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THE GRIFFIN FUNDS, INC.
Money Market Fund
Tax-Free Money Market Fund
Short-Term Bond Fund
U.S. Government Income Fund
Municipal Bond Fund
California Tax-Free Fund
Bond Fund
Growth & Income Fund
Growth Fund
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1997
The Griffin Funds, Inc. ("The Griffin Funds") is a professionally managed,
open-end investment company. This Statement of Additional Information contains
information about each of The Griffin Funds' investment portfolios -- the Money
Market Fund, the Tax-Free Money Market Fund (the "Money Market Funds"), the
Short-Term Bond Fund, the U.S. Government Income Fund, the Municipal Bond Fund,
the California Tax-Free Fund, the Bond Fund, the Growth & Income Fund and the
Growth Fund (the "Non-Money Market Funds") (collectively, the "Funds") and
relates to the single class of shares offered by the Money Market Funds and the
two classes of shares offered by each Non-Money Market Fund -- Class A Shares
and Class B Shares. This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' current Prospectus, dated
January 31, 1997, as supplemented from time to time. All terms used herein that
are defined in the Prospectuses will have the meanings assigned in the
Prospectuses. Please retain this Statement of Additional Information for future
reference. To obtain additional copies of this Statement of Additional
Information or of the Funds' Prospectuses, please call The Griffin Funds at
1-800-676-4450.
TABLE OF CONTENTS PAGE
General Information..................................................... 3
Investment Limitations.................................................. 3
Money Market Fund.................................................... 3
Tax-Free Money Market Fund........................................... 5
Short-Term Bond Fund................................................. 7
U.S. Government Income Fund.......................................... 9
Municipal Bond Fund.................................................. 11
California Tax-Free Fund............................................. 13
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Bond Fund............................................................ 15
Growth & Income Fund................................................. 17
Growth Fund.......................................................... 19
Additional Securities and Investment Practices Shared by Certain Funds.. 21
Additional Securities and Investment Practices of Specific Funds........ 30
Additional Securities and Investment Practices of the Tax-Free Money
Market Fund Only...................................................... 41
Additional Securities and Investment Practices of the Bond Fund Only.... 46
Additional Securities and Investment Practices of the Growth & Income
Fund Only............................................................. 46
Special Factors Affecting the California Tax-Free Fund.................. 47
Portfolio Transactions and Brokerage.................................... 50
Valuation of Portfolio Securities....................................... 52
Performance............................................................. 53
Additional Purchase and Redemption Information.......................... 61
Distributions and Taxes................................................. 61
Service Providers....................................................... 67
Directors and Officers.................................................. 68
Management Contracts.................................................... 71
Distribution and Service Plans.......................................... 75
Description of The Griffin Funds........................................ 77
Appendix................................................................ 80
Investment Adviser
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Griffin Financial Investment Advisers ("Griffin Advisers")
Sub-Adviser to the Money Market Fund, the Tax-Free Money Market Fund, the U.S.
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Government Income Fund, the Municipal Bond Fund and the California Tax-Free Fund
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Payden & Rygel Investment Counsel ("Payden & Rygel")
Sub-Adviser to the Short-Term Bond Fund and the Growth Fund
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T. Rowe Price Associates, Inc. ("T. Rowe Price")
Sub-Adviser to the Bond Fund and the Growth & Income Fund
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The Boston Company Asset Management, Inc. ("TBCAM")
Distributor
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Griffin Financial Services ("Griffin Financial")
Transfer Agent and Custodian
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Investors Fiduciary Trust Company ("IFTC")
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GENERAL INFORMATION
The Griffin Funds was organized as a Maryland corporation on August 5,
1993. The Griffin Funds is an open-end management investment company currently
consisting of nine series ("Funds"). As used herein, the "Adviser" or the
"Advisers" shall mean Griffin Advisers, Payden & Rygel, T.Rowe Price and/or
TBCAM as the context may require.
INVESTMENT LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such percentage limitation or standard shall be determined immediately after and
as a result of the Fund's acquisition of such security or other asset.
Accordingly, subsequent changes in values, net assets or other circumstances
will not be considered when determining whether the investment complies with the
Fund's investment policies and limitations.
Each Fund's fundamental investment policies and limitations may not be
changed without approval by a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940 ("1940 Act")) of the Fund.
However, except for investment limitations described as being fundamental, the
investment policies and limitations described in this Statement of Additional
Information are not fundamental and may be changed without shareholder approval.
Investment Limitations of the Money Market Fund
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As a matter of fundamental policy, the Money Market Fund may not:
1. purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result thereof, more than 5% of its total assets would be invested in the
securities of that issuer, except as permitted under Rule 2a-7;
2. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
3. borrow money, except that the Money Market Fund may borrow money for
temporary or emergency purposes (not for leveraging or investment) or engage in
reverse repurchase agreements in an amount not exceeding 10% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 10% of the value of the Money
Market Fund's total assets will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 10% limitation.
The Money Market Fund will not make additional investments in securities while
borrowings equal or exceed 5% of Fund assets;
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4. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Money Market Fund in accordance with
its investment objective, policies and restrictions, either directly from an
issuer or from an underwriter for an issuer may be considered an underwriting
within the meaning of the Securities Act of 1933;
5. purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government, or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Money Market Fund's
total assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that it will invest more
than 25% of its total assets in the financial services industry;
6. purchase or sell real estate (including real estate limited
partnerships), or securities issued by real estate investment trusts;
7. purchase or sell commodities, or commodity (futures) contracts;
8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but the Fund may
purchase debt securities or enter into repurchase agreements without regard to
this limitation);
9. invest in oil, gas or other mineral exploration, lease or development
programs; or
10. invest in companies for the purpose of exercising control or
management.
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The Money Market Fund does not currently intend to purchase any
security if, as a result, more than 10% of its total assets would be invested in
securities that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued.
(ii) The Money Market Fund does not currently intend to purchase warrants,
valued at the lower of cost or market, in excess of 5% of the value of the Money
Market Fund's total assets.
(iii) The Money Market Fund does not currently intend to make short sales
of securities.
(iv) The Money Market Fund does not currently intend to purchase any
securities on margin, except for such short-term credits as are necessary for
the clearance of purchases and sales of securities.
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(v) The Money Market Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) if, as a result, more
than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.
(vi) The Money Market Fund does not currently intend to purchase the
securities of any issuer if those officers and directors of The Griffin Funds
and those officers and directors of Griffin Advisers who, individually, own more
than 1/2 of 1% of the securities of such issuer together own more than 5% of
such issuer's securities.
Investment Limitations of the Tax-Free Money Market Fund
--------------------------------------------------------
As a matter of fundamental policy, the Tax-Free Money Market Fund may not:
1. purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, or any of its agencies or instrumentalities)
if, as a result thereof, (a) more than 5% of its total assets would be invested
in the securities of that issuer, or (b) the Tax-Free Money Market Fund would
hold more than 10% of the outstanding voting securities of any issuer;
2. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
3. borrow money, except that the Tax-Free Money Market Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) or
engage in reverse repurchase agreements in an amount not exceeding 10% of the
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 10% of the value of
the Tax-Free Money Market Fund's total assets will be reduced within three days
(not including Sundays and holidays) to the extent necessary to comply with the
10% limitation. The Tax-Free Money Market Fund will not make additional
investments in securities while borrowings equal or exceed 5% of Fund assets;
4. underwrite securities issued by others, except to the extent that the
purchase of municipal bonds in accordance with the Tax-Free Money Market Fund's
investment objective, policies, and restrictions, either directly from the
issuer, or from an underwriter for an issuer, may be considered an underwriting
within the meaning of the Securities Act of 1933;
5. purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or tax-exempt obligations issued or guaranteed by a U.S. territory or possession
or a state or local government, or a political subdivision of any of the
foregoing) if, as a result, more than 25% of the Tax-Free Money Market Fund's
total assets would be invested in the securities of companies whose principal
business activities are in the same industry;
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6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Tax-Free Money Market Fund from
investing in municipal bonds or other obligations secured by real estate or
interests therein;
7. purchase or sell commodities or commodity contracts;
8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but the Fund may
purchase debt securities or enter into repurchase agreements without regard to
this limitation); or
9. invest in oil, gas or other mineral exploration, lease or development
programs.
The following limitations are not fundamental, and may be changed without
shareholder approval.
(i) The Tax-Free Money Market Fund does not currently intend to purchase
any security if, as a result, more than 10% of its total assets would be
invested in securities that are deemed to be illiquid because they are subject
to legal or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued.
(ii) The Tax-Free Money Market Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Tax-Free Money Market Fund's total assets.
(iii) The Tax-Free Money Market Fund does not currently intend to make
short sales of securities.
(iv) The Tax-Free Money Market Fund does not currently intend to purchase
any securities on margin, except for such short-term credits as are necessary
for the clearance of purchase and sales of securities.
(v) The Tax-Free Money Market Fund does not currently intend to purchase
the securities of any issuer (other than securities issued or guaranteed by
domestic or foreign governments or political subdivisions thereof) if, as a
result, more than 5% of its total assets would be invested in the securities of
business enterprises that, including predecessors, have a record of less than
three years of continuous operation.
(vi) The Tax-Free Money Market Fund does not currently intend to purchase
the securities of any issuer if those officers and directors of The Griffin
Funds and those officers and directors of Griffin Advisers who individually own
more than 1/2 of 1% of the securities of such issuer together own more than 5%
of such issuer's securities.
For purposes of the foregoing limitations, the Adviser identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, the Adviser will consider the
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entity or entities responsible for payment of interest and repayment of
principal and the source of such payments; the way in which assets and revenues
of an issuing political subdivision are separated from those of other political
entities; and whether a governmental body is guaranteeing the security.
Investment Limitations of the Short-Term Bond Fund
--------------------------------------------------
As a matter of fundamental policy, the Short-Term Bond Fund may not:
1. purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Short-Term
Bond Fund's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Fund, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations;
2. purchase any securities which would cause 25% or more of the value of
the Short-Term Bond Fund's total assets at the time of purchase to be invested
in the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry);
3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
4. borrow money, except that the Short-Term Bond Fund may borrow money
for temporary or emergency purposes (not for leveraging or investment) or engage
in reverse repurchase agreements in an amount not exceeding 33-1/3% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Short-Term Bond Fund's total assets will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the
33-1/3% limitation;
5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Short-Term Bond Fund in accordance
with its investment objective, policies and restrictions, either directly from
an issuer or from an underwriter for an issuer, may be considered an
underwriting within the meaning of the Securities Act of 1933;
6. purchase or sell real estate, including real estate limited
partnerships, (but this shall not prevent the Short-Term Bond Fund from
investing in marketable securities backed by real estate mortgages or issued by
companies such as real estate investment trusts which deal in real estate or
interests therein);
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7. purchase or sell physical commodities unless acquired as a result of
ownership of securities of other instruments (but this shall not prevent the
Short-Term Bond Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities);
8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of debt securities or to repurchase agreements);
9. invest in oil, gas, or other mineral exploration, leasing or
development programs or leases; or
10. lend any portfolio security unless collateral values are continuously
maintained at not less than 100% by marking to market daily.
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The Short-Term Bond Fund does not currently intend to make short
sales of securities; provided, however, that the Short-Term Bond Fund may
purchase or sell futures contracts and may make initial and variation margin
payments in connection with purchases and sales of futures contracts or of
options on futures contracts.
(ii) The Short-Term Bond Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Short-Term Bond Fund's total assets, or warrants which are not listed on the
New York Stock Exchange ("NYSE") or American Stock Exchange ("ASE") in excess of
2% of the value of the Short-Term Bond Fund's net assets.
(iii) The Short-Term Bond Fund does not currently intend to purchase
securities on margin, except that it may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
in connection with futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.
(iv) The Short-Term Bond Fund may borrow money only (a) from a bank or
from a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Short-Term Bond Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.
(v) The Short-Term Bond Fund does not currently intend to purchase any
security if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale, or because they cannot be sold or disposed
of in the ordinary course of business at approximately the prices at which they
are valued.
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(vi) The Short-Term Bond Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof, securities of pooled
investment vehicles and mortgage or asset-backed securities) if, as a result,
more than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.
(vii) The Short-Term Bond Fund does not currently intend to purchase or
retain the securities of any issuer other than the Short-Term Bond Fund, if, to
its knowledge, those directors and officers of The Griffin Funds or of Griffin
Advisers who individually own beneficially more than 1/2 of 1% of such issuer,
together own beneficially more than 5% of such outstanding securities.
Investment Limitations of the U.S. Government Income Fund
---------------------------------------------------------
As a matter of fundamental policy, the U.S. Government Income Fund may not:
1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the U.S.
Government Income Fund's total assets would be invested in the securities of
such issuer, or more than 10% of the issuer's outstanding voting securities
would be owned by the Fund, except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations;
2. purchase any securities which would cause 25% or more of the value of
the U.S. Government Income Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that (a) there is no
limitation with respect to U.S. Government Obligations and repurchase agreements
secured by such obligations; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) utilities
will be divided according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry);
3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
4. borrow money, except that the U.S. Government Income Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) or
engage in reverse repurchase agreements in an amount not exceeding 33-1/3% of
the value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 33-1/3% of the value
of the U.S. Government Income Fund's total assets will be reduced within three
days (not including Sundays and holidays) to the extent necessary to comply with
the 33-1/3% limitation;
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5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the U.S. Government Income Fund in
accordance with its investment objective, policies and restrictions, either
directly from an issuer or from an underwriter for an issuer, may be considered
an underwriting within the meaning of the Securities Act of 1933;
6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the U.S. Government Income Fund from
investing in marketable securities backed by real estate mortgages or issued by
companies such as real estate investment trusts which deal in real estate or
interests therein;
7. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
U.S. Government Income Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities);
8. invest in oil, gas or other mineral exploration, leasing or
development programs; or
9. invest in companies for the purpose of exercising control or
management.
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The U.S. Government Income Fund may borrow money only (a) from a bank
or from a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The U.S. Government Income Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.
(ii) The U.S. Government Income Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the U.S. Government Income Fund's total assets.
(iii) The U.S. Government Income Fund does not currently intend to make
short sales of securities; provided, however, that it may purchase or sell
futures contracts and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts and may make initial and variation margin payments in connection with
purchases or sales of futures contracts or of options on futures contracts.
(iv) The U.S. Government Income Fund does not currently intend to purchase
any securities on margin, except for such short-term credits as are necessary
for the clearance of purchases and sales of securities; provided, however, that
it may purchase or sell futures contracts and may make initial and variation
margin payments in connection with purchases or sales of futures contracts or of
options on futures contracts.
(v) The U.S. Government Income Fund does not currently intend to purchase
the securities of any issuer (other than securities issued or guaranteed by
domestic or foreign
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governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(vi) The U.S. Government Income Fund does not currently intend to purchase
the securities of any issuer if those officers and directors of The Griffin
Funds and those officers and directors of Griffin Advisers who individually own
more than 1/2 of 1% of the securities of such issuer together own more than 5%
of such issuer's securities.
(vii) The U.S. Government Income Fund does not currently intend to purchase
any security if, as a result, more than 15% of its total assets would be
invested in securities that are deemed to be illiquid because they are subject
to legal or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued.
Investment Limitations of the Municipal Bond Fund
-------------------------------------------------
As a matter of fundamental investment policy, the Municipal Bond Fund may not:
1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Municipal Bond
Fund's total assets would be invested in the securities of such issuer, or more
than 10% of the issuer's outstanding voting securities would be owned by the
Fund, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations;
2. purchase any securities which would cause 25% or more of the value of
the Municipal Bond Fund's total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) there is no limitation with respect to municipal obligations
(for purposes of this limitation, Industrial Development Revenue bonds that are
backed only by the assets and revenues of a non-governmental user shall not be
deemed to be municipal obligations); (c) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (d) utilities
will be divided according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry);
3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
4. borrow money, except that the Municipal Bond Fund may borrow money
for temporary or emergency purposes (not for leveraging or investment) or engage
in reverse repurchase agreements in an amount not exceeding 33-1/3% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that
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come to exceed 33-1/3% of the value of the Municipal Bond Fund's total assets
will be reduced within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33-1/3% limitation;
5. underwrite securities issued by others, except to the extent that the
disposition of securities purchased by the Municipal Bond Fund in accordance
with its investment objective, policies, and restrictions, either directly from
the issuer, or from an underwriter for an issuer, may be considered an
underwriting within the meaning of the Securities Act of 1933;
6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Municipal Bond Fund from investing
in municipal bonds or other obligations secured by real estate or interests
therein;
7. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Municipal Bond Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities);
8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements;
9. invest in oil, gas, or other mineral exploration, leasing or
development programs; or
10. invest in companies for the purpose of exercising control or
management.
The following investment limitations are not fundamental and may be changed
without shareholder approval.
(i) The Municipal Bond Fund does not currently intend to purchase the
securities of any issuer, if, to its knowledge, those directors and officers of
The Griffin Funds or of Griffin Advisers who individually own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities.
(ii) The Municipal Bond Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Municipal Bond Fund's total assets.
(iii) The Municipal Bond Fund does not currently intend to make short sales
of securities; provided however that the Municipal Bond Fund may purchase or
sell futures contracts and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts.
(iv) The Municipal Bond Fund does not currently intend to purchase any
securities on margin, except for such short-term credits as are necessary for
the clearance of purchase and
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sales of securities; provided however that the Municipal Bond Fund may make
initial and variation margin payments in connection with purchases or sales of
futures contracts or of options on futures contracts.
(v) The Municipal Bond Fund may borrow money only (a) from a bank or from
a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Municipal Bond Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.
(vi) The Municipal Bond Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) if, as a result, more
than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.
(vii) The Municipal Bond Fund does not currently intend to purchase any
security if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued.
For purposes of the foregoing limitations, the Adviser identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, the Adviser will consider the entity or entities responsible for payment
of interest and repayment of principal and the source of such payments; the way
in which assets and revenues of an issuing political subdivision are separated
from those of other political entities; and whether a governmental body is
guaranteeing the security.
Investment Limitations of the California Tax-Free Fund
------------------------------------------------------
As a matter of fundamental policy, the California Tax-Free Fund may not:
1. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
2. borrow money, except that the California Tax-Free Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) in
an amount not to exceed 33-1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed 33-1/3% of the fund's total assets by reason of a decline in net
assets will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33-1/3% limitation;
3. underwrite any issue of securities, except to the extent that the
disposition of securities purchased by the California Tax-Free Fund in
accordance with its investment
13
<PAGE>
objective, policies, and limitations, either directly from the issuer, or from
an underwriter for an issuer, may be deemed to be underwriting;
4. purchase any securities which would cause 25% or more of the value of
the California Tax-Free Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that (a) there is no
limitation with respect to U.S. Government Obligations and repurchase agreements
secured by such obligations; (b) there is no limitation with respect to
municipal obligations (for purposes of this limitation, private activity bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be municipal obligations); (c) wholly owned finance companies
will be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of the parents; and (d)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry;
5. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the California Tax-Free Fund from
investing in municipal bonds or other obligations secured by real estate or
interests therein;
6. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
California Tax-Free Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities);
7. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements;
8. invest in oil, gas or other mineral exploration, leasing or
development programs;
9. invest in companies for the purpose of exercising control or
management.
The following investment limitations are not fundamental and may be changed
without shareholder approval.
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the California Tax-Free Fund limits its investments so that
at the close of each quarter of its taxable year: (a) with regard to at least
50% of total assets, no more than 5% of total assets are invested in the
securities of a single issuer, and (b) no more than 25% of total assets are
invested in the securities of a single issuer. Limitations (a) and (b) do not
apply to "Government securities" as defined for federal tax purposes.
(ii) The California Tax-Free Fund does not currently intend to purchase a
security if, as a result, more than 5% of its total assets would be invested in
industrial revenue bonds where
14
<PAGE>
payment of principal and interest are the responsibility of a company with less
than three years' operating history.
(iii) The California Tax-Free Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the California Tax-Free Fund's total assets.
(iv) The California Tax-Free Fund does not currently intend to make short
sales of securities; provided, however, that the California Tax-Free Fund may
purchase and sell futures contracts, and may make initial and variation margin
payments in connection with purchases or sales of futures contracts or of
options on futures contracts.
(v) The California Tax-Free Fund does not currently intend to purchase
any securities on margin; provided, however, that the California Tax-Free Fund
may make initial and variation margin payments in connection with purchases and
sales of futures contracts or options on futures contracts.
(vi) The California Tax-Free Fund may borrow money only (a) from a bank or
from a registered investment company or (b) by engaging in reverse repurchase
agreement with any party. The California Tax-Free Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.
(vii) The California Tax-Free Fund does not currently intend to purchase
the securities of any issuer, if, to its knowledge, those directors and officers
of The Griffin Funds or of Griffin Advisers who individually own beneficially
more than 1/2 of 1% of such issuer, together own beneficially more than 5% of
such outstanding securities.
For purposes of the foregoing limitations, the Adviser identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, the Adviser will consider the entity or entities responsible for payment
of interest and repayment of principal and the source of such payments, the way
in which assets and revenues of an issuing political subdivision are separated
from those of other political entities, and whether a governmental body is
guaranteeing the security.
