<PAGE>
SUPPLEMENT DATED APRIL 8, 1996
TO STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 1995
OF
SIERRA TRUST FUNDS
9301 CORBIN AVENUE, SUITE 333
P.O. BOX 1160
NORTHRIDGE, CALIFORNIA 91328-1160
The Statement of Additional Information dated October 31, 1995 of the Sierra
Trust Funds (the "Company") relating to the GLOBAL MONEY, U.S. GOVERNMENT MONEY,
CALIFORNIA MONEY, SHORT TERM HIGH QUALITY BOND, SHORT TERM GLOBAL GOVERNMENT,
U.S. GOVERNMENT, CORPORATE INCOME, CALIFORNIA MUNICIPAL, FLORIDA INSURED
MUNICIPAL, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL, NATIONAL MUNICIPAL, GROWTH
AND INCOME, GROWTH, EMERGING GROWTH, INTERNATIONAL GROWTH AND TARGET MATURITY
2002 FUNDS of the Company is hereby amended and supplemented by the following:
The "INVESTMENT ADVISOR AND SUB-ADVISORS, ADMINISTRATOR AND SUB-ADMINISTRATOR,
CUSTODIAN AND TRANSFER AGENT" section under the heading "MANAGEMENT OF THE
COMPANY" on page 14 is amended by inserting the following paragraph after the
seventh paragraph:
SUB-ADVISOR OF INTERNATIONAL GROWTH FUND. J.P. Morgan, located at 522 Fifth
Avenue, New York, New York 10036, was Sub-Advisor to the International
Growth Fund since its inception. J.P. Morgan was replaced as the
Sub-Advisor to the International Growth Fund by Warburg, Pincus
Counsellors, Inc. ("Warburg") on April 8, 1996. The sub-advisor agreement
with Warburg is subject to shareholder approval at a Special Meeting of the
Shareholders of the Company to be held on June 21, 1996. Warburg is a
professional investment counselling firm which provides investment services
to investment endowment funds, foundations and other institutions and
individuals.
By deleting all references to the International Growth Fund in the "CERTAIN
MATTERS RELATING TO J.P. MORGAN INVESTMENT MANAGEMENT INC. AND ITS AFFILIATES"
section under the heading "MANAGEMENT OF THE COMPANY" on page 20.
PLEASE RETAIN THIS SUPPLEMENT
FOR FUTURE REFERENCE
PH02/111303.1
<PAGE>
SIERRA TRUST FUNDS
9301 CORBIN AVENUE, SUITE 333
P.O. BOX 1160
NORTHRIDGE, CALIFORNIA 91328-1160
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1995
o Global Money Fund
o U.S. Government Money Fund
o California Money Fund
o Short Term High Quality Bond Fund
o U.S. Government Fund
o Corporate Income Fund
o California Municipal Fund
o California Insured Intermediate Municipal Fund
o Florida Insured Municipal Fund
o National Municipal Fund
o Growth and Income Fund
o Emerging Growth Fund
o International Growth Fund
o Short Term Global Government Fund
o Growth Fund
o Target Maturity 2002 Fund
<PAGE>
This Statement of Additional Information supplements the information
contained in the current Prospectuses of Sierra Trust Funds (the "Company")
which are dated October 31, 1995, and should be read in conjunction with the
appropriate Prospectus. Two Prospectuses dated October 31, 1995 describe the
first fifteen investment series funds of the Company that are listed above (the
"Non-Target Maturity Funds") and relate to the Class A and Class B Shares of the
Non-Target Maturity Funds. Two other Prospectuses dated October 31, 1995
describe the Non-Target Maturity Funds and relate to the Class A and Class S
Shares of the Non-Target Maturity Funds. An additional Prospectus dated March
20, 1995 describes the last investment series fund of the Company that is listed
above, the Target Maturity 2002 Fund (the "Target Maturity Fund"), and relates
to the Class A Shares of the Target Maturity Fund.
The Company's Prospectuses may be obtained without charge by writing to the
Company at P.O. Box 9702, Providence, Rhode Island 02940-9702 or by calling the
Company at 800-869-2019 (for customers of Great Western, write to the address
noted at the top of the cover page or call 800-222-5852). This Statement of
Additional Information provides information applicable to the Class A, Class B
and Class S Shares of the Non-Target Maturity Funds and the Class A Shares of
the Target Maturity Fund. This Statement of Additional Information, although not
in itself a prospectus, is incorporated by reference into the Prospectuses in
its entirety.
<PAGE>
CONTENTS
PAGE
----
GENERAL INFORMATION AND HISTORY 4
MANAGEMENT OF THE COMPANY 5
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS 23
PORTFOLIO TURNOVER 78
PORTFOLIO TRANSACTIONS 79
HOW TO BUY AND REDEEM SHARES 81
NET ASSET VALUE 84
HOW TO EXCHANGE SHARES 86
DETERMINATION OF PERFORMANCE 86
TAXES 94
DISTRIBUTOR 101
APPENDIX A-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Effective on October 14, 1992, the name of the Company was changed from GW
Sierra Trust Funds to Sierra Trust Funds and the names of the investment funds
of the Company in existence at the time were changed as follows:
Former Name Current Name
----------- ------------
1. GW U.S. Government Money U.S. Government Money Fund
Market Fund
2. GW California Municipal California Money Fund
Money Market Fund
3. GW Global Income Money Global Money Fund
Market Fund
4. GW Short Term Global Short Term Global Government
Government Fund Fund
5. GW U.S. Government U.S. Government Fund
Securities Fund
6. GW Corporate Income Fund Corporate Income Fund
7. GW California Municipal California Municipal Fund
Income Fund
8. GW National Municipal National Municipal Fund
Income Fund
9. GW Growth and Income Fund Growth and Income Fund
10. GW Strategic International International Growth Fund
Fund
11. GW Equity Opportunity Fund Emerging Growth Fund
Effective on October 9, 1992, the name of the Adviser of the Company was
changed from Great Western Financial Advisors Corporation ("GW Advisors") to
Sierra Investment Advisors Corporation ("Sierra Advisors") and the name of the
Administrator of the Company was changed from Great Western Financial Fund
Administration Corporation to Sierra Fund Administration Corporation ("Sierra
Administration"). Also, effective as of August 5, 1992, Great Western Financial
Securities Corporation ("GW Securities"), the former distributor of the Company,
transferred to Sierra Investment Services Corporation ("Sierra Services") all of
its business, assets and liabilities as principal underwriter of the Company and
Sierra Services became the principal underwriter of the Funds.
MANAGEMENT OF THE COMPANY
TRUSTEES AND OFFICERS OF THE COMPANY
The names of the Trustees and executive officers of the Company, together
with information as to their principal business occupations, are set forth
below. The executive officers of the Company are employees of organizations that
provide services to the separate investment funds (the "Funds") offered by the
Company. Each Trustee who is an "interested person" of the Company, as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), is indicated
by an asterisk.
TRUSTEES:
*F. BRIAN CERINI
President
Great Western Investment Management Corporation
9301 Corbin Avenue
Northridge, CA 91324
Since October 1990, serves as President and CEO of Great Western Investment
Management Corporation. Formed GW Securities in 1985 as President and also
serves as Chairman of the Company. Prior to joining GW Securities, he served as
First Vice President, Financial Services for Bateman Eichler, Hill Richards,
Inc., a regional brokerage firm where he directed the firm's off exchange
product responsibilities and marketing. Previously, he worked for Pacific
Southwest Airlines for seven years as Assistant to the President. He holds a BA
degree in Economics from the University of Southern California and an MBA from
the USC Graduate School of Business.
ARTHUR H. BERNSTEIN, ESQ.
Managing General Partner
California Capital Investors
11661 San Vicente Blvd., #608
Los Angeles, CA 90049
Has held this position with the firm since 1981. Also President of Bancorp
Capital Group, Inc. and President of Bancorp Venture Capital, Inc. since 1988.
Previously served on the Board of Directors of Great Western Leasing
Corporation, a subsidiary of Great Western Financial Corporation, until the
subsidiary was sold in 1987. Director of Ryder System, Inc.; Trustee, California
Family Studies Center since 1984.
DAVID E. ANDERSON
Retired, Former President & CEO
GTE California, Inc.
17960 Seabreeze Drive
Pacific Palisades, CA 90272
Retired in 1988 from GTE California, Inc. after 40 years of service. Held
the position of President and CEO from 1979 to 1988. Director of Barclay's Bank
of California until 1988. Currently involved in the following charitable
organizations as a director on the following boards: public television station
KCET; Past Campaign Chairman of United Way; LA Project for the Homeless; Task
Force Chairman for The Year 2000 Partnership; and California Economic
Development Corporation. Holds BSEE degree from Iowa State.
EDMOND R. DAVIS, ESQ.
Partner
Brobeck, Phleger & Harrison
550 South Hope Street, 21st Floor
Los Angeles, CA 90071-2604
Joined the firm as a Partner in 1987 and is responsible for estate
planning, and trusts and estate matters in the Los Angeles office. Prior to
joining the firm, had a similar position for 20 years with the law firm of
Overton, Lyman & Prince in Los Angeles. His expertise has been recognized in
Who's Who in California, The Best Lawyers of America, and Who's Who in American
Law. Member of the Board of Directors of the following non-profit, charitable
organizations: Fifield Manors, Children's Bureau of Los Angeles, Children's
Bureau Foundation, and Braille Institute of America, Inc. Educated at Pepperdine
University and is an Order of the Coif graduate of Hastings College of the Law.
JOHN W. ENGLISH
Retired, former Vice President & Chief Investment Officer
Ford Foundation
50 H New England Ave.
P.O. Box 640
Summit, NJ 07902-0640
Retired Vice President and Chief Investment Officer, the Ford Foundation (a
non-profit charitable organization). Chairman of the Board and Director, The
China Fund, Inc. (a closed-end mutual fund). Director, Paribas Trust for
Institutions (an open-end mutual fund). Trustee, Retail Property Trust (a
company providing management services for a shopping center).
OFFICERS:
F. BRIAN CERINI, CHAIRMAN AND PRESIDENT
Acts as a Trustee of the Company as well as President. Information
regarding Mr. Cerini's background is listed above under "Management of the
Company -- Trustees."
KEITH PIPES, EXECUTIVE VICE PRESIDENT, TREASURER AND SECRETARY
As Senior Vice President, Chief Financial Officer and Secretary of Great
Western Investment Management Corporation, he is responsible for its general
accounting, financial planning, compliance administration and systems
development. Joined Great Western Bank in 1983 as Manager of Strategic Planning
for the Bank and later served as product manager for the Bank's savings products
before joining GW Securities in 1986. Prior to joining the firm, served as
Senior Planning Analyst in the Mergers and Acquisitions Department of Mattel
Corporation. Holds an undergraduate degree in Economics as well as an MBA in
finance from UCLA.
MICHAEL D. GOTH, SENIOR VICE PRESIDENT
Since January 1991, serves as Chief Operating Officer and Portfolio Manager
of Sierra Advisors. Prior to joining Great Western, Mr. Goth worked for 2-1/2
years as a senior manager of Transfer Agent operations at The Shareholder
Services Group, Inc. ("TSSG") and The Boston Company. In addition, Mr. Goth has
10 years experience as executive vice president of the GIT mutual fund group,
responsible for most aspects of that fund group, including investments. Other
experience includes 4 years as a corporate banking officer at Citibank and 1-1/2
years in investment banking with Drexel Firestone. He holds B.S. and M.S.
degrees from Rensselaer Polytechnic Institute and an MBA in finance from Harvard
Business School.
STEPHEN C. SCOTT, SENIOR VICE PRESIDENT
Joined GW Securities in August 1988 to form GW Advisors, now known as
Sierra Advisors, and currently serves as the President and Chief Investment
Officer of Sierra Advisors. Prior to joining GW Securities, served as President
and Chairman of SDS Investment Advisors, a firm he founded in which he developed
asset allocation technology. Previously, President and Chairman of Smathers and
Co., an investment advisory firm. For nine years, served as the Senior Pension
Investment Consultant for the Group Pension Investment Division of Equitable
Life Insurance responsible for their major corporate clients. Has served as a
member on Board of Directors of several corporations and private organizations.
For 17 years, has served as a Trustee on the Long Beach State University
Foundation and currently chairs the Investment Committee. He holds a B.A. degree
in Economics and Finance from Long Beach State University, and continued with an
MBA in finance.
JOHN D. RUOCCO, SENIOR VICE PRESIDENT, SALES
Mr. Ruocco joined GW Securities in September 1986 as a Regional Director of
Sales in Southern California. He assumed the responsibility of Director of Sales
for the firm in November 1988. He is responsible for recruitment, sales
management, regulatory supervisor and acts as a liaison with the Retail Banking
Division's management. Mr. Ruocco has had over 22 years of experience in the
retail securities industry, the last 12 of which have focused on sales
management. Prior to joining Great Western, Mr. Ruocco served as First Vice
President, Sales at Bateman Eichler, Hill Richards, Inc. a Los Angeles based
regional firm. Mr. Ruocco attended Long Island University in Brooklyn, New York
where he received his B.S. in Finance/Accounting.
RICHARD W. GRANT, ASSISTANT SECRETARY
Has been a Partner in the firm of Morgan, Lewis & Bockius LLP since 1989.
Prior to that he was a Partner in the firm of Ballard, Spahr, Andrews &
Ingersoll beginning in 1983. He received his A.B. in 1968 from Brown University
and his J.D. in 1971 from the Boston University School of Law.
RICHARD H. ROSE, ASSISTANT TREASURER
Currently acts as Senior Vice President of TSSG, a subsidiary of First Data
Corp. (prior to May 6, 1994, a subsidiary of The Boston Company Advisors, Inc.
("Boston Advisors")). He joined Boston Advisors in 1988 as Vice President and
Fund Manager in the Fund Accounting Department. Prior to 1988, he acted as
Senior Audit Manager for Peat Marwick Main (KPMG Peat Marwick) & Co. He holds a
Master's degree in Accounting from Northeastern University, and a B.A. in
Economics from Dartmouth.
CRAIG M. MILLER, ASSISTANT TREASURER
Joined Great Western Investment Management Corporation in July 1993.
Currently acts as Vice President and Controller of Great Western Investment
Management Corporation. Prior thereto, acted as Audit Manager for Coopers &
Lybrand. He holds a Master's degree in Taxation from Bentley College, where he
also received his B.S. in Accountancy.
REMUNERATION. No director, officer or employee of Sierra Advisors, the
investment sub-advisors of the Funds (the "Sub-Advisors") or TSSG, the
Sub-Administrator of the Funds, or any affiliate of Sierra Advisors, the
Sub-Advisors or TSSG will receive any compensation from the Company for serving
as an officer or Trustee of the Company. Effective July, 1, 1993, the Company
pays each Trustee, who is not a director, officer or employee of Sierra
Advisors, the Sub-Advisors, TSSG or any of their affiliates, a fee of $7,500 per
annum plus $1,500 per Board meeting attended and $1,000 per Audit and Nominating
Committee meeting attended, and reimburses them for travel and out-of-pocket
expenses. Prior thereto, such fees were $5,000 per annum plus $1,250 per meeting
and $1,000 per Audit and Nominating Committee meeting attended.
The aggregate remuneration paid to Trustees by the Company for attendance
at Board and committee meetings for the fiscal year ended June 30, 1995 was
$81,924 (including reimbursement for travel and out-of-pocket expenses). As of
June 30, 1995, the Trustees and officers of the Company owned, in the aggregate,
less than 1% of the outstanding shares of any of the Funds. In addition, as of
October 17, 1995, to the knowledge of the Company the following shareholders
owned 5% or more of the outstanding shares of any of the Funds:
GROWTH AND INCOME FUND - CLASS A: First Interstate Bank TTee, FBO: Great Western
Employee Sav. Incentive Plan-Balanced Fund, P.O. Box 9800 Calabasas, CA
91302-9200, 5.94%.
EMERGING GROWTH FUND - CLASS A: First Interstate Bank Ttee, FBO: Great Western
Employee Sav. Incentive Plan-Balanced Fund, P.O. Box 9800, Calabasas, CA
91302-9200, 9.28%.
U.S. GOVERNMENT MONEY FUND - CLASS B: Murray C. Fine TTEE FBO, Murray C. Fine,
P.O. Box 582, Palm Beach, FL 33480, 100%.
U.S. GOVERNMENT MONEY FUND - CLASS S: Sierra Fund Administration Corp., 9301
Corbin Avenue, Northridge, CA 91324, 23.03%.
BSDT CUST IRA ROLLOVER, Donna-Lee Breen, 12 Standish Circle, Wellesley, MA
02181-5354, 76.94%.
CALIFORNIA MONEY FUND - CLASS B: Ella M. Brown, 29094 Cobblestone Street, Nuevo,
CA 92567, 14.62%.
Oscar L. Roehl Trustee, FBO The Oscar L. Roehl, 1826 Harding Avenue, Redwood
City, CA 94062, 85.37%.
CALIFORNIA MONEY FUND - CLASS S: Sierra Fund Administration Corp., 9301 Corbin
Avenue, Northridge, CA 91324, 100%.
GLOBAL MONEY FUND - CLASS B: GWB TTEE IRA R, Otto O. Tallent, Attn Tax Svgs Ctr,
P.O. Box 1023, Northridge, CA 91328, 39.23%.
Boston Safe Deposit and Trust Co., Custodian IRA FBO Willa B. Irwin, 316 West
McKee Street, Ojai, CA 92023, 12.47%.
BSDT TTEE IRA, Michelle Rouzier Chatel, 20001 S.W. 114th Avenue, Miami, FL
33189, 5.68%.
Dorothy M. Stevenson, 1024 Mt. Carmel Drive, San Jose, CA 95120, 18.23%.
Lorraine Whitney, Alfred G. Whitney, 303 Gasten Court, Boynton Beach, FL 33436,
12.25%.
BSDT TTEE IRA R, Arsenio Freyre, 2702 N.W. 22 Court, Miami, FL 33142, 5.74%.
SHORT TERM GLOBAL GOVERNMENT FUND - CLASS B: BSDT TTEE IRA R, Edward J.
Sheppard, 19844 Strathern, Canoga Park, CA 91306, 6.04%.
CALIFORNIA MUNICIPAL FUND - CLASS S: Sierra Fund Administration Corp., 9301
Corbin Avenue, Northridge, CA 91324, 100%.
NATIONAL MUNICIPAL FUND - CLASS S: Sierra Fund Administration Corp., 9301 Corbin
Avenue, Northridge, CA 91324, 100%.
SHORT TERM GLOBAL GOVERNMENT - CLASS S: KY Cabinet for Human Resources, Trustee
for the Marian K. Burns Irrevocable Charitable Remainder Trust, 275 E. Main
Street, 6th Floor West, Frankfort, KY 40621, 6.70%.
FLORIDA INSURED MUNICIPAL - CLASS S: Sierra Fund Administration Corp., 9301
Corbin Avenue, Northridge, CA 91324, 100%.
CALIFORNIA INSURED INTERMEDIATE - CLASS S: Sierra Fund Administration Corp.,
9301 Corbin Avenue, Northridge, CA 91324, 100%.
<PAGE>
The following Compensation Table shows aggregate compensation paid to
each of the Fund's Directors by the Fund and the Fund Complex, respectively in
the year ended June 30, 1995.
COMPENSATION TABLE
<TABLE>
============================================================================================================================
<CAPTION>
(1) (2) (3) (4) (5)
<S> <C> <C> <C> <C>
AGGREGATE TOTAL COMPENSATION
COMPENSATION PENSION OR ESTIMATED FROM REGISTRANT
FROM REGISTRANT RETIREMENT ANNUAL AND FUND COMPLEX
NAME OF FOR THE FISCAL BENEFITS ACCRUED BENEFITS PAID TO DIRECTORS
PERSON, YEAR ENDED AS PART OF FUND UPON FOR THE FISCAL YEAR
POSITION JUNE 30, 1995 EXPENSES RETIREMENT ENDED JUNE 30, 1995
============================================================================================================================
*F. Brian Cerini, $0 $0 $0 $0
Chairman of the Board,
President and Trustee
Keith B. Pipes, 0 0 0 0
Executive Vice President,
Treasurer and Secretary
Arthur H. Bernstein, Esq. 19,000 0 0 31,250 for
Trustee service
on 2 boards
David E. Anderson, 19,500** 0 0 32,250 for
Trustee service
on 2 boards**
Edmond R. Davis, Esq.
Trustee 19,000 0 0 31,250 for Trustee
service
on 2 boards
John W. English, 19,000 0 0 31,250 for
Trustee service
on 2 boards
============================================================================================================================
</TABLE>
* A Trustee who is an "interested person" as defined in the Investment Company
Act.
** Mr. Anderson was paid $1,500 for the Audit Committee Meeting held by the
Sierra Trust Funds and The Sierra Variable Trust.
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISORS
ADMINISTRATOR AND SUB-ADMINISTRATOR
CUSTODIAN AND TRANSFER AGENT
Sierra Advisors serves as Investment Advisor to each of the Funds and each
Sub-Advisor serves as Investment Sub-Advisor to one or more Funds pursuant to
separate written agreements. Sierra Administration serves as Administrator,
Shareholder Servicing Agent and Transfer Agent to each of the Funds and TSSG
serves as Sub-Administrator to each of the Funds pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, Sierra
Advisors, the Sub-Advisors, Sierra Administration and TSSG are described in the
Prospectuses. Sierra Advisors, the Sub-Advisors, Sierra Administration and TSSG
each compensates its respective Directors and pays the salaries of its
respective officers and employees employed by such companies respectively and by
the Company and maintains office facilities for the Company. Boston Advisors
served as Sub-Administrator to each of the Funds until May 6, 1994 when TSSG
became a subsidiary of First Data Corp. and was assigned the Sub-Administration
Agreement between Boston Advisors and the Company.
SUB-ADVISORS OF U.S. GOVERNMENT, CALIFORNIA MUNICIPAL, CALIFORNIA INSURED
INTERMEDIATE MUNICIPAL, FLORIDA INSURED MUNICIPAL AND NATIONAL MUNICIPAL FUNDS.
Due to the sale, in early 1993, of The Van Kampen Merritt Companies, Inc. ("Van
Kampen"), a wholly-owned subsidiary of Xerox Financial Services, Inc. and the
indirect parent of Van Kampen Merritt Investment Advisory Corp. ("Advisory
Corp."), the investment sub-advisor of the U.S. Government, California Municipal
and National Municipal Funds (the "Three Funds"), the shareholders of the Three
Funds were asked to vote on new investment sub-advisory agreements (the "New
Agreements") among the Sierra Trust Funds, Sierra Investment Advisors
Corporation and Van Kampen Merritt Management Inc. ("Van Kampen Management"), a
wholly-owned subsidiary of Van Kampen. At a meeting held on January 29, 1993,
the New Agreement for each of the Three Funds was approved by the respective
shareholders of each fund.
On February 17, 1993, CDV Acquisition Corporation ("CDV") acquired all of
the equity interest of Van Kampen. CDV and Van Kampen were subsequently merged
and the name of the surviving corporation was changed to The Van Kampen Merritt
Companies, Inc. ("VKM Companies"). At that time, VKM Companies was a
wholly-owned subsidiary of VKM Holding, Inc., which was indirectly controlled by
Clayton & Dubilier Associates IV Limited Partnership ("C&D Assoc. L.P."), the
general partners of which were Joseph L. Rice, III, B. Charles Ames, Alberto
Cribiore, Peter F. Dolle, Donald J. Gogel and Hubbard C. Howe. The New
Agreements were executed on February 17, 1993, and are substantially the same as
the investment advisory agreements, as supplemented by waiver agreements, that
the New Agreements replaced. Van Kampen Management continues to use in addition
to its own personnel, personnel and resources of Advisory Corp. in managing
client accounts. Van Kampen Management's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
As of December 20, 1994, VKM Companies acquired American Capital Management
& Research, Inc. and subsequently changed its name to Van Kampen American
Capital, Inc. ("VKAC"). Van Kampen Management subsequently changed its name to
Van Kampen American Capital Management, Inc. ("VKAC Management"). VKAC is a
wholly-owned subsidiary of VK/AC Holding, Inc. which is indirectly controlled by
C&D Assoc. L.P. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
Partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is C&D Assoc.
