-----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, NIXcD4SqbzHx85f0VpgF7S0hsloJHU/Z0+idCX9Pq2B6HuIFOXB5hOJbQnqfbYpf A8UPOtPgmtyaLSe/nTo4nA== 0000717316-96-000010.txt : 19960904 0000717316-96-000010.hdr.sgml : 19960904 ACCESSION NUMBER: 0000717316-96-000010 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960903 EFFECTIVENESS DATE: 19960903 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / CENTRAL INDEX KEY: 0000717316 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 946562826 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-82734 FILM NUMBER: 96624956 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03706 FILM NUMBER: 96624957 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 & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 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 485BPOS 1 POST-EFFECTIVE AMENDMENT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X ----- File No. 2-82734: Pre-Effective Amendment No.____ Post-Effective Amendment No._23_ X ----- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X ----- File No. 811-3706: Amendment No._27_ BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS (Exact Name of Registrant as Specified in Charter) 4500 Main Street, Kansas City, MO 64141-6200 (Address of Principal Executive Offices) Registrant's Telephone Number, including Area Code: 415-965-8300 Douglas A. Paul General Counsel 1665 Charleston Road, Mountain View, CA 94043 (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: Immediately, upon effectiveness (first offered 8/1/84) It is proposed that this filing become effective: __X__ immediately upon filing pursuant to paragraph (b) of Rule 485 _____ on (date) pursuant to paragraph (b) of Rule 485 _____ 60 days after filing pursuant to paragraph (a) of Rule 485 _____ on (date) pursuant to paragraph (a)(1) of Rule 485 _____ 75 days after filing pursuant to paragraph (a) (2) of Rule 485 _____ on (date) pursuant to paragraph (a)(2) of Rule 485 - -------------------------------------------------------------------------------- Registrant has elected to register an indefinite number of shares of beneficial interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. On October 25, 1995, the Registrant filed a Rule 24f-2 Notice on Form 24f-2 with respect to its fiscal year ended August 30, 1995. BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS 1933 Act Post-Effective Amendment No. 223 1940 Act Amendment No. 27 FORM N-1A CROSS-REFERENCE SHEET BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS 1933 Act Post-Effective Amendment No. 223 1940 Act Amendment No. 27 FORM N-1A CROSS-REFERENCE SHEET PART A: PROSPECTUS ITEM PROSPECTUS CAPTION 1 Cover Page 2 Transaction and Operating Expense Table 3 Financial Highlights, Performance 4 Investment Management, Further Information About the Funds, Investment Objectives of the Funds, Information About Investment Policies of the Funds, Risk Factors and Investment Techniques, Other Investment Practices 5 Investment Management 5A Not Applicable 6 Further Information About the Funds, How to Redeem Shares, Cover Page, Distributions, Taxes 7 Cover Page, Distribution of Fund Shares, How to Open an Account, Share Price, Transfer and Administrative Services 8 How to Redeem Shares, Transfer and Administrative Services 9 Not Applicable PART B: STATEMENT OF ADDITIONAL INFORMATION ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION 10 Cover Page 11 Table of Contents 12 Not Applicable 13 Investment Policies and Techniques, Investment Restrictions, Portfolio Transactions 14 Trustee and Officers 15 Additional Purchase and Redemption Information, Trustees and Officers 16 Investment Advisory Services, Administrative and Transfer Agent Services, Expense Limitation Agreement, About the Trust 17 Portfolio Transactions 18 About the Trust 19 Additional Purchase and Redemption Information, Valuation of Portfolio Securities 20 Taxes 21 Additional Purchase and Redemption Information 22 Performance 23 Cover Page BENHAM California Tax-Free & Municipal Funds Prospectus SEPTEMBER 3, 1996 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS - -------------------------------------------------------------------------------- The BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND, BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND, BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND (formerly known as the Benham California Tax-Free Short-Term Fund), BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND, BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND, BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND and BENHAM CALIFORNIA TAX-FREE INSURED FUND (the "Funds") are series of the Benham California Tax-Free and Municipal Funds, a member of the Twentieth Century family of funds, a family that includes 66 no-load mutual funds covering a variety of investment opportunities. Seven of the funds are described in this Prospectus. Their investment objectives are listed on the inside cover of this Prospectus. The other funds are described in separate prospectuses. NO-LOAD MUTUAL FUNDS Twentieth Century offers retail investors a full line of no-load funds, investments that have no sales charges or commissions. The Funds offered by this Prospectus have no 12b-1 plan or other deferred sales charges. INVESTMENTS IN THE FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT OR ANY OTHER AGENCY. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A $1.00 SHARE PRICE. This Prospectus gives you information about the Funds that you should know before investing. Please read this Prospectus carefully and retain it for future reference. Additional information is included in the Statement of Additional Information dated September 3, 1996 and filed with the Securities and Exchange Commission ("SEC"). It is incorporated into this Prospectus by reference. To obtain a copy without charge, call or write: Twentieth Century Mutual Funds 4500 Main Street o P.O. Box 419200 Kansas City, MO 64141-6200 o 1-800-345-2021 International calls: 816-531-5575 Telecommunications Device for the Deaf: 1-800-634-4113 o In Missouri: 816-753-1865 Internet: http://www.twentieth-century.com - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INVESTMENT OBJECTIVES OF THE FUNDS - -------------------------------------------------------------------------------- BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND AND BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND are money market funds which seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. THERE CAN BE NO ASSURANCE THAT THESE FUNDS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE PER SHARE. MINIMUM INITIAL INVESTMENT: $2,500. BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND, BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND, AND BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. MINIMUM INITIAL INVESTMENT: $5,000. BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND seeks to provide as high a level of current income exempt from federal and California income taxes as is consistent with its investment policies, which permit investment in lower-rated and unrated municipal securities. MINIMUM INITIAL INVESTMENT: $5,000. BENHAM CALIFORNIA TAX-FREE INSURED FUND seeks to provide as high a level of current income exempt from federal and California income taxes as is consistent with safety of principal through investment in insured California municipal securities. MINIMUM INITIAL INVESTMENT: $5,000. AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. For ease of reference, the Funds sometimes will be referred to in this Prospectus by their investment category or fund type. The Benham California Tax-Free Money Market Fund (the "Tax-Free Money Market Fund") and the Benham California Municipal Money Market Fund (the "Municipal Money Market Fund") are referred to as the "Money Market Funds". The Benham California Tax-Free Limited-Term Fund (the "Tax-Free Limited-Term Fund") the Benham California Tax-Free Intermediate-Term Fund (the "Tax-Free Intermediate-Term Fund"), the Benham California Tax-Free Long-Term Fund (the "Tax-Free Long-Term Fund"), the Benham California Municipal High-Yield Fund, (the "Municipal High-Yield Fund"), and the Benham California Tax-Free Insured Fund (the "Tax-Free Insured Fund") are referred to as the "Variable Price Funds". EACH OF THE FUNDS CONCENTRATES ITS INVESTMENTS GEOGRAPHICALLY BY INVESTING IN SECURITIES ISSUED BY AGENCIES, INSTRUMENTALITIES AND MUNICIPALITIES OF THE STATE OF CALIFORNIA. BECAUSE OF THIS CONCENTRATION, THE FUNDS MAY BE RISKIER THAN SIMILAR MUTUAL FUNDS WITH NO GEOGRAPHIC CONCENTRATION. There is no assurance that the Funds will achieve their respective investment objectives. - -------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED BY THE FUNDS TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED OR WRITTEN MATERIAL ISSUED BY OR FOR THE FUNDS, AND YOU SHOULD NOT RELY ON ANY OTHER INFORMATION OR REPRESENTATION. 2 TABLE OF CONTENTS - -------------------------------------------------------------------------------- TRANSACTION AND OPERATING EXPENSE TABLE.............4 FINANCIAL HIGHLIGHTS................................5 INFORMATION REGARDING THE FUNDS INVESTMENT POLICIES OF THE FUNDS...................12 Benham California Tax-Free Money Market Fund, Benham California Municipal Money Market Fund, Benham California Tax-Free Limited-Term Fund, Benham California Tax- Free Intermediate-Term Fund and Benham California Tax-Free Long-Term Fund..............12 Benham California Municipal High-Yield Fund......13 Benham California Tax-Free Insured Fund..........13 Portfolio Investment Quality and Maturity Guidelines.............................13 RISK FACTORS AND INVESTMENT TECHNIQUES.............15 Basic Fixed Income Investment Risks..............15 California Obligations...........................16 Special Considerations Regarding the Municipal High-Yield Fund.......................17 Tax-Free Insured Fund: Insurance Feature.........17 Municipal Securities.............................17 TAX-EXEMPT SECURITIES..............................19 OTHER INVESTMENT PRACTICES, THEIR CHARACTERISTICS AND RISKS..................19 Portfolio Turnover...............................19 When-Issued and Forward Commitment Agreements......................................20 Interest Rate Futures Contracts and Options Thereon.................................20 Restricted and Illiquid Securities...............20 Cash Management..................................21 Other Techniques.................................21 PERFORMANCE ADVERTISING............................21 HOW TO INVEST WITH TWENTIETH CENTURY AND THE BENHAM GROUP HOW TO OPEN AN ACCOUNT.............................23 By Mail..........................................23 By Wire..........................................23 By Exchange......................................24 In Person........................................24 SUBSEQUENT INVESTMENTS.............................24 By Mail..........................................24 By Telephone.....................................24 By Wire..........................................24 In Person........................................24 AUTOMATIC INVESTMENT PLAN..........................24 HOW TO EXCHANGE FROM ONE ACCOUNT TO ANOTHER.......................................24 By Mail..........................................25 By Telephone.....................................25 HOW TO REDEEM SHARES...............................25 By Mail..........................................25 By Telephone.....................................25 By Check-A-Month.................................25 Other Automatic Redemptions......................25 REDEMPTION PROCEEDS................................25 By Check.........................................25 By Wire and ACH..................................25 REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS.............................26 SIGNATURE GUARANTEE................................26 SPECIAL INVESTOR SERVICES..........................26 Automated Information Line.......................26 CheckWriting.....................................26 Open Order Service...............................27 Tax-Qualified Retirement Plans...................27 IMPORTANT POLICIES REGARDING YOUR INVESTMENTS.................................28 REPORTS TO SHAREHOLDERS............................29 EMPLOYER-SPONSORED RETIREMENT PLANS AND INSTITUTIONAL ACCOUNTS..........................29 ADDITIONAL INFORMATION YOU SHOULD KNOW SHARE PRICE........................................30 When Share Price is Determined...................30 How Share Price is Determined....................30 Where to Find Information About Share Price......31 DISTRIBUTIONS......................................31 TAXES..............................................31 Tax-Deferred Accounts............................31 Taxable Accounts.................................31 Special Tax Information..........................33 MANAGEMENT.........................................34 Investment Management............................34 Code of Ethics...................................35 Transfer and Administrative Services.............36 Distribution of Fund Shares......................36 Expenses.........................................36 FURTHER INFORMATION ABOUT THE FUNDS................37 3
TRANSACTION AND OPERATING EXPENSE TABLE - ------------------------------------------------------------------------------------------------------------------------------------ Benham Benham Benham Benham Benham Benham California California California California California California Benham Tax-Free Municipal Tax-Free Tax-Free Tax-Free Municipal California Money Market Money Market Limited-Term Intermediate- Long-Term High Yield Tax-Free SHAREHOLDER Fund Fund Fund Term Fund Fund Fund Insured Fund TRANSACTION EXPENSES: Maximum Sales Load Imposed on Purchases none none none none none none none Maximum Sales Load Imposed on Reinvested Dividends none none none none none none none Deferred Sales Load none none none none none none none Redemption Fee(1) none none none none none none none Exchange Fee none none none none none none none ANNUAL FUND OPERATING EXPENSES:(2) (as a percentage of net assets) Management Fees (net of expense limitation) .29% .29% .29% .29% .29% .29% .29% 12b-1 Fees none none none none none none none Other Expenses .23% .27% .22% .20% .20% .23% .22% Total Fund Operating Expenses .52% .56% .51% . 49% .49% .52% .51% Example: You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and redemption at the end of each time period: 1 year $ 5 $ 6 $ 5 $ 5 $ 5 $ 5 $ 5 3 years 17 18 16 16 16 17 16 5 years 29 31 29 27 27 29 29 10 years 65 70 64 62 62 65 64
(1)Redemption proceeds sent by wire are subject to a $10 processing fee. (2)Benham Management Corporation (the "Manager") has agreed to limit each Fund's total operating expenses to specified percentages of each Fund's average daily net assets. The agreement provides that the Manager may recover amounts absorbed on behalf of the Fund during the preceding 11 months if, and to the extent that, for any given month, Fund expenses were less than the expense limit in effect at that time. The current expense limits for the Benham California Tax-Free Money Market Fund and the Benham Municipal Money Market Fund are .53% and .60%, respectively, of average daily net assets. The current expense limit for the remaining Funds is .59% of average daily net assets. These expense limitations are subject to annual renewal in June. Each Fund pays the Manager management fees equal to an annualized percentage of each Fund's average daily net assets. Other expenses include administrative and transfer agent fees paid to Twentieth Century Services, Inc. The purpose of the above table is to help you understand the various costs and expenses that you, as a shareholder, will bear directly or indirectly in connection with an investment in the shares of the Funds. The example set forth above assumes reinvestment of all dividends and distributions and uses a 5% annual rate of return as required by SEC regulations. NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. 4
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS TAX-FREE MONEY MARKET FUND The Financial Highlights for each of the periods presented have been audited by KPMG Peat Marwick LLP, independent auditors (except as noted). Their reports appear in each Fund's annual report to shareholders which are incorporated by reference into the Statement of Additional Information. The semiannual and the annual reports contain additional performance information and will be made available upon request and without charge. For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ 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............ .0162 .0328 .0207 .0209 .0298 .0420 .0510 .0559 .0464 .0383 Net Realized and Unrealized Losses on Investments..... 0 (.0003) 0 0 0 0 0 0 (.0053) 0 ------- ------ ------ ------ ------ ------ ------ ------ ------ ------- Total Income From Investment Operations........ .0162 .0325 .0207 .0209 .0298 .0420 .0510 .0559 .0411 .0383 ------- ------ ------ ------ ------ ------ ------ ------ ------ ------- Less Distributions Dividends from Net Investment Income............ (.0162) (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383) Distributions from Net Realized Capital Gains 0 0 0 0 0 0 0 0 0 0 ------- ------ ------ ------ ------ ------ ------ ------ ------ ------- Total Distributions (.0162) (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383) ------- ------ ------ ------ ------ ------ ------ ------ ------ ------- 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*........ 1.63% 3.31% 2.09% 2.13% 3.00% 4.23% 5.23% 5.70% 4.24% 3.88% - ------------ SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars) $433,365 414,099 371,074 338,731 321,307 361,007 463,130 490,700 328,532 318,095 Ratio of Expenses to Average Daily Net Assets+........ .52%** .52% .50% .51% .54% .56% .56% .59% .63% .67% Ratio of Net Investment Income to Average Daily Net Assets+........ 3.27%** 3.28% 2.07% 2.09% 2.98% 4.20% 5.10% 5.59% 4.10% 3.83% - ------------------------------------------------------------------------------------------------------------------------------------ + The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
5
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) MUNICIPAL MONEY MARKET FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted) Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991+ (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period..........$ 1.00 1.00 1.00 1.00 1.00 1.00 Income From Investment Operations Net Investment Income......................... .0168 .0331 .0213 .0221 .0344 .0293 Net Realized and Unrealized Losses on Investments 0 (.0003) 0 0 0 0 ------- ------ ------ ------ ------ ------ Total Income From Investment Operations...... .0168 .0328 .0213 .0221 .0344 .0293 ------- ------ ------ ------ ------ ------ Less Distributions Dividends from Net Investment Income.......... (.0168) (.0328) (.0213) (.0221) (.0344) (.0293) Distributions from Net Realized Capital Gains. 0 0 0 0 0 0 ------- ------ ------ ------ ------ ------ Total Distributions.......................... (.0168) (.0328) (.0213) (.0221) (.0344) (.0293) ------- ------ ------ ------ ------ ------ Net Asset Value at End of Period................ $ 1.00 1.00 1.00 1.00 1.00 1.00 ======= ====== ====== ====== ====== ====== TOTAL RETURN*................................... 1.69% 3.35% 2.15% 2.25% 3.63% 3.04% - ------------ SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars)....................... $197,729 191,722 243,701 247,621 254,823 136,860 Ratio of Expenses to Average Daily Net Assets++ .56%** .53% .51% .46% .07% 0% Ratio of Net Investment Income to Average Daily Net Assets++.......................... 3.35%** 3.31% 2.13% 2.21% 3.44% 4.39%** - ------------------------------------------------------------------------------------------------------------------------------------ + From December 31, 1990 (commencement of operations) through August 31, 1991. ++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
6
