
pass-through securities, and FHA project pools.
The Long-Term Corporate Index is an index of all outstanding corporate
bonds with more than twelve years remaining until maturity which currently
includes approximately thirty securities.
28
<PAGE>
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. The Value Line Composite Index, the Russell 2000 and 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.
29
<PAGE>
As of November 30, 1997, the following shareholders, to the Trusts'
knowledge, owned beneficially more than 5% of a Fund's outstanding shares, as
noted:
Insured Fund:
Northern Trust Co. (10.8%) Deborah Murray (6.8%)
Matilda Wilbur 27 Makin Grade
P.O. Box 92956 Ross, CA 94957
Chicago, IL 60675
Northpoint Investors (5.1%)
2351 Powell Street, Suite 500
San Francisco, CA 94133
Money Market Fund:
Robert J. Fisher (5.4%)
C/O Pisces Inc.
1 Maritime Plaza, Suite 1300
San Francisco, CA 94111-3503
Government Fund:
Blush & Co. (9.1%) Asian Art Museum Foundation (6.8%)
P.O. Box 976 Golden Gate Park
New York, NY 10268 San Francisco, CA 94118
Treasury Trust:
D & D F Foundation (12.2%) Bruce Walkup & Betty Walkup,
c/o Pisces Inc. Trustees (9.6%)
1 Maritime Plaza, Suite 1300 Bruce Walkup & Betty Walkup
San Francisco, CA 94111-3503 Trust of 1981
650 California Street, Suite 3030
San Francisco, CA 94108-2702
Betty Walkup & Daniel J Kelly, Doris F Fisher Trust (6.7%)
Trustees (7.2%) 1 Maritime Plaza Suite 1300
Walkup 1994 Marital Trust 650 California Street
Suite 3030 San Francisco, CA 94108-2702
San Francisco, California 94111-3503
S&P 500 Fund:
State Street CA Inc., Custodian (8.9%)
FBO Cal/STRS
1001 Marina Village PKWY FL
3 Alameda, CA 94501
MidCap Fund:
Donald Fisher & Doris Fisher, Calhoun & Co. (8.8%)
Trustees (9.9%) c/o Comerica Bank Mutual Funds
Donald G. Fisher 1991 P.O.Box 75000
Charitable Remainder Trust 1 Detroit, MI 48275-0001
c/o Pisces Inc.
1 Maritime Plaza Suite 1300
San Francisco, CA 94111-3503
Equity Income Fund:
Timothy Abel (14.0%) Paul Purdom & Co. (9.2%)
1331 B St. #B 2330 Marinship Way #130
Hayward, CA 94541 Sausalito, CA 94965
Susan Ballinger (7.5%)
50 Makin Grade
Kentfield, CA 94904
30
<PAGE>
Equity Income Fund (Continued):
Richard F. Shelton Trustee(7.4%)
Richard F. Shelton Trust
44 Montgomery Street, Suite 2100
San Francisco, CA 94104
SmallCap Fund:
Michael McAuliffe Trust (9.0%) Richard F. Shelton Trustee (6.9%)
FBO Spieker 1991 Trust Richard F. Shelton Trust
1 Market Plaza STE 210 44 Montgomery Street, Suite 2100
San Francisco, CA 94105 San Francisco, CA 94104
Alexander D Calhoun & (6.4%)
Charles S Lafollette Trust
Thomas B Calhoun 1992 Trust
1 Maritime Plaza, Suite 300
San Francisco, CA 94111
Although each fund is offering only its own shares by this joint Statement
of Additional Information and joint Prospectus, it is possible that a fund might
become liable for any mis-statements in this statement or in the Prospectus
about one of the other funds. The Boards of Trustees of each Trust have
considered this possibility in approving the use of a joint Prospectus and
Statement of Additional Information.
FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended August 31, 1997
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, 1997 (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.
31
<PAGE>
Baa: Bonds which are rated Baa are considered as medium grade obligations; i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Conditional Rating: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation:
AAA: Municipal bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates, and hence provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch Investor's Service:
AAA: Bonds and notes rated AAA are regarded as being of the highest quality,
with the obligor having an extraordinary ability to pay interest and repay
principal which is unlikely to be affect by reasonably foreseeable events.
AA: Bonds and notes rated AA are regarded as high quality obligations. The
obligor's ability to pay interest and repay principal, while very strong, is
somewhat less than for AAA rated securities, and more subject to possible change
over the term of the issue.
32
<PAGE>
A: Bonds and notes rated A are regarded as being of good quality. The obligor's
ability to pay interest and repay principal is strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB: Bonds and notes rated BBB are regarded as being of satisfactory quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
Municipal Notes
Moody's:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of first importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used will be
as follows:
MIG-1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG-2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG-3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG-4: Notes are of adequate quality, carrying specific risk but having
protection and not being distinctly or predominantly speculative.
