<PAGE>
As Filed with the Securities and Exchange Commission on July 12, 1996
REGISTRATION NOS. 33-88568
811-8948
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 2 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
AMENDMENT NO. 4 /X/
(Check appropriate box or boxes)
------------------
Sefton Funds Trust
(formerly known as Kennebec Funds Trust)
(Exact Name of Registrant as Specified in Charter)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 524-2276
W. Robert Alexander
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
(Name and Address of Agent for Service)
Copy to:
Steven R. Howard, Esq.
Baker & McKenzie
805 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective (check appropriate box):
X immediately upon filing pursuant to paragraph (b)
- ----- on (date) pursuant to paragraph (b)
- ----- 60 days after filing pursuant to paragraph (a)
- ----- 75 days after filing pursuant to paragraph (a)(2)
- ----- on (date) pursuant to paragraph (a) of Rule 485
Pursuant to Section 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of shares of beneficial
interest, par value $.001 per share, under the Securities Act of 1933.
Registrant's Rule 24f-2 Notice for its fiscal year ended March 31, 1996 was
filed on May 26, 1996.
- ------------------------------------------------------------------------------
Total Pages:
Exhibit Index:
<PAGE>
SEFTON FUNDS TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
under the Securities Act of 1933
U.S. GOVERNMENT FUND
CALIFORNIA TAX-FREE FUND
EQUITY VALUE FUND
PART A PROSPECTUS CAPTION
- ------ ------------------
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis ......................... Fund Expenses; Fee Table
Item 3. Condensed Financial Information .. Financial Highlights
Item 4. General Description of
Registrant ....................... The Funds; The Investment Policies
and Practices of the Funds;
Investment Restrictions; Risks of
Investing in the Funds; Description
of Securities and Investment
Practices
Item 5. Management of the Fund ........... Management of the Funds
Item 6. Capital Stock and Other
Securities ....................... Dividends, Distributions and Federal
Income Tax; Other Information
Item 7. Purchase of Securities
Being Offered .................... Fund Share Valuation; Pricing of
Fund Shares; Purchase of Fund
Shares; Minimum Purchase
Requirements; Individual
Retirement Accounts
Item 8. Redemption or Repurchase ......... Redemption of Fund Shares
Item 9. Legal Proceedings ................ Not Applicable
-i-
<PAGE>
U.S. GOVERNMENT FUND
CALIFORNIA TAX-FREE FUND
EQUITY VALUE FUND
<TABLE>
<CAPTION>
<S> <C>
PART B ......................................... STATEMENT OF ADDITIONAL INFORMATION
CAPTION
Item 10. Cover Page .............................. Cover Page
Item 11. Table of Contents ....................... Table of Contents
Item 12. General Information and
History ................................ Not Applicable
Item 13. Investment Objective and
Policies ............................... Investment Policies; Investment
Restrictions
Item 14. Management of the
Registrant ............................. Management
Item 15. Control Persons and Principal
Holders of Securities .................. Other Information
Item 16. Investment Advisory and
Other Services ......................... Management; Custodian;
Independent Accountants
Item 17. Brokerage Allocation .................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities ............................. Other Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered .......................... Pricing of Fund Shares (Part A);
Purchase of Fund Shares (Part A)
Redemption of Fund Shares (Part
A); Determination of Net Asset
Value
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Item 20. Tax Status .............................. Taxation
Item 21. Underwriters ............................ Management
Item 22. Calculation of Performance
Data ................................... Expenses and Expense Limits; Yield
and Performance Information
Item 23. Financial Statements .................... Financial Statements
</TABLE>
-iii-
<PAGE>
- -----------------------------------------------------------------------------
SEFTON FUNDS
----------------------------------------
PROSPECTUS
JULY 12, 1996
----------------------------------------
- -----------------------------------------------------------------------------
/ / U.S. Government Fund
/ / California Tax-Free Fund
/ / Equity Value Fund
- -----------------------------------------------------------------------------
<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
<TABLE>
<CAPTION>
U.S. California Equity
Government Fund Tax-Free Fund Value Fund
--------------- ------------- ----------
<S> <C> <C> <C>
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** .56% .39% .32%
TOTAL PORTFOLIO OPERATING EXPENSES
(after waivers)*** 1.06% .94% 1.47%
</TABLE>
___________________
* 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 additional 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.
*** Total Portfolio Operating Expenses (before waivers) would be 1.36%, 1.19%
and 1.52%, 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 $ 11 $ 10 $ 15
3 years 34 30 47
5 years 59 52 81
10 years 130 116 177
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-
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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
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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.
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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.
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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.
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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.
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<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
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<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.
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<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.
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<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.
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<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.
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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
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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
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(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.
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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-
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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
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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
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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.
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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
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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.
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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
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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".
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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
<PAGE>
SEFTON FUNDS
APPLICATION
<PAGE>
INVESTMENT ADVISER
Sefton Capital Management
2550 Fifth Avenue, Suite 808
San Diego, California 92103
ADMINISTRATOR, SPONSOR AND DISTRIBUTOR
ALPS Mutual Funds Services, Inc.
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company
P.O. Box 8521
Boston, Massachusetts 02266-8521
COUNSEL
Baker & McKenzie
805 Third Avenue, 30th Floor
New York, New York 10022
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
950 Seventeenth Street, Suite 2500
Denver, Colorado 80202
FOR MORE INFORMATION CALL THE
SEFTON FUNDS 1-800-524-2276
- ----------------------------------------------
THESE FUNDS ARE NOT INSURED BY SEFTON CAPITAL
MANAGEMENT, THE FDIC OR ANY OTHER INSURER.
<PAGE>
SEFTON FUNDS
APPLICATION
<TABLE>
<S> <C>
================================================================================================================================
I. FUND SELECTION * INITIAL INVESTMENT Minimum initial investment $25,000 per fund
================================================================================================================================
BY WIRE: Call Sefton Funds 1-800-524-2276 to obtain an account number and
instructions regarding the transfer of funds. The application must be
completed and mailed for Sefton Funds, P.O. Box 8521, Boston, MA 02266-8521.
BY MAIL: Make your check payable to Sefton Funds and send it along with the
completed application to the address above. Indicate the amount you are
investing for each Fund below.
/ / 887 The U.S. Treasury Money Mark Fund* $____________
/ / 910 The U.S. Government Fund $____________
/ / 911 The California Tax-Free Fund $____________
/ / 912 The Equity Value Fund $____________
*The U.S. Treasury Money Market Fund ("Fund") is the U.S. Treasury
Investments Portfolio series of the Goldman Sachs Money Market Trust managed
by GSAM, a separate operating division of Goldman Sachs. If I invest in the
Fund, I understand that I am authorizing State Street Bank to effect purchase
and redemption orders on may behalf and to act as the custodian and record
owner of my shares of that Fund, and that my ownership of those shares will
be evidenced on books and records maintained by State Street Bank.
================================================================================================================================
II. ACCOUNT REGISTRATION (Please Print or Type)
================================================================================================================================
Type of Account / / Individual / / Joint* / / Trust / / Corporation** / / Partnership / / Other
- -------------------------------------------------------------------------------------------------------------------------------
Individual Registrant (Last Name, First Name, Middle Initial) Social Security Number
- -------------------------------------------------------------------------------------------------------------------------------
Joint Registrant* If applicable (Last Name, First Name, Middle Initial) Social Security Number
- -------------------------------------------------------------------------------------------------------------------------------
Street Address and Apartment Number
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code Telephone Number
- -------------------------------------------------------------------------------------------------------------------------------
Trust, Corporation, Partnership, or Other Entity Taxpayer I.D. Number
- -------------------------------------------------------------------------------------------------------------------------------
Name of Authorized Officer
- -------------------------------------------------------------------------------------------------------------------------------
Street Address and Apartment Number
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code Telephone Number
- -------------------------------------------------------------------------------------------------------------------------------
Uniform Gift/Transfers to Minors Act (Custodian's Last Name, First Name, Middle Initial) Minor's Birthdate Minor's SS#
- -------------------------------------------------------------------------------------------------------------------------------
Minor's Name (Last Name, First Name, Middle Initial) State of Residency
- -------------------------------------------------------------------------------------------------------------------------------
*Owners will be tenants with rights of survivorship unless otherwise specified. **If corporate account or other legal entity,
authorized person must sign in capacity.
================================================================================================================================
III. DISTRIBUTIONS (Dividends and Capital Gains will be reinvested unless otherwise indicated)
================================================================================================================================
Dividends are to be: / / Reinvested / / Paid in Cash
Capital Gains are to be: / / Reinvested / / Paid in Cash
================================================================================================================================
IV. DISTRIBUTIONS REINVESTED TO OTHER SEFTON FUNDS
================================================================================================================================
Permits all distributions from one Fund to be automatically reinvested into another identically registered Sefton Fund. Transfer
all distributions earned:
From Fund Account Number (if known)
- -------------------------------------------------------------------------------------------------------------------------------
To Fund Account Number (if known)
- -------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
V. DISTRIBUTIONS PAID TO THIRD PARTY
================================================================================================================================
Complete only if distribution checks are to be payable to another party. Make distribution checks payable to:
Individual's or Financial Institution's Name
- -------------------------------------------------------------------------------------------------------------------------------
Street Address Third Party's Account Number
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- -------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
VI. DISTRIBUTION REDEMPTION AUTHORIZATION
================================================================================================================================
To obtain telephone redemption privileges, check here: Yes / /
I (we) authorize the Sefton Funds and its agents to act upon instructions
from the shareholder or dealer of record, received by telephone, to have amounts wired to my (our) bank account designated below
OR mail the redemption check to the address of record established for this account. I (we) ratify any such instructions. If you
will be authorizing the bank wire option, please attach a voided check from your bank account or a letter summarizing the wiring
instructions and complete the information below:
Name of Financial Institution
- -------------------------------------------------------------------------------------------------------------------------------
Street Address
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code Bank Telephone Number
- -------------------------------------------------------------------------------------------------------------------------------
Account Number Account Number
- -------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
VII. TELEPHONE FUND CHANGES
================================================================================================================================
To obtain telephone fund exchange privileges, check, here: / /
I (we) authorize the Sefton Funds and its agents to act upon instructions from the shareholder or dealer of record, received
by telephone, to have amounts exchanged between identically registered accounts among all Sefton Funds. I (we) ratify any such
instructions.
================================================================================================================================
VIII. SYSTEMATIC WITHDRAWAL PLAN
================================================================================================================================
/ / Yes / / No This is available to shareholders with an account value of $100,000 or more.
I/we understand that by selecting this program all dividends and distributions credited to my/our account must be reinvested
regardless of the option selected in sections 3 or 4.
Please make a total withdrawal of __________ (minimum $50) from my Sefton account(s) on a
/ / Monthly / / Quarterly (Mar/Jun/Sep/Dec) / / Semi-Annual (Jun/Dec) / / Annual (Dec) basis, beginning on or about the
/ / 5th or / / 20th from the fund(s) listed below.
/ / 887 The U.S. Treasury Money Market Fund* ____________ / / 910 The U.S. Government Fund ____________
/ / 911 The California Tax-Free Fund ____________ / / 912 The Equity Value Fund ____________
/ / Make check payable to the account owner(s) and send to the address of record.
/ / Make check payable to a third party and send to the name and address below:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Street Address
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- -------------------------------------------------------------------------------------------------------------------------------
/ / Deposit payments in my bank account electronically through Automated Clearing House (ACH) to the account designated below.
/ / Checking Account (please attach a voided check)
/ / Savings Account (please attach a preprinted deposit slip)
Name of Financial Institution
- -------------------------------------------------------------------------------------------------------------------------------
Street Address
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code Bank Telephone Number
- -------------------------------------------------------------------------------------------------------------------------------
Account Name Bank Account Number
- -------------------------------------------------------------------------------------------------------------------------------
================================================================================================================================
IX. AUTOMATIC INVESTMENT PLAN (minimum $50.00)
================================================================================================================================
Please attach a voided check from your checking account or preprinted deposit slip from your savings account.
Please indicate type of account. / / Checking / / Savings
I would like to make regular investments of $_________ in the U.S. Treasury Money Market Fund+ (887) from Bank Account #_________
$_________ in the U.S. Government Fund (910) from Bank Account #_____________________
$_________ in the California Tax-Free Fund (911) from Bank Account #_________________
$_________ in the Equity Value Fund (912) from Bank Account #________________________
Please indicate by checking the appropriate box which day of the month you would like to invest on or about the / / 5th or
the / / 20th
================================================================================================================================
X. SERVICING ORGANIZATION/FINANCIAL REPRESENTATIVE INFORMATION
================================================================================================================================
- ----------------------------------------------------------- --------------------------------------------------------------
Name Dealer Number (if known)
================================================================================================================================
XI. EMPLOYMENT INFORMATION
================================================================================================================================
We are required by the National Association of Securities Dealers (NASD) Rules of Fair Practice to make a reasonable effort to
obtain the information referenced below from all non-institutional shareholders.
Owner's Occupation
- -------------------------------------------------------------------------------------------------------------------------------
Employer
- -------------------------------------------------------------------------------------------------------------------------------
Employer's Street Address
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- -------------------------------------------------------------------------------------------------------------------------------
/ / I am affiliated with, or work for, a member firm of the NASD.
Joint Owner's Occupation
- -------------------------------------------------------------------------------------------------------------------------------
Employer
- -------------------------------------------------------------------------------------------------------------------------------
Employer's Street Address
- -------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- -------------------------------------------------------------------------------------------------------------------------------
/ / I am affiliated, or work for, a member firm of the NASD.
================================================================================================================================
XII. INVESTOR SIGNATURE & CERTIFICATION FOR THE IRS
================================================================================================================================
Each of the undersigned has the authority and legal capacity to purchase mutual fund shares, is of legal age in their state and
believes each investment is suitable for themselves. Each of the undersigned has received and read the Prospectus and agrees to
its terms.
Certification - Under penalty of perjury the undersigned certifies that:
(1) The number shown by this Agreement is my correct taxpayer number, and
(2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by
the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
Note: (You must cross out item (2) if you are subject to backup withholding.)
* If joint account, all tenants must sign. ** If corporate account or other legal entity, authorized person must sign in capacity.
Signature of Individual Registrant Date
- -------------------------------------------------------------------------------------------------------------------------------
Signature of of Joint Registrant (If Applicable) Date
- -------------------------------------------------------------------------------------------------------------------------------
Signature of Trust, Corporation, Partnership or Other Entity Date
- -------------------------------------------------------------------------------------------------------------------------------
Title
- -------------------------------------------------------------------------------------------------------------------------------
Mail this application to Sefton Funds, P.O. Box 8521, Boston, MA 02266-8521
THANK YOU FOR YOUR INVESTMENT IN THE SEFTON FUNDS
IMPORTANT INFORMATION
BACKUP WITHHOLDING TAX. Internal Revenue Service regulations and the Interest and Dividend Tax Compliance Act (commonly referred
to as Backup Withholding) require us to deduct a 31% withholding tax from all dividend and interest payments as well as from the
proceeds of redemptions, exchanges, and transfers. Backup Withholding is not an additional tax. The amount of tax withheld can be
used to offset income tax liability. If withholding results in an overpayment of taxes, a refund may be obtained from the
Internal Revenue Service.
You may be excluded from Backup Withholding: (1) If you certify your correct Taxpayer Identification (TIN) or Social Security
number by completing and SIGNING this account application, or (2) If the IRS has notified you that you are no longer subject to
Backup Withholding, or (3) If you do not have a TIN, you may qualify for a temporary 60 day exemption while you are awaiting
receipt of the number. Please contact your tax advisor regarding any questions you may have.
CUSTODIANS UNDER UNIFORM GIFT/TRANSFER TO MINORS ACT (UCMA/UTMA). Only one minor and one custodian may be registered in a single
account. The application and subsequent instructions may be signed by the custodian. The custodian must be 18 years of age or
older. The application will not be held beneficially by any person other than the minor.
JOINT REGISTRANTS. For joint accounts, equal ownership of all shares is presumed. A joint account is not a beneficiary
designation. Registration for two or more persons will be "Joint Tenants with Right of Survivorship" unless otherwise specified.
Joint Tenants with Right of Survivorship should be used if two persons purchase shares with the desire that the survivor receive
total holdings on the death of the other. Example: "Brian Banks and Jane Banks, JTWROS" Tenants in common should be used if joint
owners want their respective estates to inherit their portion of the account. Example: "Brian Banks and Jane Banks, TEN COM." For
either type of joint registrations both parties must sign the application and any subsequent instructions.
TRADING AUTHORIZATION. If you desire a party other than the registered owner to have access to your account or transact business
in your account, you must file a Trading Authorization form with Sefton. Other parties may include spouse, relatives, business
officers, trust officers, financial planners, tax advisors, etc. Call Sefton to ask for a Trading Authorization form.
BUSINESS DOCUMENTATION. Corporations are required to furnish a Corporate Resolution form and/or additional paperwork to authorize
redemptions. Partnership and other business entities are required to furnish other documentation to authorize opening an account
and/or redemptions. Call Sefton to ask for the Corporate Resolution form.
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Sefton Funds Trust
(Formerly known as Kennebec Funds Trust)
370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
General and 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 "Sponsor")
This Statement of Additional Information ("SAI") describes the shares
of three funds (the "Funds") managed by SCM. Each Fund is a portfolio of Sefton
Funds Trust (the "Trust"). The Funds are:
The U.S. Government Fund
The California Tax-Free Fund
The Equity Value Fund
The SAI is not a prospectus and is only authorized for distribution
when preceded or accompanied by the prospectus for shares of the Funds dated
July 12, 1996 (the "Prospectus"). This SAI contains additional and more
detailed information than that set forth in the Prospectus and should be read
in conjunction with the Prospectus. The Prospectus may be obtained without
charge by writing or calling the Funds at the address and information number
printed above.
July 12, 1996
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT Policies 1
Bank Obligations 1
Commercial Paper 1
Corporate Debt Securities 1
Repurchase Agreements 1
Reverse Repurchase Agreements 1
Variable and Floating Rate and Master Demand Notes 2
Loans of Portfolio Securities 2
Mortgage-Related Securities 2
Foreign Securities 3
Investment Company Securities 3
Interest Rate Futures Contracts 3
Stock Index Futures Contracts 4
Put Options on Stock Index Futures Contracts 4
California Municipal Obligations 4
INVESTMENT RESTRICTIONS 10
MANAGEMENT 11
Trustees and Officers 11
Investment Adviser 12
Distribution of Fund Shares 13
Administrator, Bookkeeping and Pricing Agent 13
Service Organizations 14
EXPENSES AND EXPENSE LIMITS 14
DETERMINATION OF NET ASSET VALUE 15
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 15
PORTFOLIO TRANSACTIONS 15
Portfolio Turnover 16
TAXATION 17
OTHER INFORMATION 21
Capitalization 21
Control Persons and Principal Holders of Securities 22
Voting Rights 22
Custodian and Transfer Agent 23
Yield and Performance Information 23
Independent Accountants 24
Registration Statement 24
FINANCIAL STATEMENTS 25
INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Funds may invest, the investment policies and
portfolio strategies that the Funds may utilize, and certain risks attendant
to such investments, policies and strategies.
BANK OBLIGATIONS (U.S. Government Fund and Equity Value Fund). These
obligations include negotiable certificates of deposit and bankers'
acceptances. A description of the banks, the obligations of which the Funds
may purchase, is set forth in the Prospectus. A certificate of deposit is a
short-term, interest-bearing negotiable certificate issued by a commercial
bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is
liable for payment, as is the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date.
COMMERCIAL PAPER (All Funds). Commercial paper includes short-term
unsecured promissory notes, variable rate demand notes and variable rate
master demand notes issued by domestic and foreign bank holding companies,
corporations and financial institutions and similar taxable instruments
issued by government agencies and instrumentalities. All commercial paper
purchased by the Funds is, at the time of investment, (i) rated in one of the
<PAGE>
two highest rating categories by at least two nationally recognized statistical
rating organizations ("NRSROs"), (ii) issued or guaranteed as to principal
and interest by issuers having an existing debt security rating in one of the
two highest rating categories by a least two NRSROs, or (iii) securities which,
if not rated or single rated, are, in the opinion of the Funds' Adviser, of an
investment quality comparable to rated commercial paper in which the Funds may
invest. See "Variable and Floating Rate and Master Demand Notes."
CORPORATE DEBT SECURITIES (U.S. Government Fund and Equity Value Fund).
Fund investment in these securities is limited to corporate debt securities
(corporate bonds, debentures, notes and similar corporate debt instruments)
which meet the rating criteria established for each Fund.
The ratings of Standard & Poor's Corporation, Moody's Investors Service,
Inc., and other NRSROs represent their respective opinions as to the quality
of the obligations they undertake to rate. Ratings, however, are general and
are not absolute standards of quality. Consequently, obligations with the
same rating, maturity and interest rate may have different market prices.
After purchase by a Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither
event will require a sale of such security by the Fund. However, the Funds'
Adviser will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent the ratings given by an
NRSRO may change as a result of changes in such organizations or their rating
systems, the Adviser will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
Prospectus and in this SAI.
It is possible that unregistered securities purchased by a Fund in
reliance upon Rule 144A under the Securities Act of 1933 could have the effect
of increasing the level of the Fund's illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
REPURCHASE AGREEMENTS (All Funds). The Funds may invest in securities
subject to repurchase agreements with U.S. banks or broker-dealers. Such
agreements may be considered to be loans by the Funds for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). 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. The repurchase price exceeds the sale
price, reflecting an agreed-upon interest rate effective for the period the
buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. The Adviser will monitor
the value of the underlying security at the time the transaction is entered
into and at all times during the term of the repurchase agreement to ensure
that the value of the security always equals or exceeds the repurchase price.
In the event of default by the seller under the repurchase agreement, the Funds
may have problems in exercising their rights to the underlying securities and
may incur costs and 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.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (All Funds.)
The Funds may acquire variable and floating rate instruments as described in
the Prospectus. Variable and floating rate instruments are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
instruments purchased by a Fund will be determined by the Adviser under
guidelines established by the Board of Trustees to be of comparable quality
at the
<PAGE>
time of purchase to rated instruments eligible for purchase by the Funds. In
making such determinations, the Adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, investment banking, bank holding
and other companies) and will continuously monitor their financial condition.
There may not be an active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund. The absence of
such an active secondary market could make it difficult for a Fund to dispose
of the variable or floating rate instrument involved. In the event the
issuer of the instrument defaulted on its payment obligations, a Fund could,
for this or other reasons, suffer a loss to the extent of the default.
Variable and floating rate instruments may be secured by bank letters of
credit, guarantees or lending commitments.
Instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a U.S.
Government security with a variable rate of interest readjusted no less
frequently than every 762 days may be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate; (b) an
instrument with a floating rate of interest, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, may
be deemed to have a maturity equal to one day; (c) an instrument with a
variable rate of interest, the principal amount of which is scheduled on the
face of the investment to be paid in more than 397 days, and that is subject
to a demand feature may be deemed to have a maturity equal to the longer of
the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand;
(d) an instrument with a variable rate of interest, the principal amount of
which is scheduled to be paid in 397 days or less may be deemed to have a
maturity equal to the earlier of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand; and (e) an instrument with a floating
rate of interest, the principal amount of which is scheduled to be paid in
more than 397 days, that is subject to a demand feature, may be deemed to
have a maturity equal to the period remaining until the principal amount can
be received through demand.
LOANS OF PORTFOLIO SECURITIES (All Funds). The Funds may lend their
portfolio securities to brokers, dealers and financial institutions,
provided: (1) the loan is secured continuously by collateral consisting of
U.S. Government securities or cash or letters of credit maintained on a daily
mark-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) the Funds may at any time call the loan and
obtain the return of the securities loaned within five business days; (3) the
Funds will receive any interest or dividends paid on the loaned securities;
and (4) the aggregate market value of securities loaned will not at any time
exceed 5% of the total assets of a particular Fund.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money
market instruments. In connection with lending securities, the Funds may pay
reasonable finders, administrative and custodial fees. Loans of securities
involve a risk that the borrower may fail to return the securities or may
fail to provide additional collateral.