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) TAX-FREE LIMITED-TERM FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted) Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992+ (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period..................... $10.23 10.12 10.34 10.12 10.00 Income From Investment Operations Net Investment Income.................................... .2129 .4148 .3766 .3840 .1012 Net Realized and Unrealized Gains (Losses) on Investments .0699 .1099 (.1832) .2227 .1200 ------- ------- ------- ------- ------- Total Income From Investment Operations................. .2828 .5247 .1934 .6067 .2212 ------- ------- ------- ------- ------- Less Distributions Dividends from Net Investment Income..................... (.2128) (.4147) (.3761) (.3867) (.1012) Distributions from Net Realized Capital Gains............ 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains.... 0 0 (.0373) 0 0 ------- ------- ------- ------- ------- Total Distributions..................................... (.2128) (.4147) (.4134) (.3867) (.1012) -------- ------- ------- ------- ------- Net Asset Value at End of Period........................... $10.30 10.23 10.12 10.34 10.12 ======== ======= ======= ======= ======= TOTAL RETURN*.............................................. 2.79% 5.33% 1.90% 6.15% 1.47% - ------------ SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars).... $98,895 104,723 120,627 114,019 52,171 Ratio of Expenses to Average Daily Net Assets++.......... .51%** .51% .51% .36% 0% Ratio of Net Investment Income to Average Daily Net Assets++ 4.14%** 4.10% 3.68% 3.76% 4.08%** Portfolio Turnover Rate.................................. 38.00% 49.75% 65.66% 54.42% 19.37% - ------------------------------------------------------------------------------------------------------------------------------------ + From June 1, 1992 (commencement of operations) through August 31, 1992. ++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
7
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) TAX-FREE INTERMEDIATE-TERM FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period.. $11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 10.56 Income From Investment Operations Net Investment Income .2717 .5414 .5354 .5582 .5853 .6038 .6184 .6305 .6294 .6241 Net Realized and Unrealized Gains (Losses) on Investments....... .2097 .2000 (.4104) .5285 .3600 .3600 (.0100) .0800 (.2400) (.2600) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Income From Investment Operations .4814 .7414 .1250 1.0867 .9453 .9638 .6084 .7105 .3894 .3641 -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Less Distributions Dividends from Net Investment Income. (.2714) (.5414) (.5351) (.5592) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241) Distributions from Net Realized Capital Gains 0 0 (.0752) (.0175) 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains..... 0 0 (.0147) 0 0 0 0 0 0 0 -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Distributions (.2714) (.5414) (.6250) (.5767) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net Asset Value at End of Period........ $11.27 11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 ======== ======= ======= ======= ======= ======= ======= ======= ======= ======= TOTAL RETURN*........ 4.39% 7.09% 1.11% 10.42% 9.18% 9.74% 6.16% 7.28% 3.90% 3.53% - ------------ SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars)........ $438,404 417,550 448,293 444,460 304,988 241,496 191,217 167,444 157,300 166,966 Ratio of Expenses to Average Daily Net Assets+........ .49%** .48% .48% .50% .52% .55% .58% .60% .64% .67% Ratio of Net Investment Income to Average Daily Net Assets+.. 4.85%** 5.02% 4.82% 5.05% 5.50% 5.84% 6.08% 6.25% 6.19% 5.92% Portfolio Turnover Rate 24.01% 25.44% 43.80% 26.76% 48.70% 28.58% 20.05% 39.89% 47.01% 51.94% - ------------------------------------------------------------------------------------------------------------------------------------ + The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
8
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) TAX-FREE LONG-TERM FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period.. $10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 11.42 Income From Investment Operations Net Investment Income .3068 .6229 .6266 .6649 .6878 .6987 .7060 .7388 .7436 .7675 Net Realized and Unrealized Gains (Losses) on Investments..... .4499 .1183 (.7101) .8460 .4400 .5500 (.2200) .3100 (.1800) (.8011) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Income (Loss) From Investment Operations .7567 .7412 (.0835) 1.5109 1.1278 1.2487 .4860 1.0488 .5636 (.0336) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Less Distributions Dividends from Net Investment Income. (.3067) (.6231) (.6261) (.6658) (.6878) (.6987) (.7060) (.7388) (.7436) (.7675) Distributions from Net Realized Capital Gains 0 (.0581) (.4304) (.2651) 0 0 0 0 0 (.0789) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Distributions (.3067) (.6812) (1.0565) (.9309) (.6878) (.6987) (.7060) (.7388) (.7436) (.8464) -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net Asset Value at End of Period..... $11.39 10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 ======== ======= ======= ======= ======= ======= ======= ======= ======= ======= TOTAL RETURN*........ 6.96% 7.21% (.78)% 14.02% 10.58% 12.26% 4.66% 10.39% 5.61% (.31)% - ------------ SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars) $293,729 276,085 277,477 338,075 275,880 247,244 197,394 179,737 143,191 179,523 Ratio of Expenses to Average Daily Net Assets+........ .49%** .49% .48% .49% .52% .55% .57% .58% .63% .65% Ratio of Net Investment Income to Average Daily Net Assets+........ 5.43%** 5.84% 5.51% 5.76% 6.14% 6.48% 6.64% 6.98% 7.19% 6.87% Portfolio Turnover Rate 25.27% 59.92% 61.93% 55.11% 71.59% 37.80% 74.11% 78.08% 34.52% 81.54% - ------------------------------------------------------------------------------------------------------------------------------------ + The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
9
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) MUNICIPAL HIGH-YIELD FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted) Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+ (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period.. $9.11 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 .2780 .5612 .5629 .5703 .5809 .5879 .6266 .6611 .6527 .4509 Net Realized and Unrealized Gains (Losses) on Investments .2698 .0497 (.4793) .5401 .2800 .3000 (.1400) .2300 (.2400) (1.3100) ------- ------ ------ ------- ------- ------- ------ ------- ------ -------- Total Income (Loss) From Investment Operations........ .5478 .6109 .0836 1.1104 .8609 .8879 .4866 .8911 .4127 (.8591) ------- ------ ------ ------- ------- ------- ------ ------- ------ -------- Less Distributions Dividends from Net Investment Income. (.2778) (.5609) (.5627) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509) Distributions from Net Realized Capital Gains..... 0 0 (.1208) 0 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains..... 0 0 (.0001) 0 0 0 0 0 0 0 ------- ------ ------ ------- ------- ------- ------ ------- ------ -------- Total Distributions (.2778) (.5609) (.6836) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509) ------- ------ ------ ------- ------- ------- ------ ------- ------ -------- Net Asset Value at End of Period........ $9.38 9.11 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69 ======= ====== ====== ======= ======= ======= ====== ======= ====== ======== TOTAL RETURN*........ 6.06% 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) $129,937 116,166 116,000 114,564 79,949 65,741 44,602 32,631 13,169 8,434 Ratio of Expenses to Average Daily Net Assets++....... .52%** .51% .51% .55% .56% .50% .24% 0% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets++. 5.97%** 6.30% 6.02% 6.14% 6.54% 6.79% 7.23% 7.67% 7.85% 7.50%** Portfolio Turnover Rate 26.75% 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. ++ The ratio for the six months ended February 29, 1996, includes expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
10
- ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS (CONTINUED) TAX-FREE INSURED FUND For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted) Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+ (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA - -------------- Net Asset Value at Beginning of Period.. $ 9.89 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 .2688 .5320 .5267 .5470 .5705 .5733 .5889 .6026 .6246 .4370 Net Realized and Unrealized Gains (Losses) on Investments.... .3906 .2200 (.6922) .7588 .5000 .4700 (.2300) .4300 (.2700) (.9300) -------- ------ ------- ------- ------- ------- ------ ------- ------ ------- Total Income (Loss) From Investment Operations........ .6594 .7520 (.1655) 1.3058 1.0705 1.0433 .3589 1.0326 .3546 (.4930) -------- ------ ------- ------- ------- ------- ------ ------- ------ ------- Less Distributions Dividends from Net Investment Income. (.2694) (.5320) (.5263) (.5477) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370) Distributions from Net Realized Capital Gains..... 0 0 (.2082) (.0881) 0 0 0 0 0 0 Distributions in Excess of Net Realized Capital Gains..... 0 0 (.0700) 0 0 0 0 0 0 0 -------- ------ ------- ------- ------- ------- ------ ------- ------ ------- Total Distributions (.2694) (.5320) (.8045) (.6358) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370) -------- ------ ------- ------- ------- ------- ------ ------- ------ ------- Net Asset Value at End of Period........ $10.28 9.89 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07 ======== ====== ======= ======= ======= ======= ====== ======= ====== ======= TOTAL RETURN*........ 6.71% 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)$190,473 178,913 189,439 223,440 145,965 94,951 59,870 42,569 29,531 12,748 Ratio of Expenses to Average Daily Net Assets++....... .51%** .50% .49% .52% .55% .59% .61% .66% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets++. 5.26%** 5.54% 5.20% 5.37% 5.90% 6.18% 6.43% 6.62% 7.39% 7.11%** Portfolio Turnover Rate 19.45% 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. ++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized.
11 INFORMATION REGARDING THE FUNDS - -------------------------------------------------------------------------------- INVESTMENT POLICIES OF THE FUNDS The Funds have adopted certain investment restrictions that are set forth in the Statement of Additional Information. Those restrictions, as well as the investment objectives of the Funds identified on the inside front cover page of this Prospectus and any other investment policies designated as "fundamental" in this Prospectus or in the Statement of Additional Information, cannot be changed without shareholder approval. The Funds have implemented additional investment policies and practices to guide their activities in the pursuit of their respective investment objectives. These policies and practices, which are described throughout this Prospectus, are not designated as fundamental policies and may be changed without shareholder approval. Each Fund is a "diversified company" as defined in the Investment Company Act of 1940 (the "1940 Act"), with the exception of the Municipal Money Market Fund which is a "non-diversified company." This means that, with respect to 75% of its total assets, each Fund will not invest more than 5% of its total assets in the securities of a single issuer. As a result of new rules applicable to all money market funds, the Municipal Money Market Fund will also seek to meet this test. To meet federal tax requirements for qualifications as a regulated investment company, each Fund must limit its investments so that at the close of each quarter of its taxable year (1) no more than 25% of its total assets are invested in the securities of a single issuer (other than the U.S government or a regulated investment company), and (2) with respect to at least 50% of its total assets, no more than 5% of its total assets are invested in the securities of a single issuer. Each Fund intends to remain fully invested in municipal obligations. As a fundamental policy, each Fund will invest at least 80% of its net assets in California municipal obligations. The remaining 20% of net assets may be invested in (1) municipal obligations issued in other states, (2) municipal obligations issued by territories or possessions of the U.S., such as Puerto Rico, and (3) U.S. government obligations. For temporary defensive purposes, each Fund may invest more than 20% of its net assets in these obligations. For liquidity purposes, each Variable Price Fund may invest up to 5% of its total assets in shares of the Money Market Funds. The Funds will invest at least 80% of its net assets in obligations with interest exempt from regular federal income tax. The Municipal Money Market and Municipal High-Yield Funds, unlike the other Funds, may invest substantially all of their assets in securities which are subject to the alternative minimum tax. The descriptions that follow are designed to help you determine whether a Fund fits your investment objectives. You may want to pursue more than one objective by investing in other funds in the Twentieth Century family of funds. For an explanation of the securities ratings referred to in the following discussion, see "Other Information" in the Statement of Additional Information. BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND, BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND, BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND, BENHAM CALIFORNIA INTERMEDIATE-TERM FUND, AND BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND These Funds seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. 12 BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND The Municipal High-Yield Fund seeks to provide as high a level of current income exempt from federal and California income taxes as is consistent with its investment policies, which permit investment in lower-rated and unrated municipal securities. BENHAM CALIFORNIA TAX-FREE INSURED FUND The Tax-Free Insured Fund seeks to provide as high a level of current income exempt from federal and California income taxes as is consistent with safety of principal through investment in insured California municipal securities. PORTFOLIO INVESTMENT QUALITY AND MATURITY GUIDELINES The Money Market Funds may be appropriate for investors seeking share price stability who can accept the lower yields that short-term obligations typically provide. To offer investors the potential for higher yields, the Variable Price Funds invest in obligations with longer maturities. MONEY MARKET FUNDS In selecting investments for the Money Market Funds, the Manager adheres to regulatory guidelines concerning the quality and maturity of money market fund investments as well as to internal guidelines designed to minimize credit risk. In particular, each Fund: (1) Buys only U.S. dollar-denominated obligations with remaining maturities of 13 months or less (and variable- and floating-rate obligations with demand features that effectively shorten their maturities to 13 months or less); (2) Maintains a dollar-weighted average maturity of 60 days or less; and (3) Restricts its investments to high-quality obligations determined by the Manager, pursuant to procedures established by the board of trustees, to present minimal credit risks. To be considered high-quality, an obligation must be: (1) A U.S. government obligation; or (2) Rated (or issued by an issuer rated with respect to a class of comparable short-term obligations) in one of the two highest rating categories for short-term obligations by at least two nationally recognized statistical rating agencies ("rating agencies") (or one if only one has rated the obligation); or (3) An unrated obligation judged by the Manager, pursuant to guidelines established by the board of trustees, to be of quality comparable to the securities listed above. While it adheres to the same quality and maturity criteria as Tax-Free Money Market Fund, Municipal Money Market Fund may purchase private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal alternative minimum tax (AMT) liability. In the past, private activity securities have provided somewhat higher yields than comparable municipal securities whose interest is not a tax-preference item. Under normal circumstances, the Manager expects to invest between 50% and 80% of Municipal Money Market Fund's total assets in private activity securities. Therefore, the Fund is designed for investors who do not expect to pay alternative minimum taxes. See "Taxes" on page 31 for more information. 13 VARIABLE PRICE FUNDS The quality and maturity criteria of the Variable Price Funds is as follows: TAX-FREE LIMITED-TERM FUND TAX-FREE INTERMEDIATE-TERM FUND TAX-FREE LONG-TERM FUND The Tax-Free Limited-Term, Tax-Free Intermediate-Term and Tax-Free Long-Term Funds have identical policies governing the quality of securities in which they may invest. The Funds differ in their maturity criteria as depicted in the table on the next page. - -------------------------------------------------------------------------------- TYPICAL WEIGHTED MATURITY OF AVERAGE PORTFOLIO FUND INVESTMENTS MATURITY - -------------------------------------------------------------------------------- Tax-Free one to one to Limited-Term five years five years - -------------------------------------------------------------------------------- Tax-Free four or five to ten Intermediate-Term more years years - -------------------------------------------------------------------------------- Tax-Free seven or ten or Long-Term more years more years - -------------------------------------------------------------------------------- In terms of credit quality, each of the Tax-Free Limited-Term, Tax-Free Intermediate-Term and Tax-Free Long-Term Funds restricts its investments to: (1) Municipal bonds rated, when acquired, within the four highest categories designated by a rating agency; (2) Municipal notes (including variable-rate demand obligations) and tax-exempt commercial paper rated, when acquired, within the two highest categories designated by a rating agency; and (3) Unrated obligations judged by the Manager, under the direction of the board of trustees, to be of quality comparable to the securities listed above. MUNICIPAL HIGH-YIELD FUND Like Tax-Free Long-Term Fund, Municipal High-Yield Fund invests primarily in long- and intermediate-term California municipal obligations and maintains a weighted average portfolio maturity of ten or more years. Although Municipal High-Yield Fund typically invests a significant portion of its assets in investment-grade bonds, the Manager does not adhere to specific rating criteria in selecting investments for this Fund. The Fund invests in securities rated or judged by the Manager to be of below investment-grade quality (e.g., bonds rated BB/Ba or lower, which are sometimes referred to as "junk bonds") or unrated bonds. The Municipal High Yield Fund currently expects to invest between 20% and 40% of its total assets in below investment grade securities. Many issuers of medium- and lower-quality bonds choose not the have their obligations rated, and a large portion of the Municipal High-Yield Fund's portfolio may consist of obligations that, when acquired, were not rated. While there is no limit on the percentage of assets the Fund may invest in unrated securities, the Manager will not select investments for the Fund that, at the time of purchase (1) are not paying interest, (2) are rated C (lowest grade) by Moody's Investors Service, Inc. (Moody's) or C or D by Standard & Poor's Corporation (S&P), or (3) are considered by the Manager, under direction of the trustees, to be of a quality as low as obligations rated C or D by Moody's or S&P. See "Other Information" in the Statement of Additional Information" for a summary of bond ratings. Municipal High-Yield Fund may invest in investment-grade municipal obligations if the Manager considers it appropriate to do so. Investments of this nature may be made due to market considerations (e.g., a limited supply of medium- and lower-grade municipal obligations) or to increase liquidity of the Fund. Investing in high-grade obligations may lower the Fund's return. 