Investment Limitations of the Bond Fund
---------------------------------------
As a matter of fundamental policy, the Bond Fund may not:
1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Bond Fund's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by the Fund,
except that up to 25% of the value of the Fund's total assets may be invested
without regard to these limitations;
15
<PAGE>
2. purchase any securities which would cause 25% or more of the value of
the Bond Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry);
3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;
4. borrow money, except that the Bond Fund may borrow money for temporary
or emergency purposes (not for leveraging or investment) or engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the Bond
Fund's total assets will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation;
5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Bond Fund in accordance with its
investment objective, policies and restrictions, either directly from an issuer
or from an underwriter for an issuer, may be considered an underwriting within
the meaning of the Securities Act of 1933;
6. purchase or sell real estate, including real estate limited
partnerships, (but this shall not prevent the Bond Fund from investing in
marketable securities backed by real estate mortgages or issued by companies
such as real estate investment trusts which deal in real estate or interests
therein);
7. purchase or sell physical commodities unless acquired as a result of
ownership of securities of other instruments (but this shall not prevent the
Bond Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities);
8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of debt securities or to repurchase agreements); or
9. invest in oil, gas, or other mineral exploration, leasing or
development programs or leases.
16
<PAGE>
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The Bond Fund does not currently intend to make short sales of
securities; provided, however, that the Bond Fund may purchase or sell futures
contracts and may make initial and variation margin payments in connection with
purchases and sales of futures contracts or of options on futures contracts.
(ii) The Bond Fund does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the value of the Bond Fund's
total assets.
(iii) The Bond Fund does not currently intend to purchase securities on
margin, except that it may obtain such short-term credits as are necessary for
the clearance of transactions, and provided that margin payments in connection
with futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
(iv) The Bond Fund may borrow money only (a) from a bank or from a
registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Bond Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
(v) The Bond Fund does not currently intend to purchase any security if,
as a result, more than 15% of its total assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale, or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
(vi) The Bond Fund does not currently intend to purchase the securities of
any issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(vii) The Bond Fund does not currently intend to purchase or retain the
securities of any issuer other than the Bond Fund, if, to its knowledge, those
directors and officers of The Griffin Funds or of Griffin Advisers who
individually own beneficially more than 1/2 of 1% of such issuer, together own
beneficially more than 5% of such outstanding securities.
Investment Limitations of the Growth & Income Fund
--------------------------------------------------
As a matter of fundamental policy, the Growth & Income Fund may not:
1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer,
17
<PAGE>
or more than 10% of the issuer's outstanding voting securities would be owned by
the Fund, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations;
2. purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to U.S.
Government obligations and repurchase agreements secured by such obligations;
(b) wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services (for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry);
3. issue senior securities except as permitted under the 1940 Act or
applicable Securities and Exchange Commission ("SEC") rules, regulations or
orders;
4. borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) or engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Fund's total assets will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation;
5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Fund in accordance with its
investment objective, policies and restrictions, either directly from an issuer
or from an underwriter for an issuer may be considered an underwriting within
the meaning of the Securities Act of 1933;
6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Fund from investing in marketable
securities backed by real estate mortgages or issued by companies such as real
estate investment trusts which deal in real estate or interests therein;
7. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of debt securities or to repurchase agreements);
8. invest in oil, gas or other mineral exploration, leasing or
development programs; or
9. invest in companies for the purpose of exercising control or
management.
18
<PAGE>
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The Fund may borrow money only (a) from a bank or from a registered
investment company, or (b) by engaging in reverse repurchase agreements with any
party. The Fund will not purchase any security while borrowings representing
more than 5% of its total assets are outstanding.
(ii) The Fund does not currently intend to purchase warrants, valued at
the lower of cost or market, in excess of 5% of the value of the Fund's total
assets.
(iii) The Fund does not currently intend to make short sales of
securities; provided, however, that the Fund may purchase or sell futures
contracts and may make initial and variation margin payments in connection with
purchases or sales of futures contracts or of options on futures contracts.
(iv) The Fund does not currently intend to purchase any securities on
margin, except for such short-term credits as are necessary for the clearance of
purchases and sales of securities; provided, however that this limitation shall
not limit the Fund's ability to purchase or sell futures contracts.
(v) The Fund does not currently intend to purchase any security if, as a
result, more than 15% of its total assets would be invested in securities that
are deemed to be illiquid because they cannot be sold or disposed of in the
ordinary course of business within seven days at approximately the prices at
which they are valued.
(vi) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(vii) The Fund does not currently intend to purchase the securities of any
issuer if those officers and directors of The Griffin Funds and those officers
and directors of Griffin Advisers, who individually, own more than one half of
1% of the securities of such issuer, together own more than 5% of such issuer's
securities.
Investment Limitations of the Growth Fund
-----------------------------------------
As a matter of fundamental policy, the Growth Fund may not:
1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund,
19
<PAGE>
except that up to 25% of the value of the Fund's total assets may be invested
without regard to these limitations;
2. purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to U.S.
Government obligations and repurchase agreements secured by such obligations;
(b) wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services (for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry);
3. issue senior securities except as permitted under the 1940 Act or
applicable Securities and Exchange Commission ("SEC") rules, regulations or
orders;
4. borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) or engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Fund's total assets will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation;
5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Fund in accordance with its
investment objective, policies and restrictions, either directly from an issuer
or from an underwriter for an issuer may be considered an underwriting within
the meaning of the Securities Act of 1933;
6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Fund from investing in marketable
securities backed by real estate mortgages or issued by companies such as real
estate investment trusts which deal in real estate or interests therein;
7. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of debt securities or to repurchase agreements);
8. invest in oil, gas or other mineral exploration, leasing or
development programs;
9. invest in companies for the purpose of exercising control or
management; or
10. lend any portfolio security unless collateral values are continuously
maintained at not less than 100% by marking to market daily.
20
<PAGE>
The following investment limitations are not fundamental, and may be changed
without shareholder approval.
(i) The Growth Fund may borrow money only (a) from a bank or from a
registered investment company, or (b) by engaging in reverse repurchase
agreements with any party. The Growth Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
(ii) The Growth Fund does not currently intend to purchase warrants,
valued at the lower of cost or market, in excess of 5% of the value of the
Growth Fund's total assets, or warrants which are not listed on the NYSE or ASE
in excess of 2% of the value of the Growth Fund's net assets.
(iii) The Growth Fund does not currently intend to make short sales of
securities; provided, however, that the Growth Fund may purchase or sell futures
contracts and may make initial and variation margin payments in connection with
purchases or sales of futures contracts or of options on futures contracts.
(iv) The Growth Fund does not currently intend to purchase any securities
on margin, except for such short-term credits as are necessary for the clearance
of purchases and sales of securities; provided, however that this limitation
shall not limit the Growth Fund's ability to purchase or sell futures contracts.
(v) The Growth Fund does not currently intend to purchase any security
if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because they cannot be sold or
disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued.
(vi) The Growth Fund does not currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof, securities of pooled investment
vehicles and mortgage or asset-backed securities) if, as a result, more than 5%
of its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(vii) The Growth Fund does not currently intend to purchase the securities
of any issuer if those officers and directors of The Griffin Funds and those
officers and directors of Griffin Advisers, who individually, own more than one
half of 1% of the securities of such issuer, together own more than 5% of such
issuer's securities.
21
<PAGE>
Additional Securities and Investment Practices Shared by Certain Funds
----------------------------------------------------------------------
Asset-Backed Securities.
In General. Asset-backed securities arise through the grouping by
----------
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage-and non-mortgage backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.
The life of an asset-backed security varies depending upon rate of the
prepayment of the underlying debt instruments. The rate of such prepayments
will be a function of current market interest rates and other economic and
demographic factors. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in
prepayments in response to sharply falling interest rates will shorten the
security's average maturity and limit the potential appreciation in the
security's value relative to a conventional debt security. Consequently,
asset-backed securities may not be as effective in locking in high, long-term
yields. Conversely, in periods of sharply rising rates, prepayments are
generally slow, increasing the security's average life and its potential
for price depreciation.
Mortgage-Backed Securities. Mortgage-backed securities represent an
--------------------------
ownership interest in a pool of mortgage loans.
Mortgage pass-through securities may represent participation interests
in pools of residential mortgage loans originated by U.S. governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies, authorities or instrumentalities.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which a Fund may
invest may include those issued or guaranteed by Government National Mortgage
Association ("GNMA"), by Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"). Such Certificates are
mortgage-backed securities which represent a partial ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Such mortgage loans may have fixed or
adjustable rates of interest.
22
<PAGE>
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
invested far in advance of the maturity of the mortgages in the pool.
The yield which will be earned on mortgage-backed securities may vary
from their coupon rates for the following reasons: (i) Certificates may be
issued at a premium or discount, rather than at par; (ii) Certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Fund.
Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities (collateral
collectively hereinafter referred to as "Mortgage Assets"). Multi-class pass-
through securities are interests in a trust composed of Mortgage Assets and all
references herein to CMOs will include multi-class pass-through securities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distribution on the multi-class pass-through securities.
Moreover, principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis.
The principal and interest payments on the Mortgage Assets may be allocated
among the various classes of CMOs in several ways. Typically, payments of
principal, including any prepayments, on the underlying mortgages are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal is made on CMOs of a class
until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage assets.
A common type of SMBS will be structured so that one class receives some of
the interest and most of the principal from the mortgage assets, while the other
class receives most of the
23
<PAGE>
interest and the remainder of the principal. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may fail to
fully recoup its initial investment in these securities. The market value of any
class which consists primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates.
The average life of mortgage-backed securities varies with the maturities
of the underlying mortgage instruments. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments, mortgage refinancings, or
foreclosures. The rate of mortgage prepayments, and hence the average life of
the certificates, will be a function of the level of interest rates, general
economic conditions, the location and age of the mortgage and other social and
demographic conditions. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments.
Non-Mortgage Asset-Backed Securities. Non-mortgage asset-backed securities
------------------------------------
include interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables. Such securities are generally
issued as pass-through certificates, which represent undivided fractional
ownership interests in the underlying pools of assets. Such securities also may
be debt instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Such securities also
may include instruments issued by certain trusts, partnerships or other special
purpose issuers, including pass-through certificates representing participations
in, or debt instruments backed by, the securities and other assets owned by such
issuers.
Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.
The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore,
24
<PAGE>
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on those securities. In addition,
various state and Federal laws give the motor vehicle owner the right to assert
against the holder of the owner's obligation certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the related asset-backed securities. Insofar as credit
card receivables are concerned, credit card holders are entitled to the
protection of a number of state and Federal consumer credit laws, many of which
give such holders the right to set off certain amounts against balances owed on
the credit card, thereby reducing the amounts paid on such receivables.
The development of non-mortgage backed securities is at an early stage
compared to mortgage-backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities is not as well developed.
Convertible Bonds. The Short-Term Bond Fund, the Bond Fund and the Growth
Fund may invest in Convertible Bonds which are fixed-income debt securities
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same issuer. Convertible
securities, while usually subordinate to similar non-convertible securities, are
senior to common stocks in an issuer's capital structure. Convertible
securities offer flexibility by providing the investor with a steady income
stream (generally yielding a lower amount than similar non-convertible
securities and a higher amount than common stocks) as well as the opportunity to
take advantage of increases in the price of the issuer's common stock through
the conversion feature. Fluctuations in the convertible security's price can
reflect changes in the market value of the common stock or changes in market
interest rates. At most, 5% of the Bond Fund's net assets will be invested in
convertible securities that are either rated in one of the four highest rating
categories by a Nationally Recognized Statistical Rating Organization ("NRSRO"),
or are unrated securities determined by the Adviser, under the direction of the
Board of Directors, to be of comparable quality.
Delayed Delivery Transactions. Each of the Funds may buy and sell
securities on a delayed delivery or when-issued basis without limitation. These
transactions involve a commitment by a Fund to purchase or sell specific
securities at a predetermined price and/or yield, with payment and delivery
taking place after the customary settlement period for that type of security
(and more than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered.
When purchasing securities on a delayed delivery basis, a Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with a Fund's
other investments. If a Fund remains substantially fully invested at a time
when delayed delivery purchases are outstanding, the delayed delivery purchases
may result in a form of leverage. When delayed delivery purchases are
outstanding, a Fund will set aside cash or other liquid high quality assets in a
segregated custodial account to cover its purchase obligations. When a Fund has
sold a security on a delayed delivery basis, the Fund does not
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participate in further gains or losses with respect to the security. If the
other party to a delayed delivery transaction fails to deliver or pay for the
securities, a Fund could miss a favorable price or yield opportunity, or could
suffer a loss.
Each of the Funds may renegotiate delayed delivery transactions after they
are entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.
A Fund may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. Normally, the settlement date occurs within two
months after the transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment and settlement, no payment
is made for the securities purchased by the purchaser and, thus, no interest
accrues to the purchaser from the transaction. If a Fund chooses to dispose of
the right to acquire a when-issued security prior to its acquisition or dispose
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. The use of when-issued transactions and forward commitments
enables a Fund to hedge against anticipated changes in interest rates and
prices. A Fund also may enter into such transactions to generate income. In such
instances, a Fund agrees to resell its purchase commitment to a third-party
seller at the current market price on the date of sale and concurrently enters
into another purchase commitment for such securities at a later date. As an
inducement for a Fund to "roll over" its purchase commitment, the Fund receives
a negotiated fee. The purchase of securities with a settlement date occurring on
the Pacific Securities Association approved settlement date is considered a
normal delivery and not a "when-issued" or "forward commitment" purchase.
Foreign Index Linked Instruments. The U.S. Government Income Fund and
the Bond Fund may invest up to 10% of their total assets in Foreign Index Linked
Instruments. Foreign Index Linked Instruments are fixed income securities which
are issued by U.S. issuers (including U.S. subsidiaries of foreign issuers) and
are denominated in U.S. dollars but return principal and/or pay interest to
investors in amounts which are linked to the level of a particular foreign
index. A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries or the differential in
interest rates between particular countries. In the case of Foreign Index
Linked Instruments linking the principal component to a foreign index, the
amount of principal payable by the issuer at maturity will increase or decrease
in response to changes in the level of the foreign index during the term of the
Foreign Index Linked Instrument. In the case of Foreign Index Linked
Instruments linking the interest component to a foreign index, the amount of
interest payable will adjust periodically in response to changes in the level of
the foreign index during the term of the Foreign Index Linked Instrument.
Foreign Index Linked Instruments may be issued by a U.S. governmental agency or
instrumentality or by a private issuer.
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Generally, the Foreign Index Linked Instruments which have been issued
to date have been debt instruments closely resembling corporate debt securities,
U.S. Government Obligations or zero-coupon bonds ("Debt Securities") except for
the benchmark to which payments of principal or interest are tied. In the
future, other Foreign Index Linked Instruments may be created backed by
mortgages or other assets which closely resemble mortgage backed securities or
asset backed securities. Therefore, the risks described in the Prospectus and
in this Statement of Additional Information with respect to mortgage backed
securities, asset backed securities or Debt Securities, as the case may be, may
be equally applicable to a given Foreign Index Linked Instrument.
Foreign Index Linked Instruments present certain risks not applicable to
mortgage backed securities, asset based securities or Debt Securities. Such
Foreign Index Linked Instruments may offer higher yields than comparable
securities linked to purely domestic indices but also may be more volatile.
Foreign Index Linked Instruments are relatively recent innovations for which the
market has not yet been fully developed and, accordingly, they typically are
less liquid than comparable securities linked to purely domestic indices. In
addition, the value of Foreign Index Linked Instruments will be affected by
fluctuations in foreign exchange rates or foreign interest rates. If the
Adviser is incorrect in its prediction as to movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
a Fund on a Foreign Index Linked Instrument may be lower than if the Fund had
invested in a similarly rated domestic security. Foreign currency gains and
losses with respect to Foreign Index Linked Instruments may affect the amount
and timing of income recognized by the Funds.
Futures Transactions. As their Prospectus provides, each of the Non-Money
Market Funds may engage in transactions in futures contracts and options on
futures contracts in an effort to hedge against market risks and/or manage cash
flow into a Non-Money Market Fund. A futures contract is a bilateral agreement
providing for the purchase and sale of a specified type and amount of a
financial instrument, or, in the case of futures contracts on indexes of
securities, for the making and acceptance of a cash settlement, at a stated time
in the future for a fixed price. By its terms, a futures contract provides for
a specified settlement date on which, in the case of the majority of interest
rate futures contracts, the fixed income securities underlying a contract are
delivered by the seller and paid for by the purchaser, or on which, in the case
of a stock index futures contract, an amount equal to a dollar amount multiplied
by the difference between the value of a stock index at the close of the last
trading day of the contract and the value of such index at the time the futures
contract was originally entered into is settled between the purchaser and seller
in cash. The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no purchase price is paid or received at the time
the contract is entered into. Instead, an amount of cash or cash equivalents,
the value of which may vary but is generally equal to 2% or less of the value of
the contract, must be deposited with the broker as initial deposit or "margin."
Subsequent payments to and from the broker, referred to as "variation margin,"
are made on a daily basis as the value of the index underlying the futures
contract fluctuates, making positions in the futures contract more or less
valuable, a process known as "marking to the market."
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Futures contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures contracts call for settlement only on the expiration
date, and cannot be "exercised" at any other time during their term. At any
time prior to the expiration of a futures contract, however, a Fund may elect to
close out the Fund's position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is made and
any loss experienced by the Fund is required to be paid to the exchange clearing
corporation, while any profit due to the Fund must be delivered to it. Futures
contracts may be closed out only on the exchange or board of trade where the
contracts were initially traded.
The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in the market and interest
rates, which in turn are affected by fiscal and monetary policies and national
and international political and economic events.
A purchase or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract (i.e., margin payments). However,
the Fund would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after the decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient assets to satisfy
its obligations under a futures contract, the Fund earmarks to the futures
contract money market instruments equal in value to the current value of the
underlying instrument less the margin deposit.
Options on Futures Contracts. The Non-Money Market Funds may engage in
transactions in options on futures contracts in an effort to hedge against
market risks and/or manage cash flow into the Non-Money Market Funds. An option
on a futures contract gives the purchaser (the "holder") the right, but not the
obligation, to enter into a "long" position in the underlying futures contract
(i.e., a purchase of such futures contract) in the case of an option to purchase
(a "call" option), or a "short" position in the underlying futures contract
(i.e., a sale of such futures contract) in the case of an option to sell (a
"put" option), at a fixed price (the "strike price") up to a stated expiration
date. The holder pays a non-refundable purchase price for the option, known as
the "premium." The maximum amount of risk the purchaser of the option assumes
is equal to the premium plus related transaction costs, although this entire
amount may be lost. Upon exercise of the option by the holder, the exchange
clearing corporation establishes a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of futures contracts, such
as payment of variation margin deposits. In addition, the writer of an option
on a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
An option, whether based on a futures contract, a stock index or an equity
security, becomes worthless to the holder when it expires. A position in an
option may be terminated by the purchaser or seller prior to expiration by
effecting a closing purchase or sale transaction subject to the availability of
a secondary market, which is the purchase or sale of an option of the same
series (i.e., the same exercise price and expiration date) as the option
previously purchased
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or sold. The difference between the premiums paid and received represents the
party's profit or loss on the transaction.
Income earned from transactions in futures contracts and options thereon
would be treated in part as a short-term, and in part as a long-term, capital
gain and, if not offset by net realized capital losses, generally would be
subject to federal income taxes.
Limitations on Purchase and Sale of Futures Contracts and Options on
Futures Contracts. In general, the Non-Money Market Funds will engage in
transactions in futures contracts and related options only for bona fide hedging
and other appropriate risk management purposes, and not for speculation. In
addition, with respect to positions in futures and related options that do not
constitute bona fide hedging positions, a Non-Money Market Fund will not enter
into a futures contract or futures option contract if, immediately thereafter,
the aggregate initial margin deposits relating to such positions plus premiums
paid by it for open futures option positions, less the amount by which any such
options are "in-the-money," would exceed 5% of the Fund's total assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-
money" if the exercise price exceeds the value of the futures contract that is
the subject of the option.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures or futures options.
See "Distributions and Taxes."
Risks Associated With Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund's securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. Investments in futures contracts on fixed income
securities and related indexes involve the risk that if the adviser's investment
judgment concerning the general direction of interest rates is incorrect, a
Fund's overall performance may be poorer than if it had not entered into any
such contract. Accordingly, a decision as to 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 interest
rate trends.
Successful use of futures contracts and related options by the Non-Money
Market Funds for hedging purposes is also subject to the ability of the Funds'
adviser and/or sub-adviser to predict correctly movements in the direction of
the market. It is possible that, when a Fund has sold futures to hedge its
portfolio against a decline in the market, the index, indices, or instruments,
underlying futures might advance and the value of the underlying instruments
held
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in the Fund's portfolio might decline. It is also possible that if a Fund were
to hedge against the possibility of a decline in the market (adversely affecting
the underlying instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value of those
underlying instruments that it hedged, because it would have offsetting losses
in its futures positions.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
While a Fund will establish a futures or futures option position only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by a Fund, which could require such Fund to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. In addition, certain of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.
High Yield, High Risk Securities. The Short-Term Bond Fund and the Bond
Fund may each invest up to 5% of their respective net assets in securities that
are rated below investment grade by an NRSRO (e.g., lower than Baa by Moody's
Investor Service, Inc. or lower than BBB by Standard and Poor's Corporation)
(or, if not rated, of comparable quality), provided that any such securities
also are rated investment grade by at least one other NRSRO. Securities rated
below investment grade by an NRSRO are sometimes referred to as "high yield" or
"junk" bonds. Investors should consider the following risks associated with high
yield securities before investing in these Funds.
Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated securities. High yield
securities may be regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis
of the creditworthiness of issuers of high yield securities may be more complex
than for issuers of high quality debt securities, and the ability of a Fund to
achieve its investment objective may, to the extent of its investments in high
yield securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher quality securities.