L.P. The general partners of C&D Assoc. L.P. currently are Joseph L. Rice, III,
B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J.
Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson. In addition, certain
officers, directors and employees of VK/AC own, in the aggregate, not more than
7% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 11% of the common
stock of VK/AC Holding, Inc.
In December, 1994, Van Kampen Management was replaced as the Sub-Advisor to
the U.S. Government Fund by BlackRock Financial Management L.P. ("BlackRock").
BlackRock is located at 345 Park Avenue, 30th Floor, New York, New York 10154.
Prior to February 28, 1995, BlackRock was a Delaware limited partnership, whose
general partner was BFM Management Partners L.P. ("BFM Management"), a Delaware
limited partnership. At that time, the general partner of BFM Management was BFM
Management Corp. ("BFM Corp."), a Delaware corporation whose stock was owned by
Messrs. Laurence D. Fink and Ralph L. Schlosstein in equal 50% portions.
On February 28, 1995, BlackRock was acquired and reorganized as a Delaware
corporation by PNC Asset Management Group, Inc., a wholly-owned subsidiary of
PNC Bank, N.A. PNC Bank, N.A. is a wholly-owned subsidiary of a holding company
that operates the asset management businesses of PNC Bank Corp. ("PNC"). The
holding company is a wholly-owned subsidiary of PNC, which is a publicly-owned
multibank holding company incorporated under the laws of the Commonwealth of
Pennsylvania in 1983 and registered under the Bank Holding Company Act of 1956,
as amended.
SUB-ADVISOR OF GROWTH AND INCOME AND EMERGING GROWTH FUNDS. Capital
Guardian Trust Company ("Capital Trust"), located at 333 South Hope Street, Los
Angeles, California 90071, was Sub-Advisor to the Growth and Income and Emerging
Growth Funds since their inception. Capital Trust was replaced as the
Sub-Advisor to the Growth and Income and Emerging Growth Funds by J.P. Morgan
Investment Management Inc. ("J.P. Morgan") and Janus Capital Corporation
("Janus"), respectively, in September, 1993. J.P. Morgan provides investment
services to employee benefit plans of corporations, labor unions and state and
local governments and the accounts of other institutional investors. Janus has
been providing investment advice to mutual funds or other large institutional
clients since 1970.
CUSTODIAN. The assets of the Company are held under bank custodianship in
accordance with the 1940 Act. Boston Safe Deposit and Trust Company ("Boston
Safe") serves as Custodian for the Funds and TSSG serves as the Funds'
Sub-Transfer Agent. Under its custodial agreement with the Company, Boston Safe
is authorized to appoint one or more U.S. banking institutions as sub-custodians
of assets owned by any of the Funds. In addition, the Company may employ foreign
sub-custodians that are approved by the Board of Trustees to hold foreign
assets.
MANAGEMENT FEES. For the fiscal year ended June 30, 1995, the Company paid
Sierra Advisors management fees (net of waivers) totalling $342,696, $153,991,
$215,043, $2,663,842, $2,864,170, $1,070,631 $270,744 $1,666,333, $2,419,708,
$200,364, $319,780, $1,323,807, $1,400,644, $1,365,171, $1,097,217 and $ 1,207
with respect to the Global Money, U.S. Government Money, California Money,
Corporate Income, U.S. Government, Short Term Global Government, Short Term High
Quality Bond, National Municipal, California Municipal, Florida Insured
Municipal, California Insured Intermediate Municipal, Growth and Income,
Emerging Growth, Growth, International Growth and Target Maturity Funds,
respectively. Sierra Advisors voluntarily waived management fees in the amounts
of $342,696, $112,718, $108,224, $228,615, $633,137, $1,537,203, $1,503,986,
$1,403,390, $200,364, $319,780, $1,038,174 and $1,207 with respect to the Global
Money, U.S. Government Money, California Money, Short Term High Quality Bond,
Short Term Global Government, U.S. Government, Corporate Income, California
Municipal, Florida Insured Municipal, California Insured Intermediate Municipal,
National Municipal and Target Maturity Funds, respectively. In addition, Sierra
Advisors reimbursed expenses in the amounts of $80,852 $52,835, and $16,281 with
respect to the Florida Insured Municipal, California Insured Intermediate
Municipal and Target Maturity Funds, respectively. For the fiscal year ended
June 30, 1995, Sierra Advisors paid to the Sub-Advisors fees totalling $128,511,
$57,747, $80,641, $1,229,465, $814,920, $456,016, $81,222, $467,306, $667,343,
$72,860, $116,283, $721,411, $844,497, $780,651, $646,343 and $7,055 with
respect to the Global Money, U.S. Government Money, California Money, Corporate
Income, U.S. Government, Short Term Global Government, Short Term High Quality
Bond, National Municipal, California Municipal, Florida Insured Municipal,
California Insured Intermediate Municipal, Growth and Income, Emerging Growth,
Growth, International Growth and Target Maturity Funds, respectively.
For the fiscal year ended June 30, 1994, the Company paid Sierra Advisors
management fees (net of waivers) totalling $230,642, $154,684, $328,304,
$3,101,919, $4,569,577, $1,733,847, $40,977, $2,367,387, $3,537,012, $166,746,
$28,234, $767,652, $1,030,394, $736,329 and $736,499 with respect to the Global
Money, U.S. Government Money, California Money, Corporate Income, U.S.
Government, Short Term Global Government, Short Term High Quality Bond, National
Municipal, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, Growth and Income, Emerging Growth, Growth and
International Growth Funds, respectively. Sierra Advisors voluntarily waived
management fees in the amounts of $226,174, $68,236, $128,527, $40,977,
$913,493, $1,366,199, $101,434, $2,022,380, $166,745, $28,234, $1,140,151 and
$35,522 with respect to the Global Money, U.S. Government Money, California
Money, Short Term High Quality Bond, Short Term Global Government, U.S.
Government, Corporate Income, California Municipal, Florida Insured Municipal,
California Insured Intermediate Municipal, National Municipal and Growth and
Income Funds, respectively. In addition, Sierra Advisors reimbursed expenses in
the amounts of $57,521, $37,899 and $150,302 with respect to the Short Term High
Quality Bond, California Insured Intermediate Municipal and Florida Insured
Municipal Funds, respectively. For the fiscal year ended June 30, 1994, Sierra
Advisors paid to the Sub-Advisors fees totalling $69,594, $46,405, $98,491,
$1,431,834, $1,132,483, $591,180, $12,293, $549,097, $775,763, $55,583, $8,688,
$414,252, $608,165, $424,572 and $416,141 with respect to the Global Money, U.S.
Government Money, California Money, Corporate Income, U.S. Government, Short
Term Global Government, Short Term High Quality Bond, National Municipal,
California Municipal, Florida Insured Municipal, California Insured Intermediate
Municipal, Growth and Income, Emerging Growth, Growth and International Growth
Funds, respectively. The Target Maturity Fund had not commenced operations as of
June 30, 1994.
For the fiscal year ended June 30, 1993, the Company paid Sierra Advisors
management fees (net of waivers) totalling $3,818, $1,435,071, $84,918,
$809,443, $207,079, $1,971,388, $930,936, $484,194, $660,163, $436,417 and
$312,605 with respect to the Global Money, Corporate Income, U.S. Government
Money, National Municipal, California Money, U.S. Government, California
Municipal, Short Term Global Government, Growth and Income, Emerging Growth and
International Growth Funds, respectively. For the same period, Sierra Advisors
waived all of its management fees with respect to the Growth Fund and Florida
Insured Municipal Fund. Sierra Advisors voluntarily waived management fees in
the amounts of $292,835, $106,389, $217,588, $1,992,776, $334,266, $1,637,659,
$884, $1,053,990, $862,225 and $15,224 with respect to the Global Money, U.S.
Government Money, California Money, U.S. Government, Corporate Income,
California Municipal, Florida Insured Municipal, National Municipal, Short Term
Global Government, and Growth Funds, respectively. For the fiscal year ended
June 30, 1993, Sierra Advisors paid to the Sub-Advisors fees totalling $88,996,
$57,392, $127,400, $989,930, $816,617, $564,568, $295, $443,716, $315,390,
$243,435, $501,863, $9,441 and $183,637, with respect to the Global Money, U.S.
Government Money, California Money, U.S. Government, Corporate Income,
California Municipal, Florida Insured Municipal, National Municipal, Growth and
Income, Emerging Growth, Short Term Global Government, Growth and International
Growth Funds, respectively. In addition, Sierra Advisors reimbursed expenses in
the amounts of $2,989 and $6,741 with respect to the Growth Fund and the Florida
Insured Municipal Fund, respectively. The Short Term High Quality Bond Fund and
the California Insured Intermediate Municipal Fund had not commenced operations
as of June 30, 1993.
ADMINISTRATION FEES. For the fiscal year ended June 30, 1995, the Company
paid the Administrator administration fees (net of waivers) totalling $257,022,
$115,493, $161,282 $1,434,376, $1,822,654, $576,494, $189,519, $1,060,394,
$1,539,815, $127,505, $203,496, $594,453, $556,148, $511,456, $454,735 and
$1,690 with respect to the Global Money, U.S. Government Money, California
Money, Corporate Income, U.S. Government, Short Term Global Government, Short
Term High Quality Bond, National Municipal, California Municipal, Florida
Insured Municipal, California Insured Intermediate Municipal, Growth and Income,
Emerging Growth, Growth, International Growth and Target Maturity Funds,
respectively. The Administrator voluntarily waived administration fees totalling
$203,124, $43,310, $50,408, $117,460, $343,700, $405,720, $558,930, $511,663,
$127,505, $203,496, $391,004 and $1,690 with respect to the Global Money, U.S.
Government Money, California Money, Short Term High Quality Bond, Short Term
Global Government, U.S. Government, Corporate Income, California Municipal,
Florida Insured Municipal, California Insured Intermediate Municipal, National
Municipal, and Target Maturity Funds, respectively. For the period from July 1,
1994 to June 30, 1995, the Administrator paid to TSSG a single fee (that does
not include out-of-pocket expenses and certain transaction charges and net of
waivers of fees) for sub-administration and custody services provided to each
Fund totalling $157,724, $71,171, $84,360, $617,943, $749,131, $360,039,
$152,405, $303,537, $436,521, $37,321, $54,451, $334,542 $380,867, $312,093,
$263,659 and $692 with respect to the Global Money, U.S. Government Money,
California Money, Corporate Income, U.S. Government, Short Term Global
Government, Short Term High Quality Bond, National Municipal, California
Municipal, Florida Insured Municipal, California Insured Intermediate Municipal,
Growth and Income, Emerging Growth, Growth, International Growth and Target
Maturity Funds, respectively. During the same period, TSSG did not voluntarily
waive any of its fees with respect to the Global Money, U.S. Government Money,
California Money, Corporate Income, U.S. Government, Short Term Global
Government, Short Term High Quality Bond, National Municipal, California
Municipal, Florida Insured Municipal, California Insured Intermediate Municipal,
Growth and Income, Emerging Growth, Growth, International Growth and Target
Maturity Funds, respectively.
For the fiscal year ended June 30, 1994, the Company paid the Administrator
administration fees (net of waivers) totalling $191,352, $127,591, $270,798,
$1,971,460, $3,356,687, $953,441, $33,792, $1,627,230, $2,298,756, $113,797,
$17,915, $416,042, $496,971, $321,367 and $377,611 with respect to the Global
Money, U.S. Government Money, California Money, Corporate Income, U.S.
Government, Short Term Global Government, Short Term High Quality Bond, National
Municipal, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, Growth and Income, Emerging Growth, Growth and
International Growth Funds, respectively. The Administrator voluntarily waived
administration fees totalling $191,352, $75,907, $144,560, $33,792, $638,164,
$977,074, $226,542, $1,351,879, $113,797, $17,915, $800,617 and $60,630 with
respect to the Global Money, U.S. Government Money, California Money, Short Term
High Quality Bond, Short Term Global Government, U.S. Government, Corporate
Income, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, National Municipal and Growth and Income Funds,
respectively. For the period from July 1, 1993 to May 6, 1994, the Administrator
paid to Boston Advisors a single fee (that does not include out-of-pocket
expenses and certain transaction charges and net of waivers of fees) for
sub-administration and custody services provided to each Fund totalling $31,704,
$21,123, $44,868, $322,473, $553,968, $156,608, $5,369, $267,985, $377,425,
$18,234, $2,867, $68,806, $81,233, $51,229, and $61,314 with respect to the
Global Money, U.S. Government Money, California Money, Corporate Income, U.S.
Government, Short Term Global Government, Short Term High Quality Bond, National
Municipal, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, Growth and Income, Emerging Growth, Growth and
International Growth Funds, respectively. During the same period, Boston
Advisors did not voluntarily waive any of its fees with respect to the Global
Money, U.S. Government Money, California Money, Corporate Income, U.S.
Government, Short Term Global Government, Short Term High Quality Bond, National
Municipal, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, Growth and Income, Emerging Growth, Growth and
International Growth Funds, respectively. For the period from May 7, 1994 to
June 30, 1994, the Administrator paid to TSSG a single fee (that does not
include out-of-pocket expenses and certain transaction charges and net of
waivers of fees) for sub-administration and custody services provided to each
Fund totalling $5,625, $3,748, $7,961, $57,213, $98,285, $27,785, $952, $47,546,
$66,463, $3,235, $509, $12,208, $14,412, $9,089 and $10,876 with respect to the
Global Money, U.S. Government Money, California Money, Corporate Income, U.S.
Government, Short Term Global Government, Short Term High Quality Bond, National
Municipal, California Municipal, Florida Insured Municipal, California Insured
Intermediate Municipal, Growth and Income, Emerging Growth, Growth and
International Growth Funds, respectively. During the same period, TSSG did not
voluntarily waive any of its fees with respect to the Global Money, U.S.
Government Money, California Money, Corporate Income, U.S. Government, Short
Term Global Government, Short Term High Quality Bond, National Municipal,
California Municipal, Florida Insured Municipal, California Insured Intermediate
Municipal, Growth and Income, Emerging Growth, Growth and International Growth
Funds, respectively. The Target Maturity Fund had not commenced operations as of
June 30, 1994.
For the fiscal year ended June 30, 1993, the Company paid the Administrator
administration fees (net of waivers) totalling $153,006, $79,225, $776,122,
$194,359, $1,897,172, $975,492, $888,536, $409,000, $7,021, $228,673, $122 and
$130,191 with respect to the International Growth, U.S. Government Money,
National Municipal, California Money, U.S. Government, Corporate Income,
California Municipal, Growth and Income, Growth, Emerging Growth, Global Money
and Short Term Global Government Funds, respectively. For the same period, the
Administrator voluntarily waived all of its administration fees with respect to
the Florida Insured Municipal Fund. The Administrator voluntarily waived
administration fees totalling $246,391, $79,742, $158,507, $978,831, $154,096,
$751,807, $612, $513,067 and $615,092, with respect to the Global Money, U.S.
Government Money, California Money, U.S. Government, Corporate Income,
California Municipal, Florida Insured Municipal, National Municipal and Short
Term Global Government Funds, respectively. For the same period, the
Administrator paid to Boston Advisors a single fee (that does not include
out-of-pocket expenses and certain transaction charges and net of waivers of
fees) for sub-administration and custody services provided to each of Fund
totalling $50,340, $32,416, $71,882, $569,089, $221,214, $324,495, $130,
$255,036, $81,545, $43,883, $147,733, $1,226 and $29,845, with respect to the
Global Money, U.S. Government Money, California Money, U.S. Government,
Corporate Income, California Municipal, Florida Insured Municipal, National
Municipal, Growth and Income, Emerging Growth, Short Term Global Government,
Growth and International Growth Funds, respectively. During the same period, the
Sub-Administrator voluntarily waived $3,778, $2,455, $22,931, $20,912, $13,180,
$2,870, $5,487, $51,191, $29,158, $20, $7,047, $181 and $4,566, with respect to
the Global Money, U.S. Government Money, National Municipal, Corporate Income,
Short Term Global Government, International Growth, California Money, U.S.
Government, California Municipal, Florida Insured Municipal, Growth and Income,
Growth and Emerging Growth Funds, respectively. The Short Term High Quality Bond
Fund and the California Insured Intermediate Municipal Fund had not commenced
operations as of June 30, 1993.
Sierra Advisors has agreed that, if in any fiscal year the aggregate
expenses of a Fund (including investment advisory and administration fees, but
excluding interest, taxes, brokerage commissions and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, Sierra
Advisors will reimburse the Fund for that excess expense to the extent required
by state law in the same proportion as its respective fees bear to the combined
fee for investment advisory services. An expense reimbursement, if any, will be
estimated, reconciled and paid on a monthly basis. As of the date of this
Statement of Additional Information, the most restrictive annual expense
limitation applicable to any Fund is 2.5% of the Fund's first $30 million of
average net assets, 2.0% of the next $70 million of average net assets and 1.5%
of the average net assets in excess of $100 million. The Company may seek
waivers of such expense limitations from time to time for certain Funds. In
addition, in the event that Sierra Advisors, the Sub-Advisors, Sierra
Administration, TSSG or GW Securities decreases the amount of, or ceases to
waive a portion of, their fees, the Company has agreed to provide notice to
Texas investors at least thirty days prior to any material increase in the
"Total Fund Operating Expenses" shown in the fee table of the applicable
Prospectus.
COUNSEL AND AUDITOR
O'Melveny & Myers serves as counsel to the Company and provides legal
services to Great Western Financial Corporation and a number of its
subsidiaries, including Sierra Advisors, Sierra Administration and GW
Securities. Morgan, Lewis & Bockius LLP also provides legal services to the
Company.
Price Waterhouse LLP, independent accountants, located at 160 Federal
Street, Boston, Massachusetts 02110, serves as auditor of the Company.
ORGANIZATION OF THE COMPANY
The Company is organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
February 22, 1989, as amended from time to time (the "Trust Agreement"). In the
interest of economy and convenience, certificates representing shares in the
Company are not physically issued. Boston Safe, the Company's Custodian, and
TSSG, the Company's Sub-Transfer Agent, maintain a record of each shareholder's
ownership of Company shares. Shares do not have cumulative voting rights, which
means that holders of more than 50% of the shares voting for the election of
Trustees can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund or Class,
except with respect to the election of Trustees and the selection of independent
accountants.
Under normal circumstances, there will be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office promptly will call a shareholders'
meeting for the election of Trustees. Under the 1940 Act, shareholders of record
of no less than two-thirds of the outstanding shares of the Company may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. Under the Trust Agreement, the Trustees
are required to call a meeting of shareholders for the purpose of voting upon
the question of removal of any such Trustee when requested in writing to do so
by the shareholders of record of not less than 10% of the Company's outstanding
shares.
Massachusetts law provides that shareholders, under certain circumstances,
could be held personally liable for the obligations of the Company. However, the
Trust Agreement disclaims shareholder liability for acts or obligations of the
Company and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Company or a Trustee.
The Trust Agreement provides for indemnification from the Company's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Company. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Company would be unable to meet its obligations, a possibility that the
Company's management believes is remote. Upon payment of any liability incurred
by the Company, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Company. The Trustees intend to
conduct the operations of the Company in such a way so as to avoid, to the
extent possible, ultimate liability of the shareholders for liabilities of the
Company.
CERTAIN MATTERS RELATING TO J.P. MORGAN INVESTMENT MANAGEMENT INC. AND ITS
AFFILIATES
J.P. Morgan Investment Management Inc. ("J.P. Management"), the Sub-Advisor
to the Global Money Fund, Growth and Income Fund and International Growth Fund,
and Morgan Guaranty Trust Company of New York ("Morgan Guaranty") are both
wholly-owned subsidiaries of J.P. Morgan & Co. Incorporated ("J.P. Morgan").
Through its Corporate Finance Division, Morgan Guaranty has relationships as a
bank of deposit, as a lender, as a financial advisor and in other capacities,
with a significant number of United States corporations. Such corporate
customers of Morgan Guaranty obtain short-term funds to finance the operation of
their business generally through two sources: (i) short-term bank borrowings
from commercial banks such as Morgan Guaranty; and (ii) the issuance of
commercial paper of the type in which certain of the Funds may invest. Normally
the decision of a corporation as to which medium of short-term financing to
utilize will be influenced primarily by interest rate differentials between the
available sources of short-term funds. When interest rate differentials between
short-term bank borrowings and the commercial paper market narrow, the Corporate
Finance Division of Morgan Guaranty may be competing with the commercial paper
market to provide short-term funds to corporate borrowers.
J.P. Morgan Securities Inc. ("J.P. Securities"), a wholly-owned subsidiary
of J.P. Morgan, is a broker-dealer registered with the Securities and Exchange
Commission ("SEC") and a member of the National Association of Securities
Dealers, Inc. ("NASD"). J.P. Securities is active as a dealer in the securities
of the United States Government and an underwriter of and dealer in securities
of the United States Government agencies and money market securities. To a
limited extent, J.P. Securities also underwrites and deals in commercial paper,
corporate debt and equity securities. J.P. Morgan Securities Limited ("J.P.
Limited"), also a wholly-owned subsidiary of J.P. Morgan, underwrites,
distributes and trades international securities, including Eurobonds, commercial
paper and foreign government bonds. To the extent that the Global Money Fund,
the Growth and Income Fund or the International Growth Fund are permitted to
invest in such securities, the foregoing activities of J.P. Securities and J.P.
Limited may affect the manner in which J.P. Management makes investments for
such Funds and may affect such Funds' portfolios or the markets for the
securities in which such portfolios are invested. Such effects would be
primarily on: (1) the price of securities already held in the Global Money Fund,
the Growth and Income Fund or International Growth Fund or securities considered
for purchase, which are the same as or similar to issues underwritten or traded
by J.P. Securities, J.P. Limited, J.P. Morgan or Morgan Guaranty ("Morgan
Affiliates"), and (2) the supply of issues available for purchase by the Global
Money Fund, the Growth and Income Fund or International Growth Fund.
Particularly, where the positions of Morgan Affiliates constitute a large
percentage of a given issue, the price at which that issue is traded may
influence the price of securities of that issue or of similar securities in the
Global Money Fund, the Growth and Income Fund or International Growth Fund or
securities being considered for purchase. Also, since the Global Money Fund, the
Growth and Income Fund and International Growth Fund will not purchase directly
from Morgan Affiliates, if the positions of Morgan Affiliates in given issues is
large, it may limit the selection of available securities in that particular
maturity, yield or price range.
In addition, the Global Money Fund, the Growth and Income Fund and
International Growth Fund will not purchase securities during the existence of
any underwriting or selling group of which a Morgan Affiliate is a member except
to the extent permitted by law. Portfolio securities may not be purchased from
or sold to J.P. Management or any affiliated person (as defined in the 1940 Act)
of J.P. Management except as may be permitted by law.
J.P. Morgan issues commercial paper and long-term debt securities, and
Morgan Guaranty and some of its affiliates issue certificates of deposit and
create bankers' acceptances. The Global Money Fund, the Growth and Income Fund
and International Growth Fund will not invest in the commercial paper or other
debt securities of J.P. Morgan or in certificates of deposit or bankers'
acceptances of Morgan Guaranty or such affiliates. However, the activities of
J.P. Morgan and Morgan Guaranty and any of such affiliates in the market for
such instruments might affect the portfolios of such Funds or the market for
such instruments.
The limitations discussed in the preceding three paragraphs, in the opinion
of J.P. Management, will not significantly affect the ability of the Global
Money Fund, the Growth and Income Fund and International Growth Fund to pursue
their respective investment objectives. However, in the future in other
circumstances, such Funds may be at a disadvantage because of such limitations
in comparison to other funds with similar investment objectives which are not
subject to such limitations. The management of Sierra Advisors believes that the
effects of such limitations are more than offset by the experience and expertise
J.P. Management provides to such Funds.
