<PAGE>
SEFTON FUNDS 370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
General & Account Information: (800) 524-2276
SEFTON CAPITAL MANAGEMENT - Investment Adviser
("SCM" or the "Adviser")
ALPS MUTUAL FUNDS SERVICES, INC. - Administrator, Distributor and Sponsor
("ALPS" or the "Distributor")
This prospectus describes three funds (each, a "Fund" or, collectively, the
"Funds"), managed by Sefton Capital Management, a California corporation. The
Funds and their objectives are:
The U.S. Government Fund attempts to provide investors with as high a level
of current income as is consistent with preservation of capital.
The California Tax-Free Fund attempts to provide investors with as high a
level of current income, exempt from both Federal and California personal income
taxes, as is consistent with preservation of capital.
The Equity Value Fund (formerly known as the Equity Fund) attempts to
provide investors with long-term capital appreciation.
Shares of the Funds are sold to the public by the Distributor as an
investment vehicle for individuals, institutions, corporations and fiduciaries.
The Funds are separate investment funds of Sefton Funds Trust (the "Trust"), a
Delaware business trust and registered management investment company.
Investments in shares of the Funds involve risk, including possible loss of
principal.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Funds and should be read and retained
for information about each Fund.
A Statement of Additional Information (the "SAI"), dated July 12, 1996,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or calling the Funds at the address and
information numbers printed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
July 12, 1996
1
<PAGE>
Table of Contents
Page
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FUND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 8
THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
THE INVESTMENT POLICIES AND PRACTICES OF THE FUNDS . . . . . . . . . . . 9
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . 10
FUND SHARE VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PRICING OF FUND SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 14
MINIMUM PURCHASE REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . . 14
PURCHASE OF FUND SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 14
INDIVIDUAL RETIREMENT ACCOUNTS . . . . . . . . . . . . . . . . . . . . . 16
EXCHANGE OF FUND SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 16
REDEMPTION OF FUND SHARES. . . . . . . . . . . . . . . . . . . . . . . . 17
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX. . . . . . . . . . . . . 19
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES . . . . . . . . . . . 24
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 33
RISKS OF INVESTING IN THE FUNDS. . . . . . . . . . . . . . . . . . . . . 34
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2
<PAGE>
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
This Prospectus describes three funds managed by SCM. Each Fund has a
distinct investment objective and policies.
THE FUNDS:
U.S. GOVERNMENT FUND. The investment objective of the U.S. Government Fund
is to provide investors with as high a level of current income as is consistent
with preservation of capital. The Fund pursues its objectives by investing,
under normal conditions, at least 65% of its total assets in securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. The
Fund may also invest in certificates of deposit, bankers' acceptances, and
commercial paper rated in one of the two highest categories by a nationally
recognized statistical rating organization ("NRSRO"), investment grade corporate
debt securities, and investment grade mortgage- and asset-backed securities,
including securities issued by foreign issuers, or unrated securities of these
types determined by the Adviser to be of comparable quality. The Fund may also
enter into repurchase agreements with respect to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. The securities of
foreign issuers in which the Fund may invest are: corporate debt securities,
floating rate and variable rate debt, forward commitments and when-issued
securities, market-auction preferred stock, certificates of deposit and bankers'
acceptances issued by foreign banks, and obligations of foreign governments or
their subdivisions, agencies and instrumentalities, international agencies and
supranational entities. The Fund invests primarily in U.S. Government and U.S.
Government agency securities such that its average weighted maturity will be
from 5 to 10 years.
CALIFORNIA TAX-FREE FUND. The investment objective of the California
Tax-Free Fund is to provide investors with as high a level of current income,
exempt from both Federal and California personal income taxes, as is consistent
with preservation of capital. The Fund pursues this objective by investing
primarily in California municipal obligations ("Obligations") such that the
portfolio's weighted average maturity will be 10 or more years. The Fund invests
in obligations that present acceptable credit risks in the judgment of the
Adviser and that, at the time of purchase, are rated investment grade or, if
such securities are unrated but are determined by the Adviser to be of
comparable quality, the Fund may invest up to 15% of its portfolio in such
unrated securities. The Fund may continue to hold obligations subsequently
downgraded to below investment grade. The Fund intends to invest 100% of its
net assets in municipal obligations exempt from California and federal income
taxes. As a fundamental policy, the California Tax-Free Fund will have at
least 80% of its net assets invested in tax-exempt securities and in securities
the interest on which is not a tax preference item for purposes of the Federal
alternative minimum tax. At least 65% of the value of its total assets will be
invested in Obligations. Some of the Obligations in which the Fund invests may
be "private activity bonds," the interest on which is a tax preference item for
purposes of the Federal alternative minimum tax. For temporary
3
<PAGE>
defensive purposes, including times when Obligations may not be available in
the marketplace, the Adviser may determine that a temporary defensive
position is warranted and may invest more than 20% of the Fund's net assets
in securities that are subject to Federal income tax, California personal
income tax, or both, limited to securities issued or guaranteed by the United
States Government, its agencies or instrumentalities, and related repurchase
agreements. To the extent the Fund is so invested, it will not be invested in
accordance with its investment objectives and policies.
The California Tax-Free Fund may invest not more than 15% of its net
assets in illiquid securities. The Board of Trustees will make a determination
as to the liquidity of such investments based upon guidelines established by
the Adviser which provide for analysis of such factors as the frequency of
trades and quotes for the security, the number of dealers willing to purchase
or sell the security and the number of other potential buyers, and the
willingness of dealers to undertake and make a market in the security.
EQUITY VALUE FUND. The investment objective of the Equity Value Fund is
to provide investors with long-term capital appreciation. The Fund pursues
this objective by investing primarily in common stocks of both domestic and
foreign companies. The Fund may invest in large, well-established companies
and smaller companies with market capitalizations exceeding $50 million at
the time of purchase. Income generation is a secondary consideration for the
Fund. However, the Fund may purchase dividend paying stocks of particular
issuers when the issuer's dividend record may, in the Adviser's opinion, have
a favorable influence on the market value of the securities.
For additional information concerning the investment policies, practices
and risk considerations of the Funds, see "THE INVESTMENT POLICIES AND
PRACTICES OF THE FUNDS" AND "RISKS OF INVESTING IN THE FUNDS" in this
Prospectus.
INVESTMENT RISKS
GENERAL. The price per share of each Fund will fluctuate with changes in
value of the investments held by such Fund. Additionally, there can be no
assurance that a Fund will achieve its investment objective or be successful
in preventing or minimizing the risk of loss that is inherent in investing in
particular types of investment products. Further, investment in the securities
of issuers in any foreign country involves special risks and considerations not
typically associated with investing in U.S. companies. Because there are no
restrictions on the maturity of any individual assets in which a Fund will
invest, an investment in a Fund carries some risk of volatility in principal
value.
SPECIAL RISKS SPECIFIC TO CALIFORNIA TAX-FREE FUND. Because the
California Tax-Free Fund will be highly concentrated in particular types of
securities, the Fund will not be diversified. Investment in a non-diversified
fund could, therefore, entail greater risks than investment in a
"diversified" fund, including a risk of greater
4
<PAGE>
fluctuations in yield and share price. There are risks to investment in the
California Tax-Free Fund posed by the economic strength of and pending legal
actions against, the State of California. It is not currently possible to
assess the impact of such economic factors and cases or of current
legislation and policies on the long-term ability of California state and
municipal issuers to pay interest or repay principal on their obligations.
The foregoing is a summary of risks; see "RISKS OF INVESTING IN THE FUNDS" in
this Prospectus.
MANAGEMENT OF THE FUNDS
SCM acts as investment adviser to the Funds. For its services, the Adviser
receives from the Funds fees at annual rates based on each Fund's average daily
net assets. See "FUND EXPENSES - Fee Table" and "MANAGEMENT OF THE FUNDS" in
this Prospectus.
ALPS acts as administrator to the Funds. ALPS provides certain
administrative services to the Funds, for which it receives a fee from each
Fund payable at the annual rate of 0.20% of the Fund's average daily net
assets. ALPS will also distribute the Funds' shares and may be reimbursed for
certain of its distribution-related expenses.
For information on how to purchase or redeem shares in a Fund, please see
"PURCHASE OF FUND SHARES" and "REDEMPTION OF FUND SHARES" in this Prospectus.
5
<PAGE>
FUND EXPENSES
The purpose of the following table is to assist the shareholder in
understanding the various costs and expenses that an investor in each Fund
will bear, either directly or indirectly. Each Fund's costs and expenses are
based upon the Fund's operating expenses for its initial fiscal period,
adjusted to reflect current fees and expenses:
FEE TABLE
U.S. California Equity
Government Fund Tax-Free Fund Value Fund
--------------- ------------- ----------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) None None None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price) None None None
Deferred Sales Load (as a
percentage of redemption proceeds) None None None
Redemption Fees None None None
Exchange Fees None None None
ANNUAL FUND OPERATING EXPENSE (as a
percentage of average net assets)
Management Fees (after waivers)* .50% .55% 1.15%
12b-1 Fees None None None
Other Expenses** .65% .39% .44%
TOTAL PORTFOLIO OPERATING EXPENSES
(after waivers)*** 1.15% .94% 1.59%
___________________
* Management Fees consisting of investment advisory and administration fees
(before waivers) would be .80%, .80% and 1.20%, respectively. The fee
waivers reflected in the table are voluntary and may be modified or
terminated at any time without the Funds' consent. Management Fees payable
by each Fund are higher than those paid by most investment companies of its
type.
** Certain Service Organizations may receive fees from a Fund in amounts up to
an annual rate of 0.25% of the daily net asset value of the Fund shares
owned by the shareholders with whom the Service Organization has a servicing
relationship. Service Organizations may charge their customers certain
direct transactions fees which may include, under certain circumstances,
short-term redemption charges.
*** Total Portfolio Operating Expenses (before waivers) would be 1.45%, 1.19%
and 1.64%, respectively.
6
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment, assuming (1)
5% gross annual return, (2) redemption at the end of each time period, (3) that
operating expenses are the same as described above, and (4) reinvestment of all
dividends and distributions:
U.S. California Equity
Government Fund Tax-Free Fund Value Fund
--------------- ------------- ----------
1 year $ 12 $ 10 $ 16
3 years 37 30 51
5 years 64 52 87
10 years 140 116 190
THIS ASSUMED 5% ANNUAL RETURN AND THE EXPENSES SHOWN SHOULD NOT BE CONSIDERED
INDICATIONS OF ACTUAL OR EXPECTED PERFORMANCE OR OPERATING EXPENSES OF ANY FUND,
BOTH OF WHICH MAY VARY SIGNIFICANTLY.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The Financial Highlights for the period April 3, 1995 (commencement of
operations) to March 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon appears in the Trust's annual
report and Statement of Additional Information ("SAI"). This information
should be read in conjunction with the financial statements and notes thereto
which are included in the SAI.
