-----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, RVaHai3vhifHtXmh3KLtLIO++GapLmcvn5AHKtnMWU6tizQLPMH4sS/8Ph2ACtww 0I2vQOFXIQNJ3+7oR0fmnw== 0000717316-95-000008.txt : 19951102 0000717316-95-000008.hdr.sgml : 19951102 ACCESSION NUMBER: 0000717316-95-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS CENTRAL INDEX KEY: 0000717316 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 946562826 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03706 FILM NUMBER: 95585178 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 FORMER COMPANY: FORMER CONFORMED NAME: CAPITAL PRESERVATION TAX FREE TRUST DATE OF NAME CHANGE: 19830815 N-30D 1 ANNUAL REPORT BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Annual Report * August 31, 1995 [Picture of the California state flag] Tax-Free Money Market Fund Municipal Money Market Fund Municipal High-Yield Fund Tax-Free Insured Fund [company logo] The Benham Group Part of the Twentieth Century Family of Mutual Funds CONTENTS U.S. ECONOMIC REVIEW...................................1 MUNICIPAL MARKET SUMMARY...............................2 CALIFORNIA ECONOMIC & CREDIT ANALYSIS........................................4 TAX-FREE MONEY MARKET FUND Performance Information................................5 Portfolio Information..................................6 Management Discussion & Performance Comparison.........7 Financial Information (Audited).......................30 MUNICIPAL MONEY MARKET FUND Performance Information................................9 Portfolio Information.................................10 Management Discussion & Performance Comparison........11 Financial Information (Audited).......................30 MUNICIPAL HIGH-YIELD FUND Performance Information...............................13 Performance Comparison & Breakdown....................14 Portfolio Information.................................15 Management Discussion.................................16 Financial Information (Audited).......................30 TAX-FREE INSURED FUND Performance Information...............................18 Performance Comparison & Breakdown....................19 Portfolio Information.................................20 Management Discussion.................................21 Financial Information (Audited).......................30 INVESTMENT FUNDAMENTALS...............................23 U.S. ECONOMIC REVIEW JAMES M. BENHAM [photo of James Chairman of the Board M. Benham] Lower-than-expected inflation during the 12 months ended September 30, 1995, helped generate optimism in the U.S. financial markets. U.S. inflation, as measured by the consumer price index, increased at an annual rate of just 2.5% during the 12-month period. Corporate mergers, downsizing and global job competition kept labor costs low, and technological advances made U.S. workers more efficient, boosting U.S. productivity to a 10-year high. [graph data described below] Slow economic growth also contributed significantly to the low inflation rate. The Federal Reserve (the Fed) surprised almost everyone by achieving its goal of slow economic growth and low inflation, the so-called "soft landing." The Fed raised short-term interest rates seven times from February 1994 to February 1995 (see the accompanying graph) to slow the economy and prevent inflation. The higher interest rates caused slowdowns in auto, home and retail sales in the first quarter of 1995. Growth was even slower in the second quarter. U.S. employment suffered the biggest monthly jobs decline in four years, and industrial production declined for three consecutive months. As a result, real annual growth was just 1.3% in the second quarter. Evidence of economic weakness was so pronounced by the summer of 1995 that the Fed reduced interest rates in early July. The Fed lowered its target for the federal funds rate from 6.00% to 5.75%, the Fed's first rate cut since September 1992. Despite this action, economic signals remained mixed through the third quarter. Signs of strength appeared in the housing and manufacturing sectors, but consumer confidence ebbed and retail sales lagged. As a result, the Fed's interest rate policy committee left interest rates unchanged at its August and September meetings. Despite the Fed's inaction in September, many analysts still expect interest rates to decline by the end of the year. Some believe that the Fed could cut rates at its next policy committee meeting on November 15, but it looks more likely that the Fed will wait to see if Congress and President Clinton agree on a meaningful budget deficit reduction plan. [graph data] Discount Rate Fed Funds Rate Sep-91 5 5.45 Oct-91 5 5.21 Nov-91 4.5 4.81 Dec-91 3.5 4.43 Jan-92 3.5 4.03 Feb-92 3.5 4.06 Mar-92 3.5 3.98 Apr-92 3.5 3.73 May-92 3.5 3.82 Jun-92 3.5 3.76 Jul-92 3 3.25 Aug-92 3 3.3 Sep-92 3 3.22 Oct-92 3 3.1 Nov-92 3 3.09 Dec-92 3 2.92 Jan-93 3 3.02 Feb-93 3 3.03 Mar-93 3 3.07 Apr-93 3 2.96 May-93 3 3 Jun-93 3 3.04 Jul-93 3 3.06 Aug-93 3 3.03 Sep-93 3 3.09 Oct-93 3 2.99 Nov-93 3 3.02 Dec-93 3 2.96 Jan-94 3 3.05 Feb-94 3 3.25 Mar-94 3 3.34 Apr-94 3 3.56 May-94 3.5 4.01 Jun-94 3.5 4.25 Jul-94 3.5 4.26 Aug-94 4 4.47 Sep-94 4 4.73 Oct-94 4 4.76 Nov-94 4.75 5.29 Dec-94 4.75 5.45 Jan-95 4.75 5.53 Feb-95 5.25 5.92 Mar-95 5.25 5.98 Apr-95 5.25 6.05 May-95 5.25 6.01 Jun-95 5.25 5.98 Jul-95 5.25 5.77 Aug-95 5.25 5.75 Sep-95 5.25 5.8 1 MARKET SUMMARY MUNICIPAL SECURITIES by Dave MacEwen, Vice President & Senior Municipal Portfolio Manager Municipal Market Overview Municipal securities (munis) posted gains during the year ended August 31, 1995, although much of the rally during the past six months was concentrated in short-term munis. After a disastrous 1994, munis rebounded during the first quarter of 1995. All U.S. fixed-income securities benefited from the slow-growth, low-inflation environment that developed in early 1995. But munis received an additional boost from a favorable supply and demand imbalance. Although the muni market experienced no significant cash inflows from investors, new supply was extremely light--in the first quarter of 1995, issuance of new munis dropped to its lowest volume in five years. [graph data described below] The muni rally lost some of its momentum in the second and third quarters of 1995 when tax reform became a priority in the Republican-dominated Congress. One of the most widely discussed plans was a flat income tax proposed by House Majority Leader Dick Armey (see page 3). Flat tax fears halted the rally in long-term munis, but short-term muni yields continued their downward trend. Implementation of any federal tax reform is not expected to occur for several years, so investor demand has increased for short- and intermediate-term munis that will mature before tax reform becomes a reality. This strong demand pushed short-term muni yields lower, while long-term muni yields retraced their decline from earlier in the year (see the graph above). Orange County made headlines again in June after county voters defeated a proposed sales tax increase that would have generated enough revenue to allow the county to repay $800 million in short-term debt due in July and August. Although the county, with the assistance of the state, eventually came up with a plan to repay its debts, the defeat of the sales tax referendum raised serious questions about municipal credit quality. Municipal Securities vs. Treasury Securities Over the past six months, munis with maturities of five years or less outperformed Treasury securities with comparable maturities. This reflects the increased demand for short-term munis because of flat tax fears. Longer-term munis didn't fare as well--in the 20- to 30-year maturity sector, muni yields were little changed during the period, while comparable Treasuries rallied substantially. [graph data] "1" 4.48 3.65 "2" 4.69 3.85 "3" 4.81 4.01 4.91 4.16 "5" 5.01 4.31 5.08 4.435 "7" 5.15 4.56 5.21 4.66 5.27 4.76 "10" 5.33 4.86 5.39 4.98 5.45 5.1 5.51 5.22 5.57 5.34 "15" 5.63 5.46 5.66 5.514 5.69 5.568 5.72 5.622 5.75 5.676 "20" 5.78 5.73 5.796 5.754 5.812 5.778 5.828 5.802 5.844 5.826 "25" 5.86 5.85 5.864 5.854 5.868 5.858 5.872 5.862 5.876 5.866 "30" 5.88 5.87 2 MARKET SUMMARY MUNICIPAL SECURITIES (Continued from the previous page) This comparative performance is illustrated by the graph below, which shows municipal yields as a percentage of Treasury yields. A decreasing percentage (see the three-year note) indicates that muni and Treasury yields have moved further apart, which means that munis outperformed Treasuries. Conversely, an increasing percentage (see the 30-year bond) indicates that muni and Treasury yields have moved closer together, which means that Treasuries outperformed munis. Tax Reform and the Flat Tax Several members of Congress have recently drafted proposals intended to simplify the U.S. tax code. Some of these proposals would remove the tax advantage of munis, and this has had a negative effect on muni prices. The most widely discussed and controversial proposal so far is House Majority Leader Dick Armey's "flat tax" plan. The Armey plan would replace current tax brackets with a single 17% flat rate for all taxpayers. The plan abolishes all tax deductions and makes all investment income tax free, eliminating the tax advantage munis have over Treasuries and corporate securities. Without the tax advantage, muni yields would probably have to rise to retain their attractiveness to investors, and muni prices would decline. [graph data] 2/28/95 8/31/95 3-year note 70 67.3 30-year bond 79 88.2 In spite of the attention it has received, we doubt that the Armey plan will become a reality in its current form. It would generate less tax revenue than the current structure, and its deduction-eliminating provisions would hurt nonprofit organizations and the real estate industry, who would actively lobby against it. We believe passage of a more moderate, fiscally sound proposal is more likely. One such proposal, dubbed the "Nunn-Domenici plan" after the two senators who wrote it, features a "consumed-income" tax with graduated rates and unlimited deductions for income put into financial assets (excluding art and real estate). Interest income would remain taxable, and munis would retain their tax-exempt status. Radical or moderate, we do not expect an overhaul of the tax system to be implemented before 1998. Tax reform could be a key issue in the 1996 elections, so we don't expect any legislation to reach Congress until 1997. Although parts of the various tax proposals currently being circulated may eventually be adopted, we believe it will require a lengthy period of political wrangling. 3 CALIFORNIA CREDIT ANALYSIS STATE ECONOMIC AND CREDIT REVIEW by Steve Permut, Manager of Municipal Research During the second and third quarters of 1995, California continued the slow, steady economic recovery that began in 1994. Employment, though still well below pre-recession levels, continued to trend upward (see the graph below) as the state began to overcome the substantial job losses triggered in part by the demise of its aerospace industry. The tourism, entertainment and high-tech industries were instrumental in improving the employment picture. [graph data described below] More affordable housing prices and low mortgage rates should help resuscitate the languishing real estate market, and the state has added 15,000 construction jobs since November 1994. Migration out of the state seems to be slowing, and population growth is expected to accelerate over the next few years. This should provide solid support for the state's building industry. The state's budgetary picture has improved. The $2.8 billion deficit carried into fiscal 1995 was slashed to $600 million by reduced government spending and modest economic growth. But California's counties have been under considerable strain in the past few years. County revenues remain flat, and state funding has decreased, while social services expenditures continue to rise. Los Angeles County, where defense-related job losses were concentrated during the last recession, was hardest hit--without some action at the state and local levels, the situation could deteriorate substantially. Until these problems can be effectively addressed, we will continue to maintain a negative outlook on county debt in general. Regionally, the Central Valley, with available open space and lower housing costs, is the fastest-growing area in the state. The San Francisco Bay Area remains relatively stable and has benefited from a well-diversified economy. The Los Angeles area currently shows faster-paced job growth than the Bay Area; however, L.A.'s job losses during the recession were far more severe. Though our outlook for the state is relatively positive, the road to recovery won't be a smooth one. Military base closures announced last winter will likely aggravate unemployment. Economic recovery will continue to be slow, but once political and budgetary issues are resolved, we expect to see an improvement in trading values and ratings on the state of California's municipal obligations. [graph data] Cal. Empl. Cal. Empl. 1/31/91 12505.4 5/31/93 12050.6 2/28/91 12487.1 6/30/93 12044.2 3/31/91 12466.4 7/31/93 12038.1 4/30/91 12445.2 8/31/93 12035.4 5/31/91 12422.5 9/30/93 12037.6 6/30/91 12397.5 10/31/93 12039.2 7/31/91 12381.8 11/30/93 12040.2 8/31/91 12370.2 12/31/93 12046 9/30/91 12360.7 1/31/94 12044 10/31/91 12348.9 2/28/94 12049.7 11/30/91 12335.1 3/31/94 12061 12/31/91 12319.5 4/30/94 12075.9 1/31/92 12294.3 5/31/94 12093.4 2/29/92 12264.1 6/30/94 12105.5 3/31/92 12242.4 7/31/94 12125 4/30/92 12223.6 8/31/94 12138.1 5/31/92 12206.9 9/30/94 12147.3 6/30/92 12190.9 10/31/94 12157.3 7/31/92 12186.1 11/30/94 12165.7 8/31/92 12179.8 12/31/94 12174.3 9/30/92 12163.4 1/31/95 12174.6 10/31/92 12146.5 2/28/95 12185.2 11/30/92 12131.2 3/31/95 12193.8 12/31/92 12115.4 4/30/95 12203.3 1/31/93 12100.7 5/31/95 12212.6 2/28/93 12089.9 6/30/95 12222.8 3/31/93 12078.2 7/31/95 12242.3 4/30/93 12063.6 8/31/95 12254.8 4 TAX-FREE MONEY MARKET FUND CURRENT YIELD* As of August 31, 1995 7-Day 7-Day 7-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- Current Effective 34.70% 37.42% 41.95% 42.40% Yield Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 3.20% 3.25% 4.90% 5.11% 5.51% 5.56% The 7-Day Current Yield is calculated based on the income generated by an investment in the Fund over a seven-day period and is expressed as an annual percentage rate. The 7-Day Effective Yield is calculated similarly, although this figure is slightly higher than the Fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the Fund's investments is reinvested and generating additional income. The 7-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 7-Day Current Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes. NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years 10 Years - - -------------------------------------------------------------------------------- $1.00 3.31% 2.51% 2.95% 3.81% Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 31. The Fund commenced operations on November 9, 1983. * Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's yields and total returns will vary. The U.S. government neither insures nor guarantees investments in the Fund. The Fund is managed to maintain a stable $1.00 share price, but, as with all money market funds, there is no assurance that the Fund will be able to do so. 5 TAX-FREE MONEY MARKET FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $408,659,073 $358,608,348 Number of Issues: 101 90 Average Maturity: 47 days 24 days Average Yield: 3.86% 4.10% For definitions of these terms, see page 24. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 D1.0% SP31.8% SP137.0% SP138.0% SP1+62.0% SP1+60.2% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. Some of the Fund's securities do not carry SP1+ or SP1 ratings, but they have received equivalent ratings from Moody's or other rating services. For display purposes, we have converted the equivalent ratings to SP1+ or SP1. Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 26. For a discussion of the securities rated "D", see pages 7-8. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Bonds less than 1 year: 2.0% Put Bonds: 4.6% Put Bonds: 4.0% Commercial Paper: 7.0% Commercial Paper: 5.0% Municipal Notes: 10.8% Municipal Notes: 11.0% VRDNs: 77.6% VRDNs: 78.0% For definitions of these security types, see page 23. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 181-397 Days: 14.0% 181-397 Days: 1.5% 8-90 Days: 7.0% 91-180 Days: 9.5% 0-7 Days: 79.0% 8-90 Days: 11.6% 0-7 Days: 77.4% The Fund generally maintains an average maturity between 30 and 60 days, with 45 days considered a "neutral" position. The composition of the Fund's portfolio may change over time. 6 TAX-FREE MONEY MARKET FUND MANAGEMENT DISCUSSION with Todd Pardula, Portfolio Manager Q: On July 19, 1995, Standard & Poor's (S&P) issued a press release saying that it had lowered the Fund's credit rating from AAA to A+. What was the reason for the downgrade? A: S&P downgraded the Fund because it owns an Orange County security that is technically in default. The Fund maintains a small holding in uninsured Orange County tax and revenue anticipation notes (TRANs) that were scheduled to mature on July 19, 1995. S&P downgraded the TRANs' credit rating from SP3 to D (default) when Orange County did not pay off the $169 million in notes due on the maturity date. At the time of the downgrade, the unenhanced Orange County securities in the Fund comprised less than one percent (about 0.6%) of the portfolio, with a face value of around $2.5 million. Q: Should the Fund's shareholders be concerned about the downgrade? A: No, we don't believe so. We think that the downgrade is a technicality and that the Fund's credit situation has not deteriorated. In fact, we believe the Fund's investment quality and management standards have improved, not declined. We expect to receive final payment on the TRANs in June 1996. A "rollover" of the defaulted Orange County notes--a one-year extension of the notes' maturity date--was approved in July. We believe that the Orange County recovery plan is viable, and we expect to receive full payment on the TRANs when they mature. Furthermore, should something unexpected happen, the Fund's management company has reaffirmed its willingness to purchase as many Orange County notes from the Fund as necessary to keep the share price from dropping below $1.00. We will not sacrifice our reputation as a responsible money manager. Q: You said that you think that the Fund's investment quality and management standards have improved. Why? A: We took significant steps to reduce the Fund's Orange County exposure prior to the downgrade. We sold nearly $2 million of the Fund's Orange County holdings during the second quarter, and we "enhanced" half of the Fund's remaining Orange County TRANs with a letter of credit from State Street Bank and Trust, rated AA by S&P. We also tightened the Fund's credit standards. For example, any TRANs that we purchase now must be credit enhanced--that is, backed by a letter of credit from a major financial institution. In addition, we are reducing our exposure to securities backed by Japanese letters of credit because of growing concerns about the financial health of Japanese banks. 7 TAX-FREE MONEY MARKET FUND MANAGEMENT DISCUSSION (Continued from the previous page) Last, but not least, we continue to expand our staff of credit analysts. Our objective is to become less reliant upon the research of outside rating agencies such as S&P. The Orange County bankruptcy demonstrated the shortcomings of the outside agencies. The sheer number of financial entities the outside agencies have to review each year can cause lags in their review process and lead to dated and unreliable information. Q: How did the Fund perform? A: The Fund continued to perform well. For the one-year period ended August 31, 1995, the Fund's total return was 3.31%, compared to the 3.19% average total return for its peers in Lipper's "California Tax-Exempt Money Market Funds" category over the same period (see the Lipper Performance Comparison below). Q: What is your management strategy for the next six months? A: As long as the outlook favors lower interest rates and the tax-exempt money market yield curve* remains positively sloped, we plan to maintain an average maturity* that is longer than neutral (the Fund's neutral position is about 45 days) by purchasing one-year securities whenever supply and demand factors are advantageous. NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section beginning on page 23. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Tax-Exempt Money Market Funds" category.
1 Year 3 Years 5 Years 10 Years The Fund`s Total Return: 3.31% 2.51% 2.95% 3.81% Category Average Total Return: 3.19% 2.46% 2.99% 3.92% The Fund`s Ranking: 13 out of 50 16 out of 46 16 out of 36 3 out of 3
Total returns are based on historical performance and do not guarantee future results. 8 MUNICIPAL MONEY MARKET FUND CURRENT YIELD* As of August 31, 1995 7-Day 7-Day 7-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- Current Effective 34.70% 37.42% 41.95% 42.40% Yield Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 3.29% 3.34% 5.04% 5.26% 5.67% 5.71% The 7-Day Current Yield is calculated based on the income generated by an investment in the Fund over a seven-day period and is expressed as an annual percentage rate. The 7-Day Effective Yield is calculated similarly, although this figure is slightly higher than the Fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the Fund's investments is reinvested and generating additional income. The 7-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 7-Day Current Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes, but a portion of the dividends will be subject to the federal alternative minimum tax (AMT). NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years Life of Fund - - -------------------------------------------------------------------------------- $1.00 3.35% 2.59% N/A 3.09% Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 32. The Fund commenced operations on December 31, 1990. * Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's yields and total returns will vary. The U.S. government neither insures nor guarantees investments in the Fund. The Fund is managed to maintain a stable $1.00 share price, but, as with all money market funds, there is no assurance that the Fund will be able to do so. 9 MUNICIPAL MONEY MARKET FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $188,048,764 $201,556,314 Number of Issues: 65 40 Average Maturity: 49 days 25 days Average Yield: 4.03% 4.06% For definitions of these terms, see page 24. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 D1.0% SP31.9% SP137.0% SP135.9% SP1+62.0% SP1+62.2% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. Some of the Fund's securities do not carry SP1+ or SP1 ratings, but they have received equivalent ratings from Moody's or other rating services. For display purposes, we have converted the equivalent ratings to SP1+ or SP1. Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 26. For a discussion of the securities rated "D", see pages 11-12. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Put Bonds: 2.0% Put Bonds: 1.6% Bonds less than 1 Year: 3.0% Bonds less than 1 Year: 3.4% Municipal Notes: 12.0% Municipal Notes: 9.1% Commercial Paper: 10.0% Commercial Paper: 12.6% VRDNs: 73.0% VRDNs: 73.3% For definitions of these security types, see page 23. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 181-397 Days: 13.0% 181-397 Days: 0.9% 91-180 Days: 3.0% 91-180 Days: 9.1% 8-90 Days: 11.0% 8-90 Days: 21.8% 0-7 Days: 73.0% 0-7 Days: 68.2% The Fund generally maintains an average maturity between 30 and 60 days, with 45 days considered a "neutral" position. The composition of the Fund's portfolio may change over time. 10 MUNICIPAL MONEY MARKET FUND MANAGEMENT DISCUSSION with Todd Pardula, Portfolio Manager Q: On July 19, 1995, Standard & Poor's (S&P) issued a press release saying that it had lowered the Fund's credit rating from AAA to A+. What was the reason for the downgrade? A: S&P downgraded the Fund because it owns an Orange County security that is technically in default. The Fund maintains a small holding in uninsured Orange County tax and revenue anticipation notes (TRANs) that were scheduled to mature on July 19, 1995. S&P downgraded the TRANs' credit rating from SP3 to D (default) when Orange County did not pay off the $169 million in notes due on the maturity date. At the time of the downgrade, the unenhanced Orange County securities in the Fund comprised less than one percent (about 0.8%) of the portfolio, with a face value of around $1.5 million. Q: Should the Fund's shareholders be concerned about the downgrade? A: No, we don't believe so. We think that the downgrade is a technicality and that the Fund's credit situation has not deteriorated. In fact, we believe the Fund's investment quality and management standards have improved, not declined. We expect to receive final payment on the TRANs in June 1996. A "rollover" of the defaulted Orange County notes--a one-year extension of the notes' maturity date--was approved in July. We believe that the Orange County recovery plan is viable, and we expect to receive full payment on the TRANs when they mature. Furthermore, should something unexpected happen, the Fund's management company has reaffirmed its willingness to purchase as many Orange County notes from the Fund as necessary to keep the share price from dropping below $1.00. We will not sacrifice our reputation as a responsible money manager. Q: You said that you think that the Fund's investment quality and management standards have improved. Why? A: We took significant steps to reduce the Fund's Orange County exposure prior to the downgrade. We sold nearly $1 million of the Fund's Orange County holdings during the second quarter, and we "enhanced" half of the Fund's remaining Orange County TRANs with a letter of credit from State Street Bank and Trust, rated AA by S&P. We also tightened the Fund's credit standards. For example, any TRANs that we purchase now must be credit enhanced--that is, backed by a letter of credit from a major financial institution. In addition, we are reducing our exposure to securities backed by Japanese letters of credit because of growing concerns about the financial health of Japanese banks. 11 MUNICIPAL MONEY MARKET FUND MANAGEMENT DISCUSSION (Continued from previous page) Last, but not least, we continue to expand our staff of credit analysts. Our objective is to become less reliant upon the research of outside rating agencies such as S&P. The Orange County bankruptcy demonstrated the shortcomings of the outside agencies. The sheer number of financial entities the outside agencies have to review each year can cause lags in their review process and lead to dated and unreliable information. Q: How did the Fund perform? A: The Fund continued to perform well. For the one-year period ended August 31, 1995, the Fund's total return was 3.35%, compared to the 3.19% average total return for its peers in Lipper's "California Tax-Exempt Money Market Funds" category over the same period (see the Lipper Performance Comparison below). Q: What is your management strategy for the next six months? A: As long as the outlook favors lower interest rates and the tax-exempt money market yield curve* remains positively sloped, we plan to maintain an average maturity* that is longer than neutral (the Fund's neutral position is about 45 days) by purchasing one-year securities whenever supply and demand factors are advantageous. NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section beginning on page 23. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Tax-Exempt Money Market Funds" category. 1 Year 3 Years Life of Fund+ The Fund`s Total Return: 3.35% 2.59% 3.09% Category Average Total Return: 3.19% 2.46% 2.78% The Fund`s Ranking: 11 out of 50 12 out of 46 8 out of 38 + From February 28, 1991, to August 31, 1995. Total returns are based on historical performance and do not guarantee future results. 12 HIGH-YIELD FUND CURRENT YIELD* As of August 31, 1995 30-Day 30-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 6.44% 9.86% 10.29% 11.09% 11.18% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes, but a portion of the dividends will be subject to the federal alternative minimum tax (AMT). NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Range Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years Life of Fund - - -------------------------------------------------------------------------------- $8.31-$9.28 7.09% 6.75% 8.20% 6.10% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 33. The Fund commenced operations on December 30, 1986. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 13 HIGH-YIELD FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 12/30/86 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [graph data] Index Fund 12/86 10000 10000 10336 10171 10365 10228 10212 10259 9639 9010 9533 8821 9229 9060 9315 9117 9356 9134 8974 8658 8973 8474 9260 8724 12/87 9381 8891 9755 9206 9870 9319 9729 9217 9806 9282 9816 9322 10007 9436 10074 9506 10114 9607 10343 9758 10579 9903 10465 9898 12/88 10647 9998 10898 10159 10745 10181 10754 10178 11069 10309 11326 10512 11498 10625 11650 10740 11473 10650 11438 10663 11589 10746 11835 10924 12/89 11923 10963 11802 10924 11935 11075 11948 11078 11802 10939 12135 11251 12254 11365 12471 11576 12174 11264 12155 11219 12412 11329 12727 11527 12/90 12783 11582 12954 11772 13045 11819 13077 11852 13279 12049 13435 12186 13410 12179 13617 12350 13813 12474 14013 12644 14160 12745 14177 12742 12/91 14515 12847 14506 12833 14529 12942 14566 13030 14705 13128 14920 13284 15208 13490 15766 13903 15554 13736 15623 13820 15362 13544 15795 13875 12/92 16000 14025 16151 14125 16902 14593 16698 14504 16927 14704 17067 14851 17388 15119 17405 15129 17851 15467 18083 15670 18117 15759 17898 15630 12/93 18360 15874 18576 16084 17961 15773 16889 15153 17019 15096 17218 15297 17012 15271 17449 15584 17485 15602 17080 15422 16555 15191 16118 14803 12/94 16691 15023 17425 15444 18134 15821 18352 16102 18343 16107 19124 16592 18772 16423 18868 16490 19134 16708 Past performance does not guarantee future results. The SEC requires each variable-price mutual fund to provide a line graph comparing fund performance with an appropriate broad-based market index over 10 years (or the life of the fund). We have selected the Lehman Brothers, Inc. Long-Term Municipal Bond Index to serve as the comparative index for the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Municipal Debt Funds" category.
1 Year 3 Years 5 Years Life of Fund+ The Fund`s Total Return: 7.09% 6.75% 8.20% 6.10% Category Average Total Return: 7.07% 6.02% 8.01% 6.85% The Fund`s Ranking: 49 out of 91 4 out of 57 20 out of 47 26 out of 30
+ From December 31, 1986, to August 31, 1995. Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1995 % From % From Asset One-Year Income + Appreciation = Total Return 6.16% + 0.93% = 7.09% 14 HIGH-YIELD FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $113,306,820 $105,304,152 Number of Issues: 78 79 Average Maturity: 22.55 years 20.74 years Average Coupon: 6.70% 7.03% Average Duration: 6.70 years 6.83 years For definitions of these terms, see page 24. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Unrated: 22.4% Unrated: 29.0% BBB: 32.3% BBB: 29.0% A: 37.8% A: 29.0% AA: 2.8% AA: 5.0% AAA: 4.7% AAA: 8.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 26. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Other: 17.7% Other: 30.1% Electric: 6.5% 1915 Act: 6.2% Hospital: 6.8% Hospital: 7.0% 1915 Act: 7.8% Housing: 7.7% Mello-Roos: 11.8% Mello-Roos: 12.4% Tax Allocation: 21.3% Tax Allocation: 17.9% COPs: 28.1% COPs: 18.7% For definitions of these security types, see page 23. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Less than 30 Years: 2.1% Less than 30 Years: 3.0% 20-30 Years: 63.7% 20-30 Years: 57.9% 10-20 Years: 32.3% 10-20 Years: 27.0% 1-5 Years: 0.9% 5-10 Years: 4.3% Less than 1 Year: 1.0% 1-5 Years: 5.9% Less than 1 Year: 1.9% The Fund invests primarily in intermediate- and long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. The composition of the Fund's portfolio may change over time. 15 HIGH-YIELD FUND MANAGEMENT DISCUSSION with Steve Permut, Senior Portfolio Manager and Manager of Municipal Research NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section beginning on page 23. Q: How did the Fund perform? A: Along with the municipal bond market in general, the Fund rebounded from 1994. It has performed well in 1995, posting a year-to-date total return of 11.22% as of August 31, 1995. The Fund's total return for the fiscal year ended August 31, 1995 (which includes a portion of 1994's bear market), was 7.09%--slightly higher than the 7.07% average total return for its peers in Lipper's "California Municipal Debt Funds" category (see the Lipper Performance Comparison on page 14). The Fund also continued to meet its objective of providing a high level of tax-exempt income. As of August 31, 1995, the Fund's 30-day SEC yield was 6.44%, compared to the 4.96% average 30-day yield of its Lipper peer group.+ Q: How did you position the Fund? A: To participate in the muni market rally, we extended the Fund's average maturity* and bought securities with longer durations* and better call features.* In addition, we have been purchasing acceptable lower-quality, higher-yielding securities to keep the Fund's income level high. Q: Is that why the Fund's credit profile has changed? The Fund currently holds fewer AAA- and AA-rated securities and more BBB-rated securities than it did on February 28 (see the Portfolio Composition by Credit Rating graphs on page 15). A: Yes. Yield spreads between insured and lower-quality investment grade and non-rated securities widened over the past quarter. We increased the Fund's holdings in acceptable lower-quality securities to take advantage of the higher yields offered by these widening spreads. We also selectively increased our holdings in certificates of participation (COPs),* whose yields have been driven up by concerns about California municipal credit quality (see the Portfolio Composition by Market Sector graphs on page 15). +Although the Fund's yield may be significantly higher than that of other fixed-income funds that purchase higher-rated securities, this higher yield is generally based upon the greater credit risk of the securities in the Fund's portfolio. 16 HIGH-YIELD FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: What is your management strategy for the next six months? A: Because the outlook favors lower interest rates, we plan to continue to extend the Fund's average maturity, looking for securities at both ends of the credit spectrum--highly rated securities with better call features to allow the Fund to continue to participate in bond market gains, and acceptable lower-quality bonds to boost the Fund's yield. As always, the Fund will continue to use its in-house credit analysis team to search for hidden values in lower-rated and unrated municipal securities. Due to our negative outlook on California county issues (see the California Credit Analysis on page 4), we will continue to shy away from county-issued securities until California's counties are on a better fiscal footing. 17 INSURED FUND CURRENT YIELD* As of August 31, 1995 30-Day 30-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 5.47% 8.38% 8.74% 9.42% 9.50% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes. NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Range Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years Life of Fund - - -------------------------------------------------------------------------------- $8.83-$10.12 8.09% 6.53% 8.59% 6.64% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 34. The Fund commenced operations on December 30, 1986. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 18 INSURED FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 12/30/86 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [graph data] Index Fund 12/86 10000 10000 10336 10375 10365 10407 10212 10316 9639 9245 9533 9125 9229 9377 9315 9424 9356 9492 8974 8807 8973 8905 9260 9217 12/87 9381 9404 9755 9781 9870 9906 9729 9619 9806 9695 9816 9647 10007 9860 10074 9883 10114 9927 10343 10129 10579 10347 10465 10222 12/88 10647 10360 10898 10616 10745 10508 10754 10499 11069 10764 11326 11018 11498 11171 11650 11350 11473 11122 11438 11045 11589 11147 11835 11372 12/89 11923 11429 11802 11247 11935 11426 11948 11412 11802 11178 12135 11579 12254 11676 12471 11919 12174 11563 12155 11519 12412 11831 12727 12151 12/90 12783 12201 12954 12344 13045 12387 13077 12352 13279 12526 13435 12644 13410 12595 13617 12761 13813 12936 14013 13140 14160 13290 14177 13229 12/91 14515 13576 14506 13519 14529 13552 14566 13539 14705 13662 14920 13853 15208 14152 15766 14695 15554 14446 15623 14483 15362 14158 15795 14666 12/92 16000 14823 16151 15008 16902 15745 16698 15474 16927 15648 17067 15727 17388 16015 17405 15960 17851 16431 18083 16654 18117 16626 17898 16449 12/93 18360 16818 18576 17034 17961 16531 16889 15694 17019 15778 17218 15887 17012 15810 17449 16144 17485 16155 17080 15910 16555 15600 16118 15337 12/94 16691 15716 17425 16204 18134 16703 18352 16816 18343 16835 19124 17455 18772 17145 18868 17259 19134 17463 Past performance does not guarantee future results. The SEC requires each variable-price mutual fund to provide a line graph comparing fund performance with an appropriate broad-based market index over 10 years (or the life of the fund). We have selected the Lehman Brothers, Inc. Long-Term Municipal Bond Index to serve as the comparative index for the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Insured Municipal Debt Funds" category.