MORTGAGE-RELATED SECURITIES (All Funds). There are a number of
important differences among the agencies and instrumentalities of the U.S.
Government that issue mortgage-related securities and among the securities
that they issue. Mortgage-related securities guaranteed by the Government
National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through
Certificates (also known as "Ginnie Maes") which are guaranteed as to the
timely payment of principal and interest by GNMA and such guarantee is backed
by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA
to borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations
of the FNMA and are not backed by or entitled to the full faith and credit of
the United States, but are supported by the right of the issuer to borrow
from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
<PAGE>
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant
to an Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Macs are not guaranteed by the United States or by any Federal Home
Loan Bank and do not constitute a debt or obligation of the United States or
of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage but in no event later than one year after it becomes payable.
FOREIGN SECURITIES (U.S. Government Fund and Equity Value Fund). As
described in the Prospectus, changes in foreign exchange rates will affect
the value of securities denominated or quoted in currencies other than the
U.S. dollar.
Since Funds may invest in securities denominated in currencies other
than the U.S. dollar, and since those Funds may temporarily hold funds in
bank deposits or other money market investments denominated in foreign
currencies, a Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies
and the dollar. Changes in foreign currency exchange rates will influence
values within the Fund from the perspective of U.S. investors. Changes in
foreign currency exchange rates may also affect the value of dividends and
interest earned, gains and losses realized on the sale of securities, and net
investment income and gains, if any, to be distributed to shareholders by the
Fund. The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange
markets. These forces are affected by the international balance of payments
and other economic and financial conditions, government intervention,
speculation and other factors.
Those Funds that purchase foreign currency-denominated securities may
enter into foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are entered into in the interbank
market conducted between currency traders (usually large commercial banks)
and their customers. Forward foreign currency exchange contracts may be
bought or sold to protect a Fund against a possible loss resulting from an
adverse change in the relationship between foreign currencies and the U.S.
dollar, or between foreign currencies. Although such contracts are intended
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
INVESTMENT COMPANY SECURITIES (All Funds). The Funds may invest in
securities issued by other investment companies. Each Fund currently intends
to limit its investments in securities issued by other investment companies
so that, as determined immediately after a purchase of such securities is
made: (i) not more than 5% of the value of the Fund's total assets will be
invested in the securities of any one investment company; (ii) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (iii) not more than 3% of
the outstanding voting stock of any one investment company will be owned by
the Fund or by the Funds as a whole.
INTEREST RATE FUTURES CONTRACTS (U.S. Government Fund only). This Fund
may purchase and sell interest rate futures contracts ("futures contracts")
as a hedge against changes in interest rates. A futures contract is an
agreement between two parties to buy and sell a security for a set price on a
future date. Future contracts are traded on designated "contracts markets"
which, through their clearing corporations, guarantee performance of the
<PAGE>
contracts. Currently, there are futures contracts based on securities such
as long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract
for the sale of securities has an effect similar to the actual sale of
securities, although sale of the futures contract might be accomplished more
easily and quickly. For example, if a Fund holds long-term U.S. Government
securities and the Adviser anticipates a rise in long-term interest rates, it
could, in lieu of disposing of its portfolio securities, enter into futures
contracts for the sale of similar long-term securities. If rates increased
and the value of the Fund's portfolio securities declined, the value of the
Fund's futures contracts would increase, thereby protecting the Fund by
preventing its net asset value from declining as much as it otherwise would
have. Similarly, entering into futures contracts for the purchase of
securities has an effect similar to actual purchase of the underlying
securities, but permits the continued holding of securities other than the
underlying securities. For example, if the Adviser expects long-term
interest rates to decline, the Fund might enter into futures contracts for
the purchase of long-term securities, so that it could gain rapid market
exposure that may offset anticipated increases in the cost of securities it
intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize. 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 where a liquid secondary market does
not exist.
STOCK INDEX FUTURES CONTRACTS (Equity Value Fund only). A stock index
futures contract is an agreement in which one party agrees to deliver to the
other an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is
made. As the aggregate market value of the stocks in the index changes, the
value of the index also will change. In the event that the index level rises
above the level at which the stock index futures contract was sold, the
seller of the stock index futures contract will realize a loss determined by
the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the
stock index futures contract was sold, the seller will recognize a gain
determined by the difference between the two index levels at the expiration
of the stock index futures contract, and the purchaser will realize a loss.
Stock index futures contracts expire on a fixed date, currently one to seven
months from the date of the contract, and are settled upon expiration of the
contract.
The Fund intends to utilize stock index futures contracts primarily for
the purpose of attempting to protect the value of its common stock portfolio
in the event of a decline in stock prices. The Fund, therefore, usually will
be a seller of stock index futures contracts. This risk management strategy
is an alternative to selling securities in the portfolio and investing in
money market instruments. Also, stock index futures contracts may be
purchased to protect a Fund against an increase in prices of stocks which the
Fund intends to purchase. If the Fund is unable to invest its cash (or cash
equivalents) in stock in an orderly fashion, the Fund could purchase a stock
index futures contract which may be used to offset any increase in the price
of the stock. However, it is possible that the market may decline instead,
resulting in a loss on the stock index futures contract. If the Fund then
concludes not to invest in stock at that time, or if the price of the
securities to be purchased remains constant or increases, the Fund will
realize a loss on the stock index futures contract that is not offset by a
reduction in the price of securities purchased. The Fund also may buy or
sell stock index futures contracts to close out existing futures positions.
See "Interest Rate Futures Contracts" above for more information on the
risks of stock index futures contracts.
PUT OPTIONS ON STOCK INDEX FUTURES CONTRACTS (Equity Value Fund only).
This Fund may also purchase put options on stock index futures contracts.
Sales of such options may also be made to close out an open option position.
The Fund may, for example, purchase a put option on a particular stock index
futures contract or stock index to protect against a decline in the value of
the common stocks it holds. If the stocks in the index decline in value, the
put should become more valuable and the Fund could sell it to offset losses
in the value of the common stocks. In this way, put options may be used to
achieve the same goals the Fund seeks in selling futures contracts. A
<PAGE>
put option on a stock index future gives the purchaser the right, in return
for a premium paid, to assume a short (i.e., the right to sell stock index
futures) position in a stock index futures contract at a specified exercise
price ("strike price") at any time during the period of the option. If the
option is exercised by the holder before the last trading date during the
option period, the holder receives the futures position, as well as any
balance in the futures margin account. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will
be made entirely in cash in an amount equal to the difference between the
strike price and the closing level of the relevant index on the expiration
date.
The Adviser expects that an increase or decrease in the index in
relation to the strike price level would normally correlate to an increase or
decrease (but not necessarily to the same extent) in the value of the Fund's
common stock portfolio against which the option was written. Thus, any loss
in the option transaction may be offset by an increase in the value of the
common stock portfolio to the extent changes in the index correlate to
changes in the value of that portfolio. The Fund may liquidate the put
options it has purchased by effecting a "closing sale transaction," rather
than exercising the option. This is accomplished by selling an option of the
same series as the option previously purchased. There is no guarantee that
the Fund will be able to effect the closing sale transaction. The Fund will
realize a gain from a closing sale transaction if the price at which the
transaction is effected exceeds the premium paid to purchase the option and,
if less, the Fund will realize a loss.
CALIFORNIA MUNICIPAL OBLIGATIONS (California Tax-Free Fund). The
ability of this Fund to achieve its investment objective depends on the
ability of issuers of California Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. Recent
amendments to the California State Constitution and certain State statutes
which limit the taxing and spending authority of California governmental
entities may impair the ability of the issuers of some California Municipal
Obligations to maintain debt service on their obligations. The following
information as to certain California risk factors is given to investors in
view of the 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.
In 1978, California voters approved "Proposition 13," adding Article
XIII A, an amendment to the state constitution which limits ad valorem taxes
on real property to 1% of "full cash value" and restricts the ability of
taxing entities to increase real property taxes. The full cash value may be
adjusted annually to reflect increases (not to exceed 2%) or decreases in the
consumer price index or comparable local data, or declining property value
caused by damage; destruction or other factors.
The foregoing limitation does not apply to ad valorem taxes or special
assessments to pay the interest and redemption charges on any indebtedness
approved by the voters before July 1, 1978 or, pursuant to an amendment to
Article XIII A, any bonded indebtedness for the acquisition or improvement of
real property approved by two-thirds of the votes cast by the voters voting
on the proposition.
Primarily as a result of the reductions in local property tax revenues
received by local governments following the passage of Proposition 13,
subsequent legislation 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. There can be no assurance that additional revenue
redistribution legislation will be enacted in the future and whether, if
enacted, such legislation would provide sufficient revenue for California
issuers to pay their obligations.
The U.S. Supreme Court previously struck down as a violation of equal
protection certain property tax assessment practices in West Virginia, which
had resulted in vastly different assessments of similar properties. Among
other provisions, Proposition 13 provides that property may only be
reassessed up to 2% per year, except upon change of ownership or new
construction. As a result, recent purchasers may pay substantially higher
property
<PAGE>
taxes than long-term owners of comparable property in a community. The
Supreme Court in the West Virginia case expressly declined to comment in any
way on the constitutionality of Proposition 13.
Based on this decision, however, property owners in California have
brought three suits challenging the acquisition value assessment provisions
of Proposition 13. Two cases involve residential property, and one case
involves commercial property. In all three cases, State trial and appellate
courts have upheld the constitutionality of Proposition 13's assessment rules
and concluded that the West Virginia case did not apply to California's laws.
On June 3, 1991 the U.S. Supreme Court agreed to hear the appeal in the
challenge relating to commercial property, but the plaintiff subsequently
withdrew its case. It cannot be predicted whether the Supreme Court will
decide to hear these appeals, and if so, how it will resolve the challenge to
Proposition 13. If the Court strikes down the assessment rules of
Proposition 13, it is not known what rules will then become operative.
Further legislation is also likely. It cannot be predicted what impact any
of these developments might have on the State's financial obligations to
local governments.
In 1979 California voters approved another constitutional amendment,
Article XIII B, which may have an adverse impact on California state and
municipal issuers. Article XIII B prohibits the State from spending
"appropriations subject to limitation" in excess of an annual appropriations
limit (the "Appropriations Limit"). "Appropriations subject to limitation,"
with respect to the State, are authorizations to spend "proceeds of taxes,"
which consist of tax revenues, and certain other funds, including proceeds
from regulatory licenses, user charges or other fees to the extent that such
proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most state
subventions to local governments, tax refunds and some benefit payments such
as unemployment insurance. No limit is imposed on appropriations of funds
which are not "proceeds of taxes," such as reasonable user charges or fees,
and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase
in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels
and appropriations of certain special taxes imposed by initiatives (e.g.,
increased cigarette and tobacco taxes). The Appropriations Limit may also be
exceeded in cases of emergency. However, unless the emergency arises from
civil disturbance or natural disaster declared by the Governor, and the
appropriations are approved by two-thirds of the Legislature, the
Appropriations Limit for the next three years must be reduced by the amount
of the excess.
The Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in California per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended
average of statewide overall population growth, and change in attendance at
local school and community college ("K-14") districts. The Appropriations
Limit is tested over consecutive two-year periods. Any excess of the
aggregate "proceeds of taxes" received over such two-year period above the
combined Appropriations Limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the methods
for determining the Appropriations Limit. Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the annual
budget proposed by the Governor in January of each year for the next fiscal
year, and thereafter to be subject to the budget process and established in
the Budget Act.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This statute (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution
or ordinance adopted by a two-thirds vote of the governmental entity's
legislative body and by a majority vote of the
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electorate of the governmental entity; (ii) requires that any special tax
(defined as taxes levied for other than general governmental purposes)
imposed by a local governmental entity be approved by a two-thirds vote of
the voters within that jurisdiction; (iii) restricts the use of revenues from
a special tax to the purposes or for the service for which the special tax
was imposed; (iv) prohibits the imposition of ad valorem taxes on real
property by local governmental entities except as permitted by Article XIII A
of the California Constitution; (v) prohibits the imposition of transaction
taxes and sales taxes on the sale of real property by local governments; (vi)
requires that any tax imposed by a local government on or after August 1,
1985 be ratified by a majority of the electorate within two years of the
adoption of the initiative or be terminated by November 15, 1988; (vii)
requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of tax revenue
allocated to such local government occur in a an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and (viii) permits these provisions to be amended exclusively by
the voters of the State of California.
Other legislation and pending court cases, including those challenging
assessments, fees and other taxes as unconstitutional under Proposition 13,
may reduce the amount of state or local revenues available to California
state and municipal issuers for the purpose of paying their obligations.
Effective for the 1980-81 Fiscal Year and each fiscal year thereafter,
business inventories are entirely exempt from local taxation in California.
Although the State presently reimburses local agencies for lost revenue equal
to the total due in 1978-79 with annual increases allowed based on increases
in population and inflation, the Legislature has decreased the inflation
adjustment for State reimbursement revenues because of the need to reduce
State expenditures, and there is no assurance that further reductions in the
reimbursement formula or elimination of such reimbursements will not occur.
In June 1982, the voters of California passed two initiative measures to
repeal the California gift and inheritance tax laws and to enact, in lieu
thereof, a California death tax. California voters also passed an initiative
measure to increase, for taxable years commencing on or after January 1,
1982, the amount by which personal income tax brackets will be adjusted
annually in an effort to index tax brackets to account for the effects of
inflation. The voters also passed an initiative measure to exclude from the
definition of "change of ownership," for purposes of the valuation of real
property for taxation, the replacement of real property taken through eminent
domain proceedings. Decreases in state and local revenues in future fiscal
years as a consequence of these initiatives may result in reductions in
allocations of state revenues to California municipal issuers or the ability
of such California issuers to pay their obligations. In addition, the State
has increased expenditures by providing a variety of tax credits, including
renters' and senior citizens' credits and energy credits.
As a result of expenditures and reductions in revenues following
approval of Proposition 13, the State's financial condition declined
significantly. The State's General Fund surplus of approximately $3.7
billion that existed at the beginning of the 1978-79 fiscal year was depleted
resulting in a deficit of approximately $801 million at the close of the
1982-83 fiscal year. Cash flow shortages were financed through internal and
external sources including the issuance of revenue anticipation warrants in
November, 1982. In response, legislation was enacted reducing General Fund
expenditures and assisting local governments, and changes to existing laws
were made to raise additional revenue.
On November 8, 1988, voters approved Proposition 98, which has
significantly altered the operation and effect of the Article XIII B spending
limit, the first changes since its adoption in 1979. This combined
initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"), changes State
funding of public education below the university level, and the operation of
the State's Appropriations Limit. The Act (as modified by Proposition 111,
which was enacted on June 5, 1990), guarantees State funding for K-12 school
districts and community college districts ("K-14 Schools") at a level equal
to the
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greater of (a) in general, a fixed percent of General Fund revenues (the
"first test"), (b) the amount appropriated to K-14 schools in the prior year,
adjusted for changes in the cost of living (measured as in Article XIII B by
reference to California per capita personal income) and enrollment (the
"second test"), or (c) a third test, which would replace the second test in
any year when the percentage growth in per capita General Fund revenues from
the prior year plus one half of one percent is less than the percentage
growth in California per capita personal income (the "third test"). Under the
third test, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus
an additional small adjustment factor. If the third test is used in any
year, the difference between the third test and the second test would become
a "credit" to schools which would be the basis of payments in future years
when per capita General Fund revenue growth exceeds per capita personal
income growth. Legislation adopted prior to the end of the 1988-89 Fiscal
Year, implementing Proposition 98, determined the K-14 schools' funding
guarantee under Test 1 to be 40.3 percent of the General Fund tax revenues,
based on 1986-87 appropriations. However, that percent has been adjusted to
approximately 35 percent to account for a subsequent redirection of local
property taxes, since such redirection directly affects the share of General
Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools' minimum
funding formula for a one-year period. In the fall of 1989, the Legislature
and the Governor utilized this provision to avoid having 40.3 percent of
revenues generated by a special supplemental sales tax enacted for earthquake
relief go to K-14 schools. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit
to K-14 schools.
During the recent recession, General Fund revenues for several years
were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided
in the law. The Legislature responded to these developments by designating
the "extra" Proposition 98 payments in one year as a "loan" from future
years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. By implementing these actions, per-pupil funding
from Proposition 98 sources stayed almost constant at approximately $4,220
from Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called CALIFORNIA TEACHERS' ASSOCIATION V.
GOULD, which challenged the validity of these off-budget loans. As a part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement was
reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14 schools share
in the repayment of prior years' emergency loans to schools. Of the total
$1.76 billion in loans, the State will repay $935 million by forgiveness of
the amount owed, while schools will repay $825 million. The State share of
the repayment will be reflected as expenditures above the current Proposition
98 base calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year
period of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. Once
a court settlement is reached, and the Director of Finance certifies that
such a settlement has occurred, approximately $377 million in appropriations
from the 1995-96 Fiscal Year to schools will be disbursed in August 1996.
The 1990-91 Budget Act appropriated $16.7 billion for K-14 schools,
applying "test" of Proposition 98. During the course of the fiscal year,
revenues proved to be substantially below expectations. By the time the
Governor's Budget was introduced in January 1991, it became clear that per
capita growth in General Fund revenues for 1990-91 would be far smaller than
the growth in California per capita personal income and the Governor
therefore proposed reducing Proposition 98 funding in 1990-91 by applying
"Test 3" rather than "Test 2." The Governor also called for suspension of
Proposition 98 and 1991-92 to save $1.4 billion for the General Fund.
<PAGE>
In response to the changing revenue situation and to fully fund the
Proposition 98 guarantee in both years without exceeding it, the Legislature
enacted several bills prior to June 30, 1991 which responded to a fiscal
crisis in education funding. Fiscal Year 1990-91 Proposition 98
appropriations for K-14 schools were reduced by $1.233 billion. In order to
not adversely impact cash received by school districts, however, a short-term
loan was appropriated from the non-Proposition 98 State General Fund. The
Legislature then appropriated $18.4 billion to K-14 schools for 1991-92 (the
minimum guaranteed by Proposition 98), but designated $1.233 billion of this
amount to "repay" the prior year loan, thereby reducing cash outlays in
1991-92 by that amount. The minimum Proposition 98 guarantee requirements
for 1989-90, thereby completing the reduction in monies which count towards
Proposition 98 in 1990-91 to the minimum required amount.
Since the Act is unclear in some details, there can be no assurance that
the Legislature or a court might not interpret the Act to require a different
percentage of General Fund revenues to be allocated to K-14 Schools, or to
apply the relevant percentage to the State's budgets in a different way than
is proposed in the Governor's Budget. In any event, the Governor and other
fiscal observers expect the Act to place increasing pressure on the State's
budget over future years, potentially reducing resources available for other
State programs, especially to the extent the Article XIII B spending limit
would restrain the State's ability to fund such other programs by raising
taxes.
On November 8, 1988, voters approved Proposition 99, which imposes, as
of January 1, 1989, an additional 25 cents per pack excise tax on cigarettes,
and a new, equivalent excise tax on other tobacco products. The initiative
requires that funds from this tax be allocated to health related,
environmental and educational programs. The Legislature has, as part of the
1994-95 and 1995-96 Budget Acts redirected part of the Proposition 99 funds
to indigent health care. These actions have been blocked by court orders,
and, as regards the 1995-96 Fiscal Year, are in litigation. Legislation
enacted in 1993 added an additional 2 cents per pack excise tax for the
purpose of funding breast cancer research.
At the end of the 1988-89 Fiscal Year and during the 1989-90 Fiscal
Year, the Legislature and the governor agreed on a major initiative to
increase funding for transportation programs in the State by $18.5 billion
over a 10-year period. This initiative includes increased motor vehicle fuel
taxes and vehicle weight fees and bond issues, which were approved by the
voters at the June 1990 election.
Due to continuing budgetary and financial difficulties, California's
bond ratings have deteriorated since December 1991. S&P initially lowered
California's bond rating in December 1991 from AAA to AA. Then, in July
1992, S&P again lowered California's bond rating, from AA to A+, and it is
now A. These downgrades affected the State's general obligation bonds and
certain other obligations. Likewise, in February 1992, Moody's lowered its
California general obligation bond rating from Aaa to Aa1. Moody's
subsequently lowered the State's general obligation rating in July 1992 from
Aa1 to Aa, and it is now A1.
1995-96 Fiscal Year. With strengthening revenues and reduced caseload
growth based on an improved economy, the State entered the 1995-96 Fiscal
year budget negotiations with the smallest nominal "budget gap" to be closed
in may years. Nonetheless, serious policy differences between the Governor
and Legislature prevented timely enactment of the budget. The 1995-96 Budget
Act was signed by the Governor on August 3, 1995, 34 days after the start of
the fiscal year. The Budget Act projected General Fund revenues and transfers
of $44.1 billion, a 3.5 percent increase from the prior year. Expenditures
were budgeted as $43.4 billion, a 4 percent increase. The Department of
Finance projected that, after repaying the last of the carryover budget
deficit, there would be a positive balance of $28 million in the budget
reserve, the Special Fund for Economic Uncertainties, at June 30, 1996. The
Budget Act also projected Special Fund revenues of $12.7 billion and
appropriated Special Fund expenditures of $13.0 billion.
The Governor's Budget for the 1996-97 Fiscal Year, released on January
10, 1996 (the "Governor's Budget"), updated the current year projections, so
that revenues and transfers are estimated to be $45.0 billion, and
<PAGE>
expenditures to be $44.2 billion. The Special Fund for Economic Uncertainties
is projected to have a positive balance of about $50 billion at June 30,
1996, and on that date available internal borrowable resources (available
cash, after payment of all obligations due) will be about $2.2 billion. The
Administration projects it will issue up to $2.0 billion of revenue
anticipation notes in April, 1996, to mature by June 30, 1996, to assist in
cash flow management for the final two months of the year, after repayment of
the $4.0 billion RAW issue on April 25, 1996.
The following are the principal features of the 1995-96 Budget Act:
1. Proposition 98 funding for schools and community colleges was
originally budgeted to increase by about $1.0 billion (General Fund) and $1.2
billion total above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million ($91 per K-12 ADA) was
appropriated to the 1994-95 Proposition 98 entitlement. A large part of this
is a block grant of about $54 per pupil for any one-time purpose. For the
first time in several years, a full 2.7 percent cost of living allowance was
funded. The budget compromise anticipates a settlement of the CTA V. GOULD
litigation discussed above. The Governor's Budget indicates that, with
revenues even higher than projected, Proposition 98 apportionments will
exceed the amounts originally budgeted, reaching a level of $4,500 per ADA.
2. Cuts in health and welfare costs totaling about $0.9 billion.
Some of these cuts (totaling about $500 million) require federal legislative
or administrative approval, which were still pending as of February, 1996.
3. A 3.5 percent increase in funding for the University of
California ($90 million General Fund) and the California State University
system ($24 million General Fund), with no increases in student fees.
4. The Budget, as updated by the 1996-97 Governor's Budget dated
January 10, 1996, assumed receipt of $494 million in new federal aid for
incarceration and health care costs of illegal immigrants, above commitments
already made by the federal government.
<PAGE>
5. General Fund support for the Department of Corrections is
increased by about 8 percent over the prior year, reflecting estimates of
increased prison population, but funding is less than proposed in the 1995
Governor's Budget.
1996-97 Fiscal Year. On January 10, 1996, the Governor released his
proposed budget for the next fiscal year ( the "Governor's Budget"). The
Governor requested total General Fund appropriations of about $45.2 billion,
based on projected revenues and transfers of about $45.6 billion, which would
leave a budget reserve in the Special Fund for Economic Uncertainties at June
30, 1997 of about $400 million. The Governor renewed a proposal, which had
been rejected by the Legislature in 1995, for a 15 percent phased cuts in
individual and corporate tax rates over three years (the budget proposal
assumes this will be enacted, reducing revenues in 1996-97 by about $600
million). There was also a proposal to restructure trial court funding in a
way which would result in a $300 million decrease in General Fund revenues.