In acting for its fiduciary accounts, including such Funds, J.P. Management
will not discuss its investment decisions or positions with the personnel of any
Morgan Affiliates. J.P. Management will not execute any transactions for such
Funds with Morgan Affiliates and will execute such transactions only with
unaffiliated dealers.
The commercial banking divisions of Morgan Guaranty or its affiliates may
have deposit, loan and other commercial banking relationships with issuers of
securities purchased by the Global Money Fund, the Growth and Income Fund and
International Growth Fund, including outstanding loans to such issuers that may
be repaid in whole or in part with the proceeds of securities purchased by such
Funds in primary public offerings. Such Funds will not purchase, except as may
be permitted by applicable law, securities in any primary public offering when
the prospectus discloses that the proceeds will be used to repay in whole or in
part the loans to such issuers. J.P. Management will not cause such Funds to
make investments for the direct purpose of benefitting other commercial
interests of Morgan Affiliates at the expense of such Funds. J.P. Management has
advised such Funds that, in making investment decisions, J.P. Management will
not obtain or use material inside information in the possession of any other
division or department of J.P. Management or from Morgan Affiliates. J.P.
Management has also advised such Funds that its investment personnel do not
disclose any material inside information in their possession regarding such
Funds to any other division or department of J.P. Management or Morgan
Affiliates.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
The Prospectuses discuss the investment objective or objectives of each of
the Funds and the policies to be employed to achieve such objectives. This
section contains supplemental information concerning the 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.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE TARGET MATURITY FUND
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P")
represent the opinions of these agencies as to the quality of securities which
they rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. These ratings will be used
by the Funds as initial criteria for the selection of portfolio securities, but
the Funds will also rely upon the independent advice of their respective
Sub-Advisors to evaluate potential investments. The Appendix to this Statement
of Additional Information contains further information concerning the ratings of
Moody's and S&P and their significance. See the Prospectuses with respect to the
Global Money, U.S. Government Money and California Money Funds (the "Money
Funds") in the section entitled "The Funds' Investments, Risk Considerations and
Performance - Investment Principles - Quality Requirements", for additional
information concerning certain rating criteria.
To the extent that the rating given by Moody's or S&P for securities may
change as a result of changes in such organizations or their rating systems,
each Fund will attempt to use comparable ratings as standards for its
investments in accordance with the investment policies contained in the
Prospectuses and in this Statement of Additional Information.
U.S. GOVERNMENT SECURITIES. U.S. Government securities include debt
obligations of varying maturities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. U.S. Government securities include direct
obligations of the U.S. Treasury, and securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Resolution Trust Corporation, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association. Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance. Because the U.S.
Government is not obligated by law to provide support to an instrumentality it
sponsors, a Fund will invest in obligations issued by such an instrumentality
only if the Fund's Sub-Advisor determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
ILLIQUID INVESTMENTS. Up to 15% of the assets of each Non-Money Fund, and
up to 10% of the assets of each Money Fund, may be invested in securities that
are not readily marketable, including: (1) repurchase agreements with maturities
greater than seven calendar days; (2) time deposits maturing in more than seven
calendar days; (3) to the extent a liquid secondary market does not exist for
the instruments, futures contracts and options thereon; (4) certain
over-the-counter options, as described in the SAI; (5) except for the Short-Term
Global Government Fund, certain variable rate demand notes having a demand
period of more than seven days; and (6) certain Rule 144A securities as defined
below. These securities generally cannot be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued the investments. These factors may have an adverse effect on the
Fund's ability to dispose of the particular securities at fair market value and
may limit the fund's ability to obtain accurate market quotations for purposes
of valuing the securities and calculating the net asset value of shares of the
Fund. The Funds may also purchase securities that are not registered under the
Securities Act of 1933, as amended (the "Act"), but that can be sold to
qualified institutional buyers in accordance with Rule 144A under that Act
("Rule 144A securities"). Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in Rule 144A
securities is not determined to be liquid, that investment will be included
within the 15% or 10% limitation, as applicable, on investment in illiquid
securities.
COMBINED TRANSACTIONS. As permitted by each Fund's investment polices and
restrictions, the Funds may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions (each
separately, a "component" transaction), instead of a single transaction, as part
of a single hedging strategy when, in the opinion of the Sub-Advisor, it is in
the best interest of the Fund to do so. A combined transaction, while part of a
single hedging strategy, may contain elements of risk that are present in each
of its component transactions.
BANK OBLIGATIONS. Domestic commercial banks organized under federal law are
supervised and examined by the Comptroller of the Currency and are required to
be members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to a
Fund, depending upon the principal amount of certificates of deposit ("CDs") of
each state bank held by a Fund) and are subject to federal examination and to a
substantial body of federal law and regulation. As a result of federal and state
laws and regulations, domestic branches of domestic banks are, among other
things, generally required to maintain specific levels of reserves, and are
subject to other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of U.S. banks and of foreign branches of
foreign banks, such as CDs and time deposits ("TDs"), may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and governmental regulation. Obligations of
foreign branches of U.S. banks and foreign banks are subject to the risks
associated with investing in foreign securities generally. Foreign branches of
U.S. banks and foreign branches of foreign banks are not necessarily subject to
the same or similar regulatory requirements that apply to U.S. banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may be
publicly available about a foreign branch of a U.S. bank or about a foreign bank
than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general obligations of
the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by federal and state regulation as well as
governmental action in the country in which the foreign bank has its head
office. A U.S branch of a foreign bank may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state. In addition, branches
licensed by the Comptroller of the Currency and branches licensed by certain
states ("State Branches") may or may not be required to (1) pledge to the
regulator by depositing assets with a designated bank within the state an amount
of its assets equal to 5% of its total liabilities, or (2) maintain assets
within the state in an amount equal to a specified percentage of the aggregate
amount of liabilities of the foreign bank payable at or through all of its
agencies or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a U.S. branch of a foreign bank than about a U.S.
bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, the Funds'
respective Sub-Advisors will carefully evaluate such investments on a
case-by-case basis.
A Fund may purchase a CD, TD or bankers' acceptances issued by a bank,
savings and loan association or other banking institution with less than $1
billion in assets (a "Small Issuer Bank Obligation") only so long as the issuer
is a member of the FDIC or supervised by the Office of Thrift Supervision (the
"OTS") and so long as the principal amount of the Small Issuer Bank Obligation
is fully insured by the FDIC and is no more than $100,000. Each of these Funds
will at any one time hold only one Small Issuer Bank Obligation from any one
issuer.
Savings and loan associations whose CDs, TDs and bankers' acceptances may
be purchased by the Funds are supervised by the OTS and insured by the Savings
Association Insurance Fund, which is administered by the FDIC and is backed by
the full faith and credit of the United States Government. As a result, such
savings and loan associations are subject to regulation and examination.
MORTGAGE-BACKED SECURITIES. The mortgage-backed securities in which the
Funds may invest may be classified as governmental or government-related,
depending on the issuer or guarantor. Governmental mortgage-backed securities
are backed by the full faith and credit of the United States. GNMA, the
principal U.S. guarantor of such securities, is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development.
Government-related mortgage-backed securities which are not backed by the full
faith and credit of the United States include those issued by FNMA and FHLMC.
FNMA is a government-sponsored corporation owned entirely by private
stockholders, which is subject to general regulation by the Secretary of Housing
and Urban Development. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA. FHLMC is a corporate
instrumentality of the United States, the stock of which is owned by the Federal
Home Loan Banks. Participation certificates representing interests in mortgages
from FHLMC's national portfolio are guaranteed as to the timely payment of
interest and ultimate collection of principal by FHLMC.
Governmental or government-related entities may create mortgage loan pools
offering pass-through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage instruments,
that is, mortgage instruments in which principal or interest payments may vary
or terms to maturity may be shorter than previously customary. As new types of
mortgage-backed securities are developed and offered to investors, the Funds
will, consistent with their respective investment objectives and policies,
consider making investments in such new types of securities.
The average maturity of pass-through pools of mortgage-backed securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example, is
to assume that prepayments will result in a 7- to 9-year average life for pools
of fixed-rate 30-year mortgages. Pools of mortgages with other maturities of
different characteristics will have varying average life assumptions.
REPURCHASE AGREEMENTS. The Funds may invest in repurchase agreements
without limitation, except that the California Municipal Fund may invest no more
than 20%, in the aggregate, of its assets in repurchase agreements and certain
other securities or instruments, but this 20% limit does not apply to
investments for temporary defensive purposes.
STRATEGIES AVAILABLE TO ALL FUNDS EXCEPT THE MONEY FUNDS AND THE TARGET MATURITY
FUND
REVERSE REPURCHASE AGREEMENTS. Under the 1940 Act, reverse repurchase
agreements may be considered borrowings by the seller; accordingly each of the
Funds will limit its aggregate investments in reverse repurchase agreements and
other borrowings to no more than 30% of its total assets, except that each of
the U.S. Government, Corporate Income and Short Term High Quality Bond Funds
will limit its aggregate investments in reverse repurchase agreements, dollar
roll transactions and other borrowings to no more than 33-1/3% of its total
assets. A Fund will not engage in reverse repurchase transactions for the
purpose of leverage.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. A segregated
account in the name of the Fund consisting of cash or liquid debt securities
equal to the amount of when-issued or delayed-delivery commitments will be
established at Boston Safe, the Company's custodian. For the purpose of
determining the adequacy of the securities in the accounts, the deposited
securities will be valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities will be placed in the
account daily so that the value of the account will equal the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then-available cash flow, the sale of securities held in the
segregated account, the sale of other securities or, although it would not
normally expect to do so, from the sale of securities purchased on a when-issued
or delayed-delivery basis themselves (which may have a greater or lesser value
than the Fund's payment obligations).
STRATEGIC TRANSACTIONS. Consistent with its investment polices and
restrictions described in the Prospectus and elsewhere in this Statement of
Additional Information, a Fund may, but is not required to, utilize various
investment strategies as described below to hedge various market or currency
risks, to manage the effective maturity or duration of fixed-income securities,
or to seek potentially higher returns. Utilizing these investment strategies and
as permitted by each Fund's investment polices and restrictions, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions will be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
to establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities, or to seek potentially high
returns. No more than 5% of a Fund's assets will be used as the initial margin
or purchase price for Strategic Transactions in the aggregate entered into for
purposes other than "bona fide hedging" positions as defined in the regulations
adopted by the Commodity Futures Trading Commission ("CFTC"). Moreover, no Fund
currently intends to enter into Strategic Transactions, excluding Strategic
Transactions that are "covered" or entered into for bona fide hedging purposes,
that are in the aggregate principal amount in excess of 15% of the Fund's net
assets. Any or all of these investment techniques may be used at any time, as
use of any Strategic Transaction is a function of numerous variables including
market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Sub-Advisor's ability to predict
pertinent market movements which cannot be assured. Strategic Transactions
involving financial futures and options thereon will be purchased, sold or
entered into only for bona fide hedging, risk management or portfolio management
purposes.
Strategic Transactions have associated risks including possible default by
the other party to the transaction, illiquidity and, to the extent the
Sub-Adviser's view as to certain market movements is incorrect, losses greater
than if they had not been used. For more information about the Funds' use of put
and call options, currency transactions and options and futures transactions and
the risks associated with such transactions, see the sections relating to such
strategies in this Statement of Additional Information and the Appendix to the
applicable Prospectus. Losses resulting from the use of Strategic Transactions
may reduce net asset value, and possibly income, and such losses can be greater
than if the Strategic Transactions had not been utilized.
Strategic Transactions expose a Fund to an obligation to another party. No
Fund will enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or futures
contracts or (2) cash, receivables and U.S. government securities and other
liquid, high grade debt, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. Each
Fund will comply with SEC guidelines regarding cover for hedging transactions
and will, if the guidelines so require, set aside cash, U.S. government
securities or other liquid, high-grade debt securities in a segregated account
with Boston Safe or with a designated sub-custodian in the prescribed amount.
The use of Strategic Transactions is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
the CFTC and may become subject to regulation by various state regulatory
authorities. Each Fund will comply with the applicable regulatory requirements
when utilizing Strategic Transactions. In addition, a Fund's ability to use
Strategic Transactions may be limited by tax considerations. See "Taxes."
Special Risks of Strategic Transactions. The use of Strategic Transactions
involves special considerations and risks, as described below. Additional risks
pertaining to particular Strategic Transactions are described in other sections
to this Statement of Additional Information. Successful use of most Strategic
Transactions depends upon the Sub-Advisor's ability to predict movements of the
overall securities and interest rate markets, which requires different skills
then predicting changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed. There may be
imperfect correlation, or even no correlation, between price movements of
Strategic Transactions and price movements of the related portfolio or currency
positions. Such a lack of correlation might occur due to factors unrelated to
the value of the related portfolio or currency positions, such as speculative or
other pressures on the markets in which Strategic Transactions are traded.
Strategic Transactions, if successful, can reduce risk of loss or enhance
income, by wholly or partially offsetting the negative effect of, or accurately
predicting, unfavorable price movements or currency fluctuations in the related
portfolio or currency position. However, Strategic Transactions can also reduce
the opportunity for gain by offsetting the positive effect of favorable price
movements in the positions. In addition, a Fund might be required to maintain
assets as "cover," maintain segregated accounts or make margin payments when it
takes positions in Strategic Transactions involving obligations to third parties
(i.e., Strategic Transactions other than purchased options). These requirements
might impair the Fund's ability to sell a portfolio security or currency
position or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security or currency position
at a disadvantageous time.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which a Fund may enter, consistent with the Fund's investment policies and
restrictions, are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. A Fund would enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currently fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. A Fund will use
these transactions as hedges and not a speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or value.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, Sierra
Advisors and the Company believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. If there is a default by the
counterpart, a Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principles and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
STRATEGIES AVAILABLE TO U.S. GOVERNMENT FUND, CALIFORNIA MUNICIPAL FUND,
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND, FLORIDA INSURED MUNICIPAL FUND,
NATIONAL MUNICIPAL FUND, CORPORATE INCOME FUND, SHORT TERM GLOBAL GOVERNMENT
FUND, SHORT TERM HIGH QUALITY BOND FUND, GROWTH FUND, EMERGING GROWTH FUND,
GROWTH AND INCOME FUND AND INTERNATIONAL GROWTH FUND
FUTURES ACTIVITIES. The Funds may enter into futures contracts and options
on futures contracts that are traded on a U.S. exchange or board of trade. These
investments may be made by the Fund involved for the purpose of hedging against
changes in the value of its portfolio securities due to anticipated changes in
interest rates and market conditions, and for otherwise permitted Strategic
Transactions. In the case of the California Municipal Fund, the California
Insured Intermediate Fund and the Florida Insured Municipal Fund, such
investments will be made only in unusual circumstances, such as when that Fund's
Sub-Advisor anticipates an extreme change in interest rates or market
conditions. The ability of a Fund to trade in futures contracts and options on
futures contracts may be materially limited by the requirement of the Internal
Revenue Code of 1986, as amended, (the "Internal Revenue Code"), applicable to a
regulated investment company. See "Taxes" below.
FUTURES CONTRACTS. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. A bond index futures contract is an agreement pursuant to which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. No physical delivery of the underlying securities in the index is made.
The purpose of entering into a futures contract by a Fund is to protect the
Fund from fluctuations in the value of its securities caused by anticipated
changes in interest rates or market conditions without necessarily buying or
selling the securities. For example, if the California Municipal Fund, the
California Insured Intermediate Fund or the Florida Insured Municipal Fund owns
long-term bonds and tax-exempt rates are expected to increase, the Fund might
enter into futures contracts to sell a municipal bond index. This transaction
would have much the same effect as the Fund's selling some of the long-term
bonds in its portfolio. If tax-exempt rates increase as anticipated, the value
of certain long-term municipal securities in the portfolio would decline, but
the value of the Fund's futures contracts would increase at approximately the
same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. Of course, since the value of portfolio
securities will far exceed the value of the futures contracts entered into by a
Fund, an increase in the value of the futures contract would only mitigate --
but not totally offset -- the decline in the value of the portfolio.
No consideration is paid or received by a Fund upon entering into a futures
contract. Initially, a Fund would be required to deposit with the broker an
amount of cash or cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in its nature the
equivalent of a performance bond or good faith deposit on the contract, which is
returned to a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, a Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by a Fund is subject to
the ability of the Fund's Sub-Advisor to correctly predict movements in the
direction of interest rates or changes in market conditions. These predictions
involve skills and techniques that may be different from those involved in the
management of the portfolio being hedged. In addition, there can be no assurance
that there will be a correlation between movements in the price of the
underlying index or securities and movements in the price of the securities
which are the subject of the hedge. A decision of whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected trends
in interest rates.
Although the Funds intend to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
To ensure that transactions constitute bona fide hedges in instances
involving the purchase or sale of a futures contract, the Funds will be required
to either (i) segregate sufficient cash or high-grade liquid assets to cover the
outstanding position or (ii) cover the futures contract by either owning the
instruments underlying the futures contract or by holding a portfolio of
securities with characteristics substantially similar to the underlying index or
stock index comprising the futures contract or by holding a separate option
permitting it to purchase or sell the same futures contract. Because of the
imperfect correlation between the movements in the price of underlying indexes
or stock indexes of various futures contracts and the movement of the price of
securities in the Funds' portfolios, the Funds will periodically make
adjustments to its index futures contracts positions to appropriately reflect
the relationship between the underlying portfolio and the indexes. The Fund will
not maintain short positions in index or stock index futures contracts, options
written on index or stock index futures contracts and options written on indexes
or stock indexes, if in the aggregate, the value of these positions exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those positions, adjusted for the historical volatility
relationship between the portfolio and the index contracts.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on futures contracts is limited to the premium paid
for the option (plus transaction costs). Because the price of the option to the
purchaser is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of the Fund holding the options.
The Funds may purchase and write put and call options on futures contracts
that are traded on a U.S. exchange or board of trade as a hedge against changes
in the value of its portfolio securities, and may enter into closing
transactions with respect to such options to terminate existing positions. There
is no guarantee that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject to
the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated interest rate and
market trends by the Funds' Sub-Advisors, which could prove to be inaccurate.
Even if the expectations of the Sub-Advisors are correct, there may be an
imperfect correlation between the change in the value of the options and the
portfolio securities hedged.
STRATEGIES AVAILABLE TO U.S. GOVERNMENT FUND, CORPORATE INCOME FUND, SHORT
TERM HIGH QUALITY BOND FUND, GROWTH AND INCOME FUND, EMERGING GROWTH FUND, SHORT
TERM GLOBAL GOVERNMENT FUND, GROWTH FUND AND INTERNATIONAL GROWTH FUND
OPTIONS ON SECURITIES. The Funds may write covered put options and covered
call options on securities, purchase put and call options on securities and
enter into closing transactions. The Funds may not write put options with
respect to more than 50% of their total assets.
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (1) in-the-money call options when its
Sub-Advisor expects that the price of the underlying security will remain flat
or decline moderately during the option period, (2) at-the-money call options
when its Sub-Advisor expects that the price of the underlying security will
remain flat or advance moderately during the option period and (3)
out-of-the-money call options when its Sub-Advisor expects that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be utilized in the same market
environments as such call options described above.
So long as the obligation of the Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through which
the option was sold, requiring the Fund to deliver, in the case of a call, or
take delivery of, in the case of a put, the underlying security against payment
of the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice. To secure its obligation to deliver the underlying security
when it writes a call option, or to pay for the underlying security when it
writes a put option, the Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "Clearing Corporation") and of the securities exchange
on which the option is written.
An option may be closed out only when there exists a secondary market for
an option of the same series on a recognized securities exchange or in the
over-the-counter market. In light of this fact and current trading conditions,
the Fund expects to purchase or write call or put options issued by the Clearing
Corporation, except that options on U.S. Government securities may be purchased
or written in the over-the-counter market. Over-the-counter options can be
closed out only by agreement with the primary dealer in the transaction.
National securities exchanges on which options are traded are: The Chicago Board
Options Exchange (CBOE), The Board of Trade of the City of Chicago (CBT),
American Stock Exchange (AMEX), Philadelphia Stock Exchange (PHLX), Pacific
Stock Exchange (PSE) and the New York Stock Exchange (NYSE). Any
over-the-counter option written by a Fund will be with a qualified dealer
pursuant to an agreement under which the Fund may repurchase the option at a
formula price at which the Fund would have the absolute right to repurchase an
over-the-counter option it has sold. Such options will be considered illiquid in
an amount equal to the formula price, less the amount by which the option is
"in-the-money." In the event of the insolvency of the primary dealer, the Fund
may not be able to liquidate its position in over-the-counter options, and the
ability of the Fund to enter into closing purchase transactions on options
written by the Fund may result in a material loss to the Fund.
The Fund may realize a profit or loss upon entering into closing
transactions. In cases where the Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option, and will incur a loss if the cost of
the closing purchase transaction exceeds the premium received upon writing the
original option. Similarly, when the Fund has purchased an option and engages in
a closing sale transaction, the Fund will realize a profit or loss to the extent
that the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs.
To facilitate closing transactions, the Fund will generally purchase or
write only those options for which its Sub-Advisor believes there is an active
secondary market although there is no assurance that sufficient trading interest
to create a liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the Clearing Corporation and the
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such events, it might
not be possible to effect closing transactions in particular options. If as a
covered call option writer the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Securities exchanges have established limitations governing the maximum
number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the particular
Fund and other clients of Sierra Advisors and its Sub-Advisors and certain of
their affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying security with respect to which the Fund has written
options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, the Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed stock. The Fund may however,
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to mortgage-backed U.S. Government
securities for which the Fund may write covered call options. If a Fund writes
covered call options on a mortgage-backed security, the security that it holds
as cover may, because of scheduled amortization of unscheduled prepayments,
cease to be sufficient cover. The Fund will compensate by purchasing an
appropriate additional amount of mortgage-backed securities.
STRATEGIES AVAILABLE TO SHORT TERM GLOBAL GOVERNMENT FUND, GROWTH AND
INCOME FUND, EMERGING GROWTH FUND, INTERNATIONAL GROWTH FUND, SHORT TERM HIGH
QUALITY BOND FUND, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND AND GROWTH
FUND
OPTIONS ON SECURITIES INDEXES. In addition to options on securities, the
Funds may also purchase and sell call and put options on securities indexes.
Such options give the holder the right to receive a cash settlement during the
term of the option based upon the difference between the exercise price and the
value of the index.
Options on securities indexes entail risks in addition to the risks of
options on securities. Because exchange trading of options on securities indexes
is relatively new, the absence of a liquid secondary market to close out an
option position is more likely to occur, although the Fund generally will
purchase or write such an option only if its Sub-Advisor believes the option can
be closed out.
Use of options on securities indexes also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless its
Sub-Advisor believes the market is sufficiently developed for the risk of
trading in such options to be no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGIES AVAILABLE TO CORPORATE INCOME FUND, EMERGING GROWTH FUND, SHORT
TERM GLOBAL GOVERNMENT FUND, SHORT TERM HIGH QUALITY BOND FUND, GROWTH AND
INCOME FUND, GROWTH FUND AND INTERNATIONAL GROWTH FUND
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS. The Funds may
invest in the securities of foreign and domestic issuers in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depositary Receipts ("CDRs"), and are receipts issued in
Europe typically by non-U.S. banking and trust companies that evidence ownership
of either foreign or U.S. securities. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and CDRs, in bearer form,
are designed for use in European securities markets.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates. The Funds' dealings in forward currency exchange contracts will
be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund generally
arising in connection with the purchase or sale of its portfolio securities.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. A
Fund may not position hedge with respect to a particular currency to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in or currently
convertible into that particular currency.
If a Fund enters into a position hedging transaction, the Trust's custodian
or sub-custodian will, except in circumstances where segregated accounts are not
required by the 1940 Act and the rules adopted thereunder, place cash, U.S.