1 Year 3 Years 5 Years Life of Fund+ The Fund`s Total Return: 8.09% 6.53% 8.59% 6.64% Category Average Total Return: 7.10% 6.36% 8.36% 6.84% The Fund`s Ranking: 5 out of 22 3 out of 8 3 out of 8 6 out of 7
+ From December 31, 1986, to August 31, 1995. Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1995 % From % From Asset One-Year Income + Appreciation = Total Return 5.38% + 2.71% = 8.09% 19 INSURED FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $176,460,181 $170,391,691 Number of Issues: 65 66 Average Maturity: 18.44 years 16.77 years Average Coupon: 6.39% 6.65% Average Duration: 8.40 years 7.31 years For definitions of these terms, see page 24. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 AAA: 100% AAA: 100% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 26. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Other: 20.9% Other: 27.6% Electric: 9.4% GO: 8.5% Hospital: 9.7% Electric: 9.0% GO: 10.9% Prerefunded: 11.8% Tax Allocation: 11.3% Hospital: 12.6% Water/Sewer: 17.7% Tax Allocation: 14.0% COPs: 20.1% Water/Sewer: 16.5% For definitions of these security types, see page 23. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 20-30 Years: 34.7% 20-30 Years: 30.7% 10-20 Years: 60.9% 10-20 Years: 55.8% 5-10 Years: 3.1% 5-10 Years: 6.4% 1-5 Years: 1.3% 1-5 Years: 5.9% Less than 1 Year: 1.2% The Fund invests primarily in long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. The composition of the Fund's portfolio may change over time. 20 INSURED FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President and Municipal Portfolio Manager NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section beginning on page 23. Q: How did the Fund perform? A: The Fund was one of the top performers in its peer group during the period. For the fiscal year ended August 31, 1995, the Fund's total return was 8.09%, compared to the 7.10% average total return for the 22 funds in Lipper's "California Insured Municipal Debt Funds" category over the same period (see the Lipper Performance Comparison on page 19). Based on this performance, the Fund ranked fifth in its category. Q: Why did the Fund outperform its category average? A: The Fund's positioning helped produce higher returns. In the last few months of 1994, the Fund was more defensively positioned than many of its peers, and this limited the Fund's losses as muni prices fell. In 1995, a shift to a more neutral position enabled the Fund to benefit fully from the muni rally. Q: Can you elaborate on the Fund's positioning in 1995? A: We maintained the Fund's defensive position at the beginning of 1995 because we believed that strong economic growth could lead to higher inflation and higher interest rates. However, as 1995 progressed and it became clear that economic and market conditions were changing, we shifted our strategy. We sold nearly all of the Fund's short-term munis (maturities of five years or less), which experienced the most price appreciation in 1995, and replaced them with long-term munis (maturities of 10-30 years), which were attractively valued compared to the rest of the muni yield curve.* As a result of this repositioning, the Fund's average maturity* extended from 16.8 years to 18.4 years, and the Fund's duration* extended from 7.3 years to 8.4 years (as shown in the Portfolio Statistics on page 20). This is a more neutral position for the Fund compared to its defensive posture earlier in the year. Q: You cut back on the Fund's holdings of prerefunded bonds (from about 12% to 4%). Why? A: Prerefunded bonds* typically have short maturities, so we sold most of the Fund's prerefunded bonds when we extended the Fund's average maturity and duration. Because of the recent concerns about municipal credit quality, prerefunded bonds (with their Treasury backing) have 21 INSURED FUND MANAGEMENT DISCUSSION (Continued from the previous page) been in great demand, even more so than insured bonds. The strong demand has led to additional price appreciation, and this gave us further incentive to sell the Fund's prerefunded bonds. Q: What is your management strategy for the next six months? A: The muni market is being pulled in opposite directions by beneficial economic conditions and the specter of federal tax reform. Moderate U.S. economic growth and low inflation have created a favorable environment for munis, but flat tax fears continue to plague the muni market. Accordingly, we expect this tug-of-war to hold muni prices in a fairly narrow trading range over the next six months. With this outlook in mind, we plan to maintain the Fund's current neutral position. We may look to extend the Fund's average maturity a little if long-term munis remain cheap. We're also focusing on "call protection"--preventing any of the Fund's securities from being called* during a rally in muni prices. To achieve this protection, we've been selling munis that can be called within 4-7 years and buying munis with call dates that are 9-10 years away. Another part of our strategy is to continue adding premium bonds to the Fund's portfolio in order to avoid the undesirable taxability problem associated with discount bonds* (see page 28 for details). We try to buy premium bonds with coupons* that are at least 50 basis points* higher than prevailing muni yields. This strategy should help provide enough cushion to prevent the Fund's securities from becoming discount bonds during a downturn in the market. Q: The Fund has held a small position in derivatives over the past couple of years. Does the Fund still hold derivatives? A: Yes. The Fund owns two inverse floaters* that make up about 2.3% of the Fund's portfolio. This is down from a 3% position in inverse floaters six months ago. Although we've reduced our holdings, we continue to employ inverse floaters as a duration management tool. They have higher yields and longer durations than typical long-term bonds, and we use them to balance the Fund's duration. Although inverse floaters are more volatile than long-term bonds, their higher yields are desirable in a steep yield curve environment. 22 INVESTMENT FUNDAMENTALS DEFINITIONS Common California Municipal Securities (Munis) AMT Paper--instruments with income subject to the federal alternative minimum tax. Certificates of Participation (COPs)--securities issued to finance public property improvements (such as city halls and police stations). Development Bonds--securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. General Obligation (GO) bonds--securities backed by the taxing power of the issuer. Guaranteed Investment Contracts (GICs)--securities backed by a guarantee from an insurance company. Municipal Commercial Paper (CP)--high-grade short-term securities backed by a line of credit from a bank. Municipal Notes--securities with maturities of two years or less. Prerefunded Bonds--securities refinanced by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. Put Bonds--securities that provide the right to sell to a specified buyer at a specified time and price. Revenue Bonds--securities backed by revenues from sales taxes or from a specific project, system or facility (such as a hospital, electric utility or water system). Tax Allocation Bonds--securities issued to finance improvements in redevelopment areas (such as urban neighborhoods). Tax and Revenue Anticipation Notes (TRANs)--securities backed by the general tax revenues of the issuer. Variable-Rate Demand Notes (VRDNs)--securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. Municipal Derivatives Inverse Floaters--securities bearing interest rates that move inversely to market interest rates. Unlike most bonds, their yields increase as interest rates decline. However, if interest rates rise, they lose considerably more value than a regular fixed-rate bond. Therefore, each Benham California Tax-Free and Municipal Fund limits its investment in inverse floaters to a maximum of 10% of net assets (except for the Money Market Funds, which cannot own inverse floaters at all). 23 INVESTMENT FUNDAMENTALS DEFINITIONS (Continued from the previous page) Tender Option Bonds--intermediate- or long-term fixed-rate securities with put options attached (which give the holder the option to sell the bonds at face value at a specified time). Tender option bonds purchased by the Funds are typically structured with seven-day put features attached and pay interest at rates that are reset weekly. Each Fund limits its investment in tender option bonds to 15% of net assets. Tender option bonds are not leveraged and have risk characteristics that are similar to VRDNs. Portfolio Statistics Market Value--the market value of a fund's investments on a given date. Number of Issues--the number of different securities issuances held by a fund on a given date. Average Maturity--a weighted average of all bond maturities in a fund's portfolio (see also page 27). Average Coupon--a weighted average of all coupons held in a fund's portfolio. Average Yield--a weighted average of the yields to maturity of the securities in a money market fund's portfolio. Average Duration--a weighted average of all bond durations in a fund's portfolio (see also page 27). Investment Terms Basis Points--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equals one percentage point (or 1%). Basis points are used to avoid confusion about interest rate changes. For example, if an economist says that interest rates rose 1%, does that mean 1% of the previous rate, or one percentage point? Saying that interest rates rose by 100 basis points is a more precise way of describing the change. Coupon--the stated interest rate on a security. Discount Bonds--bonds with coupons that are lower than prevailing interest rates (see also page 28). Par Bonds--bonds that trade or are priced at their face value. Premium Bonds-- bonds with coupons that are higher than prevailing interest rates (see also page 28). 24 INVESTMENT FUNDAMENTALS THE YIELD CURVE One of the fundamental tenets of investing is the relationship between risks and returns--the greater the risks, the greater the chances of earning higher returns over time. The downside is the correspondingly higher potential for short-term losses--an investment that generates a high return probably has a greater likelihood of significant fluctuations in value or return, especially in the short run. Bonds are no exception. The riskiest bonds--those with the greatest exposure to interest rate movements and price fluctuations--generally have the highest yields and returns over time but can experience severe short-term losses. On the other hand, bonds with less exposure to interest rate movements and less price fluctuation generally have lower yields and returns but are more stable. The yield curve is a graphic representation of the relationship between bond risks and returns at a point in time. Yield curve graphs plot lengthening bond maturities (which represent risk because longer maturities increase risk) along the horizontal axis and rising yields (which represent return) on the vertical axis. Therefore, the lower left corner of yield curve graphs have the lowest risks and the lowest potential returns, while the upper right corners have the highest risks and the highest potential returns. Yield curves can have several different shapes, depending on interest rate levels and the economic environment: Normal (Upward Sloping) Yield Curve--a yield curve that shows a normal risk/ return relationship--short-term securities have lower yields than long-term securities. Most normal yield curves start in the lower left corner of the graph and rise to the upper right corner. Steep Yield Curve--a normal yield curve that shows a large difference between short-term yields and long-term yields. This typically occurs when the bond market is responding to inflation fears (causing high long-term bond yields) and the Fed hasn't raised short-term interest rates enough (or the economy hasn't slowed down enough) to quell those fears. Flat Yield Curve--a yield curve that shows short-term securities having almost the same yields as long-term securities. This typically occurs after the Fed has raised short-term interest rates several times--to fight inflation and slow down the economy--and long-term bond yields begin to fall. Inverted Yield Curve--a yield curve that shows short-term securities having higher yields than long-term securities. It's the next step after a flat yield curve if the Fed continues to raise short-term interest rates and long-term rates stay flat or fall. 25 INVESTMENT FUNDAMENTALS MUNI RISK FACTORS Credit Quality and Credit Ratings Bond credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in bond investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. In turn, credit quality and ratings greatly influence bond prices and yields--high ratings mean higher prices and less current income (yield) as compensation for risk. But credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality, as the Orange County bankruptcy made painfully clear. In that case, highly rated munis issued by a wealthy county still suffered defaults. Furthermore, in addition to the credit risk, there is still market risk. High credit ratings do not guarantee good investment performance. They do not reflect the price stability of a muni when economic or market conditions change. Callability Many munis are callable, which means they can be redeemed by the issuer before maturity. When interest rates fall, municipalities find it financially rewarding to refinance the bonds they've issued because they can reduce their monthly interest payments. The municipalities exercise their "call" options to refinance the bonds. Although calls are good for the bond issuers, they're bad for investors in munis--calls reduce the life of a municipal portfolio and force the portfolio manager to reinvest in lower-yielding munis. The durations of munis effectively shorten as rates fall. Calls also boost supply and help drive down muni prices. Call options can only be exercised on specific "call dates," which don't always coincide with periods of low interest rates when refinancing is desirable. As a result, municipalities will issue new bonds when interest rates are low and use the proceeds to buy Treasuries, which offset the old bonds (now known as prerefunded bonds) on their balance sheets until the bonds can be retired on the call date. When the call date arrives, the Treasuries mature, and the prerefunded bonds are retired. During this process, there is a period of time when both the newly issued bonds and the prerefunded bonds remain outstanding. This situation doubles the municipal bond supply, which can depress prices. Duration Extension Duration extension occurs when interest rates increase significantly, as they did in 1994. Higher interest rates reduce calls, which is good for municipal investors, but the lower level of calls causes the durations of munis to extend longer, which is bad when rates are rising. Muni funds become more susceptible to price declines at a time when greater price stability would be desirable. By contrast, Treasury durations generally shorten slightly when interest rates experience a large increase. Because of their higher coupons, premium bonds experience less duration extension than par or discount bonds. 26 INVESTMENT FUNDAMENTALS PORTFOLIO SENSITIVITY MEASUREMENTS Duration Duration measures the price sensitivity of a bond or bond fund to changes in interest rates. Specifically, duration represents the approximate percentage change in the price of a bond or bond fund if interest rates move up or down by 100 basis points (a basis point equals 0.01%). For example, as of August 31, 1995, the California Tax-Free Short-Term Fund's duration was approximately two years, while the California Tax-Free Long-Term Fund's duration was approximately eight years. If interest rates were to rise by 100 basis points, the Short-Term Fund's share price would be expected to decline by 2%, while the Long-Term Fund's share price would decline by 8%. Conversely, if interest rates were to fall by 100 basis points, the Short-Term Fund's share price would be expected to increase by 2%, while the Long-Term Fund's share price would increase by 8%. As this example illustrates, the longer the duration, the more bond or bond fund prices will move in response to interest rate changes. Therefore, portfolio managers generally want durations to be as long as possible when interest rates fall (to maximize bond price increases) and as short as possible when interest rates rise (to minimize bond price declines), taking into account the objectives of the portfolio. Duration, measured in years, also approximates (but understates) the weighted average life of a bond or bond portfolio. To calculate duration, the future interest and principal payments are added together and weighted in proportion to their time value (early payments are valued more than later payments because early payments can be reinvested and compound additional returns). Average Maturity Average maturity is another measurement of the interest rate sensitivity of a bond portfolio. Average maturity measures the average amount of time that will pass until a bond portfolio receives its principal payments from matured bonds. The longer a portfolio's average maturity is, the more interest rate exposure and interest rate sensitivity it has. For example, a portfolio with a ten-year average maturity has much more potential exposure to interest rate changes than a portfolio with a one-year average maturity. Portfolio managers generally lengthen average maturities when interest rates fall (to maximize exposure and capture as much price appreciation as possible) and reduce average maturities when interest rates rise (to minimize exposure and avoid as much price depreciation as possible), as long as this strategy is compatible with the objectives of the portfolio. Reducing the average maturity in a rising interest rate environment allows the portfolio manager to more quickly reinvest matured assets in higher-yielding securities. 27 INVESTMENT FUNDAMENTALS BOND PRICING Premium and Discount Bonds Municipal bonds are generally priced at a premium or at a discount. Premium bonds are bonds that trade or are priced above par (face value), typically because their interest coupons are higher than the prevailing market interest rate. Discount bonds are bonds that trade or are priced below par, typically because their interest coupons are lower than the prevailing market interest rate. A bond may be both a premium bond and a discount bond during its life, depending on changing market conditions. As market rates rise and bond prices fall, the price of a premium bond can fall below par, and the bond becomes a discount bond. Conversely, as market rates fall and bond prices rise, the price of a discount bond can rise above par, and the bond becomes a premium bond. Premium munis tend to have more price stability than discount munis--premium munis depreciate less when interest rates rise (they experience less duration extension), but they appreciate less when interest rates fall (they experience more calls). Discount munis behave more like long-term Treasury securities. Tax Treatment of Discount Bonds In 1993, new rules were passed regarding the tax treatment of long-term gains on discount munis. In the past, any gain earned from the market discount was treated as a capital gain, which is taxed at a maximum rate of 28%. However, the newer law requires that any gain attributable to the market discount must be treated as taxable ordinary income, which is taxed at the same rate as an individual's tax bracket (up to 39.6%). Small market discounts (according to a formula based on the price of the bond and the maturity date) are not subject to the new law. This tax treatment has made discount bonds less attractive in the muni market because most municipal investors prefer to avoid incurring taxable income. Discount munis also tend to have relatively low prices to make up for the expected tax liability. As a result, when the price of a muni falls to the point where it is traded at a market discount, the combination of reduced desirability and added tax liability tends to lead to further price declines. 28 INVESTMENT FUNDAMENTALS PORTFOLIO STRUCTURES & TAXABLE DISTRIBUTIONS Bond Portfolio Structures Barbell Structure--a structure that weights the portfolio heavily at each end, with cash at one end and long-term bonds at the other, with little or nothing in between. This structure is particularly effective when yield curves are moving from steep to flat (short-term rates are rising faster than long-term rates). The cash captures the higher short-term yields without losing value, while the long-term bonds earn high yields that offset any depreciation they might experience. Bullet Structure--a structure that clusters the bond maturities around a single maturity, typically the portfolio's average maturity. This structure is effective when the yield curve is steepening and you have targeted one maturity as the ideal place to be on the yield curve under prevailing market conditions. Ladder Structure--a structure that staggers bond maturities so they occur at regular intervals. When interest rates are rising, this structure allows alternating parts of the portfolio to be continually reinvested at higher interest rates. Taxable Distributions It's important to remember for your tax planning that tax-free funds often generate taxable year-end distributions. These distributions typically result from short-term and long-term capital gains. The taxable distributions usually happen under favorable circumstances (the capital gains reflect bond appreciation), but such distributions understandably attract attention simply because they are taxable instead of tax free. Although we manage our California tax-free and municipal bond funds to earn tax-exempt income, they sometimes realize taxable capital gains as we pursue higher total returns. By law, the funds must distribute these capital gains to shareholders each year. Under current tax law, each fund must distribute net short-term capital gains realized by the fund as taxable ordinary income. Each fund distributes net long-term capital gains to shareholders as a taxable capital gains distribution. 29 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Trustees Benham California Tax-Free and Municipal Funds: We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund and Tax-Free Insured Fund (four of the series comprising Benham California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1995, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights 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 financial highlights 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 August 31, 1995, by correspondence with the custodian and brokers. 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 the financial highlights referred to above present fairly, in all material respects, the financial position of Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund and Tax-Free Insured Fund of Benham California Tax-Free and Municipal Funds as of August 31, 1995, the results of their operations, the changes in their net assets and their financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP San Francisco, California October 9, 1995 30
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - - --------------------------------------------------------------------------------------------------------------------------- Tax-Free Money Market Fund - - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Income From Investment Operations Net Investment Income .0328 .0207 .0209 .0298 .0420 .0510 .0559 .0464 .0383 .0424 Net Realized and Unrealized Losses on Investments (.0003) 0 0 0 0 0 0 (.0053) 0 0 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income From Investment Operations .0325 .0207 .0209 .0298 .0420 .0510 .0559 .0411 .0383 .0424 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383) (.0424) Distributions from Net Realized Capital Gains 0 0 0 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Distributions (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383) (.0424) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at End of Period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 ====== ==== ==== ==== ==== ==== ==== ==== ==== ==== TOTAL RETURN* 3.31% 2.09% 2.13% 3.00% 4.23% 5.23% 5.70% 4.24% 3.88% 4.39% - - ------------- SUPPLEMENTAL DATA AND RATIOS - - ---------------------------- Net Assets at End of Period (in thousands of dollars $ 414,099 371,074 338,731 321,307 361,007 463,130 490,700 328,532 318,095 161,457 Ratio of Expenses to Average Daily Net Assets .52% .50% .51% .54% .56% .56% .59% .63% .67% .74% Ratio of Net Investment Income to Average Daily Net Assets 3.28% 2.07% 2.09% 2.98% 4.20% 5.10% 5.59% 4.10% 3.83% 4.24%
- - ------------------------ * Total return figures assume reinvestment of dividends and capital gain distributions. See the accompanying notes to financial statements. 31
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - - ----------------------------------------------------------------------------------------------------------------------------------- Municipal Money Market Fund - - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991+ ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period....................................... $ 1.00 1.00 1.00 1.00 1.00 Income From Investment Operations Net Investment Income...................................................... .0331 .0213 .0221 .0344 .0293 Net Realized and Unrealized Gains (Losses) on Investments.................. (.0003) 0 0 0 0 ________ ________ ________ ________ ________ Total Income From Investment Operations.................................. .0328 .0213 .0221 .0344 .0293 ________ ________ ________ ________ ________ Less Distributions Dividends from Net Investment Income....................................... (.0328) (.0213) (.0221) (.0344) (.0293) Distributions from Net..................................................... Realized Capital Gains..................................................... 0 0 0 0 0 ________ ________ ________ ________ ________ Total Distributions...................................................... (.0328) (.0213) (.0221) (.0344) (.0293) ________ ________ ________ ________ ________ Net Asset Value at End of Period............................................. $ 1.00 1.00 1.00 1.00 1.00 TOTAL RETURN* 3.35% 2.15% 2.25% 3.63% 3.04% - - ------------- SUPPLEMENTAL DATA AND RATIOS - - ---------------------------- Net Assets at End of Period (in thousands of dollars) $191,722 243,701 247,621 254,823 136,860 Ratio of Expenses to Average Daily Net Assets .53% .51% .46% .07% 0% Ratio of Net Investment Income to Average Daily Net Assets 3.31% 2.13% 2.21% 3.44% 4.39%** - - ---------------------- + From December 31, 1990 (commencement of operations) through August 31, 1991. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
32
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - - ------------------------------------------------------------------------------------------------------------------------------------ Municipal High-Yield Fund - - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 1990 1989 1988 1987+ ----- ----- ----- ----- ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period $ 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69 10.00 Income From Investment Operations Net Investment Income .5612 .5629 .5703 .5809 .5879 .6266 .6611 .6527 .4509 Net Realized and Unrealized Gains (Losses) on Investments .0497 (.4793) .5401 .2800 .3000 (.1400) .2300 (.2400) (1.3100) -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income (Loss) From Investment Operations .6109 .0836 1.1104 .8609 .8879 .4866 .8911 .4127 (.8591) -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income (.5609) (.5627) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509) Distributions from Net Realized Capital Gains 0 (.1208) 0 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains 0 (.0001) 0 0 0 0 0 0 0 ________ ________ ________ ________ ________ ________ ________ ________ ________ Total Distributions (.5609) (.6836) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509) -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at End of Period $ 9.11 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69 ===== ==== ==== ==== ==== ==== ==== ==== ==== TOTAL RETURN* 7.09% .87% 12.61% 10.11% 10.75% 5.77% 10.86% 5.17% (10.19)% - - ------------- SUPPLEMENTAL DATA AND RATIOS - - ---------------------------- Net Assets at End of Period (in thousands of dollars) $116,166 116,000 114,564 79,949 65,741 44,602 32,631 13,169 8,434 Ratio of Expenses to Average Daily Net Assets .51% .51% .55% .56% .50% .24% 0% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets 6.30% 6.02% 6.14% 6.54% 6.79% 7.23% 7.67% 7.85% 7.50%** Portfolio Turnover Rate 40.00% 42.55% 27.40% 32.51% 47.41% 103.74% 49.54% 142.86% 57.42% - - ----------------- + From December 30, 1986 (commencement of operations) through August 31, 1987. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. **......................Annualized. See the accompanying notes to financial statements.
33
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - - ------------------------------------------------------------------------------------------------------------------------------------ Tax-Free Insured Fund - - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 1990 1989 1988 1987+ ----- ----- ----- ----- ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period $ 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07 10.00 Income From Investment Operations Net Investment Income .5320 .5267 .5470 .5705 .5733 .5889 .6026 .6246 .4370 Net Realized and Unrealized Gains (Losses) on Investments .2200 (.6922) .7588 .5000 .4700 (.2300) .4300 (.2700) (.9300) -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income (Loss) From Investment Operations .7520 (.1655) 1.3058 1.0705 1.0433 .3589 1.0326 .3546 (.4930) -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income (.5320) (.5263) (.5477) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370) Distributions from Net Realized Capital Gains 0 (.2082) (.0881) 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains 0 (.0700) 0 0 0 0 0 0 0 ________ ________ ________ ________ ________ ________ ________ ________ ________ Total Distributions (.5320) (.8045) (.6358) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370) -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at End of Period $ 9.89 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07 ===== ==== ==== ==== ==== ==== ==== ==== ===== TOTAL RETURN* 8.09% (1.68)% 13.74% 11.67% 11.87% 3.96% 12.04% 4.58% (8.51)% - - ---------------- SUPPLEMENTAL DATA AND RATIOS - - ------------------------------------- Net Assets at End of Period (in thousands of dollars) $178,913 189,439 223,440 145,965 94,951 59,870 42,569 29,531 12,748 Ratio of Expenses to Average Daily Net Assets .50% .49% .52% .55% .59% .61% .66% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets 5.54% 5.20% 5.37% 5.90% 6.18% 6.43% 6.62% 7.39% 7.11%** Portfolio Turnover Rate 40.45% 47.12% 60.94% 53.73% 37.59% 117.47% 73.02% 145.29% 21.04% - - --------------- + From December 30, 1986 (commencement of operations) through August 31, 1987. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. **......................Annualized. See the accompanying notes to financial statements.
34
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES August 31, 1995 Tax-Free Municipal Municipal Tax-Free Money Market Money Market High-Yield Insured Fund Fund Fund Fund --------- --------- --------- --------- ASSETS Investment securities at value (cost of $408,659,073, $188,048,764, $110,224,874 and $171,565,384, respectively) $ 408,659,073 188,048,764 113,306,820 176,460,181 Cash 8,435,319 4,560,682 738,396 942,580 Interest receivable 2,063,699 885,259 2,250,283 2,788,973 Receivables for fund shares sold 455,926 534,737 167,510 109,002 Prepaid expenses and other assets 7,248 4,349 1,254 2,315 ------------ ----------- ----------- ---------- Total assets 419,621,265 194,033,791 116,464,263 180,303,051 ------------ ----------- ----------- ---------- LIABILITIES Payable for securities purchased 3,530,170 1,512,930 0 1,050,811 Payable for fund shares redeemed 1,751,089 692,854 76,486 10,467 Dividends payable 50,275 19,323 175,035 258,533 Fees payable to affiliates (Note 2) 175,329 86,119 45,734 68,767 Accrued expenses and other liabilities 15,197 225 1,140 1,910 ------------ ----------- ----------- ---------- Total liabilities 5,522,060 2,311,451 298,395 1,390,488 ------------ ----------- ----------- ---------- NET ASSETS $ 414,099,205 191,722,340 116,165,868 178,912,563 ============ =========== =========== ========== Net assets consist of: Capital paid in $ 414,243,637 191,817,804 114,953,650 175,244,715 Net realized loss on investments (1,119,549) (162,368) (1,873,819) (1,230,778) Undistributed net investment income 975,117 66,904 4,091 3,829 Net unrealized appreciation on investments 0 0 3,081,946 4,894,797 ------------ ----------- ----------- ---------- Net assets $ 414,099,205 191,722,340 116,165,868 178,912,563 ============ =========== =========== ========== Shares of beneficial interest outstanding (unlimited number of shares authorized) 414,243,637 191,817,804 12,756,782 18,084,945 ============ =========== =========== ========== Net asset value, offering price and redemption price per share $1.00 1.00 9.11 9.89 ===== ==== ===== ===== - - ----------------------- See the accompanying notes to financial statements.
35
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF OPERATIONS For the Year Ended August 31, 1995 Tax-Free Municipal Municipal Tax-Free Money Market Money Market High-Yield Insured Fund Fund Fund Fund --------- --------- --------- --------- Investment Income Interest income $ 14,475,199 8,346,065 7,372,018 10,389,130 ------------ ----------- ----------- ---------- Expenses (Note 2) Investment advisory fees 1,118,609 638,989 317,026 505,500 Administrative fees 372,776 213,037 105,659 168,491 Transfer agency fees 245,317 157,812 66,032 95,075 Printing and postage 66,019 41,694 18,045 27,953 Custodian fees 3,551 1,756 5,604 6,937 Auditing and legal fees 110,942 64,767 9,951 13,536 Registration and filing fees 13,518 1,935 1,629 2,595 Directors' fees and expenses 10,361 7,914 6,152 7,166 Other operating expenses 43,570 31,550 25,229 33,379 ------------ ----------- ----------- ---------- Total expenses 1,984,663 1,159,454 555,327 860,632 ------------ ----------- ----------- ---------- Net investment income 12,490,536 7,186,611 6,816,691 9,528,498 ------------ ----------- ----------- ---------- Realized and Unrealized Gain (Loss) on Investments (Note 4) Net realized gain (loss) (identified cost basis): Proceeds from sales 17,364,005 16,472,120 43,337,952 86,238,894 Cost of securities sold 17,649,308 16,634,488 45,211,022 86,006,443 ------------ ----------- ----------- ---------- Net realized gain (loss) (285,303) (162,368) (1,873,070) 232,451 ------------ ----------- ----------- ---------- Unrealized appreciation (depreciation) of investments: Beginning of year 0 0 1,231,494 1,892,534 End of year 0 0 3,081,946 4,894,797 ------------ ----------- ----------- ---------- Net unrealized appreciation for the year 0 0 1,850,452 3,002,263 ------------ ----------- ----------- ---------- Net realized and unrealized gain (loss) on investments (285,303) (162,368) (22,618) 3,234,714 ------------ ----------- ----------- ---------- Net increase in net assets resulting from operations $ 12,205,233 7,024,243 6,794,073 12,763,212 ============ =========== =========== ========== - - ------------------------ See the accompanying notes to financial statements.
