<PAGE>
As Filed with the Securities and Exchange Commission on April 29, 1998
Registration Nos. 33-88568
811-8948
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 6 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 8 [X]
(Check appropriate box or boxes)
SEFTON FUNDS TRUST
(Exact name of Registrant as specified in charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices with Zip Code)
---------------------
Registrant's Telephone Number, including Area Code: (800) 524-2276
---------------------
Ellen Stoutamire, Esq.
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service)
---------------------
with a copy to:
Steven R. Howard, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
It is proposed that this filing will become effective:
X
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (a)(i)
_____ 75 days after filing pursuant to paragraph (a)(ii)
_____ on (date) pursuant to paragraph (a)(ii) of rule 485
_____ 60 days after filing pursuant to paragraph (a)(i)
If appropriate, check the following box:
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
<PAGE>
SEFTON FUNDS TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
U.S. GOVERNMENT FUND
CALIFORNIA TAX-FREE FUND
EQUITY VALUE FUND
SMALL COMPANY VALUE FUND
N-1A Item No. Location
- ------------- --------
<TABLE>
<CAPTION>
Part A Prospectus Caption
- ------ ------------------
<S> <C> <C>
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fund Expenses; Fee Table
Item 3. Condensed Financial Information....... Prospectus Supplement
Item 4. General Description of Registrant..... The Funds; The Investment Policies and
Practices of the Funds; Investment
Restrictions: Risks of Investing in
the Funds; Description of Securities
and Investment Practices
Item 5. Management of the Fund................ Management of the Funds
Item 5A. Management's Discussion of Fund
Performance........................... Not Applicable
Item 6. Capital Stock and Other Securities.... Dividends, Distributions and Federal
Income Tax; Other Information
Item 7. Purchase of Securities Being Offered.. Fund Share Valuation; Pricing of Fund
Shares; Purchase of Fund Shares;
Minimum Purchase Requirements;
Individual Retirement Accounts
Item 8. Redemption or Repurchase.............. Redemption of Fund Shares
Item 9. Legal Proceedings..................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Additional
-----------------------
Part B Information Caption
- ------ -------------------
<S> <C> <C>
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Table of Contents
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objective and Policies..... Investment Policies; Investment
Restrictions
Item 14. Management of the Registrant.......... Management
Item 15. Control Persons and Principal Holders
of Securities......................... Other Information
Item 16. Investment Advisory and Other
Services.............................. Management; Custodian; Independent
Accountants
Item 17. Brokerage Allocation.................. Portfolio Transactions
Item 18. Capital Stock and Other Securities.... Other Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Pricing of Fund Shares (Part A);
Purchase of Fund Shares (Part A);
Redemption of Fund Shares (Part A);
Determination of Net Asset Value
Item 20. Tax Status............................ Taxation
Item 21. Underwriters.......................... Management
Item 22. Calculation of Performance Data....... Expenses and Expense Limits;
Calculation of Yields; Performance
Information
Item 23. Financial Statements.................. Financial Statements
</TABLE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
<PAGE>
Sefton Funds
P R O S P E C T U S
APRIL 30, 1998
[PHOTO APPEARS HERE]
U. S. GOVERNMENT FUND
CALIFORNIA TAX-FREE FUND
EQUITY VALUE FUND [SEFTON FUNDS LOGO APPEARS HERE]
SMALL COMPANY VALUE FUND
No Sales Charge
No Redemption Fees
No 12b-1 Fees
<PAGE>
SEFTON FUNDS TRUST 3435 Stelzer Road
Columbus, Ohio 43219
General & Account Information: (800) 524-2276
SEFTON CAPITAL MANAGEMENT--Investment Adviser
("SCM" or the "Adviser")
BISYS FUND SERVICES--Administrator, Distributor and Sponsor
("BISYS" or the "Distributor")
This prospectus describes four funds (each, a "Fund" or, collectively, the
"Funds"), managed by Sefton Capital Management, a California corporation. The
Funds and their objectives are:
The U.S. Government Fund attempts to provide investors with as high a level
of current income as is consistent with preservation of capital.
The California Tax-Free Fund attempts to provide investors with as high a
level of current income, exempt from both Federal and California personal
income taxes, as is consistent with preservation of capital.
The Equity Value Fund attempts to provide investors with long-term capital
appreciation.
The Small Company Value Fund attempts to provide investors with long-term
capital appreciation.
Shares of the Funds are sold to the public by the Distributor as an
investment vehicle for individuals, institutions, corporations and fiduciaries.
The Funds are separate investment funds of Sefton Funds Trust (the "Trust"), a
Delaware business trust and registered management investment company.
Investments in shares of the Funds involve risk, including possible loss of
principal.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Funds and should be read and
retained for information about each Fund.
A Statement of Additional Information (the "SAI"), dated April 30, 1998,
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 number printed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADE- QUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
April 30, 1998
1
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS................................................................. 3
FUND EXPENSES.............................................................. 6
FINANCIAL HIGHLIGHTS....................................................... 8
THE FUNDS.................................................................. 13
THE INVESTMENT POLICIES AND PRACTICES OF THE FUNDS......................... 13
MANAGEMENT OF THE FUNDS.................................................... 15
FUND SHARE VALUATION....................................................... 18
PRICING OF FUND SHARES..................................................... 19
MINIMUM PURCHASE REQUIREMENTS.............................................. 19
PURCHASE OF FUND SHARES.................................................... 19
INDIVIDUAL RETIREMENT ACCOUNTS............................................. 20
EXCHANGE OF FUND SHARES.................................................... 20
REDEMPTION OF FUND SHARES.................................................. 21
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX............................ 24
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES......................... 28
INVESTMENT RESTRICTIONS.................................................... 38
RISKS OF INVESTING IN THE FUNDS............................................ 39
OTHER INFORMATION.......................................................... 42
</TABLE>
2
<PAGE>
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
This Prospectus describes four funds managed by SCM. Each Fund has distinct
investment objectives 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 objective 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 mortgageand asset-backed
securities, including securities issued by foreign issuers, or unrated
securities of these types determined by the Adviser to be of comparable
quality. The Fund may also enter into repurchase agreements with respect to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The securities of foreign issuers in which the Fund may
invest are: corporate debt securities, floating rate and variable rate debt,
forward commitments and when-issued securities, market-auction preferred stock,
certificates of deposit and bankers' acceptances issued by foreign banks, and
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies and supranational entities. The Fund
invests primarily in U.S. Government and U.S. Government agency securities such
that its average weighted maturity will be from 5 to 10 years.
California Tax-Free Fund. The investment objective of the California Tax-
Free Fund is to provide investors with as high a level of current income,
exempt from both Federal and California personal income taxes, as is consistent
with preservation of capital. The Fund pursues this objective by investing
primarily in California municipal obligations ("Obligations") such that the
portfolio's weighted average stated maturity will be 10 or more years. The Fund
invests in obligations that present acceptable credit risks in the judgment of
the Adviser and that, at the time of purchase, are rated investment grade or,
if such securities are unrated but are determined by the Adviser to be of
comparable quality, the Fund may invest up to 15% of its portfolio in such
unrated securities. The Fund may continue to hold obligations subsequently
downgraded to below investment grade. The Fund intends to invest 100% of its
net assets in municipal obligations exempt from California and federal income
taxes. As a fundamental policy, the California Tax-Free Fund will have at least
80% of its net assets invested in tax-exempt securities and in securities the
interest on which is not a tax preference item for purposes of the Federal
alternative minimum tax. At least 65% of the value of its total assets will be
invested in Obligations. Some of the Obligations in which the Fund invests may
be "private activity bonds," the interest on which is a tax preference item for
purposes of the Federal alternative minimum tax. For temporary defensive
purposes, including times when Obligations may not be available in the
3
<PAGE>
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 not invest more than 15% of its net assets
in illiquid securities. The Board of Trustees will make a determination as to
the liquidity of such investments based upon guidelines established by the
Adviser which provide for analysis of such factors as the frequency of trades
and quotes for the security, the number of dealers willing to purchase or sell
the security and the number of other potential buyers, and the willingness of
dealers to undertake and make a market in the security.
Equity Value Fund. The investment objective of the Equity Value Fund is to
provide investors with long-term capital appreciation. The Fund pursues this
objective by investing primarily in common stocks of both domestic and foreign
companies. The Fund may invest in large, well-established companies and smaller
companies with market capitalizations exceeding $50 million at the time of
purchase. Income generation is a secondary consideration for the Fund. However,
the Fund may purchase dividend paying stocks of particular issuers when the
issuer's dividend record may, in the Adviser's opinion, have a favorable
influence on the market value of the securities.
Small Company Value Fund. The investment objective of the Small Company
Value Fund is to provide investors with long-term capital appreciation. The
Fund pursues its investment objective by investing primarily in a portfolio of
equity securities of both foreign and domestic small capitalization companies,
defined as companies having stock market capitalization of $1 billion or less
at the time of initial purchase, that the Adviser considers to be relatively
undervalued. Current income is a secondary consideration in selecting portfolio
investments. Under normal market conditions, the Fund will invest at least 65%
of its total assets in common stocks, preferred stocks, and securities
convertible into common stocks of small capitalization companies.
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.
4
<PAGE>
INVESTMENT RISKS
GENERAL. The price per share of each Fund will fluctuate with changes in
value of the investments held by such Fund. Additionally, there can be no
assurance that a Fund will achieve its investment objective or be successful in
preventing or minimizing the risk of loss that is inherent in investing in
particular types of investment products. Further, investment in the securities
of issuers in any foreign country involves special risks and considerations not
typically associated with investing in U.S. companies. Because there are no
restrictions on the maturity of any individual assets in which a Fund will
invest, an investment in a Fund carries some risk of volatility in principal
value.
SPECIAL RISKS SPECIFIC TO THE CALIFORNIA TAX-FREE FUND. Because the
California Tax-Free Fund will be highly concentrated in the securities of
California state and municipal issuers, 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 economic factors and cases or current legislation and
policies on the long-term ability of California state and municipal issuers to
pay interest or repay principal on their obligations.
The foregoing is a summary of risks; see "RISKS OF INVESTING IN THE FUNDS"
in this Prospectus.
MANAGEMENT OF THE FUNDS
SCM acts as investment adviser to the Funds. For its services, the Adviser
receives from the Funds fees at annual rates based on each Fund's average daily
net assets. See "FUND EXPENSES--Fee Table" and "MANAGEMENT OF THE FUNDS" in
this Prospectus.
BISYS acts as administrator to the Funds. BISYS provides certain
administrative services to the Funds, for which it receives a fee from each
Fund payable at the annual rate of 0.15% of the Fund's average daily net
assets. BISYS will also distribute the Funds' shares and may be reimbursed for
certain of its distribution-related expenses.
For information on how to purchase or redeem shares in a Fund, please see
"PURCHASE OF FUND SHARES" and "REDEMPTION OF FUND SHARES" in this Prospectus.
5
<PAGE>
FUND EXPENSES
The purpose of the following table is to assist the shareholder in
understanding the various costs and expenses that an investor in each Fund will
bear, either directly or indirectly. Each Fund's costs and expenses are based
upon the Fund's actual operating expenses for the fiscal year ended December
31, 1997.
FEE TABLE
<TABLE>
<CAPTION>
U.S. California Equity Small
Government Tax-Free Value Company
Fund Fund Fund Value Fund
---------- ---------- ------ ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).. None None None None
Maximum Sales Load Imposed on
Reinvested Dividends (as a percentage
of offering price)................... None None None None
Deferred Sales Load (as a percentage of
redemption proceeds)................. None None None None
Redemption Fees........................ None None None None
Exchange Fees.......................... None None None None
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net
assets)
Management Fees (after waivers)*....... 0.50% 0.45% 1.00% 1.05%
12b-1 Fees............................. None None None None
Other Expenses**....................... 0.52% 0.49% 0.41% 0.54%
---- ---- ---- ----
TOTAL PORTFOLIO OPERATING EXPENSES
(after waivers)***................... 1.02% 0.94% 1.41% 1.59%
==== ==== ==== ====
</TABLE>
- ------------------
* Management Fees consisting of investment advisory fees (before waivers)
would be .60%, .60% and 1.25%, for the U.S. Government Fund, California Tax-
Free Fund and Small Company Value Fund, respectively. The investment
advisory fee for the Equity Value Fund is 1.00%; no portion of this fee is
waived. The fee waivers reflected in the table are voluntary and may be
modified or terminated at any time without the Funds' consent.
** Certain Service Organizations may receive fees from a Fund in amounts up to
an annual rate of 0.25% of the daily net asset value of the Fund shares
owned by the shareholders with whom the Service Organization has a servicing
relationship.
*** Total Portfolio Operating Expenses (before waivers) would be 1.12%, 1.09%
and 1.79%, for the U.S. Government Fund, California Tax-Free Fund and Small
Company Value Fund, respectively. The Total Portfolio Operating Expenses
for the Equity Value Fund is 1.41%; no fees or expenses are waived.
6
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
gross annual return, (2) redemption at the end of each time period, (3) that
operating expenses are the same as described above, and (4) reinvestment of all
dividends and distributions:
<TABLE>
<CAPTION>
U.S. California Equity Small
Government Tax-Free Value Company
Fund Fund Fund Value Fund
---------- ---------- ------ ----------
<S> <C> <C> <C> <C>
1 Year.................................. $ 10 $ 10 $ 14 $ 16
3 Years................................. 32 30 45 50
5 Years................................. 56 52 77 87
10 Years................................ 125 118 169 189
</TABLE>
THIS ASSUMED 5% ANNUAL RETURN AND THE EXPENSES SHOWN SHOULD NOT BE
CONSIDERED INDICATIONS OF ACTUAL OR EXPECTED PERFORMANCE OR OPERATING EXPENSES
OF ANY FUND, BOTH OF WHICH MAY VARY SIGNIFICANTLY.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The Financial Highlights for the period ended December 31, 1997, fiscal year
ended March 31, 1997 and the period from commencement of investment operations
(April 3, 1995) to March 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon appears in the Trust's annual
report and which is incorporated by reference in the Statement of Additional
Information ("SAI"). In May 1997, each Fund changed its fiscal year-end from
March 31 to December 31. This information should be read in conjunction with
the financial statements and notes thereto which are incorporated by reference
in the SAI.
8
<PAGE>
SEFTON U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
For the Period For the Year For the Period
Ended Ended Ended
Dec. 31, 1997 (4) March 31, 1997 March 31, 1996 (1)
----------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value--beginning
of period................ $ 12.01 $ 12.35 $ 12.00
------- ------- -------
Income from investment
operations
Net investment income..... 0.52 0.69 0.71
Net realized and
unrealized gain (loss)
from investment
transactions............ 0.61 (0.29) 0.37
------- ------- -------
Total income from
investment operations.. 1.13 0.40 1.08
------- ------- -------
Dividends and distributions
to shareholders
Dividends from net
investment income....... (0.52) (0.69) (0.71)
Distributions from net
realized gain from
investment transactions. -- (0.05) (0.02)
------- ------- -------
Total dividends and
distributions.......... (0.52) (0.74) (0.73)
------- ------- -------
Net asset value--end of
period................... $ 12.62 $ 12.01 $ 12.35
======= ======= =======
Total return............... 9.59%(2) 3.31% 9.06%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................... $35,278 $30,062 $19,096
Ratio of expenses to
average net assets....... 1.02%(3) 1.09% 1.02%(3)
Ratio of net investment
income to average net
assets................... 5.60%(3) 5.64% 5.68%(3)
Ratio of expenses to
average net assets
without fee waivers...... 1.17%(3) 1.39% 1.39%(3)
Ratio of net investment
income to average net
assets without fee
waivers.................. 5.45%(3) 5.34% 5.31%(3)
Portfolio turnover rate
(5)...................... 5.49% 11.94% 45.41%
</TABLE>
- ------------------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
9
<PAGE>
SEFTON CALIFORNIA TAX FREE FUND
<TABLE>
<CAPTION>
For the Period For the Year For the Period
Ended Ended Ended
Dec. 31, 1997 (4) March 31, 1997 March 31, 1996 (1)
----------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value--beginning
of period................ $ 12.26 $ 12.19 $ 12.00
------- ------- -------
Income from investment
operations
Net investment income..... 0.43 0.59 0.58
Net realized and
unrealized gain (loss)
from investment
transactions............ 0.65 0.09 0.20
------- ------- -------
Total income from
investment operations.. 1.08 0.68 0.78
------- ------- -------
Dividends and distributions
to shareholders
Dividends from net
investment income....... (0.43) (0.59) (0.58)
Distributions from net
realized gain from
investment transactions. (0.07) (0.02) (0.01)
------- ------- -------
Total dividends and
distributions.......... (0.50) (0.61) (0.59)
------- ------- -------
Net asset value--end of
period................... $ 12.84 $ 12.26 $ 12.19
======= ======= =======
Total return............... 8.93%(2) 5.69% 6.60%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................... $40,303 $35,504 $42,593
Ratio of expenses to
average net assets....... 0.94%(3) 0.88% 0.83%(3)
Ratio of net investment
income to average net
assets................... 4.54%(3) 4.83% 4.83%(3)
Ratio of expenses to
average net assets
without fee waivers...... 1.12%(3) 1.17% 1.16%(3)
Ratio of net investment
income to average net
assets without fee
waivers.................. 4.36%(3) 4.54% 4.51%(3)
Portfolio turnover rate
(5)...................... 12.97% 14.52% 93.90%
</TABLE>
- ------------------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
10
<PAGE>
SEFTON EQUITY VALUE FUND
<TABLE>
<CAPTION>
For the Period For the Year For the Period
Ended Ended Ended
Dec. 31, 1997 (4) March 31, 1997 March 31, 1996 (1)
----------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value--beginning
of period................ $ 16.42 $ 14.92 $ 12.00
------- ------- -------
Income from investment
operations
Net investment income..... 0.14 0.17 0.21
Net realized and
unrealized gain (loss)
from investment
transactions............ 3.45 3.14 2.92
------- ------- -------
Total income from
investment operations.. 3.59 3.31 3.13
------- ------- -------
Dividends and distributions
to shareholders
Dividends from net
investment income....... (0.14) (0.17) (0.21)
Distributions from net
realized gain from
investment transactions. (2.42) (1.64) --
------- ------- -------
Total dividends and
distributions.......... (2.56) (1.81) (0.21)
------- ------- -------
Net asset value--end of
period................... $ 17.45 $ 16.42 $ 14.92
======= ======= =======
Total return............... 22.13%(2) 23.15% 26.31%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................... $85,278 $86,316 $36,326
Ratio of expenses to
average net assets....... 1.41%(3) 1.52% 1.55%(3)
Ratio of net investment
income to average net
assets................... 1.02%(3) 1.13% 1.68%(3)
Ratio of expenses to
average net assets
without fee waivers...... 1.43%(3) 1.56% 1.66%(3)
Ratio of net investment
income to average net
assets without fee
waivers.................. 1.00%(3) 1.09% 1.57%(3)
Average Commission Rate.... 0.0600 0.0520 --
Portfolio turnover rate
(5)...................... 42.10% 77.65% 62.76%
</TABLE>
- ------------------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
11
<PAGE>
SEFTON SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
For the Period Ended
December 31, 1997 (1)
---------------------
<S> <C>
Net asset value--beginning of period..................... $ 12.00
-------
Income from investment operations
Net investment income................................... 0.07
Net realized and unrealized gain (loss) from investment
transactions.......................................... 0.74
-------
Total income from investment operations................ 0.81
-------
Dividends and distributions to shareholders
Dividends from net investment income.................... (0.07)
Distributions from net realized gain from investment
transactions.......................................... --
-------
Total dividends and distributions...................... (0.07)
-------
Net asset value--end of period........................... $ 12.74
=======
Total return............................................. 6.76%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $29,680
Ratio of expenses to average net assets.................. 1.59%(3)
Ratio of net investment income to average net assets..... 1.15%(3)
Ratio of expenses to average net assets without fee
waivers................................................ 1.81%(3)
Ratio of net investment income to average net assets
without fee waivers.................................... 0.93%(3)
Average Commission Rate.................................. 0.0596
Portfolio turnover rate (4).............................. 14.81%
</TABLE>
- ------------------
(1) For the period from June 30, 1997 (commencement of operations) through
December 31, 1997.