Standard & Poor's:
Until June 29, 1984, Standard & Poor's used the same rating symbols for notes
and bonds. After June 29, 1984, for new municipal note issues due in three years
or less the ratings below usually will be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Fitch:
Fitch Investment Note Ratings are grouped into four categories with the
indicated symbols. The ratings reflect Fitch's current appraisal of the degree
of assurance of timely payment, whatever the source.
FIN-1+: Notes assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
FIN-1: Notes assigned this rating reflect an assurance of timely payment only
slightly less than the strongest issues.
FIN-2: Notes assigned this rating have a degree of assurance for timely payment
but with a lesser margin of safety than the prior two categories.
33
<PAGE>
FIN-3: Notes with this rating have speculative characteristics which suggest
that the degree of assurance for timely payment is minimal.
Commercial Paper
Moody's:
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
P-3 (Prime-3): Acceptable capacity for repayment.
Standard & Poor's:
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
Fitch:
Fitch-1: Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment.
Fitch-2: Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than the strongest issues.
Fitch-3: Commercial paper carrying this rating has a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as the two
higher categories.
Fitch-4: Issues carrying this rating have characteristics suggesting that the
degree of assurance for timely payment is minimal and is susceptible to near
term adverse change due to less favorable financial or economic conditions.
34
<PAGE>
CALIFORNIA INVESTMENT TRUST
FORM N-1A
---------------------------
PART C
OTHER INFORMATION
California Tax-Free Income Fund
California Insured Intermediate Fund
California Tax-Free Money Market Fund
---------------------------
<PAGE>
CALIFORNIA INVESTMENT TRUST
FORM N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
----------------------------------
(a) Financial Statements:
(1) Portfolio of Investments as of August 31, 1997; Statement of Assets
and Liabilities as of August 31, 1997; Statement of Operations for the
year ended August 31, 1997; Statement of Changes in Net Assets for the
years ended August 31, 1996 and 1997; Financial Highlights (for a
share outstanding during the various periods through August 31, 1997);
related notes to Financial Statements; and the Report of the
Independent Certified Public Accountants for California Tax-Free
Income Fund are incorporated by reference to the Annual Report to
Shareholders of the California Investment Trust Fund Group for the
fiscal period ended August 31, 1997.
(2) Portfolio of Investments as of August 31, 1997; Statement of Assets
and Liabilities as of August 31, 1997; Statement of Operations for the
year ended August 31, 1997; Statement of Changes in Net Assets for the
years ended August 31, 1996 and 1997; Financial Highlights (for a
share outstanding during the various periods through August 31, 1997);
related notes to Financial Statements; and the Report of the
Independent Certified Accountants for California Insured Intermediate
Fund are incorporated by reference to the Annual Report of
Shareholders to the California Investment Trust Fund Group for the
fiscal period ended August 31, 1997.
(3) Portfolio of Investments as of August 31, 1997; Statement of Assets
and Liabilities as of August 31, 1997; Statement of Operations for the
year ended August 31, 1997; Statement of Changes in Net Assets for the
years ended August 31, 1996 and 1997; Financial Highlights (for a
share outstanding during the various periods through August 31, 1997);
related notes to Financial Statements; and the Report of the
Independent Certified Public Accountants for the California Tax-Free
Money Market Fund are incorporated by reference to the Annual Report
to Shareholders of the California Investment Trust Fund Group for the
fiscal period ended August 31, 1997.
(b) Exhibits:
(1)(a) Agreement and Declaration of Trust, as amended(c)
(b) Certificate of Amendment(f)
(2)(a) By-Laws(a)
(2)(b) By-Laws Amendment(h)
(3) Voting Trust Agreement -- not applicable
(4) Specimen Certificate(b)
(5)(a) Investment Management Agreement, as amended(b)
(5)(b) Form of Administration Agreement(e)
(5)(c) Investment Management Agreement(g)
(6) Underwriting Agreement(g)
(7) Bonus, Profit Sharing, Pension and Other Similar Contracts -- not
applicable
(8) Custodian Agreement(b)
(9) Other Material Contracts -- not applicable
(10) Opinion and Consent of Counsel(b)
(11) Consent of Independent Accountants
(12) Financial Statements Omitted From Item 23 -- not applicable
(13) Agreements as to Initial capital; letter of investment intent(b)
(14) Model Retirement Plan -- not applicable
(15) Distribution Plan adopted pursuant to Rule 12b-1 -- not applicable
(16) Schedules for Performance Quotations(d)
(17) Financial Data Schedule
- ------------------------
(a) Previously filed as part of the original Registration Statement of the
Registrant as filed on September 27, 1985.
(b) Previously filed as part of Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement as filed on November 25, 1985.