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High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield
securities defaults, a Fund may incur additional expenses to seek recovery. In
the case of high yield securities structured as zero coupon or payment-in-kind
securities, the market prices of such securities are affected to a greater
extent by interest rate changes, and therefore tend to be more volatile than
securities which pay interest periodically in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of a Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
The Adviser does not rely solely on credit ratings when selecting securities for
a Fund, and develops its own independent analysis of issuer credit quality. If
a credit rating agency changes the rating of a portfolio security held by a
Fund, the Fund may retain the portfolio security if the Adviser deems it to be
in the best interest of shareholders.
Illiquid Investments are investments that may not be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Under the supervision of the Board of Directors, the
Adviser determines the liquidity of each Fund's investments and, through reports
from the Adviser, the Board monitors investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Investments considered by the Money Market Funds
to be illiquid may include repurchase agreements not entitling the holder to
payment of principal and interest within seven days, and restricted securities
and time deposits determined by the Adviser to be illiquid. Investments
currently considered by the Short-Term Bond Fund, the Municipal Bond Fund, the
California Tax-Free Fund, the Bond Fund and the Growth Fund to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days, and restricted securities and time deposits
determined by the Adviser to be illiquid. Investments currently considered by
U.S. Government Income Fund to be illiquid include over-
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the-counter options. Investments that may be considered by the Growth & Income
Fund to be illiquid include repurchase agreements not entitling the holder to
payment of principal and interest within seven days, loans and other direct debt
instruments, over-the-counter options, non-government stripped fixed-rate
mortgage-backed securities, restricted securities, government-stripped fixed-
rate mortgage-backed securities, and swap agreements determined by the Adviser
to be illiquid. However, with respect to over-the-counter options that the
Growth & Income Fund writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option and
nature and terms of any agreement the Fund may have to close out the option
before expiration.
If through a change in values, net assets or other circumstances, a Money
Market Fund were in a position where more than 10% of its net assets were
invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity. Similarly, if through a change in values, net assets or
other circumstances, a Non-Money Market Fund were in a position where more than
15% of its total assets were invested in illiquid securities, it would seek to
take appropriate steps to protect liquidity. However, there can be no assurance
that any steps taken will be successful. Accordingly, the level of illiquidity
of a Fund holding such securities may increase during any such period.
Options. The Non-Money Market Funds may purchase put and call options in
an amount not exceeding 5% of a Fund's total assets. The Funds may also write
(i.e., sell) covered put and call options in an amount not exceeding 5% of a
- -----
Fund's total assets. Such options may relate to particular securities or to
various stock or bond indexes. Purchasing options is a specialized investment
technique that entails a substantial risk of a complete loss of the amount paid
as premiums to the writer of the option.
Call options written by a Fund give the holder the right to buy the
underlying securities from the Fund at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Put options
written by a Fund give the holder the right to sell the underlying securities to
the Fund during the term of the option at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Call options
are "covered" by a Fund, for example, when it owns the underlying securities,
and put options are "covered" by a Fund, for example, when it has established a
segregated account of cash, cash equivalents or securities which can be
liquidated promptly to satisfy any obligation of a Fund to purchase the
underlying securities. A Fund also may write combinations of puts and calls on
the same underlying security.
A Fund will receive a premium from writing a put or call option, which
increases the gross income of a Fund in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, a Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, a
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current
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market value, resulting in a potential capital loss unless the security
subsequently appreciates in value.
A Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which the Fund purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to time
for a Fund to close out its written option positions.
A Fund also may purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of their portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option and, unless the
price of the underlying security changes sufficiently, the option may expire
without value.
A Fund may write and purchase options on securities both for hedging
purposes and for speculative purposes, in an effort to increase current income.
Options on securities that are written or purchased by a Fund will be traded on
U.S. and foreign exchanges and over-the-counter.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed 15% of a
Fund's net assets. The Adviser intends to limit a Fund's writing of over-the-
counter options in accordance with the following procedure. Each Fund intends
to write over-the-counter options only with primary U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York. Also, the contracts
that a Fund has in place with such primary dealers will provide that the Fund
has the absolute right to repurchase an option it writes at any time at a price
which represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific formula
may vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by a Fund for writing
the option, plus the amount, if any, of the option's intrinsic value (i.e., the
amount that the option is in-the-money). The formula also may include a factor
to account for the difference between the price of the security and the strike
price of the option, if the option is written out-of-the-money. A Fund will
treat all or a part of the formula price as illiquid for purposes of the 15%
test imposed by the SEC staff.
Risks Associated with Options Transactions. The purchase and writing
of options involves certain risks. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying securities above the exercise
price, but, as long as its obligation as a writer continues, has retained the
risk of loss should the price of the underlying security decline. The writer of
an option has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. If a put or call option purchased by a Fund
is not sold when it has
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remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, the Fund will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when a Fund seeks to close out an option position. Furthermore, if
trading restrictions or suspensions are imposed on the options markets, a Fund
may be unable to close out a position.
Repurchase Agreements. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed-upon price on an agreed-upon date. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed-upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed-upon resale price and marked to market daily) of the underlying
security. Each Fund may engage in repurchase agreements with respect to any
security in which it is authorized to invest. While it does not presently
appear possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to the Funds in connection with bankruptcy
proceedings), it is the policy of each Fund to limit repurchase agreements to
those parties whose creditworthiness has been reviewed and found satisfactory by
the Adviser.
Restricted Securities. Each Fund may purchase restricted securities that
generally can be sold in privately negotiated transactions, pursuant to an
exemption from registration under the Securities Act of 1933, or in a registered
public offering. Where registration is required, a Fund may be obligated to pay
all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time a Fund may be
permitted to sell a security under an effective registration statement. If
during such a period, adverse market conditions were to develop, a Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security. The Growth Fund and the Short-Term Bond Fund may
each invest up to 5% of its net assets in restricted securities.
Variable or Floating-Rate Instruments. Each Money Market Fund may invest
in variable or floating-rate instruments that ultimately mature in more than 397
days, if a Fund acquires a right to sell the securities that meets certain
requirements set forth in Rule 2a-7 under the 1940 Act. Variable-rate
instruments (including instruments subject to a demand feature) that mature in
397 days or less may be deemed to have maturities equal to the period remaining
until the next readjustment of the interest rate. Other variable-rate
instruments with demand features may be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand. A floating-rate instrument subject to a demand feature may be deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand.
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Additional Securities and Investment Practices of Specific Funds
----------------------------------------------------------------
Securities Lending. The Short-Term Bond Fund, the Bond Fund, the Growth &
Income Fund and the Growth Fund may lend securities to parties such as broker-
dealers or institutional investors.
Securities lending allows a Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Adviser to be of good standing. Furthermore, they
will only be made if, in the Adviser's judgment, the consideration to be earned
from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC staff that a
Fund may engage in loan transactions only under the following conditions: (1)
the Fund must receive a 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills or notes) from the borrower; (2) the borrower must
increase the collateral whenever the market value of the securities loaned
(determined on a daily basis) rises above the value of the collateral; (3) after
giving notice, the Fund must be able to terminate the loan at any time; (4) the
Fund must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5)
the Fund may pay only reasonable custodian fees in connection with the loan; and
(6) the Board of Directors must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an alternate
arrangement with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
Loans and Other Direct Debt Instruments. The Short-Term Bond Fund, the
Municipal Bond Fund, the California Tax-Free Fund, the Bond Fund and the Growth
& Income Fund may invest in loans and other direct debt instruments. Direct
debt instruments are interests in amounts owed by a corporate, governmental, or
other borrower to lenders or lending syndicates (loans and loan participation)
to suppliers of goods or services (trade claims or other receivables), to other
parties. Direct debt instruments are subject to the Funds' policies regarding
the quality of debt securities.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If a Fund does not receive scheduled interest or principal payments on
such indebtedness, the Fund's share price and yield could be adversely affected.
Loans that are fully secured offer the Fund more protection than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligations, or that the collateral can be
liquidated.
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Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Funds. For
example, if a loan is foreclosed, a Fund would become part owner of any
collateral, and would bear the costs of liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a Fund could be held liable as a co-lender.
Direct debt instruments may also involve a risk of insolvency of the lending
bank or other intermediary. Direct debt instruments that are not in the form of
securities may offer less legal protection to a Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance, the Funds
rely on the Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Funds.
A loan is often administered by a bank or other financial institution which
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of a Fund were determined to be subject
to the claims of the agent's general creditors, the Fund might incur certain
costs and delays in realizing payment on the loan or loan participation and
could suffer a loss of principal or interest.
Direct indebtedness purchased by the Funds may include letters of credit,
revolving credit facilities, or other standby financing commitments obligating a
Fund to pay additional cash on demand. These commitments may have the effect of
requiring a Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. The Funds will set aside appropriate liquid
assets in a segregated custodial account to cover their potential obligations
under standby financing commitments.
Each Fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations for each Fund).
For purposes of these limitations, each Fund generally will treat the borrower
as the "issuer" of indebtedness held by the Fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between a Fund and the borrower, if the participation does not
shift to the Fund the direct debtor-creditor relationship with the borrower, SEC
interpretations require the Fund, in appropriate circumstances, to treat both
the lending bank or other lending institution and the borrower as "issuers" for
the purposes of determining compliance with applicable diversification
requirements. Treating a financial intermediary as an issuer of indebtedness
may restrict a Fund's ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries.
Foreign Securities. The Short-Term Bond Fund, the U.S. Government Income
Fund, the Bond Fund, the Growth & Income Fund and the Growth Fund, may invest in
dollar-denominated foreign securities which are securities of foreign
governmental and private issuers that are denominated in and pay interest in
U.S. dollars. The Short-Term Bond Fund, the Bond Fund, the Growth Fund, the
U.S. Government Income Fund and the Growth & Income Fund may invest in
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American Depositary Receipts ("ADRs"), among other securities. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Designed for use in U.S. securities markets, ADRs
are an alternative to the purchase of the underlying securities in their
national markets and currencies. Most ADRs are traded on U.S. stock exchanges.
Purchases of ADRs by the Funds will be limited to sponsored ADRs. The U.S.
Government Income Fund, the Bond Fund and the Growth & Income Fund may invest in
foreign securities that impose restrictions on transfer within the U.S. or to
U.S. persons. Although securities subject to transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions.
Certain Risks Associated with Foreign Investments. Foreign investments can
involve significant risks in addition to the risks inherent in U.S. investments.
There may be less publicly available information about a foreign issuer than
about a domestic issuer. The value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those applicable to U.S. companies, and it may be more
difficult to obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial costs, are
generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may become substantial delays. It may also be difficult to enforce legal rights
in foreign countries, such as obtaining and enforcing a judgment against a
foreign issuer.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Taxes may be withheld at the source under foreign income tax laws. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments. Any
such development could have a material adverse effect on a Fund's investments
in, or the liquidity of, securities of issuers located in such countries. There
is no assurance that the Adviser will be able to anticipate these potential
events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
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Municipal Securities. The Municipal Bond Fund and the California Tax-Free
Fund may invest in certain Municipal Securities. The two principal
classifications of municipal securities are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Industrial Development Revenue bonds held
by a Fund are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of
Industrial Development Revenue bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable or floating or inverse floating
rate instruments issued by industrial development authorities and other
governmental entities. While there may not be an active secondary market with
respect to a particular instrument purchased by a Fund, a Fund may demand
payment of the principal and accrued interest on the instrument or may resell it
to a third party as specified in the instruments. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
the Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss.
Some of these instruments may be unrated, but unrated instruments purchased
by a Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "investment grade" by any major rating
service.
Municipal securities may include participations in privately arranged loans
to municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by the
Adviser to be of comparable quality at the time of purchase to rated instruments
that may be acquired by a Fund. Frequently, privately arranged loans have
variable interest rates and may be backed by a bank letter of credit. In other
cases, they may be unsecured or may be secured by assets not easily liquidated.
Moreover, such loans in most cases are not backed by the taxing authority of the
issuers and may have limited marketability or may be marketable only by virtue
of a provision requiring repayment following demand by the lender. Such loans
made by a Fund may have a demand provision permitting the Fund to require
payment within seven days. Participations in such loans, however, may not have
such a demand provision and may not be otherwise marketable. To the extent
these securities are illiquid, they will be subject to each Fund's limitation on
investments in illiquid securities. Recovery of an investment in any such loan
that is illiquid and payable on demand may depend
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on the ability of the municipal borrower to meet an obligation for full
repayment of principal and payment of accrued interest within the demand period,
normally seven days or less (unless a Fund determines that a particular loan
issue, unlike most such loans, has a readily available market). As it deems
appropriate, the Adviser will establish procedures to monitor the credit
standing of each such municipal borrower, including its ability to meet
contractual payment obligations.
Municipal securities may include units of participation in trusts holding
pools of tax-exempt leases. Municipal participation interests may be purchased
from financial institutions, and give the purchaser an undivided interest in one
or more underlying municipal securities. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to each Fund's limitation on the purchase of illiquid
securities. Municipal leases and participating interests therein which may take
the form of a lease or an installment sales contract, are issued by state and
local governments and authorities in order to acquire a wide variety of
equipment and facilities. Interest payments on qualifying leases are exempt
from Federal income taxes.
In addition, these Funds may acquire "stand-by commitments" from banks or
broker/dealers with respect to municipal securities held in their portfolios.
Under a stand-by commitment, a dealer would agree to purchase at a Fund's option
specified Municipal Securities at a specified price. A Fund will acquire stand-
by commitments solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes.
Municipal Bonds. The California Tax-Free Fund and the Municipal Bond Fund
may invest in municipal bonds, a type of municipal security. Municipal bonds
are debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as bridges,
highways, housing, hospitals, mass transportation, schools, streets, and water
and sewer works. Other purposes for which municipal bonds may be issued include
the refunding of outstanding obligations and obtaining funds for general
operating expenses or to loan to other public institutions and facilities.
Industrial development bonds are a specific type of revenue bond backed by the
credit and security of a private user. Certain types of industrial development
bonds are issued by or on behalf of public authorities to obtain funds to
provide privately-operated housing facilities, sports facilities, convention or
trade show facilities, an airport, mass transit, port or parking facilities, air
or water pollution control facilities and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal. Assessment bonds,
wherein a specially created district or project area levies a tax (generally on
its taxable property) to pay for an improvement or project may be considered a
variant of either category. There are, of course, other variations in the types
of municipal bonds, both within a particular classification and between
classifications, depending on numerous factors.
Municipal Notes. The California Tax-Free Fund and the Municipal Bond Fund
may invest in municipal notes. Municipal notes include, but are not limited to,
tax anticipation notes ("TANs"), bond anticipation notes ("BANs"), revenue
anticipation notes ("RAN") and construction loan notes. Notes sold as interim
financing in anticipation of collection of taxes, a bond sale or receipt of
other revenues are usually general obligations of the issuer.
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TANs. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such things as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations on its
BANs is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values will also change in
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
outstanding securities, including those held in the Fund's portfolio, will
decline and (if purchased at par value) they would sell at a discount. If
interests rates fall, the values of outstanding securities will generally
increase and (if purchased at par value) they would sell at a premium. Changes
in the value of municipal securities held in the Fund's portfolio arising from
these or other factors will cause changes in the net asset value ("NAV") per
share of the Fund.
The California Tax-Free Fund and the Municipal Bond Fund may also invest in
municipal commercial paper.
Municipal Lease Obligations and Certificates Of Participation. The
Municipal Bond Fund and the California Tax-Free Fund may invest a portion of
their assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sales contract, are issued by state and local governments and
authorities in order to acquire land and a wide variety of equipment and
facilities. Generally, the Funds will not hold such obligations directly as a
lessor of the property, but will purchase a participation interest in a
municipal obligation from a bank or other third party. A participation interest
gives the Funds a specified, undivided interest in the obligation in proportion
to its purchased interest in the total amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or
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public sale requirements. Leases, installment purchases or conditional sales
contracts (which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting their constitutional and statutory
requirements for the issuance of debt. Many leases and contracts include "non-
appropriation clauses" providing that the governmental issuer has no obligation
to make future payments under the lease or contract unless money is appropriated
for such purpose by the appropriate legislative body on a yearly or other
periodic basis. Non-appropriation clauses free the issuer from debt issuance
limitations.
Derivative Municipal Obligations. The Municipal Bond Fund and the
California Tax-Free Fund may also invest in more recently developed municipal
financing instruments, including custodial receipts or certificates evidencing
ownership of future interest payments, principal payments or both on underlying
municipal securities and municipal securities that contain embedded interest
rate derivative products. These types of obligations are referred to herein as
"Derivative Municipal Obligations." The Municipal Bond Fund and the California
Tax-Free Fund will not invest more than 20% of their respective total assets in
Derivative Municipal Obligations.
Derivative Municipal Obligations in which a Fund may invest include
municipal securities that contain embedded interest rate derivative products
such as interest rate swaps or caps ("Embedded Derivative Municipal
Obligations"). A discussion of interest rate derivative products is set forth
below. Embedded Derivative Municipal Obligations in essence consist of a fixed-
rate, long-term bond and a derivative contract, such as an interest rate cap
agreement. By combining these two types of securities, a municipal issuer is
able to issue a tax-exempt bond, typically with a long maturity, the coupon
payments on which vary according to a formula based on an interest rate index.
For example, in an Embedded Derivative Municipal Obligation containing an
interest rate cap, during the term of the embedded cap the investor receives the
coupon rate on the underlying long-term bond less the cost of the cap for so
long as interest rates remain below the level of the cap. When interest rates
rise above that level, the investor receives the long-term bond coupon less the
cost of the cap plus the amount by which an index specified in the cap agreement
exceeds the cap level. This type of instrument would allow a Fund to hedge
against a rise in short-term interest rates.
Embedded Derivative Municipal Obligations offer advantages over investing
separately in a traditional municipal security and an interest rate derivative
contract. In an Embedded Derivative Municipal Obligation, because the municipal
issuer is the issuer of the interest rate derivative contract, the entire amount
of interest payable on the obligation is expected to be tax-exempt. Any income
from an interest rate derivative contract purchased separately would be taxable
to a Fund. An Embedded Derivative Municipal Obligation purchased by a Fund
would be accompanied by a tax opinion stating that the entire amount of interest
payable on the obligation is tax-exempt. Because final regulations have not
been adopted by the U.S. Department of the Treasury with respect to these types
of hybrid obligations, however, it is possible that the Internal Revenue Service
might find a portion of the interest to be taxable. In addition, Embedded
Derivative Municipal Obligations may not be readily marketable. All bonds
underlying Embedded Derivative Municipal Obligations will be rated, at the time
of purchase, A
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or better by Standard & Poor's Corporation or Moody's Investors Services, Inc.,
or comparably rated by any other nationally recognized statistical rating
organization or, if unrated, of comparable quality as determined by the Adviser.
Derivative Municipal Obligations also include custodial receipts or
certificates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments or both on certain municipal
securities (such receipts or certificates are referred to herein as "Custodial
Receipts"). The underwriter of Custodial Receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a Custodial
Receipt a Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, it would be subject to state income tax (but not
federal income tax) on the income it earned on the underlying security, and the
yield on the security paid to the Fund and its shareholders would be reduced by
the amount of taxes paid. Furthermore, amounts paid by the trust or custodial
account to the Fund would lose their tax-exempt character and become taxable,
for federal and state purposes, in the hands of the Fund and its shareholders.
However, Custodial Receipts in which a Fund will invest will be accompanied by a
tax opinion stating that interest payable on the receipts is tax exempt. If a
Fund invests in Custodial Receipts, it is possible that a portion of the
discount at which the Fund purchases the receipts might have to be accrued as
taxable income during the period that a Fund holds the receipts.
With respect to certain types of Custodial Receipts, the interest on the
underlying municipal securities is divided into two or more different
components. Typically, one component (the "Auction Component") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index and is essentially a variable or floating-rate obligation. A
second component (the "Inverse Component") pays a residual interest rate based
on the difference between the total interest paid by the issuer on the municipal
securities and the rate paid on the Auction Component. Inverse Components may
also pay a rate of interest determined by subtracting a multiple of a variable
or floating rate from the total amount paid by the issuer of the municipal
securities. Because the interest rate paid to holders of Inverse Components is
generally determined by subtracting a variable or floating rate from a
predetermined amount, the interest rate paid to Inverse Component holders will
decrease as such variable or floating rate increases and increase as such
variable or floating rate decreases. Moreover, the extent of the increases and
decreases in the value of an Inverse Component in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit
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quality, redemption provisions and maturity. Investments in Inverse Components
may therefore increase the volatility of the NAV and market value of a Fund's
shares.
Some of these instruments may be unrated, but unrated instruments purchased
by a Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "investment grade" by any major rating
service.
Hedging and Additional Income Strategies. The Municipal Bond Fund and
California Tax-Free Fund may utilize various other investment strategies to
hedge against market risk, facilitate portfolio management and increase income.
These consist of interest rate swaps; caps and floors; futures; and put and call
transactions (collectively, "Hedging Transactions"). Hedging Transactions may
be used, for example, to attempt to protect against possible declines in the
market value of a Fund's portfolio resulting from downward trends in the debt
securities markets (generally due to a rise in interest rates), to protect a
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 a Fund's portfolio, to establish a position in the
securities markets as a temporary substitute for purchasing particular
securities or to increase income. In this regard, in order to decrease the
duration (a measure of price volatility in response to interest rate changes) of
a Fund's portfolio, rather than sell longer-term portfolio securities and
purchase shorter-term securities, the Fund might enter into futures contracts
for the sale of debt securities or enter into an interest rate swap where the
Fund receives floating-rate payments in exchange for making fixed-rate payments.