(2) Total return is not annualized.
(3) Annualized.
(4) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
12
<PAGE>
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 investment objective of the Equity Value Fund is to provide
investors with long-term capital appreciation.
. The investment objective of the Small Company Value Fund is to provide
investors with long-term capital appreciation.
Each Fund follows its own investment policies and practices, including
certain investment restrictions. The "Investment Restrictions" section of the
SAI contains specific investment restrictions (the "Investment Restrictions")
which govern each Fund's investments. The Investment 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, and may therefore be changed by the Board of
Trustees without shareholder approval.
The Adviser selects investments and makes investment decisions based on the
investment objective and policies of each Fund.
U.S. Government Fund. In selecting debt securities for the U.S. Government
Fund, the Adviser seeks to select those instruments that appear best
calculated to achieve the Fund's investment objective within the credit and
risk tolerances established for the Fund. In accordance with those policies,
the Fund may purchase commercial paper rated in one of the two highest rating
categories by nationally recognized statistical rating organization ("NRSRO"),
corporate debt securities rated in one of the four highest rating categories
by an NRSRO, mortgageand asset-backed securities rated in one of the four
highest rating categories by an NRSRO, and other debt instruments which are of
comparable quality in the Adviser's opinion.
California Tax-Free Fund. In selecting debt securities for the California
Tax-Free Fund, the Adviser seeks to select those instruments that appear best
calculated to achieve the Fund's investment objective within the credit and
risk tolerances established
13
<PAGE>
for the Fund. In accordance with those policies, the Fund may purchase
California Municipal Obligations rated BBB, SP-2 or better by Standard & Poor's
("S&P") or Baa, MIG-2 or better by Moody's Investors Service ("Moody's"),
commercial paper rated in one of the two highest rating categories by an NRSRO
or, if any such securities are not rated, are of comparable quality in the
Adviser's opinion. Under normal conditions, the Fund will have at least 80% of
its net assets invested in tax-exempt securities and in securities the interest
on which is not a tax preference item for purposes of the Federal alternative
minimum tax. At least 65% of the value of its total assets will be invested in
California Municipal Obligations. The remaining net assets may be invested in
U.S. Government Securities and related repurchase agreements.
Equity Value Fund. In selecting equity investments (which include common
stocks of both domestic and foreign companies) for the Equity Value Fund
(formerly known as the Equity Fund) the Adviser selects companies for
investment using both quantitative and qualitative analysis to identify those
issuers that, in the Adviser's opinion, exhibit one or more of the following
criteria: below-average valuation multiples, improving financial strength, and
a catalyst which will allow the stock to reach what the Adviser believes to be
the stock's intrinsic value generally within a year.
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, common stock of real estate investment trusts, high grade
securities convertible into common stocks, and warrants and rights. 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 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.
Small Company Value Fund. In selecting equity investments (which include
common stocks of both domestic and foreign companies) for the Small Company
Value Fund, the Adviser seeks to select small capitalization companies (defined
as companies with stock market capitalization of $1 billion or less at the time
of initial purchase) for investment using both quantitative and qualitative
analysis to identify those issuers that, in the Adviser's opinion, exhibit one
or more of the following criteria: below-average valuation multiples, improving
financial strength, and a catalyst which will allow the stock to reach what the
Adviser believes to be the stock's intrinsic value generally within a year.
The Adviser may also select other equity securities in addition to common
stocks for investment by the Small Company Value Fund. Such other equity
securities are preferred stocks, common stock of real estate investment trusts,
and warrants and rights. The Fund may invest no more than 5% of its net assets
in warrants. The Small
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Company Value Fund will invest at least 65% of its total assets in common
stocks, preferred stocks and securities convertible into common stocks of small
capitalization companies. 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 John J. Pileggi. Additional information about the
Trustees, as well as the Funds' executive officers, may be found in the SAI
under the heading "MANAGEMENT--Trustees and Officers."
THE ADVISER: SEFTON CAPITAL MANAGEMENT
Sefton Capital Management, 2550 Fifth Avenue, Suite 808, San Diego, CA
92103, acts as the investment adviser to the Funds. SCM manages the investment
and reinvestment of the assets of the Funds and continuously reviews,
supervises and administers the Funds' investments. The Adviser is responsible
for placing orders for the purchase and sale of the Funds' investments directly
with brokers and dealers selected by it in its discretion. Mr. Harley Sefton,
President and CEO of the Adviser, is responsible for the day to day management
of the Funds. Mr. Sefton started SCM in November, 1994. Prior to SCM, he was
President of First Interstate Capital Management, Inc. and San Diego Financial
Capital Management, Inc. (a wholly-owned subsidiary of San Diego Trust Savings
Bank). Prior to that, from January 1992 until January 1994, he was Vice
Chairman and Division Manager for San Diego Trust and Savings Bank, and from
July 1986 until December 1991 he was Senior Vice President and Chief Operating
Officer of San Diego Financial Capital Management, Inc. (a wholly-owned
subsidiary of San Diego Trust Savings Bank). Mr. Ted Piorkowski is the primary
fund manager for the U.S. Government Fund and the California Tax-Free Fund. Mr.
Piorkowski is a Chartered Financial Analyst who has been managing fixed income
portfolios since 1988. From March 1994 through May 1994 he managed portfolios
for First Interstate Capital Management, Inc. From January 1988 through March
1994 he managed portfolios for San Diego Financial Capital Management, Inc. (a
wholly-owned subsidiary of San Diego Trust & Savings Bank). Mr. Leif O. Sanchez
is the fund co-manager for the Equity Value Fund and the Small Company 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 the fund co-manager for the
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<PAGE>
Equity Value Fund and the Small Company Value Fund. Mr. Bowden is a Chartered
Financial Analyst who has been managing portfolios since 1986. From March 1994
through January 1995 he managed portfolios for First Interstate Capital
Management, Inc. From June 1986 through March 1994 he managed portfolios for
San Diego Financial Capital Management, Inc. (a wholly-owned subsidiary of San
Diego Trust Savings Bank).
For the advisory services it provides to the Funds, SCM receives from each
Fund a monthly fee, based on average daily net assets, at the annual rates set
forth below:
<TABLE>
<CAPTION>
Investment
Fund Advisory Fee
---- ------------
<S> <C>
U.S. Government Fund........................................ .60%
California Tax-Free Fund.................................... .60%
Equity Value Fund........................................... 1.00%
Small Company Value Fund.................................... 1.25%
</TABLE>
THE ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator and Distributor to the Funds. BISYS is located at 3435
Stelzer Road, Columbus, Ohio 43219. As Distributor, BISYS sells shares of each
Fund on behalf of the Trust. As Administrator, BISYS 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, BISYS receives an
administrator fee from each Fund, payable monthly, at the annual rate of 0.15%
of each Fund's average daily net assets. BISYS also serves as administrator and
distributor of other mutual funds.
SERVICE ORGANIZATIONS
Various banks, trust companies, broker-dealers (other than BISYS) 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
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<PAGE>
their subsidiaries or affiliates, could prevent a bank Service Organization
from continuing to perform all or part of its servicing activities. If a bank
were prohibited from so acting, its shareholder clients would be permitted to
remain shareholders of the Funds and alternative means for continuing the
servicing of such shareholders would be sought. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences. The Adviser or Administrator also may pay Service
Organizations from time to time for rendering services to shareholders.
OTHER EXPENSES
Each Fund bears all costs of its operations other than expenses specifically
assumed by BISYS 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 the 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 equity and debt securities for the account of the Funds, the Adviser
will seek the best execution of the Funds' orders. Purchase or sale of equity
securities will generally involve the payment of a commission to a broker-
dealer who executes the transaction on behalf of a Fund. 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 of portfolio debt
securities does, however, involve transaction costs. Transactions with dealers
serving as primary market makers reflect the spread between the bid and asked
prices. As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Adviser may cause a Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in the Act) to the Adviser an amount of
disclosed commissions for executing a securities transaction for the Funds in
excess of the commissions 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. 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 allocate purchase and sales orders for
portfolio securities to
17
<PAGE>
broker-dealers that are affiliated with the Adviser or Distributor, if the
Adviser believes the quality of the transaction and commissions are comparable
to what they would be with other qualified brokerage firms.
YEAR 2000 RISKS
Like other mutual funds, financial and business organizations and
individuals around the world, a Fund could be adversely affected if the
computer systems used by its Adviser and other service providers do not
properly process and calculate date-related information, certain dates, and in
particular, dates including the digit "9" and dates from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." The Adviser and
Administrator are taking steps that they each believe are reasonably designed
to address the Year 2000 Problem with respect to the computer systems that each
uses and to obtain assurances that comparable steps are being taken by each of
the Funds' other major service providers. However, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Funds.
FUND SHARE VALUATION
The net asset value per share of the Funds is calculated at 4:00 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, Martin Luther King Jr.'s Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day; and the following additional business holidays for the U.S.
Government Fund: Columbus Day and Veterans 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
BISYS, are accrued daily and taken into account for the purpose of determining
the net asset value.
Securities listed on an exchange or over-the-counter are valued on the basis
of the last sale prior to the time the valuation is made. If there has been no
sale since the immediately previous valuation, then the average of the last bid
and asked prices is used. Quotations are taken from the exchange where the
security is primarily traded. Portfolio securities which are primarily traded
on foreign exchanges may be valued with the assistance of pricing services 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 may be determined by consideration of other
factors by or under the direction of the Board of Trustees. Securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Notwithstanding the above, bonds and other fixed-income securities are valued
by using market quotations and may be valued on the basis of prices provided by
a pricing service approved by the Board of Trustees. All assets and liabilities
initially expressed in foreign currencies will be converted into U.S. dollars
at the mean between the bid and asked prices of such currencies against U.S.
dollars as last quoted by any major bank.
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<PAGE>
With respect to any options contracts entered into by the Equity Value Fund
and Small Company Value Fund, the premium received will be recorded as an asset
and equivalent liability, and thereafter the liability will be 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 will be
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 been
received.
MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in a Fund is $2,000; including an IRA
investment. 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 are invested in full and fractional shares of the
appropriate Fund. Certificates for shares are not issued. BISYS Fund Services,
Inc. (the "Transfer Agent") serves as Transfer Agent pursuant to a Transfer
Agent Agreement dated January 1, 1997. The Trust reserve the right to reject
any purchase. The Transfer Agent maintains records of each shareholder's
holdings of Fund shares, and each shareholder receives a statement of
transactions, holdings and dividends. A completed Account Application together
with a check payable to Sefton Funds should be forwarded to Sefton Funds, P.O.
Box 182494, Columbus, Ohio 43218-2494. Purchases made by check in any Fund are
not permitted to be redeemed until payment of the purchase has been collected,
which may take up to fifteen calendar days. Third party and foreign 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 the Fund 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 Sefton Funds at P.O. Box
182494, Columbus, Ohio 43218-2494. Authorized brokers, investment advisers and
Service Organizations may impose additional requirements and charges for the
services rendered.
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<PAGE>
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
the Fund 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 BISYS at 1-800-524-2276.
An application must be sent for overnight delivery to:
Sefton Funds
c/o BISYS Funds Services
3435 Stelzer Road
Columbus, Ohio 43219-2494
INDIVIDUAL RETIREMENT ACCOUNTS
The U.S. Government Fund, the Equity Value Fund and the Small Company 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 Fifth Third Bank. 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 the Funds 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. 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 Sefton Funds, P.O. Box 182494, Columbus, Ohio
43218-2494, or by calling (800) 524-2276. A shareholder may not exchange shares
of one Fund for shares of another Fund if the new Fund is not registered 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.
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.
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<PAGE>
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 the Fund. 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. Telephone exchanges will be
suspended for a period of ten days following a telephone address change. See
"REDEMPTION OF FUND SHARES--By Telephone" for a discussion of telephone
transactions generally.
Automatic Investment Program. An eligible shareholder may also participate
in the Automatic Investment Program, an investment plan that automatically
debits money from the shareholder's bank account and invests it in one or more
of the Funds in the Trust through the use of electronic funds transfer or
automatic bank drafts. Shareholders may elect to make subsequent investments by
transfers of a minimum of $50 on either the fifth or twentieth day of each
month into their established Fund account. Contact the Funds at (800) 524-2276
for more information about the Automatic Investment Program.
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on each day the
Fund is valued. Shares will be redeemed at the net asset value next determined
after a redemption request in good order has been received and accepted by the
applicable Fund. See "DETERMINATION OF NET ASSET VALUE" in the SAI.
A redemption may be a taxable transaction on which gain or loss may be
recognized.
Where the shares to be redeemed have been purchased by check, the redemption
request may be delayed if the purchasing check has not cleared, which may take
up to 15 calendar 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, if any, will continue to accrue and be
payable and the shareholder will be entitled to exercise all other beneficial
rights of ownership.
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<PAGE>
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 may modify or terminate their
services and provisions at any time. If the Funds terminate any particular
service, they will do so only after giving written notice to shareholders.
Redemption by mail will always be available to shareholders.
You may redeem your shares using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service Organization.
You may redeem your shares by contacting your authorized broker or investment
adviser and instructing him or her to redeem your shares. He or she will then
contact BISYS and place a redemption trade on your behalf.
By Mail. You may redeem your shares by sending a letter directly to the
Transfer Agent. 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 $50,000, 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
22
<PAGE>
telephone instructions and provide written confirmation to investors of such
transactions. Telephone redemptions will be suspended for a period of 10 days
following a telephone address change.
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 Sefton Capital Management or for IRAs. Sefton Capital Management
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 redemption amount is $50. A
sufficient number of shares to make the scheduled redemption will normally be
redeemed on the fifth or twentieth day of the selected month(s). Depending on
the size of the payment requested and fluctuation in the net asset value, if
any, of the shares redeemed, redemptions for the purpose of making such
payments may reduce or even exhaust the account. A shareholder may request that
these payments be sent to a predesignated bank or other designated party.
Capital gains and dividend distributions paid to the account will automatically
be reinvested at net asset value on the distribution payment date.
Redemption in Kind. All redemptions of shares of the Funds shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of that Fund at
the beginning of such period. This commitment is irrevocable without the prior
approval of the SEC and is a fundamental policy of the Funds that may not be
changed without shareholder approval. In the case of redemption requests by
shareholders in excess of such amounts, the Board of Trustees reserves the
right to have the Funds make payment, in whole or in part, in securities or
other assets, in case of an emergency or any time a cash distribution would
impair the liquidity of a Fund to the detriment of the existing shareholders.
In this event, the securities would be valued in the same manner as the
securities of that Fund are valued. If the recipient were to sell such
securities he or she may receive more or less than the value of such securities
as determined above, and might incur brokerage charges.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX
Each Fund intends to qualify as a regulated investment company and intends
to continue to qualify to be treated as a regulated investment company for each
taxable year pursuant to the provisions of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). By so qualifying and electing, each Fund
generally will not be subject to Federal income tax to the extent that it
distributes investment company taxable income and net realized capital gains in
the manner required under the Code.
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 and Small Company Value Fund will distribute investment
company taxable income quarterly. The other Funds will declare distributions of
such income daily and pay those dividends monthly. Each Fund intends to
distribute, at least annually, substantially all net capital gains (the excess
of net long-term capital gains over net short-term capital losses). In
determining amounts of capital gains to be distributed, any capital loss
carryovers from prior years will be applied against capital gains.
The amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account
for any difference between the projected and actual monthly investment income.
For all distributions, the shareholder may elect in writing, not less than
five full business days prior to the record date, to receive such distributions
in cash. Dividends declared in, and attributable to, the preceding period will
be paid within five business days after the end of the period. Unless the
shareholder chooses to receive dividend and/or capital gain distributions in
cash, distributions will be automatically reinvested in additional shares of
the respective Fund at net asset value. If you elect to receive distributions
in cash and checks (1) are returned and marked as "undeliverable" or (2) remain
uncashed for six months, your cash election will be changed automatically and
your future dividend and capital gains distributions will be reinvested in the
Fund at the per share net asset value determined as of the date of payment of
the distribution. In addition, any undeliverable checks or checks that remain
uncashed for six months will be canceled and will be reinvested in the Fund at
the per share net asset value determined as of the date of cancellation.
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 net investment company taxable income (regardless of
whether derived from dividends, interest or short-term capital gains) generally
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. With the enactment of
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the Taxpayer Relief Act of 1997, capital gains derived from a disposition of
assets held for more than one year but less than eighteen months are taxed at a
maximum rate of 28%. Capital gains derived from a disposition of assets held
for more than eighteen months are generally taxed at a maximum rate of 20%. If
a Fund makes a distribution that is designed as a capital gains distribution,
it will report to shareholders the extent to which such distribution includes
28% capital gains and 20% capital gains, based on the Fund's holding period for
the security that generated the capital gain. 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 (and therefore
taxable) 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 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 28% capital gains, long-term 20% gains, or short-term capital gains
generally depending upon the shareholder's holding period of 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 if such shares have been held by the shareholder for six months or
less.
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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, the Equity Value Fund or the Small Company
Value Fund invest in the securities of foreign issuers, they may be subject to
withholding and other similar income taxes imposed by a foreign country. Each
Fund may 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 the extent the Fund
satisfies certain holding period and other requirements with respect to
securities which have given rise to such foreign taxes, to use his pro rate
share of the foreign taxes (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 as an unaudited footnote to each Fund's financial statements, whether the
foreign taxes paid by such Fund will "pass-through" for that year.
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
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regular Federal income tax purposes. Other dividends paid by the Fund, if any,
will be taxable to shareholders.
The California Fund may derive interest on temporary taxable investments and
realize capital gains or losses from its portfolio transactions, including the
sale of securities. Dividends derived from such interest, short-term capital
gains, and long-term capital gains, respectively, will be taxable to
shareholders as described, whether such distributions are made in cash or in
additional shares of the Fund. In addition, a sale of shares in the California
Fund (including a redemption of such shares and an exchange of shares between
Funds) may be a taxable event and may result in a taxable gain or loss to the
shareholder. It is possible that a portion of the distributions of the
California Fund may constitute taxable rather than tax-exempt income in the
hands of a shareholder. A loss realized by a shareholder on the redemption,
sale, or exchange of shares of the California Fund with respect to which
exempt-interest dividends have been paid will be disallowed to the extent of
the exempt-interest dividends received if such shares have been held by the
shareholder for six months or less.
Tax-exempt interest from certain private activity bonds and exempt-interest
dividends attributable to that interest income constitute an item of tax
preference under the alternative minimum tax. Therefore, if the California Fund
invests in such private activity bonds, certain shareholders may become subject
to the alternative minimum tax on that part of the Fund's exempt-interest
dividends derived from interest income on such bonds. See the SAI for further
information about the tax consequences for certain types of investors of a Fund
investing in private activity bonds.
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.
