<PAGE>
- -------------------------------------------------
INVESTMENT ADVISER
Kennebec Capital Management, Inc.
2250 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, Massachussets 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
[LOGO]
PROSPECTUS
APRIL 1, 1996
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THESE FUNDS ARE NOT INSURED BY KENNEBEC
CAPITAL MANAGEMENT, THE FDIC OR ANY OTHER
INSURER.
/ / U.S. GOVERNMENT FUND
/ / CALIFORNIA TAX-FREE FUND
/ / EQUITY VALUE FUND
- -------------------------------------------------
[LOGO]
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[logo] 370 Seventeenth Street, Suite 2700
Denver, Colorado 80202
General Information: (800) 524-2276
Account Information: (800) 355-2608
KENNEBEC CAPITAL MANAGEMENT, INC. - Investment Adviser
("Kennebec" 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 Kennebec Capital Management Inc., 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 Kennebec Funds Trust
(the "Trust"), a Delaware business trust and registered management investment
company. Shares of the Funds involve investment 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 March 31,
1995, 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.
April 1, 1996
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Table of Contents
PAGE
----
HIGHLIGHTS......................................................... 3
FUND EXPENSES...................................................... 6
FEE TABLE.......................................................... 6
FINANCIAL HIGHLIGHTS............................................... 8
THE FUNDS.......................................................... 9
THE INVESTMENT POLICIES AND PRACTICES OF THE FUNDS................. 9
MANAGEMENT OF THE FUNDS............................................ 10
FUND SHARE VALUATION............................................... 14
PRICING OF FUND SHARES............................................. 14
MINIMUM PURCHASE REQUIREMENTS...................................... 15
PURCHASE OF FUND SHARES............................................ 15
INDIVIDUAL RETIREMENT ACCOUNTS..................................... 16
EXCHANGE OF FUND SHARES............................................ 16
REDEMPTION OF FUND SHARES.......................................... 18
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX.................... 20
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES................. 25
INVESTMENT RESTRICTIONS............................................ 35
RISKS OF INVESTING IN THE FUNDS.................................... 36
OTHER INFORMATION.................................................. 39
2
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HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
This Prospectus describes three funds managed by Kennebec. 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 the average weighted maturity will be 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 alter-
3
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native 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
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 the making of a market in
the security.
EQUITY VALUE FUND. The Equity Fund changed its name to the Equity
Value Fund effective January 1, 1996. 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. 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
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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 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 legislation, cases and policies on the long-term ability of California
state and municipal issues to pay interest or repay principal on their
obligations.
The foregoing is a summary of risks; see "RISKS OF INVESTING IN THE FUNDS".
MANAGEMENT OF THE FUNDS
Kennebec acts as investment adviser to the Funds. For its services,
the Adviser receives from the Funds fees at annual rates of 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 each Fund pays it a fee 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
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FUND EXPENSES
The purpose of the following table is to assist the shareholder in
understanding the various cost and expenses that an investor in each Fund
will bear, either directly or indirectly. Each Fund's cost and expenses are
based upon an estimate of the Fund's operating expenses for an entire fiscal
year, 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 Expense
(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.
** Estimated. 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.
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Example:
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% gross annual return and (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:
<TABLE>
<CAPTION>
U.S. California Equity
Government Fund Tax-Free Fund Value Fund
--------------- ------------- ----------
<S> <C> <C> <C>
1 year $11 $10 $15
3 years 34 30 47
</TABLE>
This assumed 5% annual return and the expenses shown should not be considered
indications of actual or expected performance or Fund operating expenses,
both of which may vary significantly. The example should not be considered a
representation of past or future expenses , and actual expenses may be
greater or lesser than those shown. Moreover, while the example assumes a 5%
annual return, a Fund's actual performance will vary and may result in an
actual return greater or less than 5%.
