CAPPIELLO-RUSHMORE TRUST
Growth Fund
Emerging Growth Fund
Utility Income Fund
Gold Fund
4922 Fairmont Avenue, Bethesda, Maryland 20814
(800) 343-3355
(301) 657-1500
STATEMENT OF ADDITIONAL INFORMATION
The Cappiello-Rushmore Trust (the "Trust") is a no-load,
open-end, non-diversified management investment company
consisting of four separate funds: the Utility Income Fund,
the Growth Fund, the Emerging Growth Fund, and the Gold Fund
(the "Funds"). Each Fund has its own investment objectives
and policies, and a shareholder's interest is limited to the
Fund in which the shareholder owns shares.
This Statement of Additional Information is not a
Prospectus. It should be read in conjunction with the Trust's
prospectuses, each dated October 25, 1995. Copies of the
Trust's prospectuses may be obtained without charge by writing
or telephoning the Trust at the above address or telephone
number.
The date of this Statement of Additional Information is
July 3, 1996.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Cross Reference to Related Item in
Prospectuses
Page in
Growth Fund,
Emerging
Page in Growth Fund,
Statement of Page in and Utility
Additional Gold Fund Income Fund
Information Prospectus Prospectus
<S> <C> <C> <C>
Investment Objectives and
Policies 3 5 7, 8, 9
Investment Limitations 8 -- --
Redemptions of Shares 9 14 15
Tax-Deferred Retirement Plans 9 16 17
Management of the Trust 10 11 12
Principal Holders of Securities 11 -- --
Calculation of Return Quotations 11 12 14
Investment Advisory and
Other Services 12 11 12
Net Asset Value 13 16 17
Taxes 13 17 18
Auditors and Custodian 16 11 12
Financial Statements 17 -- --
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INVESTMENT POLICIES
Repurchase Agreements
Each Fund of the Trust may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive
purposes due to market conditions or to generate income from
its excess cash balances. A repurchase agreement is an
agreement under which the Fund acquires a money market
instrument (generally a security issued by the U.S. government
or an agency thereof, a banker's acceptance or a certificate
of deposit) from a commercial bank, broker or dealer, subject
to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may
be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the
period the instrument is held by the Fund and is unrelated to
the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including
accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held
by the Trust's custodian bank until repurchased. In addition,
the Board of Trustees will monitor the Trusts' repurchase
agreement transactions generally and will establish guidelines
and standards for review of the creditworthiness of any bank,
broker or dealer party to a repurchase agreement with the
Trust. No more than an aggregate of 10% of a Fund's assets,
at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and
illiquid securities.
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligations to repurchase the underlying security at a time
when the value of the security has declined, the Fund may
incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to
liquidation or reorganization under the Bankruptcy Code or
other laws, a court may determine that the underlying security
is collateral for a loan by the Fund not within the control of
the Fund and therefore the Fund may not be able to
substantiate its interest in the underlying security and may
be deemed an unsecured creditor of the other party to the
agreement. While the Trust's management acknowledges these
risks, it is expected that they can be controlled through
careful monitoring procedures.
Lending of Securities
Each Fund of the Trust may lend its securities to qualified
institutional investors who need to borrow securities in order
to complete certain transactions, such as covering short
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sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its portfolio securities, a
Fund attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that might occur during
the term of the loan would be for the account of the Fund.
The Fund may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so
long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the Investment Company
Act of 1940, or the Rules and Regulations or interpretations
of the Securities and Exchange Commission (the "Commission")
thereunder, which currently requires that (a) the borrower
pledge and maintain with the Trust collateral consisting of
cash, a letter of credit issued by a domestic U.S. bank or
securities issued or guaranteed by the United States
government having at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises
(i.e., the borrower "marks to the market" on a daily basis),
(c) the loan be made subject to termination by the Trust at
any time and (d) the Fund receives reasonable interest on the
loan (which may include the Fund's investing any cash
collateral in interest bearing short-term investments), any
distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Trust will
comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which
rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of
five business days. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the
Board of Trustees.
At the present time, the Staff of the Commission does not
object if an investment company pays reasonable negotiated
fees in connection with loaned securities, so long as such
fees are set forth in a written contract and approved by the
investment company's trustees. In addition, voting rights may
pass with the loaned securities, but if a material event will
occur affecting an investment on loan, the loan must be called
and the securities voted.
Options Transactions
Purchasing Call and Put Options. The Growth Fund, Emerging
Growth Fund, and Utility Income Fund could purchase call
options to protect (i.e., hedge) against anticipated increases
in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital
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appreciation. Since the premium paid for a call option is
typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be
purchased directly. Before purchasing call options, the Funds
could benefit from any significant increase in the price of
the underlying security to a greater extent then had it
invested the same amount in the security directly. However,
because of the very high volatility of option premiums, the
Fund would bear a significant risk of losing the entire
premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e.,
hedge) against anticipated declines in the market value of
either specific portfolio securities or of the Funds' assets
generally. Alternatively, put options could be purchased for
capital appreciation in anticipation of a price decline in the
underlying security and a corresponding increase of put
options for capital risk appreciation involves the same
significant risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation
would increase the Funds' volatility by increasing the impact
of changes in the market price of the underlying securities on
the Funds' net asset value.