<TABLE>
<CAPTION>
For the Period April 3, 1995
(Commencement of Operations)
to March 31, 1996
----------------------------------------------------
U.S. Government California Tax-Free Equity Value
Fund Fund Fund
----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.00 $ 12.00 $ 12.00
---------------------------------------------
Income from investment operations:
Net investment income 0.71 0.58 0.21
Net realized and unrealized gain 0.37 0.20 2.92
---------------------------------------------
Total income from investment
operations 1.08 0.78 3.13
---------------------------------------------
Less distributions:
Dividends from net investment income (0.71) (0.58) (0.21)
Distributions from net realized gain (0.02) (0.01) (0.00)
---------------------------------------------
Total dividends and distributions (0.73) (0.59) (0.21)
---------------------------------------------
Net asset value, end of period $ 12.35 $ 12.19 $ 14.92
---------------------------------------------
---------------------------------------------
Total Return 9.06%(1) 6.60%(1) 26.31%(1)
---------------------------------------------
---------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $19,096 $42,593 $36,326
Ratio of expenses to average net assets 1.02%(2) 0.83%(2) 1.55%(2)
Ratio of net investment income to average
net assets 5.68%(2) 4.83%(2) 1.68%(2)
Ratio of expenses to average net assets
without fee waivers 1.39%(2) 1.16%(2) 1.66%(2)
Ratio of net investment income to average
net assets without fee waivers 5.31%(2) 4.51%(2) 1.57%(2)
Portfolio turnover rate (3) 45.41%(2) 93.90%(2) 62.76%(2)
</TABLE>
(1) Total return is not annualized.
(2) Annualized.
(3) Portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding
securities with a maturity date of one year or less at the time of
acquisition) for the period and dividing it by the monthly average of
the market value of such securities during the period. Purchases and
sales of investment securities (excluding short-term securities) for the
period ended March 31, 1996 were $26,590,557 and $8,446,943,
respectively, for the U.S. Government Fund, $77,782,488 and $36,252,475,
respectively, for the California Tax-Free Fund, and $41,033,391 and
$13,551,837, respectively, for the Equity Value Fund.
8
<PAGE>
THE FUNDS
Each Fund is separate investment fund or portfolio, commonly known as
mutual fund. The Funds are portfolios of delaware business trust organized
under the laws of the State of Delaware as an open-end management investment
company on January 6, 1995. The Trust's Board of Trustees oversees the
overall management of the Funds and elects the officers of each Fund.
THE INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
- The investment objective of the U.S. Government Fund is to provide
investors with as high level of current income as is consistent with
preservation of capital.
- The investment objective of the California Tax-Free Fund is to
provide investors with as high level of current income, exempt from both
Federal and California personal income taxes, as is consistent with
preservation of capital.
- The Equity Value Fund's investment objective is to provide investors
with long-term capital appreciation.
Each Fund follows its own investment policies and practices, including
certain investment restrictions. The SAI contains specific investment
restrictions which govern each Fund's investments. Those restrictions and
each Fund's investment objective are fundamental policies which may not be
changed without a majority vote of shareholders of the affected Fund. Except
for the objectives and those restrictions specifically identified as
fundamental, all other investment policies and practices described in this
Prospectus and in the SAI are not fundamental, so that the Board of Trustees
may change them without shareholder approval.
The Adviser selects investments and makes investment decisions based on
the investment objective and policies of each Fund.
U.S. GOVERNMENT FUND. In selecting debt securities for the U.S.
Government Fund, the Adviser seeks to select those instruments that appear
best calculated to achieve the Fund's investment objective within the credit
and risk tolerances established for the Fund. In accordance with those
policies, the Fund may purchase commercial paper rated in one of the two
highest rating categories by nationally recognized statistical rating
organization ("NRSRO"), corporate debt securities rated in one of the four
highest rating categories by an NRSRO, mortgage- and asset-backed securities
rated in one of the four highest rating categories by an NRSRO, and other
debt instruments which are of comparable quality in the Adviser's opinion.
CALIFORNIA TAX-FREE FUND. In selecting debt securities for the
California Tax-Free Fund, the Adviser seeks to select those instruments that
appear best calculated to achieve the Fund's investment objective within the
credit and risk tolerances estab-
9
<PAGE>
lished for the Fund. In accordance with those policies, the Fund may
purchase California Municipal Obligations rated BBB, SP-2 or better by
Standard & Poor's ("S&P") or Baa, MIG-2 or better by Moody's Investors Service
("Moody's"), commercial paper rated in one of the two highest rating
categories by an NRSRO or, if any such securities are not rated, are of
comparable quality in the Adviser's opinion. Under normal conditions, the
Fund will have at least 80% of its net assets invested in tax-exempt
securities and in securities the interest on which is not a tax preference item
for purposes of the Federal alternative minimum tax. At least 65% of the
value of its total assets will be invested in California Municipal
Obligations. The remaining net assets may be invested in U.S. Government
Securities and related repurchase agreements.
EQUITY VALUE FUND. In selecting equity investments (which include
common stocks of both domestic and foreign companies) for the Equity Value
Fund (formerly known as the Equity Fund) the Adviser selects companies for
investment using both quantitative and qualitative analysis to identify those
issuers that, in the Adviser's opinion, exhibit below-average valuation
multiples, above-average financial strength, strong position in their industry
and a history of steady profit growth.
The Adviser may also select other equity securities in addition to
common stocks for investment by the Equity Value Fund. Such other equity
securities are preferred stocks, high grade securities convertible into
common stocks, and warrants. The Fund may invest no more than 5% of its net
assets in warrants, no more than 2% of which may be invested in warrants
which are not listed on the New York or American Stock Exchanges. Normally,
the Equity Value Fund will invest at least 65% of its total assets in common
stocks or securities convertible into common stocks. For temporary defensive
purposes, however, the Fund may invest in U.S. Government securities,
certificates of deposit, bankers' acceptances, commercial paper, repurchase
agreements (maturing in seven days or less) and debt obligations of
corporations (corporate bonds, debentures, notes and other similar corporate
debt instruments) which are rated investment grade or better by S&P or
Moody's.
The types of securities and investment practices used by the Funds are
described in greater detail at "DESCRIPTION OF SECURITIES AND INVESTMENT
PRACTICES".
MANAGEMENT OF THE FUNDS
The business and affairs of each Fund are managed under the direction of
the Board of Trustees. The Trustees are Harley K. Sefton, Grace Evans
Cherashore, Gordon T. Frost, Jr. and W. Robert Alexander. Additional
information about the Trustees, as well as the Funds' executive officers, may
be found in the SAI under the heading "MANAGEMENT -- TRUSTEES AND OFFICERS."
10
<PAGE>
THE ADVISER: SEFTON CAPITAL MANAGEMENT
Sefton Capital Management (formerly Kennebec Capital Management, Inc.),
2550 Fifth Avenue, Suite 808, San Diego, CA 92103, acts as the investment
adviser to the Funds. SCM manages the investment and reinvestment of the
assets of the Funds and continuously reviews, supervises and administers the
Funds' investments. The Adviser is responsible for placing orders for the
purchase and sale of the Fund's investments directly with brokers and dealers
selected by it in its discretion. Mr. Sefton, President and CEO of the
Adviser, is responsible for the day to day management of the Funds. Mr.
Sefton started SCM in November, 1994. Prior to SCM, he was President of First
Interstate Capital Management, Inc. and San Diego Financial Capital
Management, Inc. (a wholly-owned subsidiary of San Diego Trust savings Bank).
Prior to that, from January 1992 until January 1994, he was Vice Chairman and
Division Manager for San Diego Trust and Savings Bank, and from July 1986
until December 1991 he was Senior Vice President and Chief Operating Officer
of San Diego Financial Capital Management, Inc. (a wholly-owned subsidiary of
San Diego Trust savings Bank). Mr. Ted Piorkowski is the primary fund manager
for the U.S. Government Fund and the California Tax-Free Fund. Mr. Piorkowski
is a chartered Financial Analyst who has been managing fixed income portfolios
since 1988. From March 1994 through May 1994 he managed portfolios for First
Interstate Capital Management, Inc. From January 1988 through March 1994 he
managed portfolios for San Diego Financial Capital Management, Inc. (a
wholly-owned subsidiary of San Diego Trust & Savings Bank). Mr. Leif O.
Sanchez is the co-fund manager for the Equity Value Fund. Mr. Sanchez
is a chartered Financial Analyst who has been managing portfolios since 1985.
From March 1994 through January 1995 he managed portfolios for First
Interstate Capital Management, Inc. From March 1985 through March 1994 he
managed portfolios for San Diego Financial Capital Management, Inc. (a
wholly-owned subsidiary of San Diego Trust savings Bank). Mr. Thomas C. Bowden
is co-fund manager for the Equity Value Fund. Mr. Bowden is a Chartered
Financial Analyst who has been managing portfolios since 1986. From March
1994 through January 1995 he managed portfolios for First Interstate Capital
Management, Inc. From June 1986 through March 1994 he managed portfolios for
San Diego Financial Capital Management, Inc. (a wholly-owned subsidiary of
San Diego Trust savings Bank).
For the advisory services it provides to the Funds, SCM receives from
each Fund a monthly fee, based on average daily net assets, at the annual
rates set forth below:
Fund Investment Advisory Fee
---- -----------------------
U.S. Government Fund .60%
California Tax-Free Fund .60%
Equity Value Fund 1.00%
11
<PAGE>
THE ADMINISTRATOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc., 370 Seventeenth Street, Suite 2700,
Denver, Colorado 80202, acts as Administrator and Distributor of the Funds.
As Distributor, ALPS sells shares of each Fund on behalf of the Trust. As
Administrator, ALPS provides certain administrative services necessary for
the Funds' operations including: (i) coordination of the services performed
by the Funds' investment adviser, transfer agent, custodian, independent
accountants and legal counsel; regulatory compliance, including the
compilation of information for documents such as reports to, and filings
with, the SEC and state securities commissions; and preparation of proxy
statements and shareholder reports for the Funds; (ii) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Funds' Officers and Board of Trustees; and (iii)
furnishing office space and certain facilities required for conducting the
business of the Funds. For these services, ALPS receives from each Fundee,
payable monthly, at the annual rate of 0.20% of each Fund's average daily net
assets. ALPS also serves as administrator and distributor of other mutual
funds.
SERVICE ORGANIZATIONS
Various banks, trust companies, broker-dealers (other than ALPS) or
other financial organizations (collectively, "Service Organizations") also
may provide administrative services for the Funds, such as maintaining
shareholder accounts and records at a fee of up to an annual rate of 0.25% of
Fund average daily net assets serviced. The Glass-Steagall Act and other
applicable laws provide that, among other things, banks may not engage in the
business of underwriting, selling or distributing securities. There is
currently no precedent prohibiting banks from performing administrative and
shareholder servicing functions as Service Organizations. However, judicial
or administrative decisions or interpretations of such laws, as well as
changes in either Federal or state regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, could prevent a bank
Service Organization from continuing to perform all or part of its servicing
activities. If a bank were prohibited from so acting, its shareholder clients
would be permitted to remain shareholders of the Funds and alternative means
for continuing the servicing of such shareholders would be sought. It is not
expected that shareholders would suffer any adverse financial consequences
as a result of any of these occurrences.