Government Securities or high grade debt obligations in a segregated account for
the Fund in an amount at least equal to the value of the Fund's total assets
committed to the consummation of the forward contract. For each forward foreign
currency exchange contract that is used to hedge a securities position
denominated in a foreign currency, but for which the hedging position no longer
provides, in the opinion of the Sub- Advisor or the Advisor, sufficient
protection to consider the contract to be a hedge, the Fund maintains with its
custodian a segregated account of cash, U.S. Government Securities or high grade
debt obligations in an amount at least equal to the portion of the contract that
is no longer sufficiently covered by such hedge. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
the Fund's unhedged exposure (in the case of securities denominated in a foreign
currency) or commitment with respect to the contract. Hedging transactions may
be made from any foreign currency into U.S. dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
amount of the currency that it is obligated to deliver. If the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of currency and the date it enters into an offsetting
contract for the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions with factors such
as, the currency involved, the length of the contract period and the prevailing
market conditions. Because transactions in currency exchange are usually
conducted on a principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, forward currency contracts may limit the
risk of loss due to a decline in the value of the hedged currency increase.
If a devaluation of a currency is generally anticipated, a Fund may not be
able to contract to sell the currency at a price above the devaluation level it
anticipates.
The Funds, in addition, may combine forward currency exchange contracts
with investments in securities denominated in other currencies in an attempt to
create a combined investment position, the overall performance of which will be
similar to that of a security denominated in a Fund's underlying currency. For
instance, a Fund could purchase a U.S. dollar-denominated security and at the
same time enter into a forward currency exchange contract to exchange U.S.
dollars for its underlying currency at a future date. By matching the amount of
U.S. dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, the Fund may be able to "lock in" the foreign
currency value of the security and adopt a synthetic investment position whereby
the Fund's overall investment return from the combined position is similar to
the return from purchasing a foreign currency-denominated instrument.
There is a risk in adopting a synthetic investment position. It is
impossible to forecast with absolute precision what the market value of a
particular security will be at any given time. If the value of a security
denominated in the U.S. dollar or other foreign currency is not exactly matched
with a Fund's obligation under a forward currency exchange contract on the date
of maturity, the Fund may be exposed to some risk of loss from fluctuations in
that currency. Although each Fund's Sub-Advisor will attempt to hold such
mismatching to a minimum, there can be no assurance that the Fund's Sub-Advisor
will be able to do so.
Although the foreign currency market is not believed to be necessarily more
volatile than the market in other commodities, there is less protection against
defaults in the forward trading to currencies than there is in trading such
currencies on an exchange because such forward contracts are not guaranteed by
an exchange or clearing house. The Commodity Futures Trading Commission has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Fund, it would
cease trading such contracts. Cessation of trading might adversely affect the
performance of a Fund.
STRATEGIES AVAILABLE TO SHORT TERM GLOBAL GOVERNMENT FUND, GROWTH FUND,
INTERNATIONAL GROWTH FUND, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND AND
SHORT TERM HIGH QUALITY BOND FUND
OPTIONS ON FOREIGN CURRENCIES. The Funds may purchase and write put and
call options on foreign currencies for the purpose of hedging against declines
in the U.S. Dollar value of foreign currency-denominated portfolio securities
and against increases in the U.S. Dollar cost of such securities to be acquired.
Such hedging includes cross hedging and proxy hedging where the options to buy
or sell currencies involve other currencies besides the U.S. Dollar. As one
example, a decline in the U.S. dollar value of a foreign currency in which
securities are denominated will reduce the U.S. dollar value of the securities,
even if their value in the foreign currency remains constant. To protect against
diminutions in the value of securities held by a Fund in a particular foreign
currency, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right to sell the
currency for a fixed amount in U.S. dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio that otherwise would have resulted.
When an increase in the U.S. dollar value of a currency in which securities to
be acquired are denominated is projected, thereby increasing the cost of the
securities, the Fund conversely may purchase call options on the currency. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction, or
to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
The Funds may also write covered call options on foreign currencies for the
types of hedging purposes described above. As one example, when a Fund
anticipates a decline in the U.S. dollar value of foreign currency-denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a covered call option on the relevant currency.
If the expected decline occurs, the option will most likely not be exercised,
and the diminution in value of portfolio securities will be offset by the amount
of the premium received. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge up to
the amount of the premium, and only if rates move in the expected direction. If
this does not occur, the option may be exercised and the Fund would be required
to purchase or sell the underlying currency at a loss that may not be offset-by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund may also be required to forego all or a portion of the benefits that
might otherwise have been obtained from favorable movements in exchange rates.
A call option written on a foreign currency by a Fund is "covered" if the
Fund owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire the foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by Boston Safe, or by a designated sub-custodian) upon conversion or exchange of
other foreign currency held by the Fund. A call option also is covered if the
Fund has a call on the same foreign currency and in the same principal amount as
the call written when the exercise price of the call held (1) is equal to or
less than the exercise price of the call written or (2) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, U.S. Government Securities and other high-grade liquid debt securities
in a segregated account with Boston Safe or with a designated sub-custodian.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on those
exchanges. As a result, many of the projections provided to traders on organized
exchanges will be available with respect to those transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby reducing the risk of counterpart default. Further, a liquid
secondary market in options traded on a national securities exchange may exist,
potentially permitting the Fund to liquidate open positions at a profit prior to
their exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exercise and settlement of exchange-traded foreign
currency options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
SPECIAL CONSIDERATIONS RELATING TO INTERNATIONAL GROWTH FUND AND GROWTH FUND
SECURITIES IN DEVELOPING COUNTRIES. Although most of the investments of the
International Growth Fund, Emerging Growth Fund and Growth Fund are made in
securities of companies in (or governments of) developed countries, up to 25% of
the total assets of the International Growth Fund, up to 5% of the total assets
of the Emerging Growth Fund and up to 5% of the total assets of the Growth Fund
may be invested in securities of companies in (or governments of) developing or
emerging countries (sometimes referred to as "emerging markets") as well. A
developing or emerging country is generally considered by the international
financial community, in the opinion of Sierra Advisors or the Sub-Advisor of the
International Growth Fund or Growth Fund, to be a country that is in the initial
stages of its industrialization cycle. Investing in the equity and fixed-income
markets of developing or emerging in countries involves exposure to economic
structures that are generally less diverse and mature, and to political systems
that can be expected to have less stability than those of developed countries.
Historical experience indicates that the markets of developing or emerging
countries have been more volatile than the markets of the more mature economies
of developed countries; however, such markets often have provided higher rates
of return to investors.
Price movements in the Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
securities indexes cannot serve as a complete hedge. Because options on
securities indexes require settlement in cash, the Fund may be forced to
liquidate portfolio securities to meet settlement obligations.
STRATEGY AVAILABLE TO CORPORATE INCOME FUND, NATIONAL MUNICIPAL FUND, SHORT TERM
GLOBAL GOVERNMENT FUND, GROWTH FUND, GROWTH AND INCOME FUND, EMERGING GROWTH
FUND, INTERNATIONAL GROWTH FUND, GLOBAL MONEY FUND, U.S. GOVERNMENT MONEY FUND,
CALIFORNIA MONEY FUND, CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND AND SHORT
TERM HIGH QUALITY BOND FUND
LENDING OF PORTFOLIO SECURITIES. Each of the Funds will adhere to the
following conditions whenever its portfolio securities are loaned: (1) the Fund
must receive at least 100% cash collateral or equivalent securities from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities rises above the level of the collateral; (3) the Fund
must be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the loan; and (6)
voting rights on the loaned securities may pass to the borrower, provided that
if a material event adversely affecting the investment occurs, the Company's
Board of Trustees must terminate the loan and regain the right to vote the
securities. From time to time, the Funds may pay a part of the interest earned
from the investment of the collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the Company and that is
acting as a "finder". The Funds will not lend more than 20% of their respective
total assets.
STRATEGIES AVAILABLE TO CALIFORNIA MONEY FUND, CALIFORNIA MUNICIPAL FUND,
CALIFORNIA INSURED INTERMEDIATE MUNICIPAL FUND, FLORIDA INSURED MUNICIPAL FUND
AND NATIONAL MUNICIPAL FUND
MUNICIPAL SECURITIES. Municipal Securities are securities, the interest on
which qualifies for exclusion from gross income for federal income tax purposes
in the opinion of bond counsel to the issuer. The three principal
classifications of Municipal Securities are Municipal Bonds, Municipal
Commercial Paper and Municipal Notes.
Municipal Bonds, which generally have a maturity of more than one year when
issued, have two principal classifications: General Obligation Bonds and Revenue
Bonds. An AMT-Subject Bond is a particular kind of Revenue Bond. The
classifications of Municipal Bonds and AMT-Subject Bonds are discussed below.
1. GENERAL OBLIGATION BONDS. The proceeds of these obligations are used
to finance a wide range of public projects, including construction
or improvement of schools, highways and roads, and water and sewer
systems. General Obligation Bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal
and interest.
2. REVENUE BONDS. Revenue Bonds are issued to finance a wide variety of
capital projects, including; electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges
and universities; and hospitals. The principal security for a
Revenue Bond is generally the net revenues derived from a particular
facility, group of facilities, or, in some cases, the proceeds of a
special excise or other specific revenue source. Although the
principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund which
may be used to make principal and interest payments on the issuer's
obligations. Some authorities provide further security in the form
of a state's ability (without obligation) to make up deficiencies in
the debt service reserve fund.
3. AMT-SUBJECT BONDS. AMT-Subject Bonds are considered Municipal Bonds
if the interest paid on them is excluded from gross income for
federal income tax purposes and if they are issued by or on behalf
of public authorities to raise money to finance, for example,
privately operated manufacturing or housing facilities, publicly
operated airport, dock, wharf, or mass-commuting facilities. The
payment of the principal and interest on these bonds is dependent
solely on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of real and personal property so
financed as security for such payment.
California has a variety of Special Tax District debt obligations, such as
Act 1911 and 1915 Special Assessment Bonds, Mello-Roos Bonds and Tax Allocation
bonds, which are defined as property-backed general obligation substitutes
(because the assessments for improvement do not require voter approval). The
proceeds from the issuance of these essential purpose Special Tax District Bonds
are generally used to develop raw land. As a result, these issues tend not to
carry a credit rating.
Issues of MUNICIPAL COMMERCIAL PAPER typically represent short-term,
unsecured, negotiable promissory notes. These obligations are issued by agencies
of state and local governments to finance seasonal working capital needs of
municipalities or to provide interim construction financing, and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions.
MUNICIPAL NOTES generally are used to provide for short-term capital needs
and generally have maturities of one year or less. Municipal Notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to
finance working capital needs of municipalities. Generally, they
are issued in anticipation of various seasonal tax revenues, such
as income, sales, use and business taxes and are payable from
these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued
in expectation of receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing
Program.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to
provide interim financing until long-term financing can be
arranged. In most cases, the long-term bonds provide the money for
the repayment of the notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to
provide construction financing. Permanent financing, the proceeds
of which are applied to the payment of Construction Loan Notes, is
sometimes provided by a commitment by GNMA to purchase the loan,
accompanied by a commitment by the Federal Housing Administration
to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to
purchase the loan. A Municipal Fund will only purchase
Construction Loan Notes that are subject to GNMA or bank purchase
commitments.
From time to time, proposals to restrict or eliminate the federal income
tax exemption for interest on Municipal Securities have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Internal Revenue Code, as amended, currently provides that small issue private
activity bonds will not be tax-exempt if the bonds are issued after December 31,
1986 and the proceeds are used to finance projects other than manufacturing
facilities. Interest on certain small issue private activity bonds used to
finance manufacturing facilities will not be tax-exempt if such bonds are issued
after December 31, 1989. If these deadlines are not extended, or, if a proposal
to restrict or eliminate the federal tax exemption for interest on Municipal
Securities were enacted, the availability of Municipal Securities for investment
by the Municipal Funds would be adversely affected. In such event, the Municipal
Funds would reevaluate their respective investment objectives and policies and
submit possible changes in the structure of the Funds for the consideration of
shareholders.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS. The Municipal Funds may
purchase floating rate and variable rate obligations, including participation
interests therein. Variable rate obligations provide for a specified periodic
adjustment in the interest rate, while floating rate obligations have an
interest rate that changes whenever there is a change in the external interest
rate. The Funds may purchase floating rate and variable rate obligations that
carry a demand feature which would permit the Funds to tender them back to the
issuer or remarketing agent at par value prior to maturity. Frequently, floating
rate and variable rate obligations are secured by letters of credit or other
credit support arrangements provided by banks.
PARTICIPATION INTERESTS. The Municipal Funds may invest in participation
interests purchased from banks in floating rate or variable rate municipal
securities (such as AMT-Subject Bonds) owned by banks. A participation interest
gives the purchaser an undivided interest in the municipal security in the
proportion that the relevant Fund's participation interest bears to the total
principal amount of the municipal security and provides a demand repurchase
feature. Each participation is backed by an irrevocable letter of credit or
guarantee of a bank that meets the prescribed quality standards of the Fund. A
Fund has the right to sell the instrument back to the issuing bank or draw on
the letter of credit on demand for all or any part of the Fund's participation
interest in the municipal security, plus accrued interest. Banks will retain or
receive a service fee, letter of credit fee and a fee for issuing repurchase
commitments in an amount equal to the excess of the interest paid on the
municipal securities over the negotiated yield at which the instruments were
purchased by the Fund. Participation interests in the form to be purchased by
the Fund are new instruments, and no ruling of the Internal Revenue Service has
been secured relating to their tax-exempt status. The Funds intend to purchase
participation interests based upon opinions of counsel to the issuer to the
effect that income from them is tax-exempt to the Fund.
STAND-BY COMMITMENTS. The Municipal Funds may acquire stand-by commitments
with respect to municipal securities held in their respective portfolios. Under
a stand-by commitment, a broker-dealer, dealer or bank would agree to purchase,
at the relevant Funds' option, a specified municipal security at a specified
price. Thus, a stand-by commitment may be viewed as the equivalent of a "put"
option acquired by a Fund with respect to a particular municipal security held
in the Fund's portfolio.
The amount payable to a Fund upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the municipal security (excluding
any accrued interest that the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the security, plus, (2) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the Fund. Absent unusual circumstances, the Fund would value the
underlying municipal security at amortized cost. As a result, the amount payable
by the broker-dealer, dealer or bank during the time a stand-by commitment is
exercisable would be substantially the same as the value of the underlying
municipal security.
A Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. Although a Fund could not transfer a stand-by commitment, it could
sell the underlying municipal security to a third party at any time. It is
expected that stand-by commitments generally will be available to the Funds
without the payment of any direct or indirect consideration. The Funds may,
however, pay for stand-by commitments if such action is deemed necessary. In any
event, the total amount paid for outstanding stand-by commitments held in a
Fund's portfolio would not exceed 1/2 of 1% of the value of a Fund's total
assets calculated immediately after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with
broker-dealers, dealers or banks that their Sub-Advisor believes present minimum
credit risks. A Fund's ability to exercise a stand-by commitment will depend on
the ability of the issuing institution to pay for the underlying securities at
the time the stand-by commitment is exercised. The credit of each institution
issuing a stand-by commitment to a Fund will be evaluated on an ongoing basis by
its Sub-Advisor in accordance with procedures established by the Board of
Trustees.
A Fund intends to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its right thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying municipal security. Each stand-by commitment will be
valued at zero in determining net asset value. Should a Fund pay directly or
indirectly for a stand-by commitment, its costs will be reflected in realized
gain or loss when the commitment is exercised or expires. The maturity of a
municipal security purchased by a Fund will not be considered shortened by any
stand-by commitment to which the obligation is subject. Thus, stand-by
commitments will not affect the dollar-weighted average maturity of a Fund's
portfolio.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
The ability of issuers to pay interest on, and repay principal of, California
municipal securities ("California Municipal Securities") may be affected by (1)
amendments to the California Constitution and related statutes that limit the
taxing and spending authority of California government entities, (2) voter
initiatives, (3) a wide variety of California laws and regulations, including
laws related to the operation of health care institutions and laws related to
secured interests in real property and (4) the general financial condition of
the State of California. The following information constitutes only a brief
summary, and is not intended as a complete description. The information has been
drawn, in some cases by excerpt, from official statements relating to securities
offerings of the State of California available as of the date of this Statement
of Additional Information. While the information has not been independently
verified by the California Money Fund, the California Municipal Fund, or the
California Insured Intermediate Municipal Tax Exempt Fund (the "California
Fund"), the California Fund has no reason to believe that such information is
not correct in all material respects.
Amendments to the California Constitution and Related Statutes. Certain of
the California Municipal Securities may be obligations of issuers who rely in
whole or in part on ad valorem real property taxes as a source of revenue. On
June 6, 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, which added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property, and to restrict the ability of taxing entities to
increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax on real property
to 1% of full cash value (as defined in Section 2), to be collected by the
counties and apportioned according to law; provided that the 1% limitation
does not apply to ad valorem taxes or special assessments to pay the interest
and redemption charges on (i) any indebtedness approved by the voters prior to
July 1, 1978, or (ii) any bonded indebtedness for the acquisition or improvement
of real property approved on or after July 1, 1978, by two-thirds of the votes
cast by the voters voting on the proposition. Section 2 of Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property as
shown on the 1975/76 tax bill under 'full cash value' or, thereafter, the
appraised value of real property when purchased, newly constructed, or a change
in ownership has occurred after the 1975 assessment." The "full cash value" may
be adjusted annually to reflect inflation at a rate not to exceed 2% per year,
or reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meanings of "change in ownership"
and "new construction" for purposes of determining full cash value of property
under Article XIIIA.
Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to pay
debt service on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article XIIIA of $4.00
per $100 assessed valuation (based on the former practice of using 25%, instead
of 100%, of full cash value as the assessed value for tax purposes). The
legislation further provided that, for the 1978/79 fiscal year only, the tax
levied by each county was to be apportioned among all taxing agencies within the
county in proportion to their average share of taxes levied in certain previous
years. The apportionment of property taxes in fiscal years after 1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282, which provides relief
funds from State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget funds with local
agencies. Under Chapter 282, cities and counties receive more of the remaining
property tax revenues collected under Proposition 13 instead of direct State
aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief. Chapter 282 does not affect the derivation of the base levy ($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB to
the California Constitution. Under Article XIIIB, State and local governmental
entities have an annual "appropriations limit" and are not allowed to spend
certain moneys called "appropriations subject to limitation" in an amount higher
than the "appropriations limit." Article XIIIB does not affect the appropriation
of moneys which are excluded from the definition of "appropriations subject to
limitation," including debt service on indebtedness existing or authorized as of
January 1, 1979, or bonded indebtedness subsequently approved by the voters. In
general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB also provides that if these entities' revenues in any year exceed
the amounts permitted to be spent, the excess is to be returned by revising the
tax rates or fee schedules over the subsequent two years.
Article XIIIB, like XIIIA, may require further interpretation by both the
Legislature and the courts to determine its applicability to specific situations
involving the State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a governmental entity's
ability to budget sufficient funds to meet debt service on bonds and other
obligations.
Voter Initiatives. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (as
modified by Proposition 111, which was enacted on June 5, 1990), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (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 State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace "Test 2" 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 State per capita personal
income ("Test 3"). Under "Test 3," 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 "Test 3" is used in any
year, the difference between "Test 3" and "Test 2" would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing
Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to
be 40.3 percent of the General Fund Tax revenues, based on 1986-87
appropriations. However, that percent would be adjusted to account for
redirection of local property taxes, since such a subsequent redirection
directly affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses, with
the Governor's concurrence, to suspend the K-14 schools' minimum funding formula
for a one-year period. In the fall of 1989, the Legislature and the Governor
utilized this provision to avoid having 40.3 percent of revenues generated by a
special supplemental sales tax enacted for earthquake relief go to K-14 schools.
Proposition 98 also contains provisions transferring certain State tax revenues
in excess of the Article XIII B limit to K-14 schools.
The 1991-92 Budget Act appropriated $18.4 billion for K-14 schools, applying
Test 2 of Proposition 98. During the course of the fiscal year, revenues proved
to be substantially below expectations. In response to the changing revenue
situation and to fully fund the Proposition 98 guarantee in both the 1991-92 and
1992-93 Fiscal Years without exceeding it, the Legislature enacted several bills
as part of the 1992-93 budget package which responded to the fiscal crisis in
education funding. In Fiscal Year 1991-92, Proposition 98 appropriations for
K-14 schools were reduced by $1.083 billion. In order to not adversely impact
cash received by school districts, however, a short-term loan was appropriated
from the non-Proposition 98 State General Fund. The Legislature then
appropriated $16.6 billion to K-14 schools for 1992-93 (the minimum guaranteed
by Proposition 98), but designated $1.083 billion of this amount to "repay" the
prior year loan, thereby reducing cash outlays in 1992-93 by that amount.
In addition to reducing the 1991-92 Fiscal Year appropriations for K-14 schools
by $1.083 billion and converting that amount to a loan (the "inter-year
adjustment"), Chapter 703, Statutes of 1992 ("Chapter 703") also provided for an
adjustment to Test 1, based on the additional local property taxes that were
shifted to schools and community colleges. The Test 1 percentage changed from 40
percent to 38.5 percent based on the most recent data indicating a shift amount
of $1.1 billion. Additionally, Chapter 703 contained a provision that if an
appellate court should determine that the Test 1 recalculation or the inter-year
adjustment is unconstitutional, unenforceable or invalid, Proposition 98 would
be suspended for the 1992-93 Fiscal Year, with the result that K-14 schools
would receive the amount intended by the 1992-93 Budget Act compromise.
In the 1992-93 Budget Act, a new loan of $732 million was made to K-12 schools
in order to maintain per-average daily attendance ("ADA") funding at the same
level as 1991-92, at $4,217. An additional loan of $241 million was made to
community college districts. These loans are to be repaid from future
Proposition 98 entitlements. Including both State and local funds, and adjusting
for the loans and repayments, on a cash basis, total Proposition 98 K-12 funding
in 1992-93 increased to $21.5 billion, 2.4 percent more than the amount in
1991-92 ($21.0 billion).
On October 29, 1992, because of a special statute of limitations contained in
Chapter 703, litigation was commenced concerning that law. The Governor filed a
civil action, now dismissed, to, in effect, enforce the inter-year adjustment. A
second civil action, California Teachers' Association, et al. v. Gould, et al.
(the "CTA case"), was filed by a teachers' organization, the Superintendent of
Public Instruction and others to declare the inter-year adjustment and the
provision for conditional suspension of Proposition 98 to be unlawful and to
declare invalid the provision making the $732 million loan described above
"repayable" from future years' Proposition 98 funds (see page A-63 of Appendix
A). A third civil action was filed by business, local government and taxpayer
organizations seeking to enforce the budget plan for school financing as
originally intended in Chapter 703.
One cause of action in the CTA case was heard by the Sacramento County Superior
Court on November 12, 1993. The cause of action addressed both Chapter 703 and
the corrective legislation. The court ruled orally from the bench that the
$1.083 billion reduction in the 1991-92 school appropriations was proper to the
extent that the base for determining the Proposition 98 guarantee in future
years did not include the $1.083 billion. However, the court also ruled that the
State could not implement the loan provisions to recover the excess funds or to
use the excess funds as an offset against the next fiscal year's guarantee.
In addition, the court ruled that the $732 million loan to schools and the $241
million loan to community colleges in Fiscal Year 1992-93 violated Proposition
98, and that the loans were required to be included in the base for determining
the Proposition 98 guarantee in future years. A judgment consistent with the
Court's oral ruling was entered on April 26, 1994. The State and the plaintiffs
have appealed the ruling. The impact of this lawsuit has not been reflected in
the Proposition 98 guarantee for the 1992-93 Fiscal Year or for the 1993-94,
1994-95, or 1995-96 Fiscal Years.
The 1993-94 Budget Act projected the Proposition 98 minimum funding level at
$13.5 billion based on the "Test 3" calculation where the guarantee is
determined by the change in per capita growth in General Fund revenues, which
are projected to decrease on a year-over-year basis. This amount also takes into
account increased property taxes transferred to school districts from other
local governments.