36
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS For the Years Ended August 31, 1995 and 1994 Tax-Free Municipal Municipal Tax-Free Money Market Fund Money Market Fund High-Yield Fund Insured Fund ------------------ ------------------ ------------------ ------------------ 1995 1994 1995 1994 1995 1994 1995 1994 -------- -------- -------- -------- -------- -------- -------- -------- From investment activities: Net investment income $12,490,536 7,720,190 7,186,611 5,287,434 6,816,691 6,808,425 9,528,498 10,824,476 Net realized gain (loss) on investments (285,303) 0 (162,368) 0 (1,873,070) 998,423 232,451 (110,260) Net change in unrealized appreciation (depreciation) on investments 0 0 0 0 1,850,452 (6,982,577) 3,002,263 (14,896,263) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Change in net assets derived from investment activities 12,205,233 7,720,190 7,024,243 5,287,434 6,794,073 824,271 12,763,212 (4,182,047) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- From distributions to shareholders: Net investment income (12,368,993) (7,720,190) (7,127,335) (5,287,434) (6,813,446) (6,805,587) (9,528,450) (10,816,723) Net realized gain on investments 0 0 0 0 0 (1,429,948) 0 (4,355,114) In excess of net realized gains on investments 0 0 0 0 0 (748) 0 (1,463,230) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (12,368,993) (7,720,190) (7,127,335) (5,287,434) (6,813,446) (8,236,283) (9,528,450) (16,635,067) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
37
Statements of Changes in Net Assets --Continued - - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Free Municipal Municipal Tax-Free Money Market Fund Money Market Fund High-Yield Fund Insured Fund ------------------ ------------------ ------------------ ------------------ 1995 1994 1995 1994 1995 1994 1995 1994 From capital share transactions (Note 3): Proceeds from sales of shares 466,211,495 548,608,632 310,209,174 396,441,621 58,165,774 73,614,551 51,954,200 91,484,549 Net asset value of distributions reinvested 11,717,045 7,271,719 6,894,430 5,080,789 4,776,705 5,942,772 6,459,209 12,184,178 Cost of shares redeemed (434,739,843) (523,536,597)(368,979,533) (405,441,948) (62,756,859) (70,710,126) (72,174,227)(116,853,021) ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- Change in net assets derived from capital share transactions 43,188,697 32,343,754 (51,875,929) (3,919,538) 185,620 8,847,197 (13,760,818) (13,184,294) ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in in net assets 43,024,937 32,343,754 (51,979,021) (3,919,538) 166,247 1,435,185 (10,526,056) (34,001,408) Net Assets: Beginning of year 371,074,268 338,730,514 243,701,361 247,620,899 115,999,621 114,564,436 189,438,619 223,440,027 ------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- End of year $ 414,099,205 371,074,268 191,722,340 243,701,361 116,165,868 115,999,621 178,912,563 189,438,619 ============ =========== =========== =========== =========== =========== =========== =========== - - ------------------- See the accompanying notes to financial statements.
38 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS NOTES TO FINANCIAL STATEMENTS August 31, 1995 (1) SIGNIFICANT ACCOUNTING POLICIES Benham California Tax-Free and Municipal Funds (BCTFMF) is registered under the Investment Company Act of 1940 as an open-end management investment company. Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund (collectively the "Funds") are four of the seven Funds composing BCTFMF. With the exception of the Municipal Money Market Fund, each Fund is a "diversified company" as defined in the Investment Company Act of 1940. Significant accounting policies followed by the Funds are summarized below. Valuation of Investment Securities--Securities held by the Tax-Free Money Market Fund and Municipal Money Market Fund (collectively the "Money Market Funds") are valued at amortized cost, which approximates current market value. Securities held by the Municipal High-Yield and Tax-Free Insured Funds (collectively the "Variable-Price Funds") are valued at current market value as provided by an independent pricing service. When valuations are not readily available, securities are valued at fair value as determined in good faith by the Board of Trustees. Securities transactions are recorded on the date the order to buy or sell is executed. Realized gains and losses on security transactions are determined on the basis of identified cost. Income Taxes--Each Fund of BCTFMF intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. By doing so, each Fund will not be subject to federal income or California franchise taxes to the extent that it distributes substantially all of its net investment income and net realized capital gains to shareholders. Due to the timing of dividend distributions and the differences in accounting for gains and losses for financial statement and federal income tax purposes, the fiscal year in which amounts are distributed may differ from the year in which the income and realized gains (losses) were recorded by each Fund. The differences between capital gains distributed on a book versus tax basis are shown as excess distributions of net realized capital gains in the accompanying Financial Highlights and Statements of Changes in Net Assets. As of August 31, 1995, the Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund had capital loss carryovers of $740,889, $3,865, $425,261, and $1,230,778, respectively. No capital gains distributions will be 39 made by a Fund until all of its loss carryovers have been offset or expired. The capital loss carryover for the Tax-Free Money Market Fund expires August 31, 1996. All other loss carryovers expire on August 31, 2003. Share Valuation--Each Fund's net asset value per share is computed each business day by dividing the value of its total assets, less its liabilities, by the total number of shares outstanding at the beginning of each business day. It is BCTFMF's policy to maintain a constant net asset value of $1.00 per share for the Money Market Funds, although there is no guarantee it will be able to do so. The Variable-Price Funds' net asset values fluctuate daily in response to changes in the market value of their investments. Investment Income, Premium, and Discount--Interest income and expenses are accrued daily. For each Fund, premium on securities purchased is amortized daily on a straight-line basis over the shorter period of purchase date to call date or purchase date to maturity date. Market discount is recognized as income upon sale or maturity of the securities for the Variable-Price Funds. Original issue discount for municipal securities is accrued daily using the effective interest rate method for the Variable-Price Funds. Discount is accrued daily on a straight-line basis through maturity for securities held by the Money Market Funds. Dividends and Other Distributions--The Money Market Funds' dividends are declared and credited daily and distributed on the last business day of the month. The Variable-Price Funds' dividends are declared daily, accrued throughout the month, and distributed on the last business day of the month. Each Variable-Price Fund distributes net realized capital gains, if any, once per year. Shareholders may elect to receive distributions in cash or reinvested as additional shares. (2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth Century Companies, Inc. (TCC). BMC's former parent company, Benham Management International, Inc., merged into TCC on June 1, 1995. Each Fund pays Benham Management Corporation (BMC) a monthly investment advisory fee based on its pro rata share of the dollar amount derived from applying BCTFMF's average daily net assets to the following annualized investment advisory fee schedule. .50% of the first $100 million .45% of the next $100 million .40% of the next $100 million .35% of the next $100 million .30% of the next $100 million 40 .25% of the next $1 billion .24% of the next $1 billion .23% of the next $1 billion .22% of the next $1 billion .21% of the next $1 billion .20% of the next $1 billion .19% of average daily net assets over $6.5 billion BMC provides BCTFMF with all investment advice. Twentieth Century Services, Inc. pays all compensation of BCTFMF officers and trustees who are officers or directors of TCC or any of its subsidiaries. In addition, promotion and distribution expenses are paid by BMC. BCTFMF has an Administrative Services and Transfer Agency Agreement with Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under the agreement, BFS provides substantially all administrative and transfer agency services necessary to operate the Funds. Fees for these services are based on transaction volume, number of accounts, and average net assets of all funds in The Benham Group. BCTFMF has an additional agreement with BMC pursuant to which BMC established a contractual expense guarantee that limits each Fund's expenses (excluding extraordinary expenses such as brokerage commissions and taxes) to .54% (.57% prior to June 1, 1995) of average daily net assets for the Tax-Free Money Market Fund, .58% (.60% prior to June 1, 1995) of average daily net assets for the Municipal Money Market Fund, and .62% of average daily net assets for the Variable-Price Funds. The agreement provides that BMC may recover amounts (representing expenses in excess of the Fund's expense guarantee rate) absorbed during the preceding 11 months, if, and to the extent that, for any given month, the Fund's expenses were less than the expense guarantee rate in effect at that time. The expense guarantee rate is subject to renewal in June 1996. The payables to affiliates as of August 31, 1995, based on the above agreements were as follows: Benham Benham Benham Benham Tax-Free Municipal Municipal Tax-Free Money Market Money Market High-Yield Insured Fund Fund Fund Fund ----------- ---------- --------- --------- Investment Advisor $102,821 47,766 28,333 43,296 Administrative Services 34,056 15,820 9,385 14,340 Transfer Agent 38,452 22,533 8,016 11,131 -------- -------- -------- -------- $ 175,329 86,119 45,734 68,767 ======= ===== ===== ===== BCTFMF has a distribution agreement with Benham Distributors, Inc. (BDI), which is responsible for promoting sales of and distributing the Funds' shares. BMC pays all costs incurred by BDI. BDI is a wholly owned subsidiary of TCC. 41 The Tax-Free Money Market and Municipal Money Market Funds own $5,050,000 and $2,950,000, respectively, of tax revenue and anticipation notes issued by Orange County, California, which filed for bankruptcy protection on December 6, 1994. The market values of these securities on August 31, 1995, were $4,848,000 for the Tax-Free Money Market Fund and $2,832,000 for the Municipal Money Market Fund. TCC arranged for the issuance of irrevocable standby letters of credit by State Street Bank and Trust Company in favor of the Tax-Free Money Market and Municipal Money Market Funds. The terms of the letters of credit provide for the payment of up to $2,520,000 to the Tax-Free Money Market Fund and $1,475,000 to the Municipal Money Market Fund should Orange County default in the payment of principal and/or interest on such notes. Since the letters of credit only cover one half of the amount of Orange County notes held, the Funds continue to be exposed to risk of principal and/or interest on the Orange County notes. TCC has agreed to reimburse State Street Bank for any payments made by the bank to the Funds under the letter of credit. The value of the letter of credit is not considered material to either of the Money Market Funds' financial statements. Prior to the issuance of the above mentioned letters of credit BMI agreed to purchase the Orange County notes, to the extent necessary, should they cause the Money Market Funds' net asset value to drop below the $1.00 share price. The net asset value of the Money Market Funds did not drop below $1.00, thus BMI did not purchase the Orange County notes. The value of this agreement was not considered material to either of the Money Market Funds' financial statements. (3) SHARE TRANSACTIONS Share transactions for each of the Funds for the years ended August 31, 1995, and 1994, were as follows:
Tax-Free Municipal Money Market Money Market Fund Fund ------------------- ------------------- 1995 1994 1995 1994 Shares sol................. 466,211,495 548,608,632 310,209,174 396,441,621 Reinvestment of dividends.. 11,717,045 7,271,719 6,894,430 5,080,789 ----------- ----------- ----------- ----------- 477,928,540 555,880,351 317,103,604 401,522,410 Less shares redeemed.......(434,739,843) (523,536,597) (368,979,533) (405,441,948) ------------ ------------ ------------ ------------ Net increase (decrease) in shares..... 43,188,697 32,343,754 (51,875,929) (3,919,538) ============ ============ ============ ============
42 Municipal Tax-Free High-Yield Insured Fund Fund ------------------- ------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Shares sold................ 6,551,021 7,881,975 5,419,808 9,013,452 Reinvestment of dividends.. 537,231 634,226 673,481 1,195,780 ----------- ----------- ----------- ----------- 7,088,252 8,516,201 6,093,289 10,209,232 Less shares redeemed....... (7,132,653) (7,570,167) (7,600,045) (11,611,555) ----------- ----------- ----------- ----------- Net increase (decrease) in shares..... (44,401) 946,034 (1,506,756) (1,402,323) =========== =========== =========== =========== (4) INVESTMENT SECURITIES--PURCHASES, SALES AND/OR MATURITIES Portfolio activity, excluding short-term securities, for the year ended August 31, 1995, was as follows: Municipal Tax-Free High-Yield Insured Fund Fund ---------------- ---------------- Purchases.......................... $ 42,589,842 68,892,514 =========== ========== Sales proceeds..................... $ 43,337,952 86,238,894 =========== ========== As of August 31, 1995, unrealized appreciation (depreciation) was as follows: Municipal Tax-Free High-Yield Insured Fund Fund ---------------- ---------------- Appreciated securities.............. $ 3,543,663 6,720,971 Depreciated securities.............. (461,717) (1,826,174) ---------- --------- Net unrealized appreciation......... $ 3,081,946 4,894,797 ========== ========= The cost of securities for financial reporting and federal income tax purposes is the same. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. PROXY VOTING RESULTS A special shareholder meeting was held on May 31, 1995, to vote on the following proposals. All of the proposals received the required majority of votes and were adopted. Proposal I.--To consider and vote on approval or disapproval of new Investment Advisory Agreements with BCTFMF on behalf of each Fund with BMC to take effect upon the closing of the proposed merger of BMC's parent company, Benham Management International, Inc., into TCC. 43 Proposals II, III, and IV are not applicable to shareholders of BCTFMF. Proposal V.--To elect the Board of Trustees of BCTFMF. Proposal VI.--To ratify the Board of Trustees' selection of KPMG Peat Marwick LLP as independent auditors for BCTFMF's current fiscal year end. Proposal VII.--To amend BCTFMF's Articles of Incorporation to provide dollar-based voting rights for shareholders of the Funds. A summary of voting results is as follows:
Benham California Tax-Free Benham California Municipal Money Market Fund Money Market Fund - - -------------------------------------------------------------------------------------- Proposal I. For 208,259,295 For 124,322,542 Against 13,235,876 Against 4,831,889 Abstained 9,712,437 Abstained 2,767,810 - - -------------------------------------------------------------------------------------- Proposal V. James M. Benham For 219,135,194 For 126,233,767 Withheld* 12,072,413 Withheld* 5,688,474 Ronald J. Gilson For 219,056,461 For 125,694,854 Withheld* 12,151,146 Withheld* 6,227,387 Myron S. Scholes For 219,068,855 For 126,240,508 Withheld* 12,138,752 Withheld* 5,681,733 Kenneth E. Scott For 218,949,979 For 126,240,508 Withheld* 12,257,628 Withheld* 5,681,733 Ezra Solomon For 218,656,598 For 126,238,178 Withheld* 12,551,009 Withheld* 5,684,063 Isaac Stein For 219,062,411 For 126,239,096 Withheld* 12,145,196 Withheld* 5,683,145 James E. Stowers, III For 218,592,331 For 125,683,595 Withheld* 12,615,276 Withheld* 6,238,646 Jeanne D. Wohlers For 219,037,860 For 126,237,092 Withheld* 12,169,747 Withheld* 5,685,149 *Shares withholding authority to vote. - - -------------------------------------------------------------------------------------- Proposal VI. For 215,446,211 For 127,151,920 Against 3,235,341 Against 1,325,617 Abstained 12,526,056 Abstained 3,444,704 - - -------------------------------------------------------------------------------------- Proposal VII. For 211,267,881 For 125,084,050 Against 8,743,520 Against 3,620,385 Abstained 11,196,206 Abstained 3,217,806
44
Benham California Municipal Benham California Tax-Free High-Yield Fund Insured Fund - - --------------------------------------------------------------------------------------- Proposal I. For 6,824,388 For 11,370,098 Against 195,135 Against 388,909 Abstained 555,946 Abstained 440,691 - - --------------------------------------------------------------------------------------- Proposal V. James M. Benham For 7,016,725 For 11,680,408 Withheld* 558,745 Withheld* 519,291 Ronald J. Gilson For 7,001,205 For 11,671,264 Withheld* 574,265 Withheld* 528,435 Myron S. Scholes For 7,013,655 For 11,691,867 Withheld* 561,815 Withheld* 507,832 Kenneth E. Scott For 7,017,177 For 11,691,867 Withheld* 558,293 Withheld* 507,832 Ezra Solomon For 6,993,352 For 11,653,418 Withheld* 582,118 Withheld* 546,281 Isaac Stein For 7,008,286 For 11,690,320 Withheld* 567,184 Withheld* 509,379 James E. Stowers, III For 6,998,465 For 11,643,929 Withheld* 577,005 Withheld* 555,770 , Jeanne D. Wohlers For 7,005,426 For 11,683,339 Withheld* 570,044 Withheld* 516,360 *Shares withholding authority to vote. - - --------------------------------------------------------------------------------------- Proposal VI. For 6,982,091 For 11,651,702 Against 77,234 Against 150,739 Abstained 516,143 Abstained 397,257 - - --------------------------------------------------------------------------------------- Proposal VII. For 6,784,339 For 11,131,458 Against 147,446 Against 385,882 Abstained 643,684 Abstained 682,358 - - ---------------------------------------------------------------------------------------
45
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Money Market Fund Schedule of Investment Securities August 31, 1995 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 4,500,000 Agoura Hills Multifamily Housing Revenue Bond Oakridge Apartments, Guaranteed by Continental Casualty Co. 3.900% 09/06/95* $ 4,500,000 NR/A1 155,000 Association of Bay Area Governments Lease Revenue Pooled Project, Letter of Credit-National Westminster Bank 3.250 09/07/95* 155,000 VMIG1/NR 1,900,000 Anaheim Electric Tax-Exempt Commercial Paper 3.950 09/11/95 1,900,000 P1/A-1+ 5,000,000 Anaheim Housing Authority Revenue, Heritage Village Apartments Series 1992 A, Letter of Credit-Barclay's Bank 3.700 09/07/95* 5,000,000 VMIG1/NR 3,500,000 Anaheim Unified High School District Tax and Revenue Anticipation Notes, Letter of Credit-Bank of America 5.000 09/05/96 3,530,170 MIG1/NR 4,000,000 Auburn Unified School District Certificate of Participation, Series 1993, California, Letter of Credit-Bank of California 3.750 09/07/95* 4,000,000 VMIG1/A-1 4,300,000 Auburn Unified School District Certificate of Participation Series 1993, California, Letter of Credit-Bank of California 3.750 09/07/95* 4,300,000 MIG1/A-1 5,300,000 Azusa Multifamily Housing Revenue Bond Pacific Glen Apartments, Letter of Credit-Guaranteed by Continental Casualty Co. 3.950 09/07/95* 5,300,000 NR/A-1 15,000,000 California Health Facilities Financing Authority Catholic Health Series D, Letter of Credit-Rabobank 3.400 09/07/95* 15,000,000 VMIG1/A-1+ 1,500,000 California Health Facilities Financing Authority Children's Hospital, Letter of Credit-Rabobank 3.400 09/07/95* 1,500,000 VMIG1/NR 3,400,000 California Health Facilities Financing Authority Granada Hills, Letter of Credit-Banque Paribas 3.550 09/06/95* 3,400,000 VMIG1/NR 2,000,000 California Health Facilities Financing Authority Kaiser Permanente, Kaiser Permanente Series 1993 A 3.350 09/06/95* 2,000,000 VMIG1/A-1+ 5,000,000 California Health Facilities Financing Authority Kaiser Permanente Series 1993 B 3.350 09/06/95* 5,000,000 VMIG1/A-1+ 1,015,000 California Health Facilities Financing Authority Loan Program Series A, Letter of Credit-Sanwa Bank 3.350 09/07/95* 1,015,000 VMIG1/NR 8,225,000 California Health Facilities Financing Authority Pooled Loan Series B, Letter of Credit-General Electric Credit Corporation 3.350 09/06/95* 8,225,000 VMIG1/A-1+
46
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,700,000 California Health Facilities Financing Authority Pooled Program, Letter of Credit-Swiss Bank 3.350% 09/06/95* $ 2,700,000 VMIG1/A-1+ 6,000,000 California Health Scripps Memorial Hospital, Series 1985 B, Standby Bond Purchase Agreement-Morgan Guaranty Trust, Letter of Credit-Morgan Guaranty Trust 3.350 09/07/95* 6,000,000 VMIG1/A-1+ 1,000,000 California Pollution Control Financing Authority Chevron USA, Inc. 4.100 11/15/95 999,005 Aa2/AA 10,500,000 California Pollution Control Financing Authority Chevron USA, Inc. 4.500 05/15/96 10,500,000 Aa2/AA 13,500,000 California Pollution Control Revenue Authority North County Recovery Series 1992 B, Letter of Credit-Union Bank of Switzerland 3.350 09/06/95* 13,500,000 NR/A-1+ 5,000,000 California Pollution Control Revenue PG&E Tax-Exempt Commercial Paper, Letter of Credit-Morgan Guaranty Trust 4.100 09/07/95 5,000,000 NR/A-1+ 2,500,000 California Pollution Control Revenue Bonds for Southern California Edison Series A 3.450 09/01/95* 2,500,000 VMIG1/A-1+ 5,000,000 California Public Capital Improvement Financing Authority Revenue Bonds Pool Project C, Letter of Credit-National Westminster Bank 3.700 09/15/95* 5,000,000 VMIG1/NR 7,500,000 California School Cash Reserve Program Series A, MBIA Insured 4.750 07/03/96 7,553,844 MIG1/SP1+ 500,000 California State Revenue Anticipation Warrants, FGIC Insured 5.750 04/25/96 503,922 MIG1/SP1 11,875,000 California State Revenue Anticipation Warrants Series C, Letter of Credit Supported 5.750 04/25/96 11,962,584 MIG1/SP1 12,700,000 California Statewide Communities Apartment Development Authority Series A-1, Letter of Credit-Federal National Mortgage Association Collateral Agreement 3.350 09/06/95* 12,700,000 NR/A-1+ 7,000,000 California Statewide Communities Apartment Development Authority Series A-2, Letter of Credit-Federal National Mortgage Association Collateral Agreement 3.350 09/07/95* 7,000,000 NR/A-1+ 3,000,000 California Statewide Communities Apartment Development Authority Whispering Winds Apartments, Guaranteed by Continental Casualty Co.3.900 09/06/95* 3,000,000 NR/A-1 8,000,000 California Statewide Communities Covenant Retirement Community Certificate of Participation, Letter of Credit-Lasalle National Bank 3.700 09/07/95* 8,000,000 NR/A-1+ 2,445,000 Central Unified School District, Letter of Credit Bank of California 3.850 09/06/95* 2,445,000 VMIG1/NR 1,900,000 Chico Multifamily Housing Revenue Bond Ceres Plaza Refunding Series 1993 A,Letter of Credit-Bank of America 3.400 09/07/95* 1,900,000 VMIG1/NR
47
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,930,000 Contra Costa Public Financing Authority Revenue Refunding Certificate of Participation, MBIA Insured 7.000% 06/01/96 $ 1,975,305 Aaa/AAA 12,400,000 Contra Costa Transportation Sales Tax Revenue, California, Insurance and Liquidity provided by FGIC 3.400 09/06/95* 12,400,000 VMIG1/A-1+ 1,500,000 Covina Redevelopment Agency Multifamily Housing Revenue Bond Shadowhills Apartments, Guaranteed by Continental Casualty Co. 3.950 09/07/95* 1,500,000 NR/A-1 1,000,000 Elk Grove Unified School District Tax and Revenue Anticipation Notes 5.000 09/14/95 1,000,332 NR/A-1+ 2,000,000 Foothill/Eastern Transportation Corridor Agency, Letter of Credit-Credit Suisse 3.300 09/06/95* 2,000,000 NR/A-1+ 6,500,000 Foothill/Eastern Transportation Corridor Agency, Series B, Letter of Credit-Morgan Guaranty Trust 3.350 09/07/95* 6,500,000 NR/A-1+ 5,915,000 Gardena Financing Agency Public Parking Project, California, Letter of Credit-Industrial Bank of Japan 3.700 09/07/95* 5,915,000 VMIG1/NR 5,000,000 Golden Empire School Financing Authority Kern High School District Series 1995 A, Letter of Credit-Canadian Imperial Bank of Commerc 3.400 09/06/95* 5,000,000 NR/A-1+ 12,100,000 Hayward Multifamily Housing Revenue Bond Shorewood Apartments, Insurance and Liquidity provided by FGIC. 3.550 09/07/95* 12,100,000 VMIG1/AAA 2,500,000 Healdsburg Redevelopment Agency Refunding Vineyard Plaza, California, Letter of Credit-Sumitomo Bank Ltd. 3.700 09/07/95* 2,500,000 NR/A-1 145,000 Irvine Assessment District Number 89-10, Letter of Credit-National Westminster Bank 3.350 09/01/95* 145,000 VMIG1/A-1+ 4,685,000 Irvine Public Facilities Infrastructure Authority Capital Improvement Bond Series 1987, California, Letter of Credit-National Westminster Bank 3.750 09/07/95* 4,685,000 VMIG1/NR 6,000,000 Irvine Ranch Water District, Letter of Credit-Bank of America 3.600 09/01/95* 6,000,000 VMIG1/A-1 3,000,000 Kern Community College District Certificate of Participation, Letter of Credit-Bank of California 3.650 09/06/95* 3,000,000 NR/A-1 3,600,000 Kern County Public Facility Project Series C, Letter of Credit-Union Bank of Switzerland 3.450 09/01/95* 3,600,000 VMIG1/NR 5,000,000 Long Beach Multifamily Housing Revenue Bond Channel Point Apartments, Letter of Credit-Union Bank of California 3.800 09/06/95* 5,000,000 VMIG1/NR 4,000,000 Los Angeles Community College District, Letter of Credit-Commerzbank 4.500 07/31/96 4,019,363 NR/SP1+
48
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,105,000 Los Angeles Community Redevelopment Agency Tax Assessment Bunker Hill Project A, Escrowed to Maturity 8.200% 12/01/95 $ 1,117,216 Aaa/A 2,000,000 Los Angeles County Metropolitan Transit Authority, Letter of Credit-Bank of California 3.750 10/26/95 2,000,000 P1/A-1 6,500,000 Los Angeles County Metropolitan Transportation Authority Union Station Tax-Exempt Commercial Paper, Letter of Credit-ABN-AMRO Bank, Banque National de Paris, Canadian Imperial Bank of Commerce, National Westminster Bank, Societe Generale 3.500 09/07/95* 6,500,000 VMIG1/A-1+ 5,500,000 Los Angeles County Tax and Revenue Anticipation Notes, Letter of Credit- Bank of America, Credit Suisse, Morgan Guaranty Trust, Swiss Bank, Union Bank of Switzerland, Westdeutsche Landesbank 4.500 07/01/96 5,526,298 MIG1/SP1 1,150,000 Los Angeles Multifamily Housing Revenue Bond Studio Colony Series 1985 C, California, Letter of Credit-Industrial Bank of Japan 3.500 09/07/95* 1,150,000 VMG1/NR 1,700,000 Los Angeles Waste Water Revenue Bond Series A, MBIA Insured 8.500 06/01/96 1,758,718 Aaa/AAA 2,100,000 Midway School District Certificate of Participation, Letter of Credit-Bank of California 3.600 09/07/95* 2,100,000 VMIG1/NR 3,500,000 Monterey County Reclamation and Disaster Project, Letter of Credit-Dai-Ichi Kangyo Bank 3.600 09/07/95* 3,500,000 VMIG1/NR 1,100,000 Monterey Regional Waste Water Management Authority, Letter of Credit-Dai-Ichi Kangyo Bank 3.600 09/07/95* 1,100,000 NR/A-1 9,000,000 Oceanside Multifamily Housing Revenue Refunding Bonds Lakeridge Apartments Project, Guaranteed by Continental Casualty Co. 4.050 09/06/95* 9,000,000 NR/A-1 1,000,000 Ontario Tax and Revenue Anticipation Notes 5.000 11/03/95 1,000,606 MIG1/NR 4,500,000 Orange County Apartment Development The Lake Project Series 1991 A, California, Letter of Credit-Citibank 3.600 09/07/95* 4,500,000 NR/A-1+ 3,000,000 Orange County Multifamility Housing Revenue Bond Heritage Point Apartments, Letter of Credit-Banque Paribas 4.500 09/06/95* 3,000,000 NR/A-1 2,525,000 Orange County 1994-1995 Tax and Revenue Anticipation Notes Series A, Letter of Credit-State Street Bank+ 5.450 06/30/96 2,525,000 SG/D 2,525,000 Orange County 1994-1995 Tax and Revenue Anticipation Notes Series A+ 5.450 06/30/96 2,525,000 SG/D
49
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,000,000 Orange County Transit Authority Tax-Exempt Commercial Paper, Letter of Credit-Imperial Bank of Japan 4.200% 09/12/95 $ 2,000,000 P1/A-1 4,000,000 Orange County Transit Authority Tax-Exempt Commercial Paper, Letter of Credit-Imperial Bank of Japan 4.150 09/08/95 4,000,000 P1/A-1 900,000 Palm Springs Redevelopment Agency Project #1, California, Letter of Credit-Citibank 3.700 09/06/95* 900,000 NR/A-1+ 2,900,000 Palm Springs Redevelopment Agency, Letter of Credit-Citibank 3.700 09/06/95* 2,900,000 NR/A-1+ 6,100,000 Pico Rivera Redevelopment Agency Project Certificate of Participation, Letter of Credit-Wachovia Bank of Georgia 3.450 09/05/95* 6,100,000 NR/A-1+ 2,200,000 Pomona Public Financing Authority Series M, Letter of Credit-Sumitomo Bank Ltd. 3.600 09/06/95* 2,200,000 NR/A-1 1,300,000 Richmond Joint Powers Financing Authority, Letter of Credit-Bank of California 3.600 09/01/95* 1,300,000 NR/A-1 6,240,000 Riverside County Multifamily Housing Revenue Bond Ambergate Apartments, California, Letter of Credit-Union Bank of California 3.850 09/07/95* 6,240,000 VMIG1/NR 1,715,000 Rohnert Park Multifamility Housing Revenue Bond Crossbrook Apartments, Letter of Credit-Federal National Mortgage Association Collateral Agreement 3.550 09/06/95* 1,715,000 NR/A-1+ 8,200,000 Sacramento County Multifamility Housing Revenue Bond River Oaks, Letter of Credit-Dai-Ichi Kangyo Bank 3.600 09/07/95* 8,200,000 VMIG1/A-1 1,500,000 Sacramento County Multifamility Housing Revenue Bond Series 1985 A, Letter of Credit-Dai-Ichi Kangyo Bank 3.600 09/07/95* 1,500,000 VMIG1/A-1 3,000,000 San Bernardino County Tax and Revenue Anticipation Notes Series 1995-96, Letter of Credit-Bank of Nova Scotia, Banque National de Paris, Toronto Dominion 4.500 07/05/96 3,013,353 MIG1/SP1 10,000,000 San Bernardino County Certificate of Participation Standby Bond Purchase Agreement, Merrill Lynch, MBIA Insured 3.670 09/07/95* 10,000,000 VMIG1/NR 1,900,000 San Bernardino Industrial Development Authority C & M Fine Pac, Inc., California, Letter of Credit-Sanwa Bank 3.400 09/06/95* 1,900,000 P1/NR 12,700,000 San Bernardino Multifamily Housing Revenue Bond Castle Park Apartments Series A, California, Letter of Credit-Bank of Tokyo 3.750 09/06/95* 12,700,000 VMIG1/NR 1,370,000 San Diego County Country Hills, Letter of Credit-Federal National Mortgage Association Collateral Agreement 3.550 09/06/95* 1,370,000 NR/A-1+
50
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,500,000 San Diego County Regional Transportation Commission Tax-Exempt Commercial Paper, Line of Credit-Credit Suisse, Morgan Guaranty Trust 4.150% 09/12/95 $ 2,500,000 P1/A-1+ 2,300,000 San Diego Gas and Electric Tax-Exempt Commercial Paper Industrial Development Revenue Bonds Series 1995 B 3.700 09/25/95 2,300,000 VMIG1/A-1 3,565,000 San Diego Housing Authority Multifamily Housing Revenue Bond Market Project Series 1985 G, California, Letter of Credit-Barclay's Bank 3.650 09/06/95* 3,565,000 VMIG1/NR 2,500,000 San Francisco Redevelopment Agency Fillmore Center Project #202, Letter of Credit-Bank of Nova Scotia 3.450 09/06/95* 2,500,000 NR/A-1+ 1,400,000 San Jose Financing Authority Hayes Mansion, Letter of Credit-Sumitomo Bank Ltd. 3.650 09/06/95* 1,400,000 NR/A-1 3,900,000 San Leandro Multifamily Housing Revenue Bond Parkside, Federal National Mortgage Association Collateral Agreement 3.550 09/06/95* 3,900,000 NR/A-1+ 1,500,000 San Mateo County School Insurance Group 5.000 11/13/95 1,501,147 NR/SP1+ 800,000 Santa Clara County Multifamily Housing Revenue Bond Grove Garden, Letter of Credit-Citibank 3.450 09/06/95* 800,000 VMIG1/A-1+ 3,200,000 Santa Clara Electric System Revenue Bond Series B, California, Letter of Credit-National Westminster Bank 3.300 09/06/95* 3,200,000 VMIG1/NR 4,500,000 Santa Clara Electric System Revenue Bond Series C, California, Letter of Credit-National Westminster Bank 3.300 09/06/95* 4,500,000 VMIG1/NR 4,200,000 Santa Clara Multifamily Housing Revenue Bond Foxchase Apartments, California, Insurance and Liquidity provided by FGIC 3.550 09/07/95* 4,200,000 VMIG1/A-1+ 2,000,000 Simi Valley Multifamily Housing Revenue Bond Lincoln Wood Ranch Apartments Series 1990, California, Letter of Credit-Sumitomo Bank Ltd. 3.550 09/07/95* 2,000,000 NR/A-1 2,000,000 Solano County Tax and Revenue Anticipation Notes 5.000 11/01/95 2,002,079 MIG1/SP1+ 1,000,000 South Coast Air Quality Management District Revenue Refunding Series 1992, California, AMBAC Insured 4.500 08/01/96 1,005,530 Aaa/AAA 525,000 South San Francisco Water Plant Certificate of Participation Series 1991, Letter of Credit-National Westminster Bank 3.600 09/07/95* 525,000 VMIG1/A-1+ 1,000,000 Southern California Public Power Agency Project Series 1987 A, California, Prerefunded at 102% of par 6.875 07/01/96 1,044,601 NR/AAA 1,600,000 Triunfo Sanitation District Refunding, Letter of Credit-Banque National de Paris 3.550 09/06/95* 1,600,000 NR/A-1 3,200,000 Union City Multifamily Housing Revenue Bond Skylark Apartments, Letter of Credit-Sumitomo Bank Ltd. 3.700 09/05/95* 3,200,000 NR/A-1
51
Schedule of Investment Securities-Tax-Free Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 825,000 Upland Community Redevelopment Agency Multifamily Housing Revenue Bond Northwoods, Letter of Credit-Sanwa Bank 4.000% 09/06/95* $ 825,000 NR/A-1+ 4,720,000 Vallejo Community Development Vallejo Center Project Series A, Letter of Credit-Bank of Tokyo 3.750 09/06/95* 4,720,000 NR/A-1 4,600,000 Visalia Certificate of Participation Convention Center Series 1991, Letter of Credit-Bank of California 3.750 09/07/95* 4,600,000 VMIG1/A-1 - - ------------ ------------ $ 408,255,000 Total Investment Securities (cost $408,659,073) $408,659,073 ============ ============
NR = Not Rated SG = Speculative Grade D = Default - - ---------------------- * These variable interest rate securities have maturities greater than the indicated maturity dates but are redeemable upon demand at the date indicated. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. + This security is illiquid and has been downgraded by both Moody's and S&P, due to the bankruptcy filing of Orange County, California. The Board of Trustees has determined that it was not in the best interest of the Fund to dispose of this security. This security was originally due on July 19, 1995. Orange County revised the terms of this security to extend the maturity to June 30, 1996 along with an increase in the security's interest rate. See Note 2 of the accompanying notes to financial statements.