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
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have been made with borrowed funds, even though the borrowed funds are not
directly traceable to the purchase of shares.
Up to 85% of an individual's social security benefits and certain railroad
benefits may be subject to Federal income tax. Along with other factors, total
tax-exempt income, including exempt-interest dividends, is used to calculate
the portion of such benefits that are taxed.
The treatment for state, local and municipal tax purposes of distributions
of exempt-interest dividends from the California Fund will vary according to
the laws of the state and local taxing authorities. Exempt-interest dividends
and other dividends may be subject to state and local taxation. Investors
should consult with their tax advisers as to the availability of any exemptions
from such taxes. Persons who may be "substantial users" (or "related persons"
of substantial users) of facilities financed by private activity bonds may
suffer adverse tax consequences from investing in a Fund and, therefore, should
consult their tax advisers before purchasing Fund shares. In some instances, a
state or city may exempt from tax the portion of the distribution from a Fund
that represents interest received on obligations of that state or its political
subdivisions. Under the laws of certain other states and cities, the entire
amount of any such distribution may be taxable. California law provides that
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of a regulated investment company consists of obligations
the interest of which is exempt from 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 Ginnie Mae, formerly the Federal
Home Loan Banks, Federal Farm Credit Bank, Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal Land Bank, are
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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, Equity Value Fund and Small Company
Value Fund) These obligations include negotiable certificates of deposit and
bankers' acceptances. The Funds limit their bank investments to dollar-
denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper. Commercial paper includes short-term unsecured promissory
notes, variable rate demand notes and variable rate master demand notes issued
by domestic bank holding companies, corporations and financial institutions
(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, Equity Value Fund and
Small Company 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
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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, Equity Value Fund and
Small Company Value Fund) A Fund may borrow funds by selling portfolio
securities to financial institutions such as banks and broker/dealers and
agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). Reverse repurchase agreements involve the risk that
the market value of the securities sold by a Fund may decline below the
repurchase price. A Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, a Fund will maintain in a segregated account cash or other liquid
assets (as determined by the Board) 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,
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plus accrued interest, at any time. In connection with any such purchase and on
an ongoing basis, the Adviser will consider the earning power, cash flow and
other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, a Fund may, under its minimum rating
standards, invest in them only if, at the time of an investment, the issuer
meets the criteria set forth in the immediately preceding pages of this
Prospectus for commercial paper obligations. The Funds may continue to hold
variable rate master demand notes if the creditworthiness of the issuers
declines below the minimum standards established by the Funds for investing in
such notes.
Forward Commitments and When-Issued Securities. Each Fund may purchase when-
issued securities and make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time if a Fund holds, and
maintains until the settlement date in a segregated account, cash or other
liquid assets 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 and generally may also
increase the inherent volatility of the mortgage-related security by
effectively converting short-term debt instruments into long-term debt
instruments; however, when interest rates decline, the value of mortgage-
related securities with prepayment features may not increase as much as other
fixed-income securities. In recognition of this prepayment risk to investors,
the Public Securities Association (the "PSA") has standardized the method
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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 Ginnie Mae ("GNMA") (formerly the Government National Mortgage
Association); 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.
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
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materially different risks from existing types only after such securities have
been described and their ratings disclosed in the prospectus.
Other Asset-Backed Securities. (U.S. Government Fund only) Other asset-
backed securities (unrelated to mortgage loans) have been offered to investors,
such as Certificates for Automobile Receivables ("CARS"). CARS represent
undivided fractional interests in a trust ("trust") whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interest
in the vehicles securing the contracts. Payments of principal and interest on
CARS are "passed through" monthly to certificate holders and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued
by a financial institution unaffiliated with the trustee or originator of the
trust. Underlying sales contracts are subject to prepayment, which may reduce
the overall return to certificate holders. If the letter of credit is
exhausted, certificate holders may also experience delays in payment or losses
on CARS if the full amounts due on underlying sales contracts are not realized
by the trust because of unanticipated legal or administrative costs of
enforcing the contracts, or because of depreciation, damage or loss of the
vehicles securing the contracts, or other factors. For asset-backed securities,
the industry standard uses a principal prepayment model, the "ABS Model," which
is similar to the PSA identified previously under the first 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 and Small Company Value Fund) Common stock
represents the residual ownership interest in the issuer after all of its
obligations and preferred stocks are satisfied. Common stock fluctuates in
price in response to many factors, including historical and prospective
earnings of the issuer, the value of its assets, general economic conditions,
interest rates, investor perceptions and market volatility. Furthermore, the
Small Company Value Fund primarily will invest and the Equity Value Fund may
invest in smaller companies. Small companies may have limited product lines,
markets or financial resources; may lack depth of experience; and may be more
vulnerable to adverse general market or economic developments than larger
companies. The prices of small company securities are often more volatile than
prices associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
information.
Preferred Stocks. (Equity Value Fund and Small Company Value Fund) 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.
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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.
Real Estate Investment Trusts. (Equity Value Fund and Small Company Value
Fund) The Funds may invest in the securities of real estate investment trusts
("REITs"). A REIT is a pooled investment vehicle that is organized as a
corporation or business trust which invests primarily in income producing real
estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can realize capital gains by selling properties that have appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs
involve risks similar to those associated with investing in common stock (i.e.,
securities market risks) and risks associated with investing in the real estate
industry in general: declines in real estate value, general and local economic
conditions, overbuilding and competition, property tax and operating expense
increases, changes in zoning laws, casualty losses, variations in rental
income, costs related to environmental problems and increases in interest
rates. In addition to these risks, equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while mortgage REITs
may be affected by the quality of any credit extended. Further, equity and
mortgage REITs are dependent upon management skills and generally may not be
diversified. Equity and mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, equity and
mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Internal Revenue Code of 1986, as amended, or to maintain
their exemptions from registration under the Investment Company Act of 1940.
The above factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to the REIT. In the event of a default by a borrower or
lessee, the REIT may experience delays in enforcing its rights as a mortgagee
or lessor and may incur substantial costs associated with protecting its
investments. Investors in REITs indirectly bear a proportionate share of
expenses incurred by the REITs. See "Investment Policies--Real Estate
Securities" in the Statement of Additional Information.
Foreign Securities. (U.S. Government Fund, Equity Value Fund and Small
Company Value Fund) The Funds 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."
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<PAGE>
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 and Small
Company Value Fund do not intend to invest more than 15% of their 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 each Fund's
total assets. See "Illiquid Investments" below.
The Equity Value Fund and Small Company Value Fund may also invest directly
in foreign equity securities and in securities represented by European
Depositary Receipts ("EDRs") or American Depositary Receipts ("ADRs"). ADRs are
dollar-denominated receipts generally issued by domestic banks, which represent
the deposit with the bank of a security of a foreign issuer, and which are
publicly traded on exchanges or over-the-counter in the United States. EDRs are
receipts similar to ADRs and are issued and traded in Europe.
There are certain risks associated with investments in unsponsored ADR
programs. Because the non-U.S. company does not actively participate in the
creation of the ADR program, the underlying agreement for service and payment
will be between the depositary and the shareholder. The company issuing the
stock underlying the ADRs pays nothing to establish the unsponsored facility,
as fees for ADR issuance and cancellation are paid by brokers. Investors
directly bear the expenses associated with certificate transfer, custody and
dividend payment.
In addition, in an unsponsored ADR program, there may be several
depositaries with no defined legal obligations to the non-U.S. company. The
duplicate depositaries may lead to marketplace confusion because there would be
no central source of information to buyers, sellers and intermediaries. The
efficiency of centralization gained in a sponsored program can greatly reduce
the delays in delivery of dividends and annual reports.
Foreign Currency Transactions. (U.S. Government Fund, Equity Value Fund and
Small Company 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 Funds will set aside cash or other liquid assets 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 where a liquid
35
<PAGE>
secondary market does not exist. The Fund will set aside cash or other liquid
assets 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 and Small
Company Value Fund) The Funds may write (i.e., sell) call options ("calls") to
protect against market price uncertainty if the calls are "covered" throughout
the life of the option. A call is "covered" if a Fund owns the optioned
securities and maintains, in a segregated account with that Fund's custodian,
cash or other liquid assets (as determined by the Board) with a value
sufficient to meet its obligations under the call, or if the Fund owns an
offsetting call option. When a 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 Funds also may purchase put options ("puts") for protective purposes.
When a 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 Funds 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 a 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 and Small Company Value
Fund) The Funds 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
36
<PAGE>
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 and Small
Company Value Fund) The Funds 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 a
Fund seeks to close out a futures contract or a futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a 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
37
<PAGE>
other securities. See "INVESTMENT POLICIES" in the SAI. Municipal bonds include
industrial development bonds ("IDBs"), moral obligation bonds, put bonds and
private activity bonds ("PABs"). PABs generally relate to the financing of a
facility used by a private entity or entities. The credit quality of such bonds
is usually directly related to that of the users of the facilities. The
interest on most private activity bonds is subject to the Federal alternative
minimum tax and, except under unusual market conditions, the Fund will invest
at least 80% of its assets 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 canceled. A
risk particular to these obligations is that a municipality may not appropriate
funds for lease payments.
INVESTMENT RESTRICTIONS
(1) No Fund may borrow money or pledge or mortgage its assets, except that a
Fund may borrow from banks up to 5% of the current value of its net assets for
temporary or emergency purposes and those borrowings may be secured by the
pledge of not more than 5% of the current value of that Fund's net assets (but
investments may not be purchased by a Fund while any such borrowings exist).
(2) No Fund may make loans, except loans of portfolio securities except that
a Fund may enter into repurchase agreements with respect to its portfolio
securities and may purchase the types of debt instruments described in this
Prospectus.
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<PAGE>
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. It is the intention of the Funds, unless
otherwise indicated, that with respect to the Funds' policies, that are a
result of application of law, the Funds will take advantage of the flexibility
provided by rules or interpretation of the SEC currently in existence or
promulgated in the future or changes to such laws.
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 adversely
affected by political, economic or regulatory factors that may impair the
ability of California issuers to pay interest on or to repay the principal of
their debt obligations. As a result of certain amendments to the California
Constitution and the adoption of other statutes that limit the taxing authority
of California governmental entities, and reflecting other economic factors,
California has experienced ongoing economic difficulties during the past
several years which have included budget deficits, the elimination of budget
reserves, and downgrades in the credit ratings assigned to its general
obligation bonds by certain credit rating agencies. It is not presently
possible to determine whether, or the extent to which, these credit rating
agencies will change their ratings in the future. These Obligations may be
subject to greater price volatility than municipal obligations in general as a
result of the effect of supply and demand for these securities, which, in turn
could cause greater volatility in the value of the shares of a Fund.
Obligations of issuers of California Municipal Obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Federal Bank Reform Act of 1978. In
addition, the obligations of such issuers may become subject to the laws
enacted in the future by Congress or the
39
<PAGE>
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 summary as to certain California risk
factors is given to investors in view of the California Tax-Free Fund's policy
of investing primarily in California state and municipal issuers. The
information is based primarily upon information derived from public documents
relating to securities offerings of California state and municipal issuers,
from independent municipal credit reports and historically reliable sources,
but has not been independently verified by the Fund. Changes in California
constitutional and other laws during the last several years have raised
questions about the ability of California state and municipal issuers to obtain
sufficient revenue to pay their bond obligations. In 1978 California voters
approved an amendment to the California Constitution known as Proposition 13.
Proposition 13 limits ad valorem taxes on real property and restricts the
ability of taxing entities to increase real property taxes. Legislation passed
subsequent to Proposition 13, however, provided for the redistribution of
California's General Fund surplus to local agencies, the reallocation of
revenues to local agencies and the assumption of certain local obligations by
the state so as to help California municipal issuers to raise revenue to pay
their bond obligations. It is unknown, however, whether additional revenue
redistribution legislation will be enacted in the future and whether, if
enacted, such legislation would provide sufficient revenue for such California
issuers to pay their obligations. The state is also subject to another
constitutional amendment, Article XIIIB, which may have an adverse impact on
California state and municipal issuers. Article XIIIB restricts the state from
spending certain appropriations in excess of an appropriations limit imposed
for each state and local government entity. If revenues exceed such
appropriations limit, such revenues must be returned either as revisions in the
tax rates or fee schedules. There are risks to investment in the California
Tax-Free Fund posed by pending legal actions against the State of California.
Because of the uncertain impact of the aforementioned statutes and legal
actions, the possible inconsistencies in the respective terms of the statutes
and the impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation, legal actions and policies
on the long-term ability of California state and municipal issuers to pay
interest or repay principal on their obligations. Additional considerations
relating to California state risks are presented in the SAI.
Small Capitalization Companies. (Equity Value Fund and Small Company Value
Fund) The Equity Value Fund and Small Company Value Fund may invest in
securities of small capitalization companies, defined as companies with stock
market capitalization of $1 billion or less at the time of initial purchase.
This investment may involve greater risks since these securities may have
limited marketability and, thus, may be more volatile. Because small
capitalization companies normally have fewer
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<PAGE>
shares outstanding than larger companies, it may be more difficult for the
Funds to buy or sell significant amounts of such shares without an unfavorable
impact on prevailing prices. In addition, small capitalization companies are
typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small capitalization companies than
for larger, more established ones. Therefore, an investment in these Funds may
involve a greater degree of risk than an investment in other mutual funds that
seek capital appreciation by investing in better-known, larger companies.
Foreign Securities. (U.S. Government Fund, Equity Value Fund and Small
Company Value Fund) Investing in the securities of issuers in any foreign
country including ADR's and EDR's involves special risks and considerations not
typically associated with investing in U.S. companies. These include
differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including taxes withheld from
payments on those securities. Foreign securities often trade with less
frequency and volume than domestic securities and, therefore, may exhibit
greater price volatility. Additional costs associated with an investment in
foreign securities may include higher custodial fees than apply to domestic
custodial arrangements and transaction costs of foreign currency conversions.
Changes in foreign exchange rates also will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. The Funds'
investments may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Through the Funds' flexible policies, management endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where, from time to time, it places the Funds'
investments. See the SAI for further information about foreign securities.
Non-Diversification. To provide somewhat greater investment flexibility,
both the U.S. Government and the California Tax-Free Fund 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
41
<PAGE>
risks than an investment in a "diversified" fund, including a risk of greater
fluctuations in yield and share price.
OTHER INFORMATION
CAPITALIZATION
Sefton Funds Trust was organized as a Delaware business trust on January 6,
1995 and currently consists of four 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.
VOTING
Shareholders have the right to vote in the election of Trustees and on any
and all matters on which, by law or under the provisions of the Declaration of
Trust, they may be entitled to vote. The Funds are not required to hold regular
annual meetings of shareholders and do not intend to do so.
The Declaration of Trust provides that the holders of not less than two-
thirds of the outstanding shares of the Funds may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Funds and in connection with such meeting to comply with the shareholders'
communications provisions of Section 16(c) of the Act. See "OTHER INFORMATION--
Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in the Prospectus, the phrase "vote of a
majority of the outstanding shares" of a Fund (or the Funds) means the vote of
the lesser of: (1) 67% of the shares of a Fund (or the Funds) present at a
meeting if the holders of more than 50% of the outstanding shares are present
in person or by proxy; or (2) more than 50% of the outstanding shares of a Fund
(or the Funds).
PERFORMANCE INFORMATION
A Fund may, from time to time, include its yield and total return in
advertisements or reports to shareholders or prospective investors. The methods
used to calculate the yield and total return of the Funds is mandated by the
SEC.
Quotations of "yield" for a Fund will be based on the investment income per
share during a particular 30-day (or one month) period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income by the maximum public
offering price per share on the last day of the period. The 30-day yield for
the California Tax-Free Fund and the U.S. Government Fund as of December 31,
1997 were 3.86% and 5.21%, respectively.
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<PAGE>
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,
Morningstar, Standard & Poor's 500 Stock Index, the Russell 2000 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 1997 taxable year. The last four columns of the table
show approximately how much a 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%.
43
<PAGE>
1997 TAXABLE YEAR
TAXABLE EQUIVALENT YIELD TABLE--FEDERAL AND CALIFORNIA
PERSONAL INCOME TAXES*
<TABLE>
<CAPTION>
To Equal Hypothetical Tax-
Free
Yield of
5%, 6%, 7% or 8% A
Taxable Investment
Would Have
Taxable Income(1) To Yield Approximately
- ---------------------------------------- --------------------------
Combined
Married Marginal Tax
Single Filing Jointly Rate(2)(3) 5% 6% 7% 8%
- ------------------- ------------------- ------------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
$23,776 - $37,522 18.40% 6.13% 7.35% 8.58% 9.80%
$18,761 - $26,045 $37,522 - $52,090 32.32% 7.39% 8.87% 10.34% 11.82%
$26,045 - $32,916 $52,090 - $65,832 33.76% 7.55% 9.06% 10.57% 12.08%
$32,916 - $59,750 $65,832 - $99,600 34.70% 7.66% 9.19% 10.72% 12.25%
$59,750 - $124,650 $99,600 - $151,750 37.42% 7.99% 9.59% 11.19% 12.78%
$124,650 - $271,050 $151,750 - $271,050 41.95% 8.61% 10.34% 12.06% 13.78%
over $271,050 over $271,050 45.22% 9.13% 10.95% 12.78% 14.60%
</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 1997 taxable year and California tax rate tables for the
1997 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 1997 exceeds $121,200 ($60,600 in the case of
a married individual filing a separate return).
* This chart is prepared for general information purposes only. Tax
equivalent yields are a useful tool in determining the benefits of a
tax-exempt investment; however, tax equivalent yields should not be
regarded as determinative of the desirability of such an investment. In
addition, this chart is based on a number of assumptions which may not
apply in each individual case. An investor should therefore consult a
competent tax adviser regarding tax equivalent yields in individual
circumstances.
ACCOUNT SERVICES
All transactions in shares of the Funds will be reflected in a monthly
statement for each shareholder. In those cases where a Service Organization or
its nominee is the shareholder of record of shares purchased for its customer,
the Funds have been advised that the statement may be transmitted to the
customer at the discretion of the Service Organization.
BISYS Fund Services, Inc. acts as the Funds' transfer agent. The Funds
compensate the Transfer Agent, pursuant to a Services Agreement, for providing
44
<PAGE>
personnel and facilities to perform dividend disbursing and transfer agency-
related services for the Funds. Union Bank of California acts as the Funds'
custodian.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Funds at 3435 Stelzer
Road, Columbus, Ohio 43219-2444.
General and Account Information: (800) 524-2276.
45
<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. This group is the lowest which
qualifies for investment grade. 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
investment grade. BB, B, CCC, CC--predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and CC the lowest within the
speculative rating categories.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
46
<PAGE>
DESCRIPTION OF MOODY'S RATINGS OF NOTES AND VARIABLE RATE DEMAND INSTRUMENTS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMG 2: This denotes high quality. Margins of protection are ample
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S TAX-EXEMPT COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations which have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. The following designations, all
judged to be investment grade, indicate the relative repayment ability of rated
issuers of securities in which the Trust may invest.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF S&P'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
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
47
<PAGE>
lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI: The "CI" rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF S&P'S RATINGS FOR INVESTMENT GRADE MUNICIPAL NOTES AND
SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF S&P'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT COMMERCIAL
PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
The two rating categories for securities in which the Trust may invest are as
follows:
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."