OTHER EXPENSES
Each Fund bears all costs of its operations other than expenses
specifically assumed by ALPS or the Adviser. The costs borne by the Funds
include legal and accounting expenses; Trustees' fees and expenses; insurance
premiums; custodian and transfer agent fees and expenses; expenses incurred
in acquiring or disposing of the Funds' portfolio securities; expenses of
registering and qualifying the Funds' shares for sale with the SEC and with
various state securities commissions; expenses of obtaining quotations on the
Funds' portfolio securities and pricing of the Funds' shares; expenses of
maintaining the Funds' legal existence and of shareholders' meet-
12
<PAGE>
ings; and expenses of preparation and distribution to existing shareholders
of reports, proxies and prospectuses. Each Fund bears its own expenses
associated with its establishment as a series of the Funds; these expenses
are amortized over a five-year period from the commencement of the fund's
operations. Expenses of the Funds directly attributable to the fund are
charged to that Fund; other expenses are allocated proportionately among all
of the Funds in relation to the net assets of each Fund.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Contracts, the Adviser places orders
for the purchase and sale of portfolio investments for the Funds' accounts
with brokers or dealers selected by it in its discretion.
In effecting purchases and sales of portfolio securities for the account
of the Funds, the Adviser will seek the best execution of the Funds' orders.
Purchases and sales of portfolio debt securities for the Funds are generally
placed by the Adviser with primary market makers for these securities on a
net basis, without any brokerage commission being paid by the Funds. Trading
does, however, involve transaction costs. Transactions with dealers serving
as primary market makers reflect the spread between the bid and asked prices.
Broker-dealers are selected on the basis of a variety of factors such as
reputation, capital strength, size and difficulty of order, sale of Fund
shares and research provided to the Adviser. The Adviser may cause a fund to
pay commissions higher than another broker-dealer would have charged if the
Adviser believes the commission paid is reasonable in relation to the value
of the brokerage and research services received by the Adviser.
The portfolio turnover rates for the U.S. Government Fund and the
California Tax-Free Fund are not expected to exceed 80% and the portfolio
turnover rate for the Equity Value Fund is not expected to exceed 100%.
FUND SHARE VALUATION
The net asset value per share of the Funds is calculated at 4:15 p.m.
(Eastern time) for each of the Funds, Monday through Friday, on each day the
New York Stock Exchange is open for trading, which excludes the following
business holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The
net asset value per share of the Funds is computed by dividing the value of
each Fund's net assets (i.e., the value of the assets less the liabilities)
by the total number of such Fund's outstanding shares. All expenses,
including fees paid to the Adviser and ALPS, are accrued daily and taken into
account for the purpose of determining the net asset value.
Securities listed on an exchange or over-the-counter are valued on the
basis of the last sale prior to the time the valuation is made. If there has
been no sale since the immediately previous valuation, then the current bid
price is used. Quotations are taken for the exchange where the security is
primarily traded. Portfolio securities
13
<PAGE>
which are primarily traded on foreign exchanges may be valued with the
assistance of pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is
likely to have changed such value, then the fair value of those securities
will be determined by consideration of other factors by or under the
direction of the Board of Trustees. Securities for which market quotations
are not readily available are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees. Notwithstanding the
above, bonds and other fixed-income securities are valued by using market
quotations and may be valued on the basis of prices provided by a pricing
service approved by the Board of Trustees. All assets and liabilities
initially expressed in foreign currencies will be converted into U.S dollars
at the mean between the bid and asked prices of such currencies against U.S.
dollars as last quoted by any major bank.
With respect to options contracts entered into by the Equity Value Fund,
the premium received is recorded as an asset and equivalent liability, and
thereafter the liability is adjusted to the market value of the option
determined in accordance with the preceding paragraph. The premium paid for
an option purchased by the Fund is recorded as an asset and subsequently
adjusted to market value.
PRICING OF FUND SHARES
Orders for the purchase of shares will be executed at the net asset
value per share (the "public offering price") next determined after an order
has become effective.
MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in a fund is $25,000; the minimum is
$2,000 for an IRA. Any subsequent investments must be at least $50, including
an IRA investment. All initial investments should be accompanied by a
completed Purchase Application. purchase Application accompanies this
Prospectus. A separate application is required for an IRA. The Funds reserve
the right to reject any purchase order.
PURCHASE OF FUND SHARES
All funds received by the Funds are invested in full and fractional
shares of the appropriate Fund. Certificates for shares are not issued. State
Street Bank & Trust Company ("State Street") maintains records of each
shareholder's holdings of Fund shares, and each shareholder receives a
statement of transactions, holdings and dividends. The Funds reserve the
right to reject any purchase. All purchases made by check should be in U.S.
dollars and made payable to the Sefton Funds, or State Street Bank trust
Company. Third party checks will not be accepted. Please include the Fund
name and your account number on all checks.
14
<PAGE>
All investments may be made using any of the following methods.
THROUGH AN AUTHORIZED BROKER, INVESTMENT ADVISER OR SERVICE
ORGANIZATION. Shares are available to new and existing shareholders through
authorized brokers, investment advisers and Service Organizations. To make an
investment using this method, simply complete a Purchase Application and
contact your broker, investment adviser or Service Organization with
instructions as to the amount you wish to invest. Your broker will then
contact State Street to place the order on your behalf on that day. In
addition, shares in any Fund may be purchased by forwarding an application
directly to State Street at P.O. Box 8521, Boston, MA 02266-8521. Authorized
brokers, investment advisers and Service Organizations may impose additional
requirements and charges for the services rendered.
Orders received by your broker or Service Organization for the Funds in
proper order prior to the determination of net asset value and transmitted to
State Street prior to the close of its trading (which is currently 4:00 p.m.,
Eastern time), will become effective that day. Brokers who receive orders are
obligated to transmit them promptly. You should receive written confirmation
of your order within a few days of receipt of instructions from your broker.
BY WIRE. Investments may be made directly through the use of wire
transfers of Federal funds. Contact your bank and request it to wire Federal
funds to the applicable Fund. In most cases, your bank will either be a
member of the Federal Reserve Banking System or have a relationship with a
bank that is. Your bank will normally charge you a fee for handling the
transaction. To purchase shares by a Federal funds wire, please first contact
State Street. They will establish a record of information for the wire to
insure the correct processing of funds. You can reach the Wire Desk at
1-800-524-2276.
Then, have your bank wire funds using the following instructions:
State Street Bank & Trust Company
Boston, MA 02101
ABA # 0110-0002-8
Account #99051252
Further Credit to: Fund Name, Investor Name, Investor Account Number
(if known)
As long as you have read the Prospectus, you may establish a new regular
account through the Wire Desk; IRAs may not be opened in this way. When new
accounts are established by wire, the distribution options will be set to
reinvest and the social security or tax identification number ("TIN") will
not be certified until a signed application is received. Completed
applications should be forwarded immediately to State Street. With the
Purchase Application, the shareholder can specify other distribution options
and add any special features offered by a Fund. Should any dividend
distributions or redemptions be paid before the TIN is certified, they will
be subject to 31% Federal tax withholding.
15
<PAGE>
INDIVIDUAL RETIREMENT ACCOUNTS
The U.S. Government Fund and the Equity Value Fund (the California
Tax-Free Fund is not recommended for IRAs) may be used as a funding medium
for IRAs. In addition, an IRA may be established through a custodial account
with State Street Bank & Trust Company. Completion of a special application
is required in order to create such an account, and the minimum initial
investment for an IRA is $2,000. Contributions to IRAs are subject to
prevailing amount limits set by the Internal Revenue Service. For more
information and IRA information, call ALPS at 1-800-524-2276. Additional
account level fees may be imposed for IRA accounts.
EXCHANGE OF FUND SHARES
The Funds offer two convenient ways to exchange shares in one Fund for
shares in another Fund in the Trust or (with a possible additional one day
delay) certain other funds for which ALPS is administrator. Before engaging
in an exchange transaction, a shareholder should read carefully the
Prospectus describing the Fund into which the exchange will occur, which is
available without charge and can be obtained by writing to ALPS, 370
Seventeenth Street, Suite 2700, Denver, Colorado 80202, or by calling (800)
524-2276. A shareholder may not exchange shares of one Fund for shares of
another Fund if the new Fund is not qualified for sale in the state of the
shareholder's residence. The minimum amount for an initial and subsequent
exchange is $50. The Trust may terminate or amend the terms of the exchange
privilege at any time upon at least 60 days' prior written notice to
shareholders of any modification or termination of the exchange privilege.
A new account opened by exchange must be established with the same
name(s), address and social security number as the existing account. All
exchanges will be made based on the net asset value next determined following
receipt of the request by a Fund in good order, plus any applicable sales
charge.
An exchange is taxable as a sale of a security on which a gain or loss
may be recognized. Shareholders will receive written confirmation of the
exchange following completion of the transaction.
EXCHANGE BY MAIL. To exchange Fund shares by mail, simply send a letter
of instruction to State Street. The letter of instruction must include: (i)
your account number; (ii) the Fund from and the Fund into which you wish to
exchange your investment; (iii) the dollar or share amount you wish to
exchange; and (iv) the signatures of all registered owners or authorized
parties. All signatures must be guaranteed by an eligible guarantor
institution, including a member of a national securities exchange, or by a
commercial bank or trust company, broker/dealer, credit union or savings
association.
16
<PAGE>
EXCHANGE BY TELEPHONE. To exchange Fund shares by telephone or if you
have any questions simply call the Funds at (800) 524-2276. You should be
prepared to give the telephone representative the following information: (i)
your account number, social security or tax identification number and account
registration; (ii) the name of the Fund from and the Fund into which you wish
to transfer your investment; and (iii) the dollar or share amount you wish to
exchange. The conversation may be recorded to protect you and the Funds.
Telephone exchanges are available only if the shareholder so indicates by
checking the "yes" box on the Purchase Application. See "REDEMPTION OF FUND
SHARES - By Telephone" for a discussion of telephone transactions generally.
AUTOMATIC INVESTMENT PROGRAM. An eligible shareholder may also
participate in the Automatic Investment Program, an investment plan that
automatically debits money from the shareholder's bank account and invests it
in one or more of the Funds in the Trust through the use of electronic funds
transfer or automatic bank drafts. Shareholders may elect to make subsequent
investments by transfers of a minimum of $50 on either the fifth or twentieth
day of each month into their established Fund account. Contact the Funds at
(800) 524-2276 for more information about the Automatic Investment Program.
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on each day
the Fund is valued. Shares will be redeemed at the net asset value next
determined after a redemption request in good order has been received and
accepted by the applicable Fund. See "Determination of Net Asset Value" in
the SAI.