Any or all of these techniques may be used at any time. There is no particular
strategy that requires use of one technique rather than another. The use of any
Hedging Transaction is a function of market conditions. Certain Hedging
Transactions that a Fund may use are described under "Futures Transactions,"
"Options" and "Interest Rate Transactions." Further, Hedging Transactions may
be used by the Municipal Bond Fund and the California Tax-Free Fund in the
future as they are developed to the extent deemed appropriate by the Board of
Directors.
Interest Rate Transactions. The Short-Term Bond Fund, Municipal Bond Fund
and California Tax-Free Fund may enter into interest rate swaps and may purchase
and sell interest rate caps and floors. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. 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. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling such interest rate floor.
The Short-Term Bond Fund, Municipal Bond Fund and California Tax-Free Fund
may enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis,
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depending upon whether a Fund is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis, i.e., the two payment
streams are netted out, with a Fund receiving or paying, as the case may be,
only the net amount of the two payments. The net amount of the excess, if any,
of a Fund's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash or high-quality
liquid debt securities having an aggregate NAV at least equal to the accrued
excess will be maintained in a segregated account by a Fund's custodian. If a
Fund enters into an interest rate swap on other than a net basis, the Fund will
maintain a segregated account in the full amount accrued on a daily basis of the
Fund's obligations with respect to the swap. To the extent a Fund sells (i.e.,
writes) caps and floors, it will maintain in a segregated account cash or high-
quality liquid debt securities having an aggregate NAV at least equal to the
full amount, accrued on a daily basis, of the Fund's obligations with respect to
any caps or floors. A Fund will not enter into any interest rate swap, cap or
floor transaction unless the contra-party has either long-term unsecured debt
rated at least A- by Standard & Poor's Corporation or Moody's Investors
Services, Inc. or comparably rated by any nationally recognized statistical
rating organization. The Adviser will monitor the creditworthiness of contra-
parties on an ongoing basis. If there is a default by the other party to such a
transaction, a Fund will 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
principals and as agents utilizing standardized swap documentation. The Adviser
has determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized documentation
has not yet been developed and, accordingly, they are less liquid than
swaps.
Interest rate transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that a Fund is contractually obligated to make. If the other party to an
interest rate swap defaults, a Fund's risk of loss consists of the net amount of
interest payments that the Fund contractually is entitled to receive. Therefore,
there is no specific limit on the amount of interest rate swap transactions that
may be entered into by a Fund. The aggregate purchase price of caps and floors
held by a Fund may not exceed 5% of a Fund's assets. A Fund may sell (i.e.,
write) caps and floors without limitation, subject to the segregated account
requirement described above. However, because interest rate swaps and the
purchase and sale of interest rate caps and floors as currently constructed may
generate taxable income, the Municipal Bond Fund and California Tax-Free Fund do
not expect currently to engage in such transactions to any significant degree.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on Griffin Adviser's or the sub-adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other types of investments. Because they are two
party contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. Certain
restrictions imposed on the Funds by the Internal Revenue Code may limit the
Funds ability to use swap agreements. The swaps market is a relatively
new
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market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
a Fund's ability to terminate existing swap agreements or to realize amounts to
be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC.
To qualify for this exemption, a swap agreement must be entered into by
"eligible participants," which include the following, provided the participants'
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the Investment Company Act of 1940, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have total assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through
a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Letters of Credit. The Municipal Bond Fund may purchase debt obligations,
including municipal securities, certificates of participation, commercial paper
and other short-term obligations, backed by an irrevocable letter of credit of a
bank, savings and loan association or insurance company which assumes the
obligation for payment of principal and interest in the event of default by the
issuer. Only banks, savings and loan associations and insurance companies
which, in the opinion of the Adviser, are of investment quality comparable to
other permitted investments of such Fund may be used for letter of credit-
backed investments.
Certain Taxable Obligations. The California Tax-Free Fund may invest up to
20% of its total assets in fixed-income obligations whose interest is subject to
federal income tax or the federal alternative minimum tax. In addition, the
California Tax-Free Fund may invest a portion of its assets in obligations whose
interest is subject to California income tax. The California Tax-Free Fund will
purchase taxable obligations only if they meet its quality requirements as set
forth in its Prospectus.
45
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Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the California Tax-Free Fund's distributions.
If such proposals were enacted, the availability of municipal obligations and
the value of the California Tax-Free Fund's holdings would be affected and the
Directors would reevaluate the Fund's investment objective and policies.
The California Tax-Free Fund anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as a
result of maturities of portfolio securities, sales of fund shares, or in order
to meet redemption requests, the California Tax-Free Fund may hold cash that is
not earning income. In addition, there may be occasions when, in order to raise
cash to meet redemptions, the California Tax-Free Fund may be required to sell
securities at a loss.
Additional Securities and Investment Practices
----------------------------------------------
of the Tax-Free Money Market Fund Only
--------------------------------------
Federally Taxable Obligations. The Tax-Free Money Market Fund may invest
up to 20% of its total assets in fixed-income obligations whose interest is
subject to federal income tax or the federal alternative minimum tax. Taxable
obligations purchased by the Tax-Free Money Market Fund will meet the quality
requirements as set forth in its Prospectus.
Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the Tax-Free Money Market Fund's
distributions. If such proposals were enacted, the availability of municipal
obligations and the value of the Tax-Free Money Market Fund's holdings would be
affected and the Directors would reevaluate the fund's investment objective and
policies.
The Tax-Free Money Market Fund anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as a
result of maturities of portfolio securities, sales of fund shares, or in order
to meet redemption requests, the Tax-Free Money Market Fund may hold cash that
is not earning income. In addition, there may be occasions when, in order to
raise cash to meet redemptions, the Tax-Free Money Market Fund may be required
to sell securities at a loss.
Letters of Credit. The Tax-Free Money Market Fund may purchase debt
obligations, including municipal securities, certificates of participation,
commercial paper and other short-term obligations, backed by an irrevocable
letter of credit of a bank, savings and loan association or insurance company
which assumes the obligation for payment of principal and interest in the event
of default by the issuer. Only banks, savings and loan associations and
insurance companies which, in the opinion of the Adviser, are of investment
quality comparable to other permitted investments of the Fund may be used for
letter of credit-backed investments.
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Municipal Notes. The Tax-Free Money Market Fund may invest in municipal
notes. Municipal notes include, but are not limited to, tax anticipation notes
("TANs"), bond anticipation notes ("BANs"), revenue anticipation notes ("RANs")
and construction loan notes. Notes sold as interim financing in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.
TANs. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such things as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations on its
BANs is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
Municipal Securities. The two principal classifications of municipal
securities are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the Fund are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal securities may include variable or floating rate instruments
issued by industrial development authorities and other governmental entities.
While there may not be an active secondary market with respect to a particular
instrument purchased by the Fund, the Fund may demand payment of the principal
and accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could
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make it difficult for the Fund to dispose of the instrument if the issuer
defaulted on its payment obligation or during periods the Fund is not entitled
to exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss.
Some of these instruments may be unrated, but unrated instruments purchased
by the Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "high quality" by any major rating
service. Where necessary to ensure that an instrument is of comparable "high
quality," the Fund will require that an issuer's obligation to pay the principal
of the note may be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
Municipal securities may include participations in privately arranged loans
to municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by the
Adviser, under the supervision of the Board of Directors, to be of comparable
quality at the time of purchase to rated instruments that may be acquired by the
Fund. In determining whether an unrated municipal lease satisfies these quality
requirements, the Adviser will consider, among other factors, the likelihood
that the lease will be canceled. Frequently, privately arranged loans have
variable interest rates and may be backed by a bank letter of credit. In other
cases, they may be unsecured or may be secured by assets not easily liquidated.
Moreover, such loans in most cases are not backed by the taxing authority of the
issuers and may have limited marketability or may be marketable only by virtue
of a provision requiring repayment following demand by the lender. Such loans
made by the Fund may have a demand provision permitting the Fund to require
payment within seven days. Participations in such loans, however, may not have
such a demand provision and may not be otherwise marketable. To the extent
these securities are illiquid, they will be subject to the Fund's limitation on
investments in illiquid securities. Recovery of an investment in any such loan
that is illiquid and payable on demand may depend on the ability of the
municipal borrower to meet an obligation for full repayment of principal and
payment of accrued interest within the demand period, normally seven days or
less (unless the Fund determines that a particular loan issue, unlike most such
loans, has a readily available market). As it deems appropriate, the Adviser
will establish procedures to monitor the credit standing of each such municipal
borrower, including its ability to meet contractual payment obligations.
Municipal securities may include units of participation in trusts holding
pools of tax-exempt leases. Municipal participation interests may be purchased
from financial institutions, and give the purchaser an undivided interest in one
or more underlying municipal security. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to the Fund's limitation on the purchase of illiquid
securities. Municipal leases and participation interests therein which may take
the form of a lease or an installment sales contract, are issued by state and
local governments and authorities to acquire a wide variety of equipment and
facilities. Interest payments on qualifying leases are exempt from Federal
income taxes.
In addition, the Fund may acquire "stand-by commitments" from banks or
broker/dealers with respect to municipal securities held in its portfolio. Under
a stand-by commitment, a dealer
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would agree to purchase at the Fund's option specified Municipal Securities at a
specified price. The Funds will acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes.
Standby Commitments. The Tax-Free Money Market Fund may invest in Standby
Commitments which are puts that entitle holders to same day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. The Tax-Free Money Market
Fund may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments are deemed to present
minimal risk of default.
Ordinarily the Tax-Free Money Market Fund may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. The Tax-Free Money Market Fund may
purchase standby commitments separate from or in conjunction with the purchase
of securities subject to such commitments. In the latter case, the Tax-Free
Money Market Fund would pay a higher price for the securities acquired, thus
reducing their yield to maturity. Standby commitments will not affect the
dollar-weighted average maturity of the Tax-Free Money Market Fund, or the
valuation of the securities underlying the commitments.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the Tax-
Free Money Market Fund; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.
Variable or Floating Rate Demand Obligations (VRDOs/FRDOs). The Tax-Free
Money Market Fund may invest in VRDOs/FRDOs which are tax-exempt obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating rate securities
have interest rates that change whenever there is a change in a designated base
rate while variable rate instruments provide for a specified periodic adjustment
in the interest rate. These formulas are designed to result in a market value
for the VRDO or FRDO that approximates its par value.
A demand instrument with a conditional demand feature must have received
both a short-term and a long-term high quality rating or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Board of Directors. A demand instrument with an unconditional demand feature
may be acquired solely in reliance upon a short- term high quality rating or, if
unrated, upon a finding of comparable short-term quality pursuant to procedures
adopted by the Board of Directors.
The Tax-Free Money Market Fund may invest in fixed-rate bonds subject to
third party puts and in participation interests in such bonds held by a bank in
trust or otherwise. These bonds and participation interests have tender options
or demand features that permit the Tax-Free
49
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Money Market Fund to tender (or put) its bonds to an institution at periodic
intervals and to receive the principal amount thereof. The Tax-Free Money Market
Fund considers variable rate instruments structured in this way (Participating
VRDOs) to be essentially equivalent to other VRDOs that it purchases. The
Internal Revenue Service has not ruled whether the interest on Participating
VRDOs is tax-exempt, and, accordingly the Tax-Free Money Market Fund intends to
purchase these instruments based on opinions of bond counsel.
A variable rate instrument that matures in 397 days or less may be deemed
to have a maturity equal to the period remaining until the next readjustment of
the interest rate. A variable rate instrument that matures in greater than 397
days but that is subject to a demand feature that is 397 days or less may be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand. A floating rate instrument
that is subject to a demand feature may be deemed to have a maturity equal to
the period remaining until the principal amount may be recovered through demand.
The Tax-Free Money Market Fund may purchase a demand instrument with a remaining
final maturity in excess of 397 days only if the demand feature can be exercised
on no more than 30 days' notice (a) at any time or (b) at specific intervals not
exceeding 397 days.
Additional Securities and Investment Practices of the Bond Fund Only
--------------------------------------------------------------------
Commodity-Linked Bonds. As a hedging strategy, the Bond Fund may invest in
commodity-indexed bonds involving gold, silver, other precious metals, oil, coal
and other commodities meeting certain internationally recognized specifications.
Commodity-indexed bonds, unlike futures contracts, can be of medium or long
duration and are usually interest bearing. Settlement prices can reflect
average, median or peak commodity prices over a reasonable period preceding
redemption, unlike futures contracts, which are settled on the basis of the
price prevailing at closeout. Commodity-indexed bonds are primarily issued by
corporations (for example, an oil or pipeline company might issue oil-indexed
bonds to hedge their exposure to oil price fluctuations) and investment banking
firms. These securities are typically privately placed, but some are publicly
offered and traded on the stock exchanges. Purchases of commodity-linked bonds
will be limited to less than 5% of Fund assets.
Corporate Bonds And Notes include debt securities issued by domestic
corporations, U.S. dollar-denominated debt securities issued by foreign
corporations, Yankee bonds and supranational obligations. Yankee bonds are U.S.
dollar-denominated obligations issued by foreign governments or companies.
Supranational obligations are U.S. dollar-denominated obligations issued by
international entities such as The World Bank and the Inter-American Development
Bank.
Additional Securities and Investment Practices
-----------------------------------------------
of the Growth & Income Fund Only
--------------------------------
Common Stocks. The Fund's investments in common stocks will be diversified
among industries and companies. Emphasis will be placed on common stocks which
are trading at low
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<PAGE>
valuation levels relative to their fundamentals such as price to current
earnings either relative to the market or to the security's historic price-to-
earnings relationship, in common stocks which are trading at low prices in
relation to their prospects for long term growth in dividends and earnings, and
in common stocks of issuers that have historically paid above-average or growing
dividends.
Under normal market conditions, at least 90% of the Fund's equity
securities, including, for this purpose, the convertible securities described
below, will be issued by large companies (i.e., companies with a market
capitalization of more than $1 billion). Some investments (not to exceed 10% of
the Fund's equity securities) also may be made in equity securities of medium
and smaller sized companies (i.e., those companies with at least $250 million
but less than $1 billion in capitalization) which may have the potential to
generate high levels of future revenue and earnings growth and where the
investment opportunity may not be fully reflected in the price of the securities
but which may involve greater risks than investments in larger companies. There
may be some additional risks associated with investments in smaller companies
because their shares tend to be less liquid than securities of larger companies.
Further, shares of small companies are generally more sensitive to purchase and
sale transactions and changes in the issuer's financial condition and,
therefore, the prices of such stocks may be more volatile than those of larger
company stocks.
Convertible Securities. The Fund will seek to invest in convertible
securities that provide current income and are issued by companies that have a
strong earnings and credit record. The Fund may purchase convertible securities
that are fixed-income debt securities or preferred stocks, and which may be
converted at a stated price within a specified period of time into a certain
quantity of the common stock of the same issuer. Convertible securities, while
usually are subordinate to similar non-convertible securities, are senior to
common stocks in an issuer's capital structure. Convertible securities offer
flexibility by providing the investor with a steady income stream (generally
yielding a lower amount than similar non-convertible securities and a higher
amount than common stocks) as well as the opportunity to take advantage of
increases in the price of the issuer's common stock through the conversion
feature. Fluctuations in the convertible security's price can reflect changes
in the market value of the common stock or changes in market interest rates.
Special Factors Affecting the California Tax-Free Fund
------------------------------------------------------
Certain California constitutional amendments, legislative measures,
executive orders, civil actions and voter initiatives, as well as the general
financial condition of the state, could adversely affect the ability of issuers
of California municipal obligations to pay interest and principal on such
obligations. The following information constitutes only a brief summary, does
not purport to be a complete description, and is based on information drawn from
official statements relating to securities offerings of the State of California
and various local agencies, available as of the date of this Statement of
Additional Information. While Griffin Advisors has not independently verified
such information, it has no reason to believe that such information is incorrect
in any material respect.
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<PAGE>
The California Economy and General Information. From mid-1990 to late
1993, the state suffered a recession with the worst economic, fiscal and budget
conditions since the 1930s. Construction, manufacturing (particularly related to
defense), exports and financial services, among others, were all severely
affected. Job losses had been the worst of any post-war recession.
Unemployment reached 10.1% in January 1994, but fell sharply to 7.7% in October
and November 1994, reflecting the state's recovery from the recession.
The recession seriously affected California tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. In addition, the state has been facing a structural
imbalance in its budget with the largest programs supported by the General Fund
(e.g., K-12 schools and community colleges--also known as "K-14 schools," health
and welfare, and corrections) growing at rates higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the state
experienced recurring budget deficits in the late 1980s and early 1990s. The
state's Controller reported that expenditures exceeded revenues for four of the
five fiscal years ending with 1991-92. Moreover, California accumulated and
sustained a budget deficit in its Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993.
The accumulated budget deficits during the early 1990's, together with
expenditures for school funding which are not reflected in the state's budget,
and reduction of available internal borrowable funds, 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 1995-96 fiscal year, California issued $2 billion of revenue
anticipation warrants which matured on June 28, 1996. Because of the state's
deteriorating budget and cash situation, the rating agencies reduced the state's
credit ratings between October 1991 and July 1994. Moody's Investors Service
lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered
its rating from "AAA" to "A" and termed its outlook as "stable," and Fitch
Investors Service lowered its rating from "AA" to "A."
However, since the start of 1994, California's economy has been recovering
steadily. Employment grew in excess of 500,000 during 1994 and 1995, and is
expected to continue to grow in 1996. Because of the improving economy and
California's fiscal austerity, the state has had operating surpluses for its
past four consecutive fiscal years through 1995-96 and has forecast a balanced
1996-97 fiscal year budget. In addition, the SFEU was projected to have a small
negative balance of approximately $70 million as of June 30, 1996, all but
eliminating the accumulated budget deficit of the early 1990's, and a modest
reserve of $305 million, as of June 30, 1997. For these and other reasons,
Standard & Poors upgraded its rating of California municipal obligations back to
"A+" on July 15, 1996.
Local Governments. On December 6, 1994, Orange County, California became
the largest municipality in the United States to file for protection under the
Federal Bankruptcy laws. The filing stemmed from approximately $1.7 billion in
losses suffered by the county's investment pool because of investments in high
risk "derivative" securities. In September 1995,
52
<PAGE>
California's legislature approved legislation permitting the county to use for
bankruptcy recovery $820 million over 20 years in sales taxes previously
earmarked for highways, transit, and development. In June 1996, the county
completed an $880 million bond offering secured by real property owned by the
county. In June 1996, the county emerged from bankruptcy.
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles County, California causing significant
damage to public and private structures and facilities. While county residents
and businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the county's and California's economy is not
expected to be serious. However, Los Angeles County is experiencing financial
difficulty due in part to the severe operating deficits for the county's health
care system. In August 1995, the credit rating of the county's long term bonds
was downgraded for the third time since 1992. Although the county has received
federal and state assistance, it is still facing a potential budget gap of
approximately $1 billion in the 1996-97 fiscal year. Even though the state has
no existing obligations with respect to either Orange County or Los Angeles
County, the state may be required to intervene and provide funding if the
counties cannot maintain certain programs because of insufficient resources.
State Finances. The moneys of California are segregated into the General
Fund and approximately 600 Special Funds. The General Fund consists of the
revenues received by the state's Treasury and not required by law to be
credited to any other fund, as well as earnings from state moneys not allocable
to another fund. The General Fund is the principal operating fund for the
majority of governmental activities and is the depository of most major revenue
sources of the state. The General Fund may be expended as the result of
appropriation measures by California's Legislature and approved by the Governor,
as well as appropriations pursuant to various constitutional authorizations and
initiative statutes.
The SFEU is funded with General Fund revenues and was established to
protect California from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the state's
Controller to meet cash needs of the General Fund. The Controller is required
to return moneys so transferred without payment of interest as soon as there are
sufficient moneys in the General Fund. Any appropriation made from the SFEU is
deemed an appropriation from the General Fund, for budgeting and accounting
purposes. For year-end reporting purposes, the Controller is required to add
the balance in the SFEU to the balance in the General Fund so as to show the
total moneys then available for General Fund purposes.
Inter-fund borrowing has been used for several years to meet temporary
imbalances of receipts and disbursements in the General Fund. As of June 30,
1996, the General Fund had outstanding loans from the SFEU and other Special
Funds of approximately $1.5 billion.
Changes in California Constitutional and Other Laws. In 1978, California
voters approved an amendment to the California Constitution known as
"Proposition 13," which added Article XIIIA to the California Constitution.
Article XIIIA limits ad valorem taxes on real property and restricts the ability
of taxing authorities to increase real property taxes. However,
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<PAGE>
legislation passed subsequent to Proposition 13 provided for the redistribution
of California's General Fund surplus to local agencies, the reallocation of
revenues to local agencies and the assumption of certain local obligations by
the state so as to assist California municipal issuers to raise revenue to pay
their bond obligations. It is unknown whether additional revenue redistribution
legislation will be enacted in the future and whether, if enacted, such
legislation will provide sufficient revenue for such California issuers to pay
their obligations. California is also subject to another Constitutional
Amendment, Article XIIIB, which may have an adverse impact on California state
and municipal issuers. Article XIIIB restricts the state from spending certain
appropriations in excess of an appropriation's limit imposed for each state and
local government entity. If revenues exceed such appropriation's limit, such
revenues must be returned either as revisions in the tax rates or fee schedules.