48
<PAGE>
Investment Adviser
Sefton Capital Management
2550 Fifth Avenue, Suite 808
San Diego, California 92103
Administrator, Distributor
and Transfer Agent
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
Custodian
Union Bank of California
475 Sansome Steet
San Francisco, California 94111
Legal Counsel
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas, 30th Floor
New York, New York 10019-6064
Independent Accountants
Price Waterhouse LLP
200 E. Randolph Drive
Chicago, Illinois 60601
For More Information Call
Sefton Funds (800) 524-2276
[SEFTON FUNDS LOGO APPEARS HERE]
These funds are not insured by the Sefton Capital
Management, the FDIC or any other insurer.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Sefton Funds Trust
3435 Stelzer Road
Columbus, Ohio 43219
General and Account Information: (800) 524-2276
- --------------------------------------------------------------------------------
Sefton Capital Management, Investment Adviser
("SCM" or the "Adviser")
BISYS Funds Services, Administrator, Distributor and Sponsor
("BISYS" or the "Sponsor")
This Statement of Additional Information ("SAI") describes the shares of
four funds (the "Funds") managed by SCM. Each Fund is a portfolio of Sefton
Funds Trust (the "Trust"). The Funds are:
U.S. Government Fund
California Tax-Free Fund
Equity Value Fund
Small Company Value Fund
The SAI is not a prospectus and is only authorized for distribution when
preceded or accompanied by the prospectus for shares of the Funds dated April
30, 1998 (the "Prospectus"). This SAI contains additional and more detailed
information than that set forth in the Prospectus and should be read in
conjunction with the Prospectus. The Prospectus may be obtained without charge
by writing or calling the Funds at the address and information number printed
above.
April 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT POLICIES............................................. 1
Bank Obligations........................................... 1
Commercial Paper........................................... 1
Corporate Debt Securities.................................. 1
Repurchase Agreements...................................... 1
Reverse Repurchase Agreements.............................. 2
Variable and Floating Rate Demand and Master Demand Notes.. 2
Loans of Portfolio Securities.............................. 2
Mortgage-Related Securities................................ 2
Foreign Securities......................................... 3
Real Estate Securities..................................... 3
Investment Company Securities.............................. 4
Interest Rate Futures Contracts............................ 4
Stock Index Futures Contracts.............................. 4
Put Options on Stock Index Futures Contracts............... 5
California Municipal Obligations........................... 5
INVESTMENT RESTRICTIONS......................................... 12
MANAGEMENT...................................................... 14
Trustees and Officers...................................... 14
Investment Adviser......................................... 16
Distribution of Fund Shares................................ 17
Administrators, Bookkeeping and Pricing Agent.............. 17
Service Organizations...................................... 18
DETERMINATION OF NET ASSET VALUE................................ 18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................. 18
PORTFOLIO TRANSACTIONS.......................................... 19
Portfolio Turnover......................................... 20
TAXATION........................................................ 20
OTHER INFORMATION............................................... 25
Capitalization............................................. 25
Control Persons and Principal Holders of Securities........ 26
Voting Rights.............................................. 27
Custodian and Transfer Agent............................... 28
Yield and Performance Information.......................... 28
Independent Accountants.................................... 29
Counsel.................................................... 30
Registration Statement..................................... 30
FINANCIAL STATEMENTS............................................ 30
</TABLE>
<PAGE>
INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and
the policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Funds may invest, the investment policies and portfolio
strategies that the Funds may utilize, and certain risks attendant to such
investments, policies and strategies.
Bank Obligations (U.S. Government Fund, Equity Value Fund and Small
----------------
Company Value Fund). These obligations include negotiable certificates of
deposit and bankers' acceptances. A description of the banks, the obligations of
which the Funds may purchase, is set forth in the Prospectus. A certificate of
deposit is a short-term, interest-bearing negotiable certificate issued by a
commercial bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for
payment, as is the bank, which unconditionally guarantees to pay the draft at
its face amount on the maturity date.
Commercial Paper (All Funds). Commercial paper includes short-term
----------------
unsecured promissory notes, variable rate demand notes and variable rate master
demand notes issued by domestic and foreign bank holding companies, corporations
and financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by the Funds is,
at the time of investment, (i) rated in one of the two highest rating categories
by at least two nationally recognized statistical rating organizations
("NRSROs"), (ii) issued or guaranteed as to principal and interest by issuers
having an existing debt security rating in one of the two highest rating
categories by a least two NRSROs, or (iii) securities which, if not rated or
single rated, are, in the opinion of the Funds' Adviser, of an investment
quality comparable to rated commercial paper in which the Funds may invest. See
"Variable and Floating Rate and Master Demand Notes."
Corporate Debt Securities (U.S. Government Fund, Equity Value Fund
-------------------------
and Small Company Value Fund). Fund investment in these securities is limited
to corporate debt securities (corporate bonds, debentures, notes and similar
corporate debt instruments) which meet the rating criteria established for each
Fund.
The ratings of Standard & Poor's Corporation, Moody's Investors
Service, Inc., and other NRSROs represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. Consequently, obligations with the
same rating, maturity and interest rate may have different market prices. After
purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund. However, the Funds' Adviser will
consider such event in its determination of whether the Fund should continue to
hold the security. To the extent the ratings given by an NRSRO may change as a
result of changes in such organizations or their rating systems, the Adviser
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
It is possible that unregistered securities purchased by a Fund in
reliance upon Rule 144A under the Securities Act of 1933 could have the effect
of increasing the level of the Fund's illiquidity to the extent that qualified
institutional buyers become, for a period, uninterested in purchasing these
securities.
Repurchase Agreements (All Funds). The Funds may invest in
---------------------
securities subject to repurchase agreements with U.S. banks or broker-dealers.
Such agreements may be considered to be loans by the Funds for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). A repurchase
agreement is a transaction in which the seller of a security commits itself at
the time of the sale to repurchase that security from the buyer at a mutually
agree upon time and price. The repurchase price exceeds the sale price,
reflecting an agreed-upon interest rate effective for the period the buyer owns
the security subject to repurchase. The agreed-upon rate is unrelated to the
interest rate on that security. The Adviser will monitor the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to ensure that the value of the
security always equals or exceeds the repurchase price. In the event of default
by the seller under the repurchase agreement, the Funds may have problems in
exercising their rights to the underlying securities and may incur costs and
experience time delays in connection with the disposition of such securities.
1
<PAGE>
Reverse Repurchase Agreements (U.S. Government Fund, Equity Value
-----------------------------
Fund and Small Company Value Fund). A Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Fund may decline below the repurchase
price. A Fund will pay interest on amounts obtained pursuant to a reverse
repurchase agreement. While reverse repurchase agreements are outstanding, a
Fund will maintain in a segregated account cash, or other liquid assets (as
determined by the Board) of an amount at least equal to the market value of the
securities, plus accrued interest, subject to the agreement.
Variable And Floating Rate Demand And Master Demand Notes (All
---------------------------------------------------------
Funds). The Funds may acquire variable and floating rate instruments as
described in the Prospectus. Variable and floating rate instruments are
frequently not rated by credit rating agencies; however, unrated variable and
floating rate instruments purchased by a Fund will be determined by the Adviser
under guidelines established by the Board of Trustees to be of comparable
quality at the time of purchase to rated instruments eligible for purchase by
the Funds. In making such determinations, the Adviser will consider the earning
power, cash flows and other liquidity ratios of the issuers of such instruments
(such issuers include financial, merchandising, investment banking, bank holding
and other companies) and will continuously monitor their financial condition.
There may not be an active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund. The absence of such
an active secondary market could make it difficult for a Fund to dispose of the
variable or floating rate instrument involved. In the event the issuer of the
instrument defaulted on its payment obligations, a Fund could, for this or other
reasons, suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit, guarantees or lending
commitments.
Instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a U.S.
Government security with a variable rate of interest readjusted no less
frequently than every 762 days may be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate; (b) an
instrument with a floating rate of interest, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, may be
deemed to have a maturity equal to one day; (c) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
investment to be paid in more than 397 days, and that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a variable rate of interest, the principal amount of which is
scheduled to be paid in 397 days or less may be deemed to have a maturity equal
to the earlier of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand; and (e) an instrument with a floating rate of
interest, the principal amount of which is scheduled to be paid in more than 397
days, that is subject to a demand feature, may be deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
Loans Of Portfolio Securities (All Funds). The Funds may lend their
-----------------------------
portfolio securities to brokers, dealers and financial institutions, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Funds will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of a particular Fund.
The Funds will earn income for lending their securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Funds may pay reasonable
finders, administrative and custodial fees. Loans of securities involve a risk
that the borrower may fail to return the securities or may fail to provide
additional collateral.
Mortgage-Related Securities (All Funds). There are a number of
---------------------------
important differences among the agencies and instrumentalities of the U.S.
Government that issue mortgage-related securities and among the securities that
they issue. Mortgage-related securities guaranteed by Ginne Mae ("GMNA")
(formerly the Government National Mortgage Association) include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury
2
<PAGE>
to make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Macs are not guaranteed by the United States or by any Federal Home
Loan Bank and do not constitute a debt or obligation of the United States or of
any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment
of interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal at any time after default on an underlying mortgage but in no
event later than one year after it becomes payable.
Foreign Securities (U.S. Government Fund, Equity Value Fund and Small
------------------
Company Value Fund). As described in the Prospectus, changes in foreign
exchange rates will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
Since Funds may invest in securities denominated in currencies other
than the U.S. dollar, and since those Funds may temporarily hold funds in bank
deposits or other money market investments denominated in foreign currencies, a
Fund may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rate between such currencies and the dollar. Changes in
foreign currency exchange rates will influence values within the Fund from the
perspective of U.S. investors. Changes in foreign currency exchange rates may
also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by the Fund. The rate of exchange between the
U.S. dollar and other currencies is determined by the forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation and other factors.
Those Funds that purchase foreign currency-denominated securities may
enter into foreign currency exchange contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are entered into in the interbank market conducted
between currency traders (usually large commercial banks) and their customers.
Forward foreign currency exchange contracts may be bought or sold to protect a
Fund against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar, or between foreign
currencies. Although such contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result should the value of such
currency increase.
Real Estate Securities (Equity Value Fund and Small Company Value
----------------------
Fund). The Funds may invest in REITs. Investing in REITs involves certain
unique risks in addition to those risks associated with investing in the real
estate industry in general. Although the Funds will not invest directly in real
estate, the funds may invest in equity securities of issuers primarily engaged
in or related to the real estate industry. Therefore, an investment in REITs is
subject to certain risks associated with the direct ownership of real estate and
with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increases in competition,
property taxes and operating expenses; changes in zoning laws; costs resulting
from the clean-up of, and liability to third parties for damages resulting from,
environmental problems; casualty or condemnation losses; uninsured damages from
floods, earthquakes or other natural disasters; limitations on and variations in
rents; and changes in interest rates. To the extent that assets underlying the
REITs' investments are concentrated geographically, by property type or in
certain other respects, the REITs may be subject to certain of the foregoing
risks to a greater extent. Equity REITs may be affected by changes in the value
of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon
management skills, are not diversified, are subject to heavy cash flow
dependency, default by borrowers and self-liquidation. REITs are also subject
to the possibilities of failing to
3
<PAGE>
qualify for tax free pass-through of income under the U.S. Internal Revenue
Code and failing to maintain their exemptions from registration under the 1940
Act.
REITs (especially mortgage REITs) are also subject to interest rate
risks. When interest rates decline, the value of a REIT's investment in fixed
rate obligations can be expected to rise. Conversely, when interest rates rise,
the value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investment in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with
investing in small capitalization companies. REITs may have limited financial
resources, may trade less frequently and in a limited volume and may be subject
to more abrupt or erratic price movements than larger company securities.
Investment Company Securities (All Funds). The Funds may invest in
-----------------------------
securities issued by other investment companies, including securities issued by
private investment companies. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not more
than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund or by the Funds as a
whole. The purchase of securities issued by private investment companies are
subject to the illiquid investment restrictions of the Funds.
Interest Rate Futures Contracts (U.S. Government Fund only). This
-------------------------------
Fund may purchase and sell interest rate futures contracts ("futures contracts")
as a hedge against changes in interest rates. A futures contract is an agreement
between two parties to buy and sell a security for a set price on a future date.
Future contracts are traded on designated "contracts markets" which, through
their clearing corporations, guarantee performance of the contracts. Currently,
there are futures contracts based on securities such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury
bills.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract for
the sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if a Fund holds long-term U.S. Government securities and
the Adviser anticipates a rise in long-term interest rates, it could, in lieu of
disposing of its portfolio securities, enter into futures contracts for the sale
of similar long-term securities. If rates increased and the value of the Fund's
portfolio securities declined, the value of the Fund's futures contracts would
increase, thereby protecting the Fund by preventing its net asset value from
declining as much as it otherwise would have. Similarly, entering into futures
contracts for the purchase of securities has an effect similar to actual
purchase of the underlying securities, but permits the continued holding of
securities other than the underlying securities. For example, if the Adviser
expects long-term interest rates to decline, the Fund might enter into futures
contracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
it intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize. Futures
transactions may fail as hedging techniques where price movements of the
underlying securities do not follow price movements of the portfolio securities
subject to the hedge. The loss with respect to futures transactions is
potentially unlimited. Also, the Fund may be unable to control losses by closing
its position where a liquid secondary market does not exist.
Stock Index Futures Contracts (Equity Value Fund and Small Company
-----------------------------
Value Fund). A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined by
the difference between the two index levels at the time of expiration of the
stock index futures contract, and the purchaser will realize a gain in that
amount. In the event the index level falls below the level at which the stock
index futures contract was sold, the seller will recognize a gain determined by
the difference between the two index levels at the expiration of the stock
4
<PAGE>
index futures contract, and the purchaser will realize a loss. Stock index
futures contracts expire on a fixed date, currently one to seven months from
the date of the contract, and are settled upon expiration of the contract.
The Funds intend to utilize stock index futures contracts primarily
for the purpose of attempting to protect the value of its common stock portfolio
in the event of a decline in stock prices. The Funds, therefore, usually will
be sellers of stock index futures contracts. This risk management strategy is an
alternative to selling securities in the portfolio and investing in money market
instruments. Also, stock index futures contracts may be purchased to protect a
Fund against an increase in prices of stocks which the Fund intends to purchase.
If a Fund is unable to invest its cash (or cash equivalents) in stock in an
orderly fashion, the Fund could purchase a stock index futures contract which
may be used to offset any increase in the price of the stock. However, it is
possible that the market may decline instead, resulting in a loss on the stock
index futures contract. If the Fund then concludes not to invest in stock at
that time, or if the price of the securities to be purchased remains constant or
increases, the Fund will realize a loss on the stock index futures contract that
is not offset by a reduction in the price of securities purchased. The Fund
also may buy or sell stock index futures contracts to close out existing futures
positions. See "Interest Rate Futures Contracts" above for more information on
the risks of stock index futures contracts.
Put Options On Stock Index Futures Contracts (Equity Value Fund and
--------------------------------------------
Small Company Value Fund). The Funds may also purchase put options on stock
index futures contracts. Sales of such options may also be made to close out an
open option position. The Funds may, for example, purchase a put option on a
particular stock index futures contract or stock index to protect against a
decline in the value of the common stocks it holds. If the stocks in the index
decline in value, the put should become more valuable and a Fund could sell it
to offset losses in the value of the common stocks. In this way, put options
may be used to achieve the same goals the Funds seek in selling futures
contracts. A put option on a stock index future gives the purchaser the right,
in return for a premium paid, to assume a short (i.e., the right to sell stock
index futures) position in a stock index futures contract at a specified
exercise price ("strike price") at any time during the period of the option. If
the option is exercised by the holder before the last trading date during the
option period, the holder receives the futures position, as well as any balance
in the futures margin account. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash in an amount equal to the difference between the strike price
and the closing level of the relevant index on the expiration date.
The Adviser expects that an increase or decrease in the index in
relation to the strike price level would normally correlate to an increase or
decrease (but not necessarily to the same extent) in the value of the Fund's
common stock portfolio against which the option was written. Thus, any loss in
the option transaction may be offset by an increase in the value of the common
stock portfolio to the extent changes in the index correlate to changes in the
value of that portfolio. The Funds may liquidate the put options they have
purchased by effecting a "closing sale transaction," rather than exercising the
option. This is accomplished by selling an option of the same series as the
option previously purchased. There is no guarantee that a Fund will be able to
effect the closing sale transaction. The Funds will realize a gain from a
closing sale transaction if the price at which the transaction is effected
exceeds the premium paid to purchase the option and, if less, the Funds will
realize a loss.
California Municipal Obligations (California Tax-Free Fund). The
--------------------------------
ability of this Fund to achieve its investment objective depends on the ability
of issuers of California Municipal Obligations to meet their continuing
obligations for the payment of principal and interest. Recent amendments to the
California State Constitution and certain State statutes which limit the taxing
and spending authority of California governmental entities may impair the
ability of the issuers of some California Municipal Obligations to maintain debt
service on their obligations. The following information as to certain
California risk factors is given to investors in view of the Fund's policy of
investing primarily in California state and municipal issuers. The information
is based primarily upon information derived from public documents relating to
securities offerings of California state and municipal issuers, from independent
municipal credit reports and historically reliable sources, but has not been
independently verified by the Fund.
California's economy is the largest among the 50 states and one of the
largest in the world. California is the most populous state in the nation with
total population estimated at 32.4 million. The State now comprises 12.2% of
the nation's population and 12.5% of its total personal income.
Due in part to its rapidly growing population, the California economy
has proven to be more cyclical than that of the nation. California's economy is
broad and diversified with major concentrations in high technology research and
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manufacturing, aerospace and defense-related manufacturing, trade,
entertainment, real estate, and financial services. After experiencing strong
growth throughout much of the 1980's, from 1990-1993 the State suffered through
a severe recession, the worst since 1930's, heavily influenced by large cutbacks
in defense/aerospace industries, military base closures and a major drop in real
estate construction. California's economy has been recovering and growing
steadily stronger since the start of 1994, to the point where the State's
economic growth is outpacing the rest of the nation. The unemployment rate,
while still higher that the national average, fell to the low 6% range in mid-
1997, compared with over 10% in the worst of the recession. California's
economic recovery from the recession is continuing at a strong pace. Recent
economic reports indicate that, while the rate of economic growth in California
is expected to moderate over the next three years, the increases in employment
and income will likely exceed those of the nation as a whole. The unsettled
financial situation occurring in certain Asian economies may adversely affect
the State's export-related industries and, therefore, the State's rate of
economic growth.
These economic difficulties have exacerbated the structural budget
imbalance which has been evident since fiscal year 1985-1986. Since that time,
budget shortfalls have become increasingly more difficult to solve and the State
has recorded in its general fund (the "General Fund") operating deficits in
several fiscal years. Many of these problems have been attributable to the fact
that the great population influx had produced increased demand for education and
social services at a far greater pace that the growth in the State's tax
revenues. Despite substantial tax increases, expenditure reductions and shift
of some expenditure responsibilities to local government, the budget condition
remains problematic.
As a state, California is more prone to earthquakes than most other
states in the country, creating potential economic losses from damages. On
January 17, 1994, a major earthquake, measuring 6.8 on the Richter scale, hit
Southern California centered in the area of Northridge. Total damage has been
estimated at $20 billion. Significant federal aid has been received.
Due to the Fund's concentration in the state of California and its
municipal issuers, the Fund may be affected by certain amendments to the
California constitution and state statutes which limit the taxing and spending
authority of California governmental entities and may affect their ability to
meet their debt service obligations.