14 Municipal High-Yield Fund may purchase private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal AMT liability. Under normal circumstances, the advisor expects to invest between 10% and 30% of the Fund's total assets in private activity securities. Therefore, the Fund is better suited for investors who do not expect alternative minimum tax liability. See "Taxes", on page 31 for more information. TAX-FREE INSURED FUND Tax-Free Insured Fund invests primarily in long-term municipal obligations covered by insurance that guarantees the timely payment of interest and repayment of principal. The Fund maintains a weighted average portfolio maturity of ten or more years. Under normal conditions, at least 65% of the Fund's total assets are invested in insured municipal obligations. Securities held by the Fund may be (1) insured under a new-issue insurance policy obtained by the issuer of the security, (2) insured under a secondary market insurance policy purchased by the Fund or a previous bondholder, (3) insured under a "while-in-portfolio" insurance policy purchased by the Fund, (4) secured by an escrow or trust account holing U.S. government securities, or (5) rated AAA by a rating agency based upon the issuer's credit quality. Tax-Free Insured Fund may also invest in short-term securities carrying one of the two highest ratings designated by a rating agency. For more information about the Fund's insurance feature, see page 17. RISK FACTORS AND INVESTMENT TECHNIQUES The Funds are designed for individuals in upper tax brackets seeking income free from federal and California personal income taxes. By themselves, the Funds do not constitute balanced investment plans. When choosing between the Funds, you should consider relative yield potential together with potential changes in share price, because these two factors determine each Fund's total return to investors. BASIC FIXED INCOME INVESTMENT RISKS The Money Market Funds may be appropriate for investors who would like to (1) earn income at tax-exempt money market rates while preserving their investment or (2) use a money market fund as part of a long-term, balanced investment portfolio consisting of money market instruments, bonds and stocks. The Variable Price Funds are quite distinct from one another; these Funds offer a range of potential for income and total return based on their respective quality and maturity criteria. The basic risk factors you should consider before making an investment in one or more of the Funds are described in the following paragraphs. INTEREST RATE RISK One feature the Funds have in common is their susceptibility to changing interest rates. For both Money Market Funds, interest rate changes affect the level of income the Funds generate for shareholders. For the Variable Price Funds, changing interest rates affect not only the level of income the Funds generate for shareholders, but their share prices as well. In general, when interest rates rise, the Variable Price Funds' share prices decline; when interest rates decline, their share prices rise. This pattern is due to the time value of money. A bond's worth is determined by the present value of its future cash flows. Consequently, changing interest rates have a greater effect on the present value of a long-term bond than a short-term bond. 15 CREDIT RISK In selecting investments for each Fund, the Manager carefully considers the creditworthiness of parties to be relied upon for the timely payment of interest and repayment of principal. In many cases, these parties include not only the issuer of the obligation, but a bank or other financial intermediary who offers a letter of credit or another form of guarantee on the obligation. LIQUIDITY RISK A security's rating reflects the opinions of the rating agencies that issue them and are not absolute standards of quality. Because of the cost of obtaining credit ratings, some issuers forego them. Under the direction of the board of trustees, the Manager may buy unrated bonds for the Funds if these securities are judged to be of a quality consistent with the Funds' investment policies. Similarly, on behalf of the Variable Price Funds, the Manager may purchase securities whose ratings are not consistent with the Funds' rating criteria but which the Manager judges under the direction of the board of trustees to present credit risks consistent with the Funds' quality standards. With the exception of Municipal High-Yield Fund (which may invest without limitation in unrated securities), each Fund may invest up to 10% of its net assets in unrated securities. Unrated securities may be less liquid than rated securities. The Limited-Term, Intermediate-Term and Long-Term Funds may invest up to 25% of their total assets in securities rated Baa or BBB- (the lowest investment grade category). Such securities are medium-grade investment obligations that may have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for such obligations to make principal and interest payments. CONCENTRATION RISK Each of the Funds described in this Prospectus may invest 25% or more of its total assets in obligations that generate income from similar types of projects (in particular, projects in health care, electric, water/sewer, education, and transportation). Political or economic developments affecting a single issuer or industry or similar types of projects may have a significant effect on Fund performance. CALL RISK Many municipal obligations are issued with a call feature (call features include a date on which the issuer has reserved the right to redeem the obligation prior to maturity). An obligation may be called for redemption before the Manager would otherwise choose to eliminate it from a Fund's holdings. A call may also reduce an obligation's yield to maturity. CALIFORNIA OBLIGATIONS Because the Funds invest primarily in California municipal securities, each Fund's yield and share price are affected by political and economic developments within the State of California. California municipal budgets have been strained in recent years. "Proposition 13" and similar California constitutional, statutory, and legislative initiatives have restricted the ability of California taxing entities to increase real property taxes and other tax revenues. State and local revenues are also adversely affected by the recent recession, the worst in the state since the 1930's. California has experienced a net loss of approximately 750,000 jobs since 1990. However, net job growth has occurred since early 1994 and all the jobs lost since the recession have now been replaced. The state government's response to these events in the early 1990's resulted in reductions in the amount of and rate of growth in the aid to counties, cities and school districts. The impact of these reductions has been lessened by the state's recent economic recovery. However, any events which affect the revenue received by the state and local bodies in California can have an impact on the Funds. For example, recent developments at the federal level, particularly federal welfare reform, may 16 have the effect of offsetting the revenue gains achieved in the last two years. The ability of state and local entities to make scheduled payments of interest and principal on their outstanding debt obligations could be negatively affected by such events. For further information about the risks associated with investing in California obligations, please see the Statement of Additional Information. SPECIAL CONSIDERATIONS REGARDING THE MUNICIPAL HIGH-YIELD FUND Municipal High-Yield Fund is designated for long-term investors who can accept the risks associated with seeking a high level of current income from long- or intermediate-term, medium- or lower-quality California municipal bonds. Medium- to lower-rated and unrated municipal bonds frequently are traded in markets with a limited number of participants. These conditions may limit the availability of bonds eligible for purchase by the Fund and the availability of ready buyers for bonds the Manager wants to sell on behalf of the Fund. Adverse publicity and changing investor perceptions, whether or not they are based on fundamental analysis, may affect the value and liquidity of lower-quality bonds, especially in markets with a low volume of trading. Lower-quality and unrated bonds may be more sensitive to adverse economic changes in specific localities or among specific types of projects and generally are regarded as speculative. There is no guarantee that interest payments or principal repayments will be made when due. A delay in debt service payment or other deterioration in credit quality could negatively affect the Fund's performance. However, under the direction of the trustees, the Manager attempts to reduce the risks of investing in medium- and lower- rated and unrated municipal obligations through active portfolio management, diversification, thorough credit analysis, and attention to developments and trends in the economy and the financial markets. More than the other Funds described in this Prospectus, Municipal High-Yield Fund relies on the Manager's credit analysis to achieve its investment objective. TAX-FREE INSURED FUND: INSURANCE FEATURE Insurance attached to securities held in Tax-Free Insured Fund's portfolio provides for the timely payment of interest and repayment of principal on those securities; however, this insurance does not guarantee the market value of the securities or the value of the Fund's shares. A bond issuer may purchase new-issue insurance to enhance the credit quality of a security. By paying a premium and meeting the insurer's underwriting standards, the bond issuer obtains a credit rating for its bonds comparable to the rating assigned to the insurer's claims-paying ability. A bondholder may purchase a secondary market insurance policy for a particular bond after it is issued. The Fund expects to limit its purchases of securities insured under new-issue or secondary market insurance policies to those insured by companies whose claims-paying ability is rated AAA by a rating agency at the time of the purchase. New-issue and secondary market insurance policies cannot be canceled; they continue in force as long as the bonds are outstanding. MUNICIPAL SECURITIES Municipal securities are issued to raise money for a variety of public purposes, including general financing for state and local governments as well as financing for specific projects and public facilities. Municipal securities may be backed by the full taxing power of a municipality, the revenues from a specific project, or the credit of a private organization. The following discussion provides a brief description of some securities the Funds may buy. The Funds are not limited by this discussion, and they may buy other types of securities and enter into other types of transac- 17 tions that meet their respective quality, maturity, and liquidity requirements. MUNICIPAL NOTES typically have maturities of 13 months or less and are used to provide short-term capital or to meet cash flow demands. GENERAL OBLIGATION BONDS are backed by the taxing power of the issuer. REVENUE BONDS are backed by the revenues derived from a specific project, system, or facility. Industrial development bonds are a type of revenue bond backed by the credit of a private issuer. VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS have interest rate adjustment formulas designed to stabilize their market values. These obligations normally have maturities in excess of one year but carry demand features permitting the holders to demand repayment of principal at any time or at specified intervals. With respect to the Money Market Funds, such intervals may not exceed 13 months. TENDER OPTION BONDS are created by combining an intermediate- or long-term fixed-rate tax-exempt bond with a tender agreement that gives the holder the option to tender the bond at face value. Tender option bonds purchased by the Funds are structured with rates that are reset weekly or at regular intervals. A sponsor may terminate a tender option agreement if, for example, the issuer of the underlying bond defaults on interest payments, or the underlying bond is downgraded or becomes taxable. Under such circumstances, a Fund might then own a bond that does not meet its quality or maturity criteria. The Manager monitors the credit quality of bonds underlying the Funds' tender option bond holdings and will sell or put back a tender option bond if the rating on the underlying bond falls below the second-highest rating designated by a rating agency. In addition, each Fund limits its investments in tender option bonds to 15% of net assets. MUNICIPAL LEASE OBLIGATIONS are issued by state and local governments to acquire land and a wide variety of equipment and facilities. These obligations typically are not fully backed by the issuing municipality's ability to assess taxes to meet its debt obligations. If the state or local government does not make appropriations for the following year's lease payments, the lease may terminate, with the possibility of default on the lease obligation and loss to investors. Prior to purchasing a municipal lease obligation (or a participation interest in such obligations) and on a regular basis thereafter, pursuant to guidelines adopted by the board of trustees, the Manager evaluates the credit quality and liquidity of the obligation. In making this evaluation, the Manager considers various credit factors, such as the necessity of the project; the issuer's credit quality, future borrowing plans, and sources of revenue pledged for lease repayment; general economic conditions in the region where the security is issued; liquidity indictors such as dealer activity; and with regard to unrated obligations the likelihood such lease will not be canceled. ZERO-COUPON MUNICIPAL SECURITIES do not make regular interest payments. Instead, they are sold at a deep discount to their face value. In calculating daily dividends, the Funds take into account, as income, a portion of the difference between these securities' purchase prices and face values. Because zero-coupon securities do not pay current income, their prices can be very volatile when interest rates change. The Variable Price Funds may invest in INVERSE FLOATERS to generate higher tax-exempt yields than are offered by other instruments. Inverse floaters bear interest rates that move inversely to market interest rates. Generally, the interest rate on the inverse floater is computed as the difference between an above-market fixed rate of interest and a floating rate determined by reference to a market-based or bond-specific interest rate. 18 Since inverse floaters are long-term bonds, the value of these securities may be volatile when market interest rates change. In addition, there is no guarantee that the Manager will find a ready buyer for inverse floaters. The Money Market Funds may not invest in inverse floaters. AMT BONDS (MUNICIPAL MONEY MARKET AND MUNICIPAL HIGH YIELD FUNDS ONLY) typically are tax-exempt "private activity" bonds issued after August 7, 1986, whose proceeds are directed at least in part to a private, for-profit organization. Although the interest income from AMT bonds is exempt from regular federal income tax, that income is a tax preference item for purposes of the AMT. In addition, corporate investors should note that all income from a Fund may be part of an adjustment to AMT under Section 55 of the Internal Revenue Code and the environmental tax under Internal Revenue Code Section 59A. The AMT is a special separate tax that applies to certain taxpayers who have certain adjustments to income or tax preference items. TAX-EXEMPT SECURITIES Historically, interest paid on securities issued by states, cities, counties, school districts and other political subdivisions of the United States has been exempt from federal income taxes. Legislation since 1985, however, affects the tax treatment of certain types of municipal bonds issued after certain dates and, in some cases, subjects the income from certain bonds to differing tax treatment depending on the tax status of its recipient. The Municipal Money Market Fund and the Municipal High-Yield Fund should be expected to invest some portion of their assets in bonds which, in the hands of some holders, would be subject to the AMT, as long as management determines it is in the best interest of shareholders generally to invest in such securities. (See "Taxes," page 31.) The tax-equivalent yield is based on the current double tax-exempt yield and your combined federal and state marginal tax rate. Assuming all the Funds' dividends are tax-exempt in California (which may not always be the case) and that your California taxes are fully deductible for federal income tax purposes, you can calculate your tax equivalent yield for the Funds using the followning equation: Fund's Double Tax-Free Yield Your Tax- ------------------------------------------- = Equivalent (100% - Federal Tax Rate)(100% - California Yield Tax Rate) OTHER INVESTMENT PRACTICES, THEIR CHARACTERISTICS AND RISKS For additional information regarding the investment practices of any of the Funds, see the Statement of Additional Information. PORTFOLIO TURNOVER The portfolio turnover rates of the Variable Price Funds are shown in the Financial Highlights tables on pages 5, 6, 7, 8, 9, 10 and 11 of this Prospectus. With respect to each series of shares, investment decisions to purchase and sell securities are based on the anticipated contribution of the security in question to the particular Fund's objectives. The rate of portfolio turnover is irrelevant when management believes a change is in order to achieve those objectives and, accordingly, the annual portfolio turnover rate cannot be accurately anticipated. The portfolio turnover of each Fund may be higher than other mutual funds with similar investment objectives. A high turnover rate involves correspondingly higher transaction costs that are borne directly by a Fund. It may also affect the character of capital gains, if any, realized and distributed by a Fund since short-term capital gains are taxable as ordinary income. 19 WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS Each of the Funds may sometimes purchase new issues of securities on a when-issued or forward commitment basis when, in the opinion of the Manager, such purchases will further the investment objectives of the Fund. The price of when-issued securities is established at the time commitment to purchase is made. Delivery of and payment for these securities typically occurs 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the security. Accordingly, the value of each security may decline prior to delivery, which could result in a loss to the Fund. INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON The Variable Price Funds may buy and sell interest rate futures contracts relating to debt securities ("debt futures," i.e., futures relating to indexes on types or groups of bonds) and write and buy put and call options relating to interest rate futures contracts. For options sold, a fund will segregate cash or high-quality debt securities equal to the value of securities underlying the option unless the option is otherwise covered. A fund will deposit in a segregated account with its custodian bank high-quality debt obligations maturing in one year or less, or cash, in an amount equal to the fluctuating market value of long futures contracts it has purchased, less any margin deposited on its long position. It may hold cash or acquire such debt obligations for the purpose of making these deposits. The Variable Price Funds may use futures and options transactions to maintain cash reserves while remaining fully invested, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns when a futures contract is priced more attractively than its underlying security or index. Since futures contracts and options thereon can replicate movements in the cash markets for the securities in which a fund invests without the large cash investments required for dealing in such markets, the may subject a fund to greater and more volatile risks than might otherwise be the case. The principal risks related to the use of such instruments are (1) the offsetting correlation between movements in the market price of the portfolio investments (held or intended) being hedged and in the price of the futures contract or option may be imperfect; (2) possible lack of a liquid secondary market for closing out futures or option positions; (3) the need of additional portfolio management skills and techniques; and (4) losses due to unanticipated market price movements. For a hedge to be completely effective, the price change of the hedging instrument should equal the price change of the securities being hedged. Such equal price changes are not always possible because the investment underlying the hedging instrument may not be the same investment that is being hedged. The ordinary spreads between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to distortion. Due to the possibility of distortion, a correct forecast of general interest rate trends by management may still not result in a successful transaction. Management may be incorrect in its expectations as to the extent of various interest rate movements or the time span within which the movements take place. See the Statement of Additional Information for further information about these instruments and their risks. RESTRICTED AND ILLIQUID SECURITIES The Funds may, from time to time, purchase Rule 144A securities when they present attractive investment opportunities that otherwise meet the Funds' criteria for selection. Rule 