Legislation accompanying the 1993-94 Budget Act (Chapter 66/93) provided a loan
of $609 million to K-12 schools in order to maintain per ADA funding at $4,187
and a loan of $178 million to community colleges. These loans have been combined
with the K-14 1992-93 loans into one loan totalling $1.760 billion. Repayment of
this loan would be from future years' Proposition 98 entitlements, and would be
conditioned on maintaining current funding levels per pupil for K-12 schools.
Chapter 66/93 also reduced the "Test 1" percentage to 33% to reflect the
property tax shift among local government agencies.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98 funds
for K-14 schools based on Test 2. This exceeds the minimum Proposition 98
guarantee by $8 million to maintain K-12 funding per pupil at $4,217. Based upon
updated State revenues, growth rates and inflation factors, the 1994-94 Budget
Act includes an additional $286 million with Proposition 98 for the 1993-94
Fiscal Year, to reflect a need in the continuous statutory appropriations for
school districts and county offices of education. These and various other minor
appropriation adjustments increase the 1993-94 Proposition 98 guarantee to $13.8
billion, which exceeds the minimum guarantee in that year by $272 million and
provides per pupil funding of $4,225.
The 1995-96 Governor's Budget adjusts the 1993-94 minimum guarantee to reflect
changes in enrollment and inflation, and 1993-94 Proposition 98 appropriations
are increased to $14.1 billion, primarily to reflect changes in the statutory
continuous appropriations for apportionments. The revised appropriations now
exceed the minimum guarantee by $32 million. The appropriation level still
provides per-pupil funding of $4,225. The 1994-95 Proposition 98 minimum
guarantee has also been adjusted for changes in factors described above, and is
now calculated to be $14.9 billion. Within the minimum guarantee, the dollars
per pupil have been maintained at the prior year's level; consequently, the
1994-95 minimum guarantee now includes a loan repayment of $135 million, and the
per-pupil funding increases to $4,231.
The 1995-96 Governor's Budget proposes to appropriate $15.9 billion of
Proposition 98 funds to K-14 to meet the guarantee level. Included within the
guarantee is a loan repayment of $379 million for the combined outstanding loans
of $1.76 billion. Funding per pupil is estimated to increase by $61 over 1994-95
to $4,292.
On November 4, 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (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
XIIIA, (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 vote
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 property tax revenue allocated to such local government occurs in
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.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is not possible to predict the
impact of this decision on charter cities, on special taxes, or on new taxes
imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87. Proposition 87
amended Article XVI, Section 16, of the California Constitution by authorizing
the California Legislature to prohibit redevelopment agencies from receiving any
of the property tax revenue raised by increased property tax rates levied to
repay bonded indebtedness of local governments which is approved by voters on or
after January 1, 1989. It is not possible to predict whether the California
Legislature will enact such a prohibition nor is it possible to predict the
impact of Proposition 87 on redevelopment agencies and their ability to make
payments on outstanding debt obligations.
Other Relevant California Laws. A wide variety of California laws and
regulations may affect, directly or indirectly, the payment of interest on, or
the repayment of the principal of, California Municipal Securities in which the
California Fund may invest. The impact of such laws and regulations on
particular California Municipal Securities may vary depending upon numerous
factors including, among others, the particular type of Municipal Security
involved, the public purpose funded by the Municipal Security and the nature and
extent of insurance or other security for payment of principal and interest on
the Municipal Security. For example, California Municipal Securities which are
payable only from the revenues derived from a particular facility may be
adversely affected by California laws or regulations which make it more
difficult for the particular facility to generate revenues sufficient to pay
such interest and principal, including, among others, laws and regulations which
limit the amount of fees, rates or other charges which may be imposed for use of
the facility or which increase competition among facilities of that type or
which limit or otherwise have the effect of reducing the use of such facilities
generally, thereby reducing the revenues generated by the particular facility.
California Municipal Securities, the payment of interest and principal on which
is insured in whole or in part by a California governmentally created fund, may
be adversely affected by California laws or regulations which restrict the
aggregate insurance proceeds available for payment of principal and interest in
the event of a default on such Municipal Securities.
Certain California Municipal Securities in which the Fund may invest may be
obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect such
revenues and, consequently, payment on those California Municipal Securities.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed in payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non- emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by ten percent through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held. If the
injunction is deemed to have been granted improperly, the State of California
would be entitled to recapture the payment differential for the intended
reduction period. It is not possible to predict at this time whether any
decreases will ultimately be implemented.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December, 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Certain California Municipal Securities in which the Fund may invest may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust, two of which
limit the creditor's right to obtain a deficiency judgment. One of the
limitations is based on the method of foreclosure and the other on the type of
debt secured. Under the former, a deficiency judgment is barred when the
foreclosure is accomplished by means of a nonjudicial trustee's sale. Under the
latter, a deficiency judgment is barred when the foreclosed mortgage or deed of
trust secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires the creditors secured
by real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the outstanding debt
over the fair value of the property at the time of the sale, thus preventing the
creditor from obtaining a large deficiency judgment against the debtor as the
result of low bids at a judicial sale. The fifth statutory provision gives the
debtor the right to redeem the real property from any judicial foreclosure sale
as to which a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a home mortgage could be in excess of seven
months after the initial default. Such time delays in collections could disrupt
the flow of revenues available to an issuer for the payment of debt service on
the outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain California Municipal Securities in which the Fund may invest may be
obligations which finance the acquisition of single family home mortgages for
low and moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to the California
statutory limitations described above applicable to obligations secured by real
property. Under California anti-deficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage, regardless of whether the creditor chooses
judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and cannot in any event exceed
six months' advance interest on the amount prepaid in excess of 20% of the
original amount of the mortgage loan. This limitation could affect the flow of
revenues available to an issuer for debt service on the outstanding debt
obligations which financed such home mortgages.
Because of the diverse nature of such laws and regulations and the impossibility
of either predicting in which specific California Municipal Securities the
California Fund will invest from time to time or predicting the nature or extent
of future changes in existing laws or regulations or the future enactment or
adoption of additional laws or regulations, it is not presently possible to
determine the impact of such laws and regulations on the Municipal Securities in
which the California Fund may invest and, therefore, on the units of the
California Fund.
The General Financial Condition of the State of California. From mid-1990 to
late 1993, the State suffered a recession with the worst economic, fiscal and
budget conditions since the 1930s. Construction, manufacturing (especially
aerospace), and financial services, among others, were all severely affected.
Job losses were the worst of any post-war recession. Employment levels
stabilized by late 1993 and steady growth occurred in 1994 and is expected to
continue in 1995, but pre-recession job levels are not expected to be reached
until late 1996. Economic indicators show a steady recovery underway in the
State since the start of 1994.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-12 schools
and community colleges, health and welfare, and corrections -- growing at rates
higher than the growth rates for the principal revenue sources of the State
General Fund. As a result, the State experienced recurring budget deficits in
the late 1980s and early 1990s. The State Controller reports that expenditures
exceeded revenues for four of the five fiscal years ending with 1991-92;
revenues and expenditures were equal in 1992-93, and the State had an operating
surplus of $1.1 billion in 1993-94. However, at June 30, 1994, according to the
Department of Finance, the State's special Fund for Economic Uncertainties still
had an accumulated deficit, on a budget basis, of approximately $1.5 billion.
The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget, and
reduction of available internal borrowable funds, have combined to significantly
deplete the State's cash resources to pay its ongoing expenses. In order to meet
its cash needs, the State has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. Such
borrowings are expected to continue in future fiscal years. To meet its cash
flow needs in the 1994-95 Fiscal Year, the State has issued, in July and August,
1994, $4.0 billion of revenue anticipation warrants which mature on April 25,
1996, and $3.0 billion of revenue anticipation notes maturing on June 28, 1995.
On July 25, 1994, all three of the rating agencies rating the State's long-term
debt lowered their ratings of the State's general obligation bonds. Moody's
Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's
Ratings Group lowered its rating from "A+" to "A" and termed its outlook as
"stable," and Fitch Investors Service lowered its rating from "AA" to "A."
The 1994-95 Fiscal Year Budget (as updated in the January 10, 1995 Governor's
Budget) is projected to have $42.4 billion of General Fund revenues and
transfers and $41.7 billion of budgeted expenditures. In addition, the 1994-95
Budget Act anticipates deferring retirement of about $1 billion of the
accumulated budget deficit to the 1995-96 Fiscal Year when it is intended to be
fully retired by June 30, 1996.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Funds") filed for protection under Chapter 9 of
the federal Bankruptcy Code, after reports that the Funds had suffered
significant market losses in their investments, causing a liquidity crisis for
the Funds and the County. More than 180 other public entities, most of which,
but not all, are located in the County, were also depositors in the Funds. As of
mid-January, 1995, following a restructuring of most of the Funds' assets to
increase their liquidity and reduce their exposure to interest rate increases,
the County estimated the Funds' loss at about $1.69 billion, or 22% of their
initial deposits of approximately $7.5 billion. Many of the entities which
deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations.
The State has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county administered State programs
because of insufficient resources, it may be necessary for the State to
intervene, but the State cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Funds. Under
existing legal precedent, the State is obligated to intervene when a school
district's fiscal problems would otherwise deny its students basic educational
quality. The State is not presently able to predict whether any school districts
will face insolvency because of their participation in the Fund, and if so, the
potential amount or form of aid which the State may have to provide. The
Governor has called a special session of the legislature which is expected to
consider various responses to the Orange County situation.
For the first time in four years, the State enters the upcoming fiscal year with
strengthening revenues based on an improving economy. On January 10, 1995, the
Governor presented his 1995-96 Fiscal Year Budget Proposal (the "Proposed
Budget"). The Proposed Budget estimates General Fund revenues and transfers of
$42.5 billion (an increase of 0.2 percent over 1994-95). This nominal increase
from the 1994-95 Fiscal Year reflects the Governor's realignment proposal and
the first year of his tax cut proposal (see principal features of the Proposed
Budget below for further discussions). Without these two proposals, General Fund
revenues would be projected at approximately $43.8 billion, or an increase of
3.3 percent over 1994-95. Expenditures are estimated at $41.7 billion
(essentially unchanged from 1994-95). Special Fund revenues are estimated at
$13.5 billion (10.7 percent higher than 1994-95) and Special Fund expenditures
are estimated at $13.8 billion (12.2 percent higher than 1994-95). The Proposed
Budget projects that the General fund will end the fiscal year at June 30, 1996
with a budget surplus in the Special Fund for Economic Uncertainties of about
$92 million, or less than 1 percent of General Fund expenditures, and will have
repaid all of the accumulated budget deficits.
The following are the principal features of the Proposed Budget:
1. The principal feature of the Proposed Budget is a proposed 15
percent cut in personal income and corporate tax rates, which would be
phased in at 5 percent per year starting in 1996. Existing personal
income tax rates, which are scheduled to drop from an 11 percent top
rate to 9.3 percent in 1996, would be continued during the time the
overall tax cut takes effect. This proposal would reduce General Fund
revenues by $225 million in 1995-96, but the revenue reduction would
reach $3.6 billion by 1998-99.
2. The Governor has proposed an expansion of the realignment
program between the State and counties, so that counties will take on
greater responsibility for welfare and social services, while the State
will take on increased funding of trial court costs. The proposal
includes transfer of about $1 billion of State revenues, from sales
taxes and trial court funding moneys, to counties. The net effect of the
shifts, however, is estimated to save the General Fund about $240
million.
3. The Governor proposes further cuts in health and welfare costs
totaling about $1.4 billion. Some of these cuts would require
legislative approval.
4. Proposition 98 funding for schools and community colleges will
increase by about $1.2 billion, reflecting strong General Fund revenue
growth. Per-pupil expenditures are projected to increase by $61 to
$4,292. For the first time in several years, a cost-of-living increase
(2.2 percent) is added to the enrollment growth factor. The Governor
proposes to set aside about $514 million of the Proposition 98 funding
increase to repay prior years' loans from the General Fund to schools.
As the legality of these loans is currently being challenged in a
lawsuit, the Governor proposes to set the amount aside in escrow until
the litigation (the CTA case) is resolved.
5. The Proposed Budget includes increases in funding for the
University of California ($63 million General Fund) and the California
State University system ($3 million General Fund). The Governor has
proposed a four-year funding "compact" for the higher educational units
which includes both annual increases in State funding and increases in
student fees.
6. The Proposed Budget assumes receipt of $830 million in new
federal aid for costs of undocumented and refugee immigrants, above
commitments already made by the federal government. This amount is much
less than an estimated $2.8 billion which had been included in the
Governor's pro-forma two-year plan from last summer.
The 1995-96 Budget will be subject to the Budget Adjustment or "Trigger"
legislation enacted in June, 1994. The Proposed Budget contains a cash flow
projection (based on all the assumptions described above) which shows about $1
billion of unused borrowable resources at June 30, 1996, providing this amount
of "cushion" before the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in February 1995 notes that
the Proposed Budget (and hence the margin of cushion under the "trigger") is
subject to a number of major risks, including receipt of the expected federal
immigration aid and other federal actions to allow health and welfare cuts, and
the outcome of several lawsuits concerning previous budget actions which the
State has lost at the trial court legal and which are under appeal. The
Analyst's Report also estimates that, despite more favorable revenues, the
two-year budget estimates made in July, 1994 are about $2 billion out of
balance, principally because federal immigration aid appears likely to be much
lower than previously estimated. This shortfall is much smaller than the State
has faced in recent years, and has been addressed in the Governor's Budget.
After significant debate, the 1995-96 Budget was approved by the California
legislature on August 2, 1995, and was subsequently signed into law by the
Governor.
Additional Considerations. With respect to Municipal Securities issued by the
State of California and its political subdivisions, as well as certain other
governmental issuers such as the Commonwealth of Puerto Rico, the Trust cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted. Such
proposals, if enacted, might materially adversely affect the availability of
California Municipal Securities for investment by the California Fund and the
value of the Fund's investments. In such event, the Trustees would reevaluate
the investment objective and policies of the California Fund and consider
changes in its investments structure or possible dissolution.
SPECIAL CONSIDERATIONS RELATING TO FLORIDA MUNICIPAL SECURITIES
The following information constitutes only a brief summary, and does not
purport to be a complete description. The information in this section is updated
periodically. While the Fund has not independently verified such information, it
has no reason to believe that such information is not correct in all material
respects. The source of the 1994-95, 1995-96 and 1996-97 figures set forth below
is the Revenue and Economic Analysis Unit of the Executive Office of the
Governor of the State of Florida. Such figures are preliminary and subject to
change without notice.
POPULATION. In 1980, Florida was ranked seventh among the fifty states with
a population of 9.7 million people. The State has grown dramatically since then
and as of April 1, 1994 ranks fourth with an estimated population of 13.9
million. Since the beginning of the eighties, Florida has surpassed Ohio,
Illinois, and Pennsylvania in total population. Florida's attraction, as both a
growth and retirement state, has kept net migration at an average of 235,600 new
residents per year, from 1985 through 1994.
INCOME. Over the years, Florida's personal income has grown at a strong
pace and has generally outperformed both the U.S. as a whole and the southeast
in particular. The reasons for this are twofold: first, as mentioned above,
Florida's population has expanded at a very strong pace; and second, the State's
economy since the early seventies has diversified in such a way as to provide a
broader economic base. As a result, Florida's per capita personal income has
tracked closely with the national average. Furthermore, the State's per capita
personal income has historically tracked above the southeast. From 1985 through
1994, Florida's per capita income rose an average 5.2% per year, while national
per capita income increased an average 5.1%.
The structure of Florida's income differs from that of the nation and the
southeast. Because Florida has a proportionally greater retirement age
population, property income (dividends, interest, and rent) and transfer
payments (social security and pension benefits, among other sources of income)
are a relatively more import source of income. For example, Florida's employment
income in 1994 represented 61.5% of total personal income, while the nation's
share of total personal income in the form of wages and salaries and other labor
benefits was 72.6%. Florida's income is dependent upon transfer payments
controlled by the federal government.
EMPLOYMENT. Since 1985, the State's population has increased an estimated
26.1%. In the same period of time, Florida's total non-farm employment has grown
by approximately 37.9%. The average rate of unemployment for Florida since 1985
is 6.3% while the national average is 6.4%. Though the State has grown by an
average of 287,300 people per year, the strength of the economy has created an
environment that has more than absorbed new residents seeking employment. The
job creation rate for the State of Florida is almost twice the rate for the
nation as a whole, since 1985.
CONSTRUCTION. Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. For example, total
contract construction employment as a share of total non-farm employment reached
a peak of over 10% in 1973. In 1980, the share was roughly 7.5% percent, and in
1994, the share had edged downward to nearly 5%. This trend is expected to
continue as Florida's economy continues to diversify. Florida, nevertheless, has
a dynamic construction industry, with single and multi-family housing starts
accounting for approximately 8.5% of total U.S. housing starts in 1994, while
the State's population is 5.3% of the nation's population. Since 1985, total
housing starts have averaged 148,500 per year. The increase in interest rates in
1994 has limited the growth of construction in the state.
A driving force behind Florida's construction industry is of course its
rapid growth in population. While annual growth in the State's population is
projected to slow somewhat, it is still expected to grow between 200,000 and
270,000 new residents throughout the 1990's.
TOURISM. Tourism is one of Florida's most important industries. Approximately
39.9 million people visited the State in 1994, as reported by the Florida
Department of Commerce. As discussed below, tourism in Florida has declined due
to negative publicity regarding crime.
OUTLOOK. The current Florida Economic Consensus Estimating Conference
forecast shows that the Florida economy will experience modest growth through
the current and next fiscal year. The effect of higher interest rates is most
evident in the construction sector of Florida's economy. Housing starts are
expected to total 116,000 in 1995-96 and 117,000 in 1996-97, which is
considerably less compared to what was expected prior to the interest rate
hikes. The increased interest rates would have had a much greater negative
impact on construction expenditures were it not for some near term boost from
the commercial and public construction sectors. Both business investment
spending and consumer installment credit-based buying are expected to slow down
as a result of the rising interest rates.
Income and employment growth rates are expected to reflect the slowdown in
economic growth caused by the rising interest rates.
Florida tourism still appears to be suffering from the effects of negative
publicity regarding crime against tourists in the state. Also, factors such as
"product maturity" of a Florida vacation package, higher prices, and more
aggressive marketing by competing vacation destinations, could be contributory
causes of the tourism slowdown.
Florida's population is expected to increase by 2.1% and 2.0% in 1994-95
and 1995-96 respectively. By the end of the current fiscal year total Florida
population is expected to cross 14 million. The change in population is expected
to be 285,000 this year and 277,900 next year.
REVENUES AND EXPENDITURES. Financial operations of the State of Florida
covering all receipts and expenditures are maintained through the use of four
fund types - the General Revenue Fund, Trust Funds, the Working Capital Fund and
beginning in fiscal year 1994-95, the Budget Stabilization Fund. The General
Revenue Fund receives the majority of State tax revenues. The Trust Funds
consist of monies received by the State which under law or trust agreement are
segregated for a purpose authorized by law. Revenues in the General Revenue Fund
which are in excess of the amount needed to meet appropriations may be
transferred to the Working Capital Fund. The Florida Constitution and Statutes
mandate that the State budget as a whole, and each separate fund within the
State budget, be kept in balance from currently available revenues each State
fiscal year.
Estimated fiscal year 1995-96 General Revenue plus Working Capital and
Budget Stabilization funds available total $14,683.0 million, a 2.2% increase
over 1994-95. With combined General Revenue, Working Capital Fund and Budget
Stabilization Fund appropriations at $14,824.0 million, unencumbered reserves at
the end of 1995-96 are estimated at $325.1 million.
Estimated fiscal year 1996-97 General Revenue plus Working Capital and
Budget stabilization funds available total $15,717.8 million, a 3.8% increase
over 1995-96.
In fiscal year 1994-95, the State derived approximately 66% of its total
direct revenues to these funds from State taxes and fees. Federal funds and
other special revenues accounted for the remaining revenues. Major sources of
tax revenues to the General Revenue Fund are the sales and use tax, corporate
income tax, intangible personal property tax, and beverage tax, which amounted
to 67%, 7%, 4% and 4%, respectively, of total General Revenue Funds available.
State expenditures are categorized for budget and appropriation purposes by
type of fund and spending unit, which are further subdivided by line item. In
fiscal year 1994-95, appropriations from the General Revenue Fund for education,
health and welfare, and public safety amounted to 49%, 32% and 11%,
respectively, of total General Revenue Funds available.
SALES AND USE TAX. The greatest single source of tax receipts in Florida is
the sales and use tax. The sales tax is 6% of the sales price of tangible
personal property sold at retail in the State. The use tax is 6% of the cost
price of tangible personal property when the same is not sold but is used, or
stored for use, in the State. The use tax also applies to the use in the State
of tangible personal property purchased outside Florida which would have been
subject to the sales tax if purchased from a Florida dealer. Slightly less than
10% of the sales tax is designated for local governments and is distributed to
the respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a .5% or 1% discretionary sales surtax within their
county. Proceeds from this local option sales tax are earmarked for funding
local infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources. In addition, non-consolidated
counties with a population in excess of 800,000 may levy a local option sales
tax to fund indigent health care. The tax rate cannot exceed .5% and the
combined levy of this indigent health care surtax and the aforementioned
infrastructure surtax cannot exceed 1%. Furthermore, charter counties which
adopted a charter prior to June 1, 1976, and each county with a consolidated
county/municipal government, may (by referendum) assess up to a 1% discretionary
sales surtax within their county. Proceeds from this tax are earmarked for the
development, construction, maintenance and operation of a fixed guideway rapid
transit system or may be remitted to an expressway or transportation authority
for use on county roads and bridges, for a bus system, or to service bonds
financing roads and bridges. The two taxes, sales and use, stand as complements
to each other, and taken together provide a uniform tax upon either the sale at
retail or the use of all tangible personal property irrespective of where it may
have been purchased. This tax also includes a levy on the following: (i) rentals
on tangible personal property and transient lodging and non-residential real
property; (ii) admissions to places of amusements, most sports and recreation
events; (iii) utilities (at a 7% rate), except those used in homes; and (iv)
restaurant meals. Exemptions include: groceries; medicines; hospital rooms and
meals; fuels used to produce electricity; purchases by religious, charitable and
educational nonprofit institutions; most professional, insurance and personal
service transactions; apartments used as permanent dwellings; the trade-in value
of motor vehicles; and residential utilities.
All receipts of the sales and use tax, with the exception of the tax on
gasoline and special fuels, are credited to either the General Revenue Fund, the
Solid Waste Management Trust Fund, or counties and cities. For the State fiscal
year which ended June 30, 1995, receipts from this source were $10,672.0
million, an increase of 6.0% over fiscal year 1993-94.
MOTOR FUEL TAX. The second largest source of State tax receipts is the tax
on motor fuels. Preliminary data show collections from this source in the State
fiscal year ended June 30, 1994, were $1,733.4 million. However, these revenues
are almost entirely dedicated trust funds for specific purposes and are not
included in the State's General Revenue Fund.
State and local taxes on motor fuels (gasoline and special fuel) include
several distinct fuel taxes: (i) the State sales tax on motor fuels, levied at
6% of the average retail price per gallon of fuel, not to fall below 6.9 cents
per gallon; (ii) the State excise tax of four cents per gallon of motor fuel,
proceeds distributed to local governments; (iii) the State Comprehensive
Enhanced Transportation System (SCETS) tax, which is levied at a rate in each
county equal to two-thirds of the sum of the county's local option motor fuel
taxes; (iv) aviation fuel, which depending on the air carrier's choice, can
either be taxed at 6.9 cents per gallon or eight percent of the retail price of
fuel, not to be less than 4.4 cents per gallon and (v) local option motor fuel
taxes, which may range between one cent to twelve cents per gallon.
ALCOHOLIC BEVERAGE TAX. Florida's alcoholic beverage tax is an excise tax
on beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totalling $437.3 million in the State fiscal year ended June 30,
1995, a decrease of $2.5 million from the previous year's total. The revenues
collected from this tax are deposited into the State's General Revenue Fund.