(c) Previously filed as part of Post-Effective Amendment No. 3 to the
Registrant's Registration Statement as filed on January 30, 1987.
(d) Previously filed as part of Post-Effective Amendment No. 5 to the
Registrant's Registration Statement as filed on December 28, 1989.
(e) Previously filed as part of Post-Effective Amendment No. 7 to the
Registrant's Registration Statement as filed on October 18, 1990.
(f) Previously filed as part of Post-Effective Amendment No. 10 to the
Registrant's Registration Statement as filed on August 10, 1992.
(g) Previously filed as part of Post-Effective Amendment No. 12 to the
Registrant's Registration Statement as filed on February 12, 1993.
(h) Previously filed as part of Post-Effective Amendment No. 14 to the
Registrant's Registration Statement as filed on November 2, 1993.
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant.
--------------------------------------------------------------
As of the date of this Post-Effective Amendment, to the knowledge of the
Registrant, the Registrant did not control any other person, nor was it under
common control with another person.
Item 26. Number of Holders of Securities
-------------------------------
As of November 30, 1997, the number of Shareholders of each of the
Registrant's series of shares (Funds) were as follows:
Title of Fund Number of Record Holders
- ------------- ------------------------
California Tax-Free Income Fund 2338
California Insured Intermediate Fund 288
California Tax-Free Money Market Fund 780
Item 27. Indemnification
---------------
Please see Article VI of By-Laws (previously filed as Exhibit 2(a)).
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking:
"Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provision, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue."
Notwithstanding the provisions contained in the Registrant's By-Laws, in
the absence of authorization by the appropriate court on the merits pursuant to
Sections 4 and 5 of Article VI of said By-Laws, any indemnification under said
Article shall be made by Registrant only if authorized in the manner provided in
either subsection (a) or (b) of Section 6 of Article VI.
Item 28. Business and Other Connections of Investment Adviser.
-----------------------------------------------------
CCM Partners, a California Limited Partnership, is the Registrant's
investment adviser with respect to these Funds. It has served as the investment
adviser to the California Insured Intermediate Fund (formerly the California
Insured Tax-Free Income Fund) since October 1992. CCM Partners has been engaged
during the past two fiscal years as investment adviser of the California
Investment Trust II, a diversified, open-end management investment company,
which comprises the following series: U.S. Government Securities Fund, The
United States Treasury Trust, S&P 500 Index Fund, S&P MidCap Index Fund, S&P
SmallCap Index Fund and Equity Income Fund. The principal business address of
California Investment Trust is 44 Montgomery Street, Suite 2100, San Francisco,
California 94104.
From December, 1990 through February 27, 1993, CCM Partners also served as
investment adviser of the California Tax-Free Money Trust, a registered
management investment company. The principal business address of California
Tax-Free Money Trust is 6 St. James Avenue, Boston, Massachusetts 02116.
The officers of CCM Partners, Richard F. Shelton, Phillip W. McClanahan,
and John R. Hill, have also served as officers and/or Trustees of the Registrant
and California Investment Trust during the past two fiscal years. Stephen C.
Rogers, an officer of CCM Partners, has also served as an officer of the
Registrant and California Investment Trust since October 1994. For additional
information, please see Part A of this Registration Statement.
Item 29. Principal Underwriters.
-----------------------
RFS Partners is the principal underwriter, and in that capacity distributes
the shares of the Funds. RFS Partners also serves as principal underwriter for
the California Investment Trust. Certain limited partners of RFS Partners also
serve as officers and/or trustees of the Registrant.
Item 30. Locations of Accounts and Records.
----------------------------------
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder are kept by
Registrant's Shareholder Servicing and Transfer Agent, Firstar Trust Company,
615 East Michigan Street, Milwaukee, Wisconsin 53202.
Item 31. Management Services
-------------------
All management-related service contracts are discussed in Part A or Part B
of this Form N-1A.
Item 32. Undertakings.
-------------
(a) The Registrant hereby undertakes promptly to call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee or trustees when requested in writing to do so by the record holders of
not less than 10 per centum of the Registrant's outstanding shares and to assist
its shareholders in communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to its Registration Statement and has duly caused this Post-Effective Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Francisco, the State of
California, on the 23rd day of December, 1997.
CALIFORNIA INVESTMENT TRUST
---------------------------
(Registrant)
By Richard F. Shelton*
-----------------------------
Richard F. Shelton, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Capacity Dated:
- --------- -------- ------
Richard F. Shelton* Principal Executive Officer December 23, 1997
- ---------------------- and Trustee
Richard F. Shelton
Phillip W. McClanahan* Principal Financial and December 23, 1997
- ---------------------- Accounting Officer
Philip W. McClanahan and Trustee
John R. Hill* Trustee December 23, 1997
- ----------------------
John R. Hill
Harry Holmes* Trustee December 23, 1997
- ----------------------
Harry Holmes
John B. Sias* Trustee December 23, 1997
- ----------------------
John B. Sias
* By: /s/ Julie Allecta
----------------------------------------
Julie Allecta, Attorney-in-Fact Pursuant
to Power of Attorney previously filed.
