-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OSIT3DsdFxw4O5vsOj85mPmDi4g2XBdglEzyu/xSNUjSFVh1tUCoqr4HzM3fI9RB mhCX8txoeAmQ26Rwr+lGrQ== 0000950007-96-000037.txt : 19960304 0000950007-96-000037.hdr.sgml : 19960304 ACCESSION NUMBER: 0000950007-96-000037 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960301 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA MUNI FUND CENTRAL INDEX KEY: 0000715756 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 136828244 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03674 FILM NUMBER: 96530113 BUSINESS ADDRESS: STREET 1: 90 WASHINGTON ST - 19TH FL CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2126353005 N-30D 1 ANNUAL REPORT The California Muni Fund Dear Fellow Shareholder: Financial assets scored remarkable gains in 1995. For example, the Dow Jones Industrial Average ended the year above 5000, for a gain of about 33%. The Treasury bellweather thirty year "long" bond finished 1995 with a yield less than 6%, and the Bond Buyer index of forty actively traded municipal bonds increased by 15%. A plethora of favorable developments was behind these gains. The economic fundamentals of modest growth and low inflation not only remained in tact, but actually began to be thought of as an enduring phenomenon. Rhetoric flowing from the White House and Congress seemed to indicate that genuine progress could be made toward erasing the federal budget deficit. Finally, the Federal Reserve began to reverse its tightfisted policy of 1994 by modestly reducing short term interest rates, for the first time in July, and then again in December. Saving and investment seemed to become fashionable again, as wage earners poured record sums into IRA and 401K retirement plans. Importantly, unlike 1993 when the Federal Reserve actively lowered interest rates to stimulate business activity, the Fed pursued a different strategy in 1995. Indeed, throughout the year the Central Bank was being accused of being too stringent rather than too lenient. The upshot was that market interest rates fell faster than the Federal Reserve's own rate cuts, such that the spread between short and long term interest rates narrowed dramatically throughout the year. This is important for 1996 in two respects. First, the narrowness of the interest rate spread discourages speculation and leverage. Second, since the spread itself is a reflection of a stringent monetary policy, it is highly unlikely that either economic activity or inflation will get off the ground. Indeed, while the economy may well skirt a recession in 1996, the downside risks to the economy seem greater than the upside potential. In our view, the credit easing that began in 1995 is likely to continue in 1996, resulting in a downward trend in interest rates while bond prices trend up. Unlike 1995, though, we would expect short term interest rates to begin falling somewhat faster than long term rates in 1996. The municipal bond market began 1995 on a strong note as it benefited from the positive fundamentals of slow growth and low inflation, and the reduction in the issuance of state and local bonds. By late spring, however, municipals began to underperform Treasuries as discussions about a reform of the tax system, and specifically a flat tax, received attention. In a pure flat tax system all incomes would be taxed at the same rate. In its most extreme form all deductions would be eliminated, including those for real estate taxes, mortgage interest, municipal bond interest, and state and local income taxes. The flat tax is a long way from being enacted, and even if it ever is enacted, it will be significantly amended. In our view it is unlikely to ever be enacted, and indeed, the Clinton Administration has already come out squarely against it. Nevertheless, the mere mention of eliminating the interest exclusion on municipal bonds hurt the market. By autumn, yields on municipal bonds were about comparable to the yield on Treasury bonds, instead of being lower, as is normal. In our view this anomaly is presenting municipal bond investors with a unique opportunity. As this tax hysteria subsides, municipal bonds will once again sell at a premium relative to Treasuries, meaning that municipal bond prices will rise relative to Treasuries. In the worst case, municipal bonds will yield on a par with Treasuries, which is practically the case currently. 