144A securities are securities that are privately placed with and traded among qualified institutional buyers 20 rather than the general public. Although Rule 144A securities are considered "restricted securities," they are not necessarily illiquid. With respect to securities eligible for resale under Rule 144A, the staff of the SEC has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of trustees to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of trustees is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of trustees of the Funds has delegated the day-to-day function of determining the liquidity of Rule 144A securities to the Manager. The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securities is limited to certain qualified institutional investors, the liquidity of such securities may be limited accordingly and a fund may, from time to time, hold a Rule 144A security that is illiquid. In such an event, the Manager will consider appropriate remedies to minimize the effect on such fund's liquidity. No Fund may invest more than 10% of its total assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of Fund shares). CASH MANAGEMENT Each of the Variable Price Funds may invest up to 5% of its total assets in any money market fund advised by the Manager, provided that the investment is consistent with the Fund's investment policies and restrictions. OTHER TECHNIQUES The Manager may buy other types of securities or employ other portfolio management techniques on behalf of the Funds. When SEC guidelines require it to do so, a Fund will set aside cash or appropriate liquid assets in a segregated account to cover its obligations. See the Funds' Statement of Additional Information for a more detailed discussion of these investments and some of the risks associated with them. PERFORMANCE ADVERTISING From time to time, the Funds may advertise performance data. Fund performance may be shown by presenting one or more performance measurements, including cumulative total return or average annual total return, yield, effective yield and tax-equivalent yield (for tax-exempt funds). CUMULATIVE TOTAL RETURN data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. AVERAGE ANNUAL TOTAL RETURN is determined by computing the annual compound return over a stated period of time that would have produced a fund's cumulative total return over the same period if the fund's performance had remained constant throughout. A quotation of YIELD reflects a fund's income over a stated period expressed as a percentage of the fund's share price. In the case of the Money Market Funds, yield is calculated by measuring the income generated by an investment in the Fund over a seven-day period (net of expenses). This income is then annualized, that is, the amount of income generated by the investment over the seven day period is assumed to be generated over each similar period each week throughout a full year and is shown as a percentage of the investment. The EFFECTIVE YIELD is calculated in a similar manner but, when annualized, the income earned by the investment is assumed to be reinvested. The effective yield will be slightly higher than the yield because of the compounding effect on the assumed reinvestment. 21 With respect to the Variable Price Funds, yield is calculated by adding over a 30-day (or one-month) period all interest and dividend income (net of fund expenses) calculated on each day's market values, dividing this sum by the average number of Fund shares outstanding during the period, and expressing the result as a percentage of the Fund's share price on the last day of the 30-day (or one month) period. The percentage is then annualized. Capital gains and losses are not included in the calculation. Yields are calculated according to accounting methods that are standardized in accordance with SEC rules. 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. A tax-equivalent yield demonstrates the taxable yield necessary to produce after-tax yield equivalent to that of a mutual fund which invests in exempt obligations. (See "Tax-Exempt Securities," page 19, for a description of the formula used in comparing yields to tax-equivalent yields.) Each Fund may also include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services or Donoghue's Money Fund Report) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be presented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance. A fund's performance may also be compared, on a relative basis, to the other funds in our fund family. This relative comparison, which may be based upon historical or expected fund performance, volatility or other fund characteristics, may be presented numerically, graphically or in text. The performance of a fund may also be combined or blended with other funds in our fund family, and that combined or blended performance may be compared to the same indices to which individual funds may be compared. All performance information advertised by the Funds is historical in nature and is not intended to represent or guarantee future results. The value of Fund shares when redeemed may be more or less than their original cost. 22 HOW TO INVEST WITH TWENTIETH CENTURY AND THE BENHAM GROUP - -------------------------------------------------------------------------------- The following section explains how to invest with Twentieth Century and The Benham Group, including purchases, redemptions, exchanges and special services. You will find more detail about doing business with us by referring to the Investor Services Guide that you will receive when you open an account. If you own or are considering purchasing Fund shares through an employer-sponsored retirement plan or through a bank, broker-dealer or other financial intermediary, the following sections, as well as the information contained in our Investor Services Guide, may not apply to you. Please read "Employer-Sponsored Retirement Plans and Institutional Accounts," page 29. HOW TO OPEN AN ACCOUNT To open an account, you must complete and sign an application, furnishing your taxpayer identification number. (You must also certify whether you are subject to withholding for failing to report income to the IRS.) Investments received without a certified taxpayer identification number will be returned. The minimum investment is $2,500 for the Money Market Funds and $5,000 for the Variable Price Funds. The minimum investment requirements may be different for some types of retirement accounts. Call one of our Investor Services Representatives for information on our retirement plans, which are available for individual investors or for those investing through their employers. Please note: If you register your account as belonging to multiple owners (e.g., as joint tenants), you must provide us with specific authorization on your application in order for us to accept written or telephone instructions from a single owner. Otherwise, all owners will have to agree to any transactions that involve the account (whether the transaction request is in writing or over the telephone). You may invest in the following ways: BY MAIL Send a completed application and check or money order payable in U.S. dollars to Twentieth Century. BY WIRE You may make your initial investment by wiring funds. To do so, call us or mail a completed application and provide your bank with the following information: RECEIVING BANK AND ROUTING NUMBER: Commerce Bank, N.A. (101000019) BENEFICIARY (BNF): Twentieth Century Services, Inc. 4500 Main St., Kansas City, MO 64111 BENEFICIARY ACCOUNT NUMBER (BNF ACCT): 2804918 REFERENCE FOR BENEFICIARY (RFB): Twentieth Century account number into which you are investing. If more than one, leave blank and see Bank to Bank Information below. ORIGINATOR TO BENEFICIARY (OBI): Name and address of owner of account into which you are investing. BANK TO BANK INFORMATION (BBI OR FREE FORM TEXT): o Taxpayer identification or social security number o If more than one account, account numbers and amount to be invested in each account. o Current tax year, previous tax year or rollover designation if an IRA. Specify whether IRA, SEP-IRA or SARSEP-IRA. 23 BY EXCHANGE Call 1-800-345-2021 from 7 a.m. to 7 p.m. Central time to get information on opening an account by exchanging from another Twentieth Century or Benham account. See below for more information on exchanges. IN PERSON If you prefer to work with a representative in person, please visit one of our Investors Centers, located at: 4500 Main Street Kansas City, MO 64111 1665 Charleston Road Mountain View, CA 94043 2000 S. Colorado Blvd. Denver, CO 80222. SUBSEQUENT INVESTMENTS Subsequent investments may be made by an automatic bank, payroll or government direct deposit (see "Automatic Investment Plan," this page) or by any of the methods below. The minimum investment requirement for subsequent investments: $250 for checks submitted without the remittance portion of a previous statement or confirmation, $50 for all other types of subsequent investments. BY MAIL When making subsequent investments, enclose your check with the remittance portion of the confirmation of a previous investment. If the remittance slip is not available, indicate your name, address and account number on your check or a separate piece of paper. (Please be aware that the investment minimum for subsequent investments is higher without a remittance slip.) BY TELEPHONE Once your account is open, you may make investments by telephone if you have authorized us (by choosing "Full Services" on your application) to draw on your bank account. You may call an Investor Services Representative or use our Automated Information Line. BY WIRE You may make subsequent investments by wire. Follow the wire transfer instructions on page 23 and indicate your account number. IN PERSON You may make subsequent investments in person at one of our Investors Centers. The locations of our three Investors Centers are listed on this page. AUTOMATIC INVESTMENT PLAN You may elect on your application to make investments automatically by authorizing us to draw on your bank account regularly. Such investments must be at least the equivalent of $50 per month. You also may choose an automatic payroll or government direct deposit. If you are establishing a new account, check the appropriate box under "Automatic Investments" on your application to receive more information. If you would like to add a direct deposit to an existing account, please call one of our Investor Services Representatives. HOW TO EXCHANGE FROM ONE ACCOUNT TO ANOTHER As long as you meet any minimum initial investment requirements, you may exchange your Fund shares to our other funds up to six times per year per account. For any single exchange, the shares of each fund being acquired must have a value of at least $100. 24 However, we will allow investors to set up an Automatic Exchange Plan between any two funds in the amount of at least $50 per month. See our Investor Services Guide for further information about exchanges. BY MAIL You may direct us in writing to exchange your shares from one Twentieth Century or Benham account to another. For additional information, please see our Investor Services Guide. BY TELEPHONE You can make exchanges over the phone (either with an Investor Services Representative or using our Automated Information Line--see page 26) if you have authorized us to accept telephone instructions. You can authorize this by selecting "Full Services" on your application or by calling us at 1-800-345-2021 to receive the appropriate form. HOW TO REDEEM SHARES We will redeem or "buy back" your shares at any time. Redemptions will be made at the next net asset value determined after a complete redemption request is received. Please note that a request to redeem shares in an IRA or 403(b) plan must be accompanied by an executed IRS Form W4-P and a reason for withdrawal as specified by the IRS. BY MAIL Your written instructions to redeem shares may be made either by a redemption form, which we will send to you upon request, or by a letter to us. Certain redemptions may require a signature guarantee. Please see "Signature Guarantee," page 26. BY TELEPHONE If you have authorized us to accept telephone instructions, you may redeem your shares by calling an Investor Services Representative. BY CHECK-A-MONTH If you have at least a $10,000 balance in your account, you may redeem shares by Check-A-Month. A Check-A-Month plan automatically redeems enough shares each month to provide you with redemption proceeds in an amount you choose (minimum $50). To set up a Check-A-Month plan, please call to request our Check-A-Month brochure. OTHER AUTOMATIC REDEMPTIONS You may elect to make redemptions automatically by authorizing us to send funds directly to you or to your account at a bank or other financial institution. To set up automatic redemptions, call one of our Investor Services Representatives. REDEMPTION PROCEEDS Please note that shortly after a purchase of shares is made by check or electronic draft (also known as an ACH draft) from your bank, we may wait up to 15 days or longer to send redemption proceeds (to allow your purchase funds to clear). No interest is paid on the redemption proceeds after the redemption is processed but before your redemption proceeds are sent. Redemption proceeds may be sent to you in one of the following ways: BY CHECK Ordinarily, all redemption checks will be made payable to the registered owner of the shares and will be mailed only to the address of record. For more information, please refer to our Investor Services Guide. BY WIRE AND ACH You may authorize us to transmit redemption proceeds by wire or ACH. These services will be effective 15 days after we receive the authorization. 25 Your bank will usually receive wired funds within 48 hours of transmission. Funds transferred by ACH may be received up to seven days after transmission. Wired funds are subject to a $10 fee to cover bank wire charges, which is deducted from redemption proceeds. Once the funds are transmitted, the time of receipt and the funds' availability are not under our control. REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS Whenever the shares held in an account have a value of less than the required minimum, a letter will be sent advising you of the necessity to bring the value of the shares held in the account up to the minimum. If action is not taken within 90 days of the letter's date, the shares held in the account will be redeemed and proceeds from the redemption will be sent by check to your address of record. We reserve the right to increase the investment minimums. SIGNATURE GUARANTEE To protect your accounts from fraud, some transactions will require a signature guarantee. Which transactions will require a signature guarantee will depend on which service options you elect when you open your account. For example, if you choose "In Writing Only," a signature guarantee will be required when: o Redeeming more than $25,000 o Establishing or increasing a Check-A-Month or automatic transfer on an existing account. You may obtain a signature guarantee from a bank or trust company, credit union, broker- dealer, securities exchange or association, clearing agency or savings association, as defined by federal law. For a more in-depth explanation of our signature guarantee policy, or if you live outside the United States and would like to know how to obtain a signature guarantee, please consult our Investor Services Guide. We reserve the right to require a signature guarantee on any transaction, or to change this policy at any time. SPECIAL INVESTOR SERVICES We offer several service options to make your account easier to manage. These are listed on the account application. Please make note of these options and elect the ones that are appropriate for you. Be aware that the "Full Services" option offers you the most flexibility. You will find more information about each of these service options in our Investor Services Guide. Our special investor services include: AUTOMATED INFORMATION LINE We offer an Automated Information Line, 24 hours a day, seven days a week, at 1-800-345-8765. By calling the Automated Information Line, you may listen to fund prices, yields and total return figures. You may also use the Automated Information Line to make investments into your accounts (if we have your bank information on file) and obtain your share balance, value and most recent transactions. If you have authorized us to accept telephone instructions, you also may exchange shares from one fund to another via the Automated Information Line. Redemption instructions cannot be given via the Automated Information Line. CHECKWRITING We offer CheckWriting as a service option for your account in either of the Money Market Funds. CheckWriting allows you to redeem shares in your account by writing a draft ("check") against your account balance. (Shares held in certificate form may not be redeemed by check.) There is no limit on the number of checks you can write, but each one must be for at least $100. When you write a check, you will continue to receive dividends on all shares until your check 26 is presented for payment to our clearing bank. If you redeem all shares in your account by check, any accrued distributions on the redeemed shares will be paid to you in cash on the next monthly distribution date. If you want to add CheckWriting to an existing account that offers CheckWriting, contact us by phone or mail for an appropriate form. For a new account, you may elect CheckWriting on your purchase application by choosing the "Full Services" option. CheckWriting is not available for any account held in an IRA or 403(b) plan. CheckWriting redemptions may only be made on checks provided by us. Currently, there is no charge for checks or for the CheckWriting service. We will return checks drawn on insufficient funds or on funds from investments made by means other than by wire within the previous 15 days. Neither the company nor our clearing bank will be liable for any loss or expenses associated with returned checks. Your account may be assessed a $15 service charge for checks drawn on insufficient funds. A stop payment may be ordered on a check written against your account. We will use reasonable efforts to stop a payment, but we cannot guarantee that we will be able to do so. If we are successful in fulfilling a stop-payment order, your account may be assessed a $15 fee. OPEN ORDER SERVICE Through our open order service, you may designate a price at which to buy shares of a variable price fund by exchange from one of our money market funds, or a price at which to sell shares of a variable price fund by exchange to one of our money market funds. The designated purchase price must be equal to or lower, or the designated sale price equal to or higher, than the variable price fund's net asset value at the time the order is placed, If the designated price is met within 90 calendar days, we will execute your exchange order automatically at that price (or better). Open orders not executed within 90 days will be canceled. If the fund you have selected deducts a distribution from its share price, your order price will be adjusted accordingly so the distribution does not inadvertently trigger an open order transaction on your behalf. If you close or re-register the account from which the shares are to be redeemed, your open order will be canceled. Because of their time-sensitive nature, open order transactions are accepted only by telephone or in person. These transactions are subject to exchange limitations described in each fund's prospectus, except that orders and cancellations received before 2 p.m. Central time are effective the same day, and orders or cancellations received after 2 p.m. Central time are effective the next business day. TAX-QUALIFIED RETIREMENT PLANS Each fund is available for your tax-deferred retirement plan. Call or write us and request the appropriate forms for: o Individual Retirement Accounts ("IRAs") o 403(B) plans for employees of public school systems and non-profit organizations o Profit sharing plans and pension plans for corporations and other employers. If your IRA and 403(b) accounts do not total $10,000, each account is subject to an annual $10 fee, up to a total of $30 per year. You can also transfer your tax-deferred plan to us from another company or custodian. Call or write us for a "Request to Transfer" form. 27 IMPORTANT POLICIES REGARDING YOUR INVESTMENTS Every account is subject to policies that could affect your investment. Please refer to the Investor Services Guide for further information about the policies discussed below, as well as further detail about the services we offer. (1) We reserve the right for any reason to suspend the offering of shares for a period of time, or to reject any specific purchase order (including purchases by exchange). Additionally, purchases may be refused if, in the opinion of the manager, they are of a size that would disrupt the management of the Fund. (2) We reserve the right to make changes to any stated investment requirements, including those that relate to purchases, transfers and redemptions. In addition, we may also alter, add to or terminate any investor services and privileges. Any changes may affect all shareholders or only certain series or classes of shareholders. (3) Shares being acquired must be qualified for sale in your state of residence. (4) Transactions requesting a specific price and date, other than open orders, will be refused. (5) If a transaction request is made by a corporation, partnership, trust, fiduciary, agent or unincorporated association, we will require evidence satisfactory to us of the authority of the individual making the request. (6) We have established procedures designed to assure the authenticity of instructions received by telephone. These procedures include requesting personal identification from callers, recording telephone calls, and providing written confirmations of telephone transactions. These procedures are designed to protect shareholders from unauthorized or fraudulent instructions. If we do not employ reasonable procedures to confirm the genuineness of instructions, then we may be liable for losses due to unauthorized or fraudulent instructions. The company, its transfer agent and investment adviser will not be responsible for any loss due to instructions they reasonably believe are genuine. (7) All signatures should be exactly as the name appears in the registration. If the owner's name appears in the registration as Mary Elizabeth Jones, she should sign that way and not as Mary E. Jones. (8) Unusual stock market conditions have in the past resulted in an increase in the number of shareholder telephone calls. If you experience difficulty in reaching us during such periods, you may send your transaction instructions by mail, express mail or courier service, or you may visit one of our Investors Centers. You may also use our Automated Information Line if you have requested and received an access code and are not attempting to redeem shares. (9) If you fail to provide us with the correct certified taxpayer identification number, we may reduce any redemption proceeds by $50 to cover the penalty the IRS will impose on us for failure to report your correct taxpayer identification number on information reports. (10) We will perform special inquiries on shareholder accounts. A research fee of $15 may be applied. 