The 1990 Legislature established a surcharge on alcoholic beverages. This
charge is levied on alcoholic beverages sold for consumption on premises. The
surcharge is ten cents per ounce of liquor, ten cents per four ounces of wine,
and four cents per twelve ounces of beer. Most of these proceeds are deposited
into the General Revenue Fund. In fiscal 1994-95, $97.4 million was collected.
CORPORATE INCOME TAX. Pursuant to an amendment to the State Constitution,
the State Legislature adopted, effective January 1, 1972, the "Florida Income
Tax Code" imposing a tax upon the net income of corporations, organizations,
associations and other artificial entities for the privilege of conducting
business, deriving income or existing within the State. This tax does not apply
to natural persons who engage in a trade or business or profession under their
own or any fictitious name, whether individually as proprietorships or in
partnerships with others, estates of decedents or incompetents, or testamentary
trusts.
The tax is imposed in an amount equal to 5.5% of the taxpayer's net
corporate income for the taxable year, less a $5,000 exemption. Net income is
defined as that share of a taxpayer's adjusted federal income for such year
which is apportioned to the State of Florida. Apportionment is by weighted
factors of sales (50%), property (25%) and payroll (25%). All business income is
apportioned and non-business income is allocated to a single jurisdiction,
usually the state of commercial domicile.
All receipts of the corporate income tax are credited to the General
Revenue Fund. For the fiscal year ended June 30, 1995, receipts from this source
were $1,063.5 million, an increase of 1.5% from fiscal year 1993-94.
DOCUMENTARY STAMP TAX. Deeds and other documents relating to realty are
taxed at 70 cents per $100 of consideration, while corporate shares, bonds,
certificates of indebtedness, promissory notes, wage assignments and retail
charge accounts are taxed at 35 cents per $100 of face value, or actual value if
issued without face value. Documentary stamp tax collections totalled $695.3
million during fiscal year 1994-95, posting an 11.4% decrease from the previous
fiscal year.
GROSS RECEIPTS TAX. A 2.5% tax is levied on the gross receipts of electric,
natural gas and telecommunications services. In fiscal year 1994-95, gross
receipts utilities tax collections totalled $508.4 million an increase of 10.4%
over the previous fiscal year. All gross receipts utility tax collections are
credited to the Public Education Capital Outlay and Debt Services Fund.
INTANGIBLE PERSONAL PROPERTY TAX. The intangible personal property tax is
levied on two distinct bases. First, stocks, bonds (including bonds secured by
liens on State realty), notes, governmental leaseholds, interests in limited
partnerships registered with the SEC, and other miscellaneous intangible
personal property not secured by liens on State realty are taxed annually at a
rate of 2 mills. Second, there is a non-recurring 2 mill tax on mortgages and
other obligations secured by liens on State realty. The Department of Revenue
uses part of the proceeds for administrative costs. Of the tax proceeds
remaining, 33.5% is distributed to the County Revenue Sharing Trust Fund and
66.5% is distributed to the General Revenue Fund. In fiscal year 1994-95, total
intangible personal property tax collections were $818.0 million, a 2.1%
increase over the previous fiscal year.
SEVERANCE TAXES. The severance tax includes the taxation of oil, gas and
sulfur production and a tax on the severance of primarily phosphate rock and
other solid minerals. Total collections from severance taxes totalled $54.8
million during fiscal year 1994-95, up 1.1% from the prior year.
LOTTERY. The 1987 Legislature created the Department of the Lottery to
operate the State Lottery and set forth the allocation of the lottery revenues.
Of the revenues generated by the lottery, 50% is to be returned to the public as
prizes; at least 38% is to be deposited in the Educational Enhancement Trust
Fund (for public education); and no more than 12% can be spent on the
administrative cost of operating the lottery.
Fiscal year 1994-95 produced ticket sales of $2.19 billion of which
education received approximately $853.2 million.
MISCELLANEOUS. The State Constitution does not permit a state or local
personal income tax. An amendment to the State Constitution by the electors of
the State is required to impose a personal income tax in the State.
Property valuations for homestead property is subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption will be limited to 3% or the change in the Consumer Price Index,
whichever is less. If the property changes ownership or homestead status, it is
to be re-valued at full just value on the next tax roll. Although the impact of
the growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem revenues to meet
operating expenses and other requirements normally funded with ad valorem tax
revenues.
The Florida Supreme Court recently determined in Kuhnlein v. Florida
Department of Revenue, 19 Fla.I., Weekly 467, 1994 WL 525900 (1994) that the
$295 vehicle impact fee imposed by the State on certificates of title issued for
vehicles previously titled outside Florida violated the U.S. Constitution. In
making this determination, the Court approved the trial court's order that the
State refund the taxes collected. According to the Department of Highway Safety
and Motor Vehicles, the State has not decided from what source the refunds will
be made. The State's refund exposure may be in excess of $188.0 million.
Currently, it is not possible to predict the impact of this ruling on the
State of Florida's finances.
An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the budget stabilization fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The limitation on State revenues imposed by the amendment may be
increased by the Legislature, by a two-thirds vote of each house.
The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) taxes, licenses, fees and charges for services imposed by
local, regional, or school district governing bodies; or (vii) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and is applicable to State fiscal year
1995-96.
It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.
The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.
Hurricanes continue to threaten Florida resulting in significant property
damages. The 1995 Hurricane season was especially active. The Fund cannot
preduct the impact on state finances resulting from repeated hurricane damage.
SPECIAL CONSIDERATIONS RELATING TO SHORT TERM GLOBAL GOVERNMENT
FUND, EMERGING GROWTH FUND AND GROWTH FUND
LOWER-RATED SECURITIES. The Short Term Global Government Fund may invest up
to 10%, and the Growth and Emerging Growth Funds may invest up to 35% of the net
assets of the Fund, respectively, in non-investment grade securities (rated Ba
and lower by Moody's and BB and lower by Standard & Poor's) or unrated
securities. Such securities carry a high degree or risk (including the
possibility of default or bankruptcy of the issuer of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid, than securities in the higher rating categories and are
considered speculative. See the Appendix to this Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
The current economic downturn disrupted the high yield market and impaired
the ability of issuers to repay principal and interest. Also, an increase in
interest rates could further adversely affect the value of such obligations held
by the Fund. Prices and yields of high yield securities will fluctuate over time
and may affect the Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Trustees to accurately value high yield securities in the Fund's portfolio and
to dispose of those securities. Adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it is
the policy of the Sub-Advisor of each of the Funds not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and ongoing review of credit quality. The
achievement of the Fund's investment objectives by investment in such securities
may be more dependent on its Sub-Advisor's credit analysis than is the case for
higher quality bonds. Should the rating of a portfolio security be downgraded
the Fund's Sub-Advisor will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Prices for below investment-grade securities may be affected by legislative
and regulatory developments. For example, new federal rules require savings and
loan institutions to gradually reduce their holdings of this type of security.
Also, Congress from time to time has considered legislation which would restrict
or eliminate the corporate tax deduction for interest payments on these
securities and would regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
STRATEGY AVAILABLE TO U.S. GOVERNMENT FUND, CORPORATE INCOME FUND AND SHORT TERM
HIGH QUALITY BOND FUND.
DOLLAR ROLL TRANSACTIONS. In order to seek a high level of current income,
the Funds may enter into dollar rolls or "covered rolls" in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase, typically in 30 or 60 days, substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on such securities. The Fund is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or cash equivalent securities position that matures on or before the forward
settlement date of the dollar roll transaction. As used herein the term "dollar
roll" refers to dollar rolls that are not "covered rolls." At the end of the
roll commitment period, the Fund may or may not take delivery of the securities
the Fund has contracted to purchase.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 16 below have been adopted
by the Company with respect to the Funds as fundamental policies. A fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Company, as defined in the 1940 Act. Majority is
defined in the 1940 Act as the lesser of (a) 67% or more of the shares present
at a Company meeting, if the holders of more than 50% of the outstanding shares
of the Company are present or represented by proxy, or (b) more than 50% of the
outstanding shares. A fundamental policy affecting a particular Fund may not be
changed without the vote of a majority of the outstanding shares of the affected
Fund. Investment restrictions 17 through 25 may be changed by vote of a majority
of the Company's Board of Trustees at any time.
The investment policies adopted by the Company prohibit a Fund from:
1. Purchasing the securities of any issuer (other than U.S. Government
securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer (the "5%
Limitation"), except that up to 25% of the value of the Fund's total assets
may be invested without regard to the 5% Limitation; provided that this
restriction shall not apply to the California Money, California Municipal,
California Insured Intermediate Municipal, Florida Insured Municipal and
Short Term Global Government Funds.
2. Purchasing more than 10% of the securities of any class of any one issuer;
provided that this limitation shall not apply to investments in U.S.
Government securities; provided further that this restriction shall not
apply to the California Money, California Municipal, California Insured
Intermediate Municipal, Florida Insured Municipal, Growth Fund and Short
Term Global Government Funds; and provided further that the Growth Fund may
not own more than 10% of the outstanding voting securities of a single
issuer.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position; provided
that this restriction shall not apply to the International Growth, Growth
and Short Term Global Government Funds.
5. Borrowing money, except that (a) the Funds may (i) enter into reverse
repurchase agreements or (ii) borrow from banks for temporary or emergency
(not leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities in an
aggregate amount not exceeding 30% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made, (b) the
U.S. Government, California Municipal, California Insured Intermediate
Municipal, Florida Insured Municipal, International Growth, National
Municipal, Corporate Income, Short Term High Quality Bond, Growth, Emerging
Growth, Growth and Income, and Short Term Global Government Funds may enter
into futures contracts, and (c) the U.S. Government, Corporate Income and
Short Term High Quality Bond Funds may engage in dollar roll transactions;
provided that whenever borrowings pursuant to (a) above (except that with
respect to the U.S. Government, Corporate Income and Short Term High
Quality Bond Funds, whenever borrowings pursuant to (a)(ii) above) exceed
5% of the value of a Fund's total assets, the Fund will not purchase any
securities; and provided further that each of the U.S. Government,
Corporate Income and Short Term High Quality Bond Funds is prohibited from
borrowing money or entering into reverse repurchase agreements or dollar
roll transactions in the aggregate in excess of 33 1/3% of the Fund's total
assets (after giving effect to any such borrowing).
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than 30%
of the value of the Fund's total assets. For purposes of this restriction,
(a) the deposit of assets in escrow in connection with the writing of
covered put or call options and the purchase of securities on a when-issued
or delayed-delivery basis and (b) collateral arrangements with respect to
(i) the purchase and sale of options on securities, options on indexes and
options on foreign currencies, and (ii) initial or variation margin for
futures contracts will not be deemed to be pledges of a Fund's assets.
7. Underwriting the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except that
the Fund may purchase and sell securities that are secured, directly or
indirectly, by real estate and may purchase securities issued by companies
that invest or deal in real estate.
9. Investing in commodities, except that the U.S. Government Fund, California
Municipal Fund, California Insured Intermediate Municipal, Florida Insured
Municipal Fund, International Growth Fund, National Municipal Fund,
Corporate Income Fund, Growth Fund, Emerging Growth Fund, Growth and Income
Fund, Short Term High Quality Bond Fund and Short Term Global Government
Fund may invest in futures contracts and options on futures contracts. The
entry into forward foreign currency exchange contracts is not and shall not
be deemed to involve investing in commodities.
10. Investing in oil, gas or other mineral exploration or development programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities (except in the case of the U.S.
Government Fund, California Municipal Fund, and Florida Insured Municipal
Fund) and the entry into repurchase agreements.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be
acquired as part of a consolidation, reorganization, acquisition of assets
or an offer of exchange or as otherwise permitted by law, including the
1940 Act.
13. Purchasing any securities that would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry, except in the case of the Global Money Fund, which under
normal market conditions shall have at least 25% of its total assets
invested in bank obligations; provided that this limitation shall not apply
to the purchase of (a) U.S. Government securities, (b), municipal
securities issued by governments or political subdivisions of governments
or (c) with respect to the U.S. Government Money Fund, California Money
Fund and Short Term Global Government Fund, U.S. dollar-denominated bank
instruments such as certificates of deposit, time deposits, bankers'
acceptances and letters of credit that have been issued by U.S. banks.
14. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof; provided that this restriction shall not apply to the
California Insured Intermediate Municipal Fund, Growth Fund, Short Term
Global Government Fund and Short Term High Quality Bond Fund; and provided
further that (a) the U.S. Government Fund, Corporate Income Fund, Growth
and Income Fund, Emerging Growth Fund and International Growth Fund may
purchase, write and sell covered put and call options on securities, (b)
U.S. Government Fund, California Municipal Fund, Florida Insured Municipal
Fund, National Municipal Fund, Corporate Income Fund, Emerging Growth Fund,
Growth and Income Fund and International Growth Fund may purchase, write
and sell futures contracts and options on futures contracts, (c) the
California Municipal Fund, Florida Insured Municipal Fund, National
Municipal Fund and California Money Fund may acquire stand-by commitments,
(d) the Growth and Income Fund, Emerging Growth Fund and International
Growth Funds may purchase and write put and call options on stock indexes,
and (e) the International Growth Fund may purchase put and call options and
write covered call options on foreign currency contracts.
15. With respect to the Growth Fund, investing more than 35% of the fund's
assets in non-investment grade debt securities.
16. With respect to the Short Term High Quality Bond Fund, having a
dollar-weighted average portfolio maturity in excess of five years.
17. With respect to the Growth Fund, investing more than 25% of the fund's
assets in foreign securities.
18. Purchasing securities that are not readily marketable if more than 10% of
the total assets of a Money Fund, or more than 15% of the net assets of a
Non-Money Fund, would be invested in such securities, including, but not
limited to: (1) repurchase agreements with maturities greater than seven
calendar days; (2) time deposits maturing in more than seven calendar days;
(3) to the extent a liquid secondary market does not exist for the
instruments, futures contracts and options thereon; (4) certain
over-the-counter options, as described in this SAI; (5) except for the
Short Term Global Government Fund, certain variable rate demand notes
having a demand period of more than seven days; and (6) certain Rule 144A
restricted securities that are deemed to be illiquid.
19. Investing more than 10% of its total assets in time deposits maturing in
more than seven calendar days; provided that this restriction shall not
apply to the Growth Fund, and Short Term Global Government Fund and Short
Term High Quality Bond Fund.
20. Purchasing any security if as a result the Fund would then have more than
5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for less than three
years; provided that in the case of industrial revenue bonds purchased for
the Municipal Funds, this restriction shall apply to the entity supplying
the revenues from which the issue is to be paid.
21. Making investments for the purpose of exercising control or management.
22. Purchasing or retaining securities of any company if, to the knowledge of
the Company, any of the Company's officers or Trustees or any officer or
director of Sierra Advisors or a Sub-Advisor individually owns more than
1/2 of 1% of the outstanding securities of such company and together they
own beneficially more than 5% of the securities.
23. Investing in warrants, (other than warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of
the value of Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent permitted by
applicable state securities laws.
24. Purchasing or selling interests in real estate limited partnerships.
25. Investing in mineral leases.
26. Entering into Strategic Transactions otherwise prohibited by the Fund's
investment restrictions or in the aggregate in excess of 25% of the Fund's
net assets, for purposes other than bona fide hedging positions or that are
not "covered," subject to such greater percentage limitations or may be
imposed by Sierra Advisors from time to time.
With respect to the first investment limitation set forth above, as a
result of recent amendments to a rule promulgated under the 1940 Act, the entire
investment portfolio of the Global Money Fund is subject to the 5% limitation.
However, the Global Money Fund will be able to invest more than 5% of its total
assets in the securities of a single issuer for a period of up to three Business
Days after the purchase thereof; provided that the Fund may not hold more than
one such investment at any time.
The dollar amount of short sales of securities by the Growth Fund or
International Growth Fund at any one time shall not exceed 25% of the net assets
of each Fund, respectively, and the value of securities of any one issuer in
which each Fund is short may not exceed the lesser of 2.0% of the net assets of
the Fund or 2.0% of the securities of any class of any issuer, and short sales
of securities by each Fund shall be subject to the other conditions and
exclusions of Rule 123.2(7) of the Texas state securities regulations.
For purposes of the investment restrictions described above, the issuer of
a municipal security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
For purposes of investment restriction Number 13 above, AMT-Subject Bonds and
Revenue Bonds, the payment of principal and interest on which is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry." The Company may make commitments more restrictive than the
restrictions listed above with respect to a Fund so as to permit the sale of
shares of the Fund in certain states. Should the Company determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
the Company will revoke the commitment by terminating the sale of shares of the
Fund in the state involved. The percentage limitations contained in the
restrictions listed above apply at the time of purchase of securities.
PORTFOLIO TURNOVER
The Money Funds attempt to increase yields by trading to take advantage of
short-term market variations, which result in high portfolio turnover. Because
purchases and sales of money market instruments are usually effected as
principal transactions, this policy does not result in high brokerage
commissions to these Funds. The Growth and Income Fund, Emerging Growth Fund,
Growth Fund and International Growth Fund (together, the "Equity Funds"), the
U.S. Government, Corporate Income, Short Term High Quality Bond, Short Term
Global Government, California Municipal, Florida Insured Municipal, California
Insured Intermediate Municipal and National Municipal Funds (the "Bond Funds")
and the Target Maturity Fund do not intend to seek profits through short-term
trading. Nevertheless, the Funds will not consider portfolio turnover rate a
limiting factor in making investment decisions.
Under certain market conditions, the U.S. Government Fund, Corporate Income
Fund, Growth Fund, Emerging Growth Fund, Growth and Income Fund, International
Growth Fund, Short Term High Quality Bond Fund or Short Term Global Government
Fund may experience increased portfolio turnover as a result of such Fund's
options activities. It is anticipated that the portfolio turnover rate for the
Short Term High Quality Bond Fund will exceed 200%. It is anticipated that the
portfolio turnover rate for the Target Maturity Fund will exceed 150%. For
instance, the exercise of a substantial number of options written by the Fund
(due to appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100% would
occur if all of the Fund's securities that are included in the computation of
turnover were replaced once during a period of one year. The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of portfolio securities.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation.
Certain other practices that may be employed by the Funds could result in
high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what a Fund's Sub-Advisor
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of securities.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether
transacted on a securities exchange or over-the- counter, will be effected in
the primary trading market for the securities. Decisions to buy and sell
securities for a Fund are made by its Sub-Advisor, which also is responsible for
placing these transactions, subject to the overall review of the Company's
Trustees. Although investment decisions for each Fund are made independently
from those of the other accounts managed by its Sub-Advisor, investments of the
type the Fund may make may also be made by those other accounts. When a Fund and
one or more other accounts managed by its Sub-Advisor are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
Sub-Advisor to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
Transactions on U.S. exchanges involve the payment of negotiated brokerage
commissions. With respect to exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the prices of those securities include undisclosed commissions or
concessions, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. Government securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality.
In selecting brokers or dealers to execute portfolio transactions on behalf
of a Fund, the Fund's Sub-Advisor seeks the best overall terms available. In
assessing the best overall terms available for any transaction, each Sub-Advisor
will consider the factors the Sub-Advisor deems relevant, including the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, each advisory agreement among the Company, Sierra
Advisors and a Sub-Advisor authorizes the Sub-Advisor, in selecting brokers or
dealers to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended)
provided to the Company, the other Funds and/or other accounts over which the
Sub-Advisor or its affiliates exercise investment discretion. The fees under the
advisory agreements between the Company and the Sub-Advisors are not reduced by
reason of their receiving such brokerage and research services. The Company's
Trustees will periodically review the commissions paid by the Funds to determine
if the commissions paid over representative periods of time were reasonable in
relation to the benefits received by the Company.
Consistent with applicable provisions of the 1940 Act and the rules and
exemptions adopted by the Commission thereunder, the Company's Board of Trustees
has adopted procedures pursuant to Rule 17e-1 under the 1940 Act to ensure that
all portfolio transactions with affiliates will be fair and reasonable. Under
the procedures adopted, portfolio transactions for a Fund may be executed
through GW Securities or any other affiliated broker, including J.P. Securities
or J.P. Limited (which are affiliates of J.P. Management, the Sub-Advisor of the
Global Money, Growth and Income and International Growth Funds) and Donaldson,
Lufkin Jenrette Securities Corporation (which is an affiliate of Alliance
Capital Management L.P., the Sub-Advisor of the U.S. Government Money and
California Money Funds) if, subject to other conditions in the Rule 17e-1
procedures, in the judgment of the Fund's Sub-Advisor, the use of GW Securities
or an affiliated broker is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, GW Securities or such other affiliated broker charges the Fund a
rate consistent with those charged for comparable transactions in comparable
accounts of the broker's most favored unaffiliated clients. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those cases in which better prices and executions may be obtained elsewhere.
Under rules adopted by the SEC, an affiliated broker may not execute
transactions for a Fund on the floor of any national securities exchange, but
may effect transactions by transmitting orders for execution, providing for
clearance and settlement, and arranging for the performance of those functions
by members of the exchange not associated with the affiliated broker. GW
Securities or an affiliated broker will be required to pay fees charged by those
persons performing the floor brokerage elements out of the brokerage
compensation it receives from the Fund. The Company has been advised that on
most transactions, the floor brokerage may constitute 20% or more of the total
commissions paid. For the fiscal year ended June 30, 1995, the Company paid
total brokerage commissions of $2,039,000 of which none was paid to affiliated
broker-dealers. For the fiscal year ended June 30, 1994, the Company paid total
brokerage commissions of $1,760,756, of which none was paid to affiliated
broker-dealers. The Target Maturity Fund had not commenced operations as of June
30, 1994. For the fiscal year ended June 30, 1993, the Company paid total
brokerage commissions of $510,643, of which none was paid to affiliated
broker-dealers. The Short Term High Quality Bond Fund and the California Insured
Intermediate Municipal Fund had not commenced operations as of June 30, 1993.
The Company is required to identify any securities of its "regular brokers
or dealers" (as such term is defined in the 1940 Act) which the Company has
acquired during its most recent fiscal year. As of June 30, 1995, none of the
Funds held any securities of any "regular broker or dealer" of the Company.
HOW TO BUY AND REDEEM SHARES
Class A, Class B and Class S Shares of the Funds may be purchased and
redeemed in the manner described in the Prospectuses and in this Statement of
Additional Information.
COMPUTATION OF PUBLIC OFFERING PRICES
The Funds offer their shares to the public on a continuous basis. The
public offering price per Class A Share of the Funds is equal to the respective
net asset value per Class A Share next computed after receipt of a purchase
order, plus the applicable front-end sales charge, if any. The public offering
price per Class B Share or Class S Share of the Funds is equal to the net asset
value per such Class B Share or Class S Share next computed after receipt of a
purchase order.
An illustration of the computation of the Public Offering Price per Class A
Share of the U.S. Government Fund, Corporate Income Fund, California Municipal
Fund, Florida Insured Municipal Fund, California Insured Intermediate Municipal
Fund, National Municipal Fund, Growth and Income Fund, Growth Fund, Emerging
Growth Fund, International Growth Fund, Short Term High Quality Bond Fund, Short
Term Global Government Fund and Target Maturity Fund is provided in the table
below. The computation is based on the value of each Fund's net assets and the
number of Class A Shares outstanding on June 30, 1995 and the application of the
maximum 4.5% sales charge for the Funds, except the Short Term Global Government
and Short Term High Quality Bond Funds, for which the maximum sales charge is
3.5%, and except the Target Maturity 2002 Fund, for which the maximum sales
charge is 2.0%.