A redemption may be a taxable transaction on which gain or loss may be
recognized.
Where the shares to be redeemed have been purchased by check, the
redemption request will be returned if the purchasing check has not cleared,
which may take up to 15 days. Shareholders may avoid this delay by investing
through wire transfers of Federal funds. During the period prior to the time
the shares are redeemed, dividends on the shares will continue to accrue and
be payable and the shareholder will be entitled to exercise all other
beneficial rights of ownership.
Once the shares are redeemed, a Fund will ordinarily send the proceeds
by check to the shareholder at the address of record on the next business
day. The Funds may, however, take up to seven days to make payment. This will
not be the customary practice. Also, if the New York Stock Exchange is closed
(or when trading is restricted) for any reason other than the customary
weekend or holiday closing or if an emergency condition as determined by the
SEC merits such action, the Funds may suspend redemptions or postpone payment
dates.
17
<PAGE>
REDEMPTION METHODS. To ensure acceptance of your redemption request, it
is important to follow the procedures described below. Although the Funds
have no present intention to do so, the Funds reserve the right to refuse or
to limit the frequency of any telephone or wire redemptions. Of course, it
may be difficult to place orders by telephone during periods of severe market
or economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Funds may modify or terminate their
services and provisions at any time. If the Funds terminate any particular
service, they will do so only after giving written notice to shareholders.
Redemption by mail will always be available to shareholders.
You may redeem your shares using any of the following methods:
THROUGH AN AUTHORIZED BROKER, INVESTMENT ADVISER OR SERVICE
ORGANIZATION. You may redeem your shares by contacting your authorized
broker or investment adviser and instructing him or her to redeem your
shares. He or she will then contact State Street and place a redemption trade
on your behalf.
BY MAIL. You may redeem your shares by sending a letter directly to
State Street. To be accepted, a letter requesting redemption must include:
(i) the Fund name and account registration from which you are redeeming
shares; (ii) your account number; (iii) the amount to be redeemed; (iv) the
signatures of all registered owners; and (v) for redemptions exceeding
$5,000, a signature guarantee by any eligible guarantor institution,
including a member of a national securities exchange, or a commercial bank or
trust company, broker-dealer, credit union or savings association.
Corporations, partnerships, trusts or other legal entities will be required
to submit additional documentation.
BY TELEPHONE. You may redeem your shares by calling the Funds at (800)
524-2276. You should be prepared to give the telephone representative the
following information: (i) your account number, social security number and
account registration; (ii) the Fund name from which you are redeeming shares;
and (iii) the amount to be redeemed. The conversation may be recorded to
protect you and the Funds. Telephone redemptions are available only if the
shareholder so indicates by checking the "yes" box on the Purchase
Application. The Funds employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If the Funds fail to
employ such reasonable procedures, they may be liable for any loss, damage or
expense arising out of any telephone transactions purporting to be on a
shareholder's behalf. In order to assure the accuracy of instructions
received by telephone, the Funds require some form of personal identification
prior to acting upon instructions received by telephone, record telephone
instructions and provide written confirmation to investors of such
transactions.
You may instruct the Funds to send your redemption proceeds via a wire
transmission to your personal bank. Your instructions should include: (i)
your account number, social security number and account registration; (ii)
the Fund name from which you are redeeming shares; and (iii) the amount to be
redeemed. Wire redemptions can be made only if the "yes" box has been checked
in the "Telephone
18
<PAGE>
Redemption Authorization" section on your Purchase Application, and you have
attached a copy of a voided check or a letter summarizing the wiring
instructions of the account where proceeds are to be wired. Your bank may
charge you a fee for receiving a wire payment on your behalf.
The above-mentioned services "By Telephone" and "By Wire" are not
available for clients of Sefton Capital Management or for IRAs. Sefton Funds
clients should contact their representative.
SYSTEMATIC WITHDRAWAL PLAN. An owner of $100,000 or more of a Fund may
elect to have periodic redemptions from his or her account to be paid on a
monthly, quarterly, semi-annual or annual basis. The minimum periodic payment
is $50. A sufficient number of shares to make the scheduled redemption will
normally be redeemed on the fifth or twentieth day of the selected month(s).
Depending on the size of the payment requested and fluctuation in the net
asset value, if any, of the shares redeemed, redemptions for the purpose of
making such payments may reduce or even exhaust the account. A shareholder
may request that these payments be sent to a predesignated bank or other
designated party. Capital gains and dividend distributions paid to the
account will automatically be reinvested at net asset value on the
distribution payment date.
REDEMPTION IN KIND. All redemptions of shares of the Funds shall be
made in cash, except that the commitment to redeem shares in cash extends
only to redemption requests made by each shareholder of a Fund during any
90-day period of up to the lesser of $250,000 or 1% of the net asset value of
that Fund at the beginning of such period. This commitment is irrevocable
without the prior approval of the SEC and is a fundamental policy of the
Funds that may not be changed without shareholder approval. In the case of
redemption requests by shareholders in excess of such amounts, the Board of
Trustees reserves the right to have the Funds make payment, in whole or in
part, in securities or other assets, in case of an emergency or any time a
cash distribution would impair the liquidity of a Fund to the detriment of
the existing shareholders. In this event, the securities would be valued in
the same manner as the securities of that Fund are valued. If the recipient
were to sell such securities he or she may receive more or less than the
value of such securities as determined above, and might incur brokerage
charges.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX
Each Fund has elected to be treated and has qualified as a regulated
investment company and intends to continue to qualify to be treated as a
regulated investment company for each taxable year pursuant to the provisions
of Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying and electing, each Fund generally will not be
subject to Federal income tax to the extent that it distributes investment
company taxable income and net realized capital gains in the manner required
under the Code.
19
<PAGE>
Each Fund intends to distribute to its shareholders substantially all of
its investment company taxable income (which includes, among other items,
dividends and interest and the excess, if any, of net short-term capital
gains (generally including any net option premium income) over net long-term
capital losses). The Equity Value Fund will distribute investment company
taxable income quarterly. The other Funds will declare distributions of such
income daily and pay those dividends monthly. Each Fund intends to
distribute, at least annually, substantially all net capital gains (the
excess of net long-term capital gains over net short-term capital losses). In
determining amounts of capital gains to be distributed, any capital loss
carryovers from prior years will be applied against capital gains.
The amount declared each day as a dividend may be based on projections
of estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account
for any difference between the projected and actual monthly investment income.
For all distributions, the shareholder may elect in writing, not less
than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the
preceding period will be paid within five business days after the end of the
period. Unless you choose to receive dividend and/or capital gain
distributions in cash, your distributions will be automatically reinvested in
additional shares of the respective Fund at net asset value.
Investors who redeem all or a portion of Fund shares prior to a dividend
payment date will be entitled on the next dividend payment date to all
dividends declared but unpaid on those shares at the time of their redemption.
Distributions of investment company taxable income (regardless of
whether derived from dividends, interest or short-term capital gains) will be
taxable to shareholders as ordinary income. Distributions of net long-term
capital gains designated by a Fund as capital gain distributions will be
taxable as long-term capital gains, regardless of how long a shareholder has
held his Fund shares. Distributions are taxable in the same manner whether
received in additional shares or in cash.
Earnings of the Funds not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible
4% excise tax. To prevent imposition of this tax, each Fund intends to comply
with this distribution requirement.
A distribution, including an "exempt-interest dividend," will be treated
as paid on December 31 of the calendar year if it is declared by a Fund
during October, November, or December of that year to shareholders of record
in such a month and paid by a Fund during January of the following calendar
year. Such distributions will be treated as received by shareholders in the
calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
20
<PAGE>
Special tax rules may apply to a Fund's acquisition of financial futures
contracts, forward contracts, and options on futures contracts. Such rules
may, among other things, affect whether gains and losses from such
transactions are considered to be short-term or long-term, may have the
effect of deferring losses and/or accelerating the recognition of gains or
losses, and, for purposes of qualifying as a regulated investment company,
may limit the extent to which a Fund may be able to engage in such
transactions.
A Fund's distributions with respect to a given taxable year may exceed
the current and accumulated earnings and profits of that Fund available for
distribution. In that event, distributions in excess of such earnings and
profits would be characterized as a return of capital to shareholders for
Federal income tax purposes, thus reducing each shareholder's cost basis in
his Fund shares. Distributions in excess of a shareholder's cost basis in his
shares would be treated as a gain realized from a sale of such shares.
Any gain or loss realized by a shareholder upon the sale or other
disposition of shares of a Fund, or upon receipt of a distribution in
complete liquidation of a Fund, generally will be a capital gain or loss
which will be long-term or short-term generally depending upon the
shareholder's holding period for the shares. A loss realized by a shareholder
on a redemption, sale, or exchange of shares of a Fund with respect to which
capital gain dividends have been paid will be characterized as a long-term
capital loss to the extent of such capital gain dividends.
The Funds may be required to withhold for Federal income tax ("backup
withholding") 31% of the distributions and the proceeds of redemptions
payable to shareholders who fail to provide a correct taxpayer identification
number or to make required certifications, or where a Fund or shareholder has
been notified by the Internal Revenue Service that the shareholder is subject
to backup withholding. Most corporate shareholders and certain other
shareholders specified in the code are exempt from backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. Federal income tax liability.
If the U.S. Government Fund and the Equity Value Fund invest in the
securities of foreign issuers, they may be subject to withholding and other
similar income taxes imposed by a foreign country. Each Fund intends to
elect, if it is eligible to do so under the Code, to "pass-through" to its
shareholders the amount of such foreign taxes it paid. If such an election is
made by a Fund, each shareholder of that Fund would be required to include in
gross income the taxable dividends received by him and the amount of his pro
rata share of those foreign taxes paid by the Fund. Each shareholder would be
entitled either to deduct (as an itemized deduction) his pro rata share of
the foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his U.S. Federal income tax
liability. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder will be notified within 60 days
after the close of a Fund's taxable year whether the foreign taxes paid by
the Fund will "pass-through" for that year.
21
<PAGE>
Shareholders will be notified annually by the Funds as to the Federal tax
status of distributions made by the Funds in which they invest. Depending on
the residence of the shareholder for tax purposes, distributions also may be
subject to state and local taxes, including withholding taxes. Foreign
shareholders may, for example, be subject to special withholding
requirements. Special tax treatment, including a penalty on certain
pre-retirement distributions, is accorded to accounts maintained as IRAs.
Shareholders should consult their own tax advisers as to the Federal, state
and local tax consequences of ownership of shares of the Funds in their
particular circumstances.