The Governor requested legislation to make permanent a moratorium on cost of
living increases for welfare payments and suspension of a renters tax credit,
which otherwise would go back into effect in the 1996-97 Fiscal Year. He
further proposed additional costs in certain health and welfare programs, and
assumed that cuts previously approved by the Legislature will receive federal
approval. The Governor's Budget proposes increases in funding for K-12
schools under Proposition 98, for State higher education systems (with a
second year of no student fee increases), and for corrections. The Governor's
Budget projects external cash flow borrowing of up to $3.2 billion, to mature
by June 30, 1997.
The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations. In addition, the State is involved
in certain other legal proceedings that, if decided against the State, may
require the State to make significant future expenditures or may impair
future revenue sources. Because of the prospective nature of these
proceedings, no estimate of the potential loss can be made.
While at any given time, including the present, there are numerous civil
actions pending against the State which could, if determined adversely to the
State, affect the State's expenditures and, in some cases, its revenues, the
Attorney General of the State of California is of the opinion that no pending
actions are likely to have a material adverse effect on the State's ability
to pay debt service as it becomes due.
Because of the uncertain impact of the aforementioned statutes and
cases, 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, cases and policies on the
long-term ability of California state and municipal issuers to pay interest
or repay principal on their obligations.
On December 6, 1994, Orange County, California ("Orange County"),
together with its pooled investment funds (the "Pools") filed for protection
under Chapter 9 of the federal Bankruptcy Code, after reports that the Pools
had suffered significant market losses in their investments, causing a
liquidity crisis for the Pools and Orange County. More than 200 other public
entities, most of which, but not all, are located in Orange County, were also
depositors in the Pools. Orange County has reported the Pools' loss at about
$ 1.69 billion, or about 23 percent of their initial deposits of
approximately $7.5 billion. Many of the entities which deposited moneys in
the Pools, including Orange County, faced interim and/or extended cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. Orange County has embarked on a fiscal recovery
plan based on sharp reductions in service and personnel, and rescheduling of
outstanding short term debt using certain new revenues transferred to Orange
County from other local governments pursuant to special legislation enacted
in October, 1995.
The State has no existing obligations with respect to any outstanding
obligations or securities of Orange County or any of the other participating
entities.
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions restate or are in addition to those described
under "Investment Restrictions" in the Prospectus.
Each Fund, except as indicated, may not:
(1) Invest more than 15% of the value of its net assets in investment
which are illiquid (including repurchase agreements having maturities of more
than seven calendar days, variable and floating rate demand and master demand
notes not requiring receipt of principal note amount within seven days notice
and securities of foreign issuers which are not listed on a recognized
domestic or foreign securities exchange);
(2) Borrow money or pledge, mortgage or hypothecate its assets, except
that a Fund may enter into reverse repurchase agreements or 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 its total net assets (but investments may not be
purchased by the Fund while any such borrowings exist);
(3) Issue senior securities, except insofar as a Fund may be deemed to
have issued a senior security in connection with any repurchase agreement or
any permitted borrowing;
(4) Make loans, except loans of portfolio securities and 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 its
Prospectus or the SAI;
(5) Invest in companies for the purpose of exercising control or
management;
(6) Invest more than 10% of its net assets in shares of other investment
companies;
(7) Invest in real property or Mortgage loans (including limited
partnership interest but excluding real estate investment trusts and master
limited partnerships), commodities, commodity contracts, or oil, gas and
other mineral resource, exploration, development, lease or arbitrage
transactions, provided that the Fund may invest in collateralized mortgage
obligations;
(8) Engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under the
Securities Act of 1933;
(9) Sell securities short, except to the extent that a Fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
(10) Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities;
(11) Purchase or retain the securities of any issuer, if the individual
officers and Trustees of the Funds, the Adviser or the Distributor, each owning
beneficially more than 1/2 of 1% of the securities of such issuer, together own
more than 5% of the securities of such issuer;
(12) Purchase a security if, as a result, more than 25% of the value of
its total assets would be invested in securities of one or more issuers
conducting their principal business activities in the same industry, provided
that (a) this limitation shall not apply to obligations issued or guaranteed
by the U.S. Government or its agencies and instrumentalities; (b)
wholly-owned finance companies will be considered to be in the industries of
their parents; and
<PAGE>
(c) utilities will be divided according to their services. For example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry;
(13) Invest more than 5% of its net assets in warrants which are unattached
to securities, included within that amount, no more than 2% of the value of the
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges;
(14) Write, purchase or sell puts, calls or combinations thereof, except
that the equity and fixed income funds may purchase or sell puts and calls as
otherwise described in the Prospectus of SAI; however, no Fund will invest
more than 5% of its total assets in these classes of securities for purposes
other than bona fide hedging;
(15) Invest more than 5% of the current value of its total assets in the
securities of companies which, including predecessors, have a record of less
than three years' continuous operation; or
(16) Invest more than 5% of the value of a Fund's total assets in the
securities of any one investment company; invest more than 10% of the value
of a Fund's total assets in the aggregate in securities of investment companies
as a group; or invest such that more than 3% of the outstanding voting stock of
any one investment company will be owned by any Fund or by the Funds as a whole.
In addition, each of the U.S. Government Fund and the Equity Value Fund
is a diversified fund. As such, each will not, with respect to 75% of its
total assets, invest more than 5% of its total assets in the securities of
any one issuer (except for U.S. Government securities) or purchase more than
10% of the outstanding voting securities of any one issuer.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Fund's investments will not constitute a violation of such limitation, except
that any borrowing by a Fund that exceeds the fundamental investment limitations
stated above must be reduced to meet such limitations within the period required
by the 1940 Act (currently three days). Otherwise, a Fund may continue to hold
a security even though it causes the Fund to exceed a percentage limitation
because of fluctuation in the value of the Fund's assets.
In order to permit the sale of shares in certain states, the Funds may
make commitments more restrictive than the investment policies and limitations
described above. Should the Funds determine that these commitments are no
longer in the best interests of the Funds, they will revoke the commitment by
terminating sales of its shares in the states involved.
MANAGEMENT
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and executive officers of the Funds
for the past five years are listed below. The address of each, unless
otherwise indicated, is 370 Seventeenth Street, Suite 2700, Denver, CO 80202.
Trustees deemed to be "interested persons" of the Funds for purposes of the
1940 Act are indicated by an asterisk.
Harley K. Sefton, Chairman of the Board of Trustees and President, 42 years
old* - 2550 Fifth Avenue, Suite 808, San Diego, CA 92103. President and CEO,
Sefton Capital Management President, First Interstate Capital Management,
Inc., March 1994 through August 1994; President, San Diego Financial Capital
Management, Inc., January 1994 through March 1994; Executive Vice
President/Division Manager, San Diego Trust & Savings Bank, January 1992
through January 1994; Chief Operating Officer, San Diego Financial Capital
Management, Inc., July 1986 through December 1991.
<PAGE>
W. Robert Alexander, Trustee since 1984, 68 years old* - Chairman and Chief
Executive Officer, ALPS Mutual Funds Services, Inc. since 1984.
Grace Evans Cherashore, Trustee, 40 years old - 988 West Mission Bay Drive, San
Diego, CA 92109. Chief Executive Officer, Bahia and Catamaran Hotels since
1992; Chief Financial Officer, Bahia and Catamaran Hotels, 1990-1992.
Gordon T. Frost, Jr., Trustee, 50 years old - P.O. Box 15, San Diego, CA 92122.
President/General Manager, Frost Hardwood Lumber Company since 1990.
Thomas C. Bowden, Senior Vice President, 37 years old - 2550 Fifth Avenue,
Suite 808, San Diego, CA 92103. Vice President and Portfolio Manager, Sefton
Capital Management Inc. Vice President and Portfolio Manager, First Interstate
Capital Management, Inc., March 1994 through January 1995; Vice President and
Portfolio Manager, San Diego Financial Capital Management, Inc., June 1986
through March 1994.
Ted J. Piorkowski, Senior Vice President, 37 years old - 2550 Fifth Avenue,
Suite 808, San Diego, CA 92103. Vice President and Portfolio Manager, Sefton
Capital Management Vice President and Portfolio Manager, First Interstate
Capital Management Inc., March 1994 through May 1994; Vice President and
Portfolio Manager, San Diego Financial Capital Management, Inc. 1989 through
March 1994.
Leif O. Sanchez, Senior Vice President, 34 years old - 2550 Fifth Avenue,
Suite 808, San Diego, CA 92103. Vice President and Portfolio Manager, Sefton
Capital Management Vice President and Portfolio Manager, First Interstate
Capital Management, Inc., March 1994 through January 1995; Vice President and
Portfolio Manager, San Diego Financial Capital Management, Inc.; March 1985
through March 1994.
Lani Capossere, Vice President and Secretary, 34 years old - 2550 Fifth
Avenue, Suite 808, San Diego, CA 92103. Chief Operating Officer, Sefton
Capital Management Assistant Vice President and Operations Manager, First
Interstate Capital Management, Inc., March 1994 through May 1994; Assistant
Vice President and Operations Manager, San Diego Financial Capital
Management, Inc., April 1992 through March 1994; Trust Officer, San Diego
Trust & Savings Bank, July 1980 through April 1992.
William N. Paston, Vice President and Treasurer, 40 years old - Vice
President, ALPS Mutual Funds Services, Inc., Lipper Analytical Services,
Inc., February 1991 through February 1993.
Mark A. Pougnet, Vice President, Assistant Secretary and Assistant Treasurer,
35 years old - Chief Financial Officer, ALPS Mutual Funds Services, Inc.
since 1990.
*Mr. Sefton and Mr. Alexander are both considered to be an "interested
person" of the Trust as defined in the 1940 act.
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Pension Or
Retirement Estimated Aggregate
Aggregate Benefits Annual Compensation
Compensation Accrued As Benefits From The Trust
From The Part Of Fund Upon and Fund Complex
Trust Expenses Retirement Paid to Trustees
<S> <C> <C> <C> <C>
Grace Evans Cherashore
Trustee $3,000 $0 $0 $3,000
Gordon T. Frost, Jr.
Trustee $3,000 $0 $0 $3,000
</TABLE>
Trustees of the Funds not affiliated with Sefton or ALPS receive from
the Funds an annual retainer of $1,000 and a fee of $500 for each Board of
Trustees meeting and $500 for each Board committee meeting of the Funds
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Trustees who are affiliated with Sefton or ALPS
do not receive compensation from the Funds.
INVESTMENT ADVISER
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. Mr. Harley K. Sefton owns 100% of the capital stock of
SCM. 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 Funds' investments directly with brokers and dealers selected by it in
its discretion.
The following table summarizes the advisory fees paid by the Funds and any
advisory fee waivers for the period April 3, 1995 (inception of the Funds) to
March 31, 1996.
<TABLE>
<CAPTION>
April 3, 1995 (Inception of the Funds) to March 31, 1996
Fund Name Advisory Fees (before waivers) Waiver Advisory Fees Paid
<S> <C> <C> <C>
U.S. Government Fund $112,654 $52,605 $ 60,049
California Tax-Free Fund $228,931 $91,958 $136,973
Equity Value Fund $255,969 $6,226 $249,743
</TABLE>
The current Master Investment Advisory contract and Supplements thereto
("Advisory Agreement") for the U.S. Government, California Tax-Free and
Equity Value Funds became effective on April 3, 1995. Each Advisory Agreement
will continue in effect until April 3, 1997 and thereafter from year to year
so long as such continuance is approved annually by a majority of the Funds'
Trustees who are not parties to the Advisory Agreements or interested persons
of any such party, and by either a majority of the outstanding voting shares
or the Trustees of the Funds. Each Advisory Agreement: (i) may be terminated
without the payment of any penalty by the Fund or SCM on 60 days' written
notice; (ii) terminates automatically in the event of its assignment; and
(iii) generally, may not be amended without the approval by vote of a
majority of the outstanding voting securities of such Fund.
<PAGE>
The Agreements provide that the Investment Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with its performance of services pursuant to the Advisory
Agreement, except loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its obligations under the Advisory Agreement.
DISTRIBUTION OF FUND SHARES
Effective August 11, 1995, ALPS Mutual Funds Services, Inc., 370
Seventeenth Street, Suite 2700, Denver CO 80202, replaced Furman Selz
Incorporated ("Furman Selz") as Sponsor and Distributor of the Funds. ALPS
also serves as administrator and distributor of other mutual funds. As
distributor, ALPS acts as the Funds' agent to underwrite, sell and distribute
shares in a continuous offering.
ADMINISTRATORS, BOOKKEEPING AND PRICING AGENT
Effective August 11, 1995, ALPS replaced Furman Selz as Administrator
and fund accounting agent for the Funds. ALPS provides management and
administrative services necessary for the operation of the Funds, including
among other things, (i) preparation of shareholder reports and communications,
(ii) regulatory compliance, such as reports to and filings with the Securities
and Exchange Commission ("SEC") and state securities commissions and (iii)
general supervision of the operation of the Funds, including coordination of
the services performed by the Funds' Adviser, transfer agent, custodian,
independent accountants, legal counsel and others. In addition, ALPS furnishes
office space and facilities required for conducting the business of the Funds
and pays the compensation of the Funds' officers, employees and Trustees
affiliated with ALPS. For these services, ALPS is entitled to receive a fee,
payable monthly, at the annual rate of 0.20% of the average daily net assets of
the Funds.
The Administrative Services Contracts for the California Tax-Free, U.S.
Government and Equity Value Funds were approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Contracts or
interested persons of such parties, at its meeting held on July 10, 1995.
Each Administrative Services Contract is terminable with respect to a Fund
without penalty, at any time, by vote of a majority of the Trustees who are
not "interested persons" of the Funds and who have no direct or indirect
financial interest in the Administrative Services Contract upon not more than
60 days written notice to ALPS or by vote of the holders of a majority of the
shares of the Fund involved, or, upon 60 days notice, by ALPS. Each
Administrative Services Contract will terminate automatically in the event of
its assignment.
In addition to the services it provides as administrator, ALPS has agreed,
pursuant to a separate Bookkeeping and Pricing Agreement, to maintain the
financial accounts and records of the Funds and to compute the net asset value
and certain other financial information of the Funds. Under the Bookkeeping and
Pricing Agreement, ALPS is not liable for any error of judgment or mistake of
law or for any loss suffered by the Funds, except for a loss resulting from
willful misfeasance, bad faith or negligence on the part of ALPS in the
performance of its duties under the Agreement. For the period April 3, 1995
(inception of the Funds) to March 31, 1996, ALPS and Furman Selz collectively
earned $28,393, $28,393 and $28,538 for their fund accounting services to the
U.S. Government Fund, California Tax-Free Fund and Equity Value Fund,
respectively.
<PAGE>
The following table summarizes the administration fees paid by the Funds
to ALPS and Furman Selz and any administrative fee waivers, for the period
April 3, 1995 (inception of the Funds) to March 31, 1996:
<TABLE>
<CAPTION>
April 3, 1995 (Inception of the Funds) to March 31, 1996
Administration Fees
Fund Name (before waivers) Waiver of Fees Fees Paid
<S> <C> <C> <C>
U.S. Government Fund $37,324 $16,798 $20,526
California Tax-Free Fund $76,311 $32,529 $43,782
Equity Value Fund $51,142 $21,668 $29,474
</TABLE>
SERVICE ORGANIZATIONS
The Funds may also contract with banks, trust companies, broker-dealers
(other than ALPS) or other financial organizations ("Service Organizations")
to provide certain administrative services with respect to the Funds for a
fee paid at an annual rate of up to 0.25% of daily net Fund assets serviced.
Services provided by Service Organizations may include among other things:
providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records; assisting in processing purchase
and redemption transactions; arranging for the wiring of funds; transmitting
and receiving funds in connection with client orders to purchase or redeem
shares; verifying and guaranteeing client signatures in connection with
redemption orders, transfers among and changes in client-designating
accounts; providing periodic statements showing a client's account balance
and, to the extent practicable, integrating such information with other
client transactions, furnishing periodic and annual statements and
confirmations of all purchases and redemptions of shares in a client's
account; transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Funds to clients; and
providing such other services as the Funds or a client reasonably may
request, to the extent permitted by applicable statute, rule or regulation.
Some Service Organizations may impose additional or different conditions
on their clients, such as requiring their clients to invest more than the
minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to
any amounts which might be paid to the Service Organization by the Funds.
Each Service Organization has agreed to transmit to its clients a schedule of
any such fees. Shareholders using Service Organizations are urged to consult
them regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is 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
statutes or regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from continuing to
perform all or a part of its servicing activities. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law. 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
<PAGE>
sought. In that event, changes in the operation of the Funds might occur and
a shareholder serviced by such a bank might no longer be able to avail itself
to any services then being provided by the bank. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
EXPENSES AND EXPENSE LIMITS
Currently, California is the only state imposing limitations on the
expenses of the Funds. Those expense limitations are 2-1/2 percent of the
first $30 million of a Fund's average net assets, 2 percent of the next $70
million and 1-1/2 percent of a Fund's remaining average net assets. If in
any fiscal year expenses of the Funds (excluding taxes, interest, expenses
under the Plan, brokerage commissions and other portfolio transaction
expenses, other expenditures which are capitalized in accordance with
generally accepted accounting principles and extraordinary expenses, but
including the advisory and administrative fees) exceed the expense
limitations applicable to the Funds imposed by the securities regulations of
any state, the Adviser will reimburse the Funds for such excess . During the
fiscal year ended March 31, 1996, no such expense reimbursement was required.
Except for the expenses paid by the Adviser and ALPS, the Funds bear all
costs of their operations.
DETERMINATION OF NET ASSET VALUE
As indicated under "Fund Share Valuation" in the Prospectus, a Fund's net
asset value per share for the purpose of pricing purchase and redemption
orders is determined at 4:15 p.m. (Eastern time) on each day the New York
Stock Exchange is open for trading with the exception of certain bank
holidays. The Funds will be closed on the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the Adviser, be made in the
form of securities that are permissible investments for the Funds as
described in the Prospectus. For further information about this form of
payment please contact ALPS. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by
the Fund and that the Fund receive satisfactory assurances that (i) it will
have good and marketable title to the securities received by it; (2) the
securities are in proper form for transfer to the Fund; and (3) adequate
information will be provided concerning the basis and other matters relating
to the securities.
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed (other than customary weekend and holiday
closings), or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as
a result of which disposal or valuation of portfolio securities is not
reasonably practicable, or for such other periods as the SEC may permit. (A
Fund may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.)
The Funds may suspend redemption rights or postpone redemption payments
(as well as suspend the recordation of the transfer of shares) for such
periods as are permitted under the 1940 Act. The Funds may also redeem
shares involuntarily or make payment for redemption in securities or other
property if it appears appropriate to do so in light of the Funds'
responsibilities under the 1940 Act.
<PAGE>
In addition, the Funds may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder.
All redemptions of shares of the Funds will 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 its 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 incur brokerage or other transactional charges.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment advisory
clients of the Adviser are made with a view to achieving their respective
investment objectives. Investment decisions are the product of many factors
in addition to basic suitability for the particular client involved. Thus, a
particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. Likewise,
a particular security may be bought for one or more clients when one or more
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases
or sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
The Funds have no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to
policies established by the Funds' Board of Trustees, the Adviser is
primarily responsible for portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Funds to obtain the
best results taking into account the broker-dealer's general execution and
operational facilities, the type of transaction involved and other factors
such as the dealer's risk in positioning the securities. While the Adviser
generally seeks reasonably competitive spreads or commissions, the Funds will
not necessarily be paying the lowest spread or commission available. The
reasonableness of such spreads or brokerage commissions will be evaluated by
comparing spreads or commissions among brokers or dealers in consideration of
the factors listed immediately above and research services described below.
Purchases and sales of securities will often be principal transactions in
the case of debt securities and equity securities traded otherwise than on
an exchange. The purchase or sale of equity securities will frequently
involve the payment of a commission to a broker-dealer who effects the
transaction on behalf of a Fund. Debt securities normally will be purchased
or sold from or to issuers directly or to dealers serving as market makers
for the securities at a net price. Under the 1940 Act, persons affiliated
with the Funds or the Sponsor are prohibited from dealing with the Funds as a
principal in the purchase and sale of securities except in limited situations
permitted by SEC regulations, unless a permissive order allowing such
transactions is obtained from the SEC.
The Adviser may, in circumstances in which two or more broker-dealers are
in a position to offer comparable results, give preference to a dealer which
has provided statistical or other research services to the Adviser. By
allocating transactions in this manner, the Adviser is able to supplement its
research and analysis with the views and information of securities firms.
These items, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Adviser in
<PAGE>
advising various of its clients (including the Funds), although not all of
these services are necessarily useful and of value in managing the Funds.
The management fee paid by the Funds is not reduced because the Adviser and
its affiliates receive such services. As permitted by Section 28(e) of
the Securities Exchange Act of 1934 (the "Act"), the Adviser may cause the
Funds to pay a broker-dealer which provides "brokerage and research services"
(as defined in the Act) to the Adviser an amount of disclosed commission for
effecting a securities transaction for the Funds in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Funds.
For the period April 3, 1995 (commencement of operations) to March 31,
1996, the Funds paid the following amounts in brokerage commissions: U.S.
Government Fund, $0; California Tax-Free Fund, $0, and Equity Value Fund,
$84,000.
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Funds whenever such changes are believed to be
in the best interests or the Funds and their shareholders. It is anticipated
that the annual portfolio turnover rate normally will not exceed the amounts
stated in the Funds' Prospectus. The portfolio turnover rate is calculated
by dividing the lesser of purchase or sales of portfolio securities by the
average monthly value of the Fund's portfolio securities. For purposes of
this calculation, portfolio securities exclude all securities having a
maturity when purchased of one year or less. For the period April 3, 1995
(commencement of operations) to March 31, 1996, the Funds' annualized
portfolio turnover rates were: U.S. Government Fund, 45.41%; California
Tax-Free Fund, 93.90%; and Equity Value Fund, 62.76%.
TAXATION
The Funds have elected to be treated and have qualified as regulated
investment companies and intend to continue to qualify to be treated as
regulated investment companies for each taxable year pursuant to the
provisions of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, a Fund must (a)
distribute to shareholders at least 90% of its Investment company taxable
income (which includes, among other items, dividends, taxable interest and
the excess of net short-term capital gains over net long-term capital
losses); (b) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies
or other income derived with respect to its business of investing in such
stock, securities or currencies; (c) derive less than 30% of its gross income
from the sale or other disposition of certain assets (namely, in the case of
the Fund, (i) stock or securities; (ii) options, futures, and forward
contracts (other than those on foreign currencies), and (iii) foreign
currencies (including options, futures, and forward contacts on such
currencies) not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect to
stocks or securities)) held less than 3 months; and (d) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items (including receivables), U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and not greater than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies). In
addition, a Fund earning
<PAGE>
tax-exempt interest must, in each year, distribute at least 90% of its net
tax-exempt income. By meeting these requirements, the Funds generally will
not be subject to Federal income tax on its investment company taxable income
and net capital gains which are distributed to shareholders. If the Funds do
not meet all of these Code requirements, they will be taxed as ordinary
corporations and their distributions will be taxed to shareholders as
ordinary income.
Amounts, other than tax-exempt interest, not disturbed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, each
Fund must distribute for each calendar year an amount equal to the sum of (1)
at least 98% of its ordinary income (excluding any capital gains or losses)
for the calendar year, (2) at least 98% of the excess of its capital gains
over capital losses (adjusted for certain ordinary losses) for the one-year
period ending October 31 of such year, and ( 3) all ordinary income and
capital gain net income (adjusted for certain ordinary losses) for previous
years that were not distributed during such years. A distribution, including
an "exempt-interest dividend," will be treated as paid on December 31, of a
calendar year if it is declared by a Fund during October, November or
December of that year to shareholders of record on a date in such a month and
paid by the Fund during January of the following year. Such distributions
will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Some Funds may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC under the Code if at least
one-half of its assets constitutes investment-type assets or 75% or more of
its gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock.
A Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to stockholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any
distributions are received from the PFIC. If this election is made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, other elections may become
available that would affect the tax treatment of PFIC stock held by a Fund.