Portfolio Composition by Market Sector Variable-Rate Demand Notes................ 78% Put Bonds.......................... 4% Municipal Notes........................... 11 Bond less than 1 Year.............. 2 Commercial Paper.......................... 5 ---- TOTAL.............................. 100% ====
52
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Municipal Money Market Fund Schedule of Investment Securities August 31, 1995 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,000,000 Agoura Hills Multifamily Housing Revenue Bond Oakridge Apartments, Guaranteed by Continental Casualty Co. 3.900% 09/06/95* $ 2,000,000 NR/A1 600,000 Anaheim Multifamily Housing Revenue Bond Sage Park Apartments, Letter of Credit-Bank of America 3.650 09/07/95* 600,000 VMIG1/NR 1,210,000 Anaheim Refinancing Project Certificate of Participation, Prerefunded at 102% of par 7.500 05/01/96 1,261,710 Aaa/AAA 1,500,000 Anaheim Unified School District Tax and Revenue Anticipation Notes, Letter of Credit-Bank of America 5.000 09/05/96 1,512,930 MIG1/NR 2,000,000 Auburn Industrial Development Authority Coherent, Inc. Project, Letter of Credit-Bank of Tokyo 4.150 09/06/95* 2,000,000 Aa3/NR+ 5,315,000 Azusa Multifamily Housing Revenue Bond Pacific Glen Apartments, Guaranteed by Continental Casualty Co. 3.950 09/07/95* 5,315,000 NR/A-1 4,600,000 Big Bear Lake Industrial Development Revenue South West Gas Series 1993 A, California, Letter of Credit-Union Bank of Switzerland 3.400 09/06/95* 4,600,000 P1/A-1+ 4,500,000 California Cash Reserve Program Series A, MBIA Insured 4.750 07/03/96 4,531,869 MIG1/SP1+ 2,600,000 California Department of Water Tax-Exempt Commercial Paper, Letter of Credit-Canadian Imperial Bank of Commerce 4.250 09/12/95 2,600,000 P1/A-1+ 2,250,000 California Health Facilities Financing Authority Kaiser Series 1985 A 8.400 12/01/95* 2,273,423 Aa3/AA 3,500,000 California Housing Financing Authority Home Mortgage Series 1995 E 4.600 02/01/96 3,500,000 VMIG1/A-1+ 5,000,000 California Pollution Control Revenue Colmac Energy Series B, Letter of Credit-Swiss Bank 3.450 09/06/95* 5,000,000 VMIG1/A-1+ 4,000,000 California Pollution Control Revenue Colmac Energy Solid Waste Series A, Letter of Credit-Swiss Bank 3.450 09/06/95* 4,000,000 NR/A-1+ 5,000,000 California Pollution Control Revenue Sanger Energy Project Series 1990 A, Letter of Credit-Credit Suisse 3.450 09/06/95* 5,000,000 Aa2/NR 3,100,000 California Pollution Control Revenue Stanislaus Project, Letter of Credit-Swiss Bank 3.550 09/01/95* 3,100,000 VMIG1/A-1+ 5,500,000 California Pollution Control Financing Authority Western Waste Industries, Letter of Credit-Bank of California 3.850 09/07/95* 5,500,000 VMIG1/NR
53
Schedule of Investment Securities-Municipal Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,300,000 California Public Capital Improvement Project Series C Pooled, Letter of Credit-National Westminster Bank 3.700% 09/15/95$ $ 2,300,000 VMIG1/NR 6,000,000 California State Revenue Anticipation Warrants Series C, Letter of Credit Supported 5.750 04/25/96 6,043,809 MIG1/SP1+ 2,000,000 California Statewide Communities Apartment Development Authority Whispering Winds Apartments, Guaranteed by Continental Casualty Co.3.900 09/06/95* 2,000,000 NR/A-1 1,400,000 California Statewide Communities Carvin Corporation Letter of Credit-California State Teachers Retirement System 3.650 09/06/95* 1,400,000 NR/A-1+ 1,100,000 California Statewide Communities Industrial Development Authority, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 1,100,000 NR/A-1+ 1,070,000 California Statewide Communities Industrial Development Authority Contech, Inc. Series 1989, California, Letter of Credit- California State Teachers Retirement System 3.750 09/06/95* 1,070,000 NR/A-1+ 2,015,000 California Statewide Communities Industrial Development Authority Fixed Image Labs, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 2,015,000 NR/A-1+ 5,000,000 California Statewide Communities Industrial Development Authority Nichirin Flex, California, Letter of Credit-Dai-Ichi Kangyo Bank 3.900 09/06/95* 5,000,000 P1/NR 1,100,000 California Statewide Communities Industrial Development Authority S&P Inv. Project, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 1,100,000 NR/A-1+ 2,000,000 California Statewide Communities Industrial Redevelopment Revenue Bond Howard Series B, Letter of Credit-Sanwa Bank of California 3.800 09/06/95* 2,000,000 NR/A-1 1,700,000 California Statewide Communities Industrial Development Revenue Propak Letter of Credit-California State Teachers Retirement System 3.650 09/06/95* 1,700,000 NR/A-1+ 1,000,000 California Statewide Communities Industrial Development Revenue Staub Project, Letter of Credit-California State Teachers Retirement System 3.650 09/06/95* 1,000,000 NR/A-1+ 1,800,000 California Statewide Communities Kennerly Spratling, Letter of Credit- California State Teachers Retirement System 3.650 09/06/95* 1,800,000 NR/A-1+ 800,000 California Statewide Communities Leegin Creative Leather, Letter of Credit- California State Teachers Retirement System 3.650 09/06/95* 800,000 NR/A-1+
54
Schedule of Investment Securities-Municipal Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,000,000 California Statewide Communities Multifamily Housing Revenue Bond Canyon Creek Apartments Series C, Federal National Mortgage Association Collateral Agreement 3.650% 09/06/95* $ 2,000,000 NR/A-1+ 1,000,000 California Statewide Communities Systems Engineering, Letter of Credit- California State Teachers Retirement System 3.650 09/06/95* 1,000,000 NR/A-1+ 2,500,000 Contra Costa County Housing Authority Del Norte Apartments, Letter of Credit-Sumitomo Bank Ltd. 3.800 09/05/95* 2,500,000 NR/A-1 6,400,000 Irvine Ranch Water District, Letter of Credit-Bank of America 3.600 09/01/95 6,400,000 VMIG1/A-1 800,000 Livermore Multifamily Housing Revenue Bond Portola Meadows, Letter of Credit-Bank of America 3.650 09/07/95 800,000 VMIG1/NR 3,000,000 Long Beach Harbor Tax-Exempt Commercial Paper, Letter of Credit-Canadian Imperial Bank of Commerce 4.150 09/12/95 3,000,000 NR/A-1+ 5,000,000 Long Beach Harbor Tax-Exempt Commercial Paper, Letter of Credit-Canadian Imperial Bank of Commerce 3.700 10/11/95 5,000,000 NR/A-1+ 3,000,000 Los Angeles Community College District, Letter of Credit-Commerzbank 4.500 07/31/96 3,014,522 NR/SP1+ 2,200,000 Los Angeles County Industrial Development Authority Tulip Corporation Project Issue 1, California, Letter of Credit-LaSalle National Bank4.100 09/06/95* 2,200,000 A1/NR 2,500,000 Los Angeles County Metropolitan Transit Authority Tax-Exempt Commercial Paper, Letter of Credit-ABN-AMRO Bank, Bank of California, Banque National de Paris, Canadian Imperial Bank of Commerce, National Westminster Bank 3.750 09/29/95 2,500,000 P1/A-1 5,000,000 Los Angeles County Multifamily Housing Revenue Bond Oakwood Apartments, Letter of Credit-Sumitomo Bank Ltd. 3.800 09/05/95* 5,000,000 NR/A-1 3,500,000 Los Angeles County Tax and Revenue Anticipation Notes, Letter of Credit- Bank of America, Credit Suisse, Morgan Guaranty Trust, Swiss Bank, Union Bank of Switzerland, Westdeutsche Landesbank 4.500 07/01/96 3,516,599 MIG1/SP1+ 2,700,000 Modesto Multifamily Housing Revenue Bond Live Oak Apartments, Federal National Mortgage Association Collateral Agreement 3.650 09/06/95* 2,700,000 NR/A-1+ 5,000,000 Oceanside Multifamily Housing Revenue Refunding Bonds Lakeridge Apartments Project, Guaranteed by Continental Casualty Co. 4.050 09/06/95* 5,000,000 NR/A-1 2,600,000 Ontario Industrial Development Authority, Winsford Partners Series A, Letter of Credit-Bank of America 4.100 09/06/95* 2,600,000 Aa3/NR
55
Schedule of Investment Securities-Municipal Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,600,000 Orange County Apartment Development Foothill Oaks, Letter of Credit-Bank of America 3.650% 09/07/95*$ 1,600,000 VMIG1/NR 1,475,000 Orange County 1994-1995 Tax and Revenue Anticipation Notes Series A, Letter of Credit-State Street Bank+ 5.450 06/30/96 1,475,000 SG/D 1,475,000 Orange County 1994-1995 Tax and Revenue Anticipation Notes Series A+ 5.450 06/30/96 1,475,000 SG/D 3,000,000 Orange County Transportation Authority Tax-Exempt Commercial Paper, Letter of Credit-Imperial Bank of Japan 3.800 10/02/95 3,000,000 P1/A-1 2,800,000 Palm Springs Industrial Development Authority BP Holdings, Letter of Credit-Bank of California 3.700 09/07/95* 2,800,000 NR/A-1 5,000,000 Rancho Mirage Redevelopment Agency Farmers Market Series 1986, California, Letter of Credit-Bank of America 3.700 09/07/95* 5,000,000 VMIG1/NR 9,500,000 Sacramento Multifamily Housing Revenue Bond Shadowwood Apartments Series 1993 A, California, Letter of Credit-General Electric Credit Corporation 3.700 09/06/95* 9,500,000 NR/A-1+ 1,200,000 San Bernadino County Industrial Development Authority Aqua Service, Inc., California, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 1,200,000 NR/A-1+ 1,500,000 San Bernardino County Industrial Development Authority McCain Citrus, California, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 1,500,000 NR/A-1+ 1,935,000 San Bernardino County Industrial Development Authority William Voortman, California, Letter of Credit-California State Teachers Retirement System 3.750 09/06/95* 1,935,000 NR/A-1+ 2,000,000 San Bernardino County Tax and Revenue Anticipation Notes Series 1995-1996, Letter of Credit-Bank of Nova Scotia, Banque National de Paris, Toronto Dominion 4.500 07/05/96 2,008,902 MIG1/SP1 900,000 San Diego Industrial Development Revenue Kaiser Aerospace, Letter of Credit-ABN-AMRO Bank 3.800 09/07/95* 900,000 P1/NR 2,500,000 San Diego Regional Transportation Commission Tax-Exempt Commercial Paper, Line of Credit-Credit Suisse, Morgan Guaranty Trust 4.150 09/12/95 2,500,000 P1/A-1+ 2,700,000 San Dimas Regional Development Agency Diversified Shop Certificate of Participation, Letter of Credit-Morgan Guaranty Trust 3.650 09/07/95* 2,700,000 NR/A-1+ 3,750,000 San Francisco Redevelopment Agency Fillmore Center Project, California, Letter of Credit-Bank of Nova Scotia 3.600 09/06/95* 3,750,000 NR/A-1+ 2,000,000 Simi Valley Multifamily Housing Revenue Bond Shadowridge Apartments, Letter of Credit-Citibank 3.600 09/06/95* 2,000,000 VMIG1/A-1+
56
Schedule of Investment Securities-Municipal Money Market Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 700,000 South San Francisco Multifamily Housing Revenue Bond Magnolia Plaza, Letter of Credit- Wells Fargo Bank 3.650% 09/09/95* $ 700,000 VMIG1/NR 8,910,000 Tri City Housing Financing Authority Mortgage Backed Securities, FGIC Investment Agreement 4.200 09/01/95* 8,910,000 NR/A-1+ 4,000,000 Vallejo Industrial Development Authority Meyer Cookware Industry Series 1993 A, California, Letter of Credit-Mitsubishi Bank 3.900 09/06/95* 4,000,000 NR/A-1+ 1,740,000 Vista Industrial Development Authority Professional Care, Letter of Credit-NDB Bank 3.850 09/06/95* 1,740,000 NR/A-1+ - - ------------ ------------ $ 187,845,000 Total Investment Securities (cost $188,048,764) $188,048,764** ============ ============
NR = Not Rated SG = Speculative Grade D = Default - - ---------------------- * These variable interest rate securities have maturities greater than the indicated maturity dates but are redeemable upon demand at the date indicated. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. **The Municipal Money Market Fund had 65.4% invested in private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal alternative minimum tax liability. + This security is illiquid and has been downgraded by both Moody's and S&P, due to the bankruptcy filing of Orange County, California. The Board of Trustees has determined that it was not in the best interest of the Fund to dispose of this security. This security was originally due on July 19, 1995. Orange County revised the terms of this security to extend the maturity to June 30, 1996 along with an increase in the security's interest rate. See Note 2 of the accompanying notes to financial statements.
Portfolio Composition by Market Sector Variable-Rate Demand Notes 73% Put Bonds 3% Municipal Notes 12 Bonds less than 1 Year 2 Commercial Paper 10 --- TOTAL 100% ===
57
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Municipal High-Yield Fund Schedule of Investment Securities August 31, 1995 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 500,000 Association of Bay Area Governments for St. Helena Certificate of Participation Series C, California 7.875% 06/01/11 $ 538,625 NR/BBB 1,000,000 Bret Harte Unified High School District Certificate of Participation, FSA Insured, California 6.150 09/01/26 1,009,290 Aaa/AAA 700,000 California Cities Financing Corporation Certificate of Participation Series 1991 A 7.700 05/01/11 743,057 Baa/NR 500,000 California Department of Veteran's Affairs Home Purchase Revenue Bonds Series 1988 A 8.300 08/01/19 521,650 Aa/AA- 500,000 California Educational Facility Authority Lutheran University Series 1990 7.375 12/01/16 523,430 Baa1/NR 1,000,000 California Educational Facility Authority Mills College Series 1992 6.875 09/01/22 1,033,480 A/NR 2,015,000 California Health Facility Financing Authority Pomona Valley Community Hospital Series A 7.000 01/01/17 2,054,091 NR/A- 4,000,000 California Health Facility Financing Authority for Kaiser Series A, AMBAC Insured 6.070** 10/01/12 1,440,120 Aaa/AAA 180,000 California Housing Finance Agency Home Mortgage Revenue Bonds Series 1988 B 8.600 08/01/19 190,699 Aa/AA- 790,000 California Housing Finance Agency Home Mortgage Revenue Bonds Series 1989 B 8.000 08/01/29 842,345 Aa/AA- 545,000 California Housing Finance Agency Home Mortgage Revenue Bonds Series 1990 C 7.600 08/01/30 576,681 Aa/AA- 3,500,000 California Housing Finance Agency Multi-Unit Mortgage Revenue Bonds Series 1992 C 6.875 08/01/24 3,577,945 A1/A+ 1,100,000 California Pollution Control Revenue for Southern California Edison 3.450 09/01/95* 1,100,000 P1/A-1+ 400,000 California Public Capital Improvement Financing Authority Revenue Bonds Pool 1988 A 8.500 03/01/18 433,096 Baa/NR 1,000,000 California Special District Series 1992 P, Shasta Dam Project, California 7.250 03/01/12 1,044,400 Baa/NR
58
Schedule of Investment Securities-Municipal High-Yield Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,500,000 City of Alameda Certificate of Participation Series 1995 6.200% 05/01/25 $ 2,401,625 NR/A 220,000 Clayton Oakhurst Assessment District Series 1988 A, California 8.400 09/02/10 226,600 NR/NR 915,000 Clayton Oakhurst Assessment District Series 1989, California 8.000 09/02/14 943,658 NR/NR 2,500,000 Concord Redevelopment Agency Series 1993, Junior Lien 6.000 07/01/19 2,265,325 Baa1/NR 750,000 Contra Costa County Public Financing Authority Tax Allocation Revenue Series 1992 A, California 7.100 08/01/22 774,900 NR/BBB 710,000 Corcoran Certificates of Participation, California 8.750 06/01/16 745,571 NR/NR 500,000 Cucamonga School District Certificates of Participation Series 1990, California 7.600 12/01/15 526,760 Baa/NR 1,000,000 Davis Community Facilities District #91-2 Series 1992 B, California 7.800 09/01/22 1,058,320 NR/NR 1,000,000 Dry Creek Joint School District Community Facilities District Series 1991, California, Capital Guaranty Insured 7.250 09/01/11 1,108,910 Aaa/AAA 1,000,000 El Dorado County Building Authority Series 1990, California 7.400 11/01/09 1,071,410 A/A- 3,500,000 Emeryville Public Financing Authority Tax Allocation Revenue Series 1993, California 6.500 05/01/21 3,523,765 NR/A- 350,000 Folsom Redevelopment Agency Tax Allocation Series 1987 A, California 8.600 02/01/13 375,567 NR/NR 2,350,000 Fontana Community Facility District #2 Series 988 B, California 8.500 09/01/17 2,489,331 NR/NR 1,000,000 Fontana Redevelopment Agency Juropa Hills Project Bond Anticipation Note 8.000 01/01/98 1,032,640 NR/NR 1,000,000 Fontana Redevelopment Agency Juropa Hills Project Series 1994 A 7.200 10/01/24 1,048,150 NR/BBB+ 2,500,000 Fontana Redevelopment Agency Juropa Hills Project Series 1994 B, Junior Lien 7.700 01/01/19 2,629,000 NR/NR 1,040,000 Foothill-De Anza Community College Certificates of Participation Series 1992, California 7.350 03/01/07 1,140,599 NR/A- 2,500,000 Foster City Redevelopment Agency Metropolitan Center Project Series 1995, California 6.750 09/01/20 2,547,325 NR/A- 2,020,000 Gardena Civic Center Certificate of Participation Series 1994 6.300 08/01/23 1,911,122 Baa1/BBB+ 1,250,000 Hollister Redevelopment Agency Tax Allocation Series 1989, California 7.550 10/01/13 1,316,012 NR/BBB+ 2,000,000 Industry Redevelopment Agency Tax Allocation Project No. 3, California 6.900 11/01/16 2,095,280 NR/A-
59
Schedule of Investment Securities-Municipal High-Yield Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 985,000 Irvine Assessment District 1989-9 7.400% 09/02/17 $ 1,000,780 NR/NR 1,000,000 Lake Elsinore Unified School District Community Facilities District 88-1 Series 1991, California 8.250 09/01/16 1,067,460 NR/NR 1,000,000 Los Angeles Community Redevelopment Agency Beacon Street Pool Series B, California 6.625 09/01/14 985,670 Baa/NR 120,000 Los Angeles County Housing Finance Authority Single Family Mortgage Revenue Bond GNMA Program 87 Issue B, California 9.000 12/01/20 126,815 NR/AAA 1,000,000 Los Angeles County Transportation Commission Sales Tax Revenue Series B, California 6.500 07/01/13 1,019,510 A1/AA- 45,000 Los Angeles Home Mortgage Revenue Bonds Series 1985 9.000 06/15/18 46,744 NR/A 4,960,000 Northern California Power Agency Hydroelectric Project No. 1 Series E, California 7.150 07/01/24 5,322,080 A/A- 2,000,000 Novato Community Facility District Number 1 for Vintage Oaks Project, California 7.200 08/01/15 2,039,160 NR/NR 1,500,000 Orange Grove Irrigation District Certificates of Participation Series 1992, California 7.000 02/01/15 1,524,090 NR/BBB 1,500,000 Otay Water District General Obligation Series 1992, California 6.700 09/01/22 1,507,515 NR/BBB 1,840,000 Pasadena Certificate of Participation, Various Capital Projects, California 5.750 01/01/13 1,752,600 A1/A+ 1,000,000 Pioneer Union Elementary School District General Obligation Series 1990, California 7.500 08/01/14 1,055,160 NR/BBB+ 880,000 Pittsburg Assessment District No. 90-1 Oak Hills, California 7.750 09/02/20 908,565 NR/NR 1,500,000 Pittsburg Assessment District No. 92-1 New York Landing, California 8.000 09/02/22 1,546,890 NR/NR 2,220,000 Pleasanton Joint Powers Financing Authority Series A, 6.150 09/02/12 2,199,199 Baa/NR 2,000,000 Pomona Public Financing Authority Southwest Project Series 1993 L, California 5.700 02/01/13 1,834,500 Baa/BBB+ 2,250,000 Rancho Mirage Joint Powers Financing Authority Certificates of Participation Eisenhower Memorial Hospital, California 7.000 03/01/22 2,327,018 A/NR 1,000,000 Rancho Santa Margarita Community Facilities District No. 87-5E Series A, California 7.300 08/15/18 1,001,230 NR/NR 1,000,000 Rocklin Community Facilities District No. 3 Series 1990 Stanford Ranch, California 8.100 11/01/15 1,063,540 NR/NR
60
Schedule of Investment Securities-Municipal High-Yield Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 500,000 Roseville Community Facilities District No. 2 Northeast, California 8.250% 09/01/21 $ 531,330 NR/NR 3,000,000 Roseville Certificate of Participation Series 1993, California 6.000 08/01/23 2,729,100 NR/BBB+ 2,000,000 Salinas Assessment District No. 94-1 Harden Ranch, California 6.875 09/02/11 1,993,240 NR/NR 1,780,000 San Jose Finance Authority Certificate of Participation Convention Center Project, California 6.300 09/01/09 1,838,615 A1/A+ 4,000,000 San Jose Finance Authority Certificate of Participation Convention Center Project Series C, California 6.400 09/01/22 4,006,160 A1/A+ 1,500,000 Scotts Valley Redevelopment Agency Series 1993 A, California 6.500 08/01/18 1,482,285 NR/BBB 1,000,000 Shasta Joint Powers Financing Authority Series 1992 A, California 6.700 06/01/23 1,007,080 Baa1/NR 3,250,000 Sierra Sands Unified School District Certificate of Participation Series 1993 5.750 02/01/23 2,846,285 Baa1/NR 3,000,000 South Orange County Public Financing Authority Special Tax Bonds, Jr. lien, Series B, California 7.250 09/01/13 3,013,650 NR/NR 1,615,000 South San Francisco Redevelopment Agency Gateway Project Series 1993, California 7.600 09/01/18 1,681,070 NR/NR 480,000 Southern California Housing Finance Authority Single Family Mortgage Revenue Bond Series 1991 A GNMA 7.350 09/01/24 508,877 NR/AAA 500,000 Southern California Public Power Project Pooled Revenue Bonds 6.750 07/01/10 533,895 A/A 1,000,000 Standard Elementary School District Series 1991, California 7.375 06/01/11 1,059,680 NR/A- 1,770,000 Tehama County Certificate of Participation Series 1995 Social Services Building, California 7.000 10/01/20 1,856,748 NR/A 1,775,000 Torrance Hospital Revenue Series 1992, California 6.875 07/01/15 1,846,781 NR/A 1,000,000 Trinity Public Utilities District Certificate of Participation, Electric System, California 6.750 04/01/23 1,006,170 NR/BBB- 1,000,000 Turlock Irrigation District Certificate of Participation Series 1991, California 7.300 01/01/11 1,035,370 Baa1/A- 1,565,000 Twenty-Nine Palms Water District Certificates of Participation Series 1992, California 7.100 08/01/22 1,613,781 NR/BBB 950,000 Vista Joint Powers Financing Authority Series 1990 A, California 7.500 01/01/16 992,104 Baa1/NR 2,000,000 West Contra Costa School District Certificate of Participation Series 1994, California 7.125 01/01/24 2,070,700 Ba/BBB+ 1,800,000 Western Placer Waste Management Authority Revenue Bond, California 6.750 07/01/14 1,832,976 Baa1/A-
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Schedule of Investment Securities-Municipal High-Yield Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,520,000 Windsor Redevelopment Agency Tax Allocation Bonds Series 1994, California 6.875% 09/01/15 $ 1,557,088 NR/BBB 1,000,000 Yosemite Community College District Certificate of Participation Series 1991, California 7.750 07/01/11 1,074,530 NR/BBB - - ------------ ------------ $114,140,000 Total Investment Securities (cost $110,224,874) $ 113,306,820*** ============ ============
NR = Not Rated - - -------------- * These variable interest rate securities have maturities greater than the indicated maturity dates but are redeemable upon demand at the date indicated. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. ** These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. *** The High-Yield Fund had 10.4% invested in private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal alternative minimum tax liability.