The Registrant does not intend to invest more than 5% of the
assets of any Fund in purchasing put or call options.
Writing Call and Put Options. The Growth Fund, the Utility
Income Fund, and the Gold Fund may write (sell) covered call
options and secured put options. The Emerging Growth Fund
will not engage in option transactions. By writing a call
option, the Funds become obligated during the term of the
option to deliver the securities underlying the option at the
exercise price if the option is exercised. By writing a put
option, the Funds become obligated during the term of the
option to purchase the securities underlying the option at the
exercise price. The Funds will be considered secured in
respect to put options they write if they maintain on deposit
with their custodian bank liquid high quality debt securities
having a value equal to the exercise value of the option.
During the term of the option, the writer may be assigned an
exercise notice by the broker-dealer through whom the option
was sold. The exercise notice would require the writer to
deliver, in the case of a call, or take delivery of, in the
case of a put, the underlying security against payment of the
exercise price. This obligation terminates upon expiration of
the option, or at such time that the writer effects a closing
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purchase transaction by purchasing an option covering the same
underlying security and having the same exercise price and
expiration date the one previously sold. Once an option has
been exercised, the writer of the option may not execute a
closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option,
the writer of the option is required to deposit in escrow the
underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and
sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so,
gives its guarantee to the transaction.
The principal reason for writing call options on stocks held
by the Growth Fund and the Utility Income Fund is to attempt
to realize, through the receipt of premiums, a greater return
than would be realized on the underlying securities alone. In
return for the premium, the call option writer has given up
the opportunity for profit from a price increase in the
underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the
price of the security decline. Conversely, the put option
writer gains a profit, in the form of the premium, so long as
the price of the underlying security remains above the
exercise price, but assumes an obligation to purchase the
underlying security from the buyer of the put option at the
exercise price, even though the security may fall below the
exercise price, at any time during the option period. If an
option expires, the writer realizes a gain in the amount of
the premium. Such a gain may, in the case of a covered call
option, be offset by a decline in the market value of the
underlying security during the option period. If a call
option is exercised, the writer realizes a gain or loss from
the sale of the underlying security. If a put option is
exercised, the writer must fulfill his obligation to purchase
the underlying security at the exercise price, which will
usually exceed the then market value of the underlying
security.
Investment in Foreign Securities
Each of the Funds may invest up to 20% of its total assets in
securities of foreign issuers which are traded on a recognized
U.S. securities exchange or in dollar denominated American
Depository Receipts ("ADR's"). Investing in foreign companies
may involve risks not typically associated with investing in
United States' companies. There is generally less publicly
available information about foreign companies and other
issuers comparable to reports and ratings that are published
about issuers in the United States. Foreign issuers are also
not subject to uniform accounting and auditing and financial
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reporting standards, practices and requirements comparable to
those applicable to United States issuers.
Foreign securities markets are generally not as developed or
as efficient as those in the United States. While growing in
volume, they usually have substantially less volume than the
New York Stock Exchange, and securities of some foreign
issuers are less liquid and more volatile than securities of
comparable United States issuers. Fixed commissions on
foreign exchanges are generally higher than negotiated
commission on United States exchanges, although each Fund will
endeavor to achieve the most favorable net results on its
portfolio transaction. There is generally less government
supervision and regulation of securities exchanges, brokers
and listed issuers than in the United Sates.
With respect to certain foreign countries, there is the
possibility of adverse changes in investment or exchange
control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the
Funds, political or social instability, or diplomatic
developments which could affect United States investment in
those countries. Moreover, individual foreign economies may
differ favorable or unfavorably from the United States'
economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position.
The dividends and interest payable in certain foreign
portfolio securities may be subject to foreign withholding
taxes, thus reducing the net amount of income available for
distribution to the Funds' shareholders. A shareholder
otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit
or deduction for U.S federal income tax purposes for his or
her proportionate share of taxes paid by each of the Funds.
Futures Contracts on Metals and Related Options
The Gold Fund may enter into a metals futures contract or a
related option in order to profit from fluctuations in the
price of the metal without necessarily buying or selling the
metal or other portfolio assets. For example, if the Fund
expects gold prices to increase, the Fund might purchase gold
futures contracts in anticipation of the future purchase of
gold or gold-related securities. Such a purchase would have
much the same effect as the Fund actually buying gold. If
gold prices increase as anticipated, the value of the gold
futures contracts would increase at approximately the same
rate.
No consideration is paid or received by the Fund upon the
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purchase of a metals futures contract. Initially, the Fund
will be required to deposit with a broker an initial margin
amount in cash equivalents, such as U.S. Government securities
or high-grade debt obligations. This initial margin amount is
subject to change by the exchange on which the contract is
traded and brokers may require a higher amount. The initial
margin is in the nature of a performance bond or good faith
deposit on the contract and is returned to the Fund upon
termination of the futures contract, assuming that all of the
Fund's contractual obligations have been satisfied.
Subsequent payments to and from the broker (known as
maintenance margin) will be made daily as the price of the
commodity underlying the futures contract fluctuates, making
the Fund's positions in the futures contract more or less
valuable. This process is known as "marking-to-market."
Because the value of an option on a futures contract is fixed
at the point of sale, there are no daily cash payments by the
purchaser to reflect changes in the value of the underlying
contract, however, the value of the option does change daily
and that change would be reflected in the net asset value of
the Fund.