Each Fund's intention to qualify annually as a regulated investment company
may limit the elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of
the recognition of income with respect to PFIC stock, as well as subject a
Fund itself to tax on certain income from PFIC stock, the amount that must be
distributed to stockholders and that will be taxed to stock holders as
ordinary income or long-term capital gain may be increased or decreased
substantially as compared to a Fund that did not invest in PFIC stock.
Distributions of investment company taxable income generally are taxable
to shareholders as ordinary income. Distributions from certain of the Funds
may be eligible for the dividends-received deduction available to
corporations. Distributions of net long-term capital gains, if any,
designated by the Funds as long-term capital gain dividends are taxable to
shareholders as long-term capital gain, regardless of the length of time the
Funds' shares have been held by a shareholder. All distributions are taxable
to the shareholder in the same manner whether reinvested in additional
<PAGE>
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
Distributions by a Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution, nevertheless, would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution
which nevertheless generally will be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares
of a Fund, a shareholder may realize a gain or loss depending upon his basis
in his shares. Such gain or loss generally will be treated as capital gain
or loss if the shares are capital assets in the shareholders' hands. Such
gain or loss will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. However, a loss realized by a
shareholder on the disposition of Fund shares with respect to which capital
gain dividends have been paid will, to the extent of such capital gain
dividends, be treated as long-term capital loss if such shares have been held
by the shareholder for six months or less. A loss realized on the
redemption, sale or exchange of Fund shares will be disallowed to the extent
an exempt interest dividend was received with respect to those shares if the
shares have been held by the shareholder for six months or less. Further, a
loss realized on a disposition will be disallowed to the extent the shares
disposed of are replaced (whether by reinvestment of distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will
have a cost basis for Federal income tax purposes in each share received
equal to the net asset value of a share of the Funds on the reinvestment
date.
The taxation of equity options is governed by Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a
put or call option is not included in income at the time of receipt. If the
option expires, the premium is short-term capital gain to the Fund. If the
Fund enters into a closing transaction, the difference between the amount
paid to close out its position and the premium received is short-term capital
gain or loss. If a call option written by a Fund is exercised, thereby
requiring the Fund to sell the underlying security, the premium will increase
the amount realized upon the sale of such security and any resulting gain or
loss will be a capital gain or loss, and will be long-term or short-term
depending upon the holding period of the security. With respect to a put or
call option that is purchased by a Fund, if the option is sold any resulting
gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term,
depending upon the holding period of the option. If the option is exercised,
the cost of the option, in the case of a call option, is added to the basis
of the purchased security and in the case of a put option, reduces the amount
realized on the underlying security in determining gain or loss.
Certain of the options, futures contracts, and forward foreign currency
exchange contracts that several of the Funds may invest in are so-called
"section 1256 contracts." With certain exceptions, gains or losses on
section 1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"). Also, section 1256 contracts
held by a Fund at the end of a taxable year (and, generally, for purposes of
the 4% excise tax, on October 31, of each year) are "marked-to market" with
the result that unrealized gains or losses are treated as though they were
realized and the resulting gain or loss is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on a position that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to a Fund of hedging transactions are not
entirely clear. Hedging transactions may increase the amount of short-term
capital gain realized by a Fund
<PAGE>
which is taxed as ordinary income when distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under the rules according to
the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders and which will be taxed to shareholders as
ordinary income or long-term capital gain may be increased or decreased
substantially as compared to a Fund that did not engage in such hedging
transactions.
Certain requirements that must be met under the Code in order for a Fund
to qualify as a regulated investment company, may limit the extent to which a
Fund will be able to engage in transactions in options, futures, and forward
contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues interest, dividends or
other receivables, or accrues expenses or other liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables,
or pays such liabilities, generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain options and forward and
futures contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or
contract and the date of disposition also are treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988"
gains or losses, may increase, decrease, or eliminate the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to "pass-through" to its shareholders
the amount of such foreign taxes paid by the Fund. Pursuant to this
election, a shareholder would be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign taxes paid by a Fund and would be entitled either to deduct his pro
rata share of foreign taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. Federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions, but such a shareholder may be eligible to
claim the foreign tax credit (see below). Each shareholder will be notified
within 60 days after the close of a Fund's taxable year if the foreign taxes
paid by a Fund will "pass-through" for that year and, if so, such
notification will designate (a) the shareholder's portion of the foreign
taxes paid to each such country and (b) the portion of the dividend which
represents income derived from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his total
foreign source taxable income. For this purpose, if a Fund makes the
election described in the preceding paragraph, the source of the Fund's
income flows through to its shareholders. With respect to a Fund, gains from
the sale of securities will be treated as derived from U.S. sources and
certain currency fluctuations gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit) including foreign source
passive income of a Fund. The foreign tax credit may offset only 90% of the
alternative minimum tax imposed on corporations and individuals, and foreign
taxes generally may not be deducted in computing alternative minimum taxable
income.
The Funds are required to report to the Internal Revenue Service ("IRS")
all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax
at a rate of 31% ("backup withholding") in the case of non-exempt
shareholders if (1) the shareholder fails to furnish the Funds with
<PAGE>
and to certify the shareholder's correct taxpayer identification number or
social security number, (2) the IRS notifies the Funds or a shareholder that
the shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he is not subject to
backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will
be reduced by the amounts required to be withheld. Backup withholding is not
an additional tax. Any amount withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to
consult their tax advisers about the applicability of the backup withholding
provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds
also may be subject to state and local taxes and their treatment under state
and local income tax laws may differ from Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be
exempt from state and local income taxes in certain states. Shareholders
should consult their tax advisers with respect to particular questions of
Federal, state and local taxation. Shareholders who are not U.S. persons
should consult their tax advisers regarding U.S. and foreign tax consequences
of ownership of shares of the Funds including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate
of 30% (or at a lower rate under a tax treaty).
The California Tax-Free Fund. The Fund intends to manage its portfolio
so that it will be eligible to pay "exempt-interest dividends" to
shareholders. The Fund will so qualify if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
state, municipal, and certain other securities, the interest on which is
exempt from the regular Federal income tax. To the extent that the Fund's
dividends distributed to shareholders are derived from such interest income
and are designated as exempt-interest dividends by the Fund, they will be
excludable from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends, however, must be taken into account by
shareholders in determining whether their total incomes are large enough to
result in taxation of up to 85% of their Social Security benefits and certain
railroad retirement benefits. The Fund will inform shareholders annually as
to the portion of the distributions from the Fund which constitute
exempt-interest dividends. In addition, for corporate shareholders of each
Fund, exempt-interest dividends may comprise part or all of an adjustment to
alternative minimum taxable income. Exempt-interest dividends that are
attributable to certain private activity bonds, while not subject to the
regular Federal income tax, may constitute an item of tax preference for
purposes of the alternative minimum tax.
To the extent that a Fund's dividends are derived from its investment
company taxable income (which includes interest on its temporary taxable
investments and the excess of net short-term capital gain over net long-term
capital loss), they are considered ordinary (taxable) income for Federal
income tax purposes. Such dividends will not qualify for the
dividends-received deduction for corporations. Distributions, if any, of net
long-term capital gains (the excess of net long-term capital gain over net
short-term capital loss) designated by a Fund as long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
the length of time the shareholder has owned shares of the Fund.
Upon redemption, sale or exchange of shares in the Fund, a shareholder
will realize a taxable gain or loss, depending on whether the gross proceeds
are more or less than the shareholder's tax basis for the shares. The
discussion above provides additional detail about the income tax consequences
of disposing of Fund shares.
Deductions for interest expense incurred to acquire or carry shares of
the Fund may be subject to limitations that reduce, defer or eliminate such
deductions. This includes limitations on deducting interest on indebtedness
properly allocable to investment property (which may include shares of the
Fund). In addition, a shareholder may not deduct a portion of interest on
indebtedness incurred or continued to purchase or carry shares of an
investment company (such as one of the Funds) paying exempt-interest
dividends. Such disallowance would be in an amount which bears the same
ratio to the total of such interest as the exempt-interest dividends bear to
the total dividends, excluding net capital gain
<PAGE>
dividends received by the shareholder. Under rules issued by the IRS for
determining when borrowed funds are considered used for 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.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is
treated for Federal income tax purposes as interest and, therefore, such
income would be subject to the distribution requirements of the Code.
Original issue discount on an obligation, the interest from which is exempt
from Federal income tax, generally will constitute tax-exempt interest income.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such securities, if any. This
additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security having
market discount will be treated as ordinary taxable income to the extent it
does not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day the debt
security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
Under California law, a mutual fund which qualifies as a regulated
investment company generally must have at least 50% of its total assets in
California state and local issues at the end of each quarter of its taxable
year in order to be eligible to pay dividends which will be exempt from
California personal income tax. Generally, shareholders who are California
residents will not incur California personal income tax on the amount of
exempt-interest dividends received by them from a Fund and derived from
California state and local issues, whether taken in cash or reinvested in
additional shares. Gain on the sale or redemption of Fund shares is subject
to California personal income tax.
Shareholders will normally be subject to California personal income tax
on dividends paid from income derived from taxable securities and other
taxable investments, and from securities issued by states other than
California and on distribution of capital and other taxable gains.
Each Fund will be required to report to the IRS all distributions of
investment company taxable income and net capital gains and gross proceeds
from the redemption or exchange of the Fund's shares, except in the case of
certain exempt shareholders. All such distributions and proceeds from the
redemption or exchange of the Fund's shares may be subject to withholding of
Federal income tax at the rate of 31% in the case of non-exempt shareholders
who fail to furnish a Fund with their taxpayer identification numbers and
with required certifications regarding their status under Federal income tax
laws.
A deductible "environmental tax" of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to
pay an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that
exempt-interest dividends paid by a Fund are included in alternative minimum
taxable income, corporate shareholders may be subject to the environmental
tax.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuers. The Funds, the Adviser and its affiliates, and the
Funds' counsel make no review of proceedings relating to the issuance of
state or municipal securities or the bases of such opinions.
<PAGE>
Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by private activity bonds should
consult their tax advisers before purchasing shares of one of these Funds
since the acquisition of shares of the Fund may result in adverse tax
consequences to them. In addition, all shareholders of a Fund should consult
their tax advisers about the tax consequences to them of their investments in
the Fund.
Changes in the tax law, including provisions relating to tax-exempt
income, frequently come under consideration. If such changes are enacted,
the tax consequences arising from an investment in the California Tax-Free
Fund may be affected. Since the Funds do not undertake to furnish tax
advice, it is important for shareholders to consult their tax advisers
regularly about the tax consequences to them of investing in one or more of
the Funds.
OTHER INFORMATION
CAPITALIZATION
The Funds are a Delaware business trust established under a Declaration
of Trust dated January 6, 1995 and currently consists of three separately
managed portfolios, all of which are discussed in this SAI.
The capitalization of the Funds consists solely of an unlimited number of
shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional Funds (with different investment objectives
and fundamental policies) at any time in the future. Establishment and
offering of additional Funds will not alter the rights of the shareholders.
When issued, shares are fully paid, non-assessable, redeemable and freely
transferable. Shares do not have preemptive rights or subscription rights.
In any liquidation of a Fund, each shareholder is entitled to receive his pro
rata share of the net assets of that Fund.
In the event of a liquidation or dissolution of the Funds or an
individual Fund, shareholders of a particular Fund would be entitled to
receive the assets available for distribution belong to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
respective Funds, of any general assets not belonging to any particular Fund
which are available for distribution. Shareholders of a Fund are entitled to
participate in the net distributable assets of the particular Fund involved
on liquidation, based on the number of shares of the Fund that are held by
each shareholder.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The officers and trustees of the Trust as a group owned the following
percentages of outstanding voting securities of the Funds as of June 25, 1996:
U.S. Government Fund 6%
California Tax-Free Fund 44%
Equity Value Fund 55%
Harley K. Sefton, 2550 Fifth Avenue, Suite 808, San Diego, CA 92103 and
William Stephens, 2550 Fifth Avenue, Suite 808, San Diego, CA 92103, owned
the following percentages of the outstanding voting securities of the Funds
as of June 25, 1996:
<TABLE>
<CAPTION>
U.S. Government Fund California Tax-Free Fund Equity Value Fund
<S> <C> <C> <C>
Harley K. Sefton
-record and beneficially 6% 44% 53%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
-beneficially only 89% 50% 35%
William Stephens
-record and beneficially 1% 0% 1%
-record only 89% 50% 35%
</TABLE>
Mr. Sefton and Mr. Stephens, by virtue of their shareholdings, may be
deemed control persons of the U.S. Government Fund, the California Tax-Free
Fund and the Equity Value Fund. As to those Funds for which they may be
deemed control persons, Mr. Sefton or Mr. Stephens may play a decisive or
dispositive role in the determination of issues presented to the Funds'
shareholders for a vote, including matters which may require a super majority
vote for approval.
VOTING RIGHTS
Under the Declaration of Trust, the Funds are not required to hold annual
meetings of each Fund's shareholders to elect Trustees or for other purposes.
It is not anticipated that the Funds will hold shareholders' meetings unless
required by law or the Declaration of Trust. In this regard, the Trust will
be required to hold a meeting to elect Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Trustees
have been elected by the shareholders of the Funds. In addition, the
Declaration of Trust provides that the holders of not less than two-thirds of
the outstanding shares of the Funds may remove persons 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 persons 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. To
the extent required by applicable law, the Trustees shall assist shareholders
who seek to remove any person serving as Trustee.
The Funds' shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board
of Trustees, in which case the holders of the remaining shares would not be
able to elect any Trustees.
Shareholders of all of the Funds, as well as those of any other
investment portfolio now or hereafter offered by the Fund, will vote together
in the aggregate and not separately on a Fund-by-Fund basis, except as
otherwise required by law or when permitted by the Board of Trustees. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company
such as the Funds shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of
each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to
a Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent auditors, the approval of principal underwriting contracts and
the election of trustees may be effectively acted upon by shareholders of the
Funds voting together in the aggregate without regard to a particular Fund.
CUSTODIAN AND TRANSFER AGENT
Effective August 11, 1995, State Street Bank and Trust Company; P.O. Box
8521, Boston Massachusetts
<PAGE>
02266-8521, replaced Investors Fiduciary Trust Company ("ITFC") as Custodian
and Furman Selz as Transfer Agent for the Funds. Pursuant to a Custodian
Agreement, SSB is responsible for holding the Funds' cash and portfolio
securities. SSB acts as transfer agent and dividend disbursing agent for the
Funds. The Funds compensated SSB and Furman Selz for providing personnel and
facilities to perform transfer agency related services for the Funds at a
rate intended to represent the cost of providing such services. For the
period April 3, 1995 (inception of the Funds) to March 31, 1996, SSB, IFTC
and Furman Selz collectively earned $29,448, $35,613 and $31,387 for their
services to the U.S. Government Fund, California Tax-Free Fund and Equity
Value Fund.
YIELD AND PERFORMANCE INFORMATION
The Funds may, from time to time, include their yields, effective yields,
tax equivalent yields and average annual total returns in advertisements or
reports to shareholders or prospective investors.
Quotations of yield for the Funds will be based on the investment income
per share earned during a particular 30-day period, less expenses accrued
during a period ("net investment income") and will be computed by dividing
net investment income by the maximum offering price per share on the last day
of the period, according to the following formula:
a-b 6
YIELD = 2[( --- + 1 ) - 1]
cd
where a = dividends and interest earned during the period, b = expenses
accrued for the period (net of any reimbursements), c = the average daily
number of shares outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share on the last day of
the period.
For the 30 day period ending March 31, 1996, the U.S. Government Fund's
yield was 5.669%.
Quotations of tax-equivalent yield for the California Tax-Free Fund will
be calculated by: (a) dividing the portion of the Fund's yield that is exempt
from both federal and California state income taxes by one minus a stated
combined federal and state income tax rate; (b) dividing the portion of the
Fund's yield that is exempt from federal income tax only by one minus a
stated federal income tax rate, and (c) adding the figures resulting from
(a) and (b) above to that portion, if any, of the Fund's yield that is not
exempt from federal income tax.
Based on the foregoing calculations, the yield and tax-equivalent yield
of the California Tax-Free Fund for the 30 day period ended March 31, 1996
were 4.692% and 7.483%. Tax-equivalent yield is based upon the combined state
and federal tax rate assumptions of 37.3 % (assuming a 28% federal tax rate
and a 9.3% California tax rate).
Quotations of average annual total return will be expressed in terms of
the average annual compounded rate of return of a hypothetical investment in
a Fund over periods of 1, 5 and 10 years (up to the life of the Fund),
calculated pursuant to the following formula:
n
P (1 + T) = ERV
(where P = a hypothetical initial payment of $1,000, T= the average
annual total return, n = the number of years, and ERV = the ending redeemable
value of a hypothetical $1,000 payment made at the beginning of the period).
All total return figures will reflect a proportional share of Fund expenses
(net of certain reimbursed expenses) on an annual basis, and will assume that
all dividends and distributions are reinvested when paid.
For the period April 3, 1995 (inception of the Funds) through March 31,
1996, the total return for the U.S. Government Fund, the California Tax-Free
Fund and the Equity Value Fund was 9.06%, 6.60% and 26.31%, respectively.
Quotations of yield and total return will reflect only the performance of
a hypothetical investment in the Funds
<PAGE>
during the particular time period shown. Yield and total return for the
Funds will vary based on changes in the market conditions and the level of a
Fund's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
In connection with communicating its yields or total return to current or
prospective shareholders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow
Jones Industrial Average, or other unmanaged indices so that investors may
compare the Funds' results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment
of dividends but generally do not reflect deductions for administrative and
management costs and expenses.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Funds.
Price Waterhouse LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings. Price
Waterhouse LLP's address is 950 Seventeenth Street, Suite 2500, Denver,
Colorado 80202.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included
in the Funds' Registration Statement filed with the SEC under the Securities
Act of 1933 with respect to the securities offered hereby, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC.
The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
other documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for the Funds as of March 31, 1996,
including Notes thereto, and the Report of Price Waterhouse LLP thereon, is
included herein.
KENNEBEC U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
ASSETS
Investments, at value (cost-$18,540,569) $18,922,035
Cash 464
Interest receivable 273,330
Organizational costs, net of accumulated amortization 32,150
Prepaid expenses 543
Total Assets 19,228,522
LIABILITIES
Payables:
Investment advisory fee 414
Administration 5,300
Dividends 93,821
Other 32,639
Total Liabilities 132,174
NET ASSETS $19,096,348
COMPOSITION OF NET ASSETS
Paid-in capital $18,574,086
Accumulated net realized gain from investment transactions 140,796
Net unrealized appreciation of investments 381,466
NET ASSETS $19,096,348
NET ASSET VALUE PER SHARE
Shares of beneficial interest outstanding 1,545,813
Net asset value, offering, and redemption price per share $12.35
See Notes to Financial Statements.
<PAGE>
KENNEBEC U.S. GOVERNMENT FUND
STATEMENT OF INVESTMENTS
March 31, 1996
Face Value Market Value*
- ---------- ------------
CORPORATE BONDS 8.28%
FINANCE 8.28%
$ 500,000 Integra Bank, MTN,
6.55%, 06/15/00 $ 498,666
500,000 Lehman Brothers Holdings,
8.75%, 05/15/02 543,387
500,000 Salomon Inc,
9.25%, 05/01/01 538,687
TOTAL CORPORATE BONDS
(Cost $1,532,223) 1,580,740
MORTGAGE-BACKED SECURITIES 22.53%
828,891 Federal Home Loan Mortgage Corp,
7.50%, 07/01/09 842,878
1,746,276 Federal Home Loan Mortgage Corp,
7.50%, 04/01/14 1,754,762
905,542 Federal National Mortgage Association,
7.00%, 05/01/14 892,139
806,143 Federal National Mortgage Association,
8.00%, 01/01/15 812,849
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $4,287,764) 4,302,628
U.S GOVERNMENT AGENCIES 7.62%
500,000 Federal Home Loan Mortgage Corp,
8.625%, 11/29/04 528,813
875,000 Federal Home Loan Mortgage Corp,
8.53%, 02/02/05 925,381
TOTAL U.S. GOVERNMENT AGENCIES
(Cost $1,426,200) 1,454,194
U.S. GOVERNMENT TREASURIES 59.32%
1,000,000 U.S. Treasury Bonds,
7.25%, 05/15/16 1,044,686
U.S. Treasury Notes:
1,000,000 7.75%, 02/15/01 1,068,750
2,000,000 7.50%, 05/15/02 2,129,372
2,800,000 6.25%, 02/15/03 2,791,250
1,000,000 7.25%, 08/15/04 1,054,061
1,000,000 7.875%, 11/15/04 1,095,311
2,000,000 7.50%, 02/15/05 2,145,000
TOTAL U.S. GOVERNMENT TREASURIES
(Cost $11,038,339) 11,328,430
REPURCHASE AGREEMENT
COLLATERALIZED BY U.S.
GOVERNMENT OBLIGATIONS 1.34%
$ 256,000 Repurchase agreement with State Street
Bank & Trust Company, 2.00%, dated
03/29/96 and maturing 04/01/96,
collateralized by U.S. Treasury Bonds,
11.25%, due 02/15/15 with a value of
$266,289 (Cost $256,043) $ 256,043
TOTAL INVESTMENTS
(Cost $18,540,569) 99.09% $18,922,035
Other Assets in Excess of Liabilities 0.91% 174,313
NET ASSETS 100.00% $19,096,348
* See Note 1 to Financial Statements.
<PAGE>
KENNEBEC U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
For the Period Ended March 31, 1996 (1)
INVESTMENT INCOME
Interest $1,252,093
Total Investment Income 1,252,093
EXPENSES
Investment advisory fee 112,654
Administration 37,324
Fund accounting 28,393
Legal 8,249
Audit 18,030
Custodian 17,436
Amortization of organization costs 6,380
Transfer agency 12,012
Printing 2,060
Insurance 3,836
Registration 8,001
Trustees fee 1,953
Other 3,930
Total Expenses 260,258
Expenses waived by:
Investment adviser (52,605)
Administrator (16,798)
Net Expenses 190,855
NET INVESTMENT INCOME 1,061,238
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 175,584
Unrealized appreciation of investments:
Beginning of period 0
End of period 381,466
Net change in unrealized appreciation 381,466
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 557,050
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,618,288
(1) Fund began operations on April 3, 1995.
See Notes to Financial Statements.
<PAGE>
KENNEBEC U.S. GOVERNMENT FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended March 31, 1996 (1)
FROM INVESTMENT ACTIVITIES
Net investment income $1,061,238
Net realized gain from investment transactions 175,584
Net change in unrealized appreciation 381,466
Net increase in net assets resulting from operations 1,618,288
Dividends to shareholders from net investment income (1,061,238)
Distributions to shareholders from net realized gain
from investment transactions (34,788)
Change in net assets derived from investment activities 522,262
FROM BENEFICIAL INTEREST TRANSACTIONS
Proceeds from sale of shares 25,698,168
Net asset value of shares issued to shareholders
from reinvestment of dividends and distributions 17,651
25,715,819
Cost of shares redeemed (7,175,070)
Change in net assets from beneficial interest
transactions 18,540,749
NET INCREASE IN NET ASSETS 19,063,011
NET ASSETS:
Beginning of period 33,337(2)
End of period $19,096,348
(1) Fund commenced operations April 3, 1995.
(2) Initial Capitalization.
See Notes to Financial Statements.
<PAGE>
KENNEBEC U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest
outstanding throughout the period indicated:
<TABLE>
<CAPTION>
For the Period Ended
March 31, 1996 (1)
--------------------
<S> <C>
Net asset value - beginning of period $12.00
Income from investment operations
Net investment income 0.71
Net realized and unrealized gain from investment transactions 0.37
Total income from investment operations 1.08
Dividends and distributions to shareholders
Dividends from net investment income (0.71)
Distributions from net realized gain from investment transactions (0.02)
Total dividends and distributions (0.73)
Net asset value - end of period $12.35
Total return 9.06%(2)
Ratios/Supplemental Data:
Net assets, end of period (000) $19,096
Ratio of expenses to average net assets 1.02%(3)
Ratio of net investment income to average net assets 5.68%(3)
Ratio of expenses to average net assets without fee waivers 1.39%(3)
Ratio of net investment income to average net assets without fee waivers 5.31%(3)
Portfolio turnover rate (4) 45.41%(3)
</TABLE>
(1) Fund commenced operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized
(4) A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding
securities with maturity dates 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.