In 1988, California voters approved "Proposition 98," which amended Article
XIIIB and Article XVI of the state's Constitution. Proposition 98 (as modified
by "Proposition 111," which was enacted in 1990), changed state funding of
public education below the university level and the operation of the state's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues. In 1986, California voters approved "Proposition 62,"
which provided in part that any tax for general governmental purposes imposed by
a local government be approved by a two-thirds vote of the governmental entity's
legislative body and by a majority of its electorate and that any special tax
imposed by a local government be approved by a two-thirds vote of the
electorate. In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by nonchartered cities in California without voter
approval.
Other Information. Certain debt obligations held by the California Tax-
Free Fund may be obligations payable solely from lease payments on real or
personal property leased to the state, cities, counties or their various public
entities. California law provides that a lessor may not be required to make
payments during any period that it is denied use and occupancy of the property
in proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by the California Tax-Free Fund would not be paid in a timely manner.
Certain debt obligations held by the California Tax-Free Fund may be
obligations payable solely from the revenues of health care institutions. The
method of reimbursement for indigent care, California's selective contracting
with health care providers for such care and selective contracting by health
insurers for care of its beneficiaries now in effect under California and
federal law may adversely affect these revenues and, consequently, payment on
those debt obligations.
There can be no assurance that general economic difficulties or the
financial circumstances of California or its towns and cities will not adversely
affect the market value of California municipal securities or the ability of
obligors to continue to make payments on such securities.
54
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions. Other than listed securities,
securities purchased and sold by the Funds generally will be traded on a net
basis (i.e., without commission). Purchases and sales of securities on a
securities exchange are effected through brokers who charge a commission for
their services. Brokerage commissions on United States securities exchanges are
subject to negotiation between the Advisers and the broker. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Fixed income securities and securities traded in the over-the-
counter market, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
The Advisers place all orders for the purchase and sale of portfolio
securities, options and futures contracts for the Funds and buys and sells such
securities, options and futures for the Funds through a number of broker-
dealers. In so doing, the Advisers use their best efforts to obtain for the
Funds the most favorable price and execution available, except to the extent it
may be permitted to pay higher brokerage commissions as further described below.
Subject to applicable limitations of the federal securities laws, the Advisers
will consider, in selecting broker-dealers, various relevant factors, including,
but not limited to, the size and type of the transaction; the nature and
character of the markets for the security to be purchased or sold; the execution
efficiency, settlement capability and financial condition of the broker-dealer
firm; the broker-dealer's execution services rendered on a continuing basis; and
the reasonableness of any commissions.
The Funds may execute portfolio transactions with broker-dealers who
provide research and execution services to the Funds and other accounts over
which an Adviser or its affiliates exercise investment discretion. Such
services may include advice concerning the value of securities; the advisability
of investing in, purchasing or selling securities; the availability of
securities or the purchasers or sellers of securities; furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement). The Advisers maintain listings of broker-dealers who provide such
services on a regular basis. However, as many transactions on behalf of the
Funds are placed with broker-dealers (including broker-dealers on the lists)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such broker-dealers
solely because such services were provided. The selection of such broker-
dealers is generally made by an Adviser (to the extent possible consistent with
execution considerations) based upon the quality of research and execution
services provided.
55
<PAGE>
The receipt of research from broker-dealers that execute transactions on
behalf of the Funds may be useful to an Adviser in rendering investment
management services to the Funds and/or their other clients, and conversely,
such research provided by broker-dealers who have executed transaction orders on
behalf of other clients of an Adviser may be useful to the Adviser in carrying
out its obligations to one or more Funds. The receipt of such research enables
the Advisers to avoid the additional expenses that could be incurred if the
Advisers tried to develop comparable information through their own efforts.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, an
Adviser may cause a Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in such Act) to the Adviser an amount of
commission for effecting a securities transaction for the Fund that is in excess
of the commission that another broker-dealer would have charged for effecting
the transaction. In order to cause the Funds to pay such higher commissions, an
Adviser must determine in good faith that such commissions are reasonable in
relation to the value of the brokerage and research services provided by such
executing broker-dealers viewed in terms of a particular transaction or the
overall responsibilities of the Adviser to the Fund(s) and their other clients.
In reaching this determination, an Adviser will not attempt to place a specific
dollar value on the brokerage and research services provided or to determine
what portion of the compensation should be related to those services.
The Advisers and their affiliates manage several other investment accounts,
some of which may have investment objectives similar to those of one or more
Funds. It is possible that, at times, identical securities will be appropriate
for investment by one or more Funds and by one or more of such investment
accounts. The position of each account, however, in the securities of the same
issuer may vary and the length of time that each account may choose to hold its
investment in the securities of the same issuer likewise may vary. The timing
and amount of purchase by each account will also be determined by its cash
position. If the purchase or sale of securities consistent with the investment
policies of a Fund and one or more of these accounts is considered at or about
the same time, transactions in such securities will be allocated among the
accounts in a manner deemed equitable by the Adviser. There may be
circumstances under which purchases or sales of portfolio securities by an
Adviser for one or more clients will have an adverse effect on other clients of
the Adviser.
During the fiscal year ended September 30, 1996, the Company, on behalf of
the Growth & Income Fund and the Growth Fund and pursuant to agreements or
understandings, directed $47,903,195 and $6,870, respectively, in aggregate
brokerage transactions to brokers due to research and brokerage services they
provided, and such brokers received related commissions of approximately $79,472
and $5, respectively.
The Directors periodically review the performance of the Advisers regarding
their responsibilities in connection with the placement of portfolio
transactions on behalf of each Fund and review the commissions paid by each Fund
over representative periods of time to determine if they are reasonable in
relation to the benefits received by each Fund.
During the fiscal years ended September 30, 1994, 1995 and 1996, the Funds
paid
56
<PAGE>
brokerage commissions as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
Fund 9/30/94 9/30/95 9/30/96
---- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth & Income Fund $19,046* $70,409 $222,021***
Growth Fund N/A $ 3,621** $ 18,727
- -----------------
</TABLE>
* For the period from commencement of operations on October 19, 1993
through September 30, 1994.
** For the period from commencement of operations on June 12, 1995 through
September 30, 1995.
*** The increase in the brokerage commissions paid by the Fund is the result
of the Fund's growth in assets.
In addition, as of the close of The Griffin Funds' fiscal year on September
30, 1996, the Money Market Fund, the Bond Fund, the Short-Term Bond Fund and the
Growth Fund held securities of their regular broker-dealers (or the parents
thereof) with a market value as follows: Money Market Fund: Ford Motor Credit
Corp. ($8,866,000); Bond Fund: Merrill Lynch ($662,000); PaineWebber
($395,000); Donaldson, Lufkin & Jenrette ($281,000); Prudential ($252,000); and
Ford Motor Credit Corp. ($599,000); Short-Term Bond Fund: Ford Motor Credit
Corp. ($52,000); and PaineWebber ($107,000); and Growth Fund: State Street Bank
& Trust Company ($86,000); and Investment Technology Group (ITG) ($87,000).
VALUATION OF PORTFOLIO SECURITIES
Money Market Funds. Each Money Market Fund values its investments on the
basis of amortized cost. This technique involves valuing an instrument at its
cost as adjusted for amortization of premium or accretion of discount rather
than its value based on current market quotations or appropriate substitutes
which reflect current market conditions. The amortized cost value of an
instrument may be higher or lower than the price the Fund would receive if it
sold the instrument.
Valuing each Fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act. The
Funds must adhere to certain conditions under Rule 2a-7; these conditions are
summarized in the Prospectus.
The Board of Directors of The Griffin Funds oversees the Adviser's
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Fund's net asset value ("NAV") at $1.00
per share. At such intervals as they deem appropriate, the Directors consider
the extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. In the event such deviation from the Fund's amortized cost per
share exceeds 1/2 of 1 percent, the Board of Directors will promptly consider
what corrective action, if any, should be initiated. If the Directors believe
that a deviation from the Fund's amortized cost per share may result in material
dilution or other unfair results to shareholders, the Directors have agreed to
take such corrective action, if any, as they deem appropriate to eliminate or
reduce, to the extent reasonably practicable, the dilution or unfair results.
Such corrective action could include selling portfolio instruments prior to
maturity to realize capital gain or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind;
57
<PAGE>
establishing NAV by using available market quotations; and such other measures
as the Directors may deem appropriate.
During periods of declining interest rates, a Fund's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder in a Fund may be able to obtain a somewhat
higher yield than would result if the Fund utilized market valuations to
determine its NAV. The converse would apply in a period of rising interest
rates.
Non-Money Market Funds. Securities owned by each Fund are appraised by
various methods depending on the market or exchange on which they trade.
Securities traded on the New York Stock Exchange or the American Stock Exchange
are appraised at the last sale price, or if no sale has occurred, at the latest
quoted bid price. Securities traded on other exchanges are appraised as nearly
as possible in the same manner. Securities and other assets for which exchange
quotations are not readily available are valued on the basis of closing over-
the-counter bid prices, if available, or at their fair value as determined in
good faith under consistently applied procedures under the general supervision
of the Board of Directors. Debt obligations with remaining maturities of 60
days or less are valued either at amortized cost (unless the Board of Directors
determines that amortized cost does not reflect the securities' fair value) or
at original cost plus accrued interest.
Foreign securities are valued at the last sale price in the principal
market where they are traded, or, if last sale prices are unavailable, at the
last bid price available prior to the time a Fund's NAV is determined. Foreign
security prices are furnished by quotation services who express the value of
securities in their local currency and are then translated from the local
currency into U.S. dollars at current exchange rates. Any changes in the value
of forward contracts due to exchange rate fluctuations are included in the
determination of NAV.
PERFORMANCE
The Funds may quote performance in various ways. All performance
information supplied by the Funds in advertising is historical and is not
intended to indicate future returns. A Fund's yield and total return fluctuate
in response to market conditions and other factors.
Yield Calculations
------------------
Money Market Funds. From time to time, the "yield" and "effective yield"
of the shares of the Money Market Fund and the Tax-Free Money Market Fund may be
presented in advertisements, sales literature and in reports to shareholders.
The "yield" and "effective yield" of shares of the Money Market Fund and the
Tax-Free Money Market Fund are computed separately according to formulas
prescribed by the Securities and Exchange Commission. The standardized seven-
day yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base return,
58
<PAGE>
and multiplying the base period return by (365/7). The net change in the value
of an account in each Fund includes the value of additional shares purchased
with dividends from the original share, and dividends declared on both the
original share and any such additional shares; and all fees, other than
nonrecurring account or sales charges, that are charged to shareholder accounts
in proportion to the length of the base period and the Fund's average account
size. The capital changes to be excluded from the calculation of the net change
in account value are realized gains and losses from the sale of securities and
unrealized appreciation and depreciation. The effective annualized yield for
shares of a Fund is computed by compounding the unannualized base period return
(calculated as above) by adding 1 to the base period return, raising the sum to
a power equal to 365 divided by 7, and subtracting 1 from the result.
For the seven-day period ended September 30, 1996, the yield and effective
yield of the Money Market Fund and the Tax-Free Money Market Fund were as
follows:
<TABLE>
<CAPTION>
Effective
Yield Yield
----- -----
<S> <C> <C>
Money Market Fund 4.86% 4.98%
Tax-Free Money Market Fund 3.00% 3.04%
</TABLE>
The Tax-Free Money Market Fund also may quote "tax equivalent yield." Tax-
equivalent yield is the rate an investor would have to earn from a fully taxable
investment to equal the Tax-Free Money Market Fund's tax-free yield. Tax-
equivalent yield is calculated by dividing the Tax-Free Money Market Fund's
yield by the result of one minus a stated federal or combined federal and state
tax rate. (If only a portion of the Tax-Free Money Market Fund's yield is tax-
exempt, only that portion is adjusted in the calculation.) For the 7-day period
ending September 30, 1996, the tax-equivalent yield of the Tax-Free Money Market
Fund (assuming a 39.6% federal tax rate) was 4.97%.
The table below shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1996. It shows the approximate
yield a taxable security must earn at various income brackets to produce after-
tax yields equivalent to those of tax-exempt obligations, yielding from 2.5% to
6.5%. Of course, no assurance can be given that the Tax-Free Money Market Fund
will achieve any specific tax-exempt yield. While the Tax-Free Money Market
Fund invests principally in obligations whose interest is exempt from federal
income tax, other income received by the Tax-Free Money Market Fund may be
taxable.
59
<PAGE>
1996 Federal Tax Rates and Tax-Equivalent Yields
------------------------------------------------
<TABLE>
<CAPTION>
If individual tax-exempt yield is:
Federal
Tax 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
Taxable Income* Bracket
--------------- -------
Single Return Joint Return Then taxable equivalent yield is:**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Over But Not Over Over But Not Over
$0 $24,000 $0 $40,100 15.0% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$24,001 $58,150 $40,101 $96,900 28.0% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$58,151 $121,300 $96,901 $147,700 31.0% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$121,301 $263,750 $147,701 $263,750 36.0% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
over $263,750 over $263,750 39.6% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net taxable income after all exemptions, adjustments and deductions.
** Based on 1996 tax rates (effective rates may be higher for some individuals
due to phase out of exemptions and elimination of deductions).
The Tax-Free Money Market Fund may invest a portion of its assets in
obligations that are subject to federal income tax. When the Tax-Free Money
Market Fund invests in these obligations, its tax-equivalent yield may be lower.
In the table above, tax-equivalent yields are calculated assuming investments
are 100% federally tax-free.
Yield information may be useful in reviewing a Fund's performance and in
providing a basis for comparison with other investment alternatives. However, a
Fund's yield fluctuates, unlike investments that pay a fixed interest rate over
a stated period of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio securities of the
respective investment companies they have chosen to consider.
Investors should recognize that in periods of declining interest rates each
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates each Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
each Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Fund's holdings,
thereby reducing such Fund's current yield. In periods of rising interest
rates, the opposite can be expected to occur.
Non-Money Market Funds. From time to time, the standardized 30-day yield
of Class A and Class B Shares of the Non-Money Market Funds may be presented in
advertisements, sales literature and in reports to shareholders. The yield of
the Class A and Class B Shares of the Non-Money Market Funds is a measure of the
net investment income per share (as defined) earned over a 30-day period
expressed as a percentage of the maximum offering price of a share of such
classes at the end of the period. Yield figures are determined by dividing the
net investment income per share earned during the specified 30-day period by the
maximum offering price per share on the last day of the period, according to the
following formula:
60
<PAGE>
a-b
Yield = 2[-------- to the 6th power - 1]
(cd + 1)
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = maximum offering price per share on the last day of the period
For purposes of yield quotations, income is calculated in accordance with
standardized methods applicable to all stock and bond mutual funds. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses are excluded from the
calculation.
Income calculated for the purposes of calculating a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' financial statements.
Yield information may be useful in reviewing the Funds' performance and in
providing a basis for comparison with other investment alternatives. However,
each Fund's yield fluctuates, unlike investments that pay a fixed interest rate
over a stated period of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio securities of the
respective investment companies they have chosen to consider.
For the 30-day period ended September 30, 1996, the standardized yields of
the Class A Shares and Class B Shares of the Non-Money Market Funds were as
follows:
<TABLE>
<CAPTION>
Yield for
30-Day Period
Fund Ended 9/30/96
---- -------------
Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
U.S. Government Income Fund 6.45% 6.24%
Bond Fund 6.37% 6.17%
California Tax-Free Fund 4.74% 4.45%
Municipal Bond Fund 4.66% 4.38%
Growth & Income Fund 1.40% 0.98%
Growth Fund 0% 0%
Short-Term Bond Fund 5.77% 5.48%
</TABLE>
61
<PAGE>
Investors should recognize that in periods of declining interest rates the
Funds' yields will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to a Fund from the continuous sale of its
shares will likely be invested in instruments producing lower yields than the
balance of the Funds' holdings, thereby reducing the Funds' current yields. In
periods of rising interest rates, the opposite can be expected to occur.
Tax Equivalent Yield. Tax-equivalent yield is the rate an investor would
have to earn from a fully taxable investment after taxes to equal the tax-free
yield of either the California Tax-Free Fund or the Municipal Bond Fund. Tax-
equivalent yields are calculated by dividing a fund's yield by the result of one
minus a stated federal or combined federal and state tax rate. (If only a
portion of the fund's yield is tax-exempt, only that portion is adjusted in the
calculation.)
For the 30-day period ending September 30, 1996, the Class A Shares of the
Municipal Bond Fund and the California Tax-Free Fund produced tax-equivalent
yields of 7.72% and 7.84%, respectively, based on an assumed federal tax rate of
39.6%. And, for the 30-day period ending September 30, 1996, the Class B Shares
of the Municipal Bond Fund and the California Tax-Free Fund produced tax-
equivalent yields of 7.25% and 7.37%, respectively, based on an assumed federal
tax rate of 39.6%.
California Tax-Free Fund. The tables below show the effect of a
shareholder's tax status on the effective yield under federal and state income
tax laws for 1996. They show the approximate yield a taxable security must
provide at various income brackets to produce after-tax yields equivalent to
those of tax-exempt obligations yielding from 2.0% to 7.0%. Of course, no
assurance can be given that the California Tax- Free Fund will achieve any
specific tax-exempt yield. While the Fund invests principally in obligations
whose interest is exempt from federal and state income tax, other income
received by the Fund may be taxable. The Fund does not take into account local
taxes, if any, payable on fund distributions.
62
<PAGE>
<TABLE>
<CAPTION>
1996 Combined
California and
Federal
1996 Federal Effective
Single Return Joint Return Marginal Tax Marginal Tax
Taxable Income* Taxable Income* Bracket Bracket**
--------------- --------------- ------- ---------
<S> <C> <C> <C>
$18,357 - $24,000 $36,714 - $41,000 15% 20.1%
$24,001 - $25,484 $40,101 - $50,968 28% 32.32%
$25,485 - $32,207 $50,969 - $64,414 28% 33.76%
$32,208 - $58,150 $64,415 - $96,900 28% 34.70%
$58,151 - $111,695 $96,901 - $147,700 31% 37.42%
$111,696 - $121,300 31% 37.9%
$147,701- $223,390 36% 41.95%
$121,301 - $223,390 $223,391- $263,750 36% 42.4%
$223,391 - $263,750 36% 43.04%
$263,751- $446,780 39.6% 45.64%
over $263,750 over $446,780 39.6% 46.24%
</TABLE>
* Net taxable income after all exemptions, adjustments and deductions.
** Based on rates applicable in 1996 and assuming one exemption for single
filers and two exemptions for married couples filing jointly (except that
marginal rates may be higher for some individuals due to phase out of exemptions
and elimination of deductions).
Having determined your combined effective tax bracket above, use the table
below to determine the tax equivalent yield for a given tax-free yield.
<TABLE>
<CAPTION>
If your effective combined federal and California income tax rate in 1996
is:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20.10% 32.32% 33.76% 34.70% 37.42% 37.90% 41.95% 42.40% 43.04% 45.64% 46.24%
<CAPTION>
To match
these tax-
free rates: Your taxable investment would have to earn the following yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2% 2.50% 2.96% 3.02% 3.06% 3.20% 3.22% 3.45% 3.47% 3.51% 3.68% 3.72%
3% 3.75% 4.43% 4.53% 4.59% 4.79% 4.83% 5.17% 5.21% 5.27% 5.52% 5.58%
4% 5.01% 5.91% 6.04% 6.13% 6.39% 6.44% 6.89% 6.94% 7.02% 7.36% 7.44%
5% 6.26% 7.39% 7.55% 7.66% 7.99% 8.05% 8.61% 8.68% 8.78% 9.20% 9.30%
6% 7.51% 8.87% 9.06% 9.19% 9.59% 9.66% 10.34% 10.42% 10.53% 11.04% 11.16%
7% 8.76% 10.34% 10.57% 10.72% 11.19% 11.27% 12.06% 12.15% 12.29% 12.88% 13.02%
</TABLE>
The California income tax rates are those in effect for 1996. The rates
listed reflect the 1996 inflation adjusted tax brackets. The Fund may invest a
portion of its assets in obligations that are subject to state or federal income
taxes. When the Fund invests in these obligations, its tax-equivalent yields
will be lower. In the table above, tax-equivalent yields are calculated
assuming investments are 100% federally and state tax-free.
Total Return Calculations. From time to time, the average annual and
cumulative total return of Class A and Class B shares of the Non-Money Market
Funds over stated periods may be presented in advertisements, sales literature
and in reports to shareholders. Total return
63
<PAGE>
measures both the net investment income generated by, and the effect of any
realized or unrealized appreciation or depreciation of the underlying
investments in a Fund. The Funds' average annual and cumulative total return
figures are computed in accordance with the standardized methods prescribed by
the SEC.
Average annual total return figures are computed by determining the average
annual compounded rates of return over the periods indicated in the
advertisement, sales literature or shareholders' report that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of such period (or fractional
portion thereof)
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the maximum sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory and administrative fees, charged as expenses to all shareholder
accounts.
While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that a fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual year-to-year
performance of a Fund.
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = (ERV-P) 100
-----
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of such period
P = initial payment of $ 1,000.
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts (a) the
64
<PAGE>
maximum sales charge from the hypothetical initial $1,000 investment, and (b)
all recurring fees, such as advisory and administrative fees, charged as
expenses to all shareholder accounts.
Average annual and cumulative total returns may be quoted as a percentage
or as a dollar amount, and may be calculated for a single investment, a series
of investments, or a series of redemptions over any time period. Total returns
may be broken down into their components of income and capital (including
capital gains and changes in share price, if any) in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph, or similar illustration.