There are several risks in connection with the use of metals
futures contracts and related options. Successful use of
futures contracts and related options by the Fund is subject
to the ability of the Fund's investment adviser to predict
correctly movements in the price of the commodity and other
factors affecting markets for the commodity. These
predictions involve skills and techniques that are different
from those generally involved in the management of the Fund.
In addition, there can be no assurance that there will be a
correlation between movements in the price of futures
contracts or an option on a futures contract and movements in
the price of the underlying assets.
At any time prior to the expiration of a futures contract or
an option on a futures contract, the Fund may elect to close
the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the
contract. Positions in futures contracts and options on
futures contracts may be closed out only on the exchange on
which the futures contracts and related options were entered
into (or through a linked exchange). Although the Fund
intends to purchase futures contracts and related options only
if there is an active market for the contracts or the related
options, there is no assurance that an active market will
exist for the contracts or the related options at any
particular time. Most futures exchanges limit the amount of
fluctuation that is permitted in futures contract prices
during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that
day at a price beyond that limit. It is possible that futures
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contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and
subjecting the Fund to substantial losses. In such event, and
in the event of adverse price movements, the Fund would be
required to make daily cash payments of maintenance margin,
and an increase, if any, in the value of the portion of the
portfolio being hedged may partially or completely offset
losses on the futures contract. As described above, however,
there is no guarantee that the price of the assets being
hedged will, in fact, correlate with the price movements in a
futures contract or an option thereon and, thus, provide an
offset to losses on the futures contract or the related
option.
If the Fund has hedged against the possibility of a change in
the price of the commodity adversely affecting the value of
the Fund's assets, and prices move in a direction opposite to
that which was anticipated, the Fund will probably lose part
or all of the benefit of the increased value of the assets
hedged because of offsetting losses in the Fund's futures
positions. In addition, in such a situation, if the Fund has
insufficient cash, the Fund might have to sell assets to meet
daily maintenance margin requirements at a time when it would
be disadvantageous for the Fund to do so. These sales of
assets could, but will not necessarily, be at increased prices
which reflect the change in the value of the underlying
commodity.
Portfolio Transactions
Brokerage commissions will normally be paid on a Fund's common
stock. A high portfolio turnover as a result of stock
transactions will lead to higher portfolio expenses.
Management, however, anticipates that portfolio turnover will
not exceed 75% annually.
As provided in the Management Contract between the Trust and
McCullough, Andrews, & Cappiello, Inc. ("MAC"), MAC makes
investment decisions and decisions as to the execution of
portfolio transactions for each Fund. Transactions on stock
exchanges and other agency transactions involve the payment by
a Fund of negotiated brokerage commissions. There is
generally no stated commission in the case of securities
traded in the over-the-counter markets. The best price
available is sought by MAC. This price may or may not include
an undisclosed dealer commission or markup. In underwritten
offerings, the price paid by a Fund includes a fixed
commission or discount retained by the underwriter or dealer.
MAC, in effecting purchases and sales of portfolio securities
for the account of a Fund, places orders for the purchase and
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sale of portfolio securities in such a manner as in its
opinion will offer the best price and market for the execution
of each transaction. In selecting broker-dealers and in
negotiating commission, MAC considers several factors
including the size of and difficulty of the order, the firm's
reliability, its financial conditions, its general execution
and operational capabilities, and the brokerage and research
services furnished by such firms to MAC. The term "brokerage
and research services" includes advice as to the value of
securities, the advisability of purchasing or selling
securities, the availability of securities or purchasers or
sellers of securities, and furnishing analyses and reports
concerning issuers, industries, securities, economic factors
and trends and portfolio strategy. MAC is not authorized when
placing portfolio transactions for a Fund to pay a brokerage
commission (to the extent applicable) in excess of that which
another broker might have charged for effecting the same
transaction on account of the receipt of brokerage and
research services, except that MAC may do so to obtain better
execution of a particular transaction. Although certain
brokerage and research services from brokers and dealers are
useful to the Funds and MAC, it is the opinion of MAC that
such information is only supplementary to MAC's own research
effort, since the information must still be analyzed, weighed
and reviewed by MAC's staff. Such information may be useful
to MAC in providing services to clients other than the Trust
and not all such information is used by MAC in connection with
the Trust. Conversely, such information provided to MAC by
brokers and dealers through whom the other clients of MAC
effect securities transactions may be useful to MAC in
providing services to the Trust. While MAC is responsible for
the placement of the Trust's transactions, the policies and
practices of MAC in this regard must be consistent with the
foregoing and will at all times be subject to review by the
Board of Trustees of the Trust.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be
changed without approval of the holders of a majority of the
outstanding shares of each portfolio (as defined in the
Investment Company Act of 1940).