<TABLE>
<CAPTION>
Class A Shares Florida
California Insured National
U.S. Corporate Municipal Municipal Municipal Growth and
Government Income Fund Fund Fund Fund Income Fund
---------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets $459,967,568 $383,641,846 $405,967,196 $33,714,147 $269,032,784 $170,176,888
Outstanding Shares 47,587,958 36,454,597 38,549,303 3,575,980 25,005,336 13,528,483
------------ ------------ ------------ ----------- ------------ ------------
Net Asset Value Per Share $9.67 $ 10.52 $10.53 $ 9.43 $10.76 $12.58
Sales Charge, 4.5%* of 0.46 0.50 0.50 0.44 0.51 0.59
the offering price
Offering to Public $ 10.13 $11.02 $11.03 $ 9.87 $11.27 $13.17
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
California
Short Term Insured
Global Short Term Intermediate Target
Emerging International Government High Quality Municipal Maturity
Growth Fund Growth Fund Growth Fund Fund Bond Fund Fund Fund
------------ ------------ ----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets $185,721,976 $154,763,349 $91,762,806 $103,986,429 $43,810,594 $54,506,529 $2,625,818
Outstanding Shares 12,001,672 10,910,557 9,380,637 46,354,833 18,605,549 5,213,601 243,568
------------ ------------ ----------- ------------ ----------- ----------- ----------
Net Asset Value $15.47 $14.18 $9.78 $2.24 $2.35 $10.45 $10.78
Per Share
Sales Charge, 4.5%* of 0.73 0.67* 0.46 0.08* 0.09* 0.49 0.22
the offering Price
Offering to Public $16.20 $14.85 $10.24 $2.32 $2.44 $10.94 $11.00
====== ====== ====== ===== ===== ====== ======
* The sales charge for the Short Term Global Government Fund and Short Term High
Quality Bond Fund is 3.5%, rather than 4.5%, and the sales charge for the
Target Maturity Fund is 2.0%, rather than 4.5%.
</TABLE>
In addition to the purchases on which the sales charge is waived as
listed in the prospectus, no sales charge will be assessed on a purchase by any
other investment company in connection with the combination of such company with
the Company by merger, acquisition of assets or otherwise.
REDEMPTIONS
The procedures for redemption of Class A, Class B and Class S Shares of
each Fund are summarized in the Prospectuses under "Your Account - How to Sell
Shares." The right of redemption of Class A, Class B and Class S Shares of a
Fund may be suspended or the date of payment postponed (1) for any periods
during which the New York Stock Exchange is closed (other than for customary
weekend and holiday closings), (2) when trading in the markets the Fund normally
utilizes is restricted, or an emergency, as defined by the rules and regulations
of the SEC, exists making disposal of the Fund's investments or determination of
its net assets value not reasonably practicable or (3) for such other periods as
the SEC by order may permit for protection of the Fund's shareholders.
CERTAIN WAIVERS OF THE CONTINGENT DEFERRED SALES CHARGES. Contingent
deferred sales charges (each, a "CDSC") imposed upon redemptions of Class A,
Class B and Class S Shares (other than the 1% CDSC described in "Contingent
Deferred Sales Charge - Purchases between January 2, 1990 and January 1, 1991")
will be waived in certain instances.
The 1% CDSC imposed on redemptions of Class A Shares for which the
entire sales charge at purchase was waived as described in "Application of Class
A Shares CDSCs" in the prospectuses of the Funds will be waived in certain
instances, such as for (a) redemptions of shares held at the time a shareholder
dies or becomes disabled, including the shares of a shareholder who owns the
shares with his or her spouse as joint tenants with right of survivorship,
provided that the redemption is requested within one year after the death or
initial determination of disability, and (b) redemptions in connection with the
following retirement plan distributions: (i) lump sum or other distributions
from a qualified corporate or self-employed retirement plan following
retirement, termination of employment, death or disability (or in the case of a
5% owner of the employer maintaining the plan, following attainment of age 59
1/2); (ii) distributions from an IRA, Internal Revenue Code Section 457 plan or
custodial account under Section 403(b)(7) of the Internal Revenue Code following
attainment of age 70 1/2; and (iii) a tax-free return of an excess contribution
to an IRA. For purposes of the waiver described in (a) above, a person will be
deemed "disabled" only if the person is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or be of long-continued and
indefinite duration.
The CDSC applicable to the Class B Shares and the Class S Shares may be
waived as described in the sections of the prospectuses that describe waivers of
the sales charges for the various classes of the Funds. The CDSC applicable to
the Class B Shares is waived for withdrawals under the Systematic Withdrawal
Plan under certain circumstances as described in "Systematic Withdrawal Plan" in
the prospectuses.
DISTRIBUTIONS IN KIND. If the Board of Trustees determines that it
would be detrimental to the best interests of the remaining shareholders of a
Fund to make a redemption payment wholly in cash, the Company may pay, in
accordance with SEC rules, any portion of a redemption in excess of the lesser
of $250,000 or 1% of the Fund's net assets by distribution in kind of portfolio
securities in lieu of cash. Securities issued in a distribution in kind will be
readily marketable, although shareholders receiving distributions in kind may
incur brokerage commissions when subsequently redeeming shares of those
securities.
SYSTEMATIC WITHDRAWAL PLAN. As described in the Prospectuses, a
Systematic Withdrawal Plan may be established by a shareholder who owns either
Class A or Class B Shares of a Fund with a value exceeding $10,000 and who
wishes to receive specific amounts of cash periodically. Monthly, quarterly,
semiannual or annual withdrawals in a minimum amount of $100 may be made under
the Systematic Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. The CDSC on Class B Shares
is waived for withdrawals under a Systematic Withdrawal Plan that meet certain
conditions as described in "Systematic Withdrawal Plan" in the prospectuses. To
the extent that withdrawals exceed dividends, distributions and appreciation of
a shareholder's investment in a Fund, there will be a reduction in the value of
the shareholder's investment in the relevant class of the Fund and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund. For additional information regarding the Systematic
Withdrawal Plan, write to the Company at P.O. Box 9702, Providence, Rhode Island
02940-9702 or call the Company at 800-869-2019 (for customers of Great Western,
write to the address noted at the top of the cover page or call 1-800-222-5852).
CHECK REDEMPTION PRIVILEGE. Checkwriting is available for the Class A
Shares of the Money Funds only. Checks to redeem shares of any of the Money
Funds are drawn on the Company's account at Boston Safe and shareholders will be
subject to the same rules and regulations that Boston Safe applies to checking
accounts and, will have the same rights and duties with respect to stop payment
orders, "stale" checks, and unauthorized endorsements as bank checking account
customers do under Massachusetts Uniform Commercial Code. All notices with
regard to those rights and duties must be given to Boston Safe.
NET ASSET VALUE
The Company will not calculate the net asset value of the Funds' Class
A, Class B and Class S Shares on certain holidays. On those days, securities
held by a Fund may nevertheless be actively traded, and the value of the Fund's
shares could be significantly affected.
A security that is primarily traded on a U.S. exchange (including
securities traded through the NASDAQ National Market System) is valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Over-the-counter securities that are not traded
through the NASDAQ National Market System are valued on the basis of the bid
price at the close of business on each day. An option is generally valued at the
last sale price or, in the absence of a last sale price, the last offer price.
Investments in U.S. Government securities (other than short-term securities) are
valued at the average of the quoted bid and asked prices in the over-the-counter
market. Short term investments that mature in 60 days or less are valued at
amortized cost when the Board of Trustees determines that this constitutes fair
value; assets of the Money Funds are also valued at amortized cost. The value of
a futures contract equals the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is being valued. A
settlement price may not be used if the market makes a limited move with respect
to the security or index underlying the futures contract. In such event, the
futures contract will be valued at a fair market value to be determined by or
under the direction of the Board of Trustees.
In carrying out the Board's valuation policies, TSSG, as
Sub-Administrator, may consult with one or more independent pricing services
("Pricing Service") retained by the Company. Debt securities of U.S. issuers
(other than U.S. Government securities and short-term investments), including
Municipal Securities, are valued by TSSG, as Sub-Administrator, after
consultation with the Pricing Service. When, in the judgment of the Pricing
Service, quoted bid prices for investments of the Municipal Funds are readily
available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices and asked
prices. Investments of the Municipal Funds that are not regularly quoted are
carried at fair market value as determined by the Board of Trustees, which may
rely on the assistance of the Pricing Service. The procedures of the Pricing
Service are reviewed periodically by the officers of the Company under the
general supervision and responsibility of the Board of Trustees.
VALUATION OF THE MONEY FUNDS. The valuation of the portfolio securities
of the Money Funds is based upon their amortized costs, which does not take into
account unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
The use by the Money Funds of the amortized cost method of valuing
their respective portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Money Funds must maintain dollar-weighted average portfolio
maturities of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less and invest only in securities determined
by the Board of Trustees of the Company to present minimal credit risks and meet
certain rating criteria described in the Prospectus of the Money Funds under
"Quality Requirements." Pursuant to the rule, the Board of Trustees also has
established procedures designed to stabilize, to the extent reasonably possible,
the Funds' price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures include review of the Funds' portfolio holdings by the
Board of Trustees, at such intervals as it may deem appropriate, to determine
whether the Funds' net asset values calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost.
The rule also provides that the extent of any deviation between the
Funds' net asset values based upon available market quotations or market
equivalents and the $1.00 per share net asset values based on amortized cost
must be examined by the Board of Trustees. In the event the Board of Trustees
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, pursuant to the rule
the Board of Trustees must cause the Company to take such corrective action as
the Board deems necessary and appropriate including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations.
HOW TO EXCHANGE SHARES
A shareholder may exchange all or part of their shares of one Fund for
the same class of shares of another Fund. See the Prospectuses, "How to Exchange
Shares" for information regarding the application of sales charges to certain
exchanges. An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder, and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange. See "Taxes" below. Upon 60 days prior written
notice to shareholders, the exchange privilege may be modified or terminated and
the Company may impose a charge of up to $5 for exchanges.
The exchange privilege enables a shareholder to acquire the same class
of shares in a Fund with different investment objectives or policies when the
shareholder believes that a shift between Funds is an appropriate investment
decision. This privilege is available to shareholders residing in any state in
which shares of the Fund being acquired may legally be sold.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds are immediately invested, at a price as described
above, in the same class of shares of the Fund being acquired. The Company
reserves the right to reject any exchange request.
DETERMINATION OF PERFORMANCE
From time to time, the Company may quote the performance of a Fund's
Class A, Class B and Class S Shares in terms of yield, actual distributions,
total return or capital appreciation in reports or other communications to
shareholders or in advertising material. The yield for the Class A, Class B and
Class S Shares of the Money Funds is computed by: (1) determining the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in each Fund having a balance of one share at the beginning
of a seven calendar day period for which yield is to be quoted, (2) subtracting
a hypothetical change reflecting deductions from shareholder accounts,
(3) dividing the net change by the value of the account at the beginning of the
period to obtain the base period return, and (4) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased with dividends
declared on the original share and any such additional shares, but does not
include realized gains and losses or unrealized appreciation or depreciation. In
addition, the Money Funds may calculate a compounded effective annualized yield
by adding 1 to the base period return (calculated as described above), raising
the sum to a power equal to 365/7 and subtracting 1.
The current yield for the Money Funds may be obtained by calling
800-869-2019 (for customers of Great Western, 800-447-6567). For the seven-day
period ended June 30, 1995, the yields for the outstanding shares of the Global
Money Fund, U.S. Government Money Fund and California Money Fund that are
treated as Class A Shares were 5.47%, 5.03% and 3.39%, respectively, and the
effective yields of such shares of each such Fund for the same period were
5.62%, 5.16% and 3.45%, respectively. The California Money Fund may also
calculate its tax equivalent yield as described on the following page.
The Bond Funds may quote a 30-day yield figure (the "SEC Yield") which
is calculated according to a formula prescribed by the SEC. The formula can be
expressed as follows:
YIELD = 2[(a-b + 1)6 - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
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 purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by one of the Bond Funds at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Based on the foregoing calculation, the SEC Yields for the outstanding
shares, that are treated as Class A Shares, of the U.S. Government Fund,
Corporate Income Fund, California Municipal Fund, Florida Insured Municipal
Fund, California Insured Intermediate Municipal Fund, Short Term Global
Government Fund, Short Term High Quality Bond Fund, National Municipal Fund and
Target Maturity Fund for the 30-day period ended June 30, 1995 were 6.96%,
6.98%, 4.80%, 5.34%, 4.52%, 6.74%, 5.86%, 4.95% and 5.18%, respectively.
In addition, the Fund may quote a 30-day yield based on actual
distributions during a 30-day period that is computed by dividing the net
investment income per share earned by the Fund during the period by the maximum
Public Offering Price per share on the last day of the 30-day period. This
income is "annualized" by assuming that the amount of income is generated each
month over a one-year period and is compounded semiannually. The annualized
income is then shown as a percentage of the maximum Public Offering Price. In
addition, the Bond Funds may advertise a similar 30-day yield computed in the
same manner except that the NAV per share is used in place of the Public
Offering Price per share. These 30-day average yields for the outstanding shares
of the California Municipal Fund, Florida Insured Municipal Fund, California
Insured Intermediate Municipal Fund and National Municipal Fund were 5.84%,
5.55%, 4.88% and 5.77%, respectively.
The tax equivalent yield for the California Money Fund, California
Municipal Fund, California Insured Intermediate Municipal Fund, Florida Insured
Municipal Fund, National Municipal Fund and Target Maturity Fund is computed by
dividing that portion of the Fund's yield which is tax-exempt by one minus a
stated federal and/or state income tax rate and adding the product to that
portion, if any, of the Fund's yield that is not tax-exempt. The tax-equivalent
yield for the outstanding shares of the California Money Fund, that are treated
as Class A Shares, for the 7-day period ended June 30, 1995 was 6.41%. The tax
equivalent SEC 30-day yields for the period ended June 30, 1995 for the
outstanding shares of the California Municipal Fund, Florida Insured Municipal
Fund, California Insured Intermediate Municipal Fund, National Municipal Fund
and Target Maturity Fund were 8.93%, 8.84%, 8.41%, 8.20% and 8.58%,
respectively. The tax equivalent yield based on the 30-day average yield for the
period ended June 30, 1995 for the outstanding shares of the California
Municipal Fund, Florida Insured Municipal Fund, California Insured Intermediate
Municipal Fund and the National Municipal Fund were 10.86%, 9.18%, 9.08% and
9.55%, respectively. Tax-equivalent yields assume the payment of federal income
taxes at a rate of 39.6% and, if applicable, California state income taxes at a
rate of 11.0%.
Capital appreciation for Class A, Class B and Class S Shares of the
Bond Funds and the Equity Funds shows principal changes for the period shown,
and total return combines principal changes and dividend and interest income
reinvested for the periods shown. Principal changes are based on the difference
between the beginning and closing net asset values for the period. Actual
distributions include short-term capital gains derived from option writing or
other sources. The period selected for performance data will depend upon the
purpose of reporting the performance.
The total return of the Funds' Class A, Class B and Class S Shares may
be calculated on an "average annual total return" basis, and may also be
calculated on an "aggregate total return" basis, for various periods. Average
annual total return reflects the average annual percentage change in the value
of an investment in a Fund over the particular measuring period. Aggregate total
return reflects the cumulative percentage change in value over the measuring
period. Average annual total return figures provided for Class A, Class B and
Class S Shares of the Bond and Equity Funds will be computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return/aggregate total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 years (or other) periods or the
life of the Fund
The formula for calculating aggregate total return can be expressed as
follows:
Aggregate Total Return = [ (ERV) - 1 ]
---
P
The calculation of average annual total return and aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and includes all
recurring fees charged to all shareholder accounts. In addition, with respect to
Class A Shares, the maximum 4.5% sales charge is deducted from the initial
$1,000 payment (variable "P" in the formula).
The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period and reflects deduction of all nonrecurring
charges at the end of the measuring period covered by the computation. A Fund's
net investment income changes in response to fluctuations in interest rates and
the expenses of the Fund.
<PAGE>
The Average annual rates of return (unless otherwise noted) for the
Funds for the one year and five year periods ended June 30, 1995 and for the
period from inception through June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Aggregate
Total
Since Date Return from
of Date of
One Year Five Year Inception Inception
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Short Term High Quality Bond Fund
Class A Shares 11/1/93
Adjusted for Maximum Sales Charge 0.76% N/A 0.02% .03%
Not Adjusted for Sales Charge 4.42% N/A 2.18% 3.66%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge -0.29% N/A -0.29% -0.29%
Not Adjusted for Sales Charge 3.64% N/A 3.64% 3.64%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge -1.28% N/A -1.28% -1.28%
Not Adjusted for Sales Charge 3.64% N/A 3.64% 3.64%
U.S. Government Fund
Class A Shares 7/25/89
Adjusted for Maximum Sales Charge 5.21% 6.48% 6.64% 46.45%
Not Adjusted for Sales Charge 10.17% 7.47% 7.47% 53.35%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 4.36% N/A 4.36% 4.36%
Not Adjusted for Sales Charge 9.36% N/A 9.36% 9.36%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 4.36% N/A 4.36% 4.36%
Not Adjusted for Sales Charge 9.36% N/A 9.36% 9.36%
Corporate Income Fund
Class A Shares 7/18/90
Adjusted for Maximum Sales Charge 10.37% N/A 8.84% 52.10%
Not Adjusted for Sales Charge 15.57% N/A 9.85% 59.26%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 9.73% N/A 9.73% 9.73%
Not Adjusted for Sales Charge 14.73% N/A 14.73% 14.73%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 9.73% N/A 9.73% 9.73%
Not Adjusted for Sales Charge 14.73% N/A 14.73% 14.73%
California Municipal Fund
Class A Shares 7/25/89
Adjusted for Maximum Sales Charge 2.73% 6.27% 6.29% 43.63%
Not Adjusted for Sales Charge 7.57% 7.25% 7.12% 50.40%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 1.78% N/A 1.78% 1.78%
Not Adjusted for Sales Charge 6.78% N/A 6.78% 6.78%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 1.78% N/A 1.78% 1.78%
Not Adjusted for Sales Charge 6.78% N/A 6.78% 6.78%
California Insured Intermediate Municipal Fund
Class A Shares 4/4/94
Adjusted for Maximum Sales Charge 3.82% N/A 4.90% 6.10%
Not Adjusted for Sales Charge 8.71% N/A 8.87% 11.10%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 2.90% N/A 2.90% 2.90%
Not Adjusted for Sales Charge 7.90% N/A 7.90% 7.90%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 2.90% N/A 2.90% 2.90%
Not Adjusted for Sales Charge 7.90% N/A 7.90% 7.90%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Total
Since Date Return from
of Date of
One Year Five Year Inception Inception
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Florida Insured Municipal Fund
Class A Shares 6/7/93
Adjusted for Maximum Sales Charge 1.24% N/A 0.11% .22%
Not Adjusted for Sales Charge 6.01% N/A 2.37% 4.94%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 0.23% N/A 0.23% 0.23%
Not Adjusted for Sales Charge 5.23% N/A 5.23% 5.23%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 0.23% N/A 0.23% 0.23%
Not Adjusted for Sales Charge 5.23% N/A 5.23% 5.23%
National Municipal fund
Class A Shares 7/18/90
Adjusted for Maximum Sales Charge 1.54% N/A 7.43% 42.61%
Not Adjusted for Sales Charge 6.32% N/A 8.44% 49.33%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 0.58% N/A 0.58% 0.58%
Not Adjusted for Sales Charge 5.54% N/A 5.54% 5.54%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 0.58% N/A 0.58% 0.58%
Not Adjusted for Sales Charge 5.54% N/A 5.54% 5.54%
Growth and Income Fund
Class A Shares 7/25/89
Adjusted for Maximum Sales Charge 15.05% 9.21% 8.28% 60.27%
Not Adjusted for Sales Charge 20.47% 10.22% 9.12% 67.83%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 14.67% N/A 14.67% 14.67%
Not Adjusted for Sales Charge 19.67% N/A 19.67% 19.67%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 14.75% N/A 14.75% 14.75%
Not Adjusted for Sales Charge 19.75% N/A 19.75% 19.75%
Growth Fund
Class A Shares 4/5/93
Adjusted for Maximum Sales Charge 24.72% N/A 13.92% 35.60%*
Not Adjusted for Sales Charge 32.33% N/A 16.98% 41.99%*
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 26.46% N/A 26.46% 26.46%
Not Adjusted for Sales Charge 31.46% N/A 31.46% 31.46%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 26.44% N/A 26.44% 26.44%
Not Adjusted for Sales Charge 31.44% N/A 31.44% 31.44%
International Growth Fund
Class A Shares 7/18/90
Adjusted for Maximum Sales Charge -8.33% N/A 0.39% 1.94%
Not Adjusted for Sales Charge -4.01% N/A 1.33% 6.74%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge -9.14% N/A -9.14% -9.14%
Not Adjusted for Sales Charge -4.61% N/A -4.61% -4.61%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge -9.14% N/A -9.14% -9.14%
Not Adjusted for Sales Charge -4.61% N/A -4.61% -4.61%
* Based on a maximum sales charge of 4.5%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Total
Since Date Return from
of Date of
One Year Five Year Inception Inception
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Short Term Global Government Fund
Class A Shares 2/11/92
Adjusted for Maximum Sales Charge -1.48% N/A 3.25% 11.43%
Not Adjusted for Sales Charge 2.10% N/A 4.34% 15.47%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge -2.49% N/A -2.49% -2.49%
Not Adjusted for Sales Charge 1.33% N/A 1.33% 1.33%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge -3.46% N/A -3.46% -3.46%
Not Adjusted for Sales Charge 1.33% N/A 1.33% 1.33%
Emerging Growth Fund
Class A Shares 7/18/90
Adjusted for Maximum Sales Charge 16.07% N/A 11.42% 70.82%
Not Adjusted for Sales Charge 21.54% N/A 12.46% 78.87%
Class B Shares 6/30/94
Adjusted for Maximum Sales Charge 15.69% N/A 15.69% 15.69%
Not Adjusted for Sales Charge 20.69% N/A 20.69% 20.69%
Class S Shares 6/30/94
Adjusted for Maximum Sales Charge 15.76% N/A 15.76% 15.76%
Not Adjusted for Sales Charge 20.76% N/A 20.76% 20.76%
Target Maturity
Class A Shares 3/20/95
Adjusted for Maximum Sales Charge N/A N/A 5.64% 5.64%
Not Adjusted for Sales Charge N/A N/A 7.80% 7.80%
</TABLE>
The performance of a Fund's Class A, Class B and Class S Shares will
vary from time to time depending upon market conditions, the composition of the
Fund's portfolio and the Fund's operating expenses. Consequently, any given
performance quotation should not be considered representative of the Fund's
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in a Fund with certain bank deposits or other investments that pay a
fixed yield or return for a stated period of time.
Investors should recognize that, because the Funds other than the
Equity Funds will have a high component of fixed-income securities, in periods
of declining interest rates the yields of the Funds will tend to be somewhat
higher than prevailing market rates, and in periods of rising interest rates
yields will tend to be somewhat lower. In addition, when interest rates are
falling, the inflow of net new money to the Funds from the continuous sale of
shares will likely be invested in portfolio instruments producing lower yields
than the balance of the Fund's securities, thereby reducing the current yields
of the Funds. In periods of rising interest rates, the opposite can be expected
to occur. Comparative performance information may be used from time to time in
advertising the Company's Class A, Class B and Class S Shares, including data
from Lipper Analytical Services, Inc., the S&P 500 Composite Stock Price Index,
the Dow Jones Industrial Average and other industry publications. The
International Growth Fund may compare its performance to other investments or
relevant indexes consisting of Morgan Stanley Capital International EAFE Index,
the Standard & Poor's 500 Index, the Lipper International Fund Index and The
Financial Times World Stock Index. The Short Term Global Government Fund may
also compare its performance to other investments or relevant indexes consisting
of The Europe/Asia/Far East (EAFE) Index, Morgan Stanley Capital International
World Index, The J.P. Morgan Global Traded Bond Index, the Lipper International
Fund Index, The Solomon Brothers World Government Bond Index and The Financial
Times World Stock Index.