Portfolio Composition by Market Sector Certificates of Participation 28.1% Electric 6.5% Tax Allocation 21.3 Housing 5.6 Mello-Roos 11.8 Water/Sewer 3.2 1915 Act 7.8 Other 8.9 Hospital 6.8 ---- TOTAL 100.0% =====
62
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Insured Fund Schedule of Investment Securities August 31, 1995 MUNICIPAL SECURITIES--97.7% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Banning Certificate of Participation Water System Improvement Bonds, California, AMBAC Insured 8.000% 01/01/19 $ 1,271,670 Aaa/AAA 1,000,000 Berkeley Certificate of Participation Series 1989, California, AMBAC Insured 7.500 06/01/19 1,098,760 Aaa/AAA 6,095,000 California Health Facilities Financing Authority Mills Peninsula Health Series 1995 B, Connie Lee Insured 5.750 01/15/15 5,837,182 NR/AAA 2,500,000 California Health Facilities Financing Authority Sutter Hospital Series A, AMBAC Insured 6.700 01/01/13 2,631,900 Aaa/AAA 1,250,000 California Health Facility Financing Authority Adventist Hospital Series A, MBIA Insured 7.000 03/01/13 1,365,850 Aaa/AAA 1,585,000 California Public Capital Improvement Financing Authority Revenue Bonds 1988 B, BIG Insured 8.100 03/01/18 1,711,832 Aaa/AAA 5,000,000 California State Public Works Department of Corrections, Capital Guaranty Insured 5.250 06/01/15 4,612,400 Aaa/AAA 1,000,000 California State University Housing System Revenue Refunding, AMBAC Insured 7.000 11/01/15 1,094,920 Aaa/AAA 3,925,000 California Statewide Community Development Authority Gemological Institute of America, Connie Lee Insured 6.750 05/01/10 4,318,167 NR/AAA 1,520,000 Castaic Lake Water Agency Corp. Certificate of Participation- Water System Improvement Project Series A, MBIA Insured 7.000 08/01/12 1,752,423 Aaa/AAA 3,500,000 City of Los Angeles Community Development Agency Bunker Hill, California, FSA Insured 6.500 12/01/14 3,634,820 Aaa/AAA 4,000,000 City of Los Angeles Community Development Agency Bunker Hill Series H, California, FSA Insured 6.500 12/01/15 4,154,080 Aaa/AAA 4,525,000 City of Woodland Certificate of Participation, Waste Water, California, AMBAC Insured 5.750 03/01/12 4,582,784 Aaa/AAA 1,000,000 Contra Costa Public Facility Authority Refunding Certificate of Participation, California, BIGI Insured 7.800 06/01/07 1,126,190 Aaa/AAA 1,000,000 Contra Costa Water District Revenue, AMBAC Insured 6.250 10/01/12 1,070,820 Aaa/AAA 2,000,000 Contra Costa Water District Revenue Series G, MBIA Insured 5.500 10/01/19 1,887,900 Aaa/AAA
63
Schedule of Investment Securities-Tax-Free Insured Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 East Bay Municipal Water District, California, AMBAC Insured, Prerefunded at 102% of par 6.375% 12/01/01 $ 1,120,290 Aaa/AAA 1,000,000 East Valley Water Treatment Plant Project Certificate of Participation, AMBAC Insured 6.600 12/01/14 1,057,250 Aaa/AAA 1,010,000 Eastern Water District Water and Sewer Revenue Certificate of Participation, FGIC Insured 5.250 07/01/23 905,505 Aaa/AAA 2,135,000 Encinitas Public Financing Water Revenue Series A, MBIA Insured 5.000 10/01/13 1,918,618 Aaa/AAA 5,750,000 Encino Joint Powers Financing Authority Waste Water Revenue Series A, California, AMBAC Insured 6.875 08/01/11 6,196,890 Aaa/AAA 4,000,000 Foothill-De Anza Community College Certificate of Participation, California, Connie Lee Insured 6.250 09/01/13 4,059,320 NR/AAA 975,000 Fresno Sewer Revenue Series A-1, AMBAC Insured 6.250 09/01/14 1,032,057 Aaa/AAA 5,000,000 Glendale Hospital Adventist Health System, California, MBIA Insured 6.750 03/01/13 5,304,250 Aaa/AAA 4,830,000 Glendale Unified School District Certificate of Participation, AMBAC Insured 6.500 03/01/12 5,116,419 Aaa/AAA 1,340,000 Kern High School District, California, MBIA Insured 6.250 08/01/13 1,433,693 Aaa/AAA 3,630,000 Kern High School District Series 1990 D, California, MBIA Insured 7.000 08/01/17 4,017,756 Aaa/AAA 790,000 Lake Elsinore Public Financing Authority Tax Allocation Revenue Bonds Series C, California, FGIC Insured 6.625 02/01/17 824,886 Aaa/AAA 1,500,000 Lakewood, California, Redevelopment Agency Tax Allocation Refinance- Redevelopment Project Series A, Capital Guaranty Insured 6.500 09/01/17 1,568,535 Aaa/AAA 1,900,000 Loma Linda Hospital Revenue Bonds University Medical Center Series B, California, MBIA Insured, Prerefunded at 102% of par 7.000 12/01/00 2,161,763 Aaa/AAA 2,000,000 Los Angeles Community College Certificate of Participation, California, Capital Guaranty Insured, Prerefunded at 102% of par 6.900 08/15/00 2,256,440 Aaa/AAA 1,915,000 Los Angeles Community Redevelopment Agency Housing Revenue Series C, AMBAC Insured 7.000 01/01/14 2,053,071 Aaa/AAA 5,300,000 Los Angeles County Metropolitan Transit Authority Sales Tax Revenue, AMBAC Insured 5.000 07/01/25 4,600,506 Aaa/AAA 1,100,000 Los Angeles Waste Water System Revenue Series C, California, AMBAC Insured 7.000 06/01/11 1,202,828 Aaa/AAA 5,000,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Series D, California, MBIA Insured 6.750 07/01/20 5,599,050 Aaa/AAA 1,200,000 National City Joint Power Lease Revenue, California, AMBAC Insured 6.750 10/01/17 1,275,840 Aaa/AAA
64
Schedule of Investment Securities-Tax-Free Insured Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 2,810,000 Oakland Redevelopment Agency Central District Tax Allocation, AMBAC Insured 5.500% 02/01/14 $ 2,718,253 Aaa/AAA 1,925,000 Oakland Refunding Pension Financing Series 1988 A, California, FGIC Insured 7.600 08/01/21 2,136,885 Aaa/AAA 2,000,000 Orange County Civic Center Expansion Certificate of Participation, AMBAC Insured 6.700 08/01/18 2,067,980 Aaa/AAA 1,000,000 Pasadena Certificate of Participation, AMBAC Insured 5.000 02/01/16 888,500 Aaa/AAA 1,950,000 Ramona Municipal Water District Certificate of Participation, AMBAC Insured 7.200 10/01/10 2,152,157 Aaa/AAA 580,000 Redondo Beach Redevelopment Agency Tax Allocation, California, FGIC Insured 8.625 05/01/14 629,190 Aaa/AAA 2,750,000 Richmond Redevelopment Agency Harbor Redevelopment Project Tax Allocation, Capital Guaranty Insured 7.000 07/01/09 3,051,565 Aaa/AAA 2,505,000 Sacramento Redevelopment Agency Downtown Project Series A, MBIA Insured 6.500 11/01/13 2,615,320 Aaa/AAA 3,000,000 Saddleback Community College District Certificate of Participation Series 1989, California, BIGI Insured 7.000 08/01/19 3,274,290 Aaa/AAA 4,000,000 San Bernardino County Medical Center Certificate of Participation Series A, MBIA Insured 5.500 08/01/15 3,769,080 Aaa/AAA 1,000,000 San Diego County Water Authority Revenue Certificate of Participation, FGIC Insured 7.129 04/22/09 1,008,750 Aaa/AAA 10,000,000 San Francisco Airport Refunding Issue #II, California, MBIA Insured 6.750 05/01/20 10,717,300 Aaa/AAA 5,250,000 San Francisco Bay Area Rapid Transit Sales Tax Revenue, California, AMBAC Insured 6.750 07/01/09 5,642,543 Aaa/AAA 1,100,000 San Francisco Bay Area Rapid Transit Sales Tax Revenue Series 1995, California, FGIC Insured 5.500 07/01/20 1,038,818 Aaa/AAA 2,900,000 San Francisco City and County General Obligation, FGIC Insured 5.500 06/15/14 2,762,714 Aaa/AAA 2,000,000 San Mateo Certificate of Participation Capital Improvement Project Corrections and Parking, California, MBIA Insured, Prerefunded at 102% of par 7.000 07/01/01 2,289,140 Aaa/AAA 2,000,000 San Mateo Joint Powers Financing Authority Lease Revenue, MBIA Insured 6.500 07/01/15 2,175,880 Aaa/AAA 1,000,000 Santa Clara Electric System Revenue Bond Series A, California, MBIA Insured 6.250 07/01/19 1,014,700 Aaa/AAA 2,000,000 Santa Margarita Improvement District Series 1994 B, Dana Point, California, MBIA Insured 7.250 08/01/14 2,343,020 Aaa/AAA 2,500,000 South Coast Air Quality District Series 1992, California, AMBAC Insured 6.000 08/01/11 2,601,575 Aaa/AAA
65
Schedule of Investment Securities-Tax-Free Insured Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 5,330,000 Southern California Public Power Authority, AMBAC Insured 5.500% 07/01/20 $ 4,981,151 Aaa/AAA 6,500,000 State of California General Obligation, MBIA Insured 6.000 10/01/10 6,809,335 Aaa/AAA 780,000 Sweetwater Authority Water Revenue, AMBAC Insured 7.000 04/01/10 854,123 Aaa/AAA 95,000 Thousand Oaks Residential Housing Refunding, California, AMBAC Insured7.900 01/01/16 99,261 Aaa/AAA 2,500,000 Ukiah Electric Revenue, California, MBIA Insured 6.250 06/01/18 2,650,650 Aaa/AAA 4,500,000 Vallejo Water Improvement Project Series B, California, FGIC Insured 6.500 11/01/14 4,688,550 Aaa/AAA 1,445,000 Walnut Valley USD General Obligation Series B, California, AMBAC Insured 6.000 08/01/10 1,517,786 Aaa/AAA - - ------------ ------------ 165,695,000 Total Municipal Securities 172,355,181 - - ------------ ------------ MUNICIPAL DERIVATIVES--2.3%1 2,000,000 East Bay Municipal Water District, California, AMBAC Insured (Yield Curve Notes), Inverse Floater 6.720 06/01/13 1,795,000 Aaa/AAA 2,750,000 Southern California Public Power Agency Palo Verde, FGIC Insured, Inverse Floater 6.485 07/01/17 2,310,000 Aaa/AAA - - ------------ ------------ 4,750,000 Total Municipal Derivatives 4,105,000 - - ------------ ------------ $ 170,445,000 Total Investment Securities (cost $171,565,384) $ 176,460,181 ============ ============
NR = Not Rated - - -------------- 1 Inverse floaters bear interest rates that move inversely to market interest rates. Inverse floaters typically have durations twice as long as long-term bonds, which may cause them to be twice as volatile as long-term bonds when market interest rates change. The Insured Fund is limited to 10% of its net assets in inverse floaters.
Portfolio Composition by Market Sector Certificates of Participation 20.1% Sales Tax 6.4% Water/Sewer 17.7 Transportation 6.1 Tax Allocation 11.3 Prerefunded 4.4 General Obligation 10.9 Other 4.0 Hospital 9.7 ---- Electric 9.4 TOTAL 100.0% ======
66 [THIS PAGE INTENTIONALLY LEFT BLANK] 67 Trustees James M. Benham Ronald J. Gilson Myron S. Scholes Kenneth E. Scott Ezra Solomon Isaac Stein James E. Stowers, III Jeanne D. Wohlers Officers James M. Benham Chairman of the Board John T. Kataoka President and Chief Executive Officer Bruce R. Fitzpatrick Vice President, Treasurer, and Chief Financial Officer Douglas A. Paul Vice President, Secretary and General Counsel Ann N. McCoid Controller [company logo] The Benham Group Part of the Twentieth Century Family of Funds 1665 Charleston Road Mountain View, CA 94043 1-800-321-8321 Not authorized for distribution unless preceded or accompanied by a current fund prospectus. Benham Distributors, Inc. 10/95 Q062 BENHAM CALIFORNIA TAX-FREE BOND FUNDS Annual Report * August 31, 1995 [Picture of the California state flag] Tax-Free Short-Term Fund Tax-Free Intermediate-Term Fund Tax-Free Long-Term Fund [company logo] The Benham Group Part of the Twentieth Century Family of Mutual Funds CONTENTS U.S. ECONOMIC REVIEW.................................. 1 MUNICIPAL MARKET SUMMARY.............................. 2 CALIFORNIA ECONOMIC & CREDIT ANALYSIS....................................... 4 TAX-FREE SHORT-TERM FUND Performance Information............................... 5 Performance Comparisons & Total Return Breakdown...... 6 Portfolio Information................................. 7 Management Discussion................................. 8 Financial Highlights...................................28 Financial Statements and Notes.........................31 Schedule of Investments................................39 TAX-FREE INTERMEDIATE-TERM FUND Performance Information................................10 Performance Comparisons & Total Return Breakdown.......11 Portfolio Information..................................12 Management Discussion .................................13 Financial Highlights...................................29 Financial Statements and Notes.........................31 Schedule of Investments................................42 TAX-FREE LONG-TERM FUND Performance Information................................15 Performance Comparisons & Total Return Breakdown.......16 Portfolio Information..................................17 Management Discussion .................................18 Financial Highlights...................................30 Financial Statements and Notes.........................31 Schedule of Investments................................49 INVESTMENT FUNDAMENTALS Definitions............................................20 The Yield Curve........................................22 Muni Risk Factors......................................23 Portfolio Sensitivity Measures.........................24 Bond Pricing...........................................25 Portfolio Structures & Taxable Distributions...........26 U.S. ECONOMIC REVIEW JAMES M. BENHAM [Photo of James Chairman of the Board M. Benham] Lower-than-expected inflation during the 12 months ended September 30, 1995, helped generate optimism in the U.S. financial markets. U.S. inflation, as measured by the consumer price index, increased at an annual rate of just 2.5% during the 12-month period. Corporate mergers, downsizing and global job competition kept labor costs low, and technological advances made U.S. workers more efficient, boosting U.S. productivity to a 10-year high. [graph data described below] Slow economic growth also contributed significantly to the low inflation rate. The Federal Reserve (the Fed) surprised almost everyone by achieving its goal of slow economic growth and low inflation, the so-called "soft landing." The Fed raised short-term interest rates seven times from February 1994 to February 1995 (see the accompanying graph) to slow the economy and prevent inflation. The higher interest rates caused slowdowns in auto, home and retail sales in the first quarter of 1995. Growth was even slower in the second quarter. U.S. employment suffered the biggest monthly jobs decline in four years, and industrial production declined for three consecutive months. As a result, real annual growth was just 1.3% in the second quarter. Evidence of economic weakness was so pronounced by the summer of 1995 that the Fed reduced interest rates in early July. The Fed lowered its target for the federal funds rate from 6.00% to 5.75%, the Fed's first rate cut since September 1992. Despite this action, economic signals remained mixed through the third quarter. Signs of strength appeared in the housing and manufacturing sectors, but consumer confidence ebbed and retail sales lagged. As a result, the Fed's interest rate policy committee left interest rates unchanged at its August and September meetings. Despite the Fed's inaction in September, many analysts still expect interest rates to decline by the end of the year. Some believe that the Fed could cut rates at its next policy committee meeting on November 15, but it looks more likely that the Fed will wait to see if Congress and President Clinton agree on a meaningful budget deficit reduction plan. [graph data] Discount Rate Fed Funds Rate Sep-91 5 5.45 Oct-91 5 5.21 Nov-91 4.5 4.81 Dec-91 3.5 4.43 Jan-92 3.5 4.03 Feb-92 3.5 4.06 Mar-92 3.5 3.98 Apr-92 3.5 3.73 May-92 3.5 3.82 Jun-92 3.5 3.76 Jul-92 3 3.25 Aug-92 3 3.3 Sep-92 3 3.22 Oct-92 3 3.1 Nov-92 3 3.09 Dec-92 3 2.92 Jan-93 3 3.02 Feb-93 3 3.03 Mar-93 3 3.07 Apr-93 3 2.96 May-93 3 3 Jun-93 3 3.04 Jul-93 3 3.06 Aug-93 3 3.03 Sep-93 3 3.09 Oct-93 3 2.99 Nov-93 3 3.02 Dec-93 3 2.96 Jan-94 3 3.05 Feb-94 3 3.25 Mar-94 3 3.34 Apr-94 3 3.56 May-94 3.5 4.01 Jun-94 3.5 4.25 Jul-94 3.5 4.26 Aug-94 4 4.47 Sep-94 4 4.73 Oct-94 4 4.76 Nov-94 4.75 5.29 Dec-94 4.75 5.45 Jan-95 4.75 5.53 Feb-95 5.25 5.92 Mar-95 5.25 5.98 Apr-95 5.25 6.05 May-95 5.25 6.01 Jun-95 5.25 5.98 Jul-95 5.25 5.77 Aug-95 5.25 5.75 Sep-95 5.25 5.8 1 MARKET SUMMARY MUNICIPAL SECURITIES by Dave MacEwen, Vice President & Senior Municipal Portfolio Manager Municipal Market Overview Municipal securities (munis) posted gains during the year ended August 31, 1995, although much of the rally during the past six months was concentrated in short-term munis. After a disastrous 1994, munis rebounded during the first quarter of 1995. All U.S. fixed-income securities benefited from the slow-growth, low-inflation environment that developed in early 1995. But munis received an additional boost from a favorable supply and demand imbalance. Although the muni market experienced no significant cash inflows from investors, new supply was extremely light--in the first quarter of 1995, issuance of new munis dropped to its lowest volume in five years. [graph data described below] The muni rally lost some of its momentum in the second and third quarters of 1995 when tax reform became a priority in the Republican-dominated Congress. One of the most widely discussed plans was a flat income tax proposed by House Majority Leader Dick Armey (see page 3). Flat tax fears halted the rally in long-term munis, but short-term muni yields continued their downward trend. Implementation of any federal tax reform is not expected to occur for several years, so investor demand has increased for short- and intermediate-term munis that will mature before tax reform becomes a reality. This strong demand pushed short-term muni yields lower, while long-term muni yields retraced their decline from earlier in the year (see the graph above). Orange County made headlines again in June after county voters defeated a proposed sales tax increase that would have generated enough revenue to allow the county to repay $800 million in short-term debt due in July and August. Although the county, with the assistance of the state, eventually came up with a plan to repay its debts, the defeat of the sales tax referendum raised serious questions about municipal credit quality. [graph data] "1" 4.48 3.65 "2" 4.69 3.85 "3" 4.81 4.01 4.91 4.16 "5" 5.01 4.31 5.08 4.435 "7" 5.15 4.56 5.21 4.66 5.27 4.76 "10" 5.33 4.86 5.39 4.98 5.45 5.1 5.51 5.22 5.57 5.34 "15" 5.63 5.46 5.66 5.514 5.69 5.568 5.72 5.622 5.75 5.676 "20" 5.78 5.73 5.796 5.754 5.812 5.778 5.828 5.802 5.844 5.826 "25" 5.86 5.85 5.864 5.854 5.868 5.858 5.872 5.862 5.876 5.866 "30" 5.88 5.87 Municipal Securities vs. Treasury Securities Over the past six months, munis with maturities of five years or less outperformed Treasury securities with comparable maturities. This reflects the increased demand for short-term munis because of flat tax fears. Longer-term munis didn't fare as well--in the 20- to 30-year maturity sector, muni yields were little changed during the period, while comparable Treasuries rallied substantially. 2 Market Summary Municipal Securities (Continued from the previous page) This comparative performance is illustrated by the graph below, which shows municipal yields as a percentage of Treasury yields. A decreasing percentage (see the three-year note) indicates that muni and Treasury yields have moved further apart, which means that munis outperformed Treasuries. Conversely, an increasing percentage (see the 30-year bond) indicates that muni and Treasury yields have moved closer together, which means that Treasuries outperformed munis. [graph data described below] Tax Reform and the Flat Tax Several members of Congress have recently drafted proposals intended to simplify the U.S. tax code. Some of these proposals would remove the tax advantage of munis, and this has had a negative effect on muni prices. The most widely discussed and controversial proposal so far is House Majority Leader Dick Armey's "flat tax" plan. The Armey plan would replace current tax brackets with a single 17% flat rate for all taxpayers. The plan abolishes all tax deductions and makes all investment income tax free, eliminating the tax advantage munis have over Treasuries and corporate securities. Without the tax advantage, muni yields would probably have to rise to retain their attractiveness to investors, and muni prices would decline. In spite of the attention it has received, we doubt that the Armey plan will become a reality in its current form. It would generate less tax revenue than the current structure, and its deduction-eliminating provisions would hurt nonprofit organizations and the real estate industry, who would actively lobby against it. We believe passage of a more moderate, fiscally sound proposal is more likely. One such proposal, dubbed the "Nunn-Domenici plan" after the two senators who wrote it, features a "consumed-income" tax with graduated rates and unlimited deductions for income put into financial assets (excluding art and real estate). Interest income would remain taxable, and munis would retain their tax-exempt status. Radical or moderate, we do not expect an overhaul of the tax system to be implemented before 1998. Tax reform could be a key issue in the 1996 elections, so we don't expect any legislation to reach Congress until 1997. Although parts of the various tax proposals currently being circulated may eventually be adopted, we believe it will require a lengthy period of political wrangling. [graph data] 2/28/95 8/31/95 3-year note 70 67.3 30-year bond 79 88.2 3 CALIFORNIA CREDIT ANALYSIS STATE ECONOMIC AND CREDIT REVIEW by Steve Permut, Manager of Municipal Research During the second and third quarters of 1995, California continued the slow, steady economic recovery that began in 1994. Employment, though still well below pre-recession levels, continued to trend upward (see the graph below) as the state began to overcome the substantial job losses triggered in part by the demise of its aerospace industry. The tourism, entertainment and high-tech industries were instrumental in improving the employment picture. [graph data described below] More affordable housing prices and low mortgage rates should help resuscitate the languishing real estate market, and the state has added 15,000 construction jobs since November 1994. Migration out of the state seems to be slowing, and population growth is expected to accelerate over the next few years. This should provide solid support for the state's building industry. The state's budgetary picture has improved. The $2.8 billion deficit carried into fiscal 1995 was slashed to $600 million by reduced government spending and modest economic growth. But California's counties have been under considerable strain in the past few years. County revenues remain flat, and state funding has decreased, while social services expenditures continue to rise. Los Angeles County, where defense-related job losses were concentrated during the last recession, was hardest hit--without some action at the state and local levels, the situation could deteriorate substantially. Until these problems can be effectively addressed, we will continue to maintain a negative outlook on county debt in general. Regionally, the Central Valley, with available open space and lower housing costs, is the fastest-growing area in the state. The San Francisco Bay Area remains relatively stable and has benefited from a well-diversified economy. The Los Angeles area currently shows faster-paced job growth than the Bay Area; however, L.A.'s job losses during the recession were far more severe. Though our outlook for the state is relatively positive, the road to recovery won't be a smooth one. Military base closures announced last winter will likely aggravate unemployment. Economic recovery will continue to be slow, but once political and budgetary issues are resolved, we expect to see an improvement in trading values and ratings on the state of California's municipal obligations. [graph data] Cal. Empl. 1/31/91 12505.4 2/28/91 12487.1 3/31/91 12466.4 4/30/91 12445.2 5/31/91 12422.5 6/30/91 12397.5 7/31/91 12381.8 8/31/91 12370.2 9/30/91 12360.7 10/31/91 12348.9 11/30/91 12335.1 12/31/91 12319.5 1/31/92 12294.3 2/29/92 12264.1 3/31/92 12242.4 4/30/92 12223.6 5/31/92 12206.9 6/30/92 12190.9 7/31/92 12186.1 8/31/92 12179.8 9/30/92 12163.4 10/31/92 12146.5 11/30/92 12131.2 12/31/92 12115.4 1/31/93 12100.7 2/28/93 12089.9 3/31/93 12078.2 4/30/93 12063.6 5/31/93 12050.6 6/30/93 12044.2 7/31/93 12038.1 8/31/93 12035.4 9/30/93 12037.6 10/31/93 12039.2 11/30/93 12040.2 12/31/93 12046 1/31/94 12044 2/28/94 12049.7 3/31/94 12061 4/30/94 12075.9 5/31/94 12093.4 6/30/94 12105.5 7/31/94 12125 8/31/94 12138.1 9/30/94 12147.3 10/31/94 12157.3 11/30/94 12165.7 12/31/94 12174.3 1/31/95 12174.6 2/28/95 12185.2 3/31/95 12193.8 4/30/95 12203.3 5/31/95 12212.6 6/30/95 12222.8 7/31/95 12242.3 8/31/95 12254.8 4 SHORT-TERM FUND CURRENT YIELD* As of August 31, 1995 30-Day 30-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 3.94% 6.03% 6.30% 6.79% 6.84% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes. NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Range Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years Life of Fund - - -------------------------------------------------------------------------------- $9.89-$10.23 5.33% 4.44% N/A 4.80% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 28. The Fund commenced operations on June 1, 1992. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 5 SHORT-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 6/1/92 in the Fund and in the Lehman Brothers, Inc. Three-Year Municipal Bond Index [graph data] Index Fund 5/92 10000 10000 10122 10074 10319 10249 10273 10222 8/92 10357 10277 10317 10251 10389 10347 10451 10413 10530 10497 2/93 10695 10673 10663 10616 10725 10679 10754 10699 10823 10754 10838 10733 8/93 10897 10850 10945 10913 10967 10923 10953 10925 11068 11029 11158 11095 2/94 11054 10986 10920 10881 10984 10903 11036 10929 11039 10942 11131 11029 8/94 11171 11057 11143 11037 11116 11008 11096 10946 11144 10962 11237 11059 2/95 11356 11206 11458 11290 11497 11337 11673 11468 11701 11518 11825 11581 8/95 11917 11646 Past performance does not guarantee future results. The SEC requires each variable-price mutual fund to provide a line graph comparing fund performance with an appropriate broad-based market index over 10 years (or the life of the fund). We have selected the Lehman Brothers, Inc. Three-Year Municipal Bond Index to serve as the comparative index for the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Short Municipal Debt Funds" category. 1 Year 3 Years Life of Fund+ The Fund's Total Return: 5.33% 4.44% 4.69% Category Average Total Return: 5.63% 4.77% 5.03% The Fund's Ranking: 8 out of 9 2 out of 2 2 out of 2 + From June 30, 1992, through August 31, 1995. Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1995 % From % From Asset One-Year Income + Appreciation = Total Return 4.05% + 1.28% = 5.33% 6 SHORT-TERM FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $105,636,293 $107,789,683 Number of Issues: 48 47 Average Maturity: 2.49 years 2.52 years Average Coupon: 5.61% 5.68% Average Duration: 2.17 years 2.25 years For definitions of these terms, see page 21. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 A 22.2% A 22.0% AA 20.4% AA 25.0% AAA 57.4% AAA 53.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 23. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Other: 30.3% Other: 29.1% Water/Sewer: 6.3% Electric: 4.1% Transportation: 6.5% Transportation: 6.6% Sales Tax: 8.9% COPs: 7.3% COPs: 9.6% Water/Sewer: 8.1% GO: 10.4% GOs: 9.0% Hospital: 12.5% Hospital: 13.2% Prerefunded: 15.5% Prerefunded: 22.6% For definitions of these security types, see page 20. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 5-10 Years: 6.3% 5-10 Years: 3.9% 1-5 Years: 78.3% 1-5 Years: 86.9% [less than]1 Year: 15.4% [less than]1 Year: 9.2% The Fund invests primarily in short-term California municipal obligations. The Fund's weighted average portfolio maturity is typically one to five years, with three years considered a "neutral" position. The composition of the Fund's portfolio may change over time. 7 SHORT-TERM FUND MANAGEMENT DISCUSSION with Joel Silva, Municipal Portfolio Manager NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section (pages 20-26). Q: How did the Fund perform? A: The Fund narrowly underperfomed the average return of its peers. For the fiscal year ended August 31, 1995, the Fund's total return was 5.33%, compared to the 5.63% average total return for the nine funds in Lipper's "California Short Municipal Debt Funds" category over the same period (see the Lipper Performance Comparison on page 6). Q: Why did the Fund underperform its category average? A: The Fund is typically less volatile than many of its peers. As a result, the Fund tends to outperform the category average during a declining market (such as in 1994), but it lags behind during muni market rallies (such as in 1995). Although the Fund experienced less price appreciation than its peers over the past year, it continued to provide a high level of tax-exempt income. The Fund's yield over the past 12 months was slightly higher than the average yield of its peers. Q: How has the Fund been positioned so far in 1995? A: We maintained the Fund's defensive position at the beginning of 1995 because we felt that strong economic growth could lead to higher inflation and higher interest rates. However, as 1995 progressed and it became clear that economic and market conditions were changing, we shifted our strategy. We extended the Fund's average maturity* to about three years and positioned the Fund in a bullet structure* around this maturity. This structure proved to be beneficial in the second quarter--as the muni yield curve* steepened significantly between one and five years, three-year munis provided the best combination of yield and price appreciation in this maturity sector. Recently, we began to shift the Fund's portfolio into more of a barbell structure.* One-year munis are now more attractively priced than munis maturing in two or three years, so we've added more one-year securities to the Fund's portfolio. We balanced these one-year securities with four-year munis in order to bring the Fund's average maturity back to a neutral position (around 2.5 years). Q: You cut back on the Fund's holdings of prerefunded bonds* (from about 23% to 16%). Why? A: Prerefunded bonds typically have short maturities, and like all short-term munis, they have been in great demand because of anxiety about 8 Short-Term Fund MANAGEMENT DISCUSSION (Continued from previous page) federal tax reform. Recent concerns about municipal credit quality have also boosted demand for prerefunded bonds, and this has led to some significant price appreciation. Accordingly, we sold some of the Fund's prerefunded bonds as we made changes to the Fund's portfolio. We replaced the prerefunded bonds with insured bonds in order to maintain the high level of credit quality. Q: Speaking of credit quality, the Fund's credit profile changed over the past six months. The Fund now holds more AAA-rated bonds. Why the change? A: Concerns about municipal credit quality have increased in 1995. In addition to the Orange County bankruptcy and the recent problems in Los Angeles County (see page 4), some California electric utility bonds have been downgraded, and sales tax bonds have come under pressure as some municipalities divert sales tax revenues to meet immediate expenses. In this environment, we felt the need to upgrade the Fund's overall level of credit quality, so we increased the Fund's exposure to insured bonds. One method of accomplishing this was to obtain secondary municipal bond insurance (i.e., insure an existing uninsured muni). Because new muni issuance has been low, bond insurers have focused on the secondary market, and intense competition among bond insurers has resulted in declining prices for secondary insurance. We've taken advantage of this trend by inexpensively insuring several of the Fund's munis. Q: Looking ahead, what are your plans for the Fund over the next six months? A: The muni market is being pulled in opposite directions by beneficial economic conditions and the specter of federal tax reform. Moderate U.S. economic growth and low inflation have created a favorable environment for munis, but flat tax fears continue to plague the muni market. Accordingly, we expect this tug-of-war to hold muni prices in a fairly narrow trading range over the next six months. With this outlook in mind, we plan to maintain the Fund's current neutral position. We expect to keep the Fund's barbell structure of one-year and four-year securities in place until the muni yield curve flattens. We will continue to focus our purchases on premium bonds* in order to avoid the undesirable taxability problem associated with discount bonds* (see page 25 for details). We try to buy premium bonds with coupons* that are at least 50 basis points* higher than prevailing muni yields. This strategy should help provide enough cushion to prevent the Fund's securities from becoming discount bonds during a downturn in the market. 9 INTERMEDIATE-TERM FUND CURRENT YIELD* As of August 31, 1995 30-Day 30-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 4.74% 7.26% 7.57% 8.17% 8.23% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes. NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Range Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years 10 Years - - -------------------------------------------------------------------------------- $10.26-$11.11 7.09% 6.14% 7.45% 7.23% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 29. The Fund commenced operations on November 9, 1983. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 10 INTERMEDIATE-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 9/1/85 in the Fund and in the Lehman Brothers, Inc. Five-Year Municipal General Obligation Index [graph data Index Fund 8/31/85 10000 10000 9/30/85 9991 9938 10/31/85 10256 10223 11/30/85 10489 10444 12/31/85 10329 10488 1/31/86 10802 10833 2/28/86 11107 10983 3/31/86 11136 11013 4/30/86 11207 11083 5/31/86 11053 10972 6/30/86 11166 11118 7/31/86 11160 11136 8/31/86 11432 11452 9/30/86 11578 11525 10/31/86 11776 11758 11/30/86 11921 11853 12/31/86 11883 11805 1/31/87 12113 12061 2/28/87 12223 12136 3/31/87 12154 12040 4/30/87 11794 11495 5/31/87 11794 11515 6/30/87 12043 11700 7/31/87 12181 11863 8/31/87 12205 11855 9/30/87 11795 11455 10/31/87 11969 11576 11/30/87 12112 11776 12/31/87 12245 11897 1/31/88 12547 12191 2/29/88 12674 12300 3/31/88 12625 12233 4/30/88 12741 12327 5/31/88 12587 12237 6/30/88 12679 12299 7/31/88 12736 12346 8/31/88 12699 12318 9/30/88 12823 12454 10/31/88 12934 12581 11/30/88 12866 12497 12/31/88 12901 12599 1/31/89 13086 12743 2/28/89 12947 12628 3/31/89 12865 12571 4/30/89 13086 12786 5/31/89 13323 12974 6/30/89 13470 13104 7/31/89 13666 13275 8/31/89 13613 13215 9/30/89 13619 13200 10/31/89 13631 13310 11/30/89 13805 13495 12/31/89 13917 13600 1/31/90 13924 13621 2/28/90 14028 13711 3/31/90 13984 13673 4/30/90 13938 13609 5/31/90 14193 13858 6/30/90 14297 13966 7/31/90 14467 14135 8/31/90 14418 14029 9/30/90 14448 14067 10/31/90 14661 14311 11/30/90 14872 14520 12/31/90 14928 14551 1/31/91 15147 14778 2/28/91 15285 14885 3/31/91 15249 14837 4/30/91 15440 15015 5/31/91 15519 15103 6/30/91 15516 15069 7/31/91 15671 15206 8/31/91 15873 15395 9/30/91 16067 15601 10/31/91 16190 15690 11/30/91 16241 15700 12/31/91 16606 16061 1/31/92 16638 16062 2/29/92 16648 16025 3/31/92 16593 15982 4/30/92 16739 16100 5/31/92 16889 16277 6/30/92 17132 16522 7/31/92 17581 17072 8/31/92 17449 16808 9/30/92 17559 16959 10/31/92 17503 16783 11/30/92 17714 17046 12/31/92 17837 17200 1/31/93 18030 17461 2/28/93 18500 18053 3/31/93 18290 17767 4/30/93 18408 17903 5/31/93 18473 17955 6/30/93 18722 18244 7/30/93 18735 18187 8/31/93 18990 18560 9/30/93 19127 18829 10/31/93 19156 18850 11/30/93 19100 18697 12/31/93 19362 19038 1/31/94 19544 19247 2/28/94 19178 18777 3/31/94 18751 18281 4/29/94 18940 18354 5/31/94 19046 18485 6/30/94 19002 18423 7/29/94 19209 18702 8/31/94 19302 18766 9/30/94 19157 18600 10/31/94 19050 18383 11/30/94 18928 18130 12/30/94 19094 18329 1/31/95 19277 18677 2/28/95 19557 19032 3/31/95 19868 19291 4/28/95 19922 19366 5/31/95 20358 19793 6/30/95 20374 19694 7/31/95 20659 19902 8/31/95 20868 20097 Past performance does not guarantee future results. The SEC requires each variable-price mutual fund to provide a line graph comparing fund performance with an appropriate broad-based market index over 10 years (or the life of the fund). We have selected the Lehman Brothers, Inc. Five-Year Municipal General Obligation Index to serve as the comparative index for the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Intermediate Municipal Debt Funds" category. 1 Year 3 Years 5 Years 10 Years The Fund`s Total Return: 7.09% 6.14% 7.45% 7.23% Category Average Total Return: 6.77% 5.87% 7.50% 7.23% The Fund`s Ranking: 15 out of 30 4 out of 9 4 out of 5 1 out of 1 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1995 % From % From Asset One-Year Income + Appreciation = Total Return 4.90% + 2.19% = 7.09% 11 INTERMEDIATE-TERM FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $412,450,277 $407,251,414 Number of Issues: 132 135 Average Maturity: 7.43 years 6.97 years Average Coupon: 6.12% 6.10% Average Duration: 5.32 years 5.19 years For definitions of these terms, see page 21. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 A 22.8% A 24.0% AA 16.6% AA 23.0% AAA 59.0% AAA 53.0% BBB 1.6% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 23. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Other: 24.1% Other: 26.9% GO: 6.9% Sales Tax: 8.2% Transportation: 7.5% Hospital: 8.5% Sales Tax: 10.4% Prerefunded: 9.6% Electric: 14.4% Electric: 11.7% Water/Sewer: 14.4% Water/Sewer: 13.3% COPs: 22.3% COPs: 21.8% For definitions of these security types, see page 20. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 10-20 Years: 20.9% 10-20 Years: 17.8% 5-10 Years: 60.2% 5-10 Years: 60.4% 1-5 Years: 18.2% 1-5 Years: 19.5% [less than]1 Year: 0.7% [less than]1 Year: 2.3% The Fund invests primarily in intermediate-term California municipal obligations. The Fund's weighted average portfolio maturity is typically five to ten years, with seven years considered a "neutral" position. The composition of the Fund's portfolio may change over time. 12 INTERMEDIATE-TERM FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President & Senior Municipal Portfolio Manager NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section (pages 20-26). Q: How did the Fund perform? A: The Fund performed well compared to its peers. For the fiscal year ended August 31, 1995, the Fund's total return was 7.09%, which exceeded the 6.77% average total return for the 30 funds in Lipper's "California Intermediate Municipal Debt Funds" category over the same period (see the Lipper Performance Comparison on page 11). Q: Why did the Fund outperform its category average? A: The Fund's relatively high yield over the past 12 months contributed to the Fund's outperformance. The Fund's positioning also helped produce higher returns. In the last few months of 1994, the Fund was more defensively positioned than many of its peers, and this limited the Fund's losses as muni prices fell. In 1995, the Fund's neutral position and bullet structure* enabled it to benefit fully from the muni rally. Q: Can you elaborate on the Fund's positioning in 1995? A: We maintained the Fund's defensive position at the beginning of 1995 because we believed that strong economic growth could lead to higher inflation and higher interest rates. However, as 1995 progressed and it became clear that economic and market conditions were changing, we shifted our strategy. We positioned the Fund in a bullet structure around the Fund's average maturity* of seven years. This structure proved to be beneficial in the second quarter--as the muni yield curve* steepened between five and ten years, seven-year munis provided the best combination of yield and price appreciation in this maturity sector. Recently, we've extended the Fund's average maturity out to about 7.5 years by adding longer-term munis (with maturities of 10-20 years) to the Fund's portfolio. Long-term muni prices have remained relatively stagnant over the past six months and now represent good value compared to the rest of the muni yield curve. We balanced the portfolio with some shorter-term munis to keep from extending the Fund's average maturity too aggressively. Q: You cut back on the Fund's holdings of prerefunded bonds* (from about 10% to 3%). Why? A: Prerefunded bonds typically have short maturities, and like all short-term munis, they have been in great demand because of anxiety about federal tax reform. Recent concerns about municipal credit quality have 13 Intermediate-Term Fund MANAGEMENT DISCUSSION (Continued from the previous page) also boosted demand for prerefunded bonds, and this has led to some significant price appreciation. Accordingly, selling some of the Fund's prerefunded bonds enabled us to take profits and extend the Fund's average maturity at the same time. We replaced the prerefunded bonds with longer-term insured bonds in order to maintain the high level of credit quality. Q: Speaking of credit quality, the Fund's credit profile changed over the past six months. The Fund now holds more AAA-rated bonds. Why the change? A: Concerns about municipal credit quality have increased in 1995. In addition to the Orange County bankruptcy and the recent problems in Los Angeles County (see page 4), some California electric utility bonds have been downgraded, and sales tax bonds have come under pressure as some municipalities divert sales tax revenues to meet immediate expenses. In this environment, we felt the need to upgrade the Fund's overall level of credit quality, so we increased the Fund's exposure to insured bonds. One method of accomplishing this was to obtain secondary municipal bond insurance (i.e., insure an existing uninsured muni). Because new muni issuance has been low, bond insurers have focused on the secondary market, and intense competition among bond insurers has resulted in declining prices for secondary insurance. We've taken advantage of this trend by inexpensively insuring several of the Fund's munis. Q: Looking ahead, what are your plans for the Fund over the next six months? A: The muni market is being pulled in opposite directions by beneficial economic conditions and the specter of federal tax reform. Moderate U.S. economic growth and low inflation have created a favorable environment for munis, but flat tax fears continue to plague the muni market. Accordingly, we expect this tug-of-war to hold muni prices in a fairly narrow trading range over the next six months. With this outlook in mind, we plan to maintain the Fund's current neutral position. We may look to extend the Fund's average maturity a little if long-term munis remain cheap. We will continue to focus our purchases on premium bonds* in order to avoid the undesirable taxability problem associated with discount bonds* (see page 25 for details). We try to buy premium bonds with coupons* that are at least 50 basis points* higher than prevailing muni yields. This strategy should help provide enough cushion to prevent the Fund's securities from becoming discount bonds during a downturn in the market. 14 LONG-TERM FUND CURRENT YIELD* As of August 31, 1995 30-Day 30-Day Tax-Equivalent Yields - - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - - -------------------------------------------------------------------------------- 5.67% 8.68% 9.06% 9.77% 9.84% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $94,250 37.42% -- joint taxable income of $94,251 to $143,600 41.95% -- joint taxable income of $143,601 to $219,872 42.40% -- joint taxable income of $219,873 to $256,500 All income dividends distributed by the Fund during the fiscal year ended August 31, 1995, are exempt from federal and California state income taxes. A long-term capital gain distribution was made on December 15, 1994, and was reported to shareholders on their 1994 1099-DIV Form. NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1995 Net Asset Value Range Average Annual Total Returns - - -------------------------------------------------------------------------------- (9/1/94-8/31/95) 1 Year 3 Years 5 Years 10 Years - - -------------------------------------------------------------------------------- $9.93-$11.18 7.21% 6.65% 8.53% 8.33% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 30. The Fund commenced operations on November 9, 1983. * Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 15 LONG-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 9/1/85 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [graph data] Index Fund 8/31/85 10000 10000 9/30/85 9844 9844 10/31/85 10181 10095 11/30/85 10614 10360 12/31/85 10812 10567 1/31/86 11499 11130 2/28/86 12017 11483 3/31/86 12014 11577 4/30/86 12014 11553 5/31/86 11784 11396 6/30/86 11886 11499 7/31/86 11980 11558 8/31/86 12606 12153 9/30/86 12577 12106 10/31/86 12793 12339 11/30/86 13099 12576 12/31/86 13082 12608 1/31/87 13522 12975 2/28/87 13560 12973 3/31/87 13360 12915 4/30/87 12610 11840 5/31/87 12471 11695 6/30/87 12074 12014 7/31/87 12186 12098 8/31/87 12240 12115 9/30/87 11740 11531 10/31/87 11739 11430 11/30/87 12115 11838 12/31/87 12273 12029 1/31/88 12762 12548 2/29/88 12913 12717 3/31/88 12728 12508 4/30/88 12828 12538 5/31/88 12842 12555 6/30/88 13092 12700 7/31/88 13180 12760 8/31/88 13232 12794 9/30/88 13531 12968 10/31/88 13840 13219 11/30/88 13691 13096 12/31/88 13929 13284 1/31/89 14257 13555 2/28/89 14057 13437 3/31/89 14069 13430 4/30/89 14481 13712 5/31/89 14817 13966 6/30/89 15042 14161 7/31/89 15241 14359 8/31/89 15009 14123 9/30/89 14964 14065 10/31/89 15162 14227 11/30/89 15483 14478 12/31/89 15598 14580 1/31/90 15440 14383 2/28/90 15614 14567 3/31/90 15630 14566 4/30/90 15440 14333 5/31/90 15876 14762 6/30/90 16032 14909 7/31/90 16315 15162 8/31/90 15926 14782 9/30/90 15901 14745 10/31/90 16238 15120 11/30/90 16650 15487 12/31/90 16723 15542 1/31/91 16948 15757 2/28/91 17066 15806 3/31/91 17107 15813 4/30/91 17372 16097 5/31/91 17577 16243 6/30/91 17544 16160 7/31/91 17815 16389 8/31/91 18071 16595 9/30/91 18333 16865 10/31/91 18525 17015 11/30/91 18547 16945 12/31/91 18989 17376 1/31/92 18978 17314 2/29/92 19008 17365 3/31/92 19055 17366 4/30/92 19237 17515 5/31/92 19519 17742 6/30/92 19896 18073 7/31/92 20626 18673 8/31/92 20349 18351 9/30/92 20439 18473 10/31/92 20098 18016 11/30/92 20664 18545 12/31/92 20932 18794 1/31/93 21129 18983 2/28/93 22112 19876 3/31/93 21845 19607 4/30/93 22144 19905 5/31/93 22327 20009 6/30/93 22747 20385 7/30/93 22770 20374 8/31/93 23353 20925 9/30/93 23656 21208 10/31/93 23701 21210 11/30/93 23415 20941 12/31/93 24019 21377 1/31/94 24302 21675 2/28/94 23498 21171 3/31/94 22095 20158 4/29/94 22265 20121 5/31/94 22526 20374 6/30/94 22255 20281 7/29/94 22827 20713 8/31/94 22875 20761 9/30/94 22344 20400 10/31/94 21658 20021 11/30/94 21087 19638 12/30/94 21835 19986 1/31/95 22796 20622 2/28/95 23724 21208 3/31/95 24008 21411 4/28/95 23996 21428 5/31/95 25019 22159 6/30/95 24558 21779 7/31/95 24684 21925 8/31/95 25032 22258 Past performance does not guarantee future results. The SEC requires each variable-price mutual fund to provide a line graph comparing fund performance with an appropriate broad-based market index over 10 years (or the life of the fund). We have selected the Lehman Brothers, Inc. Long-Term Municipal Bond Index to serve as the comparative index for the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/95 for the funds in Lipper's "California Municipal Debt Funds" category. 1 Year 3 Years 5 Years 10 Years The Fund`s Total Return: 7.21% 6.65% 8.53% 8.33% Category Average Total Return: 7.07% 6.02% 8.01% 8.35% The Fund`s Ranking: 44 out of 91 8 out of 57 9 out of 47 11 out of 17 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1995 % From % From % From Asset One-Year Income + Capital Gains + Appreciation = Total Return 5.70% + 0.53% + 0.98% = 7.21% 16 LONG-TERM FUND KEY PORTFOLIO STATISTICS 8/31/95 2/28/95 Market Value: $272,596,939 $270,303,870 Number of Issues: 86 83 Average Maturity: 20.25 years 17.75 years Average Coupon: 6.04% 6.39% Average Duration: 8.29 years 7.10 years For definitions of these terms, see page 21. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] [graph data] [graph data] 8/31/95 2/28/95 A 41.1% A 51.0% AA 17.3% AA 22.0% AAA 41.6% AAA 27.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 23. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] [graph data] [graph data] 8/31/95 2/28/95 Other: 22.0% Other: 27.9% Electric: 8.0% Water/Sewer: 6.3% GICs: 8.7% Sales Tax: 6.3% Sales Tax: 9.1% GICs: 8.7% Water/Sewer: 11.1% COPs: 15.6% Hospital: 19.9% Electric: 15.9% COPs: 21.2% Hospital: 19.3% For definitions of these security types, see page 20. PORTFOLIO COMPOSITION BY MATURITY [pie charts] [graph data] [graph data] 8/31/95 2/28/95 20-30 Years: 57.4% 20-30 Years: 53.2% 10-20 Years: 37.7% 10-20 Years: 31.4% 5-10 Years: 3.2% 5-10 Years: 4.4% 1-5 Years: 0.8% 1-5 Years: 8.0% [less than]1 Year: 0.9% [less than]1 Year: 3.0% The Fund invests primarily in long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. The composition of the Fund's portfolio may change over time. 17 LONG-TERM FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President & Senior Municipal Portfolio Manager NOTE: The terms marked with an asterisk (*) are defined in the Investment Fundamentals section (pages 20-26). Q: How did the Fund perform? A: The Fund performed above average compared to its peers. For the fiscal year ended August 31, 1995, the Fund's total return was 7.21%, which exceeded the 7.07% average total return for the 91 funds in Lipper's "California Municipal Debt Funds" category over the same period (see the Lipper Performance Comparison on page 16). Q: Why did the Fund outperform its category average? A: The Fund's relatively high yield over the past 12 months contributed to the Fund's outperformance. The Fund's positioning also helped produce higher returns. In the last few months of 1994, the Fund was more defensively positioned than many of its peers, and this limited the Fund's losses as muni prices fell. In 1995, a shift to a more neutral position enabled the Fund to benefit fully from the muni rally. Q: Can you elaborate on the Fund's positioning in 1995? A: We maintained the Fund's defensive position at the beginning of 1995 because we believed that strong economic growth could lead to higher inflation and higher interest rates. However, as 1995 progressed and it became clear that economic and market conditions were changing, we shifted our strategy. We sold nearly all of the Fund's short-term munis (maturities of five years or less), which experienced the most price appreciation in 1995, and replaced them with long-term munis (maturities of 10-30 years), which were attractively priced compared to the rest of the muni yield curve.* As a result of this repositioning, the Fund's average maturity* extended from 17.8 years to 20.3 years, and the Fund's duration* extended from 7.1 years to 8.3 years (as shown in the Portfolio Statistics on page 17). This is a more neutral position for the Fund compared to its defensive posture earlier in the year. Q: The Fund's credit profile changed over the past six months. The Fund now holds more AAA-rated bonds. Why the change? A: Concerns about municipal credit quality have increased in 1995. In addition to the Orange County bankruptcy and the recent problems in Los Angeles County (see page 4), some California electric utility bonds 18 Long-Term Fund MANAGEMENT DISCUSSION (Continued from the previous page) have been downgraded, and sales tax bonds have come under pressure as some municipalities divert sales tax revenues to meet immediate expenses. In this environment, we felt the need to upgrade the Fund's overall level of credit quality, so we increased the Fund's exposure to insured bonds. One method of accomplishing this was to obtain secondary municipal bond insurance (i.e., insure an existing uninsured muni). Because new muni issuance has been low, bond insurers have focused on the secondary market, and intense competition among bond insurers has resulted in declining prices for secondary insurance. We've taken advantage of this trend by inexpensively insuring several of the Fund's munis. Q: Looking ahead, what are your plans for the Fund over the next six months? A: The muni market is being pulled in opposite directions by beneficial economic conditions and the specter of federal tax reform. Moderate U.S. economic growth and low inflation have created a favorable environment for munis, but flat tax fears continue to plague the muni market. Accordingly, we expect this tug-of-war to hold muni prices in a fairly narrow trading range over the next six months. With this outlook in mind, we plan to maintain the Fund's current neutral position. We may look to extend the Fund's average maturity a little if long-term munis remain cheap. We're also focusing on "call protection"--preventing any of the Fund's securities from being called* during a rally in muni prices. To achieve this protection, we've been selling munis that can be called within 4-7 years and buying munis with call dates that are 9-10 years away. Q: The Fund has held a small position in derivatives over the past couple of years. Does the Fund still hold derivatives? A: Yes. The Fund owns one inverse floater* that makes up about 1.3% of the Fund's portfolio. This is down from a 3% position in inverse floaters six months ago. Although we've reduced our holdings, we continue to employ inverse floaters as a duration management tool. They have higher yields and longer durations than typical long-term bonds, and we use them to balance the Fund's duration. Although inverse floaters are more volatile than long-term bonds, their higher yields are desirable in a steep yield curve environment. 19 INVESTMENT FUNDAMENTALS DEFINITIONS Common California Municipal Securities (Munis) AMT Paper--instruments with income subject to the federal alternative minimum tax. Certificates of Participation (COPs)--securities issued to finance public property improvements (such as city halls and police stations). Development Bonds--securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. General Obligation (GO) bonds--securities backed by the taxing power of the issuer. Guaranteed Investment Contracts (GICs)--securities backed by a guarantee from an insurance company. Municipal Commercial Paper (CP)--high-grade short-term securities backed by a line of credit from a bank. Municipal Notes--securities with maturities of two years or less. Prerefunded Bonds--securities refinanced by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. Put Bonds--securities that provide the right to sell to a specified buyer at a specified time and price. Revenue Bonds--securities backed by revenues from sales taxes or from a specific project, system or facility (such as a hospital, electric utility or water system). Tax Allocation Bonds--securities issued to finance improvements in redevelopment areas (such as urban neighborhoods). Tax and Revenue Anticipation Notes (TRANs)--securities backed by the general tax revenues of the issuer. Variable-Rate Demand Notes (VRDNs)--securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. Municipal Derivatives Inverse Floaters--securities bearing interest rates that move inversely to market interest rates. Unlike most bonds, their yields increase as interest rates decline. However, if interest rates rise, they lose considerably more value than a regular fixed-rate bond. Therefore, each Benham California Tax-Free and Municipal Fund limits its investment in inverse floaters to a maximum of 10% of net assets (except for the Money Market Funds, which cannot own inverse floaters at all). 20 Investment Fundamentals DEFINITIONS (Continued from the previous page) Tender Option Bonds--intermediate- or long-term fixed-rate securities with put options attached (which give the holder the option to sell the bonds at face value at a specified time). Tender option bonds purchased by the Funds are typically structured with seven-day put features attached and pay interest at rates that are reset weekly. Each Fund limits its investment in tender option bonds to 15% of net assets. Tender option bonds are not leveraged and have risk characteristics that are similar to VRDNs. Portfolio Statistics Market Value--the market value of a fund's investments on a given date. Number of Issues--the number of different securities issuances held by a fund on a given date. Average Maturity--a weighted average of all bond maturities in a fund's portfolio (see also page 24). Average Coupon--a weighted average of all coupons held in a fund's portfolio. Average Yield--a weighted average of the yields to maturity of the securities in a money market fund's portfolio. Average Duration--a weighted average of all bond durations in a fund's portfolio (see also page 24). Investment Terms Basis Points--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equals one percentage point (or 1%). Basis points are used to avoid confusion about interest rate changes. For example, if an economist says that interest rates rose 1%, does that mean 1% of the previous rate, or one percentage point? Saying that interest rates rose by 100 basis points is a more precise way of describing the change. Coupon--the stated interest rate on a security. Discount Bonds--bonds with coupons that are lower than prevailing interest rates (see also page 25). Par Bonds--bonds that trade or are priced at their face value. Premium Bonds-- bonds with coupons that are higher than prevailing interest rates (see also page 25). 21 INVESTMENT FUNDAMENTALS THE YIELD CURVE One of the fundamental tenets of investing is the relationship between risks and returns--the greater the risks, the greater the chances of earning higher returns over time. The downside is the correspondingly higher potential for short-term losses--an investment that generates a high return probably has a greater likelihood of significant fluctuations in value or return, especially in the short run. Bonds are no exception. The riskiest bonds--those with the greatest exposure to interest rate movements and price fluctuations--generally have the highest yields and returns over time but can experience severe short-term losses. On the other hand, bonds with less exposure to interest rate movements and less price fluctuation generally have lower yields and returns but are more stable. The yield curve is a graphic representation of the relationship between bond risks and returns at a point in time. Yield curve graphs plot lengthening bond maturities (which represent risk because longer maturities increase risk) along the horizontal axis and rising yields (which represent return) on the vertical axis. Therefore, the lower left corner of yield curve graphs have the lowest risks and the lowest potential returns, while the upper right corners have the highest risks and the highest potential returns. Yield curves can have several different shapes, depending on interest rate levels and the economic environment: Normal (Upward Sloping) Yield Curve--a yield curve that shows a normal risk/ return relationship--short-term securities have lower yields than long-term securities. Most normal yield curves start in the lower left corner of the graph and rise to the upper right corner. Steep Yield Curve--a normal yield curve that shows a large difference between short-term yields and long-term yields. This typically occurs when the bond market is responding to inflation fears (causing high long-term bond yields) and the Fed hasn't raised short-term interest rates enough (or the economy hasn't slowed down enough) to quell those fears. Flat Yield Curve--a yield curve that shows short-term securities having almost the same yields as long-term securities. This typically occurs after the Fed has raised short-term interest rates several times--to fight inflation and slow down the economy--and long-term bond yields begin to fall. Inverted Yield Curve--a yield curve that shows short-term securities having higher yields than long-term securities. It's the next step after a flat yield curve if the Fed continues to raise short-term interest rates and long-term rates stay flat or fall. 22 INVESTMENT FUNDAMENTALS MUNI RISK FACTORS Credit Quality and Credit Ratings Bond credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in bond investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. In turn, credit quality and ratings greatly influence bond prices and yields--high ratings mean higher prices and less current income (yield) as compensation for risk. But credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality, as the Orange County bankruptcy made painfully clear. In that case, highly rated munis issued by a wealthy county still suffered defaults. Furthermore, in addition to the credit risk, there is still market risk. High credit ratings do not guarantee good investment performance. They do not reflect the price stability of a muni when economic or market conditions change. Callability Many munis are callable, which means they can be redeemed by the issuer before maturity. When interest rates fall, municipalities find it financially rewarding to refinance the bonds they've issued because they can reduce their monthly interest payments. The municipalities exercise their "call" options to refinance the bonds. Although calls are good for the bond issuers, they're bad for investors in munis--calls reduce the life of a municipal portfolio and force the portfolio manager to reinvest in lower-yielding munis. The durations of munis effectively shorten as rates fall. Calls also boost supply and help drive down muni prices. Call options can only be exercised on specific "call dates," which don't always coincide with periods of low interest rates when refinancing is desirable. As a result, municipalities will issue new bonds when interest rates are low and use the proceeds to buy Treasuries, which offset the old bonds (now known as prerefunded bonds) on their balance sheets until the bonds can be retired on the call date. When the call date arrives, the Treasuries mature, and the prerefunded bonds are retired. During this process, there is a period of time when both the newly issued bonds and the prerefunded bonds remain outstanding. This situation doubles the municipal bond supply, which can depress prices. Duration Extension Duration extension occurs when interest rates increase significantly, as they did in 1994. Higher interest rates reduce calls, which is good for municipal investors, but the lower level of calls causes the durations of munis to extend longer, which is bad when rates are rising. Muni funds become more susceptible to price declines at a time when greater price stability would be desirable. By contrast, Treasury durations generally shorten slightly when interest rates experience a large increase. Because of their higher coupons, premium bonds experience less duration extension than par or discount bonds. 23 INVESTMENT FUNDAMENTALS PORTFOLIO SENSITIVITY MEASUREMENTS Duration Duration measures the price sensitivity of a bond or bond fund to changes in interest rates. Specifically, duration represents the approximate percentage change in the price of a bond or bond fund if interest rates move up or down by 100 basis points (a basis point equals 0.01%). For example, as of August 31, 1995, the California Tax-Free Short-Term Fund's duration was approximately two years, while the California Tax-Free Long-Term Fund's duration was approximately eight years. If interest rates were to rise by 100 basis points, the Short-Term Fund's share price would be expected to decline by 2%, while the Long-Term Fund's share price would decline by 8%. Conversely, if interest rates were to fall by 100 basis points, the Short-Term Fund's share price would be expected to increase by 2%, while the Long-Term Fund's share price would increase by 8%. As this example illustrates, the longer the duration, the more bond or bond fund prices will move in response to interest rate changes. Therefore, portfolio managers generally want durations to be as long as possible when interest rates fall (to maximize bond price increases) and as short as possible when interest rates rise (to minimize bond price declines), taking into account the objectives of the portfolio. Duration, measured in years, also approximates (but understates) the weighted average life of a bond or bond portfolio. To calculate duration, the future interest and principal payments are added together and weighted in proportion to their time value (early payments are valued more than later payments because early payments can be reinvested and compound additional returns). Average Maturity Average maturity is another measurement of the interest rate sensitivity of a bond portfolio. Average maturity measures the average amount of time that will pass until a bond portfolio receives its principal payments from matured bonds. The longer a portfolio's average maturity is, the more interest rate exposure and interest rate sensitivity it has. For example, a portfolio with a ten-year average maturity has much more potential exposure to interest rate changes than a portfolio with a one-year average maturity. Portfolio managers generally lengthen average maturities when interest rates fall (to maximize exposure and capture as much price appreciation as possible) and reduce average maturities when interest rates rise (to minimize exposure and avoid as much price depreciation as possible), as long as this strategy is compatible with the objectives of the portfolio. Reducing the average maturity in a rising interest rate environment allows the portfolio manager to more quickly reinvest matured assets in higher-yielding securities. 24 INVESTMENT FUNDAMENTALS BOND PRICING Premium and Discount Bonds Municipal bonds are generally priced at a premium or at a discount. Premium bonds are bonds that trade or are priced above par (face value), typically because their interest coupons are higher than the prevailing market interest rate. Discount bonds are bonds that trade or are priced below par, typically because their interest coupons are lower than the prevailing market interest rate. A bond may be both a premium bond and a discount bond during its life, depending on changing market conditions. As market rates rise and bond prices fall, the price of a premium bond can fall below par, and the bond becomes a discount bond. Conversely, as market rates fall and bond prices rise, the price of a discount bond can rise above par, and the bond becomes a premium bond. Premium munis tend to have more price stability than discount munis--premium munis depreciate less when interest rates rise (they experience less duration extension), but they appreciate less when interest rates fall (they experience more calls). Discount munis behave more like long-term Treasury securities. Tax Treatment of Discount Bonds In 1993, new rules were passed regarding the tax treatment of long-term gains on discount munis. In the past, any gain earned from the market discount was treated as a capital gain, which is taxed at a maximum rate of 28%. However, the newer law requires that any gain attributable to the market discount must be treated as taxable ordinary income, which is taxed at the same rate as an individual's tax bracket (up to 39.6%). Small market discounts (according to a formula based on the price of the bond and the maturity date) are not subject to the new law. This tax treatment has made discount bonds less attractive in the muni market because most municipal investors prefer to avoid incurring taxable income. Discount munis also tend to have relatively low prices to make up for the expected tax liability. As a result, when the price of a muni falls to the point where it is traded at a market discount, the combination of reduced desirability and added tax liability tends to lead to further price declines. 25 INVESTMENT FUNDAMENTALS PORTFOLIO STRUCTURES & TAXABLE DISTRIBUTIONS Bond Portfolio Structures Barbell Structure--a structure that weights the portfolio heavily at each end, with cash at one end and long-term bonds at the other, with little or nothing in between. This structure is particularly effective when yield curves are moving from steep to flat (short-term rates are rising faster than long-term rates). The cash captures the higher short-term yields without losing value, while the long-term bonds earn high yields that offset any depreciation they might experience. Bullet Structure--a structure that clusters the bond maturities around a single maturity, typically the portfolio's average maturity. This structure is effective when the yield curve is steepening and you have targeted one maturity as the ideal place to be on the yield curve under prevailing market conditions. Ladder Structure--a structure that staggers bond maturities so they occur at regular intervals. When interest rates are rising, this structure allows alternating parts of the portfolio to be continually reinvested at higher interest rates. Taxable Distributions It's important to remember for your tax planning that tax-free funds often generate taxable year-end distributions. These distributions typically result from short-term and long-term capital gains. The taxable distributions usually happen under favorable circumstances (the capital gains reflect bond appreciation), but such distributions understandably attract attention simply because they are taxable instead of tax free. Although we manage our California tax-free and municipal bond funds to earn tax-exempt income, they sometimes realize taxable capital gains as we pursue higher total returns. By law, the funds must distribute these capital gains to shareholders each year. Under current tax law, each fund must distribute net short-term capital gains realized by the fund as taxable ordinary income. Each fund distributes net long-term capital gains to shareholders as a taxable capital gains distribution. 26 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Trustees Benham California Tax-Free and Municipal Funds: We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of Tax-Free Short-Term Fund, Tax-Free Intermediate-Term Fund and Tax-Free Long-Term Fund (three of the series comprising Benham California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1995, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights 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 financial highlights 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 August 31, 1995, by correspondence with the custodian and brokers. 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 the financial highlights referred to above present fairly, in all material respects, the financial position of Tax-Free Short-Term Fund, Tax-Free Intermediate-Term Fund and Tax-Free Long-Term Fund of Benham California Tax-Free and Municipal Funds as of August 31, 1995, the results of their operations, the changes in their net assets and their financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP San Francisco, California October 9, 1995 27
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - - ------------------------------------------------------------------------------------------------------------------------------- Tax-Free Short-Term Fund - - ------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992+ ------- ------- ------- ------- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period...................................... $ 10.12 10.34 10.12 10.00 Income From Investment Operations Net Investment Income..................................................... .4148 .3766 .3840 .1012 Net Realized and Unrealized Gains (Losses) on Investments................. .1099 (.1832) .2227 .1200 -------- -------- -------- -------- Total Income From Investment Operations.................................. .5247 .1934 .6067 .2212 -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income...................................... (.4147) (.3761) (.3867) (.1012) Distributions from Net Realized Capital Gains............................. 0 0 0 0 Distributions in Excess of Net Realized Capital Gains..................... 0 (.0373) 0 0 -------- -------- -------- -------- Total Distributions...................................................... (.4147) (.4134) (.3867) (.1012) -------- -------- -------- -------- Net Asset Value at End of Period............................................ $ 10.23 10.12 10.34 10.12 ======== ======== ======== ======== TOTAL RETURN*............................................................... 5.33% 1.90% 6.15% 1.47% - - ---------------- SUPPLEMENTAL DATA AND RATIOS - - ----------------------------------- Net Assets at End of Period (in thousands of dollars)....................... $ 104,723 120,627 114,019 52,171 Ratio of Expenses to Average Daily Net Assets............................... .51% .51% .36% 0% Ratio of Net Investment Income to Average Daily Net Assets.................. 4.10% 3.68% 3.76% 4.08%** Portfolio Turnover Rate..................................................... 49.75% 65.66% 54.42% 19.37% - - ------------------------------ + From June 1, 1992 (commencement of operations), through August 31, 1992. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
28
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Free Intermediate-Term Fund - - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period $ 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 10.56 9.86 Income From Investment Operations Net Investment Income .5414 .5354 .5582 .5853 .6038 .6184 .6305 .6294 .6241 .6890 Net Realized and Unrealized Gains (Losses) on Investments .2000 (.4104) .5285 .3600 .3600 (.0100) .0800 (.2400) (.2600) .7000 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income From Investment Operations .7414 .1250 1.0867 .9453 .9638 .6084 .7105 .3894 .3641 1.3890 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income (.5414) (.5351) (.5592) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241) (.6890) Distributions from Net Realized Capital Gains 0 (.0752) (.0175) 0 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains 0 (.0147) 0 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Distributions (.5414) (.6250) (.5767) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241) (.6890) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net Asset Value at End of Period $ 11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 10.56 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== TOTAL RETURN* 7.09% 1.11% 10.42% 9.18% 9.74% 6.16% 7.28% 3.90% 3.53% 14.52% - - ------------- SUPPLEMENTAL DATA AND RATIOS - - ---------------------------- Net Assets at End of Period (in thousands of dollars) $ 417,550 448,293 444,460 304,988 241,496 191,217 167,444 157,300 166,966 124,889 Ratio of Expenses to Average Daily Net Assets .48% .48% .50% .52% .55% .58% .60% .64% .67% .74% Ratio of Net Investment Income to Average Daily Net Assets 5.02% 4.82% 5.05% 5.50% 5.84% 6.08% 6.25% 6.19% 5.92% 6.71% Portfolio Turnover Rate 25.44% 43.80% 26.76% 48.70% 28.58% 20.05% 39.89% 47.01% 51.94% 23.32% - - ----------------------------- * Total return figures assume reinvestment of dividends and capital gain distributions. See the accompanying notes to financial statements.