For the periods ended September 30, 1996, the total returns of the Class A
and Class B Shares of the Non-Money Market Funds, before deducting applicable
sales charges, were as follows:
<TABLE>
<CAPTION>
Class A Class B
------- -------
Year Ended Since Inception Year Ended Since Inception
Fund 9/30/96 (10/13/93)(1) 9/30/96 (11/1/94)(1)
----- ------- ----------- ------- ----------
<S> <C> <C> <C> <C>
U. S. Government Income Fund 4.02% 4.97% 3.51% 8.55%
Bond Fund 3.12% 3.48% 2.62% 8.32%
California Tax-Free Fund 5.23% 2.73% 4.70% 8.97%
Municipal Bond Fund 4.64% 3.07% 4.22% 8.83%
Growth & Income Fund 18.08% 17.48% 17.48% 24.47%
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
------- -------
Year Ended Since Inception Year Ended Since Inception
Fund 9/30/96 (6/21/95)(1) 9/30/96 (6/12/95)(1)
---- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Short-Term Bond Fund 4.82% 5.50% 4.29% 5.25%
Growth Fund 18.35% 27.94% 17.80% 27.41%
</TABLE>
- --------------------
(1) These figures have been annualized.
For the three year period ended December 31, 1996, the average annual total
returns for the Class A Shares of the following Non-Money Market Funds, before
deducting applicable sales charges, were:
<TABLE>
<CAPTION>
Three Years
Ended
Fund 12/31/96
---- -----------
<S> <C>
U.S. Government Income Fund 5.65%
Bond Fund 4.95%
California Tax-Free Fund 3.58%
Municipal Bond Fund 3.52%
Growth & Income Fund 19.70%
</TABLE>
65
<PAGE>
For the periods ended September 30, 1996, the total returns of the Class A
and Class B Shares of the Non-Money Market Funds, after deducting applicable
sales charges, were as follows:
<TABLE>
<CAPTION>
Class A(2) Class B
---------- -------
Year Ended Since Inception Year Ended Since Inception
Fund 9/30/96 (10/13/93(1) 9/30/96(3) (11/1/94)(1)(3)
---- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
U.S. Government Income Fund -0.71% 3.33% -1.49% 6.60%
Bond Fund -1.48% 1.88% -2.38% 6.36%
California Tax-Free Fund 0.53% 1.15% -0.30% 7.02%
Municipal Bond Fund -0.03% 1.47% -0.78% 6.89%
Growth & Income Fund 12.80% 15.66% 12.48% 22.76%
<CAPTION>
Class A Class B
------- -------
Year Ended Since Inception Year Ended Since Inception
Fund 9/30/96 (6/12/95)(1) 9/30/96(3) (6/12/95)(1)(3)
---- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund 1.20%(4) 2.69%(4) 0.29% 2.98%
Growth Fund 13.02%(2) 23.53%(2) 12.80% 24.56%
</TABLE>
(1) These figures have been annualized.
(2) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).
(3) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.
(4) These figures reflect the deduction of the maximum initial sales charge of
with respect to Class A Shares (3.50%).
For the three year period ended December 31, 1996, the average annual
total returns for the Class A Shares of the following Non-Money Market Funds,
after deducting applicable sales charges, were:
<TABLE>
<CAPTION>
Three Years
Ended
Fund 12/31/96
---- ----------
<S> <C>
U.S. Government Income Fund 4.04%
Bond Fund 3.35%
California Tax-Free Fund 2.01%
Municipal Bond Fund 1.94%
Growth & Income Fund 17.88%
</TABLE>
For the periods ended September 30, 1996, the cumulative total returns of
the Class A and Class B Shares of the Non-Money Market Funds, before deducting
applicable sales charges, were as follows:
66
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
------- -------
Six Months Year Ended Since Inception Six Months Year Ended Since Inception
Fund Ended 9/30/96 9/30/96 (10/13/93) Ended 9/30/96 9/30/96 (11/1/94)
---- ------------- ------- -------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Income Fund 2.27% 4.02% 15.39% 2.02% 3.51% 17.05%
Bond Fund 1.55% 3.12% 10.64% 1.31% 2.62% 16.56%
California Tax-Free Fund 2.37% 5.23% 8.29% 2.12% 4.70% 17.90%
Municipal Bond Fund 2.10% 4.64% 9.35% 1.96% 4.22% 17.62%
Growth & Income Fund 6.41% 18.08% 60.93% 6.14% 17.48% 52.17%
<CAPTION>
Class A Class B
------- -------
Six Months Year Ended Since Inception Six Months Year Ended Since Inception
Fund Ended 9/30/96 9/30/96 (6/12/95) Ended 9/30/96 9/30/96 (6/12/95)
---- ------------- ------- ------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Bond Fund 2.24% 4.82% 7.25% 2.08% 4.29% 6.91%
Growth Fund 9.82% 18.35% 37.99% 9.51% 17.80% 37.24%
</TABLE>
For the three year period ended December 31, 1996, the cumulative total
returns for the Class A Shares of the following Non-Money Market Funds, before
deducting applicable sales charges, were:
<TABLE>
<CAPTION>
Three Years
Ended
Fund 12/31/96
---- --------
<S> <C>
U.S. Government Income Fund 17.91%
Bond Fund 15.59%
California Tax-Free Fund 11.14%
Municipal Bond Fund 10.94%
Growth & Income Fund 71.51%
</TABLE>
For the periods ended September 30, 1996, the cumulative total returns of
the Class A and Class B Shares of the Non-Money Market Funds, after deducting
applicable sales charges, were as follows:
67
<PAGE>
<TABLE>
<CAPTION>
Class A(1) Class B
--------- -------
Six Months Year Ended Since Inception Six Months Year Ended Since Inception
Fund Ended 9/30/96 9/30/96 (10/13/93) Ended 9/30/96 9/30/96(2) (11/1/94)(2)
---- ------------- ------- --------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Income Fund -2.35% -0.71% 10.17% -2.98% -1.49% 13.05%
Bond Fund -3.05% -1.48% 5.64% -3.69% -2.38% 12.56%
California Tax-Free Fund -2.18% 0.53% 3.42% -2.88% -0.30% 13.90%
Municipal Bond Fund -2.46% -0.03% 4.41% -3.04% -0.78% 13.62%
Growth & Income Fund 1.69% 12.80% 53.66% 1.14% 12.48% 48.17%
<CAPTION>
Class A Class B
------- -------
Six Months Year Ended Since Inception Six Months Year Ended Since Inception
Fund Ended 9/30/96 9/30/96 (6/12/95) Ended 9/30/96 9/30/96 (6/12/95)
---- ------------- ------- --------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Short-Term Bond Fund -1.29%(3) 1.20%(3) 3.53%(3) -1.92% 0.29%(2) 3.91%(2)
Growth Fund 4.87%(1) 13.02%(1) 31.80%(1) 4.51% 12.80%(2) 33.24%(2)
</TABLE>
(1) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).
(2) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.
(3) These figures reflect the deduction of the maximum initial sales charge of
with respect to Class A Shares (3.50%).
For the three year period ended December 31, 1996, the cumulative total
returns for the Class A Shares of the following Non-Money Market Funds, after
deducting applicable sales charges, were:
<TABLE>
<CAPTION>
Three Years
Ended
Fund 12/31/96
---- --------
<S> <C>
U.S. Government Income Fund 12.61%
Bond Fund 10.39%
California Tax-Free Fund 6.14%
Municipal Bond Fund 5.94%
Growth & Income Fund 63.79%
</TABLE>
A Fund's performance may be compared in advertising to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, especially those with similar objectives. Such comparisons may be
expressed as mutual fund rankings prepared by Lipper Analytical Services, Inc.
("Lipper," sometimes also referred to as "Lipper Analytical Services"), an
independent service located in Summit, New Jersey that monitors the performance
of mutual funds. The Lipper performance analysis ranks funds on the basis of
total return, assuming reinvestment of distributions, but does not take sales
charges or redemptions fees into consideration, and is prepared without regard
to tax consequences.
The Funds may reference and discuss their Fund number, Quotron(TM) number,
CUSIP number and current portfolio manager in advertising.
68
<PAGE>
From time to time, in reports and promotional literature, a Fund's
performance also may be compared to other mutual funds tracked by financial or
business publications and periodicals. For example, each Fund may quote
Morningstar, Inc. in its advertising materials. Morningstar, Inc. is a mutual
fund rating service that rates mutual funds on the basis of risk-adjusted
performance. In addition, each Fund may quote financial or business
publications and periodicals as they relate to fund management, investment
philosophy, and investment techniques.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index ("CPI")) and a combination of
various capital markets. The Funds may use the long-term performance of these
capital markets in order to demonstrate general long-term risk-versus-reward
investment scenarios. The performance of these capital markets is based on the
returns of several different indices and their respective returns. Ibbotson
calculates total returns in the same method as the funds. Performance
comparisons could also include the value of a hypothetical investment in any of
the capital markets.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
If the Directors determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing a
Fund's NAV. Shareholders receiving securities or other property on redemption
may realize a gain or loss for tax purposes, and will incur any costs of sale,
as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, each Fund is required to give
shareholders at least 60 days' written notice prior to terminating or modifying
its exchange privilege. Under the Rule, the 60 day notification requirement may
be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee, or deferred sales charge
ordinarily payable at the time of exchange, or (ii) if a Fund temporarily
suspends the redemption of the shares to be exchanged as permitted under the
1940 Act or by the SEC, or the fund to be acquired suspends the sale of its
shares because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
DISTRIBUTIONS AND TAXES
Distributions. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, the Advisers may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested until you
provide the Advisers with alternative instructions.
69
<PAGE>
Taxes. Qualification of each Fund as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), requires, among
other things, that (a) each Fund derive at least 90% of its annual gross income
from interest, payments with respect to securities loans, dividends and gains
from the sale or other disposition of securities or options thereon; (b) each
Fund derive less than 30% of its gross income from gains from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) each Fund diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of each Fund's assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government obligations and the securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are determined to be engaged in the same or similar trades or
businesses. As a regulated investment company, each Fund will not be subject to
federal income tax on its net investment income and net capital gains
distributed to its shareholders, provided that it distributes to its
shareholders at least 90% of its net investment income, including net tax-exempt
income, earned in each year. Each Fund intends to pay out substantially all of
its net investment income and net realized capital gains (if any) for each year.
A 4% nondeductible federal excise tax will be imposed on each Fund (other
than to the extent of a Fund's tax-exempt income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year. Each
Fund will either actually or be deemed to distribute substantially all of its
net investment income and net capital gains by the end of each calendar year
and, thus, expects not to be subject to the excise tax.
Income and dividends received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Although in some circumstances a regulated
investment company can elect to "pass through" foreign tax credits to its
shareholders, each Fund does not expect to be eligible to make such an election.
Corporate shareholders of the Growth & Income Fund or the Growth Fund may
be eligible for the dividends-received deduction on dividends distributed out of
the Fund's net investment income attributable to dividends received from
domestic corporations, which, if received directly by the corporate shareholder,
would qualify for such deduction. In order to qualify for the dividends-
received deduction, a corporate shareholder must hold the Fund shares paying the
dividends upon which the deduction is based for at least 46 days.
Depending upon state law, a portion of a Fund's dividends attributable to
interest income derived from U.S. Government securities may be exempt from state
and local taxation. The Funds will provide information on the portion of the
Funds' dividends, if any, that qualify for this exemption.
Federal Income Tax Rates. As of the printing of this SAI, the maximum
individual tax rate applicable to ordinary income is 39.60% (marginal rates may
be higher for some individuals
70
<PAGE>
due to phase out of exemptions and elimination of deductions); the maximum
individual marginal tax rate applicable to net capital gains is 28.00%; the
maximum corporate tax rate applicable to ordinary income and net capital gains
is 35.00% (except that to eliminate the benefit of lower marginal corporate
income tax rates, corporations which have taxable income in excess of $100,000
for a taxable year will be required to pay an additional amount of income tax of
up to $11,750 and corporations which have taxable income in excess of
$15,000,000 for a taxable year will be required to pay an additional amount of
tax of up to $100,000). Naturally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for example,
deductions, credits, deferrals, exemptions, sources of income and other matters.
Capital Gain Distributions. To the extent that each Fund recognizes long-
term capital gains, such gains will be distributed at least annually and these
distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. Such distributions
will be designated as capital gain distributions in a written notice mailed by
the Fund to the shareholders not later than 60 days after the close of the
Fund's taxable year.
Other Distributions. With respect to the Money Market Funds, although
dividends will be declared daily based on the Fund's daily earnings, for federal
income tax purposes, the Fund's earnings and profits will be determined at the
end of each taxable year and will be allocated pro rata over the entire year.
For federal income tax purposes, only amounts paid out of earnings and profits
will qualify as dividends. Thus, if during a taxable year a Money Market Fund's
declared dividends (as declared daily throughout the year) exceed the Fund's
earnings and profits (as determined at the end of the year), only that portion
of the year's distributions which equals the year's earnings and profits will be
deemed to have constituted a dividend. It is expected that each Money Market
Fund's annual earnings and profits will equal the dividends declared during
the year.
Disposition of Fund Shares. If a shareholder receives a designated capital
gain distribution (to be treated by the shareholder as a long-term capital gain)
with respect to any Fund share and such Fund share is held for six months or
less, then (unless otherwise disallowed) any loss on the sale or exchange of
that Fund share will be treated as a long-term capital loss to the extent of the
designated capital gain distribution. In addition, any loss realized by a
shareholder upon the sale or redemption of Fund shares held less than six months
is disallowed to the extent of any exempt-interest dividends received thereon by
the shareholder. These rules shall not apply, however, to losses incurred under
a periodic redemption plan.
If a shareholder exchanges or otherwise disposes of Fund shares within 90
days of having acquired such shares and if, as a result of having acquired those
shares, the shareholder subsequently pays a reduced sales charge on a new
purchase of shares of the Fund or of a different regulated investment company,
then the sales charge previously incurred acquiring the Fund's shares shall not
be taken into account (to the extent such previous sales charges do not exceed
the reduction in sales charges on the new purchase) for the purpose of
determining the amount of gain or loss on the disposition, but will be treated
as having been incurred in the
71
<PAGE>
acquisition of such other shares. Also, any loss realized on a redemption or
exchange of shares of the Fund will be disallowed to the extent that
substantially identical shares are reacquired within the 61-day period beginning
30 days before and ending 30 days after the shares are disposed of.
Taxation of Fund Investments. Gains or losses on sales of portfolio
securities by a Fund will generally be long-term capital gains or losses if the
securities have been held by it for more than one year, except in certain cases
such as where the Fund acquires a put or writes a call thereon. Gains
recognized on the disposition of a debt obligation (including tax-exempt
obligations purchased after April 30, 1993) purchased by the Fund at a market
discount (generally at a price less than its principal amount) will be treated
as ordinary income to the extent of the portion of market discount which accrued
during the period of time the Fund held the debt obligation. Other gains or
losses on the sale of portfolio securities will be short-term capital gains or
losses.
If an option written by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder,
then the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. Some realized capital losses may be deferred if
they result from a position which is part of a "straddle," discussed below. If
securities are sold by a Fund pursuant to the exercise of a call option written
by it, the Fund will add the premium received to the sale price of the
securities delivered in determining the amount of gain or loss on the sale. If
securities are purchased by a Fund pursuant to the exercise of a put option
written by it, the Fund will subtract the premium received from its cost basis
in the securities purchased. The requirement that a Fund derive less than 30%
of its gross income from gains from the sale of securities held for less than
three months may limit the Fund's ability to write options.
The amount of any gain or loss realized by a Fund on closing out a futures
contract will generally result in a realized capital gain or loss for tax
purposes. Certain futures contracts held at the end of each fiscal year will be
required to be "marked to market" for federal income tax purposes pursuant to
Section 1256 of the Code. In this regard, they will be deemed to have been sold
at market value. Sixty percent (60%) of any net gain or loss recognized on
these deemed sales and sixty percent (60%) of any net realized gain or loss from
any actual sales, generally will be treated as long-term capital gain or loss,
and the remaining forty percent (40%) will be treated as short-term capital gain
or loss. Transactions that qualify as designated hedges are excepted from the
"marked to market" and "60%/40%" rules. Currency transactions may be subject to
Section 988 of the Code, under which foreign currency gains or losses would
generally be computed separately and treated as ordinary income or losses. The
Funds will attempt to monitor Section 988 transactions to avoid an adverse tax
impact.
Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options contracts may be considered, for
tax purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a
regulated
72
<PAGE>
investment company were treated as entering into "straddles" by reason
of its engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by Section 1256 of
the Code. The regulated investment company may make one or more elections with
respect to "mixed straddles." Depending upon which election is made, if any,
the results with respect to the regulated investment company may differ.
Generally, to the extent the straddle rules apply to positions established by
the regulated investment company, losses realized by the regulated investment
company may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and the conversion transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of PFIC shares. If the Fund invests in a PFIC, the Fund intends to
make an available election to mark-to-market its interest in PFIC shares. Under
the election, the Fund will be treated as recognizing at the end of each taxable
year the excess, if any, of the fair market value of its interest in PFIC shares
over its basis in such shares. Although such excess will be taxable to the Fund
as ordinary income notwithstanding any distributions by the PFIC, the Fund will
not be subject to federal income tax or the interest charge with respect to its
interest in the PFIC.
Foreign Shareholders. Under the Code, distributions of net investment
income by a Fund to a nonresident alien individual, nonresident alien fiduciary
of a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a
lower treaty rate). Withholding will not apply if a dividend paid by a Fund to
a foreign shareholder is "effectively connected" with a U.S. trade or business,
in which case the reporting and withholding requirements applicable to U.S.
citizens, U.S. residents or domestic corporations will apply. Distributions of
net long-term capital gains are not subject to tax withholding, but in the case
of a foreign shareholder who is a nonresident alien individual, such
distributions ordinarily will be subject to U.S. income tax at a rate of 30% if
the individual is physically present in the U.S. for more than 182 days during
the taxable year.
Backup Withholding. The Funds may be required to withhold, subject to
certain exemptions, at a rate of 31% ("backup withholding") on dividends,
capital gain distributions, and redemption proceeds (including redemptions in
kind and proceeds from exchanges) paid or credited to an individual Fund
shareholder, unless a shareholder certifies that the Taxpayer Identification
Number ("TIN") provided is correct and that the shareholder is not subject to
backup withholding, or the IRS notifies the Funds that the shareholder's TIN is
incorrect or the shareholder is subject to backup withholding. Such tax
withheld does not constitute any additional tax imposed on the shareholder, and
may be claimed as a tax payment on the shareholder's federal income tax return.
An investor must provide a valid TIN upon opening or reopening an account.
Failure to furnish a valid TIN to the Funds could subject the investor to
penalties imposed by the IRS.
73
<PAGE>
Tax-Free Money Market Fund, Municipal Bond Fund and California Tax-Free
Fund (the "Tax-Free Funds"). The Tax-Free Funds intend that at least 50% of the
value of their total assets at the close of each quarter of their taxable years
will consist of obligations the interest on which is exempt from federal income
tax, so that they will qualify under the Code to pay "exempt-interest
dividends." The portion of total dividends paid by a Tax Free Fund with respect
to any taxable year that constitutes exempt-interest dividends will be the same
for all shareholders receiving dividends during such year. Long-term and/or
short-term capital gain distributions will not constitute exempt-interest
dividends and will be taxed as capital gain or ordinary income dividends,
respectively. The exemption of interest income derived from investments in tax-
exempt obligations for federal income tax purposes may not result in a similar
exemption under the laws of a particular state or local taxing authority.
Not later than 60 days after the close of its taxable year, a Tax-Free Fund
will notify its shareholders of the portion of the dividends paid with respect
to such taxable year which constitutes exempt-interest dividends. The aggregate
amount of dividends so designated cannot exceed the excess of the amount of
interest excludable from gross income under Section 103 of the Code received by
the Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Finally, interest on indebtedness
incurred to purchase or carry shares of a Tax-Free Fund will not be deductible
to the extent that the Fund's distributions are exempt from federal income tax.
Shareholders who earn other income, such as social security benefits, may
be subject to federal income tax on up to 85% of such benefits to the extent
that their income, including tax-exempt income, exceeds certain base amounts.
Furthermore, any loss realized by a shareholder upon the sale or redemption of
shares of a Tax-Free Fund held less than six months is disallowed to the extent
of any exempt-interest dividends received by the shareholder.
In addition, the federal alternative minimum tax ("AMT") rules ensure that
at least a minimum amount of tax is paid by taxpayers who obtain significant
benefit from certain tax deductions and exemptions. Some of these deductions
and exemptions have been designated "tax preference items" which must be added
back to taxable income for purposes of calculating AMT. Among the tax
preference items is tax-exempt interest from "private activity bonds" issued
after August 7, 1986. To the extent that a Tax-Free Fund invests in private
activity bonds, its shareholders who pay AMT will be required to report that
portion of Fund dividends attributable to income from the bonds as a tax
preference item in determining their AMT. Shareholders will be notified of the
tax status of distributions made by the Fund. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
private activity bonds should consult their tax advisors before purchasing
shares in a Tax-Free Fund. Furthermore, shareholders will not be permitted to
deduct any of their share of a Tax-Free Fund's expenses in computing their AMT.
With respect to a corporate shareholder of such Funds, exempt-interest dividends
paid by a Fund is included in the corporate shareholder's "adjusted current
earnings" as part of its AMT calculation, and may also affect its federal
"environmental tax" liability.