CALIFORNIA TAX-FREE FUND (THE "CALIFORNIA FUND"). With respect to the
California Fund, dividends derived from interest excludable from gross income
under Code Section 103 on obligations issued by states or political
subdivisions thereof and which are designated by a Fund as "exempt-interest
dividends" are not subject to the regular Federal income tax. The California
Fund will be qualified to designate and pay exempt-interest dividends if, at
the close of each quarter of its taxable year, at least 50% of the value of
its total assets consists of securities on which the interest payments are
exempt from Federal income tax under Code Section 103. To the extent that the
California Fund's dividends distributed to shareholders are derived from
earnings on interest income exempt from Federal income tax and are designated
as "exempt-interest dividends" by that Fund, they will be excludable from a
shareholder's gross income for regular Federal income tax purposes. Other
dividends paid by the Fund, if any, will be taxable to shareholders.
The California Fund may derive interest on temporary taxable investments
and realize capital gains or losses from its portfolio transactions,
including the sale of securities. Dividends derived from such interest,
short-term capital gains, and long-term capital gains, respectively, will be
taxable to shareholders as described, whether such distributions are made in
cash or in additional shares of the Fund. In addition, a sale of shares in
the California Fund (including a redemption of such shares and an exchange of
shares between Funds) may be a taxable event and may result in a taxable gain
or loss to the shareholder. It is possible that a portion of the
distributions of the California Fund may constitute taxable rather than
tax-exempt income in the hands of a shareholder. A loss realized by a
shareholder on the redemption, sale, or exchange of shares of the California
Fund with respect to which exempt-interest dividends have been paid will be
disallowed to the extent of the exempt-interest dividends received if such
shares have been held by the shareholder for six months or less.
Tax-exempt interest from certain private activity bonds and
exempt-interest dividends attributable to that interest income constitute an
item of tax preference under the alternative minimum tax. Therefore, if the
California Fund invests in such private activity bonds, certain shareholders
may become subject to the alternative minimum tax on that part of the Fund's
exempt-interest dividends derived from interest income on such bonds. See the
SAI for further information about the tax consequences for certain types of
investors of a Fund investing in private activity bonds.
22
<PAGE>
The entire amounts of exempt-interest dividends received from the
California Fund by most corporations will be part of an adjustment in
computing alternative minimum taxable income and will have to be taken into
account for purposes of the environmental tax under Code Section 59A.
There could be retroactive revocation of the tax-exempt status of
certain municipal obligations after their issuance. In addition, in
connection with budget and tax reform efforts, proposals may be made or
adopted which would change the tax treatment arising from an investment in
the California Fund. It is not possible to predict the precise impact of any
of these events, but they may affect the value of the securities in the
Fund's portfolio.
Shareholders should be aware that redeeming shares of the California
Fund after tax-exempt interest income has been accrued by the Fund but before
that income has been declared as a dividend may be disadvantageous. This is
because the gain, if any, on the redemption will be taxable, even though such
gain may be attributable in part to the accrued tax-exempt interest which, if
distributed to the shareholder as a dividend rather than as a redemption
proceed, might have qualified as an exempt-interest dividend.
Deductions for interest expense incurred (or deemed incurred) to acquire
or carry shares of the California Fund may be subject to limitations that
reduce or eliminate such deductions. In addition, under rules issued by the
Internal Revenue Service for determining when borrowed funds are considered
used for the purposes 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.
Up to 85% of an individual's social security benefits and certain
railroad benefits may be subject to Federal income tax. Along with other
factors, total tax-exempt income, including exempt-interest dividends, is
used to calculate the portion of such benefits that are taxed. . . . . . .
The treatment for state, local and municipal tax purposes of distributions of
exempt-interest dividends from the California Fund will vary according to the
laws of the state and local taxing authorities. Exempt-interest dividends and
other dividends may be subject to state and local taxation. Investors should
consult with their tax advisers as to the availability of any exemptions from
such taxes. Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by private activity bonds may
suffer adverse tax consequences from investing in a Fund and, therefore,
should consult their tax advisers before purchasing Fund shares. In some
instances, a state or city may exempt from tax the portion of the
distribution from a Fund that represents interest received on obligations of
that state or its political subdivisions. Under the laws of certain other
states and cities, the entire amount of any such distribution may be taxable.
California law provides that if, at the close of each quarter of its taxable
year, at least 50% of the value of the total assets of a regulated investment
company consists of obligations the interest of which is exempt from
23
<PAGE>
tax under California law or of obligations the interest of which is exempt
from tax under U.S. law, distributions designated as "exempt-interest"
dividends for California purposes are exempt from California personal income
taxes. Shareholders will be notified annually of the Federal income tax
status of distributions and the percentage of municipal obligation interest
income received, with its source indicated. The interest on most private
activity bonds is subject to the Federal alternative minimum tax and, except
under unusual market conditions, the Fund will invest at least 80% of its net
assets in securities that pay interest that is exempt (except for certain
corporate shareholders) from the Federal alternative minimum tax.
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have a maturity of up to one
year, are direct obligations of the United States and are the most frequently
issued marketable U.S. Government security. The U.S. Treasury also issues
securities with longer maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt
securities issued by U.S. Government-sponsored enterprises and Federal
agencies. Some obligations of agencies are supported by the full faith and
credit of the United States or by U.S. Treasury guarantees, such as
mortgage-backed certificates, which may be guaranteed by the Government
National Mortgage Association; others, such as obligations of the Federal
Home Loan Banks, Federal Farm Credit Bank, Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal Land Bank, are guaranteed by the
right of the issuer to borrow from the U.S. Treasury; others, such as
obligations of the Federal National Mortgage Association, are supported by
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations
of the Student Loan Marketing Association and the Tennessee Valley Authority,
are backed only by the credit of the agency or instrumentality issuing the
obligation. In the case of obligations not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment.
BANK OBLIGATIONS. (U.S. Government Fund and Equity Value Fund) These
obligations include negotiable certificates of deposit and bankers'
acceptances. The Funds limit their bank investments to dollar-denominated
obligations of U.S. or foreign banks which have more than $1 billion in total
assets at the time of investment and, in the case of U.S. banks, are members
of the Federal Reserve System or are examined by the Comptroller of the
Currency, or whose deposits are insured by the Federal Deposit Insurance
Corporation.
COMMERCIAL PAPER. Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic bank holding companies, corporations and financial
institutions
24
<PAGE>
(and foreign counterparts of the above), as well as similar instruments
issued by foreign and domestic government agencies and instrumentalities. The
Funds may purchase commercial paper rated in one of the two highest
categories by a NRSRO, or if unrated, of comparable quality in the Adviser's
opinion.
CORPORATE DEBT SECURITIES. (U.S. Government Fund and Equity Value Fund)
A Fund's investments in U.S. dollar- or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other
similar corporate debt instruments) which meet the previously disclosed
minimum ratings and maturity criteria (see "HIGHLIGHTS") or, if unrated, are
in the Adviser's opinion comparable in quality to rated investment grade
corporate debt securities in which the Fund may invest. See "THE INVESTMENT
POLICIES AND PRACTICES OF THE FUNDS." The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements
collateralized by securities issued by the U.S. Government and its agencies.
A repurchase agreement is a transaction in which the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. These agreements may be
considered to be loans by the purchaser collateralized by the underlying
securities. These agreements will be fully collateralized and the collateral
will be marked-to-market daily. The Funds will enter into repurchase
agreements only with dealers, domestic banks or financial institutions which,
in the opinion of the Adviser, present minimal credit risks in accordance
with guidelines adopted by the Board of Trustees. See "INVESTMENT
RESTRICTIONS." In the event of default by the seller under the repurchase
agreement, a Fund may have problems in exercising its rights to the
underlying securities and may experience time delays in connection with the
disposition of such securities.
REVERSE REPURCHASE AGREEMENTS. (U.S. Government Fund and Equity Value
Fund). A Fund may borrow funds by selling portfolio securities to financial
institutions such as banks and broker/dealers and agreeing to repurchase them
at a mutually specified date and price ("reverse repurchase agreements").
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the repurchase price. A Fund
will pay interest on amounts obtained pursuant to a reverse repurchase
agreement. While reverse repurchase agreements are outstanding, a Fund will
maintain in a segregated account cash, U.S. Government securities or other
liquid high-grade debt securities of an amount at least equal to the market
value of the securities, plus accrued interest, subject to the agreement.
LOANS OF PORTFOLIO SECURITIES. To increase current income each Fund may
lend its portfolio securities up to 5% of that Fund's total assets to
brokers, dealers and financial institutions, provided certain conditions are
met, including the condition that each loan is secured continuously by
collateral maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned. For further
information, see the SAI.
25
<PAGE>
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES. The Funds
may, from time to time, buy variable or floating rate demand notes issued by
corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them
the right of the holder to put the securities to a remarketing agent or other
entity at designated time intervals and on specified notice. The obligation
of the issuer of the put to repurchase the securities may be backed by a
letter of credit or other obligation issued by a financial institution. The
purchase price is ordinarily par plus accrued and unpaid interest. Generally,
the remarketing agent will adjust the interest rate every seven days (or at
other specified intervals) in order to maintain the interest rate at the
prevailing rate for securities with a seven-day or other designated maturity.
A Fund's investment in demand instruments which provide that the Fund will
not receive the principal note amount within seven days' notice, in
combination with the Fund's other investments in illiquid instruments, will
be limited to an aggregate total of 15% of that Fund's net assets.
The Funds may also buy variable rate master demand notes. The terms of
these obligations permit a Fund to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. These instruments permit weekly and, in some
instances, daily changes in the amounts borrowed. The Funds have the right to
increase the amount under the note at any time up to the full amount provided
by the note agreement, or to decrease the amount, and the borrower may repay
up to the full amount of the note without penalty. The note may or may not be
backed by bank letters of credit. Because the notes are direct lending
arrangements between the Fund and borrower, it is not generally contemplated
that they will be traded, and there is no secondary market for them, although
they are redeemable (and, thus, immediately repayable by the borrower) at
principal amount, plus accrued interest, at any time. In connection with any
such purchase and on an ongoing basis, the Adviser will consider the earning
power, cash flow and other liquidity ratios of the issuer, and its ability to
pay principal and interest on demand, including a situation in which all
holders of such notes make demand simultaneously. While master demand notes,
as such, are not typically rated by credit rating agencies, a Fund may, under
its minimum rating standards, invest in them only if, at the time of an
investment, the issuer meets the criteria set forth in the immediately
preceding pages of this Prospectus for commercial paper obligations. The
Funds may continue to hold variable rate master demand notes if the
creditworthiness of the issuers declines below the minimum standards
established by the Funds for investing in such notes.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase
when-issued securities and make contracts to purchase securities for a fixed
price at a future date beyond customary settlement time if a Fund holds, and
maintains until the settlement date in a segregated account, cash, U.S.