In 1978, California voters approved "Proposition 13," adding Article
XIII A, an amendment to the state constitution which limits ad valorem taxes on
real property to 1% of "full cash value" and restricts the ability of taxing
entities to increase real property taxes. The full cash value may be adjusted
annually to reflect increases (not to exceed 2%) or decreases in the consumer
price index or comparable local data, or declining property value caused by
damage, destruction or other factors. The foregoing limitation does not apply
to ad valorem taxes or special assessments to pay the interest and redemption
charges on any indebtedness approved by the voters before July 1, 1978 or,
pursuant to an amendment to Article XIII A, any bonded indebtedness for the
acquisition or improvement of real property approved by two-thirds of the votes
cast by the voters voting on the proposition.
Counties, in particular, have had fewer options to raise revenues than
many other local government entities, and have been required to maintain many
services. The entire statewide welfare system will be changed in response to
the change in federal welfare law enacted in 1996. It is yet not known how the
final system will affect county finances. Under current law, counties are
required to provide "general assistance" aid to certain persons who cannot
obtain welfare from other programs, but this mandate may be eliminated as part
of the overhaul.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
had eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected. Orange County
implemented significant reductions in services and personnel, and continues to
face fiscal constraints in the aftermath of its bankruptcy, which had been
caused by large investment losses in its pooled investment funds.
In 1979 California voters approved another constitutional amendment,
Article XIII B, which may have an adverse impact on California state and
municipal issuers. Article XIII B prohibits the State from spending
"appropriations subject to limitation" in excess of an annual appropriations
limit (the "Appropriations Limit").
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"Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed "the cost reasonably
borne by that entity in providing the regulation, product or service," but
"proceeds of taxes" exclude most state subventions to local governments, tax
refunds and some benefit payments such as unemployment insurance. No limit is
imposed on appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees, and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels and
appropriations of certain special taxes imposed by initiatives (e.g., increased
cigarette and tobacco taxes). The Appropriations Limit may also be exceeded in
cases of emergency. However, unless the emergency arises from civil disturbance
or natural disaster declared by the Governor, and the appropriations are
approved by two-thirds of the Legislature, the Appropriations Limit for the next
three years must be reduced by the amount of the excess. The Appropriations
Limit in each year is based on the limit for the prior year, adjusted annually
for changes in California per capita personal income and changes in population,
and adjusted, when applicable, for any transfer of financial responsibility of
providing services to or from another unit of government. The measurement of
change in population is a blended average of statewide overall population
growth, and change in attendance at local school and community college ("K-14")
districts. The Appropriations Limit is tested over consecutive two-year
periods. Any excess of the aggregate "proceeds of taxes" received over such two-
year period above the combined Appropriations Limits for those two years is
divided equally between transfers to K-14 districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the methods
for determining the Appropriations Limit. Government Code Section 7912 requires
an estimate of the Appropriations Limit to be included in the annual budget
proposed by the Governor in January of each year for the next fiscal year, and
thereafter to be subject to the budget process and established in the Budget
Act.
On November 4, 1986, California voters approved an initiative statute
known as Proposition 62. This statute (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity; (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction; (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed; (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article XIII
A of the California Constitution; (v) prohibits the imposition of transaction
taxes and sales taxes on the sale of real property by local governments; (vi)
requires that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority of the electorate within two years of the adoption of
the initiative or be terminated by November 15, 1988; (vii) requires that, in
the event a local government fails to comply with the provisions of this
measure, a reduction in the amount of tax revenue allocated to such local
government occur in a an amount equal to the revenues received by such entity
attributable to the tax levied in violation of the initiative; and (viii)
permits these provisions to be amended exclusively by the voters of the State of
California.
On November 5, 1996, voters approved Proposition 218, entitled the
"Right to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID
into the California Constitution. These new provisions enact limitations on the
ability of local government agencies to impose or raise various taxes, fees,
charges and assessments without voter approval. Certain "general taxes" imposed
after January 1, 1995 must be approved by voters in order to remain in effect.
In addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
Proposition 218 does not affect the State or its ability to levy or
collect taxes. There are a number of ambiguities concerning the Proposition and
its impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. The Legislative Analyst
estimated that enactment of Proposition 218 would reduce local government
revenues statewide by over $100 million a year, and that over time revenues to
local government would be reduced by several hundred million dollars a year
under this Proposition.
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On November 8, 1988, voters approved Proposition 98, which has
significantly altered the operation and effect of the Article XIII B spending
limit, the first changes since its adoption in 1979. This combined initiative
constitutional amendment and statute called the "Classroom Instructional
Improvement and Accountability Act" (the "Act"), changes State funding of public
education below the university level, and the operation of the State's
Appropriations Limit. The Act (as modified by Proposition 111, which was
enacted on June 5, 1990), guarantees State funding for K-12 school districts and
community college districts ("K-14 Schools") at a level equal to the greater of
(a) in general, a fixed percent of General Fund revenues (the "first test"), (b)
the amount appropriated to K-14 schools in the prior year, adjusted for changes
in the cost of living (measured as in Article XIII B by reference to California
per capita personal income) and enrollment (the "second test"), or (c) a third
test, which would replace the second test in any year when the percentage growth
in per capita General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in California per capita personal
income (the "third test"). Under the third test, schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues, plus an additional small adjustment factor. If the
third test is used in any year, the difference between the third test and the
second test would become a "credit" to schools which would be the basis of
payments in future years when per capita General Fund revenue growth exceeds per
capita personal income growth.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools' minimum
funding formula for a one-year period. In the fall of 1989, the Legislature and
the Governor utilized this provision to avoid having 40.3 percent of revenues
generated by a special supplemental sales tax enacted for earthquake relief go
to K-14 schools. Proposition 98 also contains provisions transferring certain
State tax revenues in excess of the Article XIII B limit to K-14 schools.
During the recent recession, General Fund revenues for several years
were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-
92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called CALIFORNIA TEACHERS' ASSOCIATION
V. GOULD, which challenged the validity of these off-budget loans. The
settlement of this case, finalized in July, 1996, provides, among other things,
that both the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans, the State will
repay $935 million by forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
The State's budget problems in recent years have been caused by a
combination of external economic conditions and a structural imbalance in that
the largest General Fund Programs -- K-14 education, health, welfare and
corrections -- were increasing faster than the revenue base, driven by the
State's rapid population growth. These pressures are expected to continue as
population trends maintain strong demand for health and welfare services, as the
school age population continues to grow, and as the State's corrections program
responds to a "Three Strikes" law enacted in 1994, which requires mandatory life
prison terms for certain third-time felony offenders.
As a result of these factors and others, and especially because a
severe recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each fiscal year thereafter, each budget required
multi billion dollar actions to bring projected revenues and expenditures into
balance. The Legislature and Governor agreed on the following principal steps
to produce Budget Acts in the years 1991-92 to 1994-95, although not all these
actions were taken in each year:
. significant cuts in health and welfare program expenditures;
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. transfers of program responsibilities and funding from the State
to local governments (referred to as "realignment"), coupled with
some reduction in mandates on local government;
. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for
schools under Proposition 98;
. reduction in growth of support for higher education programs,
coupled with increases in student fees, through the 1994-95 Fiscal
Year;
. maintenance of the minimum Proposition 98 funding guarantee for
K-14 schools, and the disbursement of additional funds to keep a
constant level of about $4,200 per K-12 pupil through the 1993-94
Fiscal Year;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to illegal immigrants, although during this time frame,
most of the additional aid requested by the Administration was not
received; and
. various one-time adjustments and accounting changes.
Despite these budget actions, as noted, the effects of the recession
led to large, unanticipated deficits in the budget reserve, the SFEU, as
compared to projected positive balances. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
During the past several fiscal years, the State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and revenue anticipation warrants were issued in the period from June 1992
to July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
On August 18, 1997, the Governor signed the 1997-98 Budget Act which
provides for General Fund and Special Fund expenditures of approximately $67.2
billion and projects a 1997-98 fiscal year and reserve of $112 million. For the
second year in a row, the State budget contains a large increase in funding for
K-14 education, reflecting strong revenues which have exceeded initial budgeted
amounts. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension contribution to the
quarterly basis existing prior to the deferral actions invalidated by the
courts. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels. Health and welfare costs combined, continuing
generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program. Unlike prior years,
this Budget Act does not depend on uncertain federal budget actions. About $300
million in federal funds, already included in the federal FY 1997 and 1998
budgets, are included in the Budget Act to offset incarceration costs for
illegal immigrants. The Budget Act contains no tax increases and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million. After enactment of the Budget Act, and prior to the
end of the Legislative Session, The Legislature and the Governor reached certain
agreements related to State expenditures and taxes. Legislation signed by the
Governor includes a variety of phased-in tax cuts, conformity with certain
provisions of the federal tax reform law passed earlier in the year, and reform
of funding for county trial courts, with the State to assume greater financial
responsibility.
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The Governor's proposed budget for fiscal year 1998-1999 proposes
total State spending of $70.6 billion (excluding the expenditure of federal
funds and selected bond funds), which is up 4.7% from the current year's budget.
This total includes $55.4 billion in General Fund spending (a 4.5% increase from
the current year) and $15.2 billion in special funds spending (a 5.3% increase).
The Governor's proposed budget anticipates a $296 million reserve for economic
uncertainties. The new budget reflects agreements reached in the prior year in
the areas of welfare reform, education, state tax relief, and the financial
restructuring of the State's trial court system. The budget contains no tax
changes and relatively few major programmatic changes.
The 1996-97 Budget Act was signed by the Governor on July 15, 1996,
along with various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special Fund). With the signing of the
Budget Act, the State implemented its regular cash flow borrowing program with
the issuance of $3.0 billion of Revenue Anticipation Notes to mature on June 30,
1997. The Budget Act appropriated a modest budget reserve in the SFEU of $305
million, as of June 30, 1997. The Department of Finance projected that, on June
30, 1997, the State's available internal borrowable (cash) resources will be
$2.9 billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing will be needed.
The following are principal features of the 1996-97 Budget Act:
(1) Proposition 98 funding for schools and community college
districts increased by almost $1.6 billion (General Fund) and
$1.65 billion total above revised 1995-96 levels. Almost half of
this money was budgeted to fund class-size reductions in
kindergarten and grades 1-3. Also, for the second year in a row,
the full cost of living allowance (3.2 percent) was funded. The
Proposition 98 increases have brought K-12 expenditures to almost
$4,800 per pupil (also called per ADA, or Average Daily
Attendance), an almost 15% increase over the level prevailing
during the recession years. Community colleges will receive an
increase in funding of $157 million for 1996-97 out of this $1.6
billion total.
Because of the higher than projected revenues in 1995-96, an
additional $1.1 billion ($190 per K-12 ADA and $145 million for
community colleges) was appropriated and retroactively applied
towards the 1995-96 Proposition 98 guarantee, bringing K-12
expenditures in that year to over $4,600 per ADA. These new funds
were appropriated for a variety of purposes, including block
grants, allocations for each school site, facilities for class
size reduction, and a reading initiative. Similar retroactive
increases totaling $230 million, based on final figures on
revenues and State population growth, were made to the 1991-92
and the 1994-95 Proposition 98 guarantees, most of which was
allocated to each school site.
(2) The Budget Act assumed savings of approximately $660 million in
health and welfare costs which required changes in federal law,
including federal welfare reform. The Budget Act further assumed
federal law changes in August 1996 which would allow welfare cash
grant levels to be reduced by October 1, 1996. These cuts totaled
approximately $163 million of the anticipated $660 million
savings. See "Federal Welfare Reform" below.
(3) A 4.9 percent increase in funding for the University of
California ($130 million General Fund) and the California State
University system ($101 million General Fund), with no increases
in student fees, maintaining the second year of the Governor's
four-year "Compact" with the State's higher education units.
(4) The Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and
health care costs of illegal immigrants. These funds reduce
appropriations in these categories that would otherwise have to
be paid from the General Fund. (For purposes of cash flow
projections, the Department of Finance expects $540 million of
this amount to be received during the 1996-97 fiscal year.)
(5) General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting
estimates of increased prison population.
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(6) With respect to aid to local governments, the principal new
programs included in the Budget Act are $100 million in grants to
cities and counties for law enforcement purposes, and budgeted
$50 million for competitive grants to local governments for
programs to combat juvenile crime.
The Budget Act did not contain any tax increases. As noted, there was
a reduction in corporate taxes. In addition, the Legislature approved another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
Following enactment of the 1996-97 Budget Act, Congress passed and the
President signed (on August 22, 1996) the Personal Responsibility and Work
Opportunity Act of 1996 (P.L. 104-193, the "Law") making a fundamental reform of
the current welfare system. Among many provisions, the Law includes: (i)
conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits to
legal noncitizens, allowing states to elect to deny additional benefits
(including TANF) to legal noncitizens, and generally denying almost all benefits
to illegal immigrants; and (iii) changes in the Food Stamp program, including
reducing maximum benefits and imposing work requirements.
The Law requires states to implement the new TANF program not later
than July 1, 1997 and provides California approximately $3.7 billion in block
grant funds for FY 1996-97 for the provisions of the Law. States are allowed to
implement TANF as soon as possible and will receive a prorated block grant
effective the date of application. The California State Plan was approved
November 27, 1996 to allow grant reductions to be implemented effective January
1, 1997 and to allow the State to capture approximately $267 million in
additional federal block grant funds over the currently budgeted level. None of
the other federal changes needed to achieve the balance of the $660 million cost
savings were enacted. Thus, in lieu of the $660 million savings initially
assumed, it is now projected that savings will total approximately $320 million.
A preliminary analysis of the Law by the Legislative Analyst's Office
indicates that an overall assessment of how these changes will affect the
State's General Fund will not be known for some time, and will depend on how the
State implements the Law. There are many choices including how quickly the
State implements the Law; the degree to which the State elects to make up for
cuts in federal aid. provide more aid to counties, or cut some of its own
existing programs for noncitizens; and the State's ability to avoid certain
penalties written into the Law.
With the continued strong economic recovery in the State, the
Department of Finance has estimated, in connection with the release of the
Governor's 1997-98 Budget Proposal, that revenues for the 1996-97 Fiscal Year
will exceed initial projections by about $760 million. This increase will be
offset by higher expenditures for K-14 school aid (Pursuant to Proposition 98)
and for health and welfare costs, because federal law changes and other federal
actions did not provide as much assistance to the State as was initially planned
in the Budget Act. The Department's updated projections show a balance in the
Special Fund for Economic Uncertainties of $197 million, slightly lower than
projected in July, 1996. The Department also projects the State's cash position
will be stronger than originally estimated, with unused internal borrowable
resources at June 30, 1997 of about $4.3 billion.
The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations. In addition, the State is involved
in certain other legal proceedings that, if decided against the State, may
require the State to make significant future expenditures or may impair future
revenue sources. Because of the prospective nature of these proceedings, no
estimate of the potential loss can be made.
While at any given time, including the present, there are numerous
civil actions pending against the State which could, if determined adversely to
the State, affect the State's expenditures and, in some cases, its revenues, the
Attorney General of the State of California is of the opinion that no pending
actions are likely to have a material adverse effect on the State's ability to
pay debt service as it becomes due.
Because of the uncertain impact of the aforementioned statutes and
cases, the possible inconsistencies in the respective terms of the statutes and
the impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation, cases and policies on the
long-term ability of California state and municipal issuers to pay interest or
repay principal on their obligations.
11
<PAGE>
Due to budgetary and financial difficulties, California's bond ratings
have deteriorated in the early 1990's. S&P initially lowered California's bond
rating in December 1991 from AAA to AA. Then, in July 1992, S&P again lowered
California's bond rating, from AA to A. Likewise, in February 1992, Moody's
lowered its California general obligation bond rating from Aaa to Aa1. Moody's
subsequently lowered the State's general obligation rating in July 1992 from Aa1
to Aa. Because of California's continuing budget problems, the State's General
Obligation bonds were downgraded in July 1994 from Aa to A1 by Moody's and from
A+ to A by S&P and from AA to A by Fitch Investment Service, Inc. ("Fitch").
All three ratings companies expressed uncertainty in the State's ability to
balance its budget by 1996. However, in 1996, citing California's improving
economy and budget situation, both Fitch and S&P raised their ratings from A to
A+. In October 1997, Fitch raised its rating from A+ to AA- referring to the
State's fundamental strengths, the extent of its economic recovery and the
return of financial stability.
On December 6, 1994, Orange County, California (the "County"),
together with its pooled investment funds (the "County Funds") filed for
protection under Chapter 9 of the Federal Bankruptcy Code, after reports that
the County Funds had suffered significant market losses in their investments,
causing a liquidity crisis for the County Funds and the County. More than 200
other public entities, most of which, but not all, are located in the County,
were also depositors in the County Funds. As of mid-January 1995, following a
restructuring of most of the County Funds' assets to increase their liquidity
and reduce their exposure to interest rate increases, the County estimated the
County Funds' loss at about $1.69 billion, or about 23% of their initial
deposits of approximately $7.5 billion. Many of the entities which deposited
monies in the County Funds, including the County, faced interim and/or extended
cash flow difficulties because of the bankruptcy filing and may be required to
reduce programs or capital projects. The County has embarked on a fiscal
recovery plan based on sharp reductions in services and personnel, and
rescheduling of outstanding short term debt using certain new revenues
transferred to the County from other local governments pursuant to special
legislation enacted in October, 1995. On June 12, 1996, it emerged from
bankruptcy after the successful sale of $880 million in municipal bonds allowed
the County to pay off the last of its creditors. On January 7, 1997, Orange
County returned to the municipal bond market with a $136 million bond issue
maturing in 13 years at an insured yield of 7.23%. In December 1997, Moody's
raised its rating on $325 million of Orange County pension obligation bonds to
Baa3 from Ba.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995, the credit rating of the county's long-
term bonds were downgraded for the third time since 1992 as a result of, among
other things, severe operating deficits for the county's health care system.
Also, the county has not yet recovered from the ongoing loss of revenue caused
by the state property tax shift initiatives in 1993 through 1995. In June 1997,
the Los Angeles County Board of Supervisors approved an approximately $12
billion 1997-98 budget containing measures to eliminate a $157 million deficit.
The county's budgetary difficulties have continued with their effect on the
1997-1998 budget still uncertain.
The effect of these various constitutional and statutory amendments
and budget developments upon the ability of California issuers to pay interest
and principal on their obligations remains unclear and in any event may depend
upon whether a particular California tax-exempt security is a general or limited
obligation bond and on the type of security provided for the bond. It is
possible that other measures affecting the taxing or spending authority of
California or its political subdivision may be approved or enacted in the
future.
INVESTMENT RESTRICTIONS
The following restrictions restate or are in addition to those
described under "Investment Restrictions" in the Prospectus.