See Notes to Financial Statements.
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
ASSETS
Investments, at value (cost-$41,528,198) $42,033,933
Cash 21,764
Interest receivable 741,817
Organizational costs, net of accumulated amortization 32,149
Prepaid expenses 1,122
Total Assets 42,830,785
LIABILITIES
Payables:
Investment advisory fee 10,906
Administration 13,606
Dividends 172,100
Other 41,552
Total Liabilities 238,164
NET ASSETS $42,592,621
COMPOSITION OF NET ASSETS
Paid-in capital $42,087,025
Distributions in excess of net realized gains (139)
Net unrealized appreciation of investments 505,735
NET ASSETS $42,592,621
Shares of beneficial interest outstanding 3,492,752
Net asset value, offering, and redemption price per share $12.19
See Notes to Financial Statements.
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
STATEMENT OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Bond Ratings Market
Face Value Moody's/S&P Value*
- ---------- ----------- ------
<S> <C> <C>
CERTIFICATE OF PARTICIPATION 3.62%
$ 1,500,000 West Covina, California Hospital,
Certificate of Participation, 6.50%,
08/15/14, Callable 08/15/04 @ 102.00 A/A $ 1,540,275
Total Certificates of Participation
(Cost $1,503,609) 1,540,275
GENERAL OBLIGATION BONDS 7.10%
1,325,000 California State, 6.25%, 04/01/08 A1/A 1,438,817
1,500,000 San Francisco City & County Public Safety,
6.50%, 06/15/08, Callable 06/15/01 @
100.00, FGIC Aaa/AAA 1,586,115
TOTAL GENERAL OBLIGATION BONDS
(Cost $2,959,066) 3,024,932
LEASE REVENUE BONDS 3.60%
1,000,000 California State Public Works-Department
of Corrections, 5.25%, 12/01/08, AMBAC Aaa/AAA 996,720
500,000 California State Public Works Board Univ,
6.625%, 10/01/10, Callable 10/01/02 @ 102.00 A/A- 535,525
TOTAL LEASE REVENUE BONDS
(Cost $1,481,103) 1,532,245
REVENUE BONDS 84.37%
1,500,000 California Educational Facilities Authorities,
Santa Clara, 6.25%, 02/01/16, Callable
02/01/02 @ 102.00 A1/NR 1,531,005
1,690,000 California Educational Facilities-Pomona,
6.125%, 02/15/08, Callable 02/15/02 @ 102.00 Aa1/AA 1,762,704
2,000,000 California Health Facilities Finance-Sutter,
7.00%, 01/01/09, Callable 01/01/99 @ 102.00,
MBIA Aaa/AAA 2,138,880
1,500,000 California Health Facilities-Scripps, 6.25%,
10/01/13, Callable 10/01/01 @ 102.00, MBIA Aaa/AAA 1,549,350
1,460,000 California Housing Finance Agency, 5.95%,
08/01/14, Callable 08/01/05 @ 102.00, MBIA Aaa/AAA 1,464,643
800,000 California Housing Finance Agency, 1995
Ser-L, 5.90%, 08/01/17, Callable 02/01/06
@ 102.00, MBIA Aaa/AAA 795,128
2,000,000 California Pollution Control Finance Authority,
Southern California Edison Ser-A, 3.40%,
02/28/08, (1) VMIG-1/A-1 2,000,000
300,000 California Pollution Control Finance Authority,
Southern California Edison Ser-C, 3.40%,
02/28/08, (1) VMIG-1/A-1 300,000
800,000 California Pollution Control Finance Authority,
Southern California Edison Ser-D, 3.40%,
02/28/08, (1) VMIG-1/A-1 800,000
</TABLE>
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
STATEMENT OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Bond Ratings Market
Face Value Moody's/S&P Value*
- ---------- ----------- -----------
<S> <C> <C> <C>
REVENUE BONDS (continued)
$1,000,000 California State Water Resources, 6.125%,
12/01/13, Callable 12/01/01 @ 101.50 Aa/AA $ 1,020,160
1,000,000 Fairfield-Suisun California Sewer, 6.25%,
05/01/16, Callable 05/01/01 @ 102.00, MBIA Aaa/AAA 1,026,660
2,000,000 Los Angeles County Public Works Financing,
6.00%, 10/01/15, Callable 10/01/04 @ 102.00 Aa/AA 2,006,940
1,000,000 Los Angeles Wastewater, 6.25%, 06/01/12,
Callable 06/01/02 @ 102.00, AMBAC Aaa/AAA 1,039,070
1,700,000 Marin Municipal Water District, 5.55%,
07/01/13, Callable 07/01/03 @ 102.00 A1/AA 1,638,630
1,500,000 M-S-R Public Power Agency, 6.00%, 07/01/20,
Callable 07/01/03 @ 102.00, AMBAC Aaa/AAA 1,503,525
1,500,000 Northern California Power Agency, 6.25%,
07/01/12, Callable 07/01/02 @ 102.00, MBIA Aaa/AAA 1,559,070
2,000,000 Rancho California Water District Financing
Authority, 5.875%, 11/01/10, Callable
11/01/05 @ 102.00, FGIC Aaa/AAA 2,078,320
1,215,000 Sacramento Municipal Utility District, 5.75%,
01/01/15, Callable 01/01/04 @ 102.00, MBIA Aaa/AAA 1,200,469
1,500,000 San Diego County RTD, 5.00%, 04/01/07,
FGIC (2) Aaa/AAA 1,483,125
1,650,000 San Francisco Airport, 6.30%, 05/01/11,
Callable 05/01/02 @ 102.00, AMBAC Aaa/AAA 1,724,745
1,500,000 San Francisco Bay Area Rapid Transit, 5.50%,
07/01/15, Callable 07/01/05 @ 101.00, FGIC Aaa/AAA 1,450,605
1,500,000 San Francisco Port Commission, 5.90%,
07/01/09, Callable 07/01/04 @ 102.00 A/BBB+ 1,522,320
1,500,000 San Francisco P.U.C. Water, 6.00%, 11/01/15,
Callable 11/01/02 @ 100.00 Aa/AA 1,502,730
1,300,000 Sunnyvale California Financing Authority,
6.30%, 10/01/17, Callable 10/01/00 @ 102.00,
MBIA Aaa/AAA 1,335,867
1,500,000 University of California Regents, 6.30%,
09/01/15, Callable 09/01/03 @ 102.00 NR/A- 1,502,535
Total Revenue Bonds
(Cost $35,584,420) 35,936,481
TOTAL INVESTMENTS
(Cost $41,528,198) 98.69% $42,033,933
Other Assets in Excess of Liabilities 1.31% 558,688
NET ASSETS 100.00% $42,592,621
</TABLE>
(1) Floating rate security - rate disclosed as of March 31, 1996.
* See Note 1 to Financial Statements.
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
STATEMENT OF OPERATIONS
For the Period Ended March 31, 1996 (1)
INVESTMENT INCOME
Interest $2,161,043
Total Investment Income 2,161,043
EXPENSES
Investment advisory fee 228,931
Administration 76,311
Fund accounting 28,393
Legal 13,283
Audit 18,030
Custodian 21,323
Amortization of organization costs 6,380
Transfer agency 14,290
Printing 3,319
Insurance 3,986
Registration 14,168
Trustees fee 3,295
Other 10,386
Total Expenses 442,095
Expenses waived by:
Investment adviser (91,958)
Administrator (32,529)
Net Expenses 317,608
NET INVESTMENT INCOME 1,843,435
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 22,588
Unrealized appreciation of investments:
Beginning of period 0
End of period 505,735
Net change in unrealized appreciation 505,735
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 528,323
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,371,758
(1) Fund began operations on April 3, 1995.
See Notes to Financial Statements.
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended March 31, 1996 (1)
FROM INVESTMENT ACTIVITIES
Net investment income $1,843,435
Net realized gain from investment transactions 22,588
Net change in unrealized appreciation 505,735
Net increase in net assets resulting from operations 2,371,758
Dividends to shareholders from net investment income (1,843,435)
Distributions to shareholders from net realized gains
from investment transactions (22,588)
Distribution to shareholders in excess of net realized
gains (139)
Change in net assets derived from investment activities 505,596
FROM BENEFICIAL INTEREST TRANSACTIONS
Proceeds from sale of shares 43,276,260
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 8,890
43,285,150
Cost of shares redeemed (1,231,462)
Change in net assets from beneficial interest
transactions 42,053,688
NET INCREASE IN NET ASSETS 42,559,284
NET ASSETS:
Beginning of period 33,337(2)
End of period $42,592,621
(1) Fund commenced operations April 3, 1995.
(2) Initial Capitalization.
See Notes to Financial Statements.
<PAGE>
KENNEBEC CALIFORNIA TAX-FREE FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest
outstanding throughout the period indicated:
<TABLE>
<CAPTION>
For the Period Ended
March 31, 1996 (1)
--------------------
<S> <C>
Net asset value - beginning of period $12.00
Income from investment operations
Net investment income 0.58
Net realized and unrealized gain from investment transactions 0.20
Total income from investment operations 0.78
Dividends and distributions to shareholders
Dividends from net investment income (0.58)
Distributions to shareholders from net realized gains from
investment transactions (0.01)
Total dividends and distributions (0.59)
Net asset value - end of period $12.19
Total return 6.60%(2)
Ratios/Supplemental Data:
Net assets, end of period (000) $42,593
Ratio of expenses to average net assets 0.83%(3)
Ratio of net investment income to average net assets 4.83%(3)
Ratio of expenses to average net assets without fee waivers 1.16%(3)
Ratio of net investment income to average net assets without fee waivers 4.51%(3)
Portfolio turnover rate (4) 93.90%(3)
</TABLE>
(1) Fund commenced operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding
securities with maturity dates 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 $77,782,488 and $36,252,475, respectively.
See Notes to Financial Statements.
<PAGE>
KENNEBEC EQUITY VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at value (cost-$31,138,395) $36,310,213
Cash 928
Receivables:
Investments sold 120,101
Dividend 77,464
Organizational costs, net of accumulated amortization 32,150
Prepaid expenses 1,116
Total Assets 36,541,972
LIABILITIES
Payables:
Investments purchased 143,400
Investment advisory fee 30,376
Administration 9,650
Other 32,578
Total Liabilities 216,004
NET ASSETS $36,325,968
COMPOSITION OF NET ASSETS
Paid-in capital $30,441,746
Distributions in excess of net investment income (4,471)
Accumulated net realized gain from investment transactions 716,875
Net unrealized appreciation of investments 5,171,818
NET ASSETS $36,325,968
Shares of beneficial interest outstanding 2,434,083
Net asset value, offering, and redemption price per share $14.92
</TABLE>
See Notes to Financial Statements.
<PAGE>
KENNEBEC EQUITY VALUE FUND
STATEMENT OF INVESTMENTS
March 31, 1996
Shares Market Value*
- ------ -------------
COMMON STOCKS 91.87%
CONSUMER CYCLICALS 9.72%
34,500 Dillard Department Stores $ 1,194,563
15,000 J.C. Penney Company Inc 746,250
12,200 May Department Stores 588,650
35,000 Rhodes Inc** 332,500
25,500 Waban Inc** 669,375
3,531,338
CONSUMER STAPLES 11.43%
36,200 American Stores Co 1,194,600
10,000 Eckerd Corp** 481,250
31,500 Kroger Co** 1,275,750
13,700 Philip Morris Companies Inc 1,202,175
4,153,775
SERVICES 7.24%
5,000 AMR Corp** 447,500
8,000 CSX Corp 365,000
13,500 Illinois Central Corp 384,750
15,000 Royal Caribbean Cruises Ltd** 365,625
39,100 Ryder System Inc 1,065,475
2,628,350
HEALTH CARE 2.36%
10,000 Bristol-Myers Squibb Co 856,250
856,250
BASIC INDUSTRY 8.41%
6,500 Aluminum Co of America 407,062
11,000 Inco Ltd 347,875
10,000 International Paper Co 393,750
6,000 Phelps Dodge Corp 411,750
15,000 PPG Industries 733,125
7,000 Reynolds Metals Co 413,875
10,000 USX - US Steel 346,250
3,053,687
MANUFACTURING 10.02%
11,500 Dana Corp 383,812
28,000 Echlin Inc 1,015,000
9,000 Magna International 415,125
17,000 Mark IV Industries 374,000
26,000 Tenneco Inc
1,452,750
TECHNOLOGY 7.66%
16,000 Gateway 2000 Inc** 446,000
14,000 International Business Machines 1,555,750
7,000 Seagate Technology** 383,250
11,000 SGS Thomson Microelectronics** 398,750
2,783,750
<PAGE>
KENNEBEC EQUITY VALUE FUND
STATEMENT OF INVESTMENTS (CONTINUED)
March 31, 1996
Shares Market Value*
- ------ ------------
ENERGY 9.36%
19,500 Nuevo Energy Co** 560,625
36,000 Repsol S.A.- ADR 1,345,500
20,000 Stone Energy** 335,000
36,000 Swift Energy Co** 472,500
34,600 Union Texas Petroleum Holdings 683,350
3,396,975
FINANCE 13.68%
20,000 Allmerica Property & Casualty 525,000
19,264 Allstate Corp 811,496
10,000 BankAmerica Corp 775,000
20,000 Chemical Banking Corp 1,410,000
10,000 Citicorp 800,000
8,100 NationsBank Corp 649,013
4,970,509
UTILITIES/REITS 11.99%
37,000 Boston Edison Co 999,000
16,500 DTE Energy 554,812
16,700 Entergy Corp 467,600
45,000 Equity Inns Inc 573,750
15,000 Reckson Associates Realty Corp 459,375
18,400 Trinet Corporate Realty Trust 529,000
51,000 Westcoast Energy Inc 771,375
4,354,912
TOTAL COMMON STOCKS
(Cost $28,198,415) 33,370,233
REPURCHASE AGREEMENT
COLLATERALIZED BY U.S.
GOVERNMENT OBLIGATIONS 8.09%
$2,939,000 Repurchase agreement with State Street
Bank & Trust Company, 4.00%, dated
3/29/96 and maturing 4/1/96,
collateralized by U.S. Treasury
Bonds, 11.25%, due 2/15/15 with a
value of $3,003,150 (Cost $2,939,980) $ 2,939,980
TOTAL INVESTMENTS
(Cost $31,138,395) 99.96% $36,310,213
Other Assets in Excess of Liabilities 0.04% 15,755
NET ASSETS 100.00% $36,325,968
* See Note 1 to Financial Statements
** Denotes non-income producing security.
<PAGE>
KENNEBEC EQUITY VALUE FUND
STATEMENT OF OPERATIONS
For the Period Ended March 31, 1996 (1)
INVESTMENT INCOME
Dividends $ 557,852
Interest 268,353
Total Investment Income $ 826,205
EXPENSES
Investment advisory fee 255,969
Administration 51,142
Fund accounting 28,538
Legal 8,566
Audit 18,118
Custodian 16,371
Amortization of organization costs 6,380
Transfer agency 15,016
Printing 2,140
Insurance 3,643
Registration 10,877
Trustees fee 2,728
Other 4,010
Total Expenses 423,498
Expenses waived by:
Investment adviser (6,226)
Administrator (21,668)
Net Expenses 395,604
NET INVESTMENT INCOME 430,601
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 716,875
Unrealized appreciation of investments:
Beginning of period 0
End of period 5,171,818
Net change in unrealized appreciation 5,171,818
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 5,888,693
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,319,294
(1) Fund began operations April 3, 1995.
See Notes to Financial Statements.
<PAGE>
KENNEBEC EQUITY VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended March 31, 1996 (1)
FROM INVESTMENT ACTIVITIES
Net investment income $ 430,601
Net realized gain from investment transactions 716,875
Net change in unrealized appreciation 5,171,818
Net increase in net assets resulting from operations 6,319,294
Dividends to shareholders from net investment income (430,601)
Distributions to shareholders in excess of net investment income (4,471)
Change in net assets derived from investment activities 5,884,222
FROM BENEFICIAL INTEREST TRANSACTIONS
Proceeds from sale of shares 31,921,516
Net asset value of shares issued to shareholders from
reinvestment of dividends and distributions 38,478
31,959,994
Cost of shares redeemed (1,551,574)
Change in net assets from beneficial interest transactions 30,408,420
NET INCREASE IN NET ASSETS 36,292,642
NET ASSETS:
Beginning of period 33,326(2)
End of period $36,325,968
(1) Fund began operations April 3, 1995.
(2) Initial Capitalization.
See Notes to Financial Statements.
<PAGE>
KENNEBEC EQUITY VALUE FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest
outstanding throughout the period indicated:
For the Period Ended
March 31, 1996 (1)
--------------------
Net asset value - beginning of period $ 12.00
Income from investment operations
Net investment income 0.21
Net realized and unrealized gain on investments 2.92
Total income from investment operations 3.13
Dividends to shareholders from net investment income (0.21)
Net asset value - end of period $ 14.92
Total return 26.31%(2)
Ratios/Supplemental Data:
Net assets, end of period (000) $ 36,326
Ratio of expenses to average net assets 1.55%(3)
Ratio of net investment income to average net assets 1.68%(3)
Ratio of expenses to average net assets without fee waivers 1.66%(3)
Ratio of net investment income to average net assets
without fee waivers 1.57%(3)
Portfolio turnover rate (4) 62.76%(3)
(1) Fund began operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) A portfolio turnover rate is, in general, the percentage computed by taking
the lesser of purchases or sales of portfolio securities (excluding
securities with maturity dates 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 $41,033,391 and $ 13,551,837,
respectively.
See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Kennebec Funds Trust (the "Trust"), a Delaware business trust was
organized on January 6, 1995. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end management
investment company. The Trust offers three series of shares - Kennebec U.S.
Government Fund, Kennebec California Tax-Free Fund, and Kennebec Equity Value
Fund (the "Funds"). The Funds commenced investment operations on April 3,
1995. The assets for each series are segregated and accounted for separately.
The Funds, for book and tax purposes, have a fiscal year-end of March 31,
1996.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by each Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. The actual results could differ from those
estimates.
a. INVESTMENT VALUATION: Marketable securities are valued at the last
sales price on the principal exchange or market on which they are traded; or,
if there were no sales that day, the closing bid prices are used. Securities
for which market quotations are not readily available are valued at their
fair market value as determined in good faith by or under the direction of
the Board of Trustees. Short-term securities having a remaining maturity of
60 days or less are valued at amortized cost which approximates market value.
b. REPURCHASE AGREEMENTS: Repurchase agreements are fully collateralized
by U.S. government securities. All collateral is held by the Trust's
custodian and is monitored daily to ensure that the collateral's market value
equals at least 100% of the repurchase price under the agreement. However, in
the event of default or bankruptcy by the counterparty to the agreement,
realization and/or retention of the collateral may be subject to legal
proceeding. Each Fund's policy is to limit repurchase agreement transactions
to those parties deemed by the Fund's Investment Adviser to have satisfactory
creditworthiness.
c. FEDERAL INCOME TAXES: The Funds have made no provision for federal
income tax for the period ended March 31, 1996. The Funds intend to
distribute to shareholders all taxable investment income and realized gains
and otherwise comply with the Internal Revenue Code applicable to regulated
investment companies.
d. SECURITIES TRANSACTIONS: Securities transactions are accounted for
on the date the securities are purchased or sold (trade date).
e. ORGANIZATION COSTS: Each of the Funds have deferred certain
organizational costs of $38,529. Such costs are being amortized over a 60
month period from the commencement of operations.
f. INVESTMENT INCOME: Dividend income is recorded on the ex-dividend
date. Interest income, which includes amortization of premium and accretion
of discount, is accrued and recorded daily.
g. Dividends, Distributions and Expenses: The Kennebec Equity Value
Fund will distribute net investment income quarterly. The Kennebec U.S.
Government Fund and Kennebec California Tax-Free Fund will declare and pay
dividends from net investment income daily and monthly, respectively.
Distributions of net realized gains, if any, are declared at least once a
year. Each Fund bears expenses incurred specifically on its behalf as well as
a portion of general expenses.
h. Capital Accounts: The Funds follow the provisions of the AICPA's
Statement of Position 93-2 "Determination, Disclosure and Financial
Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies" ("SOP").The purpose of this SOP is to
report undistributed net investment income and accumulated net realized gain
or loss in such a manner as to approximate amounts available for future
distributions to shareholders, if any.
NOTE 2 - SHARES OF BENEFICIAL INTEREST
On March 31, 1996 there was an unlimited number of no par value shares of
beneficial interest authorized. Transactions in shares of beneficial interest
for the period April 3, 1995 to March 31, 1996 were as follows:
KENNEBEC KENNEBEC KENNEBEC
U.S. GOVERNMENT CALIFORNIA TAX-FREE EQUITY VALUE
FUND FUND FUND
SHARES SOLD 2,107,816 3,592,659 2,535,361
SHARES REINVESTED 1,396 723 2,800
TOTAL 2,109,212 3,593,382 2,538,161
SHARES REDEEMED (563,399) (100,630) (104,078)
NET INCREASE 1,545,813 3,492,752 2,434,083
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENT ADVISORY FEES, ADMINISTRATION FEES AND OTHER RELATED PARTY
TRANSACTIONS
Each Fund entered into an Investment Advisory Agreement with Kennebec
Capital Management, Inc. ("Investment Adviser"). Pursuant to its advisory
agreement with the Funds, the Investment Adviser is entitled to an advisory
fee, computed daily and payable monthly at an annual rate of .60%, .60% and
1.00% of the average net assets for the Kennebec U.S. Government Fund,
Kennebec California Tax-Free Fund and Kennebec Equity Value Fund,
respectively. Kennebec Capital Management, Inc. voluntarily waived a portion
of its advisory fee for the period ended March 31, 1996. Mr. Harley K.
Sefton, President and CEO of the Investment Adviser, is responsible for the
day to day management of the Funds. As of March 31, 1996, affiliates of the
Funds own 97%, 94% and 96% of the Kennebec U.S. Government, Kennebec
California Tax-Free and Kennebec Equity Value Funds' shares outstanding,
respectively.
Each Fund entered into an Administrative Services Contract with Furman
Selz at the inception of the Funds. On August 13, 1995, Furman Selz resigned
as Administrator and each of the Funds entered into an Administrative
Services Contract with ALPS Mutual Funds Services, Inc. ("ALPS") which has
provided administrative services through March 31, 1996. The Administrator
is entitled to receive a fee from the Funds for its services computed daily
and payable monthly, at an annual rate of .20% of each Fund's average daily
net assets. Both Furman Selz and ALPS voluntarily waived a portion of the
administration fees for the period April 3, 1995 through August 13, 1995 and
August 14, 1995 through March 31, 1996, respectively. Furman Selz and ALPS,
as Administrators for the relevant periods, assisted in each of the
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund's administration and operations, including providing office space and
various legal and accounting services in connection with the regulatory
requirements applicable to each Fund.
Certain Trustees and officers of the Funds are also Members and/or
officers of Kennebec Capital Management, Inc., and ALPS Mutual Funds
Services, Inc. All affiliated and access persons, as defined in the 1940 Act,
follow strict guidelines and policies on personal trading as outlined in the
Trust's Code of Ethics.
Trustees and officers of the Funds who are affiliated persons receive no
compensation from the Funds. Trustees who are not interested persons of the
Trust, as defined in the 1940 Act, collectively received compensation and
reimbursement of expenses of $1,953, $3,295 and $2,728 from the Kennebec U.S.
Government Fund, Kennebec California Tax-Free Fund and Kennebec Equity Value
Fund, respectively, for the period ended March 31, 1996.