Government securities or high-grade debt obligations in an amount sufficient
to meet the purchase price, or if that Fund enters into offsetting contracts
for the forward sale of other securities it owns. Purchasing securities on a
when-issued basis and forward commitments involve a risk of loss if the value
of the security to be purchased declines prior to the settle-
26
<PAGE>
ment date, which risk is in addition to the risk of decline in value of a
Fund's other assets. No income accrues on securities purchased on a
when-issued basis prior to the time delivery of the securities is made,
although a Fund may earn interest on securities it has deposited in the
segregated account because it does not pay for the when-issued securities
until they are delivered. Investing in when-issued securities has the effect
of (but is not the same as) leveraging the Fund's assets. Although a Fund
would generally purchase securities on a when-issued basis or enter into
forward commitments with the intention of actually acquiring securities, that
Fund may dispose of a when-issued security or forward commitment prior to
settlement, if the Adviser deems it appropriate to do so. A Fund may realize
short-term profits or losses upon such sales.
MORTGAGE-RELATED SECURITIES. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments
of both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees paid to
the issuer or guarantor of the securities). Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due
to sale of the underlying property, refinancing, or foreclosure, net of fees
and costs which may be incurred) may expose a Fund to a lower rate of return
upon reinvestment of principal. Also, if a security subject to prepayment has
been purchased at a premium, in the event of prepayment the value of the
premium would be lost. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-related security generally will decline;
however, when interest rates decline, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed-income securities. In recognition of this prepayment risk to investors,
the Public Securities Association (the "PSA") has standardized the method of
measuring the rate of mortgage loan principal prepayments. The PSA formula,
the Constant Prepayment Rate (the "CPR") or other similar models that are
standard in the industry will be used by a Fund in calculating maturity for
purposes of its investment in mortgage-related securities. Because the
average life of mortgage-related securities may lengthen with increases in
interest rates, the portfolio-weighted average life of the securities in
which a Fund is invested may at times lengthen due to this effect. Under
these circumstances, the Adviser may, but is not required to, sell securities
in order to maintain an appropriate portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government in the case of
securities guaranteed by the Government National Mortgage Association
("GNMA"); or guaranteed by agencies or instrumentalities of the U.S.
Government in the case of securities guaranteed by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporations
("FHLMC"), which are supported only by the discretionary authority of the
U.S. Government to purchase the agency's obligations. Mortgage pass-through
securities created by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers) may be supported by various forms
of
27
<PAGE>
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
A Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of
both mortgage-backed bonds and mortgage pass-through securities. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC
or FNMA. CMOs are structured into multiple classes, with each class bearing
a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired. To the extent a particular CMO is
issued by an investment company, a Fund's ability to invest in such CMOs will
be limited. See "INVESTMENT RESTRICTIONS" in the SAI.
Assumptions generally accepted by the industry concerning the
probability of early payment may be used in the calculation of maturities for
debt securities that contain put or call provisions, sometimes resulting in a
calculated maturity different than the stated maturity of the security.
The Adviser expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will,
consistent with a Fund's investment objectives, policies and quality
standards, consider making investments in such new types of mortgage-related
securities. The Funds will invest in new types of mortgage-related securities
posing materially different risks from existing types only after such
securities have been described and their ratings disclosed in the prospectus.
OTHER ASSET-BACKED SECURITIES. (U.S. Government Fund only.) Other
asset-backed securities (unrelated to mortgage loans) have been offered to
investors, such as Certificates for Automobile Receivables ("CARS"). CARS
represent undivided fractional interests in a trust ("trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interest in the vehicles securing the contracts. Payments of
principal and interest on CARS are "passed through" monthly to certificate
holders and are guaranteed up to certain amounts and for a certain time
period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. Underlying sales contracts are
subject to prepayment, which may reduce the overall return to certificate
holders. If the letter of credit is exhausted, certificate holders may also
experience delays in payment or losses on CARS if the full amounts due on
underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage or loss of the vehicles securing the
contracts, or other factors. For asset-backed securities, the industry
standard uses a principal prepayment model, the "ABS Model", which is similar
to the PSA identified previously under the first
28
<PAGE>
paragraph of "Mortgage-Related Securities." Either the PSA model, the ABS
model or other similar models that are standard in the industry will be used
by a Fund in calculating maturity for purposes of its investment in
asset-backed securities.
TAX-EXEMPT ASSET-BACKED SECURITIES. (California Tax-Free Fund only.)
Assets of the California Fund may be invested in various types of tax-exempt,
asset-backed securities (unrelated to mortgage loans), similar to the asset
backed securities in which the U.S. Government Fund may invest, to the extent
they are or become available for investment. The Fund will invest in new
types of such securities posing materially different risks from existing
types only after such securities have been described and their ratings
disclosed in the prospectus.
COMMON STOCKS (Equity Value Fund only). Common stock represents the
residual ownership interest in the issuer after all of its obligations and
preferred stocks are satisfied. Common stock fluctuates in price in response
to many factors, including historical and prospective earnings of the issuer,
the value of its assets, general economic conditions, interest rates,
investor perceptions and market volatility.
PREFERRED STOCKS (Equity Value Fund only). Preferred stock has a
preference over common stock in liquidation and generally in dividends as
well, but is subordinated to the liabilities of the issuer in all respects.
Preferred stock may or may not be convertible into common stock. As a general
rule, the market value of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
FOREIGN SECURITIES. (U.S. Government Fund and Equity Value Fund). The
U.S. Government Fund may invest directly in both sponsored and unsponsored
U.S. dollar or foreign currency-denominated corporate securities (including
preferred or preference stock), certificates of deposit and bankers'
acceptances issued by foreign banks, and obligations of foreign governments
or their subdivisions, agencies and instrumentalities, international agencies
and supranational entities. There may be less information available to the
Funds concerning unsponsored securities, for which the paying agent is
located outside the United States. See "RISKS OF INVESTING IN THE FUNDS".
The Funds will ordinarily purchase foreign securities traded in the
United States. However, the Funds may purchase the securities of foreign
issuers directly in foreign markets, although the U.S. Government Fund does
not intend to invest more than 10% of its net assets, and the Equity Value
Fund does not intend to invest more than 15% of its net assets, directly in
foreign markets. Securities of foreign issuers that are not listed on a
recognized domestic or foreign securities exchange are deemed to be illiquid
investments subject to a limitation of no more than 15% of either Fund's
total net assets. See "Illiquid Investments" below.
29
<PAGE>
The Equity Value Fund may also invest directly in foreign equity
securities and in securities represented by European Depositary Receipts
("EDRs") or American Depositary Receipts ("ADRs"). ADRs are
dollar-denominated receipts generally issued by domestic banks, which
represent the deposit with the bank of a security of a foreign issuer, and
which are publicly traded on exchanges or over-the-counter in the United
States. EDRs are receipts similar to ADRs and are issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR
programs. Because the non-U.S. company does not actively participate in the
creation of the ADR program, the underlying agreement for service and payment
will be between the depositary and the shareholder. The company issuing the
stock underlying the ADRs pays nothing to establish the unsponsored facility,
as fees for ADR issuance and cancellation are paid by brokers. Investors
directly bear the expenses associated with certificate transfer, custody and
dividend payment.
In addition, in an unsponsored ADR program, there may be several
depositaries with no defined legal obligations to the non-U.S. company. The
duplicate depositaries may lead to marketplace confusion because there would
be no central source of information to buyers, sellers and intermediaries.
The efficiency of centralization gained in a sponsored program can greatly
reduce the delays in delivery of dividends and annual reports.
FORWARD CURRENCY TRANSACTIONS. (U.S. Government Fund and Equity Value
Fund). The Funds may enter into forward foreign currency exchange contracts
for hedging purposes in anticipation of or in order to attempt to minimize
the effect of fluctuations in the level of future foreign exchange rates. See
the SAI for further information concerning foreign currency transactions. The
Fund will set aside cash or Government Securities in an amount at least equal
to the market value of the instruments underlying the contract, less the
amount of initial margin.
INTEREST RATE FUTURES. (U.S. Government Fund only). The Fund may
purchase and sell interest rate futures contracts ("futures contracts") as a
hedge against changes in interest rates, provided that not more than 5% of
the Fund's net assets are committed to such transactions. See the SAI for
further information about interest rate futures. Futures transactions may
fail as hedging techniques where price movements of the underlying securities
do not follow price movements of the portfolio securities subject to the
hedge. The loss with respect to futures transactions is potentially
unlimited. Also, the Fund may be unable to control losses by closing its
position were a liquid secondary market does not exist. The Fund will set
aside cash or Government Securities in an amount at least equal to the market
value of the instruments underlying the contract, less the amount of initial
margin.
ILLIQUID INVESTMENTS. It is the policy of the Funds that illiquid
securities whose transfer is restricted by law (including certain securities
unregistered under federal securities law) and other illiquid securities
(including repurchase agreements of more than seven days' duration, variable
and floating rate demand and master demand
30
<PAGE>
notes not requiring receipt of the principal note amount within seven days'
notice and securities of foreign issuers that are not listed on a recognized
domestic or foreign securities exchange) may not constitute, at the time of
purchase or at any time, more than 15% of the value of the total net assets
of that Fund in which they are held. Securities with restrictions on resale
but that have a readily available market are not deemed illiquid for purposes
of this limitation.
OPTIONS ON COMMON STOCKS AND STOCK INDICES. (Equity Value Fund only).
The Fund may write (i.e., sell) call options ("calls") to protect against
market price uncertainty if the calls are "covered" throughout the life of
the option. A call is "covered" if the Fund owns the optioned securities and
maintains, in a segregated account with that Fund's custodian, cash or cash
equivalents or U.S. Government securities with a value sufficient to meet its
obligations under the call, or if the Fund owns an offsetting call option.
When the Fund writes a call, it receives a premium and gives the purchaser
the right to buy the underlying security at any time during the call period
(usually not more than nine months in the case of common stock or 15 months
in the case of U.S. Government securities) at a fixed exercise price,
regardless of market price changes during the call period. If the call is
exercised, the Fund forgoes any gain from an increase in the market price of
the underlying security over the exercise price.
The Fund also may purchase put options ("puts") for protective purposes.
When the Fund purchases a put, it pays a premium in return for the right to
sell the underlying security at the exercise price at any time during the
option period. If any put is not exercised or sold, it will become worthless
on its expiration date. If a put is purchased and becomes worthless on its
expiration date, then the Fund will have lost the premium and this will have
the effect of reducing the Fund's yield.
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call previously written by the Fund if the premium, plus
commission costs, paid to purchase the call is less (or greater) than the
premium, less commission costs, received on the sale of the call. A gain also
will be realized if a call which the Fund has written lapses unexercised,
because the Fund would retain the premium.
There can be no assurance that a liquid secondary market will exist at
any given time for a particular option.
STOCK INDEX FUTURES CONTRACTS. (Equity Value Fund only). The Fund may
enter into stock index futures contracts in order to protect the value of
common stock investments, provided that not more than 5% of the Fund's assets
are committed to such transactions. See "DESCRIPTION OF SECURITIES AND
INVESTMENT PRACTICES -Interest Rate Futures" and the SAI for further
information about stock index futures contracts and related risks.
PUT OPTIONS ON STOCK INDEX FUTURES CONTRACTS. (Equity Value Fund only).