Each Fund may not under any circumstances:
1. change its investment objective;
2. lend money to any person except (i) by purchasing a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) which are
publicly distributed or customarily purchased by
institutional invests, and (ii) as provided under "Lending
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of Securities";
3. purchase securities on margin or sell securities short
except that a Fund may sell short against the box;
4. borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then only in
amounts not exceeding 5% of the total assets of a Fund,
taken at market value;
5. issue senior securities or mortgage, pledge,
hypothecate or otherwise encumber its assets, except insofar
as any Fund may be deemed to have issued a senior security
by reason of borrowing money in accordance with restriction
(4), (ii) that the Fund may issue senior securities in
connection with foreign currency exchange transactions and
transactions in options, futures, options on futures, and
other similar investments, and (iii) as otherwise permitted
herein;
6. underwrite the securities of other issuers;
7. invest for the purpose of controlling management of
any company;
8. invest its assets in securities of other investment
companies except by purchase in the open market involving
only customary broker's commission or as part of a merger,
consolidation, reorganization or purchase of assets approved
by the portfolio's shareholders; or
9. invest in commodities or purchase real estate,
although it may purchase securities of companies which deal
in real estate or interest therein, except that this shall
not prevent the Gold Fund from (i) trading in futures
contracts and options on futures contracts or (ii) investing
in precious metals and precious minerals.
In addition, the Growth and Emerging Growth Funds will not
concentrate in any particular industry.
The following restrictions are not fundamental and may be
changed by the Board of Trustees:
Each Fund may not:
1. purchase more than 10% of the outstanding voting
securities of any company;
2. purchase or retain securities of an issuer if those
officers and Trustees of the Trust owning more than 1/2 of 1%
of such securities together own more than 5% of such
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securities;
3. invest more than 5% of total assets in securities of
companies which have (with predecessor) a record of less
than three years' continuous operation;
4. invest in oil, gas or mineral leases or exploration
or development programs;
5. purchase or acquire the security of another
investment company if immediately after such purchase or
acquisition more than three percent of the total outstanding
stock of such investment company is owned by the Fund and
all affiliated persons of the Fund unless such purchase or
acquisition is otherwise permitted under the Investment
Company Act of 1940;
6. invest more than 5% of the value of the Fund's net
assets in warrants valued at lower of cost or market.
Included within that amount, but not to exceed 2% of the
value of the Fund's net assets, may be warrants which are
not listed on the New York or American Stock Exchange;
7. invest more than 15% of the Fund's net assets in
illiquid securities; or
8. purchase or sell real property (including limited
partnership interests, but excluding readily marketable
interests in real estate investment trusts or readily
marketable securities of companies which invest in real
estate).
The above-mentioned investment limitations are considered at
the time investment securities are purchased.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the
date of payment (i) during any period that the New York Stock
Exchange is closed, or trading on the Exchange is restricted
as determined by the Commission, (ii) during any period when
an emergency exists as defined by the rules of the Commission
as a result of which it is not reasonably practical for the
Trust to dispose of securities owned by it, or fairly to
determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
The Trust has made an election with the Commission to pay in
cash all redemptions requested by any shareholder of record
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limited in amount during any 90-day period to the lesser of
$250,000 or 1% of the net assets of a Fund at the beginning of
such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the
above limit may be paid on whole or in part, in investment
securities or in cash, as the Trustees may deem advisable;
however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist
which would make such a practice detrimental to the best
interests of the Trust. If redemptions are paid in investment
securities, such securities will be valued as set forth in the
Prospectus under "Net Asset Value" and a redeeming shareholder
would normally incur brokerage expenses if he converted these
securities to cash.
TAX-DEFERRED RETIREMENT PLANS
Four tax-deferred retirement plans are available to investors.
Forms for establishing retirement plan accounts are available
by writing or calling the Fund at 1-800-532-2268 or 301-951-
6963. An annual maintenance fee and an account liquidation
fee is charged on all such accounts.
Individual Retirement Accounts (IRAs)
Regular, "rollover" and Simplified Employee Pension (SEP) IRA
accounts are available. Regular IRA contributions may be
wholly or partially deductible for Federal income tax purposes
depending on the investor's adjusted gross income and whether
the investor is a participant in a employer sponsored
retirement plan.
Pension/Profit Sharing Plans
The Fund offers defined contribution plans suitable for self-
employed individuals or businesses. A separate account may be
established for each employee. Statutory vesting options are
contained in these plans.
401(k) Plans
A 401(k) plan is available for businesses. Such plans provide
for both employee and employer contributions and are adopted
in conjunction with a Fund profit-sharing plan. The Fund does
not act, however as administrator for 401(k) plans.
Administration of a 401(k) plan would be the responsibility of
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the sponsoring organization.
403(b) Plans
A 403(b) plan is available for qualifying non-profit, tax-
exempt organizations such as public education institutions,
medical or church organizations. Separate amounts are
established for each employee and savings and earnings
accumulate tax-deferred until withdrawn. Typically, employees
do not contribute to 403(b) plans.
MANAGEMENT OF THE TRUST
The names and addresses of the trustees and officers of the
Trust, together with information as to their principal
business occupations during the past five years, are set forth
below.
*Frank A. Cappiello, 69 - Trustee. Chairman of the Board.
President of McCullough, Andrews & Cappiello, Inc., registered
investment advisers since 1983. Address: Greenspring
Station, Suite 250, 10751 Falls Road, Lutherville, MD 21093.
Peter J. DeAngelis, 59 - Trustee. President of PDA Associates,
Inc., a financial consulting and investment firm, since 1974;
President of Dow Beaters, Inc., a registered investment
advisor, since 1977. Address: P.O. Box 284, Ironia, NJ 07845
*Daniel L. O'Connor, 53 - Trustee. President and Treasurer.