29
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - - ----------------------------------------------------------------------------------------------------------------------------------- Tax-Free Long-Term Fund - - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- PER-SHARE DATA - - ------------------ Net Asset Value at Beginning of Period $ 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 11.42 10.15 Income From Investment Operations Net Investment Income .6229 .6266 .6649 .6878 .6987 .7060 .7388 .7436 .7675 .8308 Net Realized and Unrealized Gains (Losses) on Investments .1183 (.7101) .8460 .4400 .5500 (.2200) .3100 (.1800) (.8011) 1.2700 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Income (Loss) From Investment Operations .7412 (.0835) 1.5109 1.1278 1.2487 .4860 1.0488 .5636 (.0336) 2.1008 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Less Distributions Dividends from Net Investment Income (.6231) (.6261) (.6658) (.6878) (.6987) (.7060) (.7388) (.7436) (.7675) (.8308) Distributions from Net Realized Capital Gains (.0581) (.4304) (.2651) 0 0 0 0 0 (.0789) 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Distributions (.6812) (1.0565) (.9309) (.6878) (.6987) (.7060) (.7388) (.7436) (.8464) (.8308) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net Asset Value at End of Period $ 10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 11.42 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= TOTAL RETURN* 7.21% (.78)% 14.02% 10.58% 12.26% 4.66% 10.39% 5.61% (.31)% 21.53% - - ---------------- SUPPLEMENTAL DATA AND RATIOS - - ----------------------------------- Net Assets at End of Period (in thousands of dollars) $ 276,085 277,477 338,075 275,880 247,244 197,394 179,737 143,191 179,523 196,693 Ratio of Expenses to Average Daily Net Assets .49% .48% .49% .52% .55% .57% .58% .63% .65% .74% Ratio of Net Investment Income to Average Daily Net Assets 5.84% 5.51% 5.76% 6.14% 6.48% 6.64% 6.98% 7.19% 6.87% 7.70% Portfolio Turnover Rate 59.92% 61.93% 55.11% 71.59% 37.80% 74.11% 78.08% 34.52% 81.54% 47.50% - - ----------------------------- * Total return figures assume reinvestment of dividends and capital gain distributions. See the accompanying notes to financial statements.
30
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES August 31, 1995 Tax-Free Tax-Free Tax-Free Short-Term Intermediate- Long-Term Fund Term Fund Fund --------- --------- --------- ASSETS Investment securities at value (cost of $104,322,862, $396,090,513, and $265,676,227, respectively).................................... $105,636,293 412,450,277 272,596,939 Cash................................................................... 710,871 1,135,274 838,558 Investment in affiliate money market fund (Note 2)..................... 0 1,600,000 0 Interest receivable.................................................... 1,589,678 6,206,772 3,914,334 Receivables for fund shares sold....................................... 970,717 220,470 253,778 Receivables for securities sold........................................ 0 0 4,497,383 Prepaid expenses and other assets...................................... 181 7,085 4,409 ------------ ----------- ----------- Total assets....................................................... 108,907,740 421,619,878 282,105,401 ------------ ----------- ----------- LIABILITIES Payable for securities purchased....................................... 4,047,666 3,414,772 4,676,700 Payable for fund shares redeemed....................................... 23,979 86,161 796,826 Dividends payable...................................................... 69,759 402,091 437,665 Fees payable to affiliates (Note 2).................................... 42,350 164,671 107,861 Accrued expenses and other liabilities................................. 724 2,039 1,304 ------------ ----------- ----------- Total liabilities.................................................. 4,184,478 4,069,734 6,020,356 ------------ ----------- ----------- NET ASSETS................................................................ $104,723,262 417,550,144 276,085,045 ============ =========== =========== Net assets consist of: Capital paid in........................................................ $104,823,183 403,158,066 269,661,972 Net realized loss on investments....................................... (1,419,814) (1,967,649) (498,209) Undistributed net investment income.................................... 6,462 (37) 570 Net unrealized appreciation on investments............................. 1,313,431 16,359,764 6,920,712 ------------ ----------- ----------- Net assets................................................................ $104,723,262 417,550,144 276,085,045 ============ =========== =========== Shares of beneficial interest outstanding (unlimited number of shares authorized)................................ 10,233,826 37,743,491 25,238,519 ============ =========== =========== Net asset value, offering price and redemption price per share............ $10.23 11.06 10.94 ====== ===== ===== - - ------------------------ See the accompanying notes to financial statements.
31
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF OPERATIONS For the Year Ended August 31, 1995 Tax-Free Tax-Free Tax-Free Short-Term Intermediate- Long-Term Fund Term Fund Fund --------- --------- --------- Investment Income Interest income........................................................ $ 5,026,490 22,864,487 16,979,331 ---------- ---------- ---------- Expenses (Note 2) Investment advisory fees............................................... 320,571 1,219,371 788,383 Administrative fees.................................................... 106,880 406,453 262,741 Transfer agency fees................................................... 60,682 195,808 125,758 Printing and postage................................................... 18,151 67,940 44,133 Custodian fees......................................................... 8,770 16,070 12,976 Auditing and legal fees................................................ 9,583 29,283 19,711 Registration and filing fees........................................... 1,476 2,099 1,926 Directors' fees and expenses........................................... 6,213 10,943 8,635 Other operating expenses............................................... 21,185 62,713 38,282 ---------- ---------- ---------- Total expenses..................................................... 553,511 2,010,680 1,302,545 ---------- ---------- ---------- Net investment income.......................................... 4,472,979 20,853,807 15,676,786 ---------- ---------- ---------- Realized and Unrealized Gain (Loss) on Investments (Note 4) Net realized loss (identified cost basis): Proceeds from sales.................................................... 64,553,126 142,812,980 165,977,005 Cost of securities sold................................................ 65,453,238 144,178,797 166,475,214 ---------- ---------- ---------- Net realized loss.................................................. (900,112) (1,365,817) (498,209) ---------- ---------- ---------- Unrealized appreciation (depreciation) of investments: Beginning of year...................................................... (406,618) 8,862,651 3,742,411 End of year............................................................ 1,313,431 16,359,764 6,920,712 ---------- ---------- ---------- Net unrealized appreciation for the year........................... 1,720,049 7,497,113 3,178,301 ---------- ---------- ---------- Net realized and unrealized gain on investments.................... 819,937 6,131,296 2,680,092 ---------- ---------- ---------- Net increase in net assets resulting from operations...................... $ 5,292,916 26,985,103 18,356,878 ========== ========== ========== - - ------------------------- See the accompanying notes to financial statements.
32
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS For the Years Ended August 31, 1995 and 1994 Tax-Free Tax-Free Tax-Free Short-Term Fund Intermediate-Term Fund Long-Term Fund ------------------ ------------------ ------------------ 1995 1994 1995 1994 1995 1994 -------- -------- -------- -------- -------- -------- From investment activities: Net investment income $ 4,472,979 4,494,170 20,853,807 22,195,080 15,676,786 16,834,422 Net realized gain (loss) on investments (900,112) (344,322) (1,365,817) (349,208) (498,209) 5,550,383 Net change in unrealized appreciation (depreciation) on investments 1,720,049 (2,106,026) 7,497,113 (18,121,133) 3,178,301 (25,171,211) ----------- ---------- ----------- ---------- ---------- ----------- Change in net assets derived from investment activities 5,292,916 2,043,822 26,985,103 3,724,739 18,356,878 (2,786,406) ----------- ---------- ----------- ---------- ---------- ----------- From distributions to shareholders: Net investment income (4,472,853) (4,487,717) (20,852,276) (22,182,818) (15,680,810) (16,821,196) Net realized gain on investments 0 0 0 (3,072,256) (1,423,246) (11,576,250) In excess of net realized gains on investments 0 (434,404) 0 (601,832) 0 0 ----------- ---------- ----------- ---------- ---------- ----------- Total distributions to shareholders (4,472,853) (4,922,121) (20,852,276) (25,856,906) (17,104,056) (28,397,446) ----------- ---------- ----------- ---------- ---------- ----------- From capital share transactions (Note 3): Proceeds from sales of shares 50,256,918 96,286,914 83,210,172 171,586,013 69,814,068 92,994,522 Net asset value of distributions reinvested 3,659,833 4,076,594 15,963,090 20,042,613 11,600,463 20,068,714 Cost of shares redeemed (70,640,061) (90,877,985) (136,048,570) (165,663,380) (84,059,454) (142,477,408) ----------- ---------- ----------- ---------- ---------- ----------- Change in net assets derived from capital share transactions (16,723,310) 9,485,523 (36,875,308) 25,965,246 (2,644,923) (29,414,172) ----------- ---------- ----------- ---------- ---------- ----------- Net increase (decrease) in net assets (15,903,247) 6,607,224 (30,742,481) 3,833,079 (1,392,101) (60,598,024) Net Assets: Beginning of year 120,626,509 114,019,285 448,292,625 444,459,546 277,477,146 338,075,170 ----------- ---------- ----------- ---------- ---------- ----------- End of year $104,723,262 120,626,509 417,550,144 448,292,625 276,085,045 277,477,146 =========== ========== =========== ========== ========== =========== - - ------------------------- See the accompanying notes to financial statements.
33 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS NOTES TO FINANCIAL STATEMENTS August 31, 1995 (1) SIGNIFICANT ACCOUNTING POLICIES Benham California Tax-Free and Municipal Funds (BCTFMF) is registered under the Investment Company Act of 1940 as an open-end management investment company. Tax-Free Short-Term Fund, Tax-Free Intermediate-Term Fund, and Tax-Free Long-Term Fund (collectively the "Funds") are three of the seven Funds composing BCTFMF. Significant accounting policies followed by BCTFMF are summarized below. Valuation of Investment Securities--Securities held by the Funds are valued at current market value as provided by an independent pricing service. When valuations are not readily available, securities are valued at fair value, as determined in good faith by the Board of Trustees. Securities transactions are recorded on the date the order to buy or sell is executed. Realized gains and losses on security transactions are determined on the basis of identified cost. Income Taxes--Each Fund of BCTFMF intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. By doing so, each Fund will not be subject to federal income or California franchise taxes to the extent that it distributes substantially all of its net investment income and net realized capital gains to shareholders. As of August 31, 1995, the Tax-Free Short-Term Fund, Tax-Free Intermediate-Term Fund, and Tax-Free Long-Term Fund had capital loss carryovers of $608,877, $1,686,723, and $498,209, respectively. No capital gain distributions will be made by each fund until the loss carryovers have been offset or expired. The capital loss carryovers will expire by August 31, 2003. Due to the timing of dividend distributions and the differences in accounting for gains and losses for financial statement and federal income tax purposes, the fiscal year in which amounts are distributed may differ from the year in which the income and realized gains (losses) were recorded by each Fund. The differences between capital gains distributed on a book versus tax basis are shown as excess distributions of net realized capital gains in the accompanying Financial Highlights and Statements of Changes in Net Assets. Share Valuation--Each Fund's net asset value per share is computed each business day by dividing the value of its total assets, less its liabilities, by the total number of shares outstanding at the beginning of each business day. The Funds' net asset values fluctuate daily in response to changes in the market value of their investments. 34 Investment Income, Premium, and Discount--Interest income and expenses are accrued daily. Premium on securities purchased is amortized daily on a straight-line basis over the shorter period of purchase date to call date or purchase date to maturity date. The Funds recognize market discount, if any, upon the sale or maturity of securities. Original issue discount for municipal securities is accrued daily using the effective interest rate method. Dividends and Other Distributions--The Funds' dividends are declared daily, accrued throughout the month, and distributed on the last business day of the month. Each Fund distributes net realized capital gains, if any, once per year. Distributions are paid in cash or reinvested as additional shares. (2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth Century Companies, Inc. (TCC). BMC's former parent company, Benham Management International, Inc., merged into TCC on June 1, 1995. Each Fund pays Benham Management Corporation (BMC) a monthly investment advisory fee based on its pro rata share of the dollar amount derived from applying BCTFMF's average daily net assets to the following annualized investment advisory fee schedule. .50% of the first $100 million .45% of the next $100 million .40% of the next $100 million .35% of the next $100 million .30% of the next $100 million .25% of the next $1 billion .24% of the next $1 billion .23% of the next $1 billion .22% of the next $1 billion .21% of the next $1 billion .20% of the next $1 billion .19% of average daily net assets over $6.5 billion BMC provides BCTFMF with all investment advice. Twentieth Century Services, Inc. pays all compensation of BCTFMF officers and trustees who are officers or directors of TCC or any of its subsidiaries. In addition, promotion and distribution expenses are paid by BMC. BCTFMF has an Administrative Services and Transfer Agency Agreement with Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under the agreement, BFS provides substantially all administrative and transfer agency services necessary to operate the Funds. Fees for these services are based on transaction volume, number of accounts, and average net assets of all funds in The Benham Group. 35 BCTFMF has an additional agreement with BMC pursuant to which BMC established a contractual expense guarantee that limits each Fund's expenses (excluding extraordinary expenses such as brokerage commissions and taxes) to .62% of average daily net assets of each Fund. The agreement provides that BMC may recover amounts (representing expenses in excess of the Fund's expense guarantee rate) absorbed during the preceding 11 months, if, and to the extent that, for any given month, the Fund's expenses were less than the expense guarantee rate in effect at that time. The expense guarantee is subject to renewal in June 1996. The payables to affiliates as of August 31, 1995, based on the above agreements were as follows: Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Investment Advisor........... $ 25,862 102,737 67,110 Administrative Services...... 8,566 34,028 22,228 Transfer Agent............... 7,922 27,906 18,523 ------- ------- ------- $42,350 164,671 107,861 ======= ======= ======= As of August 31, 1995, the Tax-Free Intermediate-Term Fund had invested cash amounts in Benham California Tax-Free Money Market Fund (a Fund of BCTFMF) of $1,600,000. The terms of this transaction were identical to those of non-related entities except that, to avoid duplicate investment advisory fees, the Fund does not pay BMC investment advisory fees for assets invested in shares of Benham California Tax-Free Money Market Fund. BCTFMF has a distribution agreement with Benham Distributors, Inc. (BDI), which is responsible for promoting sales of and distributing the Fund's shares. BMC pays all costs incurred by BDI. BDI is a wholly owned subsidiary of TCC. (3) SHARE TRANSACTIONS
Share transactions for each of the Funds for the years ended August 31, 1995, and 1994, were as follows: Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund ------------------ ---------------- ---------------- 1995 1994 1995 1994 1995 1994 -------- --------- ------- ------- ------- ------- Shares sold 4,990,923 9,387,357 7,744,303 15,302,103 6,574,067 8,082,074 Reinvestment of dividends 363,362 398,554 1,484,142 1,802,158 1,093,963 1,755,980 --------- --------- --------- --------- -------- --------- 5,354,285 9,785,911 9,228,445 17,104,261 7,668,030 9,838,054 Less shares redeemed (7,036,430) (8,894,175) (12,750,380) (14,967,553) (7,943,944)(12,461,264) --------- --------- --------- --------- -------- --------- Net increase (decrease) in shares (1,682,145) 891,736 (3,521,935) 2,136,708 (275,914) (2,623,210) ========= ========= ========= ========= ======== =========
36 (4) INVESTMENT SECURITIES -- PURCHASES, SALES AND/OR MATURITIES Portfolio activity, excluding short-term securities, for the year ended August 31, 1995, was as follows: Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Purchases................. $ 50,698,794 104,777,591 158,596,413 =========== ========== ========== Sales proceeds............ $ 64,553,126 142,812,980 165,977,005 =========== ========== ========== As of August 31, 1995, unrealized appreciation (depreciation) was as follows: Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Appreciated securities $ 1,425,756 17,012,808 9,549,913 Depreciated securities (112,325) (653,044) (2,629,201) ----------- ---------- ---------- Net unrealized appreciation $ 1,313,431 16,359,764 6,920,712 =========== ========== ========== The cost of securities for financial reporting and federal income tax purposes is the same. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the State of California than a fund with a broader geographical diversification. PROXY VOTING RESULTS A special shareholder meeting was held on May 31, 1995, to vote on the following proposals. All of the proposals received the required majority of votes and were adopted. Proposal I.--To consider and vote on approval or disapproval of new Investment Advisory Agreements with BCTFMF on behalf of each Fund with BMC to take effect upon the closing of the proposed merger of BMC's parent company, Benham Management International, Inc., into TCC. Proposals II, III, and IV are not applicable to shareholders of BCTFMF. Proposal V.--To elect the Board of Trustees of BCTFMF. Proposal VI.--To ratify the Board of Trustees' selection of KPMG Peat Marwick LLP as independent auditors for BCTFMF's current fiscal year end. Proposal VII.--To amend BCTFMF's Articles of Incorporation to provide dollar-based voting rights for shareholders of the Funds. 37 A summary of voting results is as follows:
Benham Benham Benham California California California Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund - - -------------------------------------------------------------------------------------------------------- Proposal I. For 5,524,333 For 22,147,201 For 15,770,604 Against 382,857 Against 913,599 Against 494,336 Abstained 240,061 Abstained 938,142 Abstained 735,527 - - -------------------------------------------------------------------------------------------------------- Proposal V. James M. Benham For 5,725,658 For 22,633,962 For 16,402,388 Withheld* 421,593 Withheld* 1,364,982 Withheld* 598,080 Ronald J. Gilson For 5,725,658 For 22,607,241 For 16,434,918 Withheld* 421,593 Withheld* 1,391,703 Withheld* 565,550 Myron S. Scholes For 5,725,658 For 22,631,337 For 16,446,585 Withheld* 421,593 Withheld* 1,367,307 Withheld* 553,883 Kenneth E. Scott For 5,725,658 For 22,597,309 For 16,440,987 Withheld* 421,593 Withheld* 1,401,635 Withheld* 559,481 Ezra Solomon For 5,719,624 For 22,553,763 For 16,423,955 Withheld* 427,627 Withheld* 1,445,181 Withheld* 576,513 Isaac Stein For 5,721,329 For 22,616,122 For 16,445,328 Withheld* 425,922 Withheld* 1,382,822 Withheld* 555,140 James E. Stowers, III For 5,718,435 For 22,529,894 For 16,380,458 Withheld* 428,816 Withheld* 1,469,050 Withheld* 620,010 Jeanne D. Wohlers For 5,724,204 For 22,610,806 For 16,446,585 Withheld* 423,047 Withheld* 1,388,138 Withheld* 553,883 *Shares Withholding Authority to Vote
Benham Benham Benham California California California Tax-Free Tax-Free Tax-Free Short-Term Intermediate-Term Long-Term Fund Fund Fund - - --------------------------------------------------------------------------------------------------------- Proposal VI. For 5,874,214 For 22,836,723 For 16,247,256 Against 108,417 Against 424,004 Against 135,018 Abstained 164,619 Abstained 738,216 Abstained 618,193 - - --------------------------------------------------------------------------------------------------------- Proposal VII. For 5,579,826 For 21,980,897 For 15,740,770 Against 364,056 Against 878,762 Against 388,807 Abstained 203,368 Abstained 1,139,284 Abstained 870,890 - - ---------------------------------------------------------------------------------------------------------
38
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Short-Term Fund Schedule of Investment Securities August 31, 1995 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 3,500,000 Anaheim Redevelopment Agency Local Government Financing Joint Power, MBIA Insured 7.950% 09/01/98 $ 3,947,160 Aaa/AAA 1,775,000 Burbank Redevelopment Agency West Olive Tax Allocation Series 1994, AMBAC Insured 6.000 12/01/97 1,852,443 Aaa/AAA 2,035,000 California Health Facility Financing Authority Downey Community Hospital Series 1993 4.350 05/15/97 2,032,884 NR/A- 1,450,000 California Health Facility Financing Authority Mills Hospital Revenue Series B, Connie Lee Insured 5.500 01/15/00 1,509,204 NR/AAA 1,400,000 California Health Facility Financing Authority St. Francis Memorial Hospital 5.000 11/01/98 1,415,820 NR 1,750,000 California Health Facility Financing Authority St. Francis Memorial Hospital Series 1993 A 5.500 11/01/01 1,761,655 A/NR 815,000 California Health Facility Financing Authority St. Francis Memorial Hospital Series 1993 A 4.500 11/01/95 816,068 A/NR 1,745,000 California Health Facility Financing Authority St. Joseph Hospital Certificate of Participation 5.500 07/01/97 1,782,971 Aa/AA 3,910,000 California Health Facility Financing Authority St. Joseph Hospital Series B 4.500 07/01/99 3,886,657 Aa/AA 4,490,000 California Pollution Control Financing Authority San Diego Gas & Electric Series 1984 B 4.250 09/01/95 4,491,031 A1/A+ 1,600,000 California State Public Works Department of Justice Series A 5.500 05/01/00 1,647,552 A/A- 1,000,000 City of Los Angeles Convention Center Certificate of Participation Series 1989 A, Prerefunded at 101.5% of par 7.300 08/15/99 1,124,580 Aaa/AAA 1,700,000 Imperial Irrigation District Certificate of Participation 5.625 05/01/97 1,742,619 Aa/A+ 1,000,000 Imperial Irrigation District Certificate of Participation Series 1993, California 6.700 11/01/98 1,069,640 Aa/A+ 1,700,000 Long Beach Harbor Revenue Refunding Bonds, California 6.500 05/15/96 1,732,113 Aa/AA- 2,250,000 Long Beach Redevelopment Agency Revenue Downtown Redevelopment Series 1988 A, California, AMBAC Insured, Escrowed to Maturity 6.750 11/01/96 2,328,278 Aaa/AAA 2,000,000 Los Angeles Airport Revenue Bonds Series 1989 A, California 7.000 05/01/98 2,136,780 Aa/AA 1,025,000 Los Angeles City General Obligation Series 1995 A, FGIC Insured 5.000 09/01/00 1,050,943 Aaa/AAA 1,185,000 Los Angeles County Certificate of Participation Olive View Medical Center, California, Prerefunded at 102% of par 7.500 03/01/98 1,298,547 NR/NR*
39
Schedule of Investment Securities--Tax-Free Short-Term Fund (Continued) =============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Los Angeles County Metropolitan Transit Authority Sales Tax Revenue Proposition C, AMBAC Insured 5.900% 07/01/02$ 1,063,960 Aaa/AAA 1,500,000 Los Angeles Department of Water and Power Electric Revenue, Crossover refunded at 102% of par 7.400 05/01/98 1,640,220 Aa/AA- 3,605,000 Los Angeles Municipal Corporation, MBIA Insured 5.750 02/01/98 3,741,233 Aaa/AAA 1,000,000 Los Angeles Waste Water System Revenue 6.700 02/01/00 1,084,680 A1/A 2,000,000 Los Angeles Waste Water System Revenue, Prerefunded at 102% of par 6.800 08/01/98 2,187,680 Aaa/A 3,500,000 Merced CSAC Lease Financing Program Series 1992, California, FSA Insured 4.750 10/01/96 3,538,500 Aaa/AAA 3,270,000 Milpitas Redevelopment Agency Series 1993, California, MBIA Insured 4.400 01/15/97 3,281,510 Aaa/AAA 1,950,000 Modesto Multifamily Housing Revenue Bond Revenue Series 1992 A, Letter of Credit-Bank of America 5.000 03/01/96 1,960,862 Aa3/NR 2,000,000 Oakland Refunding Pension Financing Authority Certificate of Participation Series 1988 A, California, FGIC Insured 6.900 08/01/97 2,107,380 Aaa/AAA 2,265,000 Orange County Municipal Water District Water Facility C Series B, Letter of Credit-Barclay's Bank 4.500 07/01/96 2,261,014 Aa2/AA 1,500,000 Orange County Transportation Sales Tax, AMBAC Insured 5.500 02/15/01 1,531,785 Aaa/AAA 2,090,000 Sacramento County Laguna Community Facility District, California, FGIC Insured 4.500 12/01/96 2,113,157 Aaa/AAA 4,485,000 Sacramento Municipal Utility District Series D, California 4.600 11/15/98 4,538,013 A/A- 3,250,000 San Diego County Water Authority Certificate of Participation, California 4.400 05/01/96 3,265,080 Aa/AA- 2,625,000 San Diego Regional Transportation Commission Sales Tax Series 1994 A, FGIC Insured 5.000 04/01/99 2,694,090 Aaa/AAA 2,000,000 San Diego Unified School District Tax and Revenue Anticipation Notes Series A, Letter of Credit-WestDeutsche Landesbank 4.750 10/10/96 2,020,320 MIG1/NR 4,000,000 San Francisco Bay Area Rapid Transit, California, AMBAC Insured 4.600 07/01/97 4,025,120 Aaa/AAA 1,085,000 San Francisco City and County General Obligation, FGIC Insured 6.000 06/15/98 1,138,718 Aaa/AAA 2,930,000 San Francisco Port Commision Revenue Refunding 5.250 07/01/99 2,999,089 A/BBB+ 1,000,000 San Mateo Transportation Sales Tax Series A, AMBAC Insured 6.500 06/01/98 1,072,030 Aaa/AAA 1,185,000 South Coast Air Quality Limited Tax General Obligation, AMBAC Insured 5.500 08/01/01 1,242,141 Aaa/AAA 1,715,000 South Coast Air Quality Management District Refunding, Series 1992, AMBAC Insured 4.500 08/01/96 1,727,348 Aaa/AAA 2,135,000 Southern California Public Power Agency Pooled Transmission Authority Joint Power Series 1989, Prerefunded at 102% of par 7.000 07/01/00 2,411,226 Aaa/AAA
40
Schedule of Investment Securities--Tax-Free Short-Term Fund (Continued) - - ----------------------------------------------------------------------------------------------------------------------------- Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Southern California Public Power Authority Electric Revenue Bonds Series 1989 6.750% 07/01/99 $ 1,072,870 A/A 1,510,000 State of California General Obligation 6.500 11/01/97 1,584,594 A1/A 2,000,000 State of California General Obligation, AMBAC Insured 6.500 04/01/98 2,115,920 Aaa/AAA 2,000,000 State of California General Obligation, AMBAC Insured 6.700 09/01/97 2,104,360 Aaa/AAA 4,980,000 University of California Revenue Series A, California, MBIA Insured, Prerefunded at 102% of par 7.000 09/01/97 5,371,428 Aaa/AAA 2,000,000 West Basin Water District Certificate of Participation Series 1991, AMBAC Insured, Escrowed to Maturity 6.100 08/01/98 2,115,020 Aaa/AAA - - ------------ ------------ $101,910,000 Total Investment Securities (cost $104,322,862) $105,636,293 ============ ============ NR = Not Rated - - -------------------- * Prerefunded with U.S. government securities, not re-rated.