<PAGE>
File Nos. 33-499
811-4417
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 18
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 20
UNDER
THE INVESTMENT COMPANY ACT OF 1940
-----------------------------
CALIFORNIA INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
<PAGE>
CALIFORNIA INVESTMENT TRUST
INDEX TO EXHIBITS
Exhibit No. Page
- ----------- ----
(11) Consent of Independent Accountants
(Tait, Weller & Baker)
(27) Financial Data Schedule
EXHIBIT NO. (11)
CONSENT OF INDEPENDENT ACCOUNTANTS
(Tait, Weller & Baker)
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective Amendment to
the Registration Statement on Form N-1A of California Investment Trust and to
the use of our report dated September 25, 1997 on the financial statements and
financial highlights of California Tax-Free Income Fund, California Insured
Intermediate Fund, and California Tax-Free Money Market Fund. Each a series of
shares of California Investment Trust. Such financial statements and financial
highlights appear in the 1997 Annual Report to Shareholders which are
incorporated by reference in the Registration Statement and Prospectus.
/s/TAIT, WELLER & BAKER
----------------------------
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The following FDS has been rounded to the nearest thousand
</LEGEND>
<CIK> 0000778206
<NAME> California Investment Trust Fund Group I
<SERIES>
<NUMBER> 001
<NAME> California Tax Free Income Fund
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 196,652
<INVESTMENTS-AT-VALUE> 209,624
<RECEIVABLES> 2,922
<ASSETS-OTHER> (7)
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 212,539
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 340
<TOTAL-LIABILITIES> 340
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 196,037
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 112
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,077
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,972
<NET-ASSETS> 212,198
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,821
<OTHER-INCOME> 0
<EXPENSES-NET> 1,194
<NET-INVESTMENT-INCOME> 9,627
<REALIZED-GAINS-CURRENT> 3,205
<APPREC-INCREASE-CURRENT> 6,012
<NET-CHANGE-FROM-OPS> 18,844
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,602
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15,518
<NUMBER-OF-SHARES-REDEEMED> 15,411
<SHARES-REINVESTED> 556
<NET-CHANGE-IN-ASSETS> 17,273
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 202,582
<PER-SHARE-NAV-BEGIN> 12.31
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.54
<PER-SHARE-DIVIDEND> 0.59
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.86
<EXPENSE-RATIO> 0.59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The following figures have been rounded to the nearest thousand.
</LEGEND>
<CIK> 0000778206
<NAME> California Investment Trust Fund Group I
<SERIES>
<NUMBER> 002
<NAME> California Money Market Fund
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 93,390
<INVESTMENTS-AT-VALUE> 93,390
<RECEIVABLES> 495
<ASSETS-OTHER> 44
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,929
<PAYABLE-FOR-SECURITIES> 1,006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104
<TOTAL-LIABILITIES> 1,110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 92,881
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (63)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 92,818
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,331
<OTHER-INCOME> 0
<EXPENSES-NET> 384
<NET-INVESTMENT-INCOME> 2,947
<REALIZED-GAINS-CURRENT> 6
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,953
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,947)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 227,563
<NUMBER-OF-SHARES-REDEEMED> (240,905)
<SHARES-REINVESTED> 2,752
<NET-CHANGE-IN-ASSETS> (10,584)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 95,956
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.031
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> 0.031
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.400
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The following figures have been rounded to the nearest thousand.
</LEGEND>
<CIK> 0000778206
<NAME> California Investment Trust Fund Group I
<SERIES>
<NUMBER> 003
<NAME> Californai Insured Intermediate Fund
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 23,296
<INVESTMENTS-AT-VALUE> 24,011
<RECEIVABLES> 380
<ASSETS-OTHER> 42
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 24,433
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 43
<TOTAL-LIABILITIES> 43
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,569
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 10
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 96
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 715
<NET-ASSETS> 24,390
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,216
<OTHER-INCOME> 0
<EXPENSES-NET> 139
<NET-INVESTMENT-INCOME> 1,078
<REALIZED-GAINS-CURRENT> 130
<APPREC-INCREASE-CURRENT> 552
<NET-CHANGE-FROM-OPS> 1,760
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,068
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 553
<NUMBER-OF-SHARES-REDEEMED> 666
<SHARES-REINVESTED> 65
<NET-CHANGE-IN-ASSETS> 183
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 25,267
<PER-SHARE-NAV-BEGIN> 10.42
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> 0.45
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