28 REPORTS TO SHAREHOLDERS At the end of each calendar quarter, we will send you a consolidated statement that summarizes all of your Twentieth Century and Benham holdings, as well as an individual statement for each fund you own that reflects all year-to-date activity in your account. You may request a statement of your account activity at any time. With the exception of most automatic transactions, each time you invest, redeem, transfer or exchange shares, we will send you a confirmation of the transactions. See the Investor Services Guide for more detail. Carefully review all the information relating to transactions on your statements and confirmations to ensure that your instructions were acted on properly. Please notify us immediately in writing if there is an error. If you fail to provide notification of an error with reasonable promptness, i.e., within 30 days of non-automatic transactions or within 30 days of the date of your consolidated quarterly statement, in the case of automatic transactions, we will deem you to have ratified the transaction. No later than January 31st of each year, we will send you reports that you may use in completing your U.S. income tax return. See the Investor Services Guide for more information. Each year, we will send you an annual and a semiannual report relating to your fund, each of which is incorporated herein by reference. The annual report includes audited financial statements and a list of portfolio securities as of the fiscal year end. The semiannual report includes unaudited financial statements for the first six months of the fiscal year, as well as a list of portfolio securities at the end of the period. You also will receive an updated prospectus at least once each year. Please read these materials carefully as they will help you understand your fund. EMPLOYER-SPONSORED RETIREMENT PLANS AND INSTITUTIONAL ACCOUNTS Information contained in our Investor Services Guide and in the "How to Invest" sections beginning on page 23 pertain to shareholders who invest directly with Twentieth Century rather than through an employer-sponsored retirement plan or through a financial intermediary. If you own or are considering purchasing Fund shares through an employer-sponsored retirement plan, your ability to purchase shares of the Funds, exchange them for shares of other Twentieth Century or Benham funds, or redeem them will depend on the terms of your plan. If you own or are considering purchasing Fund shares through a bank, broker-dealer, insurance company or other financial intermediary, your ability to purchase, exchange and redeem shares will depend on your agreement with, and the policies of, such financial intermediary. You may reach one of our Institutional Investor Service Representatives by calling 1-800-345-3533 to request information about our funds, to obtain a current prospectus or to get answers to any questions about our Funds that you are unable to obtain through your plan administrator or financial intermediary. 29 ADDITIONAL INFORMATION YOU SHOULD KNOW - -------------------------------------------------------------------------------- SHARE PRICE WHEN SHARE PRICE IS DETERMINED The price of your shares is also referred to as their net asset value. Net asset value is determined by calculating the total value of a fund's assets, deducting total liabilities and dividing the result by the number of shares outstanding. Net asset value is determined at the close of regular trading on each day that the New York Stock Exchange (the "Exchange") is open. Investments and requests to redeem or exchange shares will receive the share price next determined after receipt by us of the investment, redemption or exchange request. For example, investments and requests to redeem or exchange shares received by us or our authorized agents before the close of business on the Exchange, usually 3 p.m. Central time, are effective on, and receive the price determined, that day as of the close of the Exchange. Investment, redemption and exchange requests received thereafter are effective on, and receive the price determined as of, the close of the Exchange on the next day the Exchange is open. Investments are considered received only when your check or wired funds are received by us. Wired funds are considered received on the day they are deposited in our bank account if your telephone call is received before the close of business on the Exchange, usually 3 p.m. Central time and the money is deposited that day. Investments by telephone pursuant to your prior authorization to us to draw on your bank account are considered received at the time of your telephone call. Investment and transaction instructions received by us on any business day by mail prior to the close of business on the Exchange will receive that day's price. Investments and instructions received after that time will receive the price determined on the next business day. If you invest in Fund shares through an employer-sponsored retirement plan or other financial intermediary, it is the responsibility of your plan record-keeper or financial intermediary to transmit your purchase, exchange and redemption requests to the Fund's transfer agent prior to the applicable cut-off time for receiving orders and to make payment for any purchase transactions in accordance with the Fund's procedures or any contractual arrangement with the Fund or the Fund's distributor in order for you to receive that day's price. HOW SHARE PRICE IS DETERMINED The valuation of assets for determining net asset value may be summarized as follows: Portfolio securities of each Fund, except as otherwise noted, listed or traded on a domestic securities exchange are valued at the last sale price on that exchange. Portfolio securities primarily traded on foreign securities exchanges are generally valued at the preceding closing values of such securities on the exchange where primarily traded. If no sale is reported, or if local convention or regulation so provides, the mean of the latest bid and asked prices is used. Depending on local convention or regulation, securities traded over-the-counter are priced at the mean of the latest bid and asked prices, or at the last sale price. When market quotations are not readily available, securities and other assets are valued at fair value as determined in accordance with procedures adopted by the board of trustees. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of trustees. Pursuant to a determination by the Money Market Funds' board of trustees and Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), portfolio securities of the Funds are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by assuming 30 a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. WHERE TO FIND INFORMATION ABOUT SHARE PRICE The net asset values of the Funds are published in leading newspapers daily. The yields of the Money Market Funds are published weekly in leading financial publications and daily in many local newspapers. The net asset values, as well as yield information on the Funds and all the other funds in the Twentieth Century family of funds, may be obtained by calling us. DISTRIBUTIONS At the close of each day including Saturdays, Sundays and holidays, net income of the Variable Price Funds is determined and declared as a distribution. The distribution will be paid monthly. You will begin to participate in the distributions the day AFTER your purchase is effective. (See "When Share Price is Determined," page 30.) If you redeem shares, you will receive the distribution declared for the day of the redemption. If all shares are redeemed (other than by CheckWriting), the distribution on the redeemed shares will be included with your redemption proceeds. Distributions from net realized securities gains, if any, generally are declared and paid once a year, but the Funds may make distributions on a more frequent basis to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of the 1940 Act. Participants in employer-sponsored retirement or savings plans must reinvest all distributions. For shareholders investing through taxable accounts, distributions will be reinvested unless you elect to receive them in cash. Distributions of less than $10 generally will be reinvested. Distributions made shortly after a purchase by check or ACH may be held up to 15 days. You may elect to have distributions on shares held in Individual Retirement Accounts and 403(b) plans paid in cash only if you are 591/2 years old or permanently and totally disabled. Distribution checks normally are mailed within seven days after the record date. Please consult our Investor Service Guide for further information regarding your distribution options. The board of trustees may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers. TAXES Each Fund has elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code, which means that to the extent its income is distributed to shareholders, it pays no income taxes. TAX-DEFERRED ACCOUNTS If the Funds' shares are purchased through tax-deferred accounts, such as a qualified employer-sponsored retirement or savings plan, income and capital gains distributions paid by the Funds will generally not be subject to current taxation, but will accumulate in your account under the plan on a tax-deferred basis. Employer-sponsored retirement and savings plans are governed by complex tax rules. If you elect to participate in your employer's plan, consult your plan administrator, your plan's summary plan description, or a professional tax advisor regarding the tax consequences of participation in the plan, contributions to, and withdrawals or distributions from the plan. TAXABLE ACCOUNTS If fund shares are purchased through taxable accounts, distributions of net investment income and net short-term capital gains are taxable to you as ordinary income, except as described below. The dividends from net income of the Variable Price Funds do not qualify for the 70% 31 dividends-received deduction for corporations since they are derived from interest income. Dividends representing income derived from tax-exempt bonds generally retain the bonds' tax-exempt character in a shareholder's hands. Distributions from net long-term capital gains are taxable as long-term capital gains regardless of the length of time you have held the shares on which such distributions are paid. However, you should note that any loss realized upon the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of any distribution of long-term capital gain to you with respect to such shares. Distributions of capital gains are taxable to you regardless of whether they are taken in cash or reinvested, even if the value of your shares is below your cost. If you purchase shares shortly before a capital gain distribution, you must pay income taxes on the distribution, even though the value of your investment (plus cash received, if any) will not have increased. In addition, the share price at the time you purchase shares may include unrealized gains in the securities held in the investment portfolio of the Fund. If these portfolio securities are subsequently sold and the gains are realized, they will, to the extent not offset by capital losses, be paid to you as a distribution of capital gains and will be taxable to you as short-term or long-term capital gains. In January of the year following the distribution, we or your financial intermediary will send you a Form 1099-DIV notifying you of the status of your distributions for federal income tax purposes. The Funds anticipate that substantially all of the dividends to be paid by the Funds will be exempt from federal income taxes to an individual unless, due to that person's own tax situation, he or she is subject to the AMT. In that case, it is likely that a portion of the dividends will be taxable to that shareholder while remaining tax-exempt in the hands of most other shareholders. The Funds will advise shareholders of the percentage, if any, of the dividends not exempt from federal income tax, and the percentage, if any, subject to the individual AMT should a shareholder be subject to it. Distributions may also be subject to state and local taxes, even if all or a substantial part of such distribution are derived from interest on U.S. government obligations which, if you received them directly, would be exempt from state income tax. However, most but not all states allow this tax exemption to pass through to Fund shareholders when a Fund pays distributions to its shareholders. You should consult your tax adviser about the tax status of such distributions in your own state. If you have not complied with certain provisions of the Internal Revenue Code and Regulations, we are required by federal law to withhold and remit to the IRS 31% of reportable payments (which may include dividends, capital gains distributions and redemptions). Those regulations require you to certify that the social security number or tax identification number you provide is correct and that you are not subject to 31% withholding for previous under-reporting to the IRS. You will be asked to make the appropriate certification on your application. PAYMENTS REPORTED BY US THAT OMIT YOUR SOCIAL SECURITY NUMBER OR TAX IDENTIFICATION NUMBER WILL SUBJECT US TO A PENALTY OF $50, WHICH WILL BE CHARGED AGAINST YOUR ACCOUNT IF YOU FAIL TO PROVIDE THE CERTIFICATION BY THE TIME THE REPORT IS FILED, AND IS NOT REFUNDABLE. Redemption of shares of a fund (including redemptions made in an exchange transaction) will be a taxable transaction for federal income tax purposes and shareholders will generally recognize a gain or loss in an amount equal to the difference between the basis of the shares and the amount received. Assuming that shareholders hold such shares as a capital asset, the gain or loss will be a capital gain or loss and will generally be long term if shareholders have held such shares for a period of more than one year. If a loss is realized on the redemption of Fund shares, the reinvestment in additional Fund shares within 30 days before or after the redemp- 32 tion may be subject to the "wash sale" rules of the Internal Revenue Code, resulting in a postponement of the recognition of such loss for federal income tax purposes. SPECIAL TAX INFORMATION Each Fund intends to invest a sufficient portion of its assets in state and municipal obligations so that it will qualify to pay "exempt-interest dividends" to shareholders. Such exempt-interest dividends are generally excludable from a shareholder's gross income for federal tax purposes. If a Fund earned federally taxable income from any of its investments, the income would be distributed to shareholders as a taxable dividend as described above. MUNICIPAL SECURITIES Opinions relating to the validity of municipal securities and the exemptions of interest thereon from federal income tax are rendered by bond counsel to the issuers. The Funds and the Manager rely on the opinion of bond counsel and do not undertake any independent investigation of proceedings relating to the issuance of state or municipal securities. The Funds may invest in various instruments that are not traditional state and local obligations and that are believed to generate interest excludable from taxable income under Internal Revenue Code Section 103, including, but not limited to, municipal lease obligations and inverse floaters. Although the Funds may invest in these instruments, they cannot guarantee the tax-exempt status of the income earned thereon from any other investment. AMT LIABILITY To the extent that either of the Municipal Money Market Fund and the Municipal High-Yield Fund invest in municipal obligations (private activity bonds) whose interest is treated as a tax preference item in calculating AMT liability, shareholders who calculate AMT liability will be required to include a portion of the Fund's dividends as a tax preference item in making this calculation. In addition, corporate shareholders may be required to include all dividends and distributions by the Fund in an adjustment of alternative minimum taxable income for purposes of the AMT and the environmental tax imposed under Internal Revenue Code Sections 55 and 59A, respectively. EXEMPT-INTEREST DIVIDENDS Exempt-interest dividends of a Fund, although exempt from regular federal income tax, are includable in the tax base for determining the extent to which social security or railroad retirement benefits will be subject to federal income tax. Distributions from net short-term capital gains and all or a portion of gains realized upon the disposition of market discount bonds are federally taxable as ordinary income. Long-term capital gains distributions designated as capital gain dividends are federally taxable as long-term capital gains, regardless of how long you have held your shares. Distributions generally are subject to the same tax treatment, whether they are received in cash or in additional shares. Distributions declared to shareholders of record in October, November or December and paid in January of the following year are treated as if paid on December 31st. If a Fund qualifies to pay exempt-interest dividends, its income dividends will be exempt from California personal income tax to the extent that the Fund's dividends are derived from interest on California state tax-free obligations. Distributions derived from obligations other than California state tax-free obligations, as well as distributions from short- or long-term capital gains and any other taxable income or gains, are subject to California personal income tax. The Funds' dividends are not exempt from California state franchise or corporate income taxes. Shareholders who are domiciled outside of California may be subject to income, personal property, intangibles or other taxes in their respective states. 