Shares of a Tax-Free Fund would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs
74
<PAGE>
since such plans and accounts are generally tax-exempt and, therefore, would not
benefit from the exempt status of dividends from such Funds. Such dividends
would be ultimately taxable to the beneficiaries when distributed to them.
These Funds purchase municipal obligations based on opinions of bond
counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenants at any time, interest on the
obligation could become federally taxable retroactive to the date the obligation
was issued.
It is the current position of the Staff of the Securities and Exchange
Commission that a fund which uses the word "tax-free" in its name must have a
fundamental policy requiring that during periods of normal market conditions
either (i) 80% of the fund's total assets will be invested in securities that
pay interest which is exempt from federal income taxes and which is not subject
to the federal alternative minimum tax, or (ii) 80% of the fund's income
distributions will be exempt from federal income taxes and not subject to the
federal alternative minimum tax.
California Tax-Free Fund -- California Taxes. As long as the California
Tax-Free Fund continues to qualify as a regulated investment company as
described above, it will incur no California income or franchise tax liability
on income and capital gains distributed to shareholders. California personal
income tax law provides that exempt-interest dividends paid by a regulated
investment company, or series thereof, from interest on obligations which are
exempt from California personal income tax are excludable from gross income. For
the Fund to qualify to pay exempt-interest dividends, at least 50% of the value
of the Fund's total assets must consist of such obligations at the close of each
quarter of its fiscal year. The Fund intends to qualify to pay exempt- interest
dividends; if, however, it does not, no part of its dividends will be exempt
from California corporate or personal income tax.
Distributions to shareholders derived from interest on other types of
obligations and short-term capital gains will be taxed as dividends, and long-
term capital gain distributions will be taxed as long-term capital gains.
California has an alternative minimum tax (AMT) similar to the federal AMT.
The California AMT, however, does not include interest from private activity
municipal obligations as an item of tax preference.
Interest on indebtedness incurred by a shareholder to purchase or carry
Fund shares is not deductible for California corporate or personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.
Other Considerations. Investors should be aware that the investments to be
made by the Funds may involve sophisticated tax rules that may result in income
or gain recognition by the Funds without corresponding current cash receipts.
Although the Funds will seek to avoid significant noncash income, such noncash
income could be recognized by the Funds, in which
75
<PAGE>
case the Funds may distribute cash derived from other sources in order to meet
the minimum distribution requirements described above.
The foregoing discussion and the discussions in the Prospectus address only
some of the federal tax considerations generally affecting investments in a
Fund. Each investor is urged to consult his or her tax advisor regarding
specific questions as to federal, state or local taxes and foreign taxes.
SERVICE PROVIDERS
Management. Subject to the general supervision of the Board of Directors
----------
of The Griffin Funds and in accordance with each Fund's investment policies,
Griffin Advisers serves as investment adviser to the Funds. Payden & Rygel
serves as sub- adviser to the Money Market Fund, the Tax-Free Money Market Fund,
the U.S. Government Income Fund, the Municipal Bond Fund and the California Tax-
Free Fund. T. Rowe Price serves as sub-adviser to the Growth Fund and the Short-
Term Bond Fund. TBCAM serves as sub-adviser to the Bond Fund and the Growth &
Income Fund.
Griffin Advisers, an indirect wholly owned subsidiary of H.F. Ahmanson &
Company, a savings and loan holding company, and an affiliate of Home Savings of
America and Savings of America, is located at 5000 Rivergrade Road, Irwindale,
California 91706. Griffin Advisers, a California corporation, was organized in
July, 1993 and had no prior experience advising investment companies.
Payden & Rygel, which is located at 333 South Grand, 32nd Floor, Los
Angeles, California 90071, was founded in 1983 and as of December 31, 1996
managed assets of approximately $21 billion.
T. Rowe Price, which is located at 100 East Pratt Street, Baltimore,
Maryland 21202, was established in 1937 and, together with its affiliates,
managed assets of approximately $95 billion as of December 31, 1996.
TBCAM, which is located at One Boston Place, Boston, Massachusetts 02108,
was established in 1970 and as of December 31, 1996 managed assets of
approximately $17 billion.
Prior to December 1, 1994, Piper Capital Management Inc., located at Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, MN 55402, served as sub-
adviser to the Growth & Income Fund, the Municipal Bond Fund and the Bond Fund.
Sponsor and Distributor: Griffin Financial, a registered broker-dealer, is
-----------------------
the sponsor and distributor of the Funds. In this capacity, Griffin Financial
has the exclusive right to distribute shares of the Funds. Griffin Financial is
a subsidiary of H.F. Ahmanson & Company and an affiliate of Griffin Advisers,
Home Savings of America and Savings of America.
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<PAGE>
Transfer Agent: IFTC is the Funds' custodian, transfer, shareholder
--------------
service, and dividend-paying agent. IFTC is located at 127 West 10th Street,
Kansas City, Missouri 64105.
Administrator and Sub-Administrator: Griffin Financial Administrators
-----------------------------------
serves as the administrator of the Funds pursuant to an Administration Agreement
and provides various administrative and accounting services to the Funds. IFTC
also provides certain sub-administrative services to the Funds.
DIRECTORS AND OFFICERS
The Directors and Executive Officers of The Griffin Funds are listed below.
Except as indicated, each individual has held the office shown or other office
in the same company for the last five years. Unless otherwise noted, the
business address of each Director and Officer is 5000 Rivergrade Road,
Irwindale, California 91706, which is also the address of Griffin Advisers.
Those Directors who are "interested persons" (as defined in the 1940 Act) by
virtue of their affiliation with either The Griffin Funds or Griffin Advisers,
are indicated by an asterisk (*).
HERSCHEL CARDIN, Director. Age: 70; Retired; Former Director of
--------
Investments, Home Savings of America.
VINCENT F. COVIELLO, Director. Age: 57; Turnberry Capital Corporation,
--------
President, since 1993. Prior thereto, Chairman & CEO, GNA Corp. from January
1980 to March 1993.
*WILLIAM A. HAWKINS, Director, President and Chief Executive Officer. Age:
-------- -------------------------------------
53; President and CEO, Griffin Financial Services. President & CEO, Griffin
Financial Administrators. President & CEO, Griffin Financial Investment
Advisers.
CARROL R. MCGINNIS, Director. Age: 52; 9225 Katy Freeway, Suite 205,
--------
Houston, Texas 77024. Founder, McGinnis Investments, since 1994. Prior thereto,
various positions with Transamerica Fund Management Company and its predecessor
companies during 1969-1993, including President and Chief Operating Officer.
MORTON O. SCHAPIRO, Director. Age: 43; 4535 Lennox Avenue, Sherman Oaks,
--------
California 91423. Dean of the College of Letters, Arts and Sciences and
Professor of Economics, University of Southern California, since 1991. Prior
thereto, Professor of Economics, Williams College, 1980-1991.
RICHIE D. ROWSEY, Senior Vice President. Age: 41; Senior Vice President,
---------------------
Griffin Financial Services. Senior Vice President, Griffin Financial
Administrators. Senior Vice President, Griffin Financial Investment Advisers.
JULIA D. WHITCUP, Senior Vice President & Treasurer. Age: 34; Senior Vice
---------------------------------
President & Treasurer, Griffin Financial Services. Senior Vice President &
Treasurer, Griffin Financial Administrators. Senior Vice President & Treasurer,
Griffin Financial Investment Advisers.
77
<PAGE>
DARLENE SPEARS, Vice President. Age: 34; Vice President and Compliance
--------------
Administrator, Griffin Financial Services, since June 1996. From 11/92 to 6/96,
Assistant Vice President, Compliance, Great Western Financial Securities; from
March 1992 to November 1992, Compliance Officer, Yaeger Securities, Inc.; and
from May 1985 to March 1992, Senior Compliance Analyst, Sentra Securities
Corporation.
TIM S. GLASSETT, Secretary. Age: 39; Senior Vice President & Assistant
---------
General Counsel, H.F. Ahmanson & Company. Secretary, Griffin Financial
Administrators. Secretary, Griffin Financial Investment Advisors.
HERBERT L. BOTTS, Assistant Secretary. Age: 38; Vice President & Assistant
-------------------
Secretary, Griffin Financial Services.
CHERYL A. RIVERA, Assistant Secretary. Age: 28; Assistant Secretary, Home
-------------------
Savings of America, FSB.
HENRY M. PENA, Assistant Secretary. Age: 32; Assistant Vice President,
-------------------
Griffin Financial Services.
STEVEN P. MUSON, Assistant Treasurer. Age: 30; Vice President, Griffin
-------------------
Financial Services, Griffin Financial Investment Advisers and Griffin Financial
Administrators.
Directors who are not affiliated with The Griffin Funds or Griffin Advisers
are entitled to receive from The Griffin Funds an annual retainer of $5,000 and,
generally, a fee of $2,500 for each Board of Directors and Board Committee
meeting attended. Directors are reimbursed for all out-of-pocket expenses
relating to attendance at Board of Directors' and Board Committee meetings.
Directors who are affiliated with The Griffin Funds or Griffin Advisers do not
receive compensation from The Griffin Funds, but are reimbursed for all out-of-
pocket expenses relating to attendance at meetings. The table below indicates
the total compensation received by the following Directors from The Griffin
Funds during the fiscal year ended September 30, 1996.
Compensation Table
------------------
<TABLE>
<CAPTION>
Aggregate Total
Compensation Compensation
Director from The Griffin Funds from The Griffin Funds
- -------- ---------------------- ----------------------
<S> <C> <C>
Herschel Cardin $17,500 $17,500
Vincent F. Coviello 15,000 15,000
William A. Hawkins 0 0
Carrol R. McGinnis* 15,000 15,000
Morton O. Schapiro 17,500 17,500
</TABLE>
________________
78
<PAGE>
*Mr. McGinnis joined the Board of Directors of The Griffin Funds in February
1996.
As of January 2, 1997, the Directors and Officers of The Griffin Funds as a
group, owned less than 1% of the outstanding shares of The Griffin Funds.
The Griffin Funds has adopted a Code of Ethics which, among other things,
prohibits each access person of The Griffin Funds from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
Fund, or (ii) was being purchased or sold by a Fund. For purposes of the Code
of Ethics, an access person means (i) a Director or officer of The Griffin
Funds, (ii) any employee of The Griffin Funds (or any company in a control
relationship with The Griffin Funds) who, in the course of his/her regular
duties, obtains information about, or makes recommendations with respect to, the
purchase or sale of securities by The Griffin Funds, and (iii) any natural
person in a control relationship with The Griffin Funds who obtains information
concerning recommendations made to The Griffin Funds regarding the purchase or
sale of securities. Portfolio managers and other persons who assist in the
investment process are subject to additional restrictions, including a
requirement that they disgorge to The Griffin Funds any profits realized on
short-term trading (i.e., the purchase/sale or sale/purchase of securities
within any 60-day period). The above restrictions do not apply to purchases or
sales of certain types of securities, including money market instruments and
certain U.S. Government securities. To facilitate enforcement, the Code of
Ethics generally requires that the access persons of The Griffin Funds, other
than the "disinterested" Directors, submit reports to the designated compliance
person of The Griffin Funds regarding transactions involving securities which
are eligible for purchase by a Fund.
MANAGEMENT CONTRACTS
Investment Adviser. The Griffin Funds employs Griffin Advisers to furnish
investment advisory and other services to each Fund. The Advisory Contract
provides that, subject to the overall supervision of the Board of Directors of
The Griffin Funds, and in accordance with the Funds' investment objective,
policies and limitations, Griffin Advisers shall provide the Funds with a
continuous investment program, including investment research and management with
respect to all securities and other investments (including cash and cash
equivalents) of the Funds. Griffin Advisers also is obligated to furnish to the
Board of Directors of The Griffin Funds periodic reports on the investment
activity and performance of each Fund (including financial reports and analyses
detailing each Fund's composition, comparative performance and securities
transactions), and such additional reports and information as the Board of
Directors and officers of The Griffin Funds reasonably request. The Advisory
Contract further provides that Griffin Advisers shall, at its own expense,
employ or associate itself with such persons, including such sub-investment
advisers as may be approved by The Griffin Funds, as Griffin Advisers believes
appropriate to assist it in performing its obligations under the Contract.
For the services described above, each Fund, other than the Growth & Income
Fund and the Growth Fund, pays a monthly management fee to Griffin Advisers at
the annual rate of 0.50% of the average net assets of the Fund throughout the
month. The Growth & Income Fund
79
<PAGE>
and the Growth Fund each pay a monthly management fee to Griffin Advisers at the
annual rate of 0.60% of the average net assets of each Fund.
The Advisory Contract provides that Griffin Advisers shall not be liable
for any action taken or omitted in its reasonable judgment, in good faith and
believed by it to be authorized or within the discretion conferred on it by the
Advisory Contract, provided that the Contract does not protect Griffin Advisers
against any liability to the Company or its shareholders arising by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties under the Contract or by reason of reckless disregard of its duties under
the Contract.
The Advisory Contract provides that it will continue in effect with respect
to a Fund for a period of two years from its effective date only if approved at
least annually by the vote of (a) a majority of the Fund's outstanding voting
securities (as defined in the 1940 Act) or by the Company's Board of Directors,
and (b) by the vote, cast in person at a meeting called for the purpose of
voting on the Contract, of a majority of Directors of The Griffin Funds who are
not parties to the Contract or "interested persons" (as defined in the 1940 Act)
of any such party. The Advisory Contract provides that it will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
Griffin Advisers or its affiliates pay certain expenses of The Griffin
Funds, including the costs of printing and distributing all materials relating
to each Fund prepared by it, or at its request, other than such costs relating
to proxy statements, prospectuses, shareholder reports and other materials
distributed to existing or prospective shareholders on behalf of each Fund.
The following chart indicates the amount of advisory fees paid by the Funds
to Griffin Advisers and the amount of advisory fees voluntarily waived by
Griffin Advisers for the fiscal years ended September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Net
Advisory Fees Paid Advisory Fees Waived
Fund 1996 1995 1994* 1996 1995 1994*
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $0 $22,121 $2,186 $774,401 $307,185 $78,124
Tax-Free Money Market Fund 0 3,384 1,811 53,309 43,485 25,936
Short-Term Bond Fund 0 0** N/A 57,125 3,479** N/A
U.S. Government Income Fund 0 2,164 0 203,770 116,136 61,121
Bond Fund 0 704 0 104,085 42,621 21,374
Municipal Bond Fund 0 1,201 0 31,724 18,955 9,355
California Tax-Free Fund 0 4,509 0 110,625 77,876 40,186
Growth & Income Fund 0 8,818 401 485,966 132,670 45,968
Growth Fund 0 0** N/A 78,987 4,793** N/A
</TABLE>
- ----------------
* For the period from commencement of operations on October 19, 1993 through
September 30, 1994.
** For the period from commencement of operations on June 12, 1995 through
September 30, 1995.
80
<PAGE>
At its own expense, Griffin Advisers has retained Evaluation Associates,
Inc. ("EAI") as an investment advisory consultant. Under Griffin Advisers'
arrangement with EAI, EAI periodically provides reports to management regarding
fund performance, monitors developments at each of the sub-advisers and makes
presentations to the Board of Directors of The Griffin Funds regarding market
developments and sub-adviser performance. When so requested by management, EAI
assists management in identifying and selecting investment sub-advisers for The
Griffin Funds. For its services, EAI receives a fee from Griffin Advisers.
Administrator and Distributor. Each Fund employs Griffin Financial
Administrators to provide, at its expense, certain administrative services in
connection with the operation of the Funds. Under the Administration Agreement
with The Griffin Funds, Griffin Financial Administrators furnishes office space
and certain facilities required for conducting the business for each Fund.
Griffin Financial Administrators also exercises general supervision over the
operation of the Fund, including coordination of the services performed by
Griffin Advisers, transfer and dividend disbursing agents, custodians,
independent accountants and legal counsel. Griffin Financial Administrators
supervises all regulatory compliance, including compilation of information for
documents such as reports to, and filings with, the SEC and state securities
commissions.
Griffin Financial Administrators also supervises the preparation of
periodic reports on the performance of its obligations under the administration
agreement and statements of each Fund that are distributed to each of the
Griffin Funds' officers and to the Board of Directors. It also supervises the
preparation of additional reports and proxy statements. Griffin Financial
Administrators handles all administrative services reasonably necessary for the
operation of each Fund, other than those services that are to be provided by
Griffin Advisers pursuant to the Advisory Agreement and by the transfer and
dividend disbursing agent.
For these services and the payment by Griffin Financial Administrators of
certain of The Griffin Funds' expenses, each Fund pays a monthly administrative
fee to Griffin Financial Administrators at the annual rate of 0.20% of the
average daily value of the Fund's net assets during the preceding month.
The following chart indicates, for the fiscal years ended September 30,
1996, 1995 and 1994, the amount of administration fees paid by the Funds to
Griffin Financial Administrators, the amount of administration fees waived by
Griffin Financial Administrators, and the amount of expenses reimbursed by
Griffin Financial Administrators:
81
<PAGE>
<TABLE>
<CAPTION>
Net
Administration Administration Expenses Reimbursed
Fees Paid Fees Waived by Administrator
Fund 1996 1995 1994* 1996 1995 1994* 1996 1995 1994*
---- ---- ---- ----- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund $309,760 $104,782 $ 0 $ 0 $ 26,940 $32,124 $ 193 $ 190,837 $121,963
Tax-Free Money Market Fund 10,583 16,148 0 10,741 2,600 11,099 11,779 84,781 77,096
Short-Term Bond Fund 0 0** N/A 22,850 1,392** N/A 28,021 12,879** N/A
U.S. Government Income Fund 55,941 17,960 0 25,567 29,360 24,448 4,234 144,944 109,136
Bond Fund 11,474 6,153 0 30,160 11,177 8,550 12,544 101,890 68,947
Municipal Bond Fund 2,573 3,319 0 10,116 4,743 3,742 39,494 88,657 57,155
California Tax-Free Fund 19,720 12,431 0 24,530 20,523 16,074 10,516 102,916 86,348
Growth & Income Fund 161,988 26,855 0 0 20,308 15,456 2,961 147,855 87,476
Growth Fund 3,606 0** N/A 22,723 1,598** N/A 23,094 19,668** N/A
</TABLE>
- ----------------------------
* For the period from commencement of operations on October 19, 1993 through
September 30, 1994.
** For the period from commencement of operations on June 12, 1995 through
September 30, 1995.
IFTC provides certain subadministrative services to the Funds pursuant to
its Custody Agreement and Transfer Agency Agreement, including performing
transfer agency, dividend disbursing and shareholder servicing functions for
each Fund, calculating each Fund's NAV and dividends, maintaining The Griffin
Funds' general accounting records and administering The Griffin Funds'
securities lending program, for which IFTC is entitled to compensation. In this
connection, the Administration Agreement between the Company and Griffin
Administrators provides that, at its own expense, Griffin Administrators will
pay all fees due from the Funds to IFTC arising under the Agency Agreement and
the Custody Agreement (except transaction-based fees arising under the Custody
Agreement and out-of-pocket expenses) and otherwise payable by the Funds under
those Agreements. During the fiscal years ended September 30, 1994, 1995 and
1996, the fees paid by Griffin Administrators to IFTC totalled $274,890,
$591,771 and $1,091,694, respectively.
Griffin Financial Services, located at 5000 Rivergrade Road, Irwindale,
California 91706, serves as the exclusive distributor ("Distributor") of shares
of the Funds pursuant to a Distribution Agreement between The Griffin Funds and
the Distributor dated September 30, 1993. As Distributor, Griffin Financial
Services engages in a continuous offering of shares of the Funds. Under the
Distribution Agreement, the Distributor may offer and sell shares of the Funds
to or through securities dealers, banks and other depository institutions that
have entered into sales support agreements with the Distributor.
During the fiscal year ended September 30, 1994, the Distributor received
$2,194,512 in net underwriting discounts and commissions in connection with
sales of shares of The Griffin Funds. No portion of this amount was retained by
the Distributor, but was paid out to sales representatives. During the fiscal
year ended September 30, 1995, the Distributor received $232,710 in net
underwriting discounts and commissions on sales of Class A Shares, and $1,016 in
contingent deferred sales charges on redemptions of Class B Shares. All
underwriting discounts and commissions and contingent deferred sales charges
received by the Distributor during the fiscal year ended September 30, 1995 were
retained by the Distributor. And, during the fiscal year ended September 30,
1996, the Distributor received $294,270 in net underwriting
82
<PAGE>
discounts and commissions on sales of Class A Shares, and $37,853 in contingent
deferred sales charges on redemptions of Class B Shares. All underwriting
discounts and commissions and contingent deferred sales charges received by the
Distributor during the fiscal year ended September 30, 1996 were retained by the
Distributor.
Sub-Advisers. On behalf of the Money Market Fund, the Tax-Free Money Market
Fund, the U.S. Government Income Fund, the Municipal Bond Fund and the
California Tax-Free Fund, Griffin Advisers has entered into sub-advisory
agreements with Payden & Rygel, pursuant to which Payden & Rygel has primary
responsibility for providing portfolio investment management services to each of
those Funds. On behalf of the Short-Term Bond Fund and the Growth Fund, Griffin
Advisers has entered into sub-advisory agreements with T. Rowe Price, pursuant
to which T. Rowe Price has primary responsibility for providing portfolio
investment management services to each of those Funds. And, on behalf of the
Bond Fund and the Growth & Income Fund, Griffin Advisers has entered into sub-
advisory agreements with TBCAM, pursuant to which TBCAM has primary
responsibility for providing portfolio investment management services to each of
those Funds.