Each Fund, except as indicated, may not:
(1) Invest more than 15% of the value of its net assets in investments which
are illiquid (including repurchase agreements having maturities of more
than seven calendar days, variable and floating rate demand and master
demand notes not requiring receipt of principal note amount within seven
days notice and securities of foreign issuers which are not listed on a
recognized domestic or foreign securities exchange);
(2) Borrow money or pledge, mortgage or hypothecate its assets, except that a
Fund may enter into reverse repurchase agreements or borrow from banks up
to 5% of the current value of its net assets for temporary or
12
<PAGE>
emergency purposes and those borrowings may be secured by the pledge of not
more than 5% of the current value of its total net assets (but investments
may not be purchased by the Fund while any such borrowings exist);
(3) Issue senior securities, except insofar as a Fund may be deemed to have
issued a senior security in connection with any repurchase agreement or any
permitted borrowing;
(4) Make loans, except loans of portfolio securities and except that a Fund may
enter into repurchase agreements with respect to its portfolio securities
and may purchase the types of debt instruments described in its Prospectus
or the SAI;
(5) Invest in companies for the purpose of exercising control or management;
(6) Invest more than 10% of its net assets in shares of other investment
companies;
(7) Invest in real property or Mortgage loans (including limited partnership
interest but excluding real estate investment trusts and master limited
partnerships), commodities, commodity contracts, or oil, gas and other
mineral resource, exploration, development, lease or arbitrage
transactions, provided that the Fund may invest in collateralized mortgage
obligations;
(8) Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under the
Securities Act of 1933;
(9) Sell securities short, except to the extent that a Fund contemporaneously
owns or has the right to acquire at no additional cost securities identical
to those sold short;
(10) Purchase securities on margin, except that a Fund may obtain such short-
term credits as may be necessary for the clearance of purchases and sales
of securities;
(11) Purchase or retain the securities of any issuer, if the individual officers
and Trustees of the Funds, the Adviser or the Distributor, each owning
beneficially more than 1/2 of 1% of the securities of such issuer, together
own more than 5% of the securities of such issuer;
(12) Purchase a security if, as a result, more than 25% of the value of its
total assets would be invested in securities of one or more issuers
conducting their principal business activities in the same industry,
provided that (a) this limitation shall not apply to obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents; and (c) utilities will be divided according to
their services. For example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry;
(13) Invest more than 5% of its net assets in warrants which are unattached to
securities, included within that amount (except for the Small Company Value
Fund), no more than 2% of the value of the Fund's net asset, may be
warrants which are not listed on the New York or American Stock Exchanges;
(14) Write, purchase or sell puts, calls or combinations thereof, except that
the equity and fixed income funds may purchase or sell puts and calls as
otherwise described in the Prospectus or SAI; however, no Fund will invest
more than 5% of its total assets in these classes of securities for
purposes other than bona fide hedging;
(15) Invest more than 5% of the current value of its total assets in the
securities of companies which, including predecessors, have a record of
less than three years' continuous operation; or
(16) Invest more than 5% of the value of a Fund's total assets in the securities
of any one investment company; invest more than 10% of the value of a
Fund's total assets in the aggregate in securities of investment companies
as a group; or invest such that more than 3% of the outstanding voting
stock of any one investment company will be owned by any Fund or by the
Funds as a whole.
13
<PAGE>
In addition, each of the Equity Value Fund and the Small Company Value
Fund are diversified funds. As such, each will not, with respect to 75% of its
total assets, invest more than 5% of its total assets in the securities of any
one issuer (except for U.S. Government securities) or purchase more than 10% of
the outstanding voting securities of any one issuer.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Fund's investments will not constitute a violation of such
limitation, except that any borrowing by a Fund that exceeds the fundamental
investment limitations stated above must be reduced to meet such limitations
within the period required by the 1940 Act (currently three days). Otherwise, a
Fund may continue to hold a security even though it causes the Fund to exceed a
percentage limitation because of fluctuation in the value of the Fund's assets.
MANAGEMENT
Trustees And Officers
- ---------------------
The principal occupations of the Trustees and executive officers of
the Funds for the past five years are listed below. The address of each, unless
otherwise indicated, is 3435 Stelzer Road, Columbus, Ohio, 43219. Trustees
deemed to be "interested persons" of the Funds for purposes of the 1940 Act are
indicated by an asterisk.
<TABLE>
<CAPTION>
Positions(s) Held
Name and Address Age with Registrant Occupation(s) During Past 5 Years
- ------------------------------ --- ------------------------- -------------------------------------------------------------------
<S> <C> <C> <C>
Harley K. Sefton * 44 Trustee, Chairman of the President and Chief Executive Officer, Sefton Capital Management,
Sefton Capital Management Board and President August 1994 to present; President, First Interstate Capital
2550 Fifth Avenue, Suite 808 Management, Inc., March 1994 through August 1994; President, San
San Diego, California 92103 Diego Financial Capital Management, Inc., January 1994 through March
1994; Executive Vice President/Division Manager, San Diego Trust &
Savings Bank, January 1992 through January 1994.
Grace Evans Cherashore 42 Trustee Chief Executive Officer, Bahia and Catamaran Hotels since 1992.
988 West Mission Bay Drive
San Diego, CA 92109
Gordon T. Frost, Jr. 52 Trustee President/General Manager, Frost Hardwood Lumber Company since 1990.
P.O. Box 15
San Diego, CA 92122
John J. Pileggi 39 Trustee Director of Furman Selz LLC, since 1994; Senior Managing Director of
Furman Selz LLC Furman Selz LLC (1992-1994).
237 Park Avenue
New York, New York 10017
Thomas C. Bowden 39 Vice President Vice President and Fund Manager, Sefton Capital Management, February
Sefton Capital Management 1995 to present; Vice President and Portfolio Manager, First
2550 Fifth Avenue, Suite 808 Interstate Capital Management, Inc., March 1994 through January
San Diego, California 92103 1995; Vice President and Portfolio Manager, San Diego Financial
Capital Management, Inc., June 1986 through March 1994.
Alan A. Lordi 35 Vice President Vice President and Portfolio Manager, Sefton Capital Management,
Sefton Capital Management July 1996 to present; Managing Director of Mutual Funds, Furman
2550 Fifth Avenue, Suite 808 Selz LLC, April 1995 through July 1996; Vice President and
San Diego, California 92103 Investment Marketing Director of First Interstate Capital
Management, Inc., March 1994 through April 1995; Vice President and
Investment Marketing Director of San Diego Financial Capital
Management, Inc., August 1991 through March 1994.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Ted J. Piorkowski 39 Vice President Vice President and Fund Manager, Sefton Capital Management; Vice
Sefton Capital Management President and Portfolio Manager, First Interstate Capital Management
2550 Fifth Avenue, Suite 808 Inc., March 1994 through May 1994; Vice President and Portfolio
San Diego, California 92103 Manager, San Diego Financial Capital Management, Inc., 1989 through
March 1994.
Leif O. Sanchez 36 Vice President Vice President and Fund Manager, Sefton Capital Management, February
Sefton Capital Management 1995 to present; Vice President and Portfolio Manager, First
2550 Fifth Avenue, Suite 808 Interstate Capital Management, Inc., March 1994 through January
San Diego, California 92103 1995; Vice President and Portfolio Manager, San Diego Financial
Capital Management, Inc., March 1985 through March 1994.
Lani Capossere 36 Vice President and Vice President and Chief Operating Officer, Sefton Capital
Sefton Capital Management Secretary Management, October 1994 to present; Assistant Vice President and
2550 Fifth Avenue, Suite 808 Operations Manager, First Interstate Capital Management, Inc., March
San Diego, California 92103 1994 through May 1994; Assistant Vice President and Operations
Manager, San Diego Financial Capital Management, Inc., April 1992
through March 1994.
Paul Kane 41 Vice President and Vice President and Treasurer, Financial Administration, BISYS Fund
BISYS Fund Services Treasurer Services, December 1997 to present; previously, Director,
Shareholder Reporting, Fidelity Service Company, March 1985 to
December 1997.
Greg Maddox 30 Assistant Treasurer Director, BISYS Fund Services, 1991 to present.
BISYS Fund Services
1230 Columbia Street
San Diego, California 92101
Frank Deutchki 44 Assistant Treasurer Compliance Officer, BISYS Fund Services, April 1996 to present; Vice
BISYS Fund Services President, Chase Global Funds Service, September 1995 through April
1996; Vice President, Mutual Funds Service Company, 1989 through
September 1995.
Matthew Constancio 33 Assistant Secretary Manager, Client Legal Services, BISYS Fund Services, November 1996
BISYS Fund Services to present; previously, Mutual Fund Administrator, Payden & Rygel
Investment Group.
Ellen Stoutamire 49 Assistant Secretary Vice President, Client Legal Services, BISYS Fund Services;
BISYS Fund Services previously, Associate Counsel Franklin Templeton Mutual Funds; Vice
President and General Counsel, Pioneer Western Corporation.
Irimga McKay 38 Assistant Secretary Senior Vice President, BISYS Fund Services, 1994 to present;
BISYS Fund Services previously, Senior Vice President, Concord Financial Group, 1988
1230 Columbia Street through 1992.
San Diego, California 92101
Alaina Metz 31 Assistant Secretary Chief Administrator, BISYS Fund Services, June 1995 to present;
BISYS Fund Services Supervisor, Mutual Fund Legal Department, Alliance Capital
Management, L.P., May 1989 through June 1995.
</TABLE>
- -----------------
* Mr. Sefton is considered to be an "interested person" of the Trust as defined
in the 1940 Act.
15
<PAGE>
Compensation Table
------------------
For Calendar Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement Estimated from Trust and
Compensation Benefits Accrued as Annual Benefits Fund Complex
Name of Trustee From the Trust Part of Fund Expenses Upon Retirement Paid to Trustees
- ---------------------- --------------- --------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Harley K. Sefton $ 0 $0 $0 $ 0
Grace Evans Cherashore $4,000 $0 $0 $4,000
Gordon T. Frost, Jr. $4,000 $0 $0 $4,000
John J. Pileggi $3,500 $0 $0 $3,500
</TABLE>
Trustees of the Funds not affiliated with Sefton or BISYS Fund
Services receive from the Funds an annual retainer of $1,000 and a fee of $500
for each Board of Trustees meeting and $500 for each Board committee meeting of
the Funds attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Trustees who are affiliated with Sefton or BISYS
Fund Services do not receive compensation from the Funds.
Investment Adviser
- ------------------
Sefton Capital Management, Inc. ("SCM"), 2550 Fifth Avenue, Suite 808,
San Diego, CA 92103, acts as the investment adviser to the Funds. Mr. Harley K.
Sefton owns 100% of the capital stock of SCM. SCM manages the investment and
reinvestment of the assets of the Funds and continuously reviews, supervises and
administers the Funds' investments. The Adviser is responsible for placing
orders for the purchase and sale of the Funds' investments directly with brokers
and dealers selected by it in its discretion.
For the period ended December 31, 1997, the Adviser earned fees of
$148,520 and waived fees of $32,467 for the U.S. Government Securities Fund,
earned fees of $172,233 and waived fees of $47,617 for the California Tax-Free
Fund, earned fees of $624,902 for the Equity Value Fund, and earned fee of
$177,923 and waived fees of $31,826 for the Small Company Value Fund. For the
fiscal year ended March 31, 1997, the Adviser earned fees of $133,578 and waived
fees of $54,584 for the U.S. Government Securities Fund, earned fees of $257,339
and waived fees of $98,461 for the California Tax-Free Fund, and earned fees of
$482,659 for the Equity Value Fund. For the period ended March 31, 1996, the
Adviser earned fees of $112,654 and waived fees of $52,605 for the U.S.
Government Securities Fund, earned fees of $228,931 and waived fees of $91,958
for the California Tax-Free Fund, and earned fees of $255,969 and waived fees of
$6,226 for the Equity Value Fund.
The current Master Investment Advisory contract and Supplements
thereto ("Advisory Agreement") for the U.S. Government, California Tax-Free and
Equity Value Funds became effective on April 3, 1995. The Advisory Agreement
for the Small Company Value Fund became effective on May 2, 1997. Each Advisory
Agreement will continue in effect for a two-year period and thereafter from year
to year so long as such continuance is approved annually by a majority of the
Funds' Trustees who are not parties to the Advisory Agreements or interested
persons of any such party, and by either a majority of the outstanding voting
shares or the Trustees of the Funds. Each Advisory Agreement: (i) may be
terminated without the payment of any penalty by the Fund or SCM on 60 days
written notice; (ii) terminates automatically in the event of its assignment;
and (iii) generally, may not be amended without the approval by vote of a
majority of the outstanding voting securities of such Fund. The Advisory
Agreement was renewed by a vote of the Trustees, including the Independent
Trustees, at the Board of Trustees Meeting held on February 25, 1998.
The Agreements provide that the investment adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with its performance of services pursuant to the Advisory
Agreement, except loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the investment adviser
in the performance of its obligations under the Advisory Agreement.
16
<PAGE>
Distribution Of Fund Shares
- ---------------------------
Effective January 1, 1997, BISYS Fund Services Limited Partnership
d/b/a BISYS Fund Services ("BISYS"), 3435 Stelzer Road, Columbus, Ohio 43219,
replaced ALPS Mutual Funds Services, Inc. ("ALPS") as Sponsor and Distributor of
the Funds. BISYS also serves as administrator and distributor of other mutual
funds. As distributor, BISYS acts as the Funds' agent to underwrite, sell and
distribute shares in a continuous offering.
Administrator, Bookkeeping And Pricing Agent
- --------------------------------------------
Effective January 1, 1997, BISYS Fund Services Limited Partnership
d/b/a BISYS Fund Services ("BISYS") replaced ALPS as Administrator for the
Funds. BISYS provides management and administrative services necessary for the
operation of the Funds, including among other things, (i) preparation of
shareholder reports and communications, (ii) regulatory compliance, such as
reports to and filings with the Securities and Exchange Commission ("SEC") and
state securities commissions and (iii) general supervision of the operation of
the Funds, including coordination of the services performed by the Funds'
Adviser, custodian, independent accountants, legal counsel and others. In
addition, BISYS furnishes office space and facilities required for conducting
the business of the Funds and pays the compensation of the Funds' officers,
employees and Trustees affiliated with BISYS. For these services, BISYS is
entitled to receive a fee, payable monthly, at the annual rate of 0.15% of the
average daily net assets of the Funds.
The Administration Agreements for the California Tax-Free, U.S.
Government and Equity Value Funds were approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the Contracts or
interested persons of such parties, at its meeting held on October 15, 1996. The
Administration Agreement for the Small Company Value Fund was approved by the
Board by Trustees, including a majority of the Trustees who are not parties to
the contract or "interested persons" of such parties at its meeting on May 2,
1997. At any time after December 31, 1999, each Administration Agreement is
terminable with respect to a Fund without penalty, at any time, by vote of a
majority of the Trustees who are not "interested persons" of the Funds and who
have no direct or indirect financial interest in the Administration Agreement
upon not more than 60 days written notice to BISYS or by vote of the holders of
a majority of the shares of the Fund involved, or, upon 60 days notice, by
BISYS.
BISYS Fund Services, Inc., an affiliate of BISYS serves as fund
accounting agent pursuant to a Fund Accounting Agreement, to maintain the
financial accounts and records of the Funds and to compute the net asset value
and certain other financial information of the Funds. Under the Fund Accounting
Agreement, BISYS Fund Services, Inc. is not liable for any error of judgment or
mistake of law or for any loss suffered by the Funds, except for a loss
resulting from willful misfeasance, bad faith or negligence on the part of BISYS
Fund Services, Inc. in the performance of its duties under the Agreement. For
the period ended December 31, 1997, BISYS Fund Services, Inc. earned $23,590, $
28,313, $23,081 and $16,027 for fund accounting services to the U.S. Government
Fund, California Tax-Free Fund, Equity Value Fund, and Small Company Value Fund.
For the fiscal year ended March 31, 1997 BISYS Fund Services, Inc. and ALPS
collectively earned $31,617, $32,823 and $33,170 for their fund accounting
services to the U.S. Government Fund, California Tax-Free Fund and Equity Value
Fund. For the fiscal year ended March 31, 1996, ALPS and Furman Selz LLP
collectively earned $28,393, $28,393, $28,538 for their fund accounting services
to the U.S. Government Fund, California Tax-Free Fund, and Equity Value Fund.
For the period ended December 31, 1997, BISYS was entitled to
administration fees of $40,987 for the U.S. Government Securities Fund, $47,617
for the California Tax-Free Fund, $104,421 for the Equity Value Fund, and
$21,351 for the Small Company Value Fund. Of such fees, BISYS waived fees of
$3,857 for the U.S. Government Fund, $4,559 for the California Tax-Free Fund,
and $10,686 for the Equity Value Fund. For the fiscal year ended March 31,
1997, BISYS and ALPS were entitled to administration fees of $44,158 for the
U.S. Government Securities Fund, $85,431 for the California Tax-Free Fund, and
$95,828 for the Equity Value Fund. Of such fees, BISYS and ALPS waived fees of
$9,975 for the U.S. Government Fund, $27,036 for the California Tax-Free Fund,
and $21,831 for the Equity Value Fund. For the fiscal year ended March 31,
1996, ALPS and Furman Selz LLC were entitled to administration fees of $37,324
for the U.S. Government Securities Fund, $76,311 for the California Tax-Free
Fund, and $51,142 for the Equity Value Fund. Of such fees, ALPS and Furman Selz
LLP waived fees of $16,798 for the U.S. Government Fund, $32,529 for the
California Tax-Free Fund, and $21,668 for the Equity Value Fund.
17
<PAGE>
Service Organizations
- ---------------------
The Funds may also contract with banks, trust companies, broker-
dealers (other than BISYS) or other financial organizations ("Service
Organizations") to provide certain administrative services with respect to the
Funds for a fee paid at an annual rate of up to 0.25% of daily net Fund assets
serviced. Services provided by Service Organizations may include among other
things: providing necessary personnel and facilities to establish and maintain
certain shareholder accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with client orders to purchase or redeem shares;
verifying and guaranteeing client signatures in connection with redemption
orders, transfers among and changes in client-designating accounts; providing
periodic statements showing a client's account balance and, to the extent
practicable, integrating such information with other client transactions,
furnishing periodic and annual statements and confirmations of all purchases and
redemptions of shares in a client's account; transmitting proxy statements,
annual reports, and updating prospectuses and other communications from the
Funds to clients; and providing such other services as the Funds or a client
reasonably may request, to the extent permitted by applicable statute, rule or
regulation. For the period ended December 31, 1997, Service Organizations were
paid $2,669.20 for the U.S. Government Fund, $4,115.67 for the California Tax-
Free Fund, $5,859.45 for the Equity Value Fund, and $159.38 for the Small
Company Value Fund.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more than
the minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to any
amounts which might be paid to the Service Organization by the Funds. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law. If a bank were prohibited from so acting, its shareholder
clients would be permitted to remain shareholders of the Funds and alternative
means for continuing the servicing of such shareholders would be sought. In that
event, changes in the operation of the Funds might occur and a shareholder
serviced by such a bank might no longer be able to avail itself to any services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
DETERMINATION OF NET ASSET VALUE
As indicated under "Fund Share Valuation" in the Prospectus, each
Fund's net asset value per share for the purpose of pricing purchase and
redemption orders is determined at 4:00 p.m. (Eastern time) on each day the New
York Stock Exchange is open for trading with the exception of certain bank
holidays. The Funds will be closed on the following holidays: New Year's Day,
Martin Luther King Jr.'s Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day; and the
following additional business holidays for the U.S. Government Fund: Columbus
Day and Veterans Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Payment for shares may, in the discretion of the Adviser, be made in
the form of securities that are permissible investments for the Funds as
described in the Prospectus. For further information about this form of payment
please contact BISYS. In connection with an in-kind securities payment, a Fund
will require, among other things, that the securities be valued on the day of
purchase in accordance with the pricing methods used by the Fund and that the
Fund receive satisfactory assurances that (1) it will have good and marketable
title to the securities received by it; (2) the securities are in proper form
for transfer to the Fund; and (3) adequate information will be provided
concerning the basis and other matters relating to the securities.