1 Investors in the California Muni Fund were handsomely rewarded in 1995. The Net Asset Value rose from $7.10 per share at the end of 1994 to $8.91 at the end of 1995 for an astonishing 32% total return. As a result, California Muni Fund was not only the year's highest ranking California Fund, but it was also the year's best performer among all municipal bond funds. California Muni is particularly sensitive to fluctuations in short term interest rates, so as the Federal Reserve began to ease credit around mid-year, the Fund was positively affected. Additionally, as the hangover effect of the Orange County bankruptcy of late 1994 began to fade, California credits generally rebounded from very depressed levels. Indeed, California Muni's portfolio did not include any direct Orange County credits. Finally, because we were generally constructive on the interest rate outlook for 1995, the Fund's portfolio maintained a long duration. However, many of the Fund's principal holdings were either insured or secured by letters of credit. This continues to be the case, and with evidence of a rebound in the California economy beginning to mount, these securities will perform especially well. Finally, if in fact the Federal Reserve continues gradually lowering short term interest rates in 1996, California Muni Fund will further benefit. Nonetheless, returns such as those generated in 1995 should not be expected to recur. Interest rates will probably not fall as sharply in 1996 as they did in 1995. However, as discussions about the flat tax are clarified, or more likely amended, municipal bonds will outperform Treasuries. This will positively affect the California Muni Fund. Of course, interest rates and bond prices will always fluctuate, so investors are urged to undertake an investment program over time rather than in one lump sum. Meanwhile, we thank you for your continued trust, and we look forward to continuing to serve you in the future. Sincerely, Dr. Vincent J. Malanga President 2 [CHART] Past performance is not predictive of future performance. The above illustration compares a $10,000 investment made in the California Muni Fund on 9/24/84 (Inception Date) to a $10,000 investment made in the Lehman Brothers Municipal Bond Index on that date. For comparative purposes the value of the Index on 9/28/84 is used as the beginning value on 9/24/84. All dividends and capital gain distributions are reinvested. The Fund invests primarily in California municipal securities and its performance takes into account fees and expenses. Unlike the Fund, the Lehman Brothers Municipal Bond Index is an unmanaged total return performance benchmark for the long-term, investment-grade tax exempt bond market, calculated by using municipal bonds selected to be representative of the market. The Index does not take into account fees and expenses. Further information relating to Fund performance, including expense reimbursements, if applicable, is contained in the Fund's Prospectus and elsewhere in this report. *Source: Lehman Brothers. The Consumer Price Index is a commonly used measure of inflation; it does not represent an investment return. 3 The California Muni Fund, Inc. Portfolio Composition December 31, 1995 [PI CHARTS] FIXED COUPON BONDS FCLT-Long (maturity more than 15 years) (includes long zero coupons) FCSI-Short or Intermediate-(maturity less than 15 years) (includes zero coupon bonds) VARIABLE RATE BONDS RIB (Residential Interest Bond) type inverse floaters. These are leveraged bonds whose coupon varies with rates on short term corporate issues, and whose value will fluctuate by some multiple of the fluctuations in value of a fixed rate bond with the same maturity and coupon as the underlying bond. LRIB-Long Term (maturity more than 15 years) SRIB-Short or Intermediate Term (less than 15 year maturity) IN (Index) based inverse floaters are bonds whose interest coupons vary inversely with an index of short term interest rates and then revert to a fixed rate mode. The duration and fluctuations on these bonds will be similar to fixed rate bonds with the same maturity. INLT-Long Term (maturity more than 15 years) INSI-Short or Intermediate Term (maturity less than 15 years) + If a security has a split rating, the highest applicable rating is used, including published ratings on identical credits for individual securities not individually rated. 4 (Left column) THE CALIFORNIA MUNI FUND STATEMENT OF ASSETS AND LIABILITIES December 31, 1995 - -------------------------------------------------------------------------------- ASSETS Cash.......................................................... $ 88,714 Investment in securities at value (cost $17,427,017).......... 18,194,659 Interest receivable........................................... 258,709 ----------- Total assets............................................ 18,542,082 ----------- LIABILITIES Payables Dividends................................................... 