NOTE 4 - UNREALIZED GAINS AND LOSSES ON INVESTMENTS
As of March 31, 1996:
<TABLE>
Kennebec Kennebec Kennebec
U.S. Government California Equity
Fund Tax-Free Fund Value Fund
--------------- ------------- ----------
<S> <C> <C> <C>
Gross Appreciation (excess of value over cost) $459,261 $ 616,536 $5,187,578
Gross Depreciation (excess of cost over value) (77,795) (110,801) (15,760)
Net Unrealized Appreciation $381,466 $ 505,735 $5,171,818
</TABLE>
SHAREHOLDER TAX INFORMATION (UNAUDITED)
Certain tax information regarding the Kennebec Funds Trust is required to
be provided to shareholders based upon each Fund's income and distribution
for the taxable year ended March 31, 1996. The information and distributions
reported herein may differ from the information and distributions taxable to
the shareholders for the calendar year ended December 31, 1995.
During the fiscal year ended March 31, 1996, 98% of the dividends paid by
the Kennebec California Tax-Free Fund from net investment income should be
treated as tax-exempt dividends and 37% of the dividends paid by the Kennebec
Equity Value Fund from net investment income qualify for the corporate
dividends received deduction.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of Kennebec Funds Trust
In our opinion, the accompanying statements of assets and liabilities,
including the statements of investments, and the related statements of
operations and of changes in net assets and financial highlights, present
fairly, in all material respects, the financial position of Kennebec U.S.
Government Fund, Kennebec California Tax-Free Fund and Kennebec Equity Value
Fund (constituting the Kennebec Funds Trust, hereafter referred to as the
"Trust"), at March 31, 1996, the results of each of their operations, the
changes in each of their net assets and the financial highlights for the
period April 3, 1995 (commencement of investment operations) through March
31, 1996, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trusts' management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at March 31, 1996 by correspondence with the
custodian and the application of alternative auditing procedures for
unsettled security transactions, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Denver, Colorado
April 29, 1996
<PAGE>
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) (1) Financial Statements included in Part A of this Registration
Statement: Financial Highlights for the Period ended March
31, 1996
(2) Financial Statements included in Part B of this Registration
Statement: Statement of Assets and Liabilities, Statement of
Investments, Statement of Operations, Statement of Changes
in Net Assets, Financial Highlights and Notes to Financial
Statements as of and for the Period ended March 31, 1996
(b) EXHIBITS
(1)(a) Trust Instrument
(1)(b) Amendment to Trust Instrument dated July 10, 1996.
* (2) (a) Bylaws of Registrant.
(3) None.
(4) None.
* (5) (a) Form of Master Investment Advisory Contract and Supplements
between Registrant and Sefton Capital Management (formerly
Kennebec Capital Management, Inc.)
** (5) (b) Form of Master Administration Contract and Supplements between
Registrant and ALPS Mutual Funds Services, Inc.
** (6) Form of Master Distribution Contract and Supplements between
Registrant and ALPS Mutual Funds Services, Inc.
(7) None.
** (8) Form of Custodian Contract between Registrant and State Street
Bank and Trust Company.
<PAGE>
** (9) (a) Form of Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company.
** (9) (b) Form of Accounting Agent Contract between between Registrant
and ALPS Mutual Funds Services, Inc.
(10) Opinion & Consent of Baker & McKenzie, counsel to Registrant.
(11) Consent of Independent Accountants.
(12) None.
*** (13) Subscription Agreement.
(14) None.
(15) None.
(16) Schedule of Computation of Performance Calculation.
(a) U.S. Government Fund
(b) California Tax-Free Fund
(c) Equity Value Fund
(18) None.
(27) Financial Data Schedule.
(a) U.S. Government Fund
(b) California Tax-Free Fund
(c) Equity Value Fund
Other Exhibits
** (a) Power of Attorney.
__________________
* Filed with original Registration Statement on January 13, 1995.
** Filed with Post-Effective Amendment No. 1 to Registrant's Registration
Statement on November 2, 1995.
*** Filed with Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on March 20, 1995.
-2-
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of April 30, 1996
U.S. Government Fund 22
California Tax-Free Fund 20
Equity Value Fund 64
Item 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act
of 1940 (the "1940 Act") and pursuant to Article X of the Registrant's Trust
Instrument (Exhibit 1(a) to this Registration Statement), and Section 4 of the
Master Investment Advisory Contract and Supplements (Exhibit 5 (a) to the
Registration Statement), officers, trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its
officers and trustees against liabilities, and certain costs of defending
claims against such officers and trustees, to the extent such officers and
trustees are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the
Registrant against the cost of indemnification payments to officers under
certain circumstances.
Section 4 of the Master Investment Advisory Contract (Exhibit 5(a)
to the
-3-
<PAGE>
Registration Statement) and Section 3 of the Master Administration Contract
(Exhibit 5(b) to the Registration Statement) and Section 10 of the Master
Distribution Contract (Exhibit 6 to this Registration Statement) limit the
liability of Sefton Capital Management and ALPS Mutual Funds Services, Inc.,
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the
indemnification provisions of its Declaration of Trust, By-Laws, Master
Investment Advisory Contract and Master Distribution Contract in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretations of Section 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Sefton Capital Management provides investment advisory services to
the Funds pursuant to an Advisory Agreement with the Trust. The
adviser was formed in 1994.
The executive officers and directors of Sefton Capital Management
and such executive officers and directors' positions during the past
2 years are as follows:
Name and Position Other Businesses
----------------- ----------------
Harley Sefton, President and President, First Interstate
Chief Executive Officer Capital Management, Inc.
and San Diego Financial
Capital Management, Inc.
Ted Piorkowski, Vice President and Vice President and Portfolio
Portfolio Manager Manager, First Interstate Capital
Management
Lorraine Aulani Capossere, Assistant Vice President and
Vice President and Chief Operations Manager, First
Operating Officer Interstate Capital Management,
Inc.
Jennifer Jones Sefton, Senior Accountant, Steres,
Vice President and Chief Alpert & Carne
Financial Officer
Thomas Charles Bowden, Vice President and Portfolio
Vice President and Portfolio Manager, First Interstate Captial
Manager Management, Inc.
-4-
<PAGE>
Leif Otto Sanchez, Vice President Vice President and Portfolio
and Portfolio Manager Manager, First Interstate Capital
Management, Inc.
Item 29. PRINCIPAL UNDERWRITER
(a) ALPS Mutual Funds Services, Inc. acts as Distributor/Underwriter
for various other unrelated registered investment companies.
(b) Officers and Directors
Name and Principal Positions and Offices Positions and Offices
Business Address* with Registrant with Underwriter
- ------------------------ ----------------------- ---------------------
W. Robert Alexander Trustee Chairman and Chief
Executive Officer
Arthur J. L. Lucey None President and Secretary
Mark A. Pougnet Assistant Treasurer and Chief Financial Officer
Assistant Secretary
William N. Paston Vice President and Vice President
Treasurer
Ned Burke None Senior Vice President
James V. Hyatt None General Counsel
John W. Hannon, Jr. None Director
Rick A. Pederson None Director
Asa W. Smith None Director
W. Gordon Hobgood, Jr. None Director
Steve J. Bettcher None Director
<PAGE>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Registrant with Underwriter
- ------------------------ ----------------------- ---------------------
Mary Anstine None Director
Chris Woessner None Director
____________________________________________________________________________
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder are maintained at the offices of ALPS Mutual Funds Services,
Inc., 370 Seventeenth Street, Suite 2700, Denver, Colorado 80202
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS.
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the removal of a trustee if requested to
do so by the holders of at least 10% of the Registrant's
outstanding shares.
(b) Registrant undertakes to provide the support to shareholders
specified in Section 16(c) of the 1940 Act as though that section
applied to the Registrant.
(c) Registrant undertakes to furnish to each person to whom a
prospectus is delivered, a copy of the Registrant's latest annual
report to Shareholders upon request and without charge.
-6-
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness for this registration statement pursuant
to rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 4 of its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Denver, and State of Colorado, on July 12, 1996.
SEFTON FUNDS TRUST (Registrant)
By: /s/ WILLIAM N. PASTON
---------------------------------
William N. Paston
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
HARLEY K. SEFTON* Chairman and President July 12, 1996
- -----------------------------
Harley K. Sefton
GRACE EVANS CHERASHORE* Trustee July 12, 1996
- -----------------------------
Grace Evans Cherashore
GORDON T. FROST, JR. * Trustee July 12, 1996
- -----------------------------
Gordon T. Frost, Jr.
W. ROBERT ALEXANDER* Trustee July 12, 1996
- -----------------------------
W. Robert Alexander
/s/ WILLIAM N. PASTON Vice President and Treasurer July 12, 1996
- ----------------------------- (Principal Financial Officer
William N. Paston
/s/ WILLIAM N. PASTON
- -----------------------------
William N. Paston
Attorney-in-fact
__________________
* Pursuant to Power of Attorney filed with Pre-effective Amendment No. 1 dated
November 2, 1995.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -----------------------------------------------------------------------------
EXHIBITS
to
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
- ------------------------------------------------------------------------------
SEFTON FUNDS TRUST
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------- --------
(1) (a) Trust Instrument
(1) (b) Amendment to Trust Instrument.
(10) Opinion and Consent of Baker & McKenzie, counsel to Registrant.
(11) Consent of Independent Accountants.
(16) Schedule of Computation of Performance Calculation.
(a) U.S. Government Fund
(b) California Tax-Free Fund
(c) Equity Value Fund
(18) None
(27) Financial Data Schedule
(a) U.S. Government Fund
(b) California Tax-Free Fund
(c) Equity Value Fund
-9-
<PAGE>
EXHIBIT (1)(a)
KENNEBEC FUNDS TRUST
TRUST INSTRUMENT
DATED JANUARY 6, 1995
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I -- NAME AND DEFINITIONS ................................... 1
Section 1.01 Name ............................................ 1
Section 1.02 Definitions ..................................... 2
ARTICLE II -- BENEFICIAL INTEREST .................................... 4
Section 2.01 Shares of Beneficial Interest ................... 4
Section 2.02 Issuance of Shares .............................. 5
Section 2.03 Register of Shares and Share Certificates ....... 6
Section 2.04 Transfer of Shares .............................. 7
Section 2.05 Treasury Shares ................................. 8
Section 2.06 Establishment of Series ......................... 8
Section 2.07 Investment in the Trust ......................... 10
Section 2.08 Assets and Liabilities of Series ................ 10
Section 2.09 No Preemptive Rights ............................ 13
Section 2.10 Personal Liability of Shareholders .............. 13
Section 2.11 Assent to Trust Instrument ...................... 14
ARTICLE III -- THE TRUSTEES ......................................... 14
Section 3.01 Management of the Trust ......................... 14
Section 3.02 Initial Trustees ................................ 16
Section 3.03 Term of Office of Trustees ...................... 16
Section 3.04 Vacancies and Appointment of Trustees ........... 17
Section 3.05 Temporary Absence of Trustee .................... 18
Section 3.06 Number of Trustees .............................. 18
Section 3.07 Effect of Death, Resignation, etc. of a
Trustee ......................................... 19
Section 3.08 Ownership of Assets of the Trust ................ 19
-i-
<PAGE>
TABLE OF CONTENTS (cont'd.)
PAGE
----
ARTICLE IV -- POWERS OF THE TRUSTEES ............................... 20
Section 4.01 Powers ......................................... 20
Section 4.02 Issuance and Repurchase of Shares .............. 27
Section 4.03 Trustees and Officers as Shareholders .......... 27
Section 4.04 Action By The Trustees ......................... 28
Section 4.05 Chairman of the Trustees ....................... 29
Section 4.06 Principal Transactions ......................... 29
ARTICLE V -- EXPENSES OF THE TRUST ................................ 30
Section 5.01 Trustee Reimbursement .......................... 30
ARTICLE VI -- INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND
TRANSFER AGENT ....................................... 31
Section 6.01 Investment Adviser ............................. 31
Section 6.02 Principal Underwriter .......................... 33
Section 6.03 Transfer Agent ................................. 33
Section 6.04 Parties to Contract............................. 34
Section 6.05 Provisions and Amendments ...................... 35
ARTICLE VII - SHAREHOLDERS' VOTING POWER AND MEETINGS............... 35
Section 7.01 Voting Powers................................... 35
Section 7.02 Meetings........................................ 37
Section 7.03 Quorum and Required Vote........................ 38
ARTICLE VIII - CUSTODIAN............................................. 39
Section 8.01 Appointment and Duties.......................... 39
Section 8.02 Central Certificate System...................... 41
-ii-
<PAGE>
TABLE OF CONTENTS (cont'd.)
PAGE
----
ARTICLE IX - DISTRIBUTIONS AND REDEMPTIONS........................... 42
Section 9.01 Distributions................................... 42
Section 9.02 Redemptions..................................... 43
Section 9.03 Determination of Net Asset Value and Valuation
of Portfolio Assets............................. 44
Section 9.04 Suspension of the Right of Redemption........... 46
Section 9.05 Redemption of Shares in Order to Qualify as
Regulated Investment Company.................... 46
ARTICLE X - LIMITATION OF LIABILITY AND INDEMNIFICATION.............. 48
Section 10.01 Limitation of Liability......................... 48
Section 10.02 Indemnification................................. 49
Section 10.03 Shareholders.................................... 52
ARTICLE XI - MISCELLANEOUS .......................................... 53
Section 11.01 Trust Not a Partnership ........................ 53
Section 11.02 Trustee's Good Faith Action, Expert Advice,
No Bond or Surety............................... 54
Section 11.03 Establishment of Record Dates................... 54
Section 11.04 Termination of Trust............................ 55
Section 11.05 Reorganization ................................. 57
Section 11.06 Filing of Copies, References, Headings.......... 58
Section 11.07 Applicable Law.................................. 59
Section 11.08 Amendments...................................... 61
Section 11.09 Fiscal Year..................................... 61
Section 11.10 Provisions in Conflict with Law................. 62
-iii-
<PAGE>
KENNEBEC FUNDS TRUST
DATED JANUARY 6, 1995
TRUST INSTRUMENT, made January 6, 1995 by Gordon Forrester (the
"Trustees").
WHEREAS, the Trustees desire to establish a business trust for the
investment and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust hereunder shall be held and managed in trust under
this Trust Instrument as herein set forth below.
ARTICLE I
NAME AND DEFINITIONS
NAME
<PAGE>
SECTION 1.01. The name of the trust created hereby is "Kennebec Funds
Trust".
DEFINITIONS.
SECTION 1.02. Wherever used herein, unless otherwise required by the
context or specifically provided:
(a) "Bylaws" means the Bylaws referred to in Article IV, Section 4.01(e)
hereof, as from time to time amended;
(b) The term "Commission" has the meaning given it in the 1940 Act (as
defined below). The terms "Affiliated Person", "Assignment", "Interested
Person" and "Principal Underwriter" shall have the meanings given them in the
1940 Act, as modified by or interpreted by any applicable order or orders of
the Commission or any rules or regulations adopted or interpretive releases
of the Commission thereunder. "Majority Shareholder Vote" shall have the
same meaning as the term "vote of a majority of the outstanding voting
securities" is given in the 1940 Act, as modified by or interpreted by any
applicable order or orders of the Commission or any rules or regulations
adopted or interpretive releases of the Commission thereunder.
-3-
<PAGE>
(c) The "Delaware Act" refers to Chapter 38 of Title 12 of the Delaware
Code entitled "Treatment of Delaware Business Trusts," as it may be amended
from time to time.
(d) "Net Asset Value" means the net asset value of each Series (as
defined below) of the Trust determined in the manner provided in Article IX,
Section 9.03 hereof;
(e) "Outstanding Shares" means those Shares shown from time to time in
the books of the Trust or its Transfer Agent as then issued and outstanding,
but shall not include Shares which have been redeemed or repurchased by the
Trust and which are at the time held in the treasury of the Trust;
(f) "Series" means a series of Shares (as defined below) of the Trust
established in accordance with the provisions of Article II, Section 2.06
hereof.
(g) "Shareholder" means a record owner of Outstanding Shares of the
Trust;
(h) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust or class thereof
-4-
<PAGE>
shall be divided and may include fractions of Shares as well as whole Shares;
(i) The "Trust" refers to all Kennebec Funds Trust's Funds and reference
to a Fund, when applicable to one or more Series of the Trust, shall refer to
any such Series;
(j) The "Trustees" means the person or persons who has or have signed
this Trust Instrument, so long as he or they shall continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly qualified and serving as Trustees in accordance with the
provisions of Article III hereof and reference herein to a Trustee or to the
Trustees shall refer to the individual Trustees in their capacity as Trustees
hereunder;
(k) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one
or more of the Trust or any Series, or the Trustees on behalf of the Trust or
any Series.
(l) The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time.
-5-
<PAGE>
ARTICLE II
BENEFICIAL INTEREST
SHARES OF BENEFICIAL INTEREST
SECTION 2.01. The beneficial interest in the Trust shall be divided
into such transferable Shares of one or more separate and distinct Series or
classes of a Series as the Trustees shall from time to time create and
establish. The number of Shares of each Series, and class thereof, authorized
hereunder is unlimited. Each Share shall have a par value of $0.001. All
Shares issued hereunder, including without limitation, Shares issued in
connection with a dividend in Shares or a split or reverse split of Shares,
shall be fully paid and nonassessable.
ISSUANCE OF SHARES
SECTION 2.02. The Trustees in their discretion may, from time to
time, without vote of the Shareholders, issue Shares, in addition to the then
issued and outstanding Shares and Shares held in the treasury, to such party or
parties and for
-6-
<PAGE>
such amount and type of consideration, subject to applicable law, including
cash or securities, at such time or times and on such terms as the Trustees
may deem appropriate, and may in such manner acquire other assets (including
the acquisition of assets subject to, and in connection with, the assumption
of liabilities) and businesses. In connection with any issuance of Shares,
the Trustees may issue fractional Shares and Shares held in the treasury.
The Trustees may from time to time divide or combine the Shares into a
greater or lesser number without thereby changing the proportionate
beneficial interests in the Trust. Contributions to the Trust may be
accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000th
of a Share or integral multiples thereof.
REGISTER OF SHARES AND SHARE CERTIFICATES
SECTION 2.03. A register shall be kept at the principal office of the
Trust or an office of the Trust's transfer agent which shall contain the names
and addresses of the Shareholders of each Series, the number of Shares of that
Series (or any class or classes thereof) held by them respectively and a record
of all transfers thereof. As to Shares for which no certificate has been
issued, such register shall be conclusive as to who are the holders of the
Shares and who shall be entitled to
-7-
<PAGE>
receive dividends or other distributions or otherwise to exercise or enjoy
the rights of Shareholders. No Shareholder shall be entitled to receive
payment of any dividend or other distribution, nor to have notice given to
him as herein or in the Bylaws provided, until he has given his address to
the transfer agent or such other officer or agent of the Trustees as shall
keep the said registrar for entry thereon. The Trustees, in their
discretion, may authorize the issuance of share certificates and promulgate
appropriate rules and regulations as to their use. Such certificates may be
issuable for any purpose limited in the Trustees discretion. In the event
that one or more certificates are issued, whether in the name of a
shareholder or a nominee, such certificate or certificates shall constitute
evidence of ownership of Shares for all purposes, including transfer,
assignment or sale of such Shares, subject to such limitations as the
Trustees may, in their discretion, prescribe.
TRANSFER OF SHARES
SECTION 2.04. Except as otherwise provided by the Trustees, Shares
shall be transferable on the records of the Trust only by the record holder
thereof or by his agent thereunto duly authorized in writing, upon delivery to
the Trustees or the
-8-
<PAGE>
Trust's transfer agent of a duly executed instrument of transfer, together
with a Share certificate, if one is outstanding, and such evidence of the
genuineness of each such execution and authorization and of such other
matters as may be required by the Trustees. Upon such delivery the transfer
shall be recorded on the registrar of the Trust. Until such record is made,
the Shareholder of record shall be deemed to be the holder of such Shares for
all purposes hereunder and neither the Trustees nor the Trust, nor any
transfer agent or registrar nor any officer, employee or agent of the Trust
shall be affected by any notice of the proposed transfer.
TREASURY SHARES
SECTION 2.05. Shares held in the treasury shall, until reissued
pursuant to Section 2.02 hereof, not confer any voting rights on the Trustees,
nor shall such Shares be entitled to any dividends or other distributions
declared with respect to the Shares.
ESTABLISHMENT OF SERIES
SECTION 2.06. The Trust created hereby shall consist of one or more
Series and separate and distinct records shall be
-9-
<PAGE>
maintained by the Trust for each Series and the assets associated with any
such Series shall be held and accounted for separately from the assets of the
Trust or any other Series. The Trustees shall have full power and authority,
in their sole discretion, and without obtaining any prior authorization or
vote of the Shareholders of any Series of the Trust, to establish and
designate and to change in any manner such Series of Shares or any classes of
initial or additional Series and to fix such preferences, voting powers,
right and privileges of such Series or classes thereof as the Trustees may
from time to time determine, to divide and combine the Shares or any Series
or classes thereof into a greater or lesser number, to classify or reclassify
any issued Shares or any Series or classes thereof into one or more Series or
classes of Shares, and to take such other action with respect to the Shares
as the Trustees may deem desirable. The establishment and designation of any
Series shall be effective upon the adoption of a resolution by a majority of
the Trustees setting forth such establishment and designation and the
relative rights and preferences of the Shares of such Series. A Series may
issue any number of Shares and need not issue shares. At any time that there
are no Shares outstanding of any particular Series previously established and
designated, the Trustees may by a majority vote abolish that Series and the
establishment and designation thereof.
-10-
<PAGE>
All references to Shares in this Trust Instrument shall be deemed to be
Shares of any or all Series, or classes thereof, as the context may require.
All provisions herein relating to the Trust shall apply equally to each
Series of the Trust, and each class thereof, except as the context otherwise
requires.
Each Share of a Series of the Trust shall represent an equal
beneficial interest in the net assets of such Series. Each holder of Shares of
a Series shall be entitled to receive his pro rata share of distributions of
income and capital gains, if any, made with respect to such Series. Upon
redemption of his Shares, such Shareholder shall be paid solely out of the funds
and property of such Series of the Trust.
INVESTMENT IN THE TRUST
SECTION 2.07. The Trustees shall accept investments in any Series of
the Trust from such persons and on such terms as they may from time to time
authorize. At the Trustees' discretion, such investments, subject to applicable
law, may be in the form of cash or securities in which the affected Series is
authorized to invest, valued as provided in Article IX, Section 9.03 hereof.
Investments in a Series shall be credited to each Shareholder's account in the
form of full Shares at the Net Asset
-11-
<PAGE>
Value per Share next determined after the investment is received; provided,
however, that the Trustees may, in their sole discretion, (a) fix the Net
Asset Value per Share of the initial capital contribution, (b) impose a sales
charge upon investments in the Trust in such manner and at such time
determined by the Trustees or (c) issue fractional Shares.
ASSETS AND LIABILITIES OF SERIES
SECTION 2.08. All consideration received by the Trust for the issue
or sale of Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be held
and accounted for separately from the other assets of the Trust and of every
other Series and may be referred to herein as "assets belonging to" that Series.
The assets belonging to a particular Series shall belong to that Series for all
purposes, and to no other Series, subject only to the rights of creditors of
that Series. In addition, any assets, income, earnings, profits or funds, or
payments and proceeds with respect thereto, which are not readily identifiable
as belonging to any
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particular Series shall be allocated by the Trustees between and among one or
more of the Series in such manner as the Trustees, in their sole discretion,
deem fair and equitable. Each such allocation shall be conclusive and
binding upon the Shareholders of all Series for all purposes, and such
assets, income, earnings, profits or funds, or payments and proceeds with
respect thereto shall be assets belonging to that Series. The assets
belonging to a particular Series shall be so recorded upon the books of the
Trust, and shall be held by the Trustees in trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular
Series shall be charged with the liabilities of that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general
liabilities, expenses, costs, changes or reserves of the Trust which are not
readily identifiable as belonging to a particular Series shall be allocated
and changed by the Trustees belonging to any one or more of the Series in
such manner as the Trustees in their sole discretion deem fair and equitable.