33 You may realize a taxable gain or loss when you redeem (sell) or exchange shares of a Variable Price Fund. For most types of accounts, proceeds from your redemption transactions will be reported to the IRS annually. However, because the tax treatment depends on your purchase price and your personal tax situation, your should keep regular account statements to use in determining your tax liability. If your hold Fund shares for six months or less, the deduction of any loss realized upon redemption is disallowed to the extent that you received "exempt-interest dividends" on those shares. All shareholders are required to report the receipt of dividends and distributions, including exempt-interest dividends, on their federal income tax returns. Shareholders should be aware that redeeming shares of a Fund after tax-exempt interest income has been accrued by a Fund but before that income has been distributed as a dividend may be disadvantageous. Any gain on such redemption will be taxable, even though the gain may be attributable in part to the accrued tax-exempt interest that might have qualified as an exempt-interest dividend if distributed as a dividend rather than as redemption proceeds. MANAGEMENT INVESTMENT MANAGEMENT The Funds are series of the Benham California Tax-Free and Municipal Funds (the "Trust"). Under the laws of the Commonwealth of Massachusetts, the board of trustees is responsible for managing the business and affairs of the Trust. Acting pursuant to an investment management agreement entered into with the Trust, Benham Management Corporation (the "Manager") serves as the investment manager of the Funds. Its principal place of business is 1665 Charleston Road, Mountain View, California 94043. The Manager has been providing investment advisory services to investment companies and other clients since 1971. The Manager supervises and manages the investment portfolio of each of the Funds and directs the purchase and sale of their investment securities. The Manager utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the Funds. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the Funds' portfolios and the Funds' asset mix as it deems appropriate in pursuit of the Funds' investment objectives. Individual portfolio manager members of the team may also adjusts portfolio holdings of the Funds or of sectors of the Funds as necessary between team meetings. In June 1995, Twentieth Century Companies, Inc. ("TCC") acquired Benham Management International, Inc., the then-parent company of the Manager. TCC is the parent company of Investors Research Corporation ("IRC"), which provides investment management services to the Twentieth Century family of funds. In the acquisition, the Manager became a wholly owned subsidiary of TCC. Certain employees of the Manager provide investment management services to the Twentieth Century family of funds, while certain Twentieth Century employees provide investment management services to Benham funds. The portfolio manager members of the teams managing the Funds described in this Prospectus and their work experience for the last five years are listed as follows: G. DAVID MACEWEN, Vice President, the Manager, is the manager of the portfolio management team which manages the Funds and has primary responsibility for the day-to-day operations of the Tax-Free Long-Term and Tax-Free Insured Funds. Mr. MacEwen joined Benham in 1991 as a Senior Municipal Portfolio Manager, and also currently maintains principal management responsibility for the Benham Florida Municipal Intermediate-Term, and Benham National Tax-Free Long-Term Funds. Mr. 34 MacEwen is also a member of the team that manages the Twentieth Century Investors Tax-Exempt Long-Term Fund. Mr. MacEwen is a member of the Association of Investment Management and Research (AIMR) and the Securities Analysts of San Francisco. Mr. MacEwen has an MBA in finance from the University of Delaware and a BA in Economics from Boston University. TODD PARDULA, Municipal Portfolio Manager, the Manager, is directly responsible for the management of the Money Market Funds. Before he was promoted to Portfolio Manager, Mr. Pardula, who joined Benham in 1990. Was an Associate Municipal Credit Analyst for two years. Prior to that, he was a Customer Service Representative in the Investor Services Department. Mr. Pardula is a Chartered Financial Analyst and a member of the Securities Analysts of San Francisco and the California Society of Municipal Analysts. He has a BS degree in Finance from Santa Clara University. JOEL SILVA, Municipal Portfolio Manager, the Manager, is directly responsible for the Management of the California Tax-Free Limited-Term Fund. Before being promoted to Portfolio Manager, Mr. Silva was a municipal bond trader. Mr. Silva is a Registered Representative and has a BS degree from California Polytechnic University and an MBA from California State University in Hayward. Mr. Silva also manages the Benham National Tax-Free Intermediate-Term Fund. STEVEN M. PERMUT, Senior Portfolio Manager and Manager of Municipal Research, the Manager, is primarily responsible for the management of the California Municipal High-Yield Fund. Mr. Permut is currently Secretary-Treasurer of the California Society of Municipal Analysts and a member of the National Federation of Municipal Analysts. He has a bachelor's degree in Business and Geography from State University of New York, Oneonta. COLLEEN M. DENZLER, Senior Municipal Portfolio Manager, is primarily responsible for the day-to-day operations of the Benham California Tax-Free Intermediate-Term Fund and the Benham Arizona Municipal Intermediate-Term Fund. Prior to joining the Manager in January 1996, Ms. Denzler was a Portfolio Manager with Calvert Group for 10 years, specializing in state tax-exempt portfolios. Ms. Denzler is a Chartered Financial Analyst and is a member of the Association for Investment Management and Research (AIMR) and the Washington Soceity of Investment Analysts. Ms. Denzler has a Bachelor's degree in Finance from Radford University. The activities of the Manager are subject only to directions of the Trust's Board of trustees. For the services provided to the Funds, the Manager receives an annual fee which cannot exceed .50% of average daily net assets. The Manager's fee drops to a marginal rate of .19% of average daily net assets as the Trust's assets increase. CODE OF ETHICS The Trust and the Manager have adopted a Code of Ethics, which restricts personal investing practices by employees of the Manager and its affiliates. Among other provisions, the Code of Ethics requires that employees with access to information about the purchase or sale of securities in the Funds' portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code of Ethics prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of the fund shareholders come before the interests of the people who manage those funds. 35 TRANSFER AND ADMINISTRATIVE SERVICES Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri, 64111, ("TCS") acts as transfer, administrative services and dividend paying agent for the Funds. TCS provides facilities, equipment and personnel to the Funds and is paid for such services by the Funds. For administrative services, each Fund pays TCS a monthly fee equal to its pro rata share of the dollar amount derived from applying the average daily net assets of all of the Funds managed by the Manager. The administrative fee rate ranges from .11% to .08% of average daily net assets, dropping as assets managed by the Manager increase. For transfer agent services, each Fund pays TCS a monthly fee for each shareholder account maintained and for each shareholder transaction executed during that month. The Funds charge no sales commissions, or "loads," of any kind. However, investors who do not choose to purchase or sell Fund shares directly from TCS may purchase or sell Fund shares through registered broker-dealers and other qualified service providers, who may charge investors fees for their services. These broker-dealers and service providers generally provide shareholder, administrative and/or accounting services which would otherwise be provided by TCS as the Funds' transfer agent. To accommodate these investors, the Manager and its affiliates have entered into agreements with some broker-dealers and service providers to provide these services. Fees for such services are borne normally by the Funds at the rates normally paid to TCS, which would otherwise provide the services. Any distribution expenses associated with these arrangements are borne by the Manager. From time to time, special services may be offered to shareholders who maintain higher share balances in our family of funds. These services may include the waiver of minimum investment requirements, expedited confirmation of shareholder transactions, newsletters and a team of personal representatives. Any expenses associated with these special services will be paid by the Manager or its affiliates. The Manager and TCS are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., Chairman of the board of directors of TCC, controls TCC by virtue of his ownership of a majority of its common stock. DISTRIBUTION OF FUND SHARES The Funds' shares are distributed by Twentieth Century Securities, Inc. (the "Distributor"), a registered broker-dealer and an affiliate of the Manager. The Manager pays all expenses for promoting sales of, and distributing the Fund shares offered by this Prospectus. The Funds do not pay any commissions or other fees to the Distributor or to any other broker-dealers or financial intermediaries in connection with the distribution of Fund shares. EXPENSES Each Fund pays certain operating expenses directly, including, but not limited to: custodian, audit, and legal fees; fees of the independent directors or trustees; costs of printing and mailing prospectuses, statements of additional information, proxy statements, notices, and reports to shareholders; insurance expenses; and costs of registering the Fund's shares for sale under federal and state securities laws. See the Funds' Statement of Additional Information for a more detailed discussion of independent trustee compensation. 36 FURTHER INFORMATION ABOUT THE FUNDS The Trust was organized as a Massachusetts business trust on February 18, 1983. The Trust is a registered open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of trustees. The principal office of the Trust is Twentieth Century Tower, 4500 Main Street, P.O. Box 419200, Kansas City, Missouri 64141-6200. All inquiries may be made by mail to that address, or by phone to 1-800-345-2021. (For international callers: 816-531-5575.) The Funds are individual series of the Trust which issues shares with no par value. The assets belonging to each series of shares are held separately by the custodian and in effect each series is a separate fund. Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except those matters which must be voted on separately by the series of shares affected. Matters affecting only one Fund are voted upon only by that Fund. Shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of trustees can elect all of the trustees if they choose to do so, and in such event the holders of the remaining less-than 50% of the shares will not be able to elect any person or persons to the board of trustees. Unless required by the 1940 Act, it will not be necessary for the Trust to hold annual meetings of shareholders. As a result, shareholders may not vote each year on the election of trustees or the appointment of auditors. However, pursuant to the Trust's by-laws, the holders of shares representing at least 10% of the votes entitled to be cast may request that the Trust hold a special meeting of shareholders. The Trust will assist in the communication with other shareholders. WE RESERVE THE RIGHT TO CHANGE ANY OF OUR POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED. THIS PROSPECTUS CONSTITUTES AN OFFER TO SELL SECURITIES OF A FUND ONLY IN THOSE STATES WHERE THE FUND'S SHARES HAVE BEEN REGISTERED OR OTHERWISE QUALIFIED FOR SALE. A FUND WILL NOT ACCEPT APPLICATIONS FROM PERSONS RESIDING IN STATES WHERE THE FUND'S SHARES ARE NOT REGISTERED. 37 BENHAM California Tax-Free & Municipal Funds Prospectus September 3, 1996 TWENTIETH CENTURY MUTUAL FUNDS and THE BENHAM GROUP - -------------------------------------------- P.O. Box 419200 Kansas City, Missouri 64141-6200 - -------------------------------------------- Person-to-person assistance: 1-800-345-2021 or 816-531-5575 - -------------------------------------------- Automated Information Line: 1-800-345-8765 - -------------------------------------------- Telecommunications Device for the Deaf: 1-800-634-4113 or 816-753-1865 - -------------------------------------------- Fax: 816-340-7962 - -------------------------------------------- Internet: http://www.twentieth-century.com - -------------------------------------------- BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS - -------------------------------------------------------------------------------- BN-BKT-5487 [recycled logo] 9608 Recycled BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS California Tax-Free Money Market Fund California Municipal Money Market Fund California Tax-Free Limited-Term Fund (formerly known as California Tax-Free Short-Term Fund) California Tax-Free Intermediate-Term Fund California Tax-Free Long-Term Fund California Municipal High-Yield Fund California Tax-Free Insured Fund 4500 Main Street Kansas City, MO 64111 Person-to-Person Assistance: 1-800-345-2021 or 816-531-5575 Automated: 1-800-345-8765 STATEMENT OF ADDITIONAL INFORMATION September 3, 1996 This Statement is not a prospectus, but should be read in conjunction with the Trust's current Prospectus dated September 3, 1996. The Trust's Annual Reports for the fiscal year ended August 31, 1995 are incorporated herein by reference. To obtain a copy of the Prospectus or the Annual Reports, call or write Twentieth Century Mutual Funds. TABLE OF CONTENTS Page Investment Policies and Techniques 2 Special Considerations Regarding California Municipal Securities 11 Investment Restrictions 18 Portfolio Transactions 21 Valuation of Portfolio Securities 22 Performance 23 Taxes 26 About the Trust 29 Trustees and Officers 30 Investment Advisory Services 33 Transfer and Administrative Services 34 Direct Fund Expenses 35 Expense Limitation Agreement 35 Other Information 36 Note: Throughout this document, Tax-Free Money Market Fund and Municipal Money Market Fund are referred to collectively as the Money Market Funds. Likewise, Tax-Free Limited-Term Fund, Tax-Free Intermediate-Term Fund, Tax-Free Long-Term Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund are referred to collectively as the Variable-Price Funds. 1 INVESTMENT POLICIES AND TECHNIQUES The following pages provide a more detailed description of the securities and investment practices identified in the Prospectus. Unless otherwise noted, the policies described in this Statement of Additional Information are not fundamental and may be changed by the board of trustees. MUNICIPAL NOTES Municipal notes are issued by state and local governments or government entities to provide short-term capital or to meet cash flow needs. TAX ANTICIPATION NOTES (TANs) are issued in anticipation of seasonal tax revenues, such as ad valorem property, income, sales, use, and business taxes, and are payable from these future taxes. Tax anticipation notes usually are general obligations of the issuer. General obligations are secured by the issuer's pledge of its full faith and credit (i.e., taxing power) for the payment of principal and interest. REVENUE ANTICIPATION NOTES (RANs) are issued with the expectation that receipt of future revenues, such as federal revenue sharing or state aid payments, will be used to repay the notes. Typically, these notes also constitute general obligations of the issuer. BOND ANTICIPATION NOTES (BANs) are issued to provide interim financing until long-term financing can be arranged. In most cases, the long-term bonds provide the money for repayment of the notes. TAX-EXEMPT COMMERCIAL PAPER is an obligation with a stated maturity of 365 days or less issued to finance seasonal cash flow needs or to provide short-term financing in anticipation of longer-term financing. REVENUE ANTICIPATION WARRANTS, or reimbursement warrants, are issued to meet the cash flow needs of the State of California at the end of a fiscal year and in the early weeks of the following fiscal year. These warrants are payable from unapplied money in the State's General Fund, including the proceeds of revenue anticipation notes issued following enactment of a State budget or the proceeds of refunding warrants issued by the State. MUNICIPAL BONDS Municipal bonds, which generally have maturities of more than one year when issued, are designed to meet longer-term capital needs. These securities have two principal classifications: general obligation bonds and revenue bonds. GENERAL OBLIGATION (GO) BONDS are issued by states, counties, cities, towns, and regional districts to fund a variety of public projects, including construction of and improvements to schools, highways, and water and sewer systems. General obligation bonds are backed by the issuer's full faith and credit based on its ability to levy taxes for the timely payment of interest and repayment of principal, although such levies may be constitutionally or statutorily limited as to rate or amount. REVENUE BONDS are not backed by an issuer's taxing authority; rather, interest and principal are secured by the net revenues from a project or facility. Revenue bonds are issued to finance a variety of capital projects, including construction or refurbishment of utility and waste disposal systems, 2 highways, bridges, tunnels, air and sea port facilities, schools, and hospitals. Many revenue bond issuers provide additional security in the form of a debt-service reserve fund that may be used to make payments of interest and repayments of principal on the issuer's obligations. Some revenue bond financings are further protected by a state's assurance (without obligation) that it will make up deficiencies in the debt-service reserve fund. INDUSTRIAL DEVELOPMENT BONDS (IDBs), a type of revenue bond, are issued by or on behalf of public authorities to finance privately operated facilities. These bonds are used to finance business, manufacturing, housing, athletic, and pollution control projects, as well as public facilities such as mass transit systems, air and sea port facilities, and parking garages. Payment of interest and repayment of principal on an IDB depends solely on the ability of the facility's user to meet financial obligations, and on the pledge, if any, of the real or personal property financed. The interest earned on IDBs may be subject to the federal alternative minimum tax. VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS The Funds may buy variable- and floating-rate demand obligations (VRDOs and FRDOs). These obligations carry rights that permit holders to demand payment of the unpaid principal plus accrued interest, from the issuers or from financial intermediaries. Floating-rate securities have interest rates that change whenever there is a change in a designated base rate; variable-rate instruments provide for a specified, periodic adjustment in the interest rate, which typically is based on an index. These rate formulas are designed to result in a market value for the VRDO or FRDO that approximates par value. OBLIGATIONS WITH TERM PUTS ATTACHED Each Fund may invest in fixed-rate bonds subject to third party puts and in participation interests in such bonds held by a bank in trust or otherwise. These bonds and participation interests have tender options or demand features that permit the Funds to tender (or put) their bonds to an institution at periodic intervals and to receive the principal amount thereof. Benham Management Corporation (BMC), the Funds' investment advisor, expects that the Funds will pay more for securities with puts attached than for securities without these liquidity features. BMC may buy securities with puts attached to keep a Fund fully invested in municipal securities while maintaining sufficient portfolio liquidity to meet redemption requests or to facilitate management of the Funds' investments. To ensure that the interest on municipal securities subject to puts is tax-exempt to the Funds, BMC limits the Funds' use of puts in accordance with applicable interpretations and rulings of the Internal Revenue Service. Because it is difficult to evaluate the likelihood of exercise or the potential benefit of a put, puts normally will be determined to have a value of zero, regardless of whether any direct or indirect consideration is paid. Accordingly, puts as separate securities are not expected to affect the Funds' weighted average maturities. When the