18
<PAGE>
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
The Funds may suspend redemption rights or postpone redemption
payments (as well as suspend the recordation of the transfer of shares) for such
periods as are permitted under the 1940 Act. The Funds may also redeem shares
involuntarily or make payment for redemption in securities or other property if
it appears appropriate to do so in light of the Funds' responsibilities under
the 1940 Act.
In addition, the Funds may redeem shares involuntarily to reimburse a
Fund for any loss sustained by reason of the failure of a shareholder to make
full payment for shares purchased by the shareholder.
All redemptions of shares of the Funds will be made in cash, except
that the commitment to redeem shares in cash extends only to redemption requests
made by each shareholder of a Fund during any 90-day period of up to the lesser
of $250,000 or 1% of the net asset value of that Fund at the beginning of such
period. This commitment is irrevocable without the prior approval of the SEC and
is a fundamental policy of the Funds that may not be changed without shareholder
approval. In the case of redemption requests by shareholders in excess of such
amounts, the Board of Trustees reserves the right to have the Funds make
payment, in whole or in part, in securities or other assets in case of an
emergency or any time a cash distribution would impair the liquidity of a Fund
to the detriment of its existing shareholders. In this event, the securities
would be valued in the same manner as the securities of that Fund are valued. If
the recipient were to sell such securities, he or she may incur brokerage or
other transactional charges.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Adviser's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Funds' Board of Trustees, the Adviser is primarily
responsible for portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Funds to obtain the best results
taking into account the broker-dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities. While the Adviser generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available. The reasonableness of such
spreads or brokerage commissions will be evaluated by comparing spreads or
commissions among brokers or dealers in consideration of the factors listed
immediately above and research services described below.
Purchases and sales of securities will often be principal transactions
in the case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Under the 1940 Act, persons affiliated with the Funds or the Sponsor are
prohibited from dealing with the Funds as a principal in the purchase and sale
of securities except in limited situations permitted by SEC regulations, unless
a permissive order allowing such transactions is obtained from the SEC.
19
<PAGE>
The Adviser may, in circumstances in which two or more broker-dealers
are in a position to offer comparable results, give preference to a dealer which
has provided statistical or other research services to the Adviser. By
allocating transactions in this manner, the Adviser is able to supplement its
research and analysis with the views and information of securities firms. These
items, which in some cases may also be purchased for cash, include such matters
as general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Adviser in advising
various of its clients (including the Funds), although not all of these services
are necessarily useful and of value in managing the Funds. The management fee
paid by the Funds is not reduced because the Adviser and its affiliates receive
such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), the Adviser may cause the Funds to pay a broker-dealer which
provides "brokerage and research services" (as defined in the Act) to the
Adviser an amount of disclosed commission for effecting a securities transaction
for the Funds in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Funds as a factor in the selection
of broker-dealers to execute portfolio transactions for the Funds.
For the period ended December 31,1997, the Equity Value Fund paid
$125,790 and Small Company Value Fund paid $60,034 in brokerage commissions.
The U.S. Government Fund and California Tax-Free Fund did not pay any brokerage
commissions. For the year ended March 31,1997, the Equity Value Fund paid
$162,097 in brokerage commissions. The U.S. Government Fund and California Tax-
Free Fund did not pay any brokerage commissions. For the period April 3, 1995
(commencement of investment operations) to March 31, 1996, the Equity Value Fund
paid $84,000 in brokerage commissions. The U.S. Government Fund and California
Tax-Free Fund did not pay any brokerage commissions.
Portfolio Turnover
- ------------------
Changes may be made in the portfolio consistent with the investment
objectives and policies of the Funds whenever such changes are believed to be in
the best interests of the Funds and their shareholders. 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. For
purposes of this calculation, portfolio securities exclude all securities having
a maturity when purchased of one year or less.
For the fiscal year ended December 31, 1997 the Funds' annual
portfolio turnover rates were: U.S. Government Fund 5.49%; California Tax-Free
Fund 12.97%, Equity Value Fund 42.10% and Small Company Value Fund 14.81%. For
the fiscal year ended March 31, 1997 the Funds' annual portfolio turnover rates
were: U.S. Government Fund 11.94%; California Tax-Free Fund 14.52% and Equity
Value Fund 77.65%. For the period April 3, 1995 (commencement of investment
operations) to March 31, 1996, the Funds' annualized portfolio turnover rates
were: U.S. Government Fund, 45.41%; California Tax-Free Fund, 93.90%; and Equity
Value Fund, 62.76%.
TAXATION
The Funds have elected to be treated and have qualified as regulated
investment companies and intend to continue to qualify to be treated as
regulated investment companies for each taxable year pursuant to the provisions
of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
To qualify as a regulated investment company, a Fund must (a) distribute to
shareholders at least 90% of its investment company taxable income (which
includes, among other items, dividends, taxable interest and the excess of net
short-term capital gains over net long-term capital losses); (b) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies or other income derived with respect to
its business of investing in such stock, securities or currencies; and (c)
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by cash
and cash items (including receivables), U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
20
<PAGE>
calculation to an amount not greater than 5% of the value of the Fund's total
assets and not greater than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies). In addition, a Fund
earning tax-exempt interest must, in each year, distribute at least 90% of its
net tax-exempt income. By meeting these requirements, the Funds generally will
not be subject to Federal income tax on its investment company taxable income
and net capital gains which are distributed to shareholders. If the Funds do not
meet all of these Code requirements, they will be taxed as ordinary corporations
and their distributions will be taxed to shareholders as ordinary income.
Amounts, other than tax-exempt interest, not 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 the excise tax, each
Fund must distribute for each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gain net
income (adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31, of a calendar year if it is
declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Some Funds may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC under the Code if at least
one-half of its assets constitutes investment-type assets or 75% or more of its
gross income is investment-type income. Under the PFIC rules, an "excess
distribution" received with respect to PFIC stock is treated as having been
realized ratably over the period during which the Fund held the PFIC stock. A
Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, a Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
a Fund may make a mark-to-market election with respect to certain PFIC stocks.
If it does so, the special rules relating to the taxation of excess
distributions will not apply. The result of such an election would be to
accelerate the Fund's recognition of gains or losses due to changes in the
prices of such stocks. Each Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders and that will be taxed to shareholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC stock. Investors should consult
their own tax advisors in this regard.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions from certain of the
Funds may be eligible for the dividends-received deduction available to
corporations. To the extent dividends received by a Fund are attributable to
foreign corporations, a corporation that owns shares will not be entitled to the
dividends-received deduction with respect to its pro rata portion of such
dividends, since the dividends-received deduction is generally available only
with respect to dividends paid by domestic corporations.
Distributions of net long-term capital gains, if any, designated by
the Funds as long- term capital gain dividends are taxable to shareholders as
long-term capital gain, regardless of the length of time the Funds' shares have
been held by a shareholder. With the enactment of the Taxpayer Relief Act of
1997, capital gains derived from a disposition of assets held for more than one
year but less than eighteen months are taxed at a maximum rate of 28 percent.
Capital gains
21
<PAGE>
derived from a disposition of assets held for more than eighteen months are
generally taxed at a maximum rate of 20 percent. If a Fund makes a distribution
that is designed as a capital gains distribution, it will report to shareholders
the extent to which such distribution includes 28% capital gains and 20% capital
gains, based on the Fund's holding period for the security that generated the
capital gain. All distributions are taxable to the shareholder in the same
manner whether reinvested in additional shares or received in cash. Shareholders
will be notified annually as to the Federal tax status of distributions.
Distributions by a Fund reduce the net asset value of the Fund's
shares. Should a distribution reduce the net asset value below a shareholder's
cost basis, such distribution, nevertheless, would be taxable to the shareholder
as ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Funds. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
nevertheless generally will be taxable to them.
Upon the taxable disposition (including a sale or redemption) of
shares of a Fund, a shareholder may realize a gain or loss depending upon his
basis in his shares. Such gain or loss generally will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands. Such gain
or loss will be long-term 28 percent capital gains, long-term 20 percent gains,
or short-term capital gains, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on the redemption, sale or exchange of Fund
shares will be disallowed to the extent an exempt interest dividend was received
with respect to those shares if the shares have been held by the shareholder for
six months or less. Further, a loss realized on a disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
The taxation of equity options is governed by Code section 1234.
Pursuant to Code section 1234, the premium received by a Fund for selling a put
or call option is not included in income at the time of receipt. If the option
expires, the premium is short-term capital gain to the Fund. If the Fund enters
into a closing transaction, the difference between the amount paid to close out
its position and the premium received is short-term capital gain or loss. If a
call option written by a Fund is exercised, thereby requiring the Fund to sell
the underlying security, the premium will increase the amount realized upon the
sale of such security and any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term depending upon the holding period of
the security. With respect to a put or call option that is purchased by a Fund,
if the option is sold any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term, depending upon the holding period of the
option. If the option expires, the resulting loss is a capital loss and is long-
term or short-term, depending upon the holding period of the option. If the
option is exercised, the cost of the option, in the case of a call option, is
added to the basis of the purchased security and in the case of a put option,
reduces the amount realized on the underlying security in determining gain or
loss.
Certain of the options, futures contracts, and forward foreign
currency exchange contracts that several of the Funds may invest in are so-
called "section 1256 contracts." With certain exceptions, gains or losses on
section 1256 contracts generally are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, section 1256 contracts held by a Fund
at the end of a taxable year (and, generally, for purposes of the 4% excise tax,
on October 31 of each year) are "marked-to market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as 60/40 gain or loss. Investors should
consult their own tax advisors in this regard.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few
22
<PAGE>
regulations implementing the straddle rules have been promulgated, the tax
consequences to a Fund of hedging transactions are not entirely clear. Hedging
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to stockholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under the rules according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders and which will be taxed to shareholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a Fund that did not engage in such hedging transactions. Investors
should consult their own tax advisors in this regard.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues interest, dividends
or other receivables, or accrues expenses or other liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables, or
pays such liabilities, generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain options and forward and futures
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "section 988" gains or losses, may
increase, decrease, or eliminate the amount of a Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.
Investors should consult their own tax advisors in this regard.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other similar income taxes imposed by the foreign
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and intends to elect to "pass-through" to its shareholders the
amount of such foreign taxes paid by the Fund. Pursuant to this election, a
shareholder would be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by a
Fund and would be entitled either to deduct his pro rata share of foreign taxes
in computing his taxable income or, to the extent the Fund satisfies certain
holding period and other requirements with respect to securities which have
given rise to such foreign taxes, to use his pro rate share of the foreign taxes
as a foreign tax credit against his U.S. Federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions, but such a shareholder may be eligible to claim
the foreign tax credit (see below). Each shareholder will be notified within 60
days after the close of a Fund's taxable year whether the foreign taxes paid by
a Fund will "pass-through" for that year and, if so, such notification will
designate (a) the shareholder's portion of the foreign taxes paid to each such
country, and (b) the portion of the dividend which represents income derived
from foreign sources.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his total
foreign source taxable income. For this purpose, if a Fund makes the election
described in the preceding paragraph, the source of the Fund's income flows
through to its shareholders. With respect to a Fund, gains from the sale of
securities will be treated as derived from U.S. sources and certain currency
fluctuations gains, including fluctuation gains from foreign currency-
denominated debt securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit) including foreign source passive income of a
Fund. The foreign tax credit may offset only 90% of the alternative minimum tax
imposed on corporations and individuals, and foreign taxes generally may not be
deducted in computing alternative minimum taxable income.
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt shareholders if
(1) the shareholder fails to furnish the Funds with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject
23
<PAGE>
to backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Backup withholding is not an
additional tax. Any amount withheld may be credited against the shareholder's
U.S. Federal income tax liability. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local income taxes in certain states. Shareholders should consult
their tax advisers with respect to particular questions of Federal, state and
local taxation. Shareholders who are not U.S. persons should consult their tax
advisers regarding U.S. and foreign tax consequences of ownership of shares of
the Funds including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
The California Tax-Free Fund. The Fund intends to manage its
----------------------------
portfolio so that it will be eligible to pay "exempt-interest dividends" to
shareholders. The Fund will so qualify if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of state,
municipal, and certain other securities, the interest on which is exempt from
the regular Federal income tax. To the extent that the Fund's dividends
distributed to shareholders are derived from such interest income and are
designated as exempt-interest dividends by the Fund, they will be excludable
from a shareholder's gross income for Federal income tax purposes. Exempt-
interest dividends, however, must be taken into account by shareholders in
determining whether their total incomes are large enough to result in taxation
of up to 85% of their Social Security benefits and certain railroad retirement
benefits. The Fund will inform shareholders annually as to the portion of the
distributions from the Fund which constitute exempt-interest dividends. In
addition, for corporate shareholders of each Fund, exempt-interest dividends may
comprise part or all of an adjustment to alternative minimum taxable income.
Exempt-interest dividends that are attributable to certain private activity
bonds, while not subject to the regular Federal income tax, may constitute an
item of tax preference for purposes of the alternative minimum tax.
To the extent that a Fund's dividends are derived from its investment
company taxable income (which includes interest on its temporary taxable
investments and the excess of net short-term capital gain over net long-term
capital loss), they are considered ordinary (taxable) income for Federal income
tax purposes. Such dividends will not qualify for the dividends-received
deduction for corporations. Distributions, if any, of net long-term capital
gains (the excess of net long-term capital gain over net short-term capital
loss) designated by a Fund as long-term 28 percent capital gain dividends or
long-term 20 percent capital gain dividends are taxable to shareholders as long-
term 28 percent capital gain or long-term 20 percent capital gain regardless of
the length of time the shareholder has owned shares of the Fund.
Upon redemption, sale or exchange of shares in the Fund, a shareholder
will realize a taxable gain or loss, depending on whether the gross proceeds are
more or less than the shareholder's tax basis for the shares. The discussion
above provides additional detail about the income tax consequences of disposing
of Fund shares.
Deductions for interest expense incurred to acquire or carry shares of
the Fund may be subject to limitations that reduce, defer or eliminate such
deductions. This includes limitations on deducting interest on indebtedness
properly allocable to investment property (which may include shares of the
Fund). In addition, a shareholder may not deduct a portion of interest on
indebtedness incurred or continued to purchase or carry shares of an investment
company (such as one of the Funds) paying exempt-interest dividends. Such
disallowance would be in an amount which bears the same ratio to the total of
such interest as the exempt-interest dividends bear to the total dividends,
excluding net capital gain dividends received by the shareholder. Under rules
issued by the IRS for determining when borrowed funds are considered used for
purposes of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to the purchase of shares.
Certain of the debt securities acquired by the Fund may be treated as
debt securities that were originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Fund, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, therefore, such income would be subject to
the distribution requirements of the Code. Original issue
24
<PAGE>
discount on an obligation, the interest from which is exempt from Federal income
tax, generally will constitute tax-exempt interest income.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security having market discount
will be treated as ordinary taxable income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes into account
the semi-annual compounding of interest.
Under California law, a mutual fund which qualifies as a regulated
investment company generally must have at least 50% of its total assets in
California state and local issues at the end of each quarter of its taxable year
in order to be eligible to pay dividends which will be exempt from California
personal income tax. Generally, shareholders who are California residents will
not incur California personal income tax on the amount of exempt-interest
dividends received by them from a Fund and derived from California state and
local issues, whether taken in cash or reinvested in additional shares. Gain on
the sale or redemption of Fund shares is subject to California personal income
tax.
Shareholders will normally be subject to California personal income
tax on dividends paid from income derived from taxable securities and other
taxable investments, and from securities issued by states other than California
and on distribution of capital and other taxable gains.
Each Fund will be required to report to the IRS all distributions of
investment company taxable income and net capital gains and gross proceeds from
the redemption or exchange of the Fund's shares, except in the case of certain
exempt shareholders. All such distributions and proceeds from the redemption or
exchange of the Fund's shares may be subject to withholding of Federal income
tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish a Fund with their taxpayer identification numbers and with required
certifications regarding their status under Federal income tax laws.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuers. The Funds, the Adviser and its affiliates, and the
Funds' counsel make no review of proceedings relating to the issuance of state
or municipal securities on the bases of such opinions.
Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by private activity bonds should
consult their tax advisers before purchasing shares of one of these Funds since
the acquisition of shares of the Fund may result in adverse tax consequences to
them. In addition, all shareholders of a Fund should consult their tax advisers
about the tax consequences to them of their investments in the Fund.
Changes in the tax law, including provisions relating to tax-exempt
income, frequently come under consideration. If such changes are enacted, the
tax consequences arising from an investment in the California Tax-Free Fund may
be affected. Since the Funds do not undertake to furnish tax advice, it is
important for shareholders to consult their tax advisers regularly about the tax
consequences to them of investing in one or more of the Funds.
OTHER INFORMATION
Capitalization
- --------------
The Trust is a Delaware business trust established under a Declaration
of Trust dated January 6, 1995 and currently consists of four separately managed
portfolios, all of which are discussed in this SAI.
The capitalization of the Funds consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. The Board of
Trustees may establish additional Funds (with different investment objectives
and fundamental policies) at any time in the future. Establishment and offering
of additional Funds will not alter the rights of the shareholders. When issued,
shares are fully paid, non-assessable, redeemable and freely transferable.
Shares do not have preemptive rights or subscription rights. In any liquidation
of a Fund, each shareholder is entitled to receive his pro rata share of the net
assets of that Fund.
25
<PAGE>
In the event of a liquidation or dissolution of the Funds or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
respective Funds, of any general assets not belonging to any particular Fund
which are available for distribution. Shareholders of a Fund are entitled to
participate in the net distributable assets of the particular Fund involved in
liquidation, based on the number of shares of the Fund that are held by each
shareholder.
Control Persons And Principal Holders Of Securities
- ---------------------------------------------------
As of April 2, 1998, to the knowledge of the Administrator, the
Officers and Trustees of the Trust, as a group, own less than 1% of the
outstanding voting securities of each Fund. As of April 2, 1998, the following
persons were known by the Fund to own of record 5% or more of the outstanding
voting securities of each Fund.
<TABLE>
<CAPTION>
U.S. Government Fund Shares Owned Percentage Owned
- ---------------------------- ------------- ----------------
<S> <C> <C>
SBT & CO 268,221.121 8.46% (2)
P.O. Box 8469
La Jolla, CA 92038
Thomas & Donna Sefton CRUT 361,834.042 11.41%
333 S. Hope Street
Los Angeles, CA 90071
Sefton CRUT 514,360.688 16.23%
333 S. Hope Street
Los Angeles, CA 90071
SBT & CO 830,635.965 26.20% (1)(2)
Reinvest Account
P.O. Box 8469
La Jolla, CA 92038
CORELINK Financial, Inc. 1,054,601.324 33.27% (1)(2)
1855 Gateway Blvd.
Concord, CA 94524
<CAPTION>
California Tax-Free Fund Shares Owned Percentage Owned
- ---------------------------- ------------- ----------------
<S> <C> <C>
SBT & CO 310,957.821 9.55% (2)
P.O. Box 8469
La Jolla, CA 92038
SBT & CO 799,816.792 24.55% (2)
Reinvest Account
P.O. Box 8469
La Jolla, CA 92038
CORELINK Financial, Inc. 1,929,931.241 59.24% (1)(2)
1855 Gateway Blvd.
Concord, CA 94524
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Equity Value Fund Shares Owned Percentage Owned
- -------------------------- ------------- ----------------
<S> <C> <C>
SBT & CO 392,438.230 8.03% (2)
P.O. Box 8469
La Jolla, CA 92038
SBT & CO 1,934,573.982 39.61% (1)(2)
Reinvest Account
P.O. Box 8469
La Jolla, CA 92038
CORELINK Financial, Inc. 2,160,886.027 44.24% (1)(2)
1855 Gateway Blvd.
Concord, CA 94524
<CAPTION>
Small Company Value Fund Shares Owned Percentage Owned
- -------------------------- ------------- ----------------
<S> <C> <C>
SBT & CO 171,105.890 6.64% (2)
P.O. Box 8469
La Jolla, CA 92038
SBT & CO 629,762.196 24.42% (2)
Reinvest Account
P.O. Box 8469
La Jolla, CA 92038
CORELINK Financial, Inc. 1,700,042.082 65.93% (1)(2)
1855 Gateway Blvd.
Concord, CA 94524
</TABLE>
- ----------------
(1) Accountholder may be deemed to have "control" as that term is defined under
the 1940 Act.