14,473 Capital Shares Redeemed..................................... 5,812,594 Accrued expenses.............................................. 92,683 ----------- Total liabilities....................................... 5,919,750 ----------- NET ASSETS consisting of: Accumulated net realized loss.................... $ (373,252) Unrealized appreciation of securities............ 767,642 Paid-in-capital applicable to 1,416,845 shares of beneficial interest (Note 4)................ 12,227,942 ----------- ----------- $12,622,332 =========== NET ASSET VALUE PER SHARE....................................... $8.91 ===== (Right column) STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 - -------------------------------------------------------------------------------- INVESTMENT INCOME Interest income............................................... $1,111,595 EXPENSES (Notes 2 and 3) Management fee....................................... $67,639 Custodian and accounting fees........................ 61,158 Transfer agent fees.................................. 27,231 Professional fees.................................... 142,856 Printing and postage................................. 9,607 Interest............................................. 53,171 Distribution expenses................................ 51,029 Shareholder communication............................ 12,000 Trustees' fees....................................... 7,532 Miscellaneous........................................ 730 ------- Total expenses.......................................... 432,953 ---------- Net investment income................................... 678,642 ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments.............................. 152,418 Unrealized appreciation of investments for the year........... 3,192,187 ---------- Net gain on investments................................. 3,344,605 ---------- NET INCREASE IN NET ASSETS FROM OPERATIONS...................... $4,023,247 ========== STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended December 31, December 31, 1995 1994 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income............................................. $ 678,642 $ 947,323 Net realized gain (loss) on investments........................... 152,418 (525,670) Unrealized appreciation (depreciation) of investments for the year 3,192,187 (3,571,076) ------------ ------------ Net increase (decrease) in net assets from operations....... 4,023,247 (3,149,423) DIVIDENDS PAID TO SHAREHOLDERS FROM Investment income................................................. (678,642) (947,323) CAPITAL SHARE TRANSACTIONS (Note 4)................................. (1,279,945) (1,625,159) ------------ ------------ Total increase (decrease)................................... 2,064,660 (5,721,905) NET ASSETS: Beginning of year................................................. 10,557,672 16,279,577 ------------ ------------ End of year....................................................... $12,622,332 $10,557,672 ============ ============
See Notes to Financial Statements. 5 THE CALIFORNIA MUNI FUND STATEMENT OF INVESTMENTS December 31, 1995 - --------------------------------------------------------------------------------
Principal Amount Issue000 Type0 Rating00 Value ------ -------- ----- -------- ----- $ 100,000 Arvin Development Corporation, COP, RB, 8.750%, 9/01/18........................ FCLT NR $ 24,015 9,395,000 Bakersfield, COP, ETM, CAB, 4/15/21............................................ FCLT AAA 2,335,127 200,000 Beverly Hills, PFA, RB, IFRN*, MBIA Insured, 6/01/15........................... LRIB AAA 192,344 250,000 Big Independent Cities, Pooled Insurance Program, RB, Series A, 8.250%, 3/01/09.............................................................. FCLT NR 258,205 100,000 CSAC Finance Corp, COP, Sutter County Health Facilities Project, 7.800%, 1/01/21.............................................................. FCLT BAA1 101,873 40,000 California Health Facilities Authority, Pomona Valley Community Hospital Project, Series A, 7.000%, 1/01/17........................................... FCLT A- 40,527 1,050,000 California Health Facilities Authority, Valley Presbyterian Hospital Project, RB, Series A, 9.000%, 5/01/12................................................ FCLT BB 1,051,333 300,000 California Statewide Communities Development Authority, Cedars Sinai Medical Project, COP, RB, IFRN*, 11/01/15............................................ LRIB A1 248,232 15,000 Corona City, CRA, SFRM, RB, 9.000%, 11/15/12................................... FCLT A 15,395 300,000 East Bay, Wastewater System Project, RB, Refunding, AMBAC Insured, IFRN*, 6/01/20............................................................... LRIB AAA 297,774 500,000 Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, CAB, 1/01/26................................................................. FCLT BBB- 74,410 250,000 Hawthorne, CRA, TAR, 6.750%, 9/01/24........................................... FCLT BAA 264,592 1,800,000 Irvine Ranch Water District, Consolidated Improvement Districts, LOC Industrialized Bank of Japan, VRDN, 6/01/15.............................. VRDN VMIG1 1,800,000 200,000 Lake Elsinore, USD, Refunding, COP, 6.900%, 2/01/20............................ FCLT BBB 215,066 1,700,000 Los Angeles Regional Airports Improvement Corp, LOC Societe Generale, VRDN, 12/01/25............................................................... VRDN A1+ 1,700,000 1,192,923 Los Angeles, HFA, MFH Project C, CAB, RB, 12/01/2.............................. FCLT NR 1,192,923 15,000 Los Angeles, Home Mortgage, RB, 9.000%, 6/15/18................................ FCLT A 15,620 300,000 Los Angeles, Multiple Capital Facilities Project III, COP, IFRN*, 11/01/11..... INLT A1 300,438 575,000 Madera, USD, COP, Educational Facilities Project, 5.750%, 9/01/13.............. FCLT BAA1 560,027 35,000 Modesto, Valley Oak Project, RB, 10.60%, 5/01/09............................... FCSI NR 36,450 350,000 New Haven, USD, AMBAC Insured, CAB, 8/01/16.................................... FCLT AAA 107,636 250,000 Northern California Power Agency, Multiple Capital Facilities, RB, MBIA Insured, IFRN*, 8/01/25................................................. LRIB AAA 292,083 250,000 Northern California Transmission Agency, CA-ORE Transmission Project, RB, MBIA insured, IFRN*, 4/29/24................................................. LRIB AAA 245,325 250,000 Orange County, LTA, RB, IFRN*, 2/14/11......................................... LRIB AA 272,963 250,000 Orange County, LTA, RB, IFRN*, 2/14/11......................................... LRIB AAA 271,358 250,000 Palmdale, SFRM, Series A, CAB, 3/01/17......................................... FCLT AAA 75,903 200,000 Panoche, Water District, COP, 7.500%, 12/01/08................................. FCSI BBB 219,374 250,000 Rancho, Water District Financing Authority, RB, Prerefunded @104, AMBAC Insured, IFRN*, 8/17/21................................................ LRIB AAA 318,075 250,000 Redding, Electric System, COP, Series A, FGIC Insured, IFRN*, 6/01/19.......... LRIB AAA 254,368 500,000 Rio, USD, COP, FSA Insured, Convertible, CAB, 9/01/28.......................... FCLT AAA 332,780
6 THE CALIFORNIA MUNI FUND STATEMENT OF INVESTMENTS (continued) December 31, 1995 - --------------------------------------------------------------------------------
Principal Amount Issue000 Type0 Rating00 Value ------ -------- ----- -------- ----- $ 175,000 Riverside, HFA, Riverside Apartment Project, RB, 7.875%, 11/01/19.............. FCSI BB- $ 185,133 2,000,000 Salinas Redevelopment Agency, TAB, CGIC Insured, Central City Project, CAB, 11/01/22................................................................ FCLT AAA 453,040 500,000 San Bernardino, COP, Series B, MBIA Insured, IFRN*, 7/01/16.................... INLT AAA 515,550 900,000 San Bernardino, COP, Series PA-38, MBIA Insured, IFRN*, 7/01/16................ LRIB AAA 937,512 200,000 San Diego Water Authority, COP, FGIC Insured, IFRN*, 4/22/09................... LRIB AAA 220,992 1,440,000 San Jose, CRA, TAB, MBIA Insured, IFRN*, 8/01/16............................... LRIB AAA 1,325,174 250,000 Solana County, IHFA, Northbay Hospital, COP, 7.750%, 11/01/19.................. FCLT BBB- 261,855 500,000 Southern California Public Power Authority, AMBAC Insured, IFRN*, 7/01/15...... LRIB AAA 461,015 250,000 Southern California Public Power Authority, FGIC Insured, IFRN*, 7/01/17....... LRIB AAA 244,297 105,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series A, 6.450%, 12/01/28....... FCLT AAA 110,029 250,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series B, 6.300%, 12/01/28....... FCLT AAA 258,482 100,000 Upland, HFA, RB, 7.850%, 7/01/20............................................... FCLT BBB 107,364 ----------- Total Investments (Cost $17,427,017**)................................. $18,194,659 ===========
* Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. (see Note 5). Rates shown are at year end. ** Cost is the same for Federal income tax purposes. 7 THE CALIFORNIA MUNI FUND STATEMENT OF INVESTMENTS (continued) December 31, 1995 - -------------------------------------------------------------------------------- Legend 0Type FCLT -Fixed Coupon Long Term FCSI -Fixed Coupon Short or Intermediate Term LRIB -Residual Interest Bond Long Term SRIB -Residual Interest Bond Short or Intermediate Term INLT -Indexed Inverse Floating Rate Bond Long Term INSI -Indexed Inverse Floating Rate Bond Short or Intermediate Term VRDN -Variable Rate Demand Note 00Ratings If a security has a split rating the highest applicable rating is used, including published ratings on identical credits for individual securities not individually rated. Ratings are unaudited. NR-Not Rated 000Issue AMBAC American Municipal Bond Assurance Corporation AMT Alternative Minimum Tax CAB Capital Appreciation Bond CGIC Capital Guaranty Insurance Company COP Certificate of Participation CRA California Redevelopment Agency ETM Escrowed to Maturity FGIC Financial Guaranty Insurance Corporation FNMA Federal National Mortgage Association FSA Financial Security Association GNMA Government National Mortgage Association HFA Housing Finance Authority IHFA Intercommunity Hospital Financing Authority LTA Local Transportation Authority MBIA Municipal Bond Insurance Assurance Corporation MFH Multi Family Housing PFA Public Financing Authority RB Revenue Bond SFRM Single Family Residential Mortgage TAB Tax Allocation Bond TAR Tax Allocation Refunding USD Unified School District See Notes to Financial Statements. 8 THE CALIFORNIA MUNI FUND NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (Left Column) 1. Significant Accounting Policies The California Muni Fund (the Fund) was organized as a Massachusetts business trust and is registered as an open end management investment company under the Investment Company Act of 1940. The Fund seeks to provide investors with as high a level of income that is excluded from gross income for Federal income tax purposes and exempt from California personal income tax as is consistent with the preservation of capital. The following is a summary of significant accounting policies followed in the preparation of its financial statements: Valuation of Securities-Investments are stated at value based on prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Securities not priced in this manner are at the mean of the last reported bid and asked prices provided by principal market makers and recognized dealers in such securities. Other assets and securities for which no quotations are readily available are valued in good faith under methods approved by the Board of Trustees. Federal Income Taxes-It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to "regulated investment companies" and to distribute all of its taxable and tax exempt income to its shareholders. Therefore, no provision for federal income tax is required. Distributions-The Fund declares dividends daily from its net investment income and pays such dividends on the last business day of each month. Distributions of net capital gains, if any, realized on sales of investments are made annually, as declared by the Fund's Board of Trustees. Distributions are determined in accordance with income tax regulations. Dividends are reinvested at the net asset value unless shareholders request payment in cash. General-Securities transactions are accounted for on a trade date basis. Interest income is accrued as earned. Premiums and original issue discount on securities purchased are amortized over the life of the respective securities. Realized gains and losses from the sale of securities are recorded on an identified cost basis. Accounting Estimates-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. 2. Investment Advisory Fees and Other Transactions With Affiliates Under a Management Agreement, the Fund pays an investment management fee to Fundamental Portfolio Advisors, Inc. (the Man- (Right column) ager) equal to 0.5% of the Fund's average daily net asset value up to $100 million and decreasing by .02% of each $100 million increase in net assets down to 0.4% of net assets in excess of $500 million. Under the Agreement, the Manager is required to reimburse to the Fund an amount not exceeding the amount of fees payable to the Manager under the Agreement for any fiscal year, if, and to the extent that the aggregate operating expenses of the Fund for any fiscal year (including the fees payable to the Manager, but excluding interest expense, taxes, brokerage fees and commissions, extraordinary expenses beyond the control of the Manager and other fees and expenses properly excludable from the definition of "aggregate annual expenses" under California law) exceed any expense limitation imposed under California law. No such reimbursements was required during the year ended December 31, 1995. Pursuant to a Distribution