Generally, each sub-advisory agreement provides that, subject to the
overall supervision and control of Griffin Advisers and The Griffin Funds, and
in accordance with the respective Fund's investment objective, policies and
limitations, a sub-adviser is obligated to provide a continuous investment
program, including investment research and management with respect to all
securities and other investments (including cash and cash equivalents) of the
Fund. Each sub-adviser also is obligated to furnish to Griffin Advisers and the
Board of Directors of The Griffin Funds periodic reports on the investment
activity and performance of each Fund, and such additional reports and
information as Griffin Advisers and the Board of Directors of The Griffin Funds
reasonably request.
A management fee is calculated and paid by each Fund to Griffin Advisers
every month. Griffin Advisers, in turn, pays Payden & Rygel, T. Rowe Price and
TBCAM for the sub-advisory services they provide to their respective funds.
Specifically, with respect to the Money Market Fund and the Tax-Free Money
Market Fund, Griffin Advisers pays Payden & Rygel fees at an annual rate of
0.25% of the first $25 million of each Fund's average daily net assets, and
0.20% of each Fund's average daily net assets in excess of $25 million. With
respect to the U.S. Government Income Fund, the California Tax-Free Fund and the
Municipal Bond Fund, Griffin Advisers pays Payden & Rygel fees at an annual rate
of 0.30% of the first $50 million of each Fund's average daily net assets, 0.25%
of the next $450 million of each Fund's average daily net assets and 0.20% of
each Fund's average daily net assets in excess of $500 million, with a minimum
annual fee of $25,000 for each Fund. With respect to the Short-Term Bond Fund
and the Growth Fund, Griffin Advisers pays T. Rowe Price fees at an annual rate
of 0.30% of the first $50 million of each Fund's average daily net assets, 0.25%
of the next $450 million of each Fund's average daily net assets and 0.20% of
such Fund's average daily net assets in excess of $500 million, with a minimum
annual fee of $25,000 for each Fund. With respect to the Bond Fund and the
Growth & Income Fund, Griffin Advisers pays TBCAM fees at an annual rate of
0.30% of the first $50 million of each Fund's average daily net assets, 0.25% of
the next $450 million of each Fund's average daily net assets and 0.20% of such
Fund's average daily net
83
<PAGE>
assets in excess of $500 million. The fees paid to the sub-advisers are not
reduced by any voluntary or mandatory expense reimbursements that may be put
into effect by Griffin Advisers from time to time.
Generally, each sub-advisory agreement provides that a sub-adviser will not
be liable for any action taken or omitted in its reasonable judgment, in good
faith and believed by it to be authorized or within the discretion conferred on
the sub-adviser by its sub-advisory agreement, provided that the agreement does
not protect a sub-adviser against any liability to Griffin Advisers, The Griffin
Funds or their shareholders arising by reason of willful misfeasance, bad faith
or gross negligence in the performance by the sub-adviser of its duties under
the agreement or by reason of reckless disregard by the sub-adviser of its
duties under the agreement.
Each sub-advisory agreement provides that it will continue in effect with
respect to a Fund for a period of two years from its effective date only if
approved at least annually by the vote of (a) a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by The Griffin
Funds' Board of Directors, and (b) by the vote, cast in person at a meeting
called for the purpose of voting on the agreement, of a majority of Directors of
The Griffin Funds who are not parties to the agreement or "interested persons"
(as defined in the 1940 Act) of any such party. Each sub-advisory agreement
provides that it will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
The following chart indicates the amount of sub-advisory fees paid by
Griffin Advisers to the respective sub-advisers for the fiscal years ended
September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Sub-Advisory Fees Paid
Fund 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C>
Money Market Fund $322,888 $144,384 $39,993(1)
Tax-Free Money Market Fund 27,407 25,138 17,495(1)
Short-Term Bond Fund 37,029 7,848(2) N/A
U.S. Government Income Fund 122,452 71,204 30,946(1)
Bond Fund 62,735 62,513(3) 17,082(3)
Municipal Bond Fund 24,996 20,830(3) 17,082(3)
California Tax-Free Fund 66,351 49,522 22,354(1)
Growth & Income Fund 288,486 62,513(3) 22,398(3)
Growth Fund 41,560 7,848(2) N/A
</TABLE>
- ------------------------
(1) For the period from commencement of operations on October 19, 1993 through
September 30, 1994.
(2) For the period from commencement of operations on June 12, 1995 through
September 30, 1995.
(3) Piper Capital Management Inc. ("Piper") served as sub-adviser to the Bond
Fund, the Municipal Bond Fund and the Growth and Income Fund during the
fiscal year ended September 30, 1994 and from October 1, 1994 through
December 1, 1994. During the period from October 1, 1994 through December
1, 1994, Piper received $4,166, $4,166 and $7,350 in fees from Griffin
Advisers for acting as sub-adviser to the Bond Fund, the Municipal Bond
Fund and the Growth & Income Fund, respectively. These amounts are in
addition to those shown in the table as being paid to Payden & Rygel and
TBCAM during the fiscal year ended September 30, 1995.
84
<PAGE>
DISTRIBUTION AND SERVICE PLANS
As indicated in the Prospectus, each Fund has adopted one or more Plans
under Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule"). The
Plans for the Money Market Fund and the Tax-Free Money Market Fund, and the
Class A Shares of the U.S. Government Income Fund, the Municipal Bond Fund, the
California Tax-Free Fund, the Bond Fund and the Growth & Income Fund were
adopted on September 30, 1993 by the Board of Directors, including a majority of
the Directors who were not "interested persons" (as defined in the 1940 Act) of
the Funds and who had no direct or indirect financial interest in the operation
of the Plans or in any agreement related to the Plan (the "Qualified
Directors"), and were approved by the sole shareholder of each Fund on October
7, 1993. The Plans for the Class B Shares of the U.S. Government Income Fund,
the Municipal Bond Fund, the California Tax-Free Fund, the Bond Fund and the
Growth & Income Fund were adopted by the Board of Directors of the Company,
including a majority of the Qualified Directors, on September 30, 1993 and were
approved by the sole shareholder of the Class B Shares of each Fund on November
1, 1994. The Plans for the Class A and Class B Shares of the Growth Fund and the
Short-Term Bond Fund were adopted by the Board of Directors of The Griffin Funds
on May 11, 1995, and by the sole shareholder of each Fund on June 12, 1995.
Money Market Funds. Under the Plans adopted by the Money Market Funds, the
Distributor may receive compensatory payments and/or reimbursements to defray
all or part of the cost of preparing, printing and delivering prospectuses to
prospective shareholders of each Fund or for other distribution-related or sales
support services. Payments under the Plans may not exceed, on an annual basis,
0.20% of each Fund's average daily net assets. The fees paid under the Plans can
be used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their investments.
During the fiscal year ended September 30, 1996, the Money Market Fund
incurred $309,760 in distribution and service fees under its Plan, of which
amount $17,566 was waived by the Distributor. The $292,194 in distribution and
service fees paid by the Money Market Fund during the fiscal year ended
September 30, 1996 was paid to the Distributor as compensation for distribution
and shareholder services. And, during the fiscal year ended September 30, 1996,
the Tax-Free Money Market Fund incurred $21,324 in distribution and service fees
under its Plan, the entire amount of which was waived by the Distributor.
Non-Money Market Funds. Under the Plans adopted by the Non-Money Market
Funds, the Distributor may receive compensatory payments and/or reimbursements
to defray all or part of the cost of preparing, printing, and delivering
prospectuses to prospective shareholders of each Fund or for other distribution-
related or sales support services. Payments under the Plans may not exceed, on
an annual basis, 0.25% of each Fund's average daily net assets of the Class A
Shares and 0.75% of each Fund's average daily net assets of the Class B Shares.
The fee paid under the Plans for the Class A Shares of each Fund also can be
used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their investments.
A separate fee of up to 0.25% of the average daily net assets of the Class B
Shares of the Fund represented by Class B Shares owned by investors with whom
the
85
<PAGE>
servicing agent maintains a servicing relationship is imposed on the Class B
Shares of the Funds.
The following table indicates the fees incurred by the Class A Shares of
the Non-Money Market Funds under the Plans, the purposes for which such amounts
were spent and the amount of such fees that was voluntarily waived by the
Distributor during the fiscal year ended September 30, 1996:
<TABLE>
<CAPTION>
Distribution
and
Funds Service Fees Paid Waived Fees
----- ----------------- -----------
Compensation to Underwriters
----------------------------
<S> <C> <C>
Short-Term Bond Fund $0 $28,420
U.S. Government Income Fund 0 94,459
Bond Fund 0 51,314
Municipal Bond Fund 0 15,214
California Tax-Free Fund 0 50,361
Growth & Income Fund 170,888 8,829
Growth Fund 0 30,734
</TABLE>
The following table indicates the fees incurred by the Class B Shares of
the Non-Money Market Funds under the Plans, the purposes for which such amounts
were expended and the amount of such fees that was voluntarily waived by the
Distributor during the fiscal year ended September 30, 1996:
<TABLE>
<CAPTION>
Distribution
and
Funds Service Fees Paid Waived Fees
----- ----------------- -----------
Compensation to Underwriters
----------------------------
<S> <C> <C>
Short-Term Bond Fund $284 $284
U.S. Government Income Fund 15,121 14,851
Bond Fund 1,456 1,457
Municipal Bond Fund 1,296 1,296
California Tax-Free Fund 9,903 9,903
Growth & Income Fund 67,566 23,509
Growth Fund 4,354 4,354
</TABLE>
General Information. The Funds may participate in joint distribution
activities with any of the other funds of The Griffin Funds, in which event
expenses reimbursed out of the assets of the Funds may be attributable, in part,
to the distribution-related activities of another Griffin Fund. Generally, the
expenses attributable to joint distribution activities will be allocated among
each Fund and other Griffin Funds in proportion to their relative net asset
sizes, although The Griffin Funds' Board of Directors may allocate such expenses
in any other manner that it deems fair and equitable.
The Plans will continue in effect from year to year if such continuance is
approved by a majority vote of both the Directors of The Griffin Funds and the
Qualified Directors. Any
86
<PAGE>
distribution agreement related to the Plan also must be approved by such vote of
the Directors and the Qualified Directors. Distribution agreements will
terminate automatically if assigned, and may be terminated at any time, without
payment of any penalty, by a vote of a majority of the outstanding voting
securities of the Fund involved. The Plans may not be amended to increase
materially the amounts payable thereunder without the approval of a majority of
the outstanding voting securities of the applicable Fund, and no material
amendment to a Plan may be made except by a majority of both the Directors of
The Griffin Funds and the Qualified Directors.
The Plans require that the Treasurer of The Griffin Funds shall provide to
the Directors, and the Directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Plan. The Rule
also requires that the selection and nomination of Directors who are not
"interested persons" of The Griffin Funds be made by such disinterested
Directors.
DESCRIPTION OF THE GRIFFIN FUNDS
Each Fund is a portfolio of The Griffin Funds, Inc., an open-end management
investment company organized as a Maryland corporation on August 5, 1993. The
Griffin Funds' Articles of Incorporation permit the Directors to create
additional series. Currently there are nine portfolios of The Griffin Funds: the
Money Market Fund, Tax-Free Money Market Fund, Growth & Income Fund, U.S.
Government Income Fund, Municipal Bond Fund, California Tax-Free Fund, Bond
Fund, Short-Term Bond Fund and Growth Fund.
In the event that Griffin Advisers ceases to be the investment adviser to
The Griffin Funds or a Fund, the right of The Griffin Funds or Fund to use the
identifying name "Griffin" may be withdrawn.
The assets of The Griffin Funds received for the issue or sale of shares of
each Fund and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such Fund, and
constitute the underlying assets of such Fund. The underlying assets of each
Fund are segregated on the books of account, and are to be charged with the
liabilities with respect to such Fund and with a share of the general expenses
of The Griffin Funds. Expenses with respect to The Griffin Funds are to be
allocated in proportion to the asset value of the respective Funds, except where
allocations of direct expense can otherwise be fairly made. The officers of The
Griffin Funds, subject to the general supervision of the Board of Directors,
have the power to determine which expenses are allocable to a given Fund, or
which are general or allocable to all of the Funds. In the event of the
dissolution or liquidation of The Griffin Funds, shareholders of each Fund are
entitled to receive as a class the underlying assets of such Fund available for
distribution.
The Money Market Funds offer only one class of shares. Each of the Non-
Money Market Funds is comprised of two classes of shares, Class A Shares and
Class B Shares. With respect to matters that affect one class of a Non-Money
Market Fund but not another, the shareholders vote as a class; for example, the
approval of a Plan. Subject to the foregoing, all shares of a Fund have
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equal voting rights and will be voted in the aggregate, and not by series,
except where voting by a series is required by law or where the matter involved
only affects one series. For example, a change in a Fund's fundamental
investment policies would be voted upon only by shareholders of that Fund and
not shareholders of The Griffin Funds' other investment portfolios.
Additionally, approval of an advisory contract is a matter to be determined
separately by portfolio. Approval by the shareholders of one portfolio is
effective as to that portfolio whether or not sufficient votes are received from
the shareholders of the other portfolios to approve the proposal as to those
portfolios. As used in the Prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of a Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of The Griffin Funds
as a whole, means the vote of the lesser of (i) 67% of The Griffin Funds' shares
represented at a meeting if the holders of more than 50% of The Griffin Funds'
outstanding shares are present in person or by proxy, or (ii) more than 50% of
The Griffin Funds' outstanding shares. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
The Funds may dispense with annual meetings of shareholders in any year in
which it is not required to elect Directors under the 1940 Act. However, The
Griffin Funds has undertaken to hold a special meeting of its shareholders for
the purpose of voting on the question of removal of a Director or Directors if
requested in writing by the holders of at least 10% of The Griffin Funds'
outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by The Griffin Funds.
As of January 13, 1996, the following persons were known by The Griffin
Funds to own of record or beneficially (as indicated) 5% or more of the
outstanding shares of the following Funds (and classes):
Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
Money Market Fund
Bankers Trust Company NA TR 23.72%
Ahmanson Advantage Acct (Record)
P.O. Box 712039
Los Angeles, CA 90071-7039
Home Savings of America FSB 19.42%
4900 Rivergrade Road (Record)
Mail Code 3080
Irwindale, CA 91706-1404
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Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
U.S. Government Income Fund
Class A
- -------
Bankers Trust Company NA TR 8.52%
Ahmanson Advantage Acct (Record)
P.O. Box 712039
Los Angeles, CA 90071-7039
Municipal Bond Fund
Class A
- -------
Griffin Financial Services of America 16.60%
Attn: Finance (Seed Account) (Beneficial)
P.O. Box 60070
City Industry, CA 91716-0070
Leah S. Glickfield 8.88%
Lynne D. Arbaugh JT WROS (Beneficial)
3750 Galt Ocean Drive #606
Ft Lauderdale, FL 33308-7620
Class B
- -------
Margaret Spears 8.77%
Maryann Dunning (Beneficial)
Leonard Alcomo JTWROS
215 S.E. Third Avenue, Apt. 405B
Hallandale, FL 33009-5680
Vera Stanislavsky 6.20%
5400 Yarmouth Avenue (Beneficial)
Encino, CA 91316-2309
Elizabeth B. Weise 5.54%
7937 Venetian Street (Beneficial)
Miramar, FL 33023-2447
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Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
Sadie Bach 10.30%
Laurence Bach JT WROS (Beneficial)
9601 Sunrise Lakes Blvd., #112
Sunrise, FL 33322-1129
John A. Nelson TTEE 15.39%
U/A 04/06/95 (Beneficial)
John A. Nelson Living Trust
1126 Caballo Ct
San Jose, CA 95132-2804
Floyd O. Allgaier TTEE 28.90%
UA 11/23/1992 (Beneficial)
Floyd O. Allgaier Trust
1025 Glen Echo Avenue
San Jose, CA 95125-4316
Be-Fong Shih 7.17%
4917 Thorntree (Beneficial)
Plano, TX 75024-2495
California Tax-Free Fund
Class A
- -------
Griffin Financial Services of America 5.33%
Attn: Finance (Seed Account) (Beneficial)
P.O. Box 60070
City Industry, CA 91716-0070
Bond Fund
Class A
- -------
Bankers Trust Company NA TR 8.25%
Ahmanson Advantage Acct (Record)
P.O. Box 712039
Los Angeles, CA 90071-7039
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Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
Griffin Financial Services of America 6.33%
Attn: Finance (Seed Account) (Beneficial)
P.O. Box 60070
City Industry, CA 91716-0070
Class B
- -------
Pearl Beekman Altman 5.58%
9320 Sunrise Lakes Blvd. (Beneficial)
Apt. 205 Bldg. 106
Sunrise, FL 33322-2107
Robert G. Linnabary 6.92%
3116 Gingerwood Lane (Beneficial)
Lancaster, CA 93536-4797
Home Savings of America TTEE 5.46%
Catherine A. Inglove (Beneficial)
2677 Centinela Avenue 205
Santa Monica, CA 90405-3145
Griffin Short-Term Bond Fund
Class A
- -------
Griffin Financial Services 5.80%
P.O. Box 60070 (Beneficial)
City Industry, CA 91716-0070
Class B
- -------
Home Savings of America TTEE 19.78%
IRA of Friedel B. Erz (Beneficial)
290 Palisades Street
Pasadena, CA 91103-2140
Kin Llian Chang 11.48%
Man Ling Chang JT TEN (Beneficial)
c/o Mr. Chang
P.O. Box 9
Santa Monica, CA 90406-0009
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Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
Florence F. Kuper TTEE 7.92%
U/A 2/24/89 (Beneficial)
Florence F. Kuper Trust
939-A Avenida Majorca
Laguna Hills, CA 92653-6416
Anne Kaplan TTEE 17.08%
U/A 11/27/85 (Beneficial)
Kaplan Trust
295 Avenida Sevilla
Laguna Hills, CA 92653-3437
Pauline Dorsett 16.67%
16 Meadowood (Beneficial)
Aliso Viejo, CA 92656-1502
H. Fred Bauer TTEE 5.43%
U/A 4/12/96 (Beneficial)
The Bauer Rev. Living Trust
25201 Sea Vista Drive
Dana Point, CA 92629-1149
Griffin Growth Fund
Class A
- -------
Bankers Trust Company NA TR 10.58%
Ahmanson Advantage Acct (Record)
P.O. Box 712039
Los Angeles, CA 90071-7039
Griffin Financial Services 6.89%
P.O. Box 60070 (Beneficial)
City Industry, CA 91716-0070
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Fund/Class Percentage of Shares
Name and Address of Owner Held of Record or Beneficially
------------------------- ------------------------------
Griffin Growth & Income Fund
Class A
- -------
Bankers Trust Company NA TR 11.79%
Ahmanson Advantage Acct (Record)
P.O. Box 712039
Los Angeles, CA 90071-7039
Custodian. IFTC, located at 127 West 10th Street, Kansas City, Missouri
64105 is custodian of the assets of The Griffin Funds. The custodian is
responsible for safekeeping of The Griffin Funds' assets and the appointment of
subcustodian banks and clearing agencies. The custodian takes no part in
determining the investment policies of The Griffin Funds or in deciding which
securities are purchased or sold by The Griffin Funds. The Company may, however,
invest in obligations of the custodian and may purchase securities from or sell
securities to the custodian.
Independent Auditors. KPMG Peat Marwick LLP, located at 725 South Figueroa
Street, Los Angeles, California 90017, serves as The Griffin Funds' independent
auditors.
Legal Counsel. Morrison & Foerster LLP, located at 2000 Pennsylvania
Avenue, N.W., Suite 5500, Washington, D.C. 20006, serves as legal counsel to The
Griffin Funds.
Financial Statements. The financial statements for the fiscal year ended
September 30, 1996, and the report thereon of KPMG Peat Marwick LLP included in
the Annual Report are incorporated by reference in this Statement of Additional
Information. The Letter to Shareholders contained in such Annual Report is not
incorporated by reference and is not a part of the registration statement or
this Statement of Additional Information.
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APPENDIX
Description of Moody's Investors Service, Inc.'s commercial paper ratings:
Prime-1 -- issuers (or related institutions) have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges with high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 -- issuers (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above 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 alternate liquidity is maintained.
Description of Moody's Investors Service, Inc.'s corporate and 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 edge." 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 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 that are rated Baa are considered 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
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characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Description of Standard & Poor's Corporation's commercial paper ratings:
A-1 -- This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2 -- Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1. Description of Standard & Poor's Corporation's corporate and
municipal bond RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt issues only in small degree
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for those in higher-rated categories.
Descriptions of Fitch Investors Service, Inc.'s commercial paper ratings:
Fitch-1 -- (Highest Grade) Commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
Fitch-2 -- (Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.
Description of Fitch Investors Service, Inc.'s corporate and municipal bond
ratings:
AAA -- rated bonds are considered to be investment grade and are of the
highest quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by foreseeable events.
AA -- rated bonds are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than AAA rated securities or more subject to change
over the term of the issue.
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A -- rated bonds 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.
Description of Duff and Phelps' commercial paper ratings:
Duff 1 -- Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors. Risk factors
are minor.
Duff 2 -- Good certainty of timely payment. Liquidity and company
fundamentals are sound. Although ongoing internal funds needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Description of Duff And Phelps' corporate and municipal bond ratings:
AAA -- Bonds that are rated AAA are of the highest credit quality. The risk
factors are considered to be negligible, being only slightly more than for risk-
free U.S. Treasury debt.
AA -- Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest, but may vary slightly from time to time
because of economic conditions.
A -- Bonds that are rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
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