7
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FINANCIAL HIGHLIGHTS
The following unaudited supplementary financial information with respect to
the Funds is for a share of a Fund outstanding throughout the period April 3,
1995 (commencement of operations) to September 30, 1995:
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 3, 1995
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 1995
-------------------------------------------------------
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 0.35 0.29 0.11
Net realized and unrealized gain
on investments 0.51 0.10 1.42
-------------------------------------------------
Total income from investment
operations 0.86 0.39 1.53
-------------------------------------------------
Less distributions:
Dividends from net investment
income (0.35) (0.29) (0.10)
-------------------------------------------------
Net asset value, end of period $12.51 $12.10 $13.43
-------------------------------------------------
-------------------------------------------------
Total Return 7.19% 3.28% 12.80%
-------------------------------------------------
-------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period
(in thousands) $18,630 $38,300 $26,291
Ratio of expenses to average net
assets 1.09%(1) 0.81%(1) 1.64%(1)
Ratio of net investment income to
average net assets 5.69%(1) 4.93%(1) 1.93%(1)
Ratio of expenses to average net
assets without fee waivers 1.43%(1) 1.19%(1) 1.79%(1)
Ratio of net investment income to
average net assets without fee waivers 5.35%(1) 4.55%(1) 1.78%(1)
Portfolio turnover rate(2) 36.56%(1) 147.98%(1) 52.05%(1)
</TABLE>
(1) Annualized.
(2) A 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 September 30, 1995 were $19,332,045 and $2,121,922,
respectively, for the U.S. Government Fund, $64,450,216 and $26,935,185,
respectively, for the California Tax-Free Fund, and $22,968,962 and
$3,871,035, respectively, for the Equity Value Fund.
8
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THE FUNDS
Each Fund is a separate investment fund or portfolio, commonly known
as a mutual fund. The Funds are portfolios of a 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 a 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 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'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 a 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.
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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 established for the Fund. In accordance with
those policies, the Fund may purchase California Municipal Obligations rated
BBB, SP-2 or better by S&P or Baa, MIG-2 or better by 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, a 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 infor-
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mation about the Trustees, as well as the Funds' executive officers, may be
found in the SAI under the heading "MANAGEMENT - TRUSTEES AND OFFICERS."
THE ADVISER: KENNEBEC CAPITAL MANAGEMENT, INC.
Kennebec Capital Management, Inc., 2550 Fifth Avenue, Suite 808, San
Diego, CA 92103, acts as the investment adviser to the Funds. Kennebec
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 Kennebec in
November, 1994. Prior to Kennebec, 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). From October
1985 through January 1988 he was a financial analyst for 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).
11
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For the advisory services it provides to the Funds, Kennebec receives
from each Fund a monthly fee, based on average daily net assets, at the
annual rates set forth below:
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
---- -----------------------
<S> <C>
U.S. Government Fund .60%
California Tax-Free Fund .60%
Equity Value Fund 1.00%
</TABLE>
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 Fund a
fee, 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 a part of its
servicing activities. If a bank were prohibited from so acting, its
shareholder clients would be permitted to remain
12
<PAGE>
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' meetings; 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 a Fund's operations. Expenses of
the Funds directly attributable to a 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%.
13
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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 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 which are primarily traded on foreign exchanges may be
valued with the assistance of a 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. Over-the-counter securities
are valued on the basis of the bid price at the close of business on each
business day. 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.
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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. A 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 Kennebec 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.
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.
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.
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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.
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
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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.
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.
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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.
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' services and their provisions
may be modified or terminated at any time by the Funds. 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.
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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 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 Kennebec Capital Management, Inc. or for IRAs.
Kennebec 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
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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 $5,000,000 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 intends to continue to qualify annually and to elect to be
treated as a regulated investment company 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.
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.
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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.
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
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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 invests 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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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-
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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.
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
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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 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'
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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 (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
agree-
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ments"). 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.
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
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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 page of this Prospectus for commercial paper
obligations. The Funds may continue to hold variable rate master demand notes
if the creditworthiness of the issues deliver 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
settlement 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
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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 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.
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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
consists 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 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
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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.
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
unspon-
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sored 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 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
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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.
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
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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
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market conditions, the Fund will invest at least 80% of its assets 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
(ALL FUNDS, EXCEPT AS INDICATED)
(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.
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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".
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.
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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 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
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California state and municipal issuers to pay interest or repay principal on
their obligations.
California has relatively great size, wealth and a diverse economy.
California'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.
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,
38
<PAGE>
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.
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
Kennebec 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
offi-
39
<PAGE>
cers 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 Trustee 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.
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
invest-
40
<PAGE>
ment 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 September 30, 1995 were 5.019% and 5.787%, 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 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%.
41
<PAGE>
<TABLE>
<CAPTION>
1995 TAXABLE YEAR
TAXABLE EQUIVALENT YIELD TABLE - FEDERAL AND CALIFORNIA PERSONAL
INCOME TAXES*
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5% 6% 7% 8%
- ------------------------------------------------------------------------------------------------
$ 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 $256,000 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.