Portfolio Composition by Market Sector Prerefunded 15.5% Water/Sewer 6.3% Hospital 12.5 Tax Allocation 4.9 General Obligation 10.4 Electric 4.3 Certificates of Participation 9.6 Other 21.1 Sales Tax 8.9 _____ Transportation 6.5 TOTAL 100.0% 41
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Intermediate-Term Fund Schedule of Investment Securities August 31, 1995 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Alameda County Transportation Authority Sales Tax Revenue, FGIC Insured 5.500% 11/01/01 $ 1,049,960 Aaa/AAA 4,060,000 Burbank Redevelopment Agency West Olive Tax Allocation Series 1994, AMBAC Insured 6.500 12/01/01 4,474,526 Aaa/AAA 4,795,000 California Department of Water Resources Central Valley Project Series J-2 5.800 12/01/04 5,105,093 Aa/AA 2,145,000 California Educational Facility Authority University of San Diego Series 1989, MBIA Insured 6.750 10/01/02 2,363,232 Aaa/AAA 3,145,000 California Health Facility Financing Authority Catholic Healthcare Series 1995, AMBAC Insured 6.000 07/01/04 3,390,372 Aaa/AAA 2,010,000 California Health Facility Financing Authority Downey Community Hospital 5.300 05/15/04 1,931,911 NR/A 1,500,000 California Health Facility Financing Authority Kaiser Permanente Series A 6.700 10/01/99 1,604,460 Aa3/AA 1,505,000 California Health Facility Financing Authority Pomona Valley Hospital Medical Center Series A, MBIA Insured 7.100 01/01/00 1,661,730 Aaa/AAA 1,660,000 California Health Facility Financing Authority St. Francis Memorial Hospital 5.375 11/01/00 1,657,278 A/NR 1,280,000 California Health Facility Financing Authority St. Francis Memorial Hospital Series A 5.250 11/01/99 1,283,213 A/NR 1,560,000 California Health Facility Financing Authority St. Francis Memorial Hospital Series A 5.750 11/01/04 1,542,372 A/NR 1,745,000 California Health Facility Financing Authority St. Francis Memorial Hospital Series A 5.625 11/01/02 1,745,349 A/NR 4,520,000 California Public Works Board Lease Revenue Secretary of State, AMBAC Insured 6.200 12/01/05 4,950,440 Aaa/AAA 3,000,000 California Public Works Board University of California Series A, Various Projects 6.150 11/01/09 3,040,800 A1/A- 3,250,000 California Public Works Energy-Efficiency Pooled Project Series 1991 A 6.000 09/01/99 3,404,830 A/BBB+ 4,325,000 California Public Works Series A 6.250 09/01/05 4,549,770 A/A- 1,000,000 California Public Works University of California Project Series A, AMBAC Insured 5.900 12/01/03 1,074,830 Aaa/AAA 2,500,000 California State Department of Veteran's Affairs Series A 6.200 08/01/98 2,645,650 Aa/AA 3,000,000 California State Public Works California State University Series 1992 A, Various Projects 5.700 10/01/99 3,116,910 A/A-
42
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 3,710,000 California State Public Works Prison Board (Franchise Tax Board) Certificate of Participation 6.900% 10/01/06 $ 3,928,853 A/A- 2,000,000 California State Public Works University of California Regents Series A 5.080 09/01/00 1,556,300 A1/A 3,100,000 California Statewide Association of Counties Oakland Convention Center Lease Revenue, AMBAC Insured 6.125 10/01/06 3,296,106 Aaa/AAA 2,385,000 California Statewide Association of Counties St. Joseph Health System Certificate of Participation 6.500 07/01/03 2,566,308 Aa/AA 2,945,000 Castaic Lake Water Agency, California, MBIA Insured 5.750 08/01/01 3,107,623 Aaa/AAA 7,780,000 Central California Joint Powers Health Facility Certificate of Participation, California 5.250 02/01/04 7,467,789 A/NR 2,545,000 City and County of San Francisco General Obligation Series A, FGIC Insured 5.300 06/15/07 2,554,417 Aaa/AAA 2,080,000 City of Los Angeles Equipment Acquisition Project Series 1989 G 7.300 10/01/96 2,149,721 A/A+ 1,465,000 City of Woodland Waste Water System Refunding, California, AMBAC Insured 6.000 03/01/06 1,568,092 Aaa/AAA 2,500,000 Contra Costa County Public Facility Insured Revenue Bond Certificate of Participation, California, BIGI Insured 7.450 06/01/00 2,800,400 Aaa/AAA 1,065,000 Contra Costa County Water District Revenue Series A, California, Prerefunded at 102% of par 7.000 10/01/00 1,201,182 NR/NR** 6,485,000 Contra Costa Transportation Authority Sales Tax Series 1991 A, California, Escrowed to Maturity 6.200 03/01/99 6,892,193 A1/NR 3,485,000 East Bay Municipal Utilities District Waste System Revenue, California 6.100 06/01/06 3,697,864 A1/AA 2,570,000 East Bay Municipal Utilities District Waste Water System Revenue, California 6.000 06/01/05 2,731,370 A1/AA 6,850,000 Imperial Irrigation District, MBIA Insured 6.500 11/01/07 7,618,639 Aaa/AAA 2,790,000 Irvine Ranch Water District Joint Power Revenue Bonds Series 1988, California 6.600 02/15/96 2,808,442 NR/A+ 1,750,000 Loma Linda Hospital Revenue University Medical Center, California, AMBAC Insured 6.950 12/01/05 1,910,913 Aaa/AAA 1,500,000 Los Angeles Airport Revenue Bond Series C, California 6.800 05/01/01 1,598,055 Aa/AA 4,000,000 Los Angeles Capital Asset Lease Revenue, California, AMBAC Insured 5.875 12/01/05 4,281,000 Aaa/AAA 1,000,000 Los Angeles Convention Center Certificate of Participation, California, AMBAC Insured 6.750 08/15/01 1,109,760 Aaa/AAA 4,000,000 Los Angeles County Correctional Facility Project Certificate of Participation, California, MBIA Insured 6.000 09/01/99 4,255,000 Aaa/AAA 1,415,000 Los Angeles County Master Refund Project Certificate of Participation Series 1991, California 6.400 05/01/00 1,485,028 Baa1/BBB+
43
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Los Angeles County Metropolitan Transit Authority Sales Tax Revenue, AMBAC Insured 5.900% 07/01/06 $ 1,056,490 Aaa/AAA 1,000,000 Los Angeles County Multiple Capital Facilities Project #2 Certificate of Participation , California 6.900 03/01/01 1,070,070 Baa1/BBB+ 1,500,000 Los Angeles County Public Properties Certificate of Participation , California 6.000 10/01/98 1,546,170 Baa1/BBB+ 2,650,000 Los Angeles County Public Properties Certificate of Participation , California 6.150 04/01/99 2,752,184 Baa1/BBB+ 2,000,000 Los Angeles County Transportation Commission Certificate of Participation Series B 6.250 07/01/04 2,151,040 A1/A+ 3,900,000 Los Angeles County Transportation Commission Certificate of Participation Series B 6.000 07/01/01 4,054,908 A1/A+ 4,765,000 Los Angeles County Transportation Commission Certificate of Participation Series B 6.200 07/01/03 5,011,636 A1/A+ 1,000,000 Los Angeles County Transportation Commission Sales Tax Revenue, California, FGIC Insured 5.750 07/01/01 1,059,750 Aaa/AAA 4,000,000 Los Angeles County Transportation Commission Sales Tax Revenue, California, FGIC Insured 5.875 07/01/02 4,276,480 Aaa/AAA 3,515,000 Los Angeles County Transportation Commission Sales Tax Revenue Proposition C Series A, California 6.200 07/01/04 3,805,093 A1/A+ 3,765,000 Los Angeles County Transportation Commission Sales Tax Revenue Proposition C Series A, California 6.400 07/01/06 4,070,379 A1/A+ 3,000,000 Los Angeles County Transportation Commission Sales Tax Revenue Series 1992 A, California, MBIA Insured 5.700 07/01/01 3,155,970 Aaa/AAA 2,500,000 Los Angeles County Transportation Commission Sales Tax Revenue Series A, Proposition A, California 6.400 07/01/02 2,694,275 A1/AA- 1,000,000 Los Angeles Department of Water and Power Electric Revenue, California, MBIA Insured 5.700 01/15/05 1,036,650 Aaa/AAA 2,135,000 Los Angeles Department of Water and Power Electric Revenue, California 6.625 10/01/01 2,366,733 Aa/AA- 1,000,000 Los Angeles Department of Water and Power Electric Revenue, FGIC Insured 6.300 04/15/06 1,065,570 Aaa/AAA 4,685,000 Los Angeles Municipal Improvement Corporation, California, MBIA Insured 6.000 02/01/03 5,032,112 Aaa/AAA 2,000,000 Los Angeles Municipal Improvement Corporation Lease Series 1989, California 7.200 09/01/96 2,062,120 Aa/AA 2,070,000 Los Angeles Municipal Improvement Corporation Lease Revenue Series A, California 4.900 09/01/02 2,049,466 Aa/NR
44
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 Los Angeles Public Properties Certificate of Participation Series A, California, BIGI Insured 6.250% 04/01/00 $ 1,075,980 Aaa/AAA 2,000,000 Los Angeles Solid Waste Project Certificate of Participation Series 1990 6.400 11/01/97 2,091,340 A1/AA 4,780,000 Los Angeles Waste Water, AMBAC Insured 6.200 06/01/06 5,138,978 Aaa/AAA 2,045,000 Los Angeles Waste Water System Revenue, MBIA Insured 6.600 02/01/00 2,220,727 Aaa/AAA 1,000,000 Los Angeles Waste Water System Revenue Series B 6.800 06/01/02 1,097,230 A1/A 2,500,000 Los Angeles Waste Water System Revenue Series B 7.150 06/01/00 2,819,575 NR/AAA 1,550,000 Los Angeles Waste Water System Revenue Series B, AMBAC Insured 5.700 06/01/01 1,637,559 Aaa/AAA 7,190,000 Metropolitan Water District of Southern California Water Revenue 6.500 07/01/04 7,883,044 Aa/AA 1,000,000 Metropolitan Water District of Southern California Waterworks Revenue 6.625 07/01/06 1,090,930 Aa/AA 4,000,000 Metropolitan Water District of Southern California Waterworks Revenue Series 1991 A 6.100 07/01/99 4,261,840 Aa/AA 4,000,000 Metropolitan Water District of Southern California Waterworks Revenue Series 1991, Prerefunded at 102% of par 6.750 07/01/01 4,509,760 NR/AA 10,000,000 Northern California Power Agency Geothermal Project 3 Revenue, AMBAC Insured 5.500 07/01/05 10,321,100 Aaa/AAA 1,500,000 Northern California Power Agency Multi-Capital Series A, MBIA Insured 6.300 08/01/06 1,622,595 Aaa/AAA 2,000,000 Northern California Power Agency Public Power Revenue Series A, MBIA Insured 6.200 08/01/05 2,167,200 Aaa/AAA 1,000,000 Oakland Refunding Pension Financing Authority Certificate of Participation Series 1988 A, California, FGIC Insured 7.200 08/01/00 1,092,550 Aaa/AAA 1,165,000 Ontario Redevelopment Financing Authority Local Agency Series A, Capital Guaranty Insured 5.800 09/02/06 1,218,054 Aaa/AAA 1,365,000 Ontario Redevelopment Project #1 Center City Cimarron Project, MBIA Insured 5.700 08/01/01 1,444,115 Aaa/AAA 1,645,000 Orange County Transportation Sales Tax 5.750 02/15/05 1,653,686 Aa/AA 7,500,000 Orange County Transportation Sales Tax Revenue, AMBAC Insured 5.500 02/15/01 7,658,925 Aaa/AAA 1,250,000 Orange County Water District Certificate of Participation Series 1990, California, Prerefunded at 102% of par 7.000 08/15/00 1,414,900 Aaa/AAA 1,900,000 Orange County Water District Certificate of Participation Series A, California, AMBAC Insured 4.900 08/15/02 1,887,802 Aaa/AAA 2,500,000 Orange County West Valley Detention Center Certificate of Participation , California, Prerefunded at 102% of par 7.625 06/01/99 2,820,425 NR/NR* 1,330,000 Oxnard Harbor District Revenue Refunding Series 1995, Capital Guaranty Insured 7.000 08/01/04 1,524,566 Aaa/AAA
45
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ------------------------------------------------------ ----- ------ ------- ---------- $ 670,000 Palomar/Pomerado Hospital District Revenue Bond Series 1989 A, California, MBIA Insured 6.600% 11/01/96 $ 691,862 Aaa/AAA 1,000,000 Pasadena Certificate of Participation Series 1990, California, Prerefunded at 102% of par 6.850 08/01/00 1,125,240 Aaa/A+ 1,600,000 Puerto Rico Commonwealth, MBIA Insured 6.500 07/01/02 1,801,008 Aaa/AAA 1,000,000 Ramona Municipal Water District Certificate of Participation Refunding, California, AMBAC Insured 6.900 10/01/01 1,118,050 Aaa/AAA 2,000,000 Riverside County Transportation Commission Sales Tax Revenue Series A, California 6.625 06/01/02 2,194,840 A/A+ 4,000,000 Riverside Transit Sales Tax Revenue Series A, AMBAC Insured 6.500 06/01/01 4,377,680 Aaa/AAA 5,710,000 Sacramento Municipal Series C, MBIA Insured 5.750 11/15/07 5,920,014 Aaa/AAA 8,000,000 Sacramento Municipal Utility District Electric Revenue Series A, California, MBIA Insured 6.200 08/15/05 8,671,360 Aaa/AAA 6,825,000 Sacramento Municipal Utility District Series 1991 Z, California, FGIC Insured 6.000 07/01/02 7,337,899 Aaa/AAA 3,520,000 Sacramento Municipal Utility District Series 2, California, FGIC Insured 5.850 07/01/00 3,742,922 Aaa/AAA 5,000,000 San Bernardino County Medical Center Poject Series A Certificate of Participation, MBIA Insured 5.750 08/01/07 5,223,650 Aaa/AAA 3,800,000 San Diego County Water Authority Certificate of Participation Series A 6.000 05/01/02 3,964,730 Aa/AA 7,200,000 San Diego County Water Authority Certificate of Participation Series A 6.125 05/01/03 7,569,576 Aa/AA 4,000,000 San Diego Regional Transportation Commission Sales Tax Revenue Series 1994 A, FGIC Insured 6.000 04/01/04 4,305,080 Aaa/AAA 4,420,000 San Diego Unified School District Certificate of Participation Series B 4.600 07/01/01 4,375,181 Aa/AA 2,410,000 San Francisco Airport Series 2, MBIA Insured 6.350 05/01/01 2,618,079 Aaa/AAA 1,000,000 San Francisco Bay Area Rapid Transit, FGIC Insured 5.350 07/01/07 1,008,100 Aaa/AAA 1,250,000 San Francisco Bay Area Rapid Transit Sales Tax Revenue, FGIC Insured 6.400 07/01/05 1,350,275 Aaa/AAA 5,005,000 San Francisco City & County Airport Commission Revenue Refunding, California, AMBAC Insured 6.100 05/01/01 5,375,370 Aaa/AAA 6,000,000 San Francisco City & County Airport Commission Revenue Refunding, California, AMBAC Insured 6.100 05/01/00 6,425,580 Aaa/AAA 2,100,000 San Francisco City & County Airport Commission Revenue Refunding, California, MBIA Insured 6.350 05/01/03 2,306,556 Aaa/AAA 3,340,000 San Francisco City & County Sewer Revenue, California 6.000 10/01/01 3,554,695 A1/A+
46
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 3,405,000 San Francisco Port Commission Revenue Refunding 5.625% 07/01/02 $ 3,506,775 A/BBB+ 3,950,000 San Jose Financing Authority Convention Center 6.000 09/01/05 4,044,366 A1/A+ 4,580,000 San Jose Financing Authority Convention Center Refunding Series 1993 6.100 09/01/06 4,690,470 A1/A+ 3,875,000 San Jose Redevelopment Agency Tax Allocation Series A, California, Escrowed to Maturity, MBIA Insured 6.000 08/01/02 4,162,215 Aaa/AAA 2,200,000 San Jose-Santa Clara Clean Water Financing Authority Revenue, Series A, California, MBIA Insured 7.250 10/01/01 2,376,198 Aaa/AAA 1,015,000 Santa Ana Police Administration Holding Certificate of Participation Series A, MBIA Insured 5.500 07/01/07 1,016,553 Aaa/AAA 1,230,000 Santa Clara County Multi-Facilities Project Certificate of Participation, California, AMBAC Insured 6.000 05/15/05 1,306,924 Aaa/AAA 2,215,000 Santa Clara County Multi-Facilities Project Certificate of Participation, California, AMBAC Insured 6.000 05/15/01 2,368,876 Aaa/AAA 1,785,000 South Sutter Hydroelectric Refunding Revenue, California, FGIC Insured 6.800 08/01/01 1,952,719 Aaa/AAA 3,745,000 Southern California Public Power Agency Palo Verde Revenue Bond Series 1989 A, AMBAC Insured 6.800 07/01/99 4,077,856 Aaa/AAA 3,000,000 Southern California Public Power Agency Pooled Transmission Authority Joint Power Series 1989 6.750 07/01/01 3,254,640 A/A 1,500,000 Southern California Public Power Agency Transmission Authority Project Series 1988 A 7.000 07/01/00 1,627,965 Aa/AA- 3,090,000 Southern California Public Power Agency Transmission Project Revenue Series 1992, Junior Lien, MBIA Insured 5.625 07/01/03 3,260,753 Aaa/AAA 2,000,000 Southern California Public Power Authority Multipurpose Projects 6.750 07/01/00 2,160,880 A/A 1,500,000 Southern California Rapid Transit District Certificate of Participation, MBIA Insured 6.500 07/01/07 1,607,985 Aaa/AAA 4,065,000 Southern California Rapid Transit District Certificate of Participation Series 1991, MBIA Insured 6.200 07/01/02 4,417,516 Aaa/AAA 5,000,000 Southern California Rapid Transit District Certificate of Participation Workers Compensation, MBIA Insured 6.400 07/01/04 5,441,900 Aaa/AAA 1,950,000 State of California General Obligation 6.750 02/01/06 2,182,284 A1/A 1,175,000 State of California General Obligation, AMBAC Insured 6.250 06/01/04 1,275,345 Aaa/AAA 1,855,000 State of California General Obligation, FGIC Insured 7.000 11/01/06 2,150,335 Aaa/AAA 2,500,000 State of California General Obligation, AMBAC Insured 6.100 02/01/02 2,677,525 Aaa/AAA 3,000,000 State of California General Obligation, MBIA Insured 6.000 09/01/03 3,236,820 Aaa/AAA
47
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 3,000,000 State of California General Obligation, AMBAC Insured 6.800% 05/01/01 $ 3,322,530 Aaa/AAA 10,000,000 State of California General Obligation, AMBAC Insured 6.500 03/01/02 10,992,300 Aaa/AAA 3,000,000 University of California Multipurpose Project Revenue Series A, California, MBIA Insured 6.000 09/01/02 3,230,340 Aaa/AAA 4,845,000 University of California Multipurpose Project Revenue Series A, California, MBIA Insured 6.100 09/01/00 5,210,991 Aaa/AAA 1,650,000 Y/S School Facility Financing Authority Special Tax, MBIA Insured 5.750 09/01/07 1,691,711 Aaa/AAA - - ------------ ------------ $ 388,105,000 Total Investment Securities (cost $396,090,513) $412,450,277 ============ ============ NR = Not Rated - - ------------------ * These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. ** Prerefunded with U.S. government securities, not re-rated.
Portfolio Composition by Market Sector Certificates of Participation 22.3% General Obligation 6.9% Water/Sewer 14.4 Hospital 6.6 Electric 14.4 Other 17.5 Sales Tax 10.4 _____ Transportation 7.5 TOTAL 100.0% ===== 48
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Long-Term Fund Schedule of Investment Securities August 31, 1995 MUNICIPAL SECURITIES-98.7% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ------------- ------------------------------------------------------------------ ----- ------ ------- ---------- $ 2,300,000 Alameda County Certificate of Participation Capital Project Series 1989, California, MBIA Insured 6.420%** 06/15/17 $ 604,210 Aaa/AAA 3,000,000 California Department of Water 5.500 12/01/23 2,777,550 Aa/AA 6,000,000 California Educational Facility Authority for Santa Clara University 6.250 02/01/16 6,019,020 A1/NR 1,300,000 California Educational Facility Authority for Stanford University Series I 7.125 01/01/19 1,425,138 Aaa/AAA 2,500,000 California Health Facilities Financing Authority Adventist Health System Series 1991 B, MBIA Insured 6.750 03/01/14 2,641,225 Aaa/AAA 2,775,000 California Health Facilities Financing Authority Episcopal Homes Series 1985 A, State Insured 7.800 07/01/15 3,035,517 NR/A 1,730,000 California Health Facilities Financing Authority Gould Medical Center Series A, State Insured, Escrowed to Maturity 7.300 04/01/20 1,963,602 NR/A 5,165,000 California Health Facilities Financing Authority St. Francis Memorial Hospital Series 1993 C 5.875 11/01/23 4,743,484 A/NR 3,000,000 California Health Facility Financing Authority Kaiser Permanente Series A 6.140** 10/01/09 1,304,760 Aa3/AA 7,420,000 California Health Facility Financing Authority Kaiser Permanente 7.000 01/01/18 7,898,367 Aa3/AA 4,915,000 California Health Facility Financing Authority Kaiser Permanente Series A 6.500 12/01/20 5,008,041 Aa3/AA 3,285,000 California Health Facility Financing Authority Kaiser Permanente Series 1985 A 9.125 10/01/15 3,362,559 Aa3/AA 1,500,000 California Health Facility Financing Authority H.M. Newhall Memorial Hospital Series 1988 A, State Insured 8.000 10/01/18 1,651,395 NR/A 5,000,000 California Health Facility Financing Authority Mills Hospital Revenue Series B, Connie Lee Insured 5.750 01/15/15 4,788,500 NR/AAA 1,500,000 California Health Facility Financing Authority Pomona Valley Hospital Medical Center, MBIA Insured 6.750 01/01/07 1,617,285 Aaa/AAA 2,000,000 California Health Facility Financing Authority Revenue Series A, State Insured 6.750 03/01/20 2,063,840 NR/A 1,500,000 California Health Facility Financing Authority Sutter Hospital Series A, Letter of Credit-Morgan Guaranty Trust 3.300 09/01/95* 1,500,000 VMIG1/A1+ 3,000,000 California Health Facility Financing Authority Sutter Hospital Series A, MBIA Insured 7.000 01/01/09 3,239,430 Aaa/AAA
49
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ============================================================================================================================= Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 3,110,000 California Health Facility Financing Authority Sutter Hospital Series A, AMBAC Insured 6.700% 01/01/13 $ 3,274,084 Aaa/AAA 1,400,000 California Housing Finance Agency Multi-Unit 6.750 02/01/09 1,405,320 A1/A+ 1,290,000 California Housing Finance Agency Multi-Unit Rental 6.875 02/01/22 1,300,242 A1/A+ 1,150,000 California Housing Finance Authority Home Mortgage Series 1987 C 6.800 08/01/17 1,203,843 Aa/AA- 2,000,000 California Housing Finance Authority Home Mortgage Series 1987 A 8.200 08/01/17 2,130,220 Aa/AA- 4,625,000 California Housing Finance Authority Home Mortgage Series 1994 G 7.250 08/01/17 5,017,061 Aa/AA- 1,000,000 California Pollution Control Revenue for Southern California Edison Series C 3.450 09/01/95* 1,000,000 VMIG1/A1+ 1,500,000 California Pollution Control Revenue for Southern California Edison Series D 6.850 12/01/08 1,589,715 A2/A+ 5,000,000 California State Public Works Department of Corrections, Capital Guaranty Insured 5.250 06/01/15 4,612,400 Aaa/AAA 2,500,000 California State Public Works Department of Corrections State Prisons Series A, AMBAC Insured 5.000 12/01/19 2,211,500 Aaa/AAA 1,410,000 California State New Prison Construction Series 1984 B 10.000 08/01/03 1,867,235 A1/A 3,000,000 California State Public Works Lease Revenue Series A 5.750 09/01/21 2,801,130 A/A- 3,500,000 California State Public Works California State University Series 1992 A, Various Projects 6.700 10/01/17 3,622,360 A/A- 1,000,000 California State Public Works University of California Project 6.625 12/01/19 1,039,680 A/A- 1,000,000 California State Public Works Prison Board (Franchise Tax Board) Certificate of Participation 6.900 10/01/06 1,058,990 A/A- 4,500,000 California Statewide Community Development Authority Certificates of Participation for United Medical Center, State Insured 6.750 12/01/21 4,645,620 NR/A 3,750,000 California Statewide Community Development Authority Sutter Health Obligation Group, MBIA Insured 5.500 08/15/22 3,467,963 Aaa/AAA 2,580,000 City of Concord Joint Power Financing Authority Concord Police Facilities Project Lease Revenue Series 1993, California 5.250 08/01/13 2,314,337 A/NR 1,000,000 Coachella Valley Water District #71 6.750 10/01/12 1,041,900 A/NR 8,000,000 Compton Redevelopment Agency Tax Allocation Series 1995 A, Capital Guaranty Insured 6.500 08/01/13 8,406,080 Aaa/AAA 4,000,000 Contra Costa Water District Series G, MBIA Insured 5.500 10/01/19 3,775,800 Aaa/AAA 5,000,000 Irvine Ranch Water District Joint Powers Agency Local Pool Revenue, California, GIC 7.800 02/15/08 5,355,300 NR/A+ 1,900,000 Irvine Ranch Water District Joint Powers Agency Local Pool Revenue, California, GIC 7.875 02/15/23 2,040,125 NR/A+
50
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,815,000 Kern County High School District General Obligation, MBIA Insured 7.150% 08/01/14 $ 2,114,802 Aaa/AAA 2,125,000 Laverne Regional Development Agency Certificate of Participation Capital Improvement Bonds Series 1988, California, BIGI Insured 7.450 11/01/18 2,344,789 Aaa/AAA 4,050,000 Los Angeles County Transportation Commission Sales Tax Refunding Revenue Series 1989 A, California, MBIA Insured 5.630** 07/01/02 2,775,303 Aaa/AAA 3,000,000 Los Angeles County Transportation Commission Sales Tax Revenue Series A 7.400 07/01/15 3,305,400 A1/AA- 1,000,000 Los Angeles Municipal Improvement Lease Revenue Library Series A, California, Prerefunded at 102% of par 7.100 06/01/99 1,113,330 A1/A+ 1,000,000 Los Angeles Transportation Sales Tax Revenue, MBIA Insured 6.500 07/01/13 1,051,170 Aaa/AAA 2,665,000 Los Angeles Transportation Sales Tax Revenue, MBIA Insured 5.750 07/01/18 2,598,615 Aaa/AAA 5,000,000 Los Angeles Transportation Sales Tax Revenue Series B 5.750 07/01/18 4,732,450 A1/AA- 2,000,000 Los Angeles Transportation Sales Tax Revenue Series B, FGIC Insured 5.750 07/01/18 1,950,180 Aaa/AAA 3,000,000 Los Angeles Waste Water System Revenue Series A, California, MBIA Insured 5.875 06/01/24 2,948,550 Aaa/AAA 2,420,000 Los Angeles Waste Water System Revenue Series C, California 6.900 06/01/09 2,624,054 A1/A 3,050,000 Los Angeles Waste Water System Revenue Series C, California 7.100 06/01/18 3,333,376 A1/A 5,830,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Series D, MBIA Insured 6.750 07/01/20 6,528,492 Aaa/AAA 2,650,000 Metropolitan Water District of Southern California Water Revenue 6.625 07/01/12 2,814,883 Aa/AA 8,000,000 Metropolitan Water District of Southern California Water Revenue 5.750 08/10/18 7,694,480 Aa/AA 4,910,000 Northern California Power Agency Public Power Hydroelectric Project #1 Series E 7.150 07/01/24 5,268,430 A/A- 3,000,000 Oakland Redevelopment Agency Tax Allocation, California, AMBAC Insured 5.500 02/01/14 2,902,050 Aaa/AAA 4,750,000 Orange County Civic Center Expansion Certificate of Participation, AMBAC Insured 6.700 08/01/18 4,911,452 Aaa/AAA 3,000,000 Orange County Water District Certificate of Participation Series 1989, California, AMBAC Insured 6.500 08/15/11 3,113,490 Aaa/AAA 5,750,000 Riverside County Transportation Authority Sales Tax Revenue Series A, California 6.500 06/01/09 5,990,350 A/A+ 1,000,000 Sacramento Lease Revenue Series A, AMBAC Insured 5.375 11/01/14 951,130 Aaa/AAA 3,530,000 San Bernardino County Medical Center Series A Certificate of Participation, MBIA Insured 5.500 08/01/15 3,326,213 Aaa/AAA 1,000,000 San Bernardino Valley Municipal Water District 6.750 07/01/00 1,113,260 A/A 3,500,000 San Diego Transportation Sales Tax Revenue Series 1991 A, California, Escrowed to Maturity 5.470** 04/01/04 2,288,755 Aaa/AA-
51
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ============================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ----------- -------------------------------------------------------------------- ----- ------ ------- ---------- $ 1,000,000 San Francisco City and County Redevelopment Hotel Tax, Capital Guaranty Insured 6.750% 07/01/15 $ 1,073,020 Aaa/AAA 5,500,000 San Jose Financing Authority Community Facilities Project 5.625 11/15/18 5,043,555 A1/A+ 6,390,000 San Jose Financing Authority Convention Center Refunding Series 1993 C, California 6.400 09/01/22 6,399,841 A1/A+ 5,000,000 San Jose Financing Authority Convention Center Refunding Series 1993 C, California 6.400 09/01/17 5,034,100 A1/A+ 4,000,000 San Mateo County Joint Power Finance Authority Lease Revenue-Cap Projects, MBIA Insured 6.000 07/01/19 4,076,160 Aaa/AAA 3,475,000 San Mateo Joint Power Finance Authority Lease Revenue, California, MBIA Insured 6.500 07/01/16 3,775,414 Aaa/AAA 3,000,000 San Pablo Redevelopment Agency Merged Project, FGIC Insured 5.250 12/01/23 2,687,790 Aaa/AAA 3,500,000 Santa Ana Financial Authority Lease Revenue Police, MBIA Insured 6.250 07/01/15 3,705,100 Aaa/AAA 5,150,000 Santa Clara/San Mateo Counties Midpeninsula Open Space District 7.000 09/01/14 5,449,678 NR/A+ 2,000,000 South Orange County Financial Authority Special Tax Revenue Series A, California, MBIA Insured 7.000 09/01/11 2,279,620 Aaa/AAA 3,260,000 Southern California Multiple Projects Series 1989 6.000 07/01/18 3,165,101 A/A 3,000,000 Southern California Public Power Agency Palo Verde Series 1989 A, AMBAC Insured 5.580** 07/01/04 1,898,040 Aaa/AAA 1,425,000 Southern California Public Power Agency Pooled Transportation Authority Project Series 1989 7.000 07/01/09 1,518,865 A/A 3,730,000 Southern California Public Power Authority Revenue Multipurpose Projects Series 1989 6.750 07/01/13 3,986,699 A/A 7,315,000 Southern California Public Power Authority Revenue Multipurpose Projects Series 1989 6.750 07/01/12 7,818,126 A/A 4,000,000 Southern California Public Power Authority Transmission Series A, MBIA Insured 5.000 07/01/22 3,459,920 Aaa/AAA 1,310,000 Southern California Public Power Authority Transmission Series 1992, MBIA Insured 5.500 07/01/20 1,229,068 Aaa/AAA 5,000,000 State of California General Obligation 5.750 03/01/19 4,794,950 A1/A 3,000,000 State of California General Obligation, AMBAC Insured 6.125 10/01/11 3,162,060 Aaa/AAA - - ------------ ------------ 271,205,000 Total Municipal Securities 269,176,939 - - ------------ ------------
52
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ============================================================================================================================== MUNICIPAL DERIVATIVES--1.3%1 Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - - ------------------------------------------------------ ----- ------ ------- ---------- $ 4,000,000 Northern California Transmission Agency Series 1993 A, California, Inverse Floater, Residual Interest Bonds, MBIA Insured 6.060% 04/29/24 $ 3,420,000 Aaa/AAA - - ------------ ------------ 4,000,000 Total Municipal Derivatives 3,420,000 - - ------------ ------------ $ 275,205,000 Total Investment Securities (cost $265,676,227) $ 272,596,939 ============ ============
NR = Not Rated - - ---------- * These variable interest rate securities have maturities greater than the indicated maturity dates but are redeemable upon demand at the date indicated. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these instruments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. ** These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. 1 Inverse floaters bear interest rates that move inversely to market interest rates. Inverse floaters typically have durations twice as long as long-term bonds, which may cause them to be twice as volatile as long-term bonds when market interest rates change. The Long-Term Fund is limited to 10% of its net assets in inverse floaters. Portfolio Composition by Market Sector Certificates of Participation 21.2% General Obligation 6.4% Hospital 19.9 Tax Allocation 5.5 Water/Sewer 11.1 Other 10.1 Sales Tax 9.1 _____ GIC 8.7 Electric 8.0 TOTAL 100.0% ===== 53 Trustees James M. Benham Ronald J. Gilson Myron S. Scholes Kenneth E. Scott Ezra Solomon Isaac Stein James E. Stowers, III Jeanne D. Wohlers Officers James M. Benham Chairman of the Board John T. Kataoka President and Chief Executive Officer Bruce R. Fitzpatrick Vice President, Treasurer, and Chief Financial Officer Douglas A. Paul Vice President, Secretary and General Counsel Ann N. McCoid Controller [company logo] The Benham Group Part of the Twentieth Century Family of Funds 1665 Charleston Road Mountain View, CA 94043 1-800-321-8321 Not authorized for distribution unless preceded or accompanied by a current fund prospectus. Benham Distributors, Inc. 10/95 Q080 -----END PRIVACY-ENHANCED MESSAGE-----