Each such allocation shall be conclusive and binding upon the Shareholders
of all Series for all purposes. Without limitation of the foregoing
provisions of this Section 2.08, but subject to the right of the Trustees in
their discretion to allocate general liabilities, expenses, costs, charges or
reserves as herein provided, the debts, liabilities, obligations and expenses
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incurred, contracted for or otherwise existing with respect to a particular
Series shall be enforceable against the assets of such Series only, and not
against the assets of the Trust generally. Notice of this contractual
limitation on inter-Series liabilities may, in the Trustee's sole discretion,
be set forth in the certificate of trust of the Trust (whether originally or
by amendment) as filed or to be filed in the Office of the Secretary of State
of the State of Delaware pursuant to the Delaware Act, and upon the giving of
such notice in the certificate of trust, the statutory provisions of Section
3804 of the Delaware Act relating to limitations on inter-Series liabilities
(and the statutory effect under Section 3804 of setting forth such notice in
the certificate of trust) shall become applicable to the Trust and each
Series. Any person extending credit to, contracting with or having any claim
against any Series may look only to the assets of that Series to satisfy or
enforce any debt, liability, obligation or expense incurred, contracted for
or otherwise existing with respect to that Series. No Shareholder or former
Shareholder of any Series shall have a claim on or any right to any assets
allocated or belonging to any other Series.
NO PREEMPTIVE RIGHTS
SECTION 2.09. Shareholders shall have no preemptive or
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other right to subscribe to any additional Shares or other securities issued
by the Trust or the Trustees, whether of the same or other Series.
PERSONAL LIABILITY OF SHAREHOLDERS
SECTION 2.10. Each Shareholder of the Trust and of each Series shall
not be personally liable for the debts, liabilities, obligations and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
by or on behalf of any Series. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription for any Shares or
otherwise. Every note, bond, contract or other undertaking issued by or on
behalf of the Trust or the Trustees relating to the Trust or to a Series shall
include a recitation limiting the obligation represented thereby to the Trust or
to one or more Series and its or their assets (but the omission of such a
recitation shall not operate to bind any Shareholder or Trustee of the Trust).
ASSENT TO TRUST INSTRUMENT
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SECTION 2.11. Every Shareholder, by virtue of having purchased a Share
shall become a Shareholder and shall be held to have expressly assented and
agreed to be bound by the terms hereof.
ARTICLE III
THE TRUSTEES
MANAGEMENT OF THE TRUST
SECTION 3.01. The Trustees shall have exclusive and absolute control
over the Trust Property and over the business of the Trust to the same extent
as if the Trustees were the sole owners of the Trust Property and business in
their own right, but with such powers of delegation as may be permitted by
this Trust Instrument. The Trustees shall have power to conduct the business
of the Trust and carry on its operations in any and all of its branches and
maintain offices both within and without the State of Delaware, in any and
all states of the United States of America, in the District of Columbia, in
any and all commonwealths, territories, dependencies, colonies, or
possessions of the United States of America, and in any foreign jurisdiction
and to do all such other things and execute all such
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instruments as they deem necessary, proper or desirable in order to promote
the interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust
made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Trust Instrument, the presumption shall be in favor of a
grant of power to the Trustees.
The enumeration of any specific power in this Trust Instrument shall not
be construed as limiting the aforesaid power. The powers of the Trustees may
be exercised without order of or resort to any court.
Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 3.04 of this Article III, the Trustees shall be elected
by the Shareholders owning of record a plurality of the Shares voting at a
meeting of Shareholders. Such a meeting shall be held on a date fixed by the
Trustees. In the event that less than a majority of the Trustees holding
office have been elected by Shareholders, the Trustees then in office will
call a Shareholders' meeting for the election of Trustees.
INITIAL TRUSTEES
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SECTION 3.02. The initial Trustees shall be the persons named herein.
On a date fixed by the Trustees, the Shareholders shall elect at least one
but not more than twelve Trustees, as specified by the Trustees pursuant to
Section 3.06 of this Article III.
TERM OF OFFICE OF TRUSTEES
SECTION 3.03. The Trustees shall hold office during the lifetime of
this Trust, and until its termination as herein provided; except (a) that any
Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery
or upon such later date as is specified therein; (b) that any Trustee may be
removed at any time by written instrument, signed by at least two-thirds of
the number of Trustees prior to such removal, specifying the date when such
removal shall become effective; (c) that any Trustee who requests in writing
to be retired or who has died, become physically or mentally incapacitated by
reason of disease or otherwise, or is otherwise unable to serve, may be
retired by written instrument signed by a majority of the other Trustees,
specifying the date of his retirement; and (d) that a Trustee may be removed
at any meeting of the Shareholders of the Trust by a vote of Shareholders
owning at least two-thirds of the
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outstanding Shares.
VACANCIES AND APPOINTMENT OF TRUSTEES
SECTION 3.04. In case of the declination to serve, death, resignation,
retirement, removal, physical or mental incapacity by reason of disease or
otherwise, or a Trustee is otherwise unable to serve, or an increase in the
number of Trustees, a vacancy shall occur. Whenever a vacancy in the Board
of Trustees shall occur, until such vacancy is filled, the other Trustees
shall have all the powers hereunder and the certificate of the other Trustees
of such vacancy shall be conclusive. In the case of an existing vacancy, the
remaining Trustees shall fill such vacancy by appointing such other person as
they in their discretion shall see fit consistent with the limitations under
the 1940 Act. Such appointment shall be evidenced by a written instrument
signed by a majority of the Trustees in office or by resolution of the
Trustees, duly adopted, which shall be recorded in the minutes of a meeting
of the Trustees, whereupon the appointment shall take effect.
An appointment of a Trustee may be made by the Trustees then in office
in anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees
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effective at a later date, provided that said appointment shall become
effective only at or after the effective date of said retirement, resignation
or increase in number of Trustees. As soon as any Trustee appointed pursuant
to this Section 3.04 shall have accepted this trust, the trust estate shall
vest in the new Trustee or Trustees, together with the continuing Trustees,
without any further act or conveyance, and he shall be deemed a Trustee
hereunder. The power to appoint a Trustee pursuant to this Section 3.04 is
subject to the provisions of Section 16(a) of the 1940 Act.
TEMPORARY ABSENCE OF TRUSTEE
SECTION 3.05. Any Trustee may, by power of attorney, delegate his power
for a period not exceeding six months at any one time to any other Trustee or
Trustees, provided that in no case shall less than two Trustees personally
exercise the other powers hereunder except as herein otherwise expressly
provided.
NUMBER OF TRUSTEES
SECTION 3.06. The number of Trustees shall be at least one (1), and
thereafter shall be such number as shall be fixed from time to time by a
majority of the Trustees, provided,
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however, that the number of Trustees shall in no event be more than twelve
(12).
EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE
SECTION 3.07. The declination to serve, death, resignation, retirement,
removal, incapacity, or inability of the Trustees, or any one of them, shall
not operate to terminate the Trust or to revoke any existing agency created
pursuant to the terms of this Trust Instrument.
OWNERSHIP OF ASSETS OF THE TRUST
SECTION 3.08. The assets of the Trust and of each Series shall be held
separate and apart from any assets now or hereafter held in any capacity
other than as Trustee hereunder by the Trustees or any successor Trustees.
Legal title in all of the assets of the Trust and the right to conduct any
business shall at all times be considered as vested in the Trustees on behalf
of the Trust, except that the Trustees may cause legal title to any Trust
Property to be held by, or in the name of the Trust, or in the name of any
person as nominee. No Shareholder shall be deemed to have a severable
ownership in any individual asset of the Trust or of any Series or any right
of partition or
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possession thereof, but each Shareholder shall have, except as otherwise
provided for herein, a proportionate undivided beneficial interest in the
Trust or Series. The Shares shall be personal property giving only the
rights specifically set forth in this Trust Instrument.
ARTICLE IV
POWERS OF THE TRUSTEES
POWERS
SECTION 4.01. The Trustees in all instances shall act as principals,
and are and shall be free from the control of the Shareholders. The Trustees
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not in any way be bound or limited by present or future laws
or customs in regard to trust investments, but shall have full authority and
power to make any and all investments which they, in their sole discretion,
shall deem proper to accomplish the purpose of this Trust without recourse to
any court or other authority. Subject to any applicable limitation
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in this Trust Instrument or the Bylaws of the Trust, the Trustees shall have
power and authority:
(a) To invest and reinvest cash and other property, and to hold cash or
other property uninvested, without in any event being bound or limited by any
present or future law or custom in regard to investments by trustees, and to
sell, exchange, lend, pledge, mortgage, hypothecate, write options on and
lease any or all of the assets of the Trust;
(b) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations;
(c) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee,
or undertake the performance of an obligation or engagement of any other
Person and to lend Trust Property;
(d) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by
the Trust itself, or both, or
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otherwise pursuant to a plan of distribution of any kind;
(e) To adopt Bylaws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and
repeal them to the extent that they do not reserve that right to the
Shareholders; such Bylaws shall be deemed incorporated and included in this
Trust Instrument;
(f) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;
(g) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Trust Instrument or in the Bylaws;
(h) To retain one or more transfer agents and shareholder servicing
agents, or both;
(i) To set record dates in the manner provided herein or in the Bylaws;
(j) To delegate such authority as they consider
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desirable to any officers of the Trust and to any investment adviser,
manager, custodian, underwriter or other agent or independent contractor;
(k) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article IX, Section 11.04(b) hereof;
(l) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem
proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(m) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(n) To hold any security or property in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form;
or either in the name of the Trust or in the name of a custodian or a nominee
or nominees, subject in either case to proper safeguards according to the
usual practice
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of Delaware business trusts or investment companies;
(o) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes
of such Series having relative rights, powers and duties as they may provide
consistent with applicable law;
(p) Subject to the provisions of Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series
or to apportion the same between or among two or more Series, provided that
any liabilities or expenses incurred by a particular Series shall be payable
solely out of the assets belonging to that Series as provided for in Article
II hereof;
(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which
is held in the Trust; to consent to any contract, lease, mortgage, purchase,
or sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust;
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(r) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(s) To make distributions of income and of capital gains to Shareholders
in the manner hereinafter provided;
(t) To establish, from time to time, a minimum investment for Shareholders
in the Trust or in one or more Series or class, and to require the redemption
of the Shares of any Shareholders whose investment is less than such minimum
upon giving notice to such Shareholder;
(u) To establish one or more committees, to delegate any of the powers
of the Trustees to said committees and to adopt a committee charter providing
for such responsibilities, membership (including Trustees, officers or other
agents of the Trust therein) and any other characteristics of said committees
as the Trustees may deem proper. Notwithstanding the provisions of this
Article IV, and in addition to such provisions or any other provision of this
Trust Instrument or of the Bylaws, the Trustees may by resolution appoint a
committee consisting of less than the whole number of Trustees then in office,
which committee may be empowered to act for and bind the Trustees and the Trust,
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as if the acts of such committee were the acts of all the Trustees then in
office, with respect to the institution, prosecution, dismissal, settlement,
review or investigation of any action, suit or proceeding which shall be
pending or threatened to be brought before any court, administrative agency
or other adjudicatory body;
(v) To interpret the investment policies, practices or limitations of
any Series;
(w) To establish a registered office and have a registered agent in
the state of Delaware; and
(x) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and power,
and the foregoing enumeration of specific
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powers shall not be held to limit or restrict in any manner the general
powers of the Trustees. Any action by one or more of the Trustees in their
capacity as such hereunder shall be deemed an action on behalf of the Trust
or the applicable Series, and not an action in an individual capacity.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see to the
application of any payments made or property transferred to the Trustees or upon
their order.
ISSUANCE AND REPURCHASE OF SHARES
SECTION 4.02. The Trustees shall have the power to issue, sell,
repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of,
and otherwise deal in Shares and, subject to the provisions set forth in Article
II and Article IX, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the Trust, or the
particular Series of the Trust, with respect to
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which such Shares are issued.
TRUSTEES AND OFFICERS AS SHAREHOLDERS
SECTION 4.03. Any Trustee, officer or other agent of the Trust may
acquire, own and dispose of Shares to the same extent as if he were not a
Trustee, officer or agent; and the Trustees may issue and sell or cause to be
issued and sold Shares to and buy such Shares from any such person or any firm
or company in which he is interested, subject only to the general limitations
herein contained as to the sale and purchase of such Shares; and all subject to
any restrictions which may be contained in the Bylaws.
ACTION BY THE TRUSTEES
SECTION 4.04. The Trustees shall act by majority vote at a meeting
duly called or by unanimous written consent without a meeting or by telephone
meeting provided a quorum of Trustees participate in any such telephone
meeting, unless the 1940 Act requires that a particular action be taken only at
a meeting at which the Trustees are present in person. At any meeting of the
Trustees, a majority of the Trustees shall constitute a quorum. Meetings of the
Trustees may be called orally or in writing by
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the Chairman and/or Trustees or by any two other Trustees. Notice of the
time, date and place of all meetings of the Trustees shall be given by the
party calling the meeting to each Trustee by telephone, telefax, or telegram
sent to his home or business address at least twenty-four hours in advance of
the meeting or by written notice mailed to his home or business address at
least seventy-two hours in advance of the meeting. Notice need not be given
to any Trustee who attends the meeting without objecting to the lack of
notice or who executes a written waiver of notice with respect to the
meeting. Any meeting conducted by telephone shall be deemed to take place at
the principal office of the Trust, as determined by the Bylaws or by the
Trustees. Subject to the requirements of the 1940 Act, the Trustees by
majority vote may delegate to any one or more of their number their authority
to approve particular matters or take particular actions on behalf of the
Trust. Written consents or waivers of the Trustees may be executed in one or
more counterparts. Execution of a written consent or waiver and delivery
thereof to the Trust may be accomplished by telefax.
CHAIRMAN OF THE TRUSTEES
SECTION 4.05. The Trustees shall appoint one of their number to be
Chairman of the Board of Trustees. The Chairman
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shall preside at all meetings of the Trustees, shall be responsible for the
execution of policies established by the Trustees and the administration of
the Trust, and may be (but is not required to be) the chief executive,
financial and/or accounting officer of the Trust.
PRINCIPAL TRANSACTIONS
SECTION 4.06. Except to the extent prohibited by applicable law, the
Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustees or officer of
the Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with any investment adviser, distributor or
transfer agent for the Trust or with any Interested Person of such person; and
the Trust may employ any such person, or firm or company in which such person is
an Interested Person, as broker, legal counsel, registrar, investment adviser,
distributor, transfer agent, dividend disbursing agent, custodian or in any
other capacity upon customary terms.
ARTICLE V
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EXPENSES OF THE TRUST
TRUSTEE REIMBURSEMENT
SECTION 5.01. Subject to the provisions of Article II, Section 2.08
hereof, the Trustees shall be reimbursed from the Trust estate or the assets
belonging to the appropriate Series for their expenses and disbursement,
including, without limitation, fees and expenses of Trustees who are not
Interested Persons of the Trust, interest expense, taxes, fees and commissions
of every kind, expenses of pricing Trust portfolio securities, expenses of
issue, repurchase and redemption of shares, including expenses attributable to a
program of periodic repurchases or redemptions, expenses of registering and
qualifying the Trust and its Shares under Federal and State laws and regulations
or under the laws of any foreign jurisdiction, charges of third parties,
including investment advisers, managers, custodians, transfer agents, portfolio
accounting and/or pricing agents, and registrars, expenses of preparing and
setting up in type prospectuses and statements of additional information and
other related Trust documents, expenses of printing and distributing
prospectuses sent to existing Shareholders, auditing and legal expenses, reports
to Shareholders, expenses of meetings of Shareholders and proxy
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solicitations therefor, insurance expenses, association membership dues and
for such non-recurring items as may arise, including litigation to which the
Trust (or a Trustee acting as such) is a party, and for all losses and
liabilities by them incurred in administering the Trust, and for the payment
of such expenses, disbursements, losses and liabilities the Trustees shall
have a lien on the assets belonging to the appropriate Series, or in the case
of an expense allocable to more than one Series, on the assets of each such
Series, prior to any rights or interests of the Shareholders thereto. This
section shall not preclude the Trust from directly paying any of the
aforementioned fees and expenses.
ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
INVESTMENT ADVISER
SECTION 6.01. The Trustees may in their discretion, from time to
time, enter into an investment advisory or management contract or contracts with
respect to the Trust or any Series whereby the other party or parties to such
contract or contracts shall undertake to furnish the Trustees with such
management, investment advisory, statistical and research
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facilities and services and such other facilities and services, if any, and
all upon such terms and conditions, as the Trustees may in their discretion
determine; provided, however, that the initial approval and entering into of
such contract or contracts shall be subject to a Majority Shareholder Vote.
Notwithstanding any other provision of this Trust Instrument, the Trustees
may authorize any investment adviser (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities, other investment instruments of
the Trust, or other Trust Property on behalf of the Trustees, or may
authorize any officer, agent, or Trustee to effect such purchases, sales or
exchanges pursuant to recommendations of the investment adviser (and all
without further action by the Trustees). Any such purchases, sales and
exchanges shall be deemed to have been authorized by all of the Trustees.
The Trustees may authorize, subject to applicable requirements of the
1940 Act, including those relating to Shareholder approval, the investment
adviser to employ, from time to time, one or more sub-advisers to perform such
of the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and
sub-adviser. Any reference in this Trust Instrument to the
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investment adviser shall be deemed to include such sub-advisers, unless the
context otherwise requires.
PRINCIPAL UNDERWRITER
SECTION 6.02. The Trustees may in their discretion from time to time
enter into an exclusive or non-exclusive underwriting contract or contracts
providing for the sale of Shares, whereby the Trust may either agree to sell
Shares to the other party to the contract or appoint such other party its sales
agent for such Shares. In either case, the contract shall be on such terms and
conditions, if any, as may be prescribed in the Bylaws, and such further terms
and conditions as the Trustees may in their discretion determine not
inconsistent with the provisions of this Article VI, or of the Bylaws; and such
contract may also provide for the repurchase or sale of Shares by such other
party as principal or as agent of the Trust.
TRANSFER AGENT
SECTION 6.03. The Trustees may in their discretion from time to time
enter into one or more transfer agency and shareholder service contracts whereby
the other party or parties shall undertake to furnish the Trustees with transfer
agency and
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shareholder services. The contract or contracts shall be on such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the provisions of this Trust Instrument or of the Bylaws.
PARTIES TO CONTRACT
SECTION 6.04. Any contract of the character described in Sections
6.01, 6.02 and 6.03 of this Article VI or any contract of the character
described in Article VIII hereof may be entered into with any corporation, firm,
partnership, trust or association, although one or more of the Trustees or
officers of the Trust may be an officer, director, trustee, shareholder, or
member of such other party to the contract, and no such contract shall be
invalidated or rendered void or voidable by reason of the existence of any
relationship, nor shall any person holding such relationship be disqualified
from voting on or executing the same in his capacity as Shareholder and/or
Trustee, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article VI or Article VIII hereof or
of the Bylaws. The same
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person (including a firm, corporation, partnership, trust or association) may
be the other party to contracts entered into pursuant to Sections 6.01, 6.02
and 6.03 of this Article VI or pursuant to Article VIII hereof, and any
individual may be financially interested or otherwise affiliated with persons
who are parties to any or all of the contracts mentioned in this Section 6.04.
PROVISIONS AND AMENDMENTS
SECTION 6.05. Any contract entered into pursuant to Sections 6.01 or
6.02 of this Article VI shall be consistent with and subject to the requirements
of Section 15 of the 1940 Act or other applicable Act of Congress hereafter
enacted with respect to its continuance in effect, its termination, and the
method of authorization and approval of such contract or renewal thereof, and no
amendment to any contract, entered into pursuant to Section 6.01 of this Article
VI shall be effective unless assented to in a manner consistent with the
requirements of said Section 15, as modified by any applicable rule, regulation
or order of the Commission.
ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
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VOTING POWERS
SECTION 7.0l. The Shareholders shall have power to vote only (i) for
the election of Trustees as provided in Article III, Sections 3.01 and 3.02
hereof, (ii) for the removal of Trustees as provided in Article III, Section
3.03(d) hereof, (iii) with respect to any investment advisory or management
contract as provided in Article VI, Sections 6.01 and 6.05 hereof, and (iv)
with respect to such additional matters relating to the Trust as may be
required by law, by this Trust Instrument, or the Bylaws or any registration
of the Trust with the Commission or any State, or as the Trustees may
consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall
be voted separately by individual Series, except (i) when required by the
1940 Act, Shares shall be voted in the aggregate and not by individual
Series; and (ii) when the Trustees have determined that the matter affects
the interests of more than one Series, then the Shareholders of all such
Series shall be entitled to vote thereon. The Trustees may also determine
that a matter affects only the interests of one or more classes of a Series,
in which case any such matter shall be voted
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on by such class or classes. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote, and each fractional Share
shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person
or by proxy or in any manner provided for in the Bylaws. A proxy may be
given in writing. The Bylaws may provide that proxies may also, or may
instead, be given by any electronic or telecommunications device or in any
other manner. Notwithstanding anything else herein or in the Bylaws, in the
event a proposal by anyone other than the officers or Trustees of the Trust
is submitted to a vote of the Shareholders of one or more Series or of the
Trust, or in the event of any proxy contest or proxy solicitation or proposal
in opposition to any proposal by the officers or Trustees of the Trust,
Shares may be voted only in person or by written proxy. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required or permitted by law, this Trust Instrument or any of the
Bylaws of the Trust to be taken by Shareholders.
MEETINGS
SECTION 7.02. The first Shareholders' meeting shall be
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held in order to elect Trustees as specified in Section 3.02 of Article III
hereof at the principal office of the Trust or such other place as the
Trustees may designate. Meetings may be held within or without the State of
Delaware. Special meetings of the Shareholders of any Series may be called
by the Trustees and shall be called by the Trustees upon the written request
of Shareholders owning at least one-tenth of the Outstanding Shares entitled
to vote. Whenever ten or more Shareholders meeting the qualifications set
forth in Section 16(c) of the 1940 Act, as the same may be amended from time
to time, seek the opportunity of furnishing materials to the other
Shareholders with a view to obtaining signatures on such a request for a
meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record, subject to any rights provided to the Trust or any
Trustees provided by said Section 16(c). Notice shall be sent, by First
Class Mail or such other means determined by the Trustees, at least 15 days
prior to any such meeting.
QUORUM AND REQUIRED VOTE
SECTION 7.03. One-third of Shares entitled to vote in
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person or by proxy shall be a quorum for the transaction of business at a
Shareholders' meeting, except that where any provision of law or of this
Trust Instrument permits or requires that holders of any Series shall vote as
a Series (or that holders of a class shall vote as a class), then one-third
of the aggregate number of Shares of that Series (or that class) entitled to
vote shall be necessary to constitute a quorum for the transaction of
business by that Series (or that class). Any lesser number shall be
sufficient for adjournments. Any adjourned session or sessions may be held,
within a reasonable time after the date set for the original meeting, without
the necessity of further notice. Except when a larger vote is required by
law or by any provision of this Trust Instrument or the Bylaws, a majority of
the Shares voted in person or by proxy shall decide any questions and a
plurality shall elect a Trustee, provided that where any provision of law or
of this Trust Instrument permits or requires that the holders of any Series
shall vote as a Series (or that the holders of any class shall vote as a
class), then a majority of the Shares present in person or by proxy of that
Series or, if required by law, a Majority Shareholder Vote of that Series (or
class), voted on the matter in person or by proxy shall decide that matter
insofar as that Series (or class) is concerned. Shareholders may act by
unanimous written consent. Actions taken by Series (or class)
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may be consented to unanimously in writing by Shareholders of that Series.
ARTICLE VIII
CUSTODIAN
APPOINTMENT AND DUTIES
SECTION 8.0l. The Trustees shall at all times employ a bank, a company
that is a member of a national securities exchange, or a trust company, each
having capital, surplus and undivided profits of at least two million dollars
($2,000,000) as custodian with authority as its agent, but subject to such
restrictions, limitations and other requirements, if any, as may be contained
in the Bylaws of the Trust:
(1) to hold the securities owned by the Trust and deliver the same upon
written order or oral order confirmed in writing;
(2) to receive and receipt for any moneys due to the Trust and deposit
the same in its own banking
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department or elsewhere as the Trustees may direct; and
(3) to disburse such funds upon orders or vouchers;
and the Trust may also employ such custodian as its agent:
(4) to keep the books and accounts of the Trust or of any Series or
class and furnish clerical and accounting services; and
(5) to compute, if authorized to do so by the Trustees, the Net Asset
Value of any Series, or class thereof, in accordance with the
provisions hereof; all upon such basis of compensation as may be
agreed upon between the Trustees and the custodian.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian, and upon such terms and conditions, as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees,
provided that in every case such sub-custodian shall be a bank, a company
that is
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a member of a national securities exchange, or a trust company
organized under the laws of the United States or one of the states thereof
and having capital, surplus and undivided profits of at least two million
dollars ($2,000,000) or such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act.