Plan (the Plan) adopted pursuant to Rule12b-1, promulgated under the Investment Company Act of 1940, the Fund may pay certain promotional and advertising expenses and may compensate certain registered securities dealers and financial institutions for services provided in connection with the processing of orders for purchase or redemption of the Fund's shares and furnishing other shareholder services. Payments by the Fund shall not in the aggregate, in any fiscal year, exceed 0.5% of the average daily net assets of the Fund. Under a Distribution Agreement with Fundamental Service Corporation (FSC), an affiliate of the Manager, amounts are paid under the Plan to compensate FSC for the services it provides and the expenses it bears in distributing the Fund's shares to investors. Fees for those services aggregated $9,600 for the year ended December 31, 1995. The Fund compensates Fundamental Shareholder Services, Inc., an affiliate of the Manager, for the services it provides under a Transfer Agent and Service Agreement. Transfer agent fees for the year ended December 31, 1995 are set forth in the statement of operations. 3. Trustees' Fees All of the Trustees of the Fund are also directors or trustees of two other affiliated mutual funds for which the Manager acts as investment adviser. For services and attendance at board meetings and meetings of committees which are common to each Fund, each Trustee who is not affiliated with the Manager is compensated at the rate of $6,500 per quarter pro rated among the funds based on their respective average net assets. 4. Shares of Beneficial Interest As of December 31, 1995 there were an unlimited number of shares of beneficial interest (no par value) authorized. 9 THE CALIFORNIA MUNI FUND NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- (left column) Transactions in shares of beneficial interest were as follows: Year Ended Year Ended December 31, 1995 December 31, 1994 ------------------------ ------------------------ Shares Amount Shares Amount --------- ---------- --------- ----------- Shares sold............. 7,881,857 $66,180,540 1,971,607 $15,716,250 Shares issued on reinvestment of dividends............. 60,506 494,825 69,822 570,507 Shares redeemed......... (8,012,453) (67,955,310) (2,270,355) (17,911,916) --------- ---------- --------- ----------- Net increase (decrease). (70,090) ($1,279,945) (228,926) ($1,625,159) ========= ========== ========= =========== 5. Complex Securities and Investment Transactions Inverse Floating Rate Notes: The Fund invests in variable rate securities commonly called "inverse floaters". The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rate on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed rate bond. Certain interest rate movements and other market factors can substantially affect the liquidity of IFRN's. Investment Transactions: During the year ended December 31, 1995, the cost of purchases and proceeds from sales of investment securities, other than short-term obligations, were $7,389,258 and $7,877,645 respectively. As of December 31, 1995 the net unrealized appreciation of portfolio securities amounted to $767,642 composed of unrealized appreciation of $1,033,537 and unrealized depreciation of $265,895. (Right column) 6. Line of Credit The Fund has a line of credit agreement with its custodian bank collateralized by portfolio securities. Borrowings under this agreement bear interest linked to the bank's prime rate. 7. Contingencies The Fund has been named as a defendant in a class action lawsuit alleging that the Fund invested in certain derivative financial instruments that were inconsistent with the Fund's stated investment objectives. The suit claims that the defendants, which include the Fund's investment adviser, distributor, and certain control persons, are liable for damages because there existed material misstatements or omissions in the prospectuses that rendered them misleading. Management has entered into negotiations with the plaintiffs who have consented to a series of adjournments of all operative dates in the litigation. These negotiations have resulted in a settlement in principle with the plaintiffs that, if consummated, would require a payment of approximately $500,000 or more under certain future circumstances by the Fund's investment adviser and no liability or cost to the Fund or its shareholders. The contemplated stipulation of settlement expressly states that the settlement does not constitute an admission of wrongdoing by the Fund or any of the other defendants. The settlement remains subject to final documentation and agreement by the parties and approval by the Court. If the settlement is not successfully concluded, the Fund intends to contest the litigation vigorously. If this litigation ever goes forward, it would involve significant complexities that preclude a present determination of whether any liability to the Fund ultimately would result and, if so, whether any such liability would be material to the financial position of the Fund. Accordingly, and because the contemplated settlement does not require any payment by the Fund, no amount has been accrued in the financial statements with respect to this matter. 