The Fund may purchase put options on stock index futures as another method of
protecting their assets against market declines. See the SAI for further
information about these options contracts.
31
<PAGE>
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily
limit has been reached on a particular contract, no trades may be made that
day at a price beyond that limit. In addition, certain of these instruments
are relatively new and without a significant trading history. As a result,
there is no assurance that an active secondary market will develop or
continue to exist. Lack of a liquid market for any reason may prevent the
Fund from liquidating an unfavorable position and the Fund would remain
obligated to meet margin requirements until the position is closed.
The use of the techniques listed above which involve the segregation of
assets to cover future obligations may impair the liquidity of the Fund's
assets and its ability to operate as an open-end investment company. The
Adviser will monitor each Fund's use of such techniques and report to the
Trustees concerning their impact, if any, on liquidity and the Fund's ability
to meet redemptions.
CALIFORNIA MUNICIPAL OBLIGATIONS. (California Tax-Free Fund only.) The
Obligations in which the Fund invests include but are not limited to
municipal bonds, floating rate and variable rate municipal obligations,
participation interest in municipal bonds, tax-exempt asset-backed
certificates, tax-exempt commercial paper, short-term municipal notes,
standby commitments, general obligation bonds, revenue bonds, stripped
municipal bonds, Mello-Roos Community Facility Act Bonds, and callable and
putable bonds. The Adviser expects that governmental, government-related or
private entities may create other tax-exempt investments in addition to those
described above. As new types of tax-exempt vehicles are developed, the
Adviser will, consistent with the Fund's investment objectives, policies and
quality standards, consider making investments in such types of Obligations.
The Fund will not invest in new types of tax-exempt vehicles posing
materially greater risks than existing types before describing such
securities and disclosing their ratings in the prospectus. The Fund will only
purchase Obligations rated BBB, SP-2 or better by S&P or Baa, MIG-2 or better
by Moody's (or given equivalent ratings by at least two other NRSROs) or, if
the securities are not rated, are of comparable quality in the Adviser's
opinion. The Fund will invest primarily in securities rated BBB (or
equivalent) or better and will maintain a weighted average rating of at least
A (or equivalent). The Fund's concentration in investments in Obligations may
subject the Fund to greater risk with respect to its portfolio securities
than an investment company with a broader range of investments, because
changes in the financial condition or market assessment of issuers of
Obligations generally may cause greater fluctuations in the Fund's yields and
price of Fund shares. Also, the political or economic developments that
affect one such security might also affect the other securities. See
"INVESTMENT POLICIES" in the SAI. Municipal bonds include industrial
development bonds ("IDBs"), moral obligation bonds, put bonds and private
activity bonds ("PABs"). PABs generally relate to the financing of a
facility used by a private entity or entities. The credit quality of such
bonds is usually directly related to that of the users of the facilities. The
interest on most private activity bonds is subject to the Federal alternative
minimum tax and, except under unusual market conditions, the Fund will invest
at least 80% of its assets
32
<PAGE>
in Obligations that pay interest that is exempt (except for certain corporate
shareholders) from the Federal alternative minimum tax. The identification of
the issuer of a municipal security depends on the terms and conditions of the
security. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the subdivision and the security is backed only by the
assets and revenues of the subdivision, such subdivision would be deemed to
be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the nongovernmental
user, then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other entity
guarantees a security, such a guarantee would be considered a separate
security.
MUNICIPAL LEASE OBLIGATIONS. (California Tax-Free Fund only.) The Fund
may invest in municipal lease obligations including certificates of
participation ("COPs"), which finance a variety of public projects. Because
of the way these instruments are structured, they carry a greater risk than
other types of municipal securities. The Fund may invest in lease obligations
only when they are rated by a rating agency or if unrated are deemed by the
Adviser, under the direction of the Board of Trustees, to be of a quality
comparable to the Fund's quality standards. Prior to purchasing a municipal
lease obligation and on a regular basis thereafter, the Adviser will evaluate
the credit quality and liquidity of the security. In making its evaluation,
the Adviser will consider various credit factors, such as the necessity of
the project, the municipality's credit quality, future borrowing plans, and
sources of revenue pledged for lease repayment, general economic conditions
in the region where the security is issued, and liquidity factors, such as
dealer activity. The Adviser will also assess the likelihood that the lease
will not be cancelled. A risk particular to these obligations is that a
municipality may not appropriate funds for lease payments.
INVESTMENT RESTRICTIONS
(1) No Fund may borrow money or pledge or mortgage its assets, except
that a Fund may borrow from banks up to 5% of the current value of its net
assets for temporary or emergency purposes and those borrowings may be
secured by the pledge of not more than 5% of the current value of that Fund's
net assets (but investments may not be purchased by a Fund while any such
borrowings exist).
(2) No Fund may make loans, except loans of portfolio securities except
that a Fund may enter into repurchase agreements with respect to its
portfolio securities and may purchase the types of debt instruments described
in this Prospectus.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of each Fund which may be changed only when
permitted by law and approved by the holders of a majority of the applicable
Fund's outstanding voting securities as described under "OTHER INFORMATION -
Voting".
33
<PAGE>
If a percentage restriction on investment policies or the investment or
use of assets set forth in this Prospectus are adhered to at the time a
transaction is effected, later changes in percentage resulting from changing
values will not be considered a violation.
RISKS OF INVESTING IN THE FUNDS
CERTAIN RISK CONSIDERATIONS
GENERAL. The price per share of each of the Funds will fluctuate with
changes in value of the investments held by the Fund. For example, the value
of a Fund's shares will generally fluctuate inversely with the movements in
interest rates. Shareholders of a Fund should expect the value of their
shares to fluctuate with changes in the value of the securities owned by the
Fund.
There is, of course, no assurance that a Fund will achieve its
investment objective or be successful in preventing or minimizing the risk of
loss that is inherent in investing in particular types of investment
products. In order to attempt to minimize that risk, the Adviser monitors
developments in the economy, the securities markets, and with each particular
issuer. Also, as noted earlier, each diversified Fund is managed within
certain limitations that restrict the amount of a Fund's investment in any
single issuer.
CALIFORNIA MUNICIPAL OBLIGATIONS. (California Tax-Free Fund only).
Because this Fund will concentrate its investments in Obligations, it may be
affected by political, economic or regulatory factors that may impair the
ability of California issuers to pay interest on or to repay the principal of
their debt obligations. As a result of certain amendments to the California
Constitution and the adoption of other statutes that limit the taxing
authority of California governmental entities, and reflecting other economic
factors, California has experienced ongoing economic difficulties during the
past several years which have included budget deficits, the elimination of
budget reserves, and downgrades in the credit ratings assigned to its general
obligation bonds by certain credit rating agencies. It is not presently
possible to determine whether, or the extent to which, these credit rating
agencies will change their ratings in the future. These Obligations may be
subject to greater price volatility than municipal obligations in general as
a result of the effect of supply and demand for these securities, which, in
turn could cause greater volatility in the value of the shares of a Fund.
Obligations of issuers of California Municipal Obligations are subject
to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bank Reform Act of
1978. In addition, the obligations of such issuers may become subject to the
laws enacted in the future by Congress or the California legislatures or by
referenda extending the time for payment or principal and/or interest, or
imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a
34
<PAGE>
result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its Obligations may be
materially affected. Additional considerations relating to the risks of
investing in California Municipal Obligations are presented in the SAI.
CALIFORNIA STATE RISKS. The following information as to certain
California risk factors is given to investors in view of the California
Tax-Free Fund's policy of investing primarily in California state and
municipal issuers. The information is based primarily upon information
derived from public documents relating to securities offerings of California
state and municipal issuers, from independent municipal credit reports and
historically reliable sources, but has not been independently verified by the
Fund.
Changes in California constitutional and other laws during the last
several years have raised questions about the ability of California state and
municipal issuers to obtain sufficient revenue to pay their bond obligations.
In 1978 California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem taxes
on real property and restricts the ability of taxing entities to increase
real property taxes. Legislation passed subsequent to Proposition 13,
however, provided for the redistribution of California's General Fund surplus
to local agencies, the reallocation of revenues to local agencies and the
assumption of certain local obligations by the state so as to help California
municipal issuers to raise revenue to pay their bond obligations. It is
unknown, however, whether additional revenue redistribution legislation will
be enacted in the future and whether, if enacted, such legislation would
provide sufficient revenue for such California issuers to pay their
obligations. The state is also subject to another constitutional amendment,
Article XIIIB, which may have an adverse impact on California state and
municipal issuers. Article XIIIB restricts the state from spending certain
appropriations in excess of an appropriations limit imposed for each state
and local government entity. If revenues exceed such appropriations limit,
such revenues must be returned either as revisions in the tax rates or fee
schedules. There are risks to investment in the California Tax-Free Fund
posed by pending legal actions against the State of California. Because of
the uncertain impact of the aforementioned statutes and legal actions, the
possible inconsistencies in the respective terms of the statutes and the
impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation, legal actions and policies
on the long-term ability of California state and municipal issuers to pay
interest or repay principal on their obligations.
California has relatively great size, wealth and a diverse economy.
Cali-fornia's economy is one of the largest in the world and the state ranks
number one among the 50 states in manufacturing, foreign trade, agriculture,
construction and tourism. It is the largest in population of the states, with
approximately 50% greater population than New York, and accounts for about
11% of the total national income and about 13% of personal income in the U.S.
Through the 1980s, the rate of state population growth was more than twice
that for the country.
35
<PAGE>
The California economy experienced a significant recession during the
1990-1993 time period. During the recession, the economy lost hundreds of
thousands of jobs. Most of the job losses were attributable to defense
industry down-sizing and construction industry contraction. The State's
finances have had operating deficits since 1990 and by the end of fiscal year
1994 a significant accumulated deficit. By the end of fiscal year 1995, the
state had produced an $821 million operating surplus. Currently, California
is experiencing job growth in high-technology industries lead by the computer
industry, motion picture production, electronic manufacturing and export
related trade. California is now gaining jobs at a faster pace than the
national average. There is, however, no assurance that the recent favorable
economic developments will continue in the future.
Orange County, California filed for protection from creditors using
Chapter 9 of the federal Bankruptcy Code on December 6, 1994. This bankruptcy
is the largest municipal bankruptcy filing ever. The filing followed the
collapse of the county's investment pool which was pursuing a risky interest
rate strategy involving a high degree of leveraging. Funds in the investment
pool included those from more than 180 local municipalities and agencies. On
May 2, 1995, the bankruptcy court approved a settlement between the county
and the participants in the investment pool. At this time it is impossible to
predict what further adverse financial impact on California's municipal bond
market, if any, will result from Orange County's bankruptcy.
FOREIGN SECURITIES. (U.S. Government Fund and Equity Value Fund only).