Since 1975, the General Partner of Money Management
Associates, a registered investment adviser. Address: #2201
East Tower, 4000 North Ocean Drive, Singer Island, FL 33404.
Bruce C. Ellis, 50 - Trustee. Vice President, LottoPhone,
Inc., a telephone state lottery service, since September 1991.
Vice President, Shoppers' Express, December 1987 - December
1991. Vice President, Ridgewell's Caterers from January 1972
to December 1987. Address: 7108 Heathwood Court, Bethesda, MD
20817
Peter B. Petersen, 62 - Trustee. Professor of Management and
Organization Theory, Johns Hopkins University since 1979.
Address: Johns Hopkins University, School of Continuing
Studies, Shaffer Hall 203, Baltimore, MD 21216.
Leo Seybold, 81 - Trustee. Retired 1988. Formerly Executive
Vice President and General Counsel, U.S. Travel Affiliates,
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Inc. from 1979 to 1988. Address: 5804 Rockmere Drive,
Bethesda, MD 20816.
David H. Andrews, CFA, 66 - Vice President. Vice Chairman of
McCullough, Andrews & Cappiello. Address 101 California
Street, San Francisco, CA 94111.
Robert F. McCullough, CPA, 63 - Vice President. Chairman of
McCullough, Andrews & Cappiello. Address 101 California
Street, San Francisco, CA 94111.
Timothy N. Coakley, CPA, 28 - Controller. Formerly Audit
Manager, Deloitte & Touche LLP until 1994. Address: 4922
Fairmont Avenue, Bethesda, MD 20814.
Stephenie E. Adams, 26 - Secretary. Director of Marketing,
Rushmore Services, Inc., from July 1994 to Present. Regional
Sales Coordinator, Media General Cable, from June 1993 to June
1994. Graduate Student, Northwestern University, Evanston,
Illinois, M.S., from September 1991 to December 1992.
Student, Stephens College, Columbia, Missouri, B.A., from
August 1987 to May 1991. Address: 4922 Fairmont Avenue,
Bethesda, MD 20814.
* Indicates interested person
PRINCIPAL HOLDERS OF SECURITIES
On October 9, 1995, there were outstanding 2,120,048,
1,496,441, 3,787,995, and 689,556 shares of the Utility Income
Fund, the Growth Fund, the Emerging Growth Fund, and the Gold
Fund, respectively. Charles Schwab & Co., San Francisco,
California owned for the benefit of others 35.93%, 25.02%,
40.69%, and 22.33% of the Utility Income Fund, the Growth
Fund, the Emerging Growth Fund, and the Gold Fund
respectively. National Automobile Dealers Association, McLean,
Virginia, owned 18.22% of the Growth Fund. National Financial
Services Corporation, New York, New York, owned for the
benefit of others, 12.69% and 30.14% of the Emerging Growth
Fund and Utility Income Fund, respectively. FTC & Company,
Denver, Colorado, and Donaldson, Lufkin and Jenrette, Jersey
City, New Jersey owned for the benefit of others, 8.08% and
5.47% of the Emerging Growth Fund, respectively. Robert
Prechter, Gainesville, Georgia, and Harold Cleaveland,
Houston, Texas owned 6.19% and 5.53% of the Gold Fund,
respectively. Officers and Trustees of the Trust, as a group,
own less than 1% of the shares outstanding.
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CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of the
Funds to that of other mutual funds and to other relevant
market indices in advertisements or in reports to
shareholders, performance may be stated in terms of total
return. Under the rules of the Securities and Exchange
Commission ("SEC Rules"), Fund advertising performance must
include total return quotes calculated according to the
following formula:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1,
5, or 10 year periods at the end of the 1, 5,
or 10 yearperiods (orfractional portionthereof).
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover
1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Funds. In
calculating the ending redeemable value, all dividends and
distributions by the Funds are assumed to have been reinvested
at net asset value as described in the Funds' Prospectus on
the reinvestment dates during the period. Total return, or
"T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5, and 10 year
periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value.
The Funds, from time to time, also may include in such
advertising a total return figure that is not calculated
according to the formula set forth above in order to compare
more accurately the performance of the Funds with other
measures of investment return. For example, in comparing the
total return of the Funds with data published by Lipper
Analytical Services, Inc., or with the performance of the
Standard & Poor's 500 Stock Index or the Dow Jones Industrial
Average, the Funds calculate their aggregate total return for
the specified periods of time by assuming the investment of
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$10,000 in a Fund's shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning
value. Such alternative total return information will be
given no greater prominence in such advertising than the
information prescribed under SEC Rules.
The average annual compounded rates of return for the one year
period ended June 30, 1995, assuming the reinvestment of all
dividends and distributions, for the Growth Fund, Emerging
Growth Fund, Utility Income Fund, and Gold Fund were 32.65%,
43.71%, 16.62%, and 3.89%, respectively. The average annual
compounded rates of return, assuming the reinvestment of all
dividends and distributions, for the Growth Fund, Emerging
Growth Fund, and Utility Income Fund were 15.04%, 16.40%, and
1.78%, respectively, for the period commencing October 6, 1992
and ending June 30, 1995, and for the Gold Fund was -0.84% for
the period commencing March 7, 1994 and ending June 30, 1995.