CENTRAL CERTIFICATE SYSTEM
SECTION 8.02. Subject to such rules, regulations and orders as the
Commission may adopt, the Trustees may direct the custodian to deposit all or
any part of the securities owned by the Trust in a system for the central
handling of securities established by a national securities exchange or a
national securities association registered with the Commission under the
Securities Exchange Act of 1934, as amended, or such other person as may be
permitted by the Commission, or otherwise in accordance with the 1940 Act,
pursuant to which system all securities of any particular class or series of
any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal
only upon the order of the Trust or its custodians, subcustodians or other
agents.
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ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS
DISTRIBUTIONS
SECTION 9.0l.
(a) The Trustees may from time to time declare and pay dividends or
other distributions with respect to any Series. The amount of such dividends
or distributions and the payment of them and whether they are in cash or any
other Trust Property shall be wholly in the discretion of the Trustees.
(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other
distribution or among the Shareholders of record at such other date or time
or dates or times as the Trustees shall determine, which dividends or
distributions, at the election of the Trustees, may be paid pursuant to a
standing resolution or resolutions adopted only once or with such frequency
as the Trustees may determine. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plans, cash dividend payout plans or
related plans as the Trustees shall deem
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appropriate.
(c) Anything in this Trust Instrument to the contrary notwithstanding,
the Trustees may at any time declare and distribute a stock dividend pro rata
among the Shareholders of a particular Series, or class thereof, as of the
record date of that Series fixed as provided in Section (b) hereof.
REDEMPTIONS
SECTION 9.02. In case any holder of record of Shares of a particular
Series desires to dispose of his Shares or any portion thereof, he may
deposit at the office of the transfer agent or other authorized agent of that
Series a written request or such other form of request as the Trustees may
from time to time authorize, requesting that the Series purchase the shares
in accordance with this Section 9.02; and the Shareholder so requesting shall
be entitled to require the Series to purchase, and the Series or the
principal underwriter of the Series shall purchase his said Shares, but only
at the Net Asset Value thereof (as described in Section 9.03 of this Article
IX). The Series shall make payment for any shares to be redeemed, as
aforesaid, in cash or property from the assets of that Series and payment for
such Shares shall be made by the Series or the principal
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underwriter of the Series to the Shareholder of record within seven (7) days
after the date upon which the request is effective. Upon redemption, shares
shall become Treasury shares and may be re-issued from time to time.
DETERMINATION OF NET ASSET VALUE
AND VALUATION OF PORTFOLIO ASSETS
SECTION 9.03. The term "Net Asset Value" of any Series shall mean that
amount by which the assets of that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. Such value shall be
determined separately for each Series and shall be determined on such days
and at such times as the Trustees may determine. Such determination shall be
made with respect to securities for which market quotations are readily
available, at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Trustees; provided, however, that the Trustees, without Shareholder approval,
may alter the method of valuing portfolio securities insofar as permitted
under the 1940 Act and the rules, regulations and interpretations thereof
promulgated or issued by the Commission or insofar as permitted by any Order
of the Commission applicable to the Series. The Trustees may delegate any of
their powers and duties under this
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Section 9.03 with respect to valuation of assets and liabilities. The
resulting amount, which shall represent the total Net Asset Value of the
particular Series, shall be divided by the total number of shares of that
Series outstanding at the time and the quotient so obtained shall be the Net
Asset Value per Share of that Series. At any time the Trustees may cause the
Net Asset Value per Share last determined to be determined again in similar
manner and may fix the time when such redetermined value shall become
effective. If, for any reason, the net income of any Series determined at
any time, is a negative amount, the Trustees shall have the power with
respect to that Series (i) to offset each Shareholder's pro rata share of
such negative amount from the accrued dividend account of such Shareholder,
or (ii) to reduce the number of Outstanding Shares of such Series by reducing
the number of Shares in the account of each Shareholder by a pro rata portion
of the number of full and fractional Shares which represents the amount of
such excess negative net income, or (iii) to cause to be recorded on the
books of such Series an asset account in the amount of such negative net
income (provided that the same shall thereupon become the property of such
Series with respect to such Series and shall not be paid to any Shareholder),
which account may be reduced by the amount, of dividends declared thereafter
upon the Outstanding Shares of such Series on the day such negative net
income is experienced, until
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such asset account is reduced to zero; (iv) to combine the methods described
in clauses (i) and (ii) and (iii) of the sentence; or (v) to take any other
action they deem appropriate, in order to cause (or in order to assist in
causing) the Net Asset Value per Share of such Series to remain at a constant
amount per Outstanding Share immediately after each such determination and
declaration. The Trustees shall also have the power not to declare a
dividend out of net income for the purpose of causing the Net Asset Value per
share to be increased. The Trustees shall not be required to adopt, but may
at any time adopt, discontinue or amend the practice of maintaining the Net
Asset Value per Share of the Series at a constant amount.
SUSPENSION OF THE RIGHT OF REDEMPTION
SECTION 9.04. The Trustees may declare a suspension of the right of
redemption or postpone the date of payment as permitted under the 1940 Act.
Such suspension shall take effect at such time as the Trustees shall specify
but not later than the close of business on the business day next following
the declaration of suspension, and thereafter there shall be no right of
redemption or payment until the Trustees shall declare the suspension at an
end. In the case of a suspension of the right of redemption, a Shareholder
may either withdraw his request for
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redemption or receive payment based on the Net Asset Value per Share next
determined after the termination of the suspension. In the event that any
Series are divided into classes, the provisions of this Section 9.03, to the
extent applicable as determined in the discretion of the Trustees and
consistent with applicable law, may be equally applied to each such class.
REDEMPTION OF SHARES IN ORDER TO
QUALIFY AS REGULATED INVESTMENT COMPANY
SECTION 9.05. If the Trustees shall, at any time and in good faith,
be of the opinion that direct or indirect ownership of Shares of any Series has
or may become concentrated in any Person to an extent which would disqualify any
Series as a regulated investment company under the Internal Revenue Code, then
the Trustees shall have the power (but not the obligation) by lot or other means
deemed equitable by them (i) to call for redemption by any such person of a
number, or principal amount, of Shares sufficient to maintain or bring the
direct or indirect ownership of Shares into conformity with the requirements for
such qualification and (ii) to refuse to transfer or issue Shares to any person
whose acquisition of the Shares in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in
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this Article IX.
The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of Shares
as the Trustees deem necessary to comply with the provisions of the Internal
Revenue Code, or to comply with the requirements of any other taxing authority.
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATION OF LIABILITY
SECTION 10.01. A Trustee, when acting in such capacity, shall not be
personally liable to any person other than the Trust or a beneficial owner for
any act, omission or obligation of the Trust or any Trustee. A Trustee shall
not be liable for any act or omission or any conduct whatsoever in his capacity
as Trustee, provided that nothing contained herein or in the Delaware Act shall
protect any Trustee against any liability to the Trust or to Shareholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
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conduct of the office of Trustee hereunder.
INDEMNIFICATION
SECTION 10.02.
(a) Subject to the exceptions and limitations contained in Section
(b) below:
(i) every Person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include,
without
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limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office,
(A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees
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who are neither Interested Persons of the Trust nor are parties
to the matter based upon a review of readily available facts (as
opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed to a full
trial-type inquiry);
provided, however, that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the Trustees or by
independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be a
Covered Person and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.
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(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 10.02 may be paid by the Trust or Series from time
to time prior to final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid over by him to
the Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (a)
such Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust is insured against losses arising out of any such
advance payments or (c) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 10.02.
SHAREHOLDERS
SECTION 10.03. In case any Shareholder or former Shareholder of any
Series shall be held to be personally liable
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solely by reason of his being or having been a Shareholder of such Series and
not because of his acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his heirs, executors, administrators or
other legal representatives, or, in the case of a corporation or other
entity, its corporate or other general successor) shall be entitled out of
the assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, on behalf of the affected Series, shall, upon request by the
Shareholder, assume the defense of any claim made against the Shareholder for
any act or obligation of the Series and satisfy any judgment thereon from the
assets of the Series.
ARTICLE XI
MISCELLANEOUS
TRUST NOT A PARTNERSHIP
SECTION 11.01. It is hereby expressly declared that a trust and not a
partnership is created hereby. No Trustee hereunder shall have any power to
bind personally either the Trust's officers or any Shareholder. All persons
extending
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credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the appropriate Series or (if the
Trustees shall have yet to have established Series) of the Trust for payment
under such credit, contract or claim; and neither the Shareholders nor the
Trustees, nor any of their agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Trust Instrument shall protect a
Trustee against any liability to which the Trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee hereunder.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
SECTION 11.02. The exercise by the Trustees of their powers and
discretions hereunder in good faith and with reasonable care under the
circumstances then prevailing shall be binding upon everyone interested.
Subject to the provisions of Article X hereof and to Section 11.01 of this
Article XI, the Trustees shall not be liable for errors of judgment or mistakes
of fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Trust Instrument, and subject to
the provisions of Article X hereof and
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Section 11.01 of this Article XI, shall be under no liability for any act or
omission in accordance with such advice or for failing to follow such advice.
The Trustees shall not be required to give any bond as such, nor any surety
if a bond is obtained.
ESTABLISHMENT OF RECORD DATES
SECTION 11.03. The Trustees may close the Share transfer books of the
Trust for a period not exceeding sixty (60) days preceding the date of any
meeting of Shareholders, or the date for the payment of any dividends or other
distributions, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect; or in lieu of
closing the stock transfer books as aforesaid, the Trustees may fix in advance a
date, not exceeding sixty (60) days preceding the date of any meeting of
Shareholders, or the date for payment of any dividend or other distribution, or
the date for the allotment of rights, or the date when any change or conversion
or exchange of Shares shall go into effect, as a record date for the
determination of the Shareholders entitled to notice of, and to vote at, any
such meeting, or entitled to receive payment of any such dividend or other
distribution, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of Shares, and
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in such case such Shareholders and only such Shareholders as shall be
Shareholders of record on the date so fixed shall be entitled to such notice
of, and to vote at, such meeting, or to receive payment of such dividend or
other distribution, or to receive such allotment or rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of any Shares
on the books of the Trust after any such record date fixed as aforesaid.
TERMINATION OF TRUST
SECTION 11.04.
(a) This Trust shall continue without limitation of time but subject to
the provisions of sub-section (b) of this Section 11.04.
(b) The Trustees may, subject to a Majority Shareholder Vote of each
Series affected by the matter or, if applicable, to a Majority Shareholder
Vote of the Trust, and subject to a vote of a majority of the Trustees,
(i) sell and convey all or substantially all of the assets of the
Trust or any affected Series to another trust, partnership, association
or corporation, or to a
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separate series of shares thereof, organized under the laws of any state
which trust, partnership, association or corporation is an open-end
management investment company as defined in the 1940 Act, or is a series
thereof, for adequate consideration which may include the assumption of
all outstanding obligations, taxes and other liabilities, accrued or
contingent, of the Trust or any affected Series, and which may include
shares of beneficial interest, stock or other ownership interests of
such trust, partnership, association or corporation or of a series
thereof; or
(ii) at any time sell and convert into money all of the assets of
the Trust or any affected Series.
Upon making reasonable provision, in the determination of the Trustees,
for the payment of all such liabilities in either (i) or (ii), by such
assumption or otherwise, the Trustees shall distribute the remaining proceeds
or assets (as the case may be) of each Series (or class) ratably among the
holders of Shares of that Series then outstanding.
(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in sub-section (b), the Trust or any
affected Series shall terminate
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and the Trustees and the Trust shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all
parties with respect to the Trust or Series shall be cancelled and discharged.
Upon termination of the Trust, following completion of winding up of its
business, the Trustees shall cause a certificate of cancellation of the
Trust's certificate of trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.
REORGANIZATION
SECTION 11.05. Notwithstanding anything else herein, the Trustees, in
order to change the form of organization of the Trust, may, without prior
Shareholder approval, (i) cause the Trust to merge or consolidate with or
into one or more trusts, partnerships, associations or corporations so long
as the surviving or resulting entity is an open-end management investment
company under the 1940 Act, or is a series thereof, that will succeed to or
assume the Trust's registration under that Act and which is formed, organized
or existing under the laws of a state, commonwealth possession or colony of
the United States or (ii) cause the Trust to incorporate under the laws of
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Delaware. Any agreement of merger or consolidation or certificate of merger
may be signed by a majority of Trustees and facsimile signatures conveyed by
electronic or telecommunication means shall be valid. Pursuant to and in
accordance with the provisions of Section 3815(f) of the Delaware Act, and
notwithstanding anything to the contrary contained in this Trust Instrument,
an agreement of merger or consolidation approved by the Trustees in
accordance with this Section 11.05 may effect any amendment to the Trust
Instrument or effect the adoption of a new trust instrument of the Trust if
it is the surviving or resulting trust in the merger or consolidation.
FILING OF COPIES, REFERENCES, HEADINGS
SECTION 11.06. The original or a copy of this Trust Instrument and of
each amendment hereof or Trust Instrument supplemental hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder.
Anyone dealing with the Trust may rely on a certificate by an officer or
Trustee of the Trust as to whether or not any such amendments or supplements
have been made and as to any matters in connection with the Trust hereunder,
and with the same effect as if it were the original, may rely on a copy
certified by an officer or
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Trustee of the Trust to be a copy of this Trust Instrument or of any such
amendment or supplemental Trust Instrument, references to this Trust
Instrument, and all expressions like "herein," "hereof" and "hereunder,"
shall be deemed to refer to this Trust Instrument as amended or affected by
any such supplemental Trust Instrument. All expressions like "his", "he" and
"him", shall be deemed to include the feminine and neuter, as well as
masculine, genders. Headings are placed herein for convenience of reference
only and in case of any conflict, the text of this Trust Instrument, rather
than the headings, shall control. This Trust Instrument may be executed in
any number of counterparts each of which shall be deemed an original.
APPLICABLE LAW
SECTION 11.07. The trust set forth in this instrument is made in the
State of Delaware, and the Trust and this Trust Instrument, and the rights
and obligations of the Trustees and Shareholders hereunder, are to be
governed by and construed and administered according to the Delaware Act and
the laws of said State; provided, however, that there shall not be applicable
to the Trust, the Trustees or this Trust Instrument (a) the provisions of
Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the
laws (statutory or common) of the State
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of Delaware (other than the Delaware Act) pertaining to trusts which relate
to or regulate (i) the filing with any court or governmental body or agency
of trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining court or other governmental approval
concerning the acquisition, holding or disposition of real or personal
property, (iv) fees or other sums payable to trustees, officers, agents or
employees of a trust, (v) the allocation of receipts and expenditures to
income and principal, (vi) restrictions or limitations on the permissible
nature, amount or concentration of trust investments or requirements relating
to the titling, storage or other manner of holding of trust assets, or (vii)
the establishment of fiduciary or other standards or responsibilities or
limitations on the acts or powers of trustees, which are inconsistent with
the limitations or liabilities or authorities and powers of the Trustees set
forth or referenced in this Trust Instrument. The Trust shall be of the type
commonly called a "business trust", and without limiting the provisions hereof,
the Trust may exercise all powers or privileges afforded to trusts or actions
that may be engaged in by trusts under the Delaware Act, and the absence of a
specific reference herein to any such power, privilege or action shall not imply
that the Trust may not exercise such power or
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privilege or take such actions.
AMENDMENTS
SECTION 11.08. Except as specifically provided herein, the Trustees
may, without shareholder vote, amend or otherwise supplement this Trust
Instrument by making an amendment, a Trust Instrument supplemental hereto or
an amended and restated trust instrument. Shareholders shall have the right
to vote (i) on any amendment which would affect their right to vote granted
in Section 7.01 of Article VII hereof, (ii) on any amendment to this Section
11.08, (iii) on any amendment as may be required by law or by the Trust's
registration statement filed with the Commission and (iv) on any amendment
submitted to them by the Trustees. Any amendment required or permitted to be
submitted to Shareholders which, as the Trustees determine, shall affect the
Shareholders of one or more Series shall be authorized by vote of the
Shareholders of each Series affected and no vote of shareholders of a Series
not affected shall be required. Notwithstanding anything else herein, any
amendment to Article 10 hereof shall not limit the rights to indemnification
or insurance provided therein with respect to action or omission of Covered
Persons prior to such amendment.
FISCAL YEAR
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SECTION 11.09. The fiscal year of the Trust shall end on a specified
date as set forth in the Bylaws, provided, however, that the Trustees may,
without Shareholder approval, change the fiscal year of the Trust.
PROVISIONS IN CONFLICT WITH LAW
SECTION 11.10. The provisions of this Trust Instrument are severable,
and if the Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have
constituted a part of this Trust Instrument; provided, however, that such
determination shall not affect any of the remaining provisions of this Trust
Instrument or render invalid or improper any action taken or omitted prior to
such determination. If any provision of this Trust Instrument shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction,
such invalidity or unenforceability shall attach only to such provision in
such jurisdiction and shall not in any manner affect such provisions in any
other jurisdiction or any other provision of this Trust Instrument in any
jurisdiction.
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IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees
of the Trust, have executed this instrument this 6th day of January, 1995.
------------------------------------
Gordon Forrester, as Trustee and not
individually
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EXHIBIT (1)(B)
AMENDMENT TO THE
TRUST INSTRUMENT OF
KENNEBEC FUNDS TRUST
DATED JULY 10, 1996
AMENDMENT TO TRUST INSTRUMENT, made July 10, 1996 by W. Robert Alexander
(the "Trustees").
WHEREAS, there has heretofore been established a trust for the
investment and reinvestment of funds contributed thereto; and
WHEREAS, there was originally filed with the Secretary of State of the
State of Delaware a Trust Instrument, dated January 6, 1995, creating the
Trust; and
WHEREAS, the Trustees desire to amend the Trust Instrument, dated
January 6, 1995, and to file with the Secretary of State of the State of
Delaware an Amendment to the Trust Instrument; and
WHEREAS, the Trustees desire to change the name of the business trust to
Sefton Funds Trust.
IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, has executed this instrument this 10th day of July, 1996.
---------------------------------------
W. Robert Alexander, as Trustee and not
individually
<PAGE>
July 12, 1996
Sefton Funds Trust
370 Seventeenth Street, Suite 2700
Denver, CO 80202
RE: SEFTON FUNDS TRUST
REGISTRATION NO. 33-88568
FILE NO. 811-8948
-------------------------
Dear Sir or Madam:
It is our opinion that the securities being registered will, when
sold, be legally issued, fully paid and non-assessable and we hereby consent to
the reference to our firm as Counsel in Post-Effective Amendment No. 2 to
Registration 33-88568.
Very truly yours,
Baker & McKenzie
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated April
29, 1996, relating to financial statements and financial highlights of the
Kennebec Funds Trust (now known as the Sefton Funds Trust), which appears in
such Statement of Additional Information, and to the incorporation by reference
of our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings
"Financial Statements" and "Independent Accountants" in such Statement of
Additional Information and to the references to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
Denver, Colorado
July 12, 1996
<PAGE>
EXHIBIT 16(a)
U.S. GOVERNMENT FUND
TOTAL RETURN FOR THE PERIOD FROM INCEPTION (APRIL 3, 1995) THROUGH MARCH 31,
1996
ERV
T = [ ( -----) - 1 ]
p
Where: T = average total return for the period.
ERV= ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
p= hypothetical initial payment of $1,000
PERIOD ENDED MARCH 31, 1996
ERV = $1,090.55 p = $1,000
T = [(1090.55) - 1] = 9.06
---------
1000
-10-
<PAGE>
EXHIBIT 16(b)
CALIFORNIA TAX-FREE FUND
TOTAL RETURN FOR THE PERIOD FROM INCEPTION (APRIL 3, 1995) THROUGH MARCH 31,
1996
ERV
T = [ ( -----) - 1 ]
p
Where: T = average total return for the period.
ERV= ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
p= hypothetical initial payment of $1,000
PERIOD ENDED MARCH 31, 1996
ERV = $1,066.08 p = $1,000
T = [(1066.08) - 1] = 6.60
---------
1000
-11-
<PAGE>
EXHIBIT 16(c)
EQUITY VALUE FUND
TOTAL RETURN FOR THE PERIOD FROM INCEPTION (APRIL 3, 1995) THROUGH MARCH 31,
1996
ERV
T = [ ( -----) - 1 ]
p
Where: T = average total return for the period.
ERV= ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
p= hypothetical initial payment of $1,000
PERIOD ENDED MARCH 31, 1996
ERV = $1,263.11 p = $1,000
T = [(1263.11) - 1] = 26.31
---------
1000
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> KENNEBEC U.S. GOVERNMENT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-03-1995
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 18540569
<INVESTMENTS-AT-VALUE> 18922035
<RECEIVABLES> 273330
<ASSETS-OTHER> 32693
<OTHER-ITEMS-ASSETS> 464
<TOTAL-ASSETS> 19228522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132174
<TOTAL-LIABILITIES> 132174
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<ACCUMULATED-NET-GAINS> 140796
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 19096348
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1252093
<OTHER-INCOME> 0
<EXPENSES-NET> (190855)
<NET-INVESTMENT-INCOME> 1061238
<REALIZED-GAINS-CURRENT> 175584
<APPREC-INCREASE-CURRENT> 381466
<NET-CHANGE-FROM-OPS> 1618288
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1061238)
<DISTRIBUTIONS-OF-GAINS> (34788)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2107816
<NUMBER-OF-SHARES-REDEEMED> (563399)
<SHARES-REINVESTED> 1396
<NET-CHANGE-IN-ASSETS> 19063011
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 260258
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<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> .37
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> KENNEBEC CALIFORNIA TAX FREE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-03-1995
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 41528198
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<RECEIVABLES> 741817
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<OTHER-ITEMS-ASSETS> 21764
<TOTAL-ASSETS> 42830785
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 238164
<TOTAL-LIABILITIES> 238164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42087025
<SHARES-COMMON-STOCK> 3492752
<SHARES-COMMON-PRIOR> 2778
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (139)
<ACCUM-APPREC-OR-DEPREC> 505735
<NET-ASSETS> 42592621
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2161043
<OTHER-INCOME> 0
<EXPENSES-NET> (317608)
<NET-INVESTMENT-INCOME> 1843435
<REALIZED-GAINS-CURRENT> 22588
<APPREC-INCREASE-CURRENT> 505735
<NET-CHANGE-FROM-OPS> 2371758
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1843435)
<DISTRIBUTIONS-OF-GAINS> (22727)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3592659
<NUMBER-OF-SHARES-REDEEMED> (100630)
<SHARES-REINVESTED> 723
<NET-CHANGE-IN-ASSETS> 42559284
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 228931
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 442095
<AVERAGE-NET-ASSETS> 38350898
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.19
<EXPENSE-RATIO> .83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> KENNEBEC EQUITY VALUE FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-03-1995
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 31138395
<INVESTMENTS-AT-VALUE> 36310213
<RECEIVABLES> 197565
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<TOTAL-LIABILITIES> 72604
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<PAID-IN-CAPITAL-COMMON> 30441746
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<ACCUMULATED-NET-GAINS> 716875
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5171818
<NET-ASSETS> 36325968
<DIVIDEND-INCOME> 557852
<INTEREST-INCOME> 268353
<OTHER-INCOME> 0
<EXPENSES-NET> (395604)
<NET-INVESTMENT-INCOME> 430601
<REALIZED-GAINS-CURRENT> 716875
<APPREC-INCREASE-CURRENT> 5171818
<NET-CHANGE-FROM-OPS> 6319294
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<DISTRIBUTIONS-OF-INCOME> (435072)
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<NUMBER-OF-SHARES-REDEEMED> (104078)
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