Investing in the securities of issuers in any foreign country including ADR's
and EDR's involves special risks and considerations not typically associated
with investing in U.S. companies. These include differences in accounting,
auditing and financial reporting standards; generally higher commission rates
on foreign portfolio transactions; the possibility of nationalization,
expropriation or confiscatory taxation; adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country); and political instability which could
affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be
subject to foreign taxes, including taxes withheld from payments on those
securities. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price
volatility. Additional costs associated with an investment in foreign
securities may include higher custodial fees than apply to domestic custodial
arrangements and transaction costs of foreign currency conversions. Changes
in foreign exchange rates also will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. The Funds'
investments may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different
nations, by exchange control regulations and by indigenous economic and
political developments. Through the Funds' flexible policies, management
endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it
places the Funds' investments. See the SAI for further information about
foreign securities.
36
<PAGE>
NON-DIVERSIFICATION. To provide somewhat greater investment
flexibility, both the U.S. Government and the California Tax-Free Funds are
"non-diversified" funds under the Investment Company Act of 1940, as amended
(the "Act") and, as such, are not required to meet any diversification
requirements under that Act. However, the Funds must, nevertheless, meet
certain diversification tests to qualify as regulated investment companies
under the Code. The Funds may use their ability as non-diversified funds to
concentrate their assets in the securities of a smaller number of issuers
which the Adviser deems to be attractive investments, rather than invest in a
larger number of securities merely to satisfy non-tax diversification
requirements. Such concentration also involves a risk of loss to that Fund
should the issuer be unable to make interest or principal payments thereon or
should the market value of such securities decline. Investment in a
non-diversified fund could, therefore, entail greater risks than an
investment in a "diversified" fund, including a risk of greater fluctuations
in yield and share price.
OTHER INFORMATION
CAPITALIZATION
Sefton Funds Trust was organized as a Delaware business trust on
January 6, 1995 and currently consists of three separately managed
portfolios. The Board of Trustees may establish additional portfolios in the
future. The capitalization of the Funds consists solely of an unlimited
number of shares of beneficial interest with a par value of $0.001 each. When
issued, shares of the Funds are fully paid, non-assessable and freely
transferable.
Under Delaware law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Funds. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Funds for acts or obligations of the Funds, which are binding
only on the assets and property of the Funds and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed
by the Funds or the Trustees. The risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Funds themselves would be unable to meet their obligations and should be
considered remote.
VOTING
Shareholders have the right to vote in the election of Trustees and on
any and all matters on which, by law or under the provisions of the
Declaration of Trust, they may be entitled to vote. The Funds are not
required to hold regular annual meetings of shareholders and do not intend to
do so. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in
writing to do so by the holders of not less than 10% of the outstanding
shares of the Funds. See "OTHER INFORMATION -Voting Rights" in the SAI.
37
<PAGE>
The Declaration of Trust provides that the holders of not less than
two-thirds of the outstanding shares of the Funds may remove a person serving
as Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in
writing to do so by the holders of not less than 10% of the outstanding
shares of the Funds and in connection with such meeting to comply with the
shareholders' communications provisions of Section 16(c) of the Act. See
"OTHER INFORMATION - Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in the Prospectus, the phrase "vote
of a majority of the outstanding shares" of a Fund (or the Funds) means the
vote of the lesser of: (1) 67% of the shares of a Fund (or the Funds) present
at a meeting if the holders of more than 50% of the outstanding shares are
present in person or by proxy; or (2) more than 50% of the outstanding shares
of a Fund (or the Funds).
PERFORMANCE INFORMATION
A Fund may, from time to time, include its yield and total return in
advertisements or reports to shareholders or prospective investors. The
methods used to calculate the yield and total return of the Funds is mandated
by the SEC.
Quotations of "yield" for a Fund will be based on the investment income
per share during a particular 30-day (or one month) period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income
by the maximum public offering price per share on the last day of the period.
The 30-day yield for the California Tax-Free Fund and the U.S. Government
Fund as of March 31, 1996 were 4.69% and 5.67%, respectively.
Quotations of yield and effective yield reflect only a Fund's
performance during the particular period on which the calculations are based.
Yield and effective yield for a Fund will vary based on changes in market
conditions, the level of interest rates and the level of that Fund's
expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in that Fund over periods of 1, 5 and 10 years (up to the life of
that Fund), reflect the deduction of a proportional share of Fund expenses
(on an annual basis), and assume that all dividends and distributions are
reinvested when paid.
Performance information for a Fund may be compared to various unmanaged
indices, such as those indices prepared by Lipper Analytical Services,
Standard & Poor's 500 Stock Index, the Dow Jones Industrial Average and other
entities or organizations which track the performance of investment
companies. Any performance information should be considered in light of the
Fund's investment objectives and
38
<PAGE>
policies, characteristics and quality of the Funds and the market conditions
during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of
the methods used to determine yield and total return for Funds, see the SAI.
The California Tax-Free Fund may also advertise its "taxable equivalent
yield." Taxable equivalent yield is the yield that an investment, subject to
both Federal and California personal income taxes, would need to earn in
order to equal, on an after-tax basis, the yield on an investment exempt from
such taxes (normally calculated assuming the maximum combined Federal and
California marginal tax rate). A taxable equivalent yield quotation for a
Fund will be higher than the yield or the effective yield quotations for a
Fund.
The following table shows how to translate the yield of an investment
that is exempt from both Federal and California personal income taxes into a
taxable equivalent yield for the 1995 taxable year. The last four columns of
the table shows approximately how much taxable investment would have to yield
in order to generate an after-tax (Federal and California personal income
taxes) yield of 5%, 6%, 7% or 8%. For example, the table shows that a married
taxpayer filing a joint return with taxable income of $50,000 would have to
earn a yield of approximately 10.34% before Federal and California personal
income taxes in order to earn a yield after such taxes of 7%.
1995 TAXABLE YEAR
TAXABLE EQUIVALENT YIELD TABLE - FEDERAL AND CALIFORNIA PERSONAL
INCOME TAXES*
<TABLE>
Taxable Income(1) Combined
- --------------------------------------- Marginal To Equal Hypothetical Tax-Free Yield of
Married Tax 5%, 6%, 7% or 8% A Taxable Investment
Single Filing Jointly Rate(2)(3) Would Have To Yield Approximately
- --------------------------------------------------------------------------------------------
5% 6% 7% 8%
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 22,898-$ 36,136 18.40% 6.13% 7.35% 8.58% 9.80%
$ 36,137-$ 39,000 20.10 6.26 7.51 8.76 10.01
$ 23,350-$ 25,083 $ 39,001-$ 50,166 32.32 7.39 8.87 10.34 11.82
$ 25,084-$ 31,700 $ 50,167-$ 63,400 33.76 7.55 9.06 10.57 12.08
$ 31,701-$ 56,550 $ 63,401-$ 94,250 34.70 7.66 9.19 10.72 12.25
$ 56,551-$109,936 $ 94,251-$143,600 37.42 7.99 9.59 11.19 12.78
$109,937-$117,950 37.90 8.05 9.66 11.27 12.88
$143,601-$219,872 41.95 8.61 10.34 12.06 13.78
$117,951-$219,872 $219,873-$256,500 42.40 8.68 10.42 12.15 13.89
$219,873-$256,500 43.04 8.78 10.53 12.29 14.04
$256,501-$439,744 45.64 9.20 11.04 12.88 14.72
over $256,500 over $439,744 46.24 9.30 11.16 13.02 14.88
</TABLE>
________________________
(1) Assuming the Federal alternative minimum tax is not applicable.
(2) The combined marginal rates were calculated using Federal tax rate tables
for the 1995 taxable year and California tax rate tables for the 1995
taxable year. The Federal and California tax rate tables are indexed
each year to reflect changes in the Consumer Price Index and the
California Price Index, respectively.
39
<PAGE>
(3) The combined Federal and California personal income tax marginal rates
assume that California income taxes are fully deductible for
Federal income tax purposes as an itemized deduction. However, the
ability to deduct itemized deductions (including state income
taxes) for Federal income tax purposes is limited for those
taxpayers whose Federal adjusted gross income for 1995 exceeds
$114,700 ($57,350 in the case of a married individual filing a
separate return).
* This chart is prepared for general information purposes only. Tax
equivalent yields are a useful tool in determining the benefits of
a tax-exempt investment; however, tax equivalent yields should not
be regarded as determinative of the desirability of such an
investment. In addition, this chart is based on a number of
assumptions which may not apply in each individual case. An
investor should therefore consult a competent tax adviser regarding
tax equivalent yields in individual circumstances.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a monthly
statement for each shareholder. In those cases where a Service Organization
or its nominee is the shareholder of record of shares purchased for its
customer, the Funds have been advised that the statement may be transmitted
to the customer at the discretion of the Service Organization.
State Street Bank & Trust Company acts as the Funds' transfer agent and
custodian. The Funds compensate State Street, pursuant to a Services
Agreement, for providing personnel and facilities to perform dividend
disbursing and transfer agency-related services and custodian services for
the Funds.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to ALPS, 370 Seventeenth
Street, Suite 2700, Denver, Colorado 80202.
General and Account Information: (800) 524-2276.
40
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its four highest bond ratings are
listed as follows: Aaa - judged to be the best quality and they carry the
smallest degree of investment risk; Aa - judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally know
as high grade bonds; A - possess many favorable investment attributes and are
to be considered as "upper medium grade obligations"; Baa - considered to be
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. Other Moody's
bond descriptions include: Ba - judged to have speculative elements, their
future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest; Ca -speculative in a high degree, often in
default; C - lowest rated class of bonds, regarded as having extremely poor
prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end
of its rating category; the modifier 2 indicates a mid-range ranking; and
modifier 3 indicates a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its four highest bond ratings are
listed as follows: AAA - highest grade obligations, in which capacity to pay
interest and repay principal is extremely strong; AA - also qualify as high
grade obligations, having a very strong capacity to pay interest and repay
principal, and differs from AAA issues only in a small degree; A - regarded
as upper medium grade, having a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories; BBB - regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories. This group is the lowest which
qualifies for commercial bank investment. BB, B, CCC, CC - predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with terms of the obligations; BB indicates the highest grade and
CC the lowest within the speculative rating categories.
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
41
<PAGE>
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND
INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings
on issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMG 2: This denotes high quality. Margins of protection are
ample although not as large as in the preceding group.
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations which have an original maturity
not exceeding nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a rated
issuer or issued in conformity with any applicable law. The following
designations, all judged to be investment grade, indicate the relative
repayment ability of rated issuers of securities in which the Trust may
invest.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree.
42
<PAGE>
A: Debt rated "A" has strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
CI: The "CI" rating is reserved for income bonds on which no interest
is being paid.
D: Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND
SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Those 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.
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT COMMERCIAL
PAPER:
An S&P commercial paper rating is a current assessment of the likelihood
of timely repayment of debt having an original maturity of no more than 365
days. The two rating categories for securities in which the Trust may invest
are as follows:
43
<PAGE>
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics will be denoted with a plus (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
44