In addition to the total return quotations discussed above,
the Funds also may advertise their yield based on a thirty-day
(or one month) period ended on the date of the most recent
balance sheet included in the Trust's Registration Statement,
computed by dividing the net investment income per share of a
Fund earned during the period by the maximum offering price
per Fund share on the last day of the period, according to the
following formula:
YIELD = 2[(a-b/cd+1) 6-1]
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on
the last day of the period.
INVESTMENT ADVISORY AND OTHER SERVICES
The four Funds of the Trust receive investment advisory
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services from McCullough, Andrews & Cappiello, Inc., whose
principal location is 101 California Street, Suite 4250, San
Francisco, California 94111 and who has an office at
Greenspring Station, Suite 250, 10751 Falls Road, Lutherville,
Maryland 21093. Pursuant to the investment advisory contract
between the Trust and MAC, the Growth Fund and the Emerging
Growth Fund pay MAC an investment advisory fee at an annual
rate of 0.50% of the net assets of each Fund. The Utility
Income Fund pays MAC at an annual rate of 0.35% of the net
assets of the Fund. The Gold Fund pays MAC at an annual rate
of 0.70% of the net assets of the Fund. MAC manages the
investment and reinvestment of the assets of each Fund in
accordance with its investment objective, policies and
limitations, subject to the general supervision and control of
the Trust's officers and Board of Trustees. MAC bears all
costs associated with providing these services. For the
fiscal years ended June 30, 1995, 1994, and 1993, the Funds
paid the following investment advisory fees to MAC:
1995 1994 1993
Growth Fund $ 67,000 $32,268 $1,276
Emerging Growth Fund $126,202 $67,592 $1,796
Utility Income Fund $ 55,310 $36,042 $2,086
Gold Fund $ 44,448 $13,482 ---
MAC is owned by its three principals: Robert F. McCullough,
C.P.A., David H. Andrews, C.F.A., and Frank A. Cappiello. In
addition to providing investment advisory services to the
Trust, MAC manages investment portfolios for employee
retirement plans, charitable foundations, endowments, taxable
corporations and individuals.
The Trust has contracted with Money Management Associates
("Administrator") to provide administrative services to the
Trust. Under the administrative services agreement with the
Administrator, the Trust pays a fee at the annual rate of
1.00% of the daily net assets of the Growth, Emerging Growth
and Gold Funds, and .70% of the daily net assets of the
Utility Income Fund. For the fiscal years ended June 30,
1995, 1994, and 1993, the Funds paid the following
administrative services fees to the Administrator:
1995 1994 1993
Growth Fund $134,001 $ 64,535 $2,553
Emerging Growth Fund $252,403 $135,183 $3,594
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Utility Income Fund $110,619 $ 72,084 $4,078
Gold Fund $ 63,496 $ 19,260 ---
The Administrator is responsible for all costs of the Funds
including costs of registration of the Trust and the Funds'
shares with the Securities and Exchange Commission and the
various states, all expenses of dividend and transfer agent
services, outside auditing and legal fees, costs of
maintenance of business trust existence, preparation of
prospectuses including printing and distribution thereof to
existing and potential shareholders, shareholder reports,
shareholder meetings, portfolio pricing services and all costs
incurred in providing the custodial services.
Certain of these administrative services are provided by
Rushmore Trust and Savings, FSB ("RTS"), a wholly owned
subsidiary of the Administrator, under a subcontractual
agreement with the Administrator. These services include
transfer agency functions, dividend disbursing and other
shareholder services and custody of the Trust's assets.
The investment advisory agreement and the administrative
services agreement described above continue in effect from
year to year, if specifically approved at least annually by a
vote cast in person at a meeting called for such purpose of a
majority of the Trustees, and a majority of the Trustees who
are not "interested persons" as defined in the 1940 Act
("Independent Trustees"). The contracts may be terminated by
either party thereto, by the Independent Trustees of the Trust
or by a vote of the holders of a majority of the outstanding
securities of a Fund at any time, without penalty, upon 60
days' written notice, and automatically terminates in the
event of an assignment. Termination will not affect the right
of the Adviser or the Administrator to receive payment of any
unpaid balance of the compensation earned prior to
termination.
NET ASSET VALUE
The net asset value of each Fund's shares will be determined
daily as of 4:00 p.m., Eastern time, except on customary
national business holidays which result in the closing of the
New York Stock Exchange and on weekends. The net asset value
per share of a Fund is calculated by dividing the Fund's net
worth by the number of outstanding shares. Listed securities
will be valued at their last sales price on the New York Stock
Exchange and other major exchanges. Over-the-counter
securities shall be valued at their last sales price. Options
and futures contracts are valued at the last sales price as of
the close of trading on the applicable exchanges. If market
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quotations are not readily available, the Board of Trustees
will value the portfolios' securities in good faith. Gold and
other precious metals are valued daily at fair market value,
based upon price quotations in common use, in such manner as
the Trustees from time to time (not less frequently than
quarterly) determines in good faith to most accurately reflect
their fair value. The Trustees will periodically review these
methods of valuation and recommend changes which may be
necessary to assure that the portfolios' instruments are
valued at fair value.
TAXES
Each Fund will seek to qualify for treatment as a regulated
investment company (a "RIC") under Subchapter M of the U.S.
Internal Revenue Code of 1986, as amended (the "Code").