(2) Accountholder disclaims beneficial ownership.
Voting Rights
- -------------
Under the Declaration of Trust, the Funds are not required to hold
annual meetings of each Fund's shareholders to elect Trustees or for other
purposes. It is not anticipated that the Funds will hold shareholders' meetings
unless required by law or the Declaration of Trust. In this regard, the Trust
will be required to hold a meeting to elect Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Trustees
have been elected by the shareholders of the Funds. In addition, the Declaration
of Trust provides that the holders of not less than two-thirds of the
outstanding shares of the Funds may remove persons serving as Trustee either by
declaration in writing or at a meeting called for such purpose. The Trustees
are required to call a meeting for the purpose of considering the removal of
persons serving as Trustee if requested in writing to do so by the holders of
not less than 10% of the outstanding shares of the Funds. To the extent required
by applicable law, the Trustees shall assist shareholders who seek to remove any
person serving as Trustee.
The Funds' shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
Shareholders of all of the Funds, as well as those of any other
investment portfolio now or hereafter offered by the Fund, will vote together in
the aggregate and not separately on a Fund-by-Fund basis, except as otherwise
required by law or when permitted by the Board of Trustees. Rule 18f-2 under the
1940 Act provides that any matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as the Funds shall
not be deemed to have been effectively acted upon unless approved by the holders
of a majority of the outstanding shares of each Fund affected by the matter. A
Fund is affected by a matter unless it is clear that the interests of each Fund
in the
27
<PAGE>
matter are substantially identical or that the matter does not affect any
interest of the Fund. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to a Fund only if approved by a majority of the
outstanding shares of such Fund. However, the Rule also provides that the
ratification of the appointment of independent auditors, the approval of
principal underwriting contracts and the election of trustees may be effectively
acted upon by shareholders of the Funds voting together in the aggregate without
regard to a particular Fund.
Custodian And Transfer Agent
- ----------------------------
Union Bank of California, ("UBC") is the Funds' custodian. Pursuant
to a Custodian Agreement, UBC is responsible for holding the Funds' cash and
portfolio securities.
Effective January 1, 1997, BISYS Fund Services, Inc. replaced State
Street Bank and Trust Company ("SSB") as Transfer Agent for the Funds. For the
fiscal year ended December 31, 1997, BISYS Fund Services, Inc. earned $5,384,
$12,674, $19,911 and $2,580 for performing transfer agency services provided to
the U.S. Government Fund, California Tax-Free Fund, Equity Value Fund and Small
Company Value Fund, respectively. For the year ended March 31, 1997, BISYS Fund
Services, Inc. and SSB collectively earned $40,021, $37,358 and $45,336 for
performing transfer agency and custodian services provided to the U.S.
Government Fund, California Tax-Free Fund and Equity Value Fund, respectively.
For the period April 3, 1995 (commencement of investment operations) to March
31, 1996, the Trust paid, $29,448, $35,613 and $31,387 for transfer agency and
custodian services provided to the U.S. Government Fund, California Tax-Free
Fund and Equity Value Fund.
Yield And Performance Information
- ---------------------------------
The Funds may, from time to time, include their yields, effective
yields, tax equivalent yields and average annual total returns in advertisements
or reports to shareholders or prospective investors.
Quotations of yield for the Funds will be based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during a period ("net investment income") and will be computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula:
a - b
YIELD = 2 [ ( ----- + 1 )/6/ - 1 ]
cd
where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
For the period ended December 31, 1997, the 30-day yield for the U.S.
Government Fund was 5.21%.
Quotations of tax-equivalent yield for the California Tax-Free Fund will be
calculated by: (a) dividing the portion of the Fund's yield that is exempt from
both federal and California state income taxes by one minus a stated combined
federal and state income tax rate; (b) dividing the portion of the Fund's yield
that is exempt from federal income tax only by one minus a stated federal income
tax rate, and (c) adding the figures resulting from (a) and (b) above to that
portion, if any, of the Fund's yield that is not exempt from federal income tax.
Based on the foregoing calculations, the 30-day yield and tax-equivalent
yield of the California Tax-Free Fund for the period ended December 31, 1997
were 3.86% and 6.98%. Tax-equivalent yield is based upon the combined state and
federal tax rate assumptions of 44.7%.
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in a Fund
over periods of 1, 5 and 10 years (up to the life of the Fund), calculated
pursuant to the following formula:
28
<PAGE>
P ( 1 + T )/n/ = ERV
where: P = a hypothetical initial payment of $1,000.
T = the average annual total return.
n = the number of years.
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
All total return figures will reflect a proportional share of Fund expenses
(net of certain reimbursed expenses) on an annual basis, and will assume that
all dividends and distributions are reinvested when paid.
The following table sets forth the average annual total returns for the
U.S. Government Fund, California Tax-Free Fund, Equity Value Fund and Small
Company Value Fund for certain time periods ended December 31, 1997.
<TABLE>
<CAPTION>
Since Inception One Year
--------------- --------
<S> <C> <C>
U.S. Government Fund - (inception April 3, 1995)............. 8.0% 8.4%
California Tax-Free Fund - (inception April 3, 1995)......... 7.7% 8.5%
Equity Value Fund - (inception April 3, 1995)................ 26.3% 25.3%
Small Company Value Fund - (inception June 30, 1997)......... 6.8% N.A.
</TABLE>
Quotations of yield and total return will reflect only the performance
of a hypothetical investment in the Funds during the particular time period
shown. Yield and total return for the Funds will vary based on changes in the
market conditions and the level of a Fund's expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
In connection with communicating its yields or total return to current
or prospective shareholders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indices which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Funds' results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Independent Accountants
- -----------------------
Price Waterhouse LLP serves as the independent accountants for the
Funds. Price Waterhouse LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings. Price
Waterhouse LLP's address is 200 E. Randolph Drive, Chicago, IL 60601.
29
<PAGE>
Counsel
- -------
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel to the
Funds and also from time to time provides advice to the Adviser in the capacity
as investment adviser to the Funds.
Registration Statement
- ----------------------
This SAI and the Prospectus do not contain all the information
included in the Funds' Registration Statement filed with the SEC under the
Securities Act of 1933 with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements for the Trust and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial
statements included in the Annual Report have been audited by the Trust's
independent accountants, Price Waterhouse LLP, whose report thereon dated
February 13, 1998, is also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such report given upon
their authority as experts in accounting and auditing. Additional copies of the
Annual Report may be obtained at no charge by telephoning the Trust at the
telephone number appearing on the front page of this Statement of Additional
Information.
30
<PAGE>
PART C.
OTHER INFORMATION
Item 24. Financial Statements And Exhibits.
(a) Financial Statements:
--------------------
Included in Part A of this Registration Statement:
-------------------------------------------------
(1) Financial Highlights for the periods ended March 31, 1996, March
31, 1997, and December 31, 1997 (audited).
Included in Part B of this Registration Statement:
-------------------------------------------------
(1) Statements of Assets and Liabilities dated December 31, 1997
(audited).*
(2) Statements of Investments dated December 31, 1997 (audited).*
(3) Statements of Operations for the period ended December 31, 1997
(audited).*
(4) Statements of Changes in Net Assets for the periods ended March
31, 1997 and December 31, 1997 (audited).*
(5) Financial Highlights for the periods ended March 31, 1996, March
31, 1997, and December 31, 1997 (audited).*
(6) Notes to Financial Statements dated December 31, 1997 (audited).*
(7) Report of Independent Accountants to Financial Statements for the
period ended December 31, 1997 (audited).*
(b) Exhibits:
---------
Exhibit
Number Description of Exhibit
------ ----------------------
1(a) -- Trust Instrument. (1)(3)
1(b) -- Amendment to Trust Instrument. (3)
2(a) -- Bylaws of Registrant. (1)
3 -- None.
4 -- None.
5(a) -- Form of Master Investment Advisory Contract and Supplements
between Registrant and Sefton Capital Management,
Inc. (1)(6)
5(b) -- Form of Master Administration Agreement and Supplements
between Registrant and BISYS Fund Services Limited
Partnership. (4)(5)
6 -- Form of Master Distribution Agreement and Supplements between
Registrant and BISYS Fund Services Limited Partnership. (4)
7 -- None.
8 -- Form of Custodian Contract between Registrant and Union
Bank of California, N.A. (6)
9(a) -- Form of Transfer Agency Agreement between Registrant and
BISYS Fund Services, Inc.(4)
9(b) -- Form of Fund Accounting Agreement between Registrant and
BISYS Fund Services, Inc.(4)
10 -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison. (7)
11 -- Consent of Price Waterhouse LLP. (7)
12 -- None.
13 -- Subscription Agreement. (2)
14 -- None.
15 -- None.
C-1
<PAGE>
16 -- Schedule of Computation of Performance Calculation.
(a) Sefton U.S. Government Fund (5)
(b) Sefton California Tax-Free Fund (5)
(c) Sefton Equity Value Fund (5)
(d) Sefton Small Company Value Fund (6)
17 -- Financial Data Schedule. (7)
18 -- None.
Other Exhibits
A -- Power of Attorney. (4)
- -----------------
* Incorporated by reference to the Registrant's Annual Report filed with the
Securities and Exchange Commission on May 30, 1997.
(1) Filed as an Exhibit to Registrant's Initial Registration Statement on Form
N-1A on January 13, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to Registrant's Pre-Effective Amendment No. 1 to the
Registration Statement on March 20, 1995 and incorporated herein by
reference.
(3) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 2 to the
Registration Statement on July 12, 1996 and incorporated herein by
reference.
(4) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 3 to the
Registration Statement on April 16, 1997 and incorporated herein by
reference.
(5) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 4 to the
Registration Statement on June 30, 1997 and incorporated herein by
reference.
(6) Filed as an Exhibit to Registrant's Post-Effective Amendment No. 5 to the
Registration Statement on November 20, 1997 and incorporated herein by
reference.
(7) Filed herewith.
Item 25. Persons Controlled By Or Under Common Control With Registrant.
None.
Item 26. Number Of Holders Of Securities.
Name of Fund As of April 2, 1998
------------ -------------------
Sefton U.S. Government Fund 36
Sefton California Tax-Free Fund 30
Sefton Equity Value Fund 130
Sefton Small Company Value Fund 40
Item 27. Indemnification.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940 (the "1940 Act") and pursuant to Article X of the Registrant's Trust
Instrument (Exhibit 1(a) to this Registration Statement) and Section 4 of the
Master Investment Advisory Contract and Supplements (Exhibit 5(a) to the
Registration Statement), officers, trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
C-2
<PAGE>
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers
and trustees against liabilities, and certain costs of defending claims against
such officers and trustees, to the extent such officers and trustees are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers under certain circumstances.
Section 4 of the Master Investment Advisory Contract (Exhibit 5(a) to the
Registration Statement) and Section 3 of the Master Administration Contract
(Exhibit 5(b) to the Registration Statement) and Section 10 of the Master
Distribution Contract (Exhibit 6 to this Registration Statement) limit the
liability of Sefton Capital Management, Inc. and BISYS, respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its Declaration of Trust, By-Laws, Investment Advisory Contract
and Distribution Contract in a manner consistent with Release No. 11330 of the
Securities and Exchange Commission under the 1940 Act so long as the
interpretations of Section 17(h) and 17(i) of such Act remain in effect and are
consistently applied.
Item 28. Business And Other Connections Of Investment Adviser
Sefton Capital Management, Inc. provides investment advisory services to
the Funds pursuant to an Advisory Agreement with the Trust. The adviser was
formed in 1994.
The executive officers of Sefton Capital Management, Inc. and such
executive officers' and directors' positions during the past 2 years are as
follows:
<TABLE>
<CAPTION>
Name and Position Other Businesses
----------------- ----------------
<S> <C>
Harley Knox Sefton, President, First Interstate Capital Management, Inc.
President and Chief Executive Officer and San Diego Financial Capital Management, Inc.
Theodore James Piorkowski, Vice President and Portfolio Manager,
Vice President and Fund Manager First Interstate Capital Management
Lorraine Aulani Capossere, Assistant Vice President and Operations Manager,
Vice President and Chief Operating Officer First Interstate Capital Management, Inc.
Jennifer Jones Sefton, Senior Accountant, Steres Alpert & Carne
Vice President and Chief Financial Officer
Thomas Charles Bowden, Vice President and Portfolio Manager,
Vice President and Fund Manager First Interstate Capital Management, Inc.
Leif Otto Sanchez, Vice President and Portfolio Manager,
Vice President and Fund Manager First Interstate Capital Management, Inc.
Alan Ashwell Lordi, Managing Director, Furman Selz LLC
Vice President and Portfolio Manager
</TABLE>
Item 29. Principal Underwriter
(a) BISYS Fund Services Limited Partnership, an Ohio limited partnership,
is the distributor (the "Distributor") for the shares of the
Registrant. The Distributor also serves as the principal underwriter
or placement agent for other unrelated registered investment
companies.
C-3
<PAGE>
(b) The information required by this item 29 with respect to the
Distributor is incorporated by reference to Schedule A of Form BD
filed by BISYS Fund Services Limited Partnership pursuant to the
Securities Exchange Act of 1934 (SEC File No. 8-32480).
(c) Not applicable.
Item 30. Location Of Accounts And Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of:
(1) Records relating to management and investment advisory functions:
Sefton Capital Management
2550 Fifth Avenue, Suite 808
San Diego, California 92103
(2) Records relating to administration and distribution functions:
BISYS Fund Services Limited Partnership
3435 Stelzer Road,
Columbus, Ohio, 43219
(3) Records relating to fund accounting and registrar/transfer agency
functions:
BISYS Fund Services, Inc.
3435 Stelzer Road,
Columbus, Ohio, 43219
(4) Records relating to custodial functions:
Union Bank of California, N.A.
475 Sansome Street
San Francisco, California 94111
Item 31. Management Services
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the removal of a trustee if requested to do so
by the holders of at least 10% of the Registrant's outstanding
shares.
(b) Registrant undertakes to provide the support to shareholders
specified in Section 16(c) of the 1940 Act as though that section
applied to the Registrant.
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered, a copy of the Registrant's latest annual report to
Shareholders upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 6 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego and State of California, on April 28, 1998.
SEFTON FUNDS TRUST
(Registrant)
By: /s/ Harley K. Sefton
--------------------------
Harley K. Sefton
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 6 to Registration Statement has been signed below
by the following persons in the capacities indicated and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Harley K. Sefton Chairman, President and Trustee April 28, 1998
- --------------------------
Harley K. Sefton
Grace Evans Cherashore * Trustee April 28, 1998
- --------------------------
Grace Evans Cherashore
Gordon T. Frost, Jr. * Trustee April 28, 1998
- --------------------------
Gordon T. Frost, Jr.
John J. Pileggi * Trustee April 28, 1998
- --------------------------
John J. Pileggi
/s/ Paul Kane Vice President and Treasurer April 28, 1998
- -------------------------- (Principal Financial Officer)
Paul Kane
/s/ Harley K. Sefton
- ---------------------
Harley K. Sefton
Attorney-in-fact
- ----------------
* Pursuant to Power of Attorney filed as an exhibit to Registrant's Post-
Effective Amendment No. 3 to the Registration Statement on April 16, 1997 and
incorporated herein by reference.
<PAGE>
FILED EXHIBIT INDEX
-------------------
Exhibit
Number Description of Exhibit
- ------ ------------------------------------------------------------------
10 Consent of Paul, Weiss, Rifkind, Wharton & Garrison
11 Consent of Price Waterhouse LLP
27 Financial Data Schedules
<PAGE>
EXHIBIT 10
April 28, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Sefton Funds Trust (Registration No. 33-88568)
----------------------------------------------
Dear Sir/Madam:
As counsel to Sefton Funds Trust (the "Trust"), we have reviewed Post-
Effective Amendment No.6 to the Trust's Registration Statement on Form N-1A (the
"Amendment"). The Amendment is being filed pursuant to Rule 485 of the 1933 Act
and it is proposed that it will become effective immediately upon filing
pursuant to paragraph (b).
Based on our review, it is our view that the Amendment does not
include disclosure which we believe would render it ineligible to become
effective under paragraph (b) of Rule 485.
It is our opinion that the securities being registered will when sold, be
legally issued, fully paid and non-assessable and we hereby consent to the
reference to our firm as Counsel in Post-Effective Amendment No. 6 to
Registration No. 33-88568.
Sincerely,
PAUL, WEISS, RIFKIND,
WHARTON & GARRISON
<PAGE>
EXHIBIT 11
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 6 to the registration Statement on Form N-1A (the "Registration
Statement") of our report dated February 13, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report to Shareholders of Sefton Funds Trust, which is also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectus and under the
headings "Independent Accountants" and "Financial Statements" in the Statement
of Additional Information.
PRICE WATERHOUSE LLP
200 Eats Randolph Drive
Chicago, Illinois
April 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000935742
<NAME> SEFTON FUND TRUST
<SERIES>
<NUMBER> 001
<NAME> SEFTON US GOVERNMENT FUND
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 33,562,864
<INVESTMENTS-AT-VALUE> 35,014,947
<RECEIVABLES> 464,231
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19,433
<TOTAL-ASSETS> 35,498,611
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 220,428
<TOTAL-LIABILITIES> 220,428
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,868,220
<SHARES-COMMON-STOCK> 2,794,390
<SHARES-COMMON-PRIOR> 2,502,570
<ACCUMULATED-NII-CURRENT> 38,754
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 80,874
<ACCUM-APPREC-OR-DEPREC> 1,452,083
<NET-ASSETS> 35,278,183
<DIVIDEND-INCOME> 1,077
<INTEREST-INCOME> 1,638,534
<OTHER-INCOME> 0
<EXPENSES-NET> 251,724
<NET-INVESTMENT-INCOME> 1,387,887
<REALIZED-GAINS-CURRENT> (803)
<APPREC-INCREASE-CURRENT> 1,613,047
<NET-CHANGE-FROM-OPS> 3,000,131
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,387,887
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 394,674
<NUMBER-OF-SHARES-REDEEMED> 171,902
<SHARES-REINVESTED> 69,048
<NET-CHANGE-IN-ASSETS> 5,216,107
<ACCUMULATED-NII-PRIOR> 34,961
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 76,278
<GROSS-ADVISORY-FEES> 148,520
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 288,048
<AVERAGE-NET-ASSETS> 32,873,769
<PER-SHARE-NAV-BEGIN> 12.01
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .61
<PER-SHARE-DIVIDEND> .52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.62
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000935742
<NAME> SEFTON FUND TRUST
<SERIES>
<NUMBER> 002
<NAME> SEFTON CALIFORNIA TAX-FREE FUND
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 37,208,372
<INVESTMENTS-AT-VALUE> 39,724,762
<RECEIVABLES> 661,542
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