PERFORMANCE COMPARISONS
In reports or other communications to shareholders or in advertising
material, a Fund may make certain performance comparisons as described in the
prospectuses of the Funds. Another performance comparison one or more of the
Funds may use is the following comparison of the return on IRA accounts to the
return on conventional savings plans:
[THE FOLLOWING IS A TABULAR REPRESENTATION THAT REPLACES GRAPHIC MATERIAL
FOR EDGAR FILING PURPOSES.]
The following replaces a bar graph that indicates years of investment in
increments of five years beginning at five years and ending at twenty years on
the horizontal axis and amount of total return for "Tax-Deferred Growth
(after-tax contributions and tax-deferred earnings)" and for "Conventional
Savings Plan (after-tax contributions and earnings)" on the vertical axis.
IRAS CAN HELP YOU EARN MORE
For $100,000 compounded annually at 8%
$146,933+ $215,892+ $466,096+
$128,359++ 164,761++ $271,461++
---------- ---------- ----------
5 Years 10 Years 20 Years
+Tax-Deferred Growth *(after-tax contributions and tax-deferral earnings)
++Conventional Savings Plan (after-tax contributions and earnings)
[END OF TABULAR REPRESENTATION THAT REPLACES GRAPHIC MATERIAL FOR EDGAR
FILING PURPOSES.]
* When you make withdrawals from your IRA account, you must pay taxes
on the earnings as well as on any tax-deductible contributions. Earnings on
conventional savings plans invested in various asset mediums are taxed annually,
but you are not taxed on withdrawals from such savings plans. If any payment
from your IRA account is taken before age 59 1/2, a 10% tax penalty may be
imposed.
The sole purpose of this chart is to illustrate your tax-deferred
earnings from an IRA savings account in comparison to earnings from a taxable
conventional savings plan over a period of 20 years, and the chart translates
federal tax savings from a tax-free investment into an equivalent yield from a
taxable investment. The chart assumes a 36% tax rate for all periods (before the
deduction of any fees, charges or expenses) at a fixed rate of 8%. The chart
assumes no withdrawals from the savings plans and reinvestment of all dividends
and/or income during the 20-year period shown.
This chart is for illustrative purposes only and does not represent
past, current or future yields of any of the funds of the Sierra Trust Funds,
nor does it illustrate the effect of fluctuations in principal value.
TAXES
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly alter the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Fund is treated as a separate entity for federal income tax
purposes and is not combined with the Company's other Funds. Each of the Funds
intends to continue qualifying as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. A Fund that is a RIC and distributes to
its shareholders at least 90% of its taxable net investment income (including,
for this purpose, its net realized short-term capital gains) and 90% of its
tax-exempt interest income (reduced by certain expenses), will not be liable for
federal income taxes to the extent its taxable net investment income and its net
realized long-term and short-term capital gains, if any, are distributed to its
shareholders.
In order to qualify as a RIC under the Code, in addition to satisfying
the distribution requirement described above, each Fund must (a) derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities, or foreign currencies, and certain other related income,
including, generally, certain gains from options futures, and forward contracts;
(b) derive less than 30% of its gross income for each taxable year from the sale
or other disposition of any of the following investments if such investments are
held for less than three months: stock, securities, options, futures or forward
contracts (other than options futures, or forward contracts on foreign
currencies), or foreign currencies (or options, futures, or forward contracts on
foreign currencies) that are not directly related to the company's business of
investing in stock or securities; and (c) diversify its holdings so that, at the
end of each fiscal quarter of the Fund's taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items, U.S.
government securities, securities of other RICs, and other securities, with such
other securities limited, in respect to any one issuer, to an amount that does
not represent more than 10% of the outstanding voting securities of such issuer
or exceed 5% of the value of the Fund's total assets and (ii) not more than 25%
of the value of its assets is invested in the securities (other than U.S.
government securities and securities of other RICs) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar, or related trades or businesses.
Notwithstanding the distribution requirement described above, which
only requires a Fund to distribute at least 90% of its annual investment company
taxable income and tax-exempt interest income and does not require any minimum
distribution of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), a Fund will be subject to a nondeductible 4%
federal excise tax to the extent it fails to distribute by the end of any
calendar year at least 98% of its ordinary income for that year and at least 98%
of its capital gain net income (the excess of short- and long-term capital gains
over short- and long-term capital losses) for the one-year period ending on
October 31 of that year, plus certain other amounts.
Because the California Money Fund, California Municipal Fund,
California Insured Intermediate Fund, Florida Insured Municipal Fund and
National Municipal Fund will distribute exempt-interest dividends, interest on
indebtedness incurred or continued by a shareholder to purchase or carry shares
of these funds will not be deductible for federal income tax purposes or, in the
case of the California and Florida Funds, for California and Florida income tax
purposes. Any loss on the sale or exchange of shares in these Funds held for six
months or less will be disallowed to the extent of any exempt-interest dividend
received by the shareholders with respect to such shares. In addition, the Code
may require a shareholder who receives exempt-interest dividends to treat as
taxable income a portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Municipal funds may not be an appropriate
investment for persons (including corporations and other business entities) who
are "substantial users" (or who are related to substantial users) of facilities
financed by "private activity bonds" or "industrial development bonds." For
these purposes, the term "substantial user" is defined generally to include a
"non-exempt person" who regularly uses in a trade or business a part of a
facility financed from the proceeds of such bonds. Moreover, as noted in the
Prospectuses, (1) some or all of these Funds' dividends may be a specific
preference item, or a component of an adjustment item, for purposes of the
federal individual and corporate alternative minimum taxes and (2) the receipt
of these Funds' dividends and distributions may affect a corporate shareholder's
federal environmental tax liability. In addition, the receipt of dividends and
distributions may affect a foreign corporate shareholder's federal "branch
profits" tax liability and a Subchapter S corporate shareholder's federal
"excess net passive income" tax liability. Similar rules apply for California
State personal income tax purposes. Shareholders should consult their own tax
advisers as to whether they are (1) "substantial users" with respect to a
facility or "related" to such users within the meaning of the Code or (2)
subject to federal alternative minimum tax, the federal "environmental" tax, the
federal "branch profits" tax, or the federal "excess net passive income" tax.
Issuers of bonds purchased by the Municipal Funds (or the beneficiary of such
bonds) may have made certain representations or covenants in connection with the
issuance of such bonds to satisfy certain requirements of the Code that must be
satisfied subsequent to the issuance of such bonds. Shareholders should be aware
that exempt-interest dividends may become subject to federal income taxation
retroactively to the date of issuance of the bonds to which such dividends are
attributable if such representations are determined to have been inaccurate or
if the issuers (or the beneficiary) of the bonds fail to comply with certain
covenants made at that time.
If a Fund fails to qualify as a regulated investment company for any
year, all of its income will be subject to tax at corporate rates, and its
distributions (including capital gains distributions) will be taxable as
ordinary income dividends to its shareholders, subject to the dividends received
deduction for corporate shareholders. Otherwise, distributions made by the Bond
Funds generally will not be eligible for the dividends received deduction
otherwise available to corporate tax payers.
As described above and in the Prospectuses, certain of the Funds may
invest in certain types of futures contracts and options. The Funds anticipate
that these investment activities will not prevent the Funds from qualifying as
regulated investment companies. As a general rule, these investment activities
may increase or decrease the amount of long-term and short-term capital gains or
losses realized by a Fund and, accordingly, will affect the amount of capital
gains distributed to a Fund's shareholders.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Short Term Global Government
Fund accrues interest or other receivables (or accrues expenses or other
liabilities) denominated in a foreign currency and the time the Short Term
Global Government 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, futures and forward contracts, gains or
loss attributable to fluctuations in the value of the foreign currency between
the dates of acquisition and 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 or decrease the amount of the Short Term Global
Government Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Many futures contracts entered into by the Short Term Global Government
Fund or the Growth Fund, certain forward foreign currency contracts, and all
listed nonequity options written or purchased by the Short Term Global
Government Fund or Growth Fund will be governed by Section 1256 of the Code. On
the last trading day of the Short Term Global Government Fund's or Growth Fund's
fiscal year, all such outstanding Section 1256 positions will be marked to
market (i.e., treated as if such positions were closed out at their closing
price on such day), with any resulting gain or loss recognized as 60% long-term
and 40% short-term capital gain or loss. Under certain circumstances, entry into
a futures contract to sell a security may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
Positions of the Short Term Global Government Fund or Growth Fund which
consist of at least one position not governed by Section 1256 and at least one
position governed by Section 1256 which substantially diminishes the Short Term
Global Government Fund's or Growth Fund's risk of loss with respect to such
other position will be treated as a "mixed straddle." Generally, a "straddle" is
governed by Section 1092 of the Code, the operation of which may cause deferral
of losses, adjustments in holding periods of securities and conversion of
short-term capital losses into long-term capital losses. Although mixed
straddles are subject to the straddle rules of Section 1092 of the Code, certain
tax elections exist for them which may affect the operations of these rules.
Each of the Short Term Global Government Fund and Growth Fund intends to monitor
its transactions in options and futures and may make certain tax elections in
connection with those investments.
As a general rule, a Fund's gain or loss on a sale or exchange of an
investment will be a long-term capital gain or loss if the Fund has held the
investment for more than one year and will be a short-term capital gain or loss
if it has held the investment for one year or less. Furthermore, as a general
rule, a shareholder's gain or loss on a sale or redemption of Fund shares will
be a long-term capital gain or loss if the shareholder has held the Fund shares
for more than one year and will be a short-term capital gain or loss if the
shareholder has held the Fund shares for one year or less.
While only the Equity Funds expect to realize a significant amount of
net long-term capital gains, any such realized gains will be distributed as
described in the Prospectus. Such distributions ("capital gain dividends"), if
any, will be taxable to shareholders as long-term capital gains, regardless of
how long a shareholder has held Fund shares, and will be designated as capital
gain dividends in a written notice mailed to the shareholder after the close of
the Fund's taxable year. Any loss on the sale or exchange of shares in a Fund
that have been held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividend received by the
shareholder with respect to such shares.
FLORIDA TAXES
Taxation of Fund Shares. Florida does not impose an income tax on
individuals. Thus, dividends and distributions paid by the Florida Insured
Municipal Fund to individuals who are residents of Florida are not taxable by
Florida. Florida imposes an income tax on corporations and similar entities at a
rate of 5.5%. Distributions of investment income and capital gains by the
Florida Insured Municipal Fund will be subject to Florida corporate income tax.
Accordingly, investors in the Florida Insured Municipal Fund, including, in
particular, investors that may be subject to the Florida corporate income tax,
should consult their tax advisors with respect to the application of the Florida
corporate income tax to the receipt of Fund dividends and distributions and to
the investor's Florida tax situation in general.
Florida imposes a tax on intangible personal property owned by Florida
residents. Shares in the Florida Insured Municipal Fund constitute intangible
personal property for purposes of the Florida intangible personal property tax.
Thus, unless an exemption applies, shares in the Florida Insured Municipal Fund
will be subject to the Florida intangible personal property tax. Florida
provides an exemption for shares in an investment fund if the fund's portfolio
of assets consists solely of assets exempt from the Florida intangible personal
property tax. Assets exempt from Florida intangible personal property tax
include obligations issued by the State of Florida and its political
subdivisions, municipalities, and public authorities; obligations of the United
States Government or its agencies; and cash.
The Florida Insured Municipal Fund has received a ruling from the
Florida Department of Revenue that if, on the last business day of any calendar
year, the Insured Municipal Fund's assets consist solely of assets exempt from
the Florida intangible personal property tax, shares of the Florida Insured
Municipal Fund will be exempt from the Florida intangible personal property tax
in the following year. Based on the ruling, if the Insured Municipal Fund's
assets consist, on the last business day of the calendar year, solely of assets
exempt from the Florida intangible personal property tax, shares of the Florida
Insured Municipal Fund owned by Florida residents will be exempt from the
Florida intangible personal property tax. If shares of the Fund are subject to
the Florida intangible personal property tax because less than 100% of the
Fund's assets on the last business day of the calendar year consists of assets
exempt from the Florida intangible personal property tax, only the portion of
the net asset value of a share of the Florida Insured Municipal Fund that is
attributable to obligations of the United States Government will be exempt from
taxation.
Taxation of the Florida Insured Municipal Fund. If the Fund does not
have a taxable nexus to Florida, such as through the location of the Florida
Fund's activities or those of its advisors within the state, under present
Florida law, the Fund is not subject to Florida corporate income taxation.
Additionally, if the Fund's assets do not have a taxable situs in Florida as of
January 1 of each calendar year, the Fund will not be subject to the Florida
intangible personal property tax. If the Fund has a taxable nexus to Florida or
the Fund's assets have a taxable situs in Florida, the Fund will be subject to
Florida taxation. The Florida Insured Municipal Fund intends to operate so as
not to be subject to Florida taxation.
SHAREHOLDER STATEMENTS
Each shareholder will receive after the close of the calendar year an
annual statement and such other written notices as are appropriate as to the
federal income and California State personal income tax status of the
shareholder's dividends and distributions received from the Fund for the prior
calendar year. These statements will also inform shareholders as to the amount
of exempt-interest dividends that is a specific preference item for purposes of
the federal individual and corporate alternative minimum taxes and as to the
exempt portion, if any, of the shareholder's shares of the Florida Insured
Municipal Fund for purposes of the Florida State intangible personal property
tax for the current tax year. Shareholders should consult their tax advisers as
to any other state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded or exempt from federal
income taxation or California State personal income taxation and the dollar
amount of dividends subject to federal income taxation or California State
personal income taxation, if any, will vary for each shareholder depending upon
the size and duration of each shareholder's investment in a Fund. To the extent
that the California Money Fund, California Municipal Fund, California Insured
Intermediate Municipal Fund, Florida Insured Municipal Fund or National
Municipal Fund earns taxable net investment income, it intends to designate as
taxable dividends the same percentage of each day's dividend (or of each day's
taxable net investment income) as its taxable net investment income bears to its
total net investment income earned on that day. Therefore, the percentage of
each day's dividend designated as taxable, if any, may vary from day to day.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that the taxpayer identification number is correct and that the shareholder is
not subject to "backup withholding," then the shareholder may be subject to a
31% "backup withholding" tax with respect to (1) taxable dividends and
distributions and (2) the proceeds of any redemptions of Fund shares. An
individual's taxpayer identification number is his or her social security
number. The 31% "backup withholding" tax is not an additional tax and may be
credited against a taxpayer's regular federal income tax liability.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSIDERATIONS GENERALLY
AFFECTING A FUND AND ITS SHAREHOLDERS, AND IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS WITH
SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THEIR STATE AND LOCAL
TAX LIABILITIES.
DISTRIBUTOR
Sierra Services serves as the Company's distributor for the Class A,
Class B and Class S Shares on a best efforts basis pursuant to two separate
distribution agreements between the Company and Sierra Services. To compensate
Sierra Services for the distribution-related services it provides, and
broker-dealers authorized by Sierra Services, the Company has adopted three
plans of distribution (the "Plans") pursuant to Rule 12b-1 under the 1940 Act,
one with respect to each of the classes of shares, the Class A, Class B and
Class S Shares. Under the Plan for the Class A Shares, Sierra Services will be
entitled to receive a distribution fee, accrued daily and paid monthly,
calculated with respect to Class A Shares at the annual rate of up to .25% of
the average daily net assets of the Class A Shares of each Fund. Under the Plans
for the Class B Shares and Class S Shares, the Class B Shares and Class S Shares
will be charged, respectively, distribution fees at an annual rate of up to .75%
of the average daily net assets of such class of each Fund. Payments under the
Plans may be used to defray a portion of the costs incurred in rendering
distribution services to respective classes of the Funds, including costs such
as costs of advertising or sales literature or payment of commissions on the
sale of shares of the Funds. Class B Shares and Class S Shares are also subject
to a service fee at an annual rate of .25% of the average daily net assets of
each Fund. This service fee may be used for personal service and maintenance of
shareholder accounts.
The Plans are designed to enable Sierra Services through GWFSC to
compensate their representatives and others for selling Company shares. Payments
under the Plans are not tied exclusively to the distribution expenses actually
incurred by Sierra Services or GWFSC, and such payments may exceed distribution
expenses actually incurred by Sierra Services or GWFSC. Sierra Services
anticipates, however, that for the foreseeable future distribution expenses
incurred will greatly exceed amounts paid under the Plans. The Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Company and who have no direct or indirect financial interest in the
operation of the Plan ("Independent Trustees"), will evaluate the
appropriateness of the Plans and their payment terms on a continuing basis and
in doing so will consider all relevant factors, including expenses borne by
Sierra Services and GWFSC in the current year and in prior years and amounts
received under the Plans.
Under their terms, the Plans remain in effect from year to year,
provided such continuance is approved annually by vote of the Board of Trustees,
including a majority of the Independent Trustees. Each of the Plans may not be
amended to increase materially the amount to be spent for the services provided
by Sierra Services without approval by the shareholders of the class of shares
of the Fund to which the Plan applies, and all material amendments of the Plans
also require Board approval. Each of the Plans may be terminated at any time,
without penalty, by vote of a majority of the Independent Trustees, or, with
respect to any class of shares of any of the Funds, by a vote of a majority of
the outstanding voting securities of the class of shares of the Fund (as such
vote is defined in the 1940 Act). If a Plan is terminated (or not renewed) with
respect to any class of any one or more Funds, it may continue in effect with
respect to the same class of any Fund as to which it has not been terminated (or
has been renewed). Pursuant to the distribution agreements, Sierra Services will
provide the Board of Trustees periodic reports of any amounts expended under the
Plans and purpose for which such expenditures were made.
For the fiscal years ended June 30, 1995, 1994 and 1993, Sierra
Services received distribution fees totalling (after waivers of fees)
$6,715,281, $7,622,912 and $5,562,958, respectively, in the aggregate, from the
Funds under the Class A Plan. For the same periods, Sierra Services received
$58,212, $172,906 and $236,049, respectively, representing contingent deferred
sales charges on redemptions of Class A Shares of the Funds. The Target Maturity
Fund had not commenced operations as of June 30, 1994; the Short Term High
Quality Bond Fund and the California Insured Intermediate Municipal Fund had not
commenced operations as of June 30, 1993. In addition, for the fiscal years
ended June 30, 1995 and 1994, Sierra Services received $7,099,863 and
$28,076,080, respectively, representing compensation from front-end sales
charges on Fund shares sold. For each fiscal year ended June 30, 1995, 1994 and
1993, Sierra Services voluntarily waived no distribution fees in the aggregate.
During the fiscal year ended June 30, 1995, Sierra Services incurred
distribution expenses with respect to the Funds totalling $8,637,057.53
consisting of $1,146,626.18 for media advertising; $201,353.18 for planning of
marketing promotion; $195,497.60 for preparation of sales literature;
$1,340,176.33 for printing of sales literature; $383,510.40 for distribution of
sales literature; $ 61,661.89 for distribution of shareholders' reports;
$615,400.45 for printing of shareholders' reports; $812,112.36 for salaries to
the Sierra Services' personnel; $3,512,235.61 in commissions and additional
compensation to the Sierra Services' personnel; $70,281.74 for occupancy;
$85,754.94 for telephone; and $212,446.85 in administration expenses.
For the fiscal year ended June 30, 1995, FDI received distribution fees
from the Funds totalling $326,969,48, in the aggregate under the Class B
Distribution Plan and $306,138.04, in the aggregate under the Class S
Distribution Plan. For the same period, FDI received $237,541.68, representing
CDSCs on redemptions of Class B Shares of the Funds and $155,076.72,
representing CDSCs on redemptions of Class S Shares of the Funds. For the fiscal
year ended June 30, 1995, FDI did not waive any distribution fees. FDI paid out
all of the distribution related fees it received for each of the Class B and
Class S Shares to the financier of the sales commissions paid on sale of Class B
Shares and Class S Shares, respectively.
<PAGE>
APPENDIX
DESCRIPTION OF BOND, NOTES AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA: Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have 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 bonds in higher rated
categories.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as for Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. The modifier 1 indicates that the issue
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category. Description of Duff's corporate bond
ratings
Bonds rated AAA by Duff are judged by Duff to be of the highest credit
quality, with negligible risk factors being only slightly more than for
risk-free U.S. Treasury debt. Bonds rated AA by Duff are judged by Duff to be of
high credit quality with strong protection factors and risk that is modest but
that may vary slightly from time to time because of economic conditions. Bonds
rated A by Duff are judged by Duff to have average but adequate protection
factors. However, risk factors are more variable and greater in periods of
economic stress. Bonds rated BBB by Duff are judged by Duff as having below
average protection factors but still considered sufficient for prudent
investment, with considerable variability in risk during economic cycles.
DESCRIPTION OF FITCH'S CORPORATE BOND RATINGS
Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events . Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Bonds rated A by Fitch are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings. Bonds rated BBB by
Fitch are considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
AAA - Prime - These bonds have the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
General Obligation Bonds - In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to
remain, substantial. Stability of the pledged revenues is also exceptionally
strong due to the competitive position of the municipal enterprise or to the
nature of the revenues. Basic security provisions (including rate covenant,
earnings test for issuance of additional bonds, debt service reserve
requirements) are rigorous. There is evidence of superior management.
AA - High Grade - Bonds in this group have a very strong capacity to
pay interest and repay principal and differ from the highest rated debt only in
small degree.
A - Good Grade - Bonds in this category have 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 bonds
in higher rated categories. Regarding municipal bonds, the rating differs from
the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expenditures
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB - Medium Grade - Bonds in this group are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit 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 bonds in this category than for bonds in higher rated
categories.
General Obligation Bonds - Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of debt
service. The difference between A and BBB ratings is that the latter shows more
than one fundamental weakness, or one very substantial fundamental weakness,
whereas the former shows only one deficiency among the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC, CC and C - Bonds rated BB, B, CCC, CC and C are regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
D - Bonds rated D are in default, or the obligor has filed for
bankruptcy. The D rating is issued when interest or principal payments are not
made on the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace period.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually
given note ratings (designated SP-1, -2 or -3) to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a strong
capacity to pay principal and interest. Those issues determined to possess a
very strong capacity to pay debt service are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and economic changes over the term
of the notes.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issuer
ranks in the lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing, from superior liquidity support, or from established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation of MIG 2/VMIG 2 are of high quality, with margins of protection
ample, although not as large as the preceding group. Loans bearing the
designation MIG 3/VMIG 3 are of favorable quality, with all security elements
accounted for but lacking the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established. Loans bearing the designation
MIG 4/VMIG 4 are of adequate quality. Protection commonly regarded as required
of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payments is strong. Those issues determined to possess
extremely strong safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by good fundamental
protection factors. Risk factors are minor. Ratings of Duff-1 are further
refined by the gradations of "1+" and "1-". Issues rated Duff-1+ have the
highest certainty of timely payment, outstanding short term liquidity, and
safety just below risk-free U.S. Treasury short-term obligations. Issues rated
Duff-1- have high certainty of timely payment, strong liquidity factors
supported by good fundamental protection factors, and small risk factors. Paper
rated Duff-2 is regarded as having good certainty of timely payment, good access
to capital markets and sound liquidity factors and company fundamentals. Risk
factors are small.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating F-1+ (Exceptionally Strong Credit Quality) is the highest
commercial rating assigned by Fitch and is assigned to issues regarded as having
the strongest degree of assurance for timely payment. Paper rated F-1 (Very
Strong Credit Quality) is regarded as having an assurance of timely payment only
slightly less in degree than issues rated F-1+. The rating F-2 (Good Credit
Quality) reflects an assurance of timely payment, but the margin of safety is
not as great as for issues assigned F-1+ or F-1 ratings.
<PAGE>
FINANCIAL STATEMENTS
The following are the audited financial statements for the fiscal year ended
June 30, 1995, and the Report of Independent Accountants of Price Waterhouse LLP
dated August 15, 1995 relating to the financial statements and financial
highlights of each of the fund series constituting the Sierra Trust Funds.
For purposes of this filing of this Post-Effective Amendment No. 22, such
audited financial statements and report of independent accountants are
incorporated by reference to the Post-Effective Amendment No. 21 to the
Company's Registration Statement on Form N-1A (File No. 33-27 489) filed with
the SEC on September 1, 1995.