Provided that a Fund (i) is a RIC and (ii) distributes at
least 90% of its net investment income (including, for this
purpose, net realized short-term capital gains), the Fund will
not be liable for Federal income taxes to the extent its net
investment income and its net realized long- and short-term
capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed
income, each Fund must generally distribute at least 98% of
its income, including its net long-term capital gains. One of
several requirements for RIC qualification is that the Fund
must receive at least 90% of its gross income each year from
dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities
or foreign currencies, or other income derived with respect to
the Fund's investments in stock, securities, and foreign
currencies (the "90% Test").
In addition, under the Code, a Fund will not qualify as a RIC
for any taxable year if more than 30% of the Fund's gross
income for that year is derived from gains on the sale of
securities held less than three months (the "30% Test").
These requirements may also restrict the extent of a Fund's
activities in option and other portfolio transactions.
Specifically, the 30% Test will limit the extent to which a
Fund may: (i) sell securities held for less than three
months; (ii) write options which expire in less than three
months; and (iii) effect closing transactions with respect to
call or put options that have been written or purchased within
the preceding three months. Finally, as discussed below, this
30% Test requirement also may limit investments by a Fund in
futures contracts and options on stock indexes, securities,
and futures contracts.
When the Gold Fund is required to sell securities to meet
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significant redemptions or exchanges, the Gold Fund may enter
into futures contracts as a hedge against price declines in
the securities to be sold. Gains realized by the Gold Fund
upon closing out the Gold Fund's position in these contracts
are subject to the 30% Test. Ordinarily, these gains could
not be offset by declines in the value of the hedged
securities for purposes of the 30% Test. Section 851(g)(1) of
the Code, however, provides that, in the case of a "designated
hedge," for purposes of the 30% Test, increases and decreases
in value (during the period of the hedge) of positions which
are part of the hedge are to be netted. Section 851(g)(2) of
the Code provides that a "designated hedge" exists when: (i)
the taxpayer's risk of loss with respect to any position in
property is reduced by reason of a contractual obligation to
sell substantially identical property; and (ii) the taxpayer
clearly identifies the positions which are part of the hedge
in the manner prescribed in Internal Revenue Service ("IRS")
regulations.
IRS regulations have not yet been issued specifying how this
identification requirement can be satisfied. The legislative
history with respect to Section 851(g) states that, prior to
issuance of regulations, the identification requirement is
satisfied either by: (i) placing the positions that are part
of the hedge in a separate account that is maintained by a
broker, futures commission merchant ("FCM"), custodian, or
similar person, and that is designated as a hedging account,
provided that such person maintaining such account makes
notations identifying the hedged and hedging positions and the
date on which the hedge is established; or (ii) the
designation by such a broker, FCM, custodian, or similar
person of such positions as a hedge for purposes of these
provisions, provided that the RIC is provided with a written
confirmation stating the date that the hedge is established
and identifying the hedged and hedging positions.
When the Gold Fund enters into futures contracts to hedge
against price declines of securities to be sold, the Gold Fund
may identify such securities and contracts as a hedge so as to
qualify under Section 851(g)(1) of the Code. There can be no
assurances, however, that the Gold Fund (or such Fund's
agents) will be able to comply with the identification
requirements that may be contained in future IRS regulations.
Moreover, the netting rule of Section 851(g)(1) is available
only if the securities to be sold and the property subject to
the futures contracts constitute "substantially identical"
property. The Gold Fund generally intends to sell pro rata
the securities being hedged, but it is unclear whether the
securities and the futures contracts would constitute
"substantially identical" property.
To minimize the risk that it will not satisfy the 30% Test
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because of frequent redemptions and exchanges of shares that
may occur, each Fund will seek to meet its obligations in
connection with redemptions and exchanges without the
realization of gains on the sales of stock or securities,
options, futures or forward contracts, or foreign currencies
(or options, futures contracts, or forward contracts on such
foreign currencies). In this regard, each Fund will seek
(consistent with its investment strategies) to use available
cash, proceeds of borrowing facilities, proceeds of the sale
of stock or securities, options, futures or forward contracts,
or foreign currencies (or options, futures contracts, or
forward contracts on such foreign currencies) that have been
held for three months or more, and the proceeds of the sale of
such assets that produce either no gain or the smallest amount
of such gain.
Section 851(h)(3) of the Code also provides a special rule for
series mutual funds with respect to the 30% Test. Pursuant to
Section 851(h)(3), a RIC that is part of a series fund will
not fail the 30% Test as a result of sales made within five
days of "abnormal redemptions" if: (i) the sum of the
percentages for abnormal redemptions exceeds 30%; and (ii) the
RIC of which such fund is a part would meet the 30% Test if
all the funds of the investment company were treated as a
single corporation. Abnormal redemptions are defined as
redemptions which occur on any day when net redemptions exceed
one percent of net asset value. If abnormal redemptions
require a Fund to sell securities with a holding period of
less than three months, the Fund intends to make those sales
within five days of such redemptions so as to qualify for the
exclusion afforded by Section 851(h)(3) of the Code if it is
possible to do so.