8. Selected Financial Information 10 THE CALIFORNIA MUNI FUND NOTES TO FINANCIAL STATEMENTS (continued) - --------------------------------------------------------------------------------
Years Ended December 31, ------------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net Asset Value, Beginning of Year......................... $ 7.10 $ 9.49 $ 8.81 $ 8.80 $ 8.64 Income from investment operations: Net investment income...................................... .419 .553 .563 .604 .571 Net realized and unrealized gains (losses) on investments.. 1.810 (2.390) .876 .010 .160 Total from investment operations................... 2.229 (1.837) 1.439 .614 .731 Less Distributions: Dividends from net investment income....................... (.419) (.553) (.563) (.604) (.571) Dividends from net realized gains.......................... - - (.196) - - Total distributions................................ (.419) (.553) (.759) (.604) (.571) Net Asset Value, End of Year............................... $ 8.91 $ 7.10 $ 9.49 $ 8.81 $ 8.80 Total Return .............................................. 32.02% (19.89%) 16.80% 7.23% 8.75% RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (000).............................. 12,622 10,558 16,280 11,549 9,669 Ratios to Average Net Assets: Interest expense......................................... .39% .98% .39% .16% .14% Operating expenses....................................... 2.81% 2.50% 1.77%* 1.47%* 2.24% Total expenses..................................... 3.20% 3.48% 2.16%* 1.63%* 2.38% Net investment income.............................. 5.02% 6.80% 6.04%* 6.87%* 6.58%* Portfolio turnover rate.................................... 53.27% 15.88% 51.26% 18.91% 47.34% BANK LOANS Amount outstanding at end of year (000 omitted)............ $ 0 $1,292 $3,714 0 645 Average amount of bank loans outstanding during the year (000 omitted)............................................ $ 642 $1,690 $ 958 274 155+ Average number of shares outstanding during the year (000 omitted)............................................ 1,635 1,711 1,517 1,214 1,115+ Average amount of debt per share during the year........... $ .39 $ .95 $ .63 $ .23 $ .14 +Monthly average. **These ratios are after expense reimbursement of .50% for each of the years ended December 31, 1993, and 1992.
11 INDEPENDENT AUDITOR'S REPORT The Board of Trustees and Shareholders The California Muni Fund We have audited the accompanying statement of assets and liabilities including the statement of investments of The California Muni Fund as of Decernber 31, 1995 and the related statement of operations for the year then ended, statements of changes in net assets for each of the two years in the period then ended, and the selected financial information for each of the five years in the period then ended. These financial statements and selected financial information are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and selected financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and selected financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected financial information referred to above present fairly, in all material respects, the financial position of The California Muni Fund as of December 31, 1995, the results of its operations, changes in its net assets, and selected financial information for the periods indicated, in conformity with generally accepted accounting principles. S I G N A T U R E New York, New York February 13, 1996 12 (Left column) THE CALIFORNIA MUNI FUND 90 Washington Street New York, NY 10006 1-800-322-6864 Independent Auditors McGladrey & Pullen, LLP New York, NY 10017 Attorney Kramer, Levin, Naftalis, Nessen, Kamin & Frankel 919 Third Avenue New York, NY 10022 This report and the financial statements contained herein are submitted for the general information of the shareholders of theFund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. (Right Column) THE CALIFORNIA MUNI FUND Annual Report December 31, 1995 THE CALIFORNIA MUNI FUND Double Tax-Free Investing FUNDAMENTAL Fundamental Family of Funds -----END PRIVACY-ENHANCED MESSAGE-----