(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.
42
<PAGE>
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.
43
<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.
44
<PAGE>
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
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.
45
<PAGE>
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.
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.
46
<PAGE>
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:
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."
47
<PAGE>
APPLICATION
<TABLE>
<CAPTION>
<C> <C> <S> <C>
=====================================================================================================================
I. FUND SELECTION - INITIAL INVESTMENT MINIMUM INITIAL INVESTMENT $25,000 PER FUND.
=====================================================================================================================
By Wire: Call Kennebec Funds 1-800-524-2276 to obtain an account number and instructions regarding the transfer of
funds. The application must be completed and mailed to: Kennebec Funds, P.O. Box 8521, Boston, MA 02266-8521.
By Mail: Make your check payable to Kennebec Funds and send it along with this completed application to the address
above. Indicate the amount you are investing in each Fund below.
/ / 913 The U.S. Treasury Money Market 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 a FGIC Public Trust managed by FGIC Advisors, Inc. If I invest in the
Fund, I understand that I am authorizing State Street Bank to effect purchase and redemption orders on my 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 Birthday 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.
=====================================================================================================================
III. DISTRIBUTIONS (DIVIDENDS AND CAPITAL GAINS WILL BE INVESTED UNLESS OTHERWISE INDICATED)
=====================================================================================================================
Dividends are to be: / / Reinvested / / Paid in Cash
Capital Gains are to be / / Reinvested / / Pain in Cash
=====================================================================================================================
IV. DISTRIBUTIONS REINVESTED TO OTHER KENNEBEC FUNDS
=====================================================================================================================
Permits all distributions from one Fund to be automatically reinvested into another identically registered Kennebec 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:
- ----------------------------------------------------------------------------------------------------------------------
Street Address Third Party's Account Number
- ----------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
=====================================================================================================================
VI. TELEPHONE REDEMPTION AUTHORIZATION
=====================================================================================================================
To obtain telephone fund exchange privileges, check here: Yes / /
I (we) authorize the Kennebec 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 your option, please attach a voided check from your bank account or a letter summarizing in wiring
instructions and complete the information below.
Name of Financial Institution
- ----------------------------------------------------------------------------------------------------------------------
Street Address
- ----------------------------------------------------------------------------------------------------------------------
City, State, Zip Code Bank Telephone Number
- ----------------------------------------------------------------------------------------------------------------------
Account Name Account Number
- ----------------------------------------------------------------------------------------------------------------------
=====================================================================================================================
VII. TELEPHONE FUND EXCHANGES
=====================================================================================================================
To obtain fund exchange privileges, check here: / /
I (we) authorize the Kennebec 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 Kennebec 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.
We understand that by selecting this program all dividends and distributors 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 Kennebec 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 period(s) listed below.
/ / 913 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:
Name
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<C> <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 $50,000)
=====================================================================================================================
Please attach a voided check from your checking account or preprinted deposit slip from your savings account.
Pleas indicated type of account. / / Checking / / Savings
I would like to make regular investments of $________ in the U.S. Treasury Money Market Fund*
(913) 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.
Print 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 an read the
Prospectus and agrees to its terms.
Certification - Under penalty of perjury the undersigned certifies that:
/ / The number shown on this Agreement is my correct taxpayer number, and
/ / 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 Joint Registrant (If Applicable) Date
- ----------------------------------------------------------------------------------------------------------------------
Signature of Trust, Corporation, Partnership or Other Entity Date
- ----------------------------------------------------------------------------------------------------------------------
Title
- ----------------------------------------------------------------------------------------------------------------------
Mail this application to Kennebec Funds, P.O. Box 8521, Boston, MA 02266-8521.
THANK YOU FOR YOUR INVESTMENT IN THE KENNEBEC 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.
I (we) 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 (UGMA/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 parties to inherit their portion of the account. Example: "Brian
Banks and Jane Banks, TEN COM." For either type of joint registration both parties MUST sign the application and any
subsequent instructions.
ADDING 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 Kennebec. Other parties may include spouse,
relatives, business officers, trust officers, financial planners, tax advisors, etc. Call Kennebec 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. Partnerships and other business entities are required to furnish other documentation to authorize
opening an account and/or redemption. Call Kennebec to ask for the Corporate Resolution form or appropriate documentation.
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