If a Fund does not satisfy the 30% Test for any taxable year
of the Fund, that Fund will not qualify as a RIC for that
year. If a Fund fails to qualify as a RIC for any taxable
year, the Fund would be taxed in the same manner as an
ordinary corporation. In that event, the Fund would not be
entitled to deduct the distributions which the Fund had paid
to shareholders and, thus, would incur a corporate income tax
liability on all of the Fund's taxable income whether or not
distributed. The imposition of corporate income taxes on the
Fund would directly reduce the return to an investor from an
investment in the Fund.
In the event of a failure by a Fund to qualify as a RIC, the
Fund's distributions, to the extent such distributions are
derived from the Fund's current or accumulated earnings and
profits, would constitute dividends that would be taxable to
shareholders as ordinary income and would be eligible for the
dividends-received deduction for corporate shareholders. This
treatment would also apply to any portion of the distributions
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that might have been treated in the shareholder's hands as
long-term capital gains, as discussed below, had the Fund
qualified as a RIC.
If a Fund were to fail to qualify as a RIC for one or more
taxable years, the Fund could then qualify (or re-qualify) as
a RIC for a subsequent taxable year only if the Fund had
distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the
interest charge mentioned below, if applicable) attributable
to such period. The Fund might also be required to pay to the
IRS interest on 50% of such accumulated earnings and profits.
In addition, pursuant to the Code and an interpretative notice
issued by the IRS, if the Fund should fail to qualify as a RIC
and should thereafter seek to re-qualify as a RIC, the Fund
may be subject to tax on the excess (if any) of the fair
market of the Fund's assets over the Fund's basis in such
assets, as of the day immediately before the first taxable
year for which the Fund seeks to re-qualify as a RIC.
If a Fund determines that it will not qualify as a RIC under
Subchapter M of the Code, the Fund will establish procedures
to reflect the anticipated tax liability in its net asset
value.
As a RIC, each Fund will not be subject to Federal income
taxes on the net investment income and capital gains that it
distributes to its shareholders. The distribution of net
investment income and capital gains will be taxable to
shareholders regardless of whether the shareholder elects to
receive these distributions in cash or in additional shares.
Distributions reported to shareholders as long-term capital
gains shall be taxable as such, regardless of how long the
shareholder has owned the shares. Shareholders of a Fund will
be notified annually by the Trust as to the Federal tax status
of all distributions made by the Fund. Distributions may be
subject to state and local taxes.
A Fund has available to it a number of elections under the
Code concerning the treatment of option transactions for tax
purposes. The Fund will utilize the tax treatment most
favorable to a majority of investors in the Fund. Taxation of
these transactions will vary according to the elections made
by the Fund. These tax considerations may have an impact on
investment decisions made by the Fund.
If a call option written by a Fund expires, the amount of the
premium received by such Fund for the option will be short-
term capital gain to such Fund. If such an option is closed
by a Fund, any gain or loss realized by the Fund as a result
of the closing purchase transaction will be short-term capital
gain or loss to such Fund. If the holder of a call option
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exercises its right under the option, any gain or loss
realized by the Fund upon the sale of the underlying security
pursuant to such exercise will be short-term or long-term
capital gain or loss to the Fund depending on such Fund's
holding period for the underlying security.
With respect to call options purchased by a Fund, such Fund
will realize short-term or long-term capital gain or loss if
such option is sold and will realize short-term or long-term
capital loss if the option is allowed to expire depending on
such Fund's holding period for the call option. If such a
call option is exercised, the amount paid by the Fund for the
option will be added to the basis of the stock so acquired.
A Fund in its operations may also utilize options on stock
indexes. Options on broadbased stock indexes are classified
as nonequity options under the Code. As such, gains and
losses resulting from the expiration, exercise, or closing of
such nonequity options, as well as gains and losses resulting
from futures contract transactions, will be treated as long-
term capital gain or loss to the extent of 60% thereof and
short-term capital gain or loss to the extent of 40% thereof
(hereinafter blended gain or loss). In addition, any option
held by a Fund on the last day of a fiscal year will be
treated as sold for market value on that date, and gain or
loss recognized as a result of such deemed sale will be
blended gain or loss.
A Fund's trading strategies involving nonequity options on
stock indexes may constitute "straddle" transactions.
"Straddles" may effect the taxation of such instruments and
may cause the postponement of recognition of losses incurred
in certain closing transactions.
A Fund's transactions in options could, under some
circumstances, preclude the Fund's qualifying for the special
tax treatment available to investment companies meeting the
requirements of Subchapter M of the Code. However, it is the
intention of each Fund's management to limit gains from such
investments to less than 10% of the gross income of the Fund
during any fiscal year in order to maintain this
qualification.
AUDITORS AND CUSTODIAN
Deloitte & Touche LLP, independent certified public
accountants, are the auditors of the Trust and are responsible
for auditing the annual financial statements of the Trust.
Rushmore Trust and Savings, FSB, Bethesda, Maryland, acts as
the custodian for the Trust and is responsible for
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safeguarding and controlling the Trust's cash and securities,
handling the securities and collecting interest on the Fund's
investments.
FINANCIAL STATEMENTS
The Financial Statements (audited) of the Trust for the fiscal
year ended June 30, 1995, are incorporated by reference from
the Trust's 1995 Annual Report to Shareholders. Copies of the
Trust's Annual Report may be obtained without charge by
contacting the Trust at 4922 Fairmont Avenue, Bethesda,
Maryland 20814, or by telephoning the Trust at (800) 622-1386
or (301) 657-1510.
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