Fund has paid for a put, the cost will be reflected as unrealized depreciation on the underlying security for the period the put is held. Any gain on the sale of the underlying security will be reduced by the cost of the put. There is a risk that the seller of a put will not be able to repurchase the underlying obligation when (or if) a Fund attempts to exercise the put. To minimize such risks, the Funds will purchase obligations with puts attached only from sellers deemed creditworthy by BMC. 3 TENDER OPTION BONDS Tender option bonds (TOBs) were created to increase the supply of high-quality, short-term tax-exempt obligations, and thus they are of particular interest to the Money Market Funds. However, any of the Funds may purchase these instruments. TOBs are created by municipal bond dealers who purchase long-term tax-exempt bonds in the secondary market, place the certificates in trusts, and sell interests in the trusts with puts or other liquidity guarantees attached. The credit quality of the resulting synthetic short-term instrument is based on the guarantor's short-term rating and the underlying bond's long-term rating. There is some risk that a remarketing agent will renege on a tender option agreement if the underlying bond is downgraded or defaults. Because of this, BMC monitors the credit quality of bonds underlying the Funds' TOB holdings and intends to sell or put back any TOB if the rating on its underlying bond falls below the second-highest rating category designated by a nationally recognized statistical rating agency (a "rating agency.") BMC also takes steps to minimize the risk that the Fund may realize taxable income as a result of holding TOBs. These steps may include consideration of (a) legal opinions relating to the tax-exempt status of the underlying municipal bonds, (b) legal opinions relating to the tax ownership of the underlying bonds, and (c) other elements of the structure that could result in taxable income or other adverse tax consequences. After purchase, BMC monitors factors related to the tax-exempt status of the Fund's TOB holdings in order to minimize the risk of generating taxable income. WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS The Funds may engage in municipal securities transactions on a when-issued or forward commitment basis in which the transaction price and yield are each fixed at the time the commitment is made, but payment and delivery occur at a future date (typically 15 to 45 days later). When purchasing securities on a when-issued or forward commitment basis, the Fund assumes the rights and risks of ownership, including the risks of price and yield fluctuations. While the Fund will make commitments to purchase or sell securities with the intention of actually receiving or delivering them, it may sell the securities before the settlement date if doing so is deemed advisable as a matter of investment strategy. In purchasing securities on a when-issued or forward commitment basis, the Fund will maintain until the settlement date a segregated account consisting of cash, cash equivalents, or high-quality liquid securities in an amount sufficient to meet the purchase price. When the time comes to pay for when-issued securities, the Fund will meet its obligations with available cash, through the sale of securities, or, although it would not normally expect to do so, by selling the when-issued securities themselves (which may have a market value greater or less than the Fund's payment obligation). Selling securities to meet when-issued or forward commitment obligations may generate capital gains or losses. The Funds may sell a security and at the same time make a commitment to purchase the same security at a future date and specified price. Conversely, the Funds may purchase a security and at 4 the same time make a commitment to sell the same security at a future date and specified price. These types of transactions are executed simultaneously in what are known as "dollar-roll" or "cash-and-carry" transactions. For example, a broker-dealer may seek to purchase a particular security that the Funds own. The Funds will sell that security to the broker-dealer and simultaneously enter into a forward commitment agreement to buy it back at a future date. This type of transaction generates income for the Funds if the dealer is willing to execute the transaction at a favorable price in order to acquire a specific security. In purchasing "dollar rolls" or "cash-and-carry" transactions, the Fund will maintain until the settlement date a segregated account consisting of cash, cash equivalents, or high-quality liquid securities in an amount sufficient to meet the purchase price. As an operating policy, each Fund will not commit more than 50% of its total assets to when-issued or forward commitment agreements. If fluctuations in the value of securities held cause more than 50% of a Fund's total assets to be committed under when-issued or forward commitment agreements, BMC need not sell such agreements, but it will be restricted from entering into further agreements on behalf of the Fund until the percentage of assets committed to such agreements is below 50% of total assets. MUNICIPAL LEASE OBLIGATIONS Each Fund may invest in municipal lease obligations. These obligations, which may take the form of a lease, an installment purchase, or a conditional sale contract, are issued by state and local governments and authorities to acquire land and a wide variety of equipment and facilities. Generally, the Funds will not hold such obligations directly as a lessor of the property but will purchase a participation interest in a municipal lease obligation from a bank or other third party. Municipal leases frequently carry risks distinct from those associated with general obligation or revenue bonds. State constitutions and statutes set forth requirements that states and municipalities must meet to incur debt. These may include voter referenda, interest rate limits, or public sale requirements. Leases, installment purchases, or conditional sale contracts (which normally provide for title to the leased asset to pass to the government issuer) have evolved as a way for government issuers to acquire property and equipment without meeting constitutional and statutory requirements for the issuance of debt. Many leases and contracts include nonappropriation clauses, which provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for such purposes by the appropriate legislative body on a yearly or other periodic basis. Municipal lease obligations also may be subject to abatement risk. For example, construction delays or destruction of a facility as a result of an uninsurable disaster that prevents occupancy could result in all or a portion of a lease payment not being made. California and its municipalities are the largest issuers of municipal lease obligations in the United States. INVERSE FLOATERS (VARIABLE-PRICE FUNDS) The Variable-Price Funds may hold inverse floaters. An inverse floater is a type of derivative that bears an interest rate that moves inversely to market interest rates. As market interest rates rise, the interest rate on inverse floaters goes down, and vice versa. Generally, this is accomplished by 5 expressing the interest rate on the inverse floater as an above-market fixed rate of interest, reduced by an amount determined by reference to a market-based or bond-specific floating interest rate (as well as by any fees associated with administering the inverse floater program). Inverse floaters may be issued in conjunction with an equal amount of Dutch Auction floating-rate bonds (floaters), or a market-based index may be used to set the interest rate on these securities. Floaters and inverse floaters may be brought to market by a broker-dealer who purchases fixed-rate bonds and places them in a trust or by an issuer seeking to reduce interest expenses by using a floater/inverse floater structure in lieu of fixed-rate bonds. In the case of a broker-dealer structured offering (where underlying fixed-rate bonds have been placed in a trust), distributions from the underlying bonds are allocated to floater and inverse floater holders in the following manner: (i) Floater holders receive interest based on rates set at a Dutch Auction, which is typically held every 28 to 35 days. Current and prospective floater holders bid the minimum interest rate that they are willing to accept on the floaters, and the interest rate is set just high enough to ensure that all of the floaters are sold. (ii) Inverse floater holders receive all of the interest that remains on the underlying bonds after floater interest and auction fees are paid. Procedures for determining the interest payment on floaters and inverse floaters brought to market directly by the issuer are comparable, although the interest paid on the inverse floaters is based on a presumed coupon rate that would have been required to bring fixed-rate bonds to market at the time the floaters and inverse floaters were issued. Where inverse floaters are issued in conjunction with floaters, inverse floater holders may be given the right to acquire the underlying security (or to create a fixed-rate bond) by calling an equal amount of corresponding floaters. The underlying security may then be held or sold. However, typically, there are time constraints and other limitations associated with any right to combine interests and claim the underlying security. Floater holders subject to a Dutch Auction procedure generally do not have the right to "put back" their interests to the issuer or to a third party. If a Dutch Auction fails, the floater holder may be required to hold its position until the underlying bond matures, during which time interest on the floater is capped at a predetermined rate. The secondary market for floaters and inverse floaters may be limited. The market value of inverse floaters tends to be significantly more volatile than fixed-rate bonds. The interest rates on inverse floaters may be significantly reduced, even to zero, if interest rates rise. LOWER-QUALITY BONDS (MUNICIPAL HIGH-YIELD FUND) As indicated in the Prospectus, an investment in the Municipal High-Yield Fund carries greater risk than an investment in the other Funds because the Fund may invest without limitation in lower-rated bonds and unrated bonds judged by BMC to be of comparable quality (collectively, "lower-quality bonds"). 6 While the market values of higher-quality bonds tend to correspond to market interest rate changes, the market values of lower-quality bonds tend to reflect the financial condition of their issuers. Projects financed through the issuance of lower-quality bonds are often highly leveraged. The issuer's ability to service its debt obligations may be adversely affected by an economic downturn, a period of rising interest rates, the issuer's inability to meet projected revenue forecasts, or a lack of needed additional financing. Lower-quality bonds generally are unsecured and often are subordinated to other obligations of the issuer. These bonds frequently have call or buy-back features that permit the issuer to call or repurchase the bond from the holder. Premature disposition of a lower-quality bond due to a call or buy-back feature, deterioration of the issuer's creditworthiness, or a default may make it difficult for BMC to manage the flow of income to the Fund, which may have negative tax implications for shareholders. The market for lower-quality bonds tends to be concentrated among a smaller number of dealers than the market for higher-quality bonds. This market is dominated by dealers and institutions (including mutual funds), rather than by individuals. To the extent that a secondary trading market for lower-quality bonds exists, it may not be as liquid as the secondary market for higher-quality bonds. Limited liquidity in the secondary market may adversely affect market prices and hinder BMC's ability to dispose of particular bonds when it determines that it is in the best interest of the Fund to do so. Reduced liquidity may also hinder BMC's ability to obtain market quotations for purposes of valuing the Fund's portfolio and determining its net asset value. BMC continually monitors securities to determine their relative liquidity. The Fund may incur expenses in excess of its ordinary operating expenses if it becomes necessary to seek recovery on a defaulted lower-quality bond. LIMITED-TERM SECURITIES (VARIABLE-PRICE FUNDS) Under certain circumstances, the Tax-Free Long-Term Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund may invest in short-term municipal or U.S. government securities, including money market instruments (short-term securities). Except as otherwise required for temporary defensive purposes, BMC does not expect these Funds' investments in short-term securities to exceed 35% of total assets. If a Fund invests in U.S. government securities, a portion of dividends paid to shareholders will be taxable at the federal level, and may be taxable at the state level, as ordinary income. However, BMC intends to minimize such investments and, when suitable short-term municipal securities are unavailable, may allow the Funds to hold cash to avoid generating taxable dividends. Pursuant to an exemptive order from the Securities and Exchange Commission, each Variable-Price Fund may invest up to 5% of its total assets in shares of the Money Market Funds to facilitate cash management provided that the investment is consistent with the Funds' investment policies and restrictions. To avoid generating dividend income subject to the federal alternative minimum tax (AMT), the Variable-Price Funds (excluding Municipal High-Yield Fund) will limit their Money Market Fund investments to Tax-Free Money Market Fund. Municipal High-Yield Fund, which ordinarily invests in AMT securities, may invest up to 5% of its total assets in shares of either of the Money Market Funds. 7 CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED TO FINANCE SIMILAR PROJECTS OR FACILITIES From time to time, a significant portion of a Fund's assets may be invested in municipal obligations related to the extent that economic, business, or political developments affecting one of these obligations could affect the other obligations in a similar manner. For example, if a Fund invested a significant portion of its assets in utility bonds and a state or federal government agency or legislative body promulgated or enacted new environmental protection requirements for utility providers, projects financed by utility bonds could suffer as a class. Additional financing might be required to comply with the new environmental requirements, and outstanding debt might be downgraded in the interim. Among other factors that could negatively affect bonds issued to finance similar types of projects are state and federal legislation regarding financing for municipal projects, pending court decisions relating to the validity or means of financing municipal projects, material or manpower shortages, and declining demand for projects or facilities financed by the municipal bonds. FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS) Each Variable-Price Fund may enter into futures contracts, options, or options on futures contracts. Some futures and options strategies, such as selling futures, buying puts, and writing calls, hedge a Fund's investments against price fluctuations. Other strategies, such as buying futures, writing puts, and buying calls, tend to increase market exposure. The Funds do not use futures and options transactions for speculative purposes. Although other techniques may be used to control a Fund's exposure to market fluctuations, the use of futures contracts may be a more effective means of hedging this exposure. While a Fund pays brokerage commissions in connection with opening and closing out futures positions, these costs are lower than the transaction costs incurred in the purchase and sale of the underlying securities. FUTURES CONTRACTS provide for the sale by one party and purchase by another party of a specific security at a specified future time and price. Futures contracts are traded on national futures exchanges. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S. government agency. The Funds may engage in futures and options transactions based on securities indexes such as the Bond Buyer Index of Municipal Bonds that are consistent with the Fund's investment objectives. The Fund may also engage in futures and options transactions based on specific securities such as U.S. Treasury bonds or notes. Bond Buyer Municipal Bond Index futures contracts differ from traditional futures contracts in that when delivery takes place, no bonds change hands. Instead, these contracts settle in cash at the spot market value of the Bond Buyer Municipal Bond Index. Although other types of futures contracts by their terms call for actual delivery or acceptance of the underlying securities, in most cases the contracts are closed out before the settlement date. A futures position may be closed by taking an opposite position in an identical contract (i.e., buying a contract that has previously been sold or selling a contract that has previously been bought). To initiate and maintain open positions in a futures contract, a Fund would be required to make a good faith margin deposit in cash or government securities with a futures broker or custodian. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying security) if it is not terminated prior to the specified delivery date. Minimum initial 8 margin requirements are established by the futures exchanges and may be revised. In addition, brokers may establish deposit requirements that are higher than the exchange minimums. Once a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, the contract holder is required to pay additional "variation" margin. Conversely, changes in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to or from the futures broker for as long as the contract remains open and do not constitute margin transactions for purposes of the Funds' investment restrictions. RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options prices can be volatile, and trading in these markets involves certain risks. If BMC applies a hedge at an inappropriate time or judges interest rate trends incorrectly, futures and options strategies may lower a Fund's return. A Fund could suffer losses if it were unable to close out its position because of an illiquid secondary market. Futures contracts may be closed out only on an exchange that provides a secondary market for these contracts, and there is no assurance that a liquid secondary market will exist for any particular futures contract at any particular time. Consequently, it may not be possible to close a futures position when BMC considers it appropriate or desirable to do so. In the event of adverse price movements, a Fund would be required to continue making daily cash payments to maintain its required margin. If the Fund had insufficient cash, it might have to sell portfolio securities to meet daily margin requirements at a time when BMC would not otherwise elect to do so. In addition, a Fund may be required to deliver or take delivery of instruments underlying futures contracts it holds. BMC will seek to minimize these risks by limiting the contracts entered into on behalf of the Funds to those traded on national futures exchanges and for which there appears to be a liquid secondary market. A Fund could suffer losses if the prices of its futures and options positions were poorly correlated with its other investments, or if securities underlying futures contracts purchased by a Fund had different maturities than those of the portfolio securities being hedged. Such imperfect correlation may give rise to circumstances in which a Fund loses money on a futures contract at the same time that it experiences a decline in the value of its "hedged" portfolio securities. A Fund could also lose margin payments it has deposited with a margin broker, if, for example, the broker became bankrupt. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond the limit. However, the daily limit governs only price movement during a particular trading day and, therefore, does not limit potential losses. In addition, the daily limit may prevent liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund obtains the right, but not the obligation, to sell the futures contract (a put option) or to buy the contract (a call option) at a 9 fixed strike price. A Fund can terminate its position in a put option by allowing it to expire or by exercising the option. If the option is exercised, the Fund completes the sale of the underlying security at the strike price. Purchasing an option on a futures contract does not require a Fund to make margin payments unless the option is exercised. Although they do not currently intend to do so, the Funds may write (or sell) call options that obligate it to sell (or deliver) the option's underlying instrument upon exercise of the option. While the receipt of option premiums would mitigate the effects of price declines, the Funds would give up some ability to participate in a price increase on the underlying security. If a Fund were to engage in options transactions, it would own the futures contract at the time a call were written and would keep the contract open until the obligation to deliver it pursuant to the call expired. RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each Variable-Price Fund may enter into futures contracts, options, or options on futures contracts, provided that such obligations represent no more than 20% of the Fund's net assets. Under the Commodity Exchange Act, a Fund may enter into futures and options transactions (a) for hedging purposes without regard to the percentage of assets committed to initial margin and option premiums, or (b) for other than hedging purposes, provided that assets committed to initial margin and option premiums do not exceed 5% of the Fund's net assets. To the extent required by law, each Fund will set aside cash and appropriate liquid assets in a segregated account to cover its obligations related to futures contracts and options. The Funds intend to comply with tax rules applicable to regulated investment companies, including a requirement that capital gains from the sale of securities held less than three months constitute less than 30% of a Fund's gross income for each fiscal year. Gains on some futures contracts and options are included in this 30% calculation, which may limit the Funds' investments in such instruments. MUNICIPAL BOND INSURERS (TAX-FREE INSURED FUND) Securities held by Tax-Free Insured Fund may be (a) insured under a new-issue insurance policy obtained by the issuer of the security, (b) insured under a secondary market insurance policy purchased by the Fund or a previous bond holder, or (c) insured under a "when-in-portfolio" policy held by the Fund. The following paragraphs provide some background on the bond insurance organizations most frequently relied upon for municipal bond insurance in the U.S. AMBAC Indemnity Corporation (AMBAC Indemnity) is a Wisconsin-domiciled stock insurance corporation with admitted assets of approximately $2.1 billion (unaudited) and statutory capital of approximately $1.2 billion (unaudited) as of December 31, 1994. Statutory capital consists of AMBAC Indemnity's policyholders' surplus and statutory contingency reserve. AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc., a publicly-held company. Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) have rated AMBAC Indemnity's claims-paying ability Aaa and AAA, respectively. Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of FGIC Corporation, a Delaware corporation with admitted assets of $2.1 billion and a statutory capital base of $1.1 billion as of December 31, 1994. Statutory capital consists of total capital and surplus as well as contingency reserve. FGIC's claims-paying ability was rated Aaa/AAA/AAA by Moody's, S&P, and Fitch, respectively. Municipal Bond Investors Assurance Corporation (MBIA) is a monoline insurance company organized as a New York corporation. As of December 31, 1994, MBIA (consolidated) had admitted 10 assets of $3.4 billion (unaudited), total liabilities of $1.6 billion (unaudited), and total capital and surplus of $1.7 billion (unaudited). All bond issues insured by MBIA are rated "Aaa" by Moody's and all short-term loans insured by MBIA "MIG-1." All bond issues insured by MBIA are rated "AAA" by S&P. SPECIAL CONSIDERATIONS REGARDING CALIFORNIA MUNICIPAL SECURITIES As briefly discussed in the Prospectus, the Funds are susceptible to political, economic, and regulatory events that affect issuers of California municipal obligations. These include possible adverse affects of California constitutional amendments, legislative measures, voter initiatives, and other matters described below. The following information about risk factors is provided in view of the Funds' policies of concentrating their assets in California municipal securities. This information is based on recent official statements relating to securities offerings of California issuers, although it does not constitute a complete description of the risk associated with investing in securities of these issuers. While BMC has not independently verified the information contained in the official statements, it has no reason to believe the information is inaccurate. ECONOMIC OVERVIEW California's economy is the largest among the 50 states and one of the largest in the world. The State's population of over 30 million as of 1990, representing approximately 12% of the U.S. population, grew by 27% in the 1980s. Total personal income, an estimated $703 billion in 1994, accounted for approximately 12% of personal income nationwide. In 1994, total employment increased 260,000 from 1993 levels of 13.8 million. Jobs are concentrated in the service, trade, and manufacturing sectors. From mid-1990 to late 1993, the State's economy suffered its worst recession since the 1930s, with recovery starting later than for the nation as a whole. The State has experienced the worst job losses of any post-war recession. Prerecession job levels may not be realized until near the end of the decade. The largest job losses have been in Southern California, led by declines in the aerospace and construction industries. Weakness statewide occurred in manufacturing, construction, services and trade. Additional military base closures will have further adverse effects on the State's economy later in the decade. Since the start of 1994, the California economy has shown signs of steady recovery and growth. The State Department of Finance reports net job growth, particularly in construction and related manufacturing, wholesale and retail trade, transportation, recreation and services. This growth has offset the continuing but slowing job losses in the aerospace industry and restructuring of the finance and utility sectors. Unemployment in the State was down substantially in 1994 from its 10% peak in January, 1994, but still remains higher than the national average rate. Retail sales were up strongly in 1994 from year-earlier figures. Delay or slowdown in recovery will adversely affect State revenues. CONSTITUTIONAL LIMITATIONS ON TAXES Many California issuers rely on ad valorem property taxes as a source of revenue. The taxing powers of California local governments and districts are limited by Article XIIIA of the California Constitution, enacted by voters in 1978 and commonly known as "Proposition 13." Article XIIIA limits to 1% of full cash value the rate of ad valorem taxes on real property and restricts the 11 reassessment of property to 2% per year, except where new construction or changes of ownership have occurred (subject to a number of exemptions). Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay debt service on voter-approved bonded indebtedness. The U.S. Supreme Court has upheld Proposition 13 against claims that it has unlawfully resulted in widely varying tax liability on similarly situated properties. Article XIIIA also requires voters of any governmental unit to give two-thirds approval to levy any "special tax." Subsequent court decisions, however, have allowed non-voter approved "general taxes" so long as they are not dedicated to a specific use. In response to these decisions, voters adopted an initiative in 1986 that imposed new limits on the ability of local government entities to raise or levy general taxes without voter approval. Based upon a 1991 intermediate appellate court decision, it was believed that significant parts of this initiative, known as "Proposition 62", were unconstitutional. On September 28, 1995, the California Supreme Court rendered a decision in the case of Santa Clara County Local Transportation Authority v. Guardino which rejected the prior decision and upheld Proposition 62, while striking down a 1/2 cent sales tax for transportation purposes which was approved by a majority, but less than 2/3, vote. Proposition 62 does not apply to charter cities, but other local governments may be constrained in raising any taxes without voter approval. CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS The State and its local governments are subject to an annual appropriations limit imposed by Article XIIIB of the California Constitution. This article was enacted by voters in 1979 and was significantly amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits the State and subject local governments from spending "appropriations subject to limitation" in excess of an appropriations limit. The appropriations limit is adjusted annually to reflect population changes and changes in the cost of living as well as transfers of responsibility between government units. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes" consisting of tax revenues and certain other charges and fees to the extent that such proceeds exceed the cost of providing the product or service. However, proceeds of taxes exclude most State subventions to local governments. "Excess revenues" under Article XIIIB are measured over a two-year cycle. Local governments must return any excess revenues to taxpayers through tax rate reductions. The State must refund 50% of any excess and pay the other 50% to schools and community colleges. With the application of more liberal annual adjustment factors since 1988 and depressed revenues since 1990 due to the recession, few governments are currently operating near their spending limits, but this condition may change over time. Local governments may, by voter approval, exceed their spending limits for a limited time. Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and possible inconsistencies in their terms, and the impossibility of predicting future appropriations, population changes, changes in the cost of living, or the probability of continuing legal challenges, it is difficult to measure the full impact of these Articles on the California municipal market or on the ability of California issuers to pay debt service on their obligations. OBLIGATIONS OF THE STATE OF CALIFORNIA As of October 1, 1995, the State had approximately $18.4 billion of general obligation bonds outstanding, and approximately $3.3 billion remained authorized but unissued. Of the State's outstanding general obligation debt, 22% is presently self-liquidating (i.e., program revenues are 12 expected to be sufficient to reimburse the General Fund for debt service payments). In fiscal 1994-95, debt service on general obligation bonds and lease-purchase debt was approximately 5.25% of General Fund revenues. The State's principal sources of General Fund revenues for fiscal 1993-94 were the California personal income tax (44% of total revenues), the sales tax (35%), bank and corporation taxes (12%), and the gross premium tax on insurance (3%). Historically, the State has paid the principal of and interest on its general obligation bonds, lease-purchase debt, and short-term obligations when due. General. Throughout the 1980's, State spending increased rapidly as the State population and economy also grew rapidly, including increased spending for many assistance programs to local governments, which were constrained by Proposition 13 and other laws. The largest State program is assistance to local public school districts. In 1988, an initiative (Proposition 98) was enacted which (subject to suspension by a two-thirds vote of the Legislature and the Governor) guarantees local school districts and community college districts a minimum share of State General Fund revenues (currently about 33%). Since the start of 1990-91 Fiscal Year, the State has faced adverse economic, fiscal, and budget conditions. The economic recession seriously affected State tax revenues. It also caused increased expenditures for health and welfare programs. The State is also facing a structural imbalance in its budget with the largest programs supported by the General Fund (education, health, welfare and corrections) growing at rates higher than the growth rates for the principal revenue sources of the General Fund. These structural concerns will be exacerbated in coming years by the expected need to substantially increase capital and operating funds for corrections as a result of a "Three Strikes" law enacted in 1994. Recent Budgets. As a result of these factors, among others, from the late 1980's until 1992-93, the State had a period of nearly chronic budget imbalance, with expenditures exceeding revenues in four out of six years, and the State accumulated and sustained a budget deficit in the budget reserve, the Special Fund for Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each year thereafter, each budget required multibillion dollar actions to bring projected revenues and expenditures into balance and to close large "budget gaps" which were identified. The Legislature and Governor eventually agreed on a number of different steps to produce Budget Acts in the years 1991-92 to 1994-95, including: o significant cuts in health and welfare program expenditures; o transfers of program responsibilities and funding from the State to local governments, coupled with some reduction in mandates on local government; o transfer of about $3.6 billion in annual local property tax revenues from cities, counties, redevelopment agencies and some other districts to local school districts, thereby reducing State funding for schools; o reduction in growth of support for higher education programs, coupled with increases in student fees; o revenue increases (particularly in the 1991-92 Fiscal Year budget), most of which were for a short duration; o increased reliance on aid from the federal government to offset the costs of incarcerating, educating and providing health and welfare services to undocumented aliens (although these efforts have produced much less federal aid than the State Administration has requested); and o various one-time adjustments and accounting changes. 13 Despite these budget actions, the effects of the recession led to large, unanticipated deficits in the SFEU, as compared to projected positive balances. By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large (almost $2.8 billion) that it was impractical to budget to retire it in one year, so a two-year program was implemented, using the issuance of revenue anticipation warrants to carry a portion of the deficit over the end of the fiscal year. When the economy failed to recover sufficiently in 1993-94, a second two-year plan was implemented in 1994-95, to carry the final retirement of the deficit into 1995-96. The combination of stringent budget actions cutting State expenditures, and the turnaround of the economy by late 1993, finally led to the restoration of positive financial results. While General Fund revenues and expenditures were essentially equal in FY 1992-93 (following two years of excess expenditures over revenues), the General Fund had positive operating results in FY 1993-94 and 1994-95, which have reduced the accumulated budget deficit to around $600 million as of June 30, 1995. A consequence of the accumulated budget deficits in the early 1990's, together with other factors such as disbursement of funds to local school districts "borrowed" from future fiscal years and hence not shown in the annual budget, was to significantly reduce the State's cash resources available to pay its ongoing obligations. When the Legislature and the Governor failed to adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to carry out its normal annual cash flow borrowing to replenish its cash reserves, the State Controller was forced to issue registered warrants ("IOUs") to pay a variety of obligations representing prior years' or continuing appropriations, and mandates from court orders. Available funds were used to make constitutionally-mandated payments, such as debt service on bonds and warrants. Between July 1 and September 4, 1992 the State Controller issued a total of approximately $3.8 billion of registered warrants. After that date, all remaining outstanding registered warrants (about $2.9 billion) were called for redemption from proceeds of the issuance of 1992 Interim Notes after the budget was adopted. The State's cash condition became so serious in late spring of 1992 that the State Controller was required to issue revenue anticipation warrants maturing in the following fiscal year in order to pay the State's continuing obligations. The State was forced to rely increasingly on external debt markets to meet its cash needs, as a succession of notes and warrants (both forms of short-term cash flow financing) were issued in the period from June 1992 to July 1994, often needed to pay previously-maturing notes or warrants. These borrowings were used also in part to spread out the repayment of the accumulated budget deficit over the end of a fiscal year. The State issued $7.0 billion of short-term debt in July 1994 to meet its cash flow needs and to finance the deferral of part of the accumulated budget deficit to the 1995-96 fiscal year. In order to assure repayment of $4 billion of this borrowing which matures on April 25, 1996, the State enacted legislation (the "Trigger Law") which can lead to automatic, across-the-board cuts in General Fund expenditures in either the 1994-95 or 1995-96 fiscal years if cash flow projections made at certain times during those years show deterioration from the projections made in July 1994 when the borrowings were made. On November 15, 1994, the State Controller as part of the Trigger Law reported that the cash position of the General Fund on June 30, 1995 would be about $580 million better than earlier projected, so no automatic budget adjustments were required in 1994-95. The Controller's report showed that loss of federal funds was offset by higher revenues, lower expenditures, and certain other increases in cash resources. Current Budget. For the first time in four years, the State entered the 1995-96 fiscal year with strengthening revenues based on an improving economy. The major feature of the Governor's proposed Budget, a 15% phased tax cut, was rejected by the Legislature. 14 The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days after the start of the fiscal year. The Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The Department of Finance projects that, after repaying the last of the carryover budget deficit, there will be a positive balance of less than $30 million in the budget reserve, the Special Fund for Economic Uncertainties, at June 30, 1996, providing no margin for adverse results during the year. The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal Year will be the smallest in many years, comprising about $2 billion of notes to be issued in April, 1996, and maturing by June 30, 1996. With full payment of $4 billion of revenue anticipation warrants on April 25, 1996, the Department sees no further need for borrowing over the end of the fiscal year. The Department projects that available internal cash resources to pay State obligations will be almost $2 billion at June 30, 1996. This "cushion" will be re-examined by the State Controller on October 15, 1995, in the last step under the "Trigger Law" process. If the Controller believes the available internal cash resources on June 30, 1996 will, in fact, be zero or less, her report would start a process which could lead to automatic budget cuts starting in December, 1995. The principal features of the 1995-96 Budget Act, in addition to those noted above, are additional cuts in health and welfare expenditures (some of which are subject to approvals or waivers by the federal government); assumed receipt of an additional $473 million of federal aid for illegal immigrant costs; and an increase in per-pupil funding for public schools and community colleges, the first such significant increase in four years. In July 1994, all three of the rating agencies that rate the State's long-term debt lowered their ratings of the State's general obligation bonds. Moody's Investors Service, Inc. lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered its rating from "A+" to "A" and termed the bond outlook as "stable," and Fitch Investors Service, Inc. lowered its rating from "AA" to "A." The credit quality of obligations issued by local California issuers is not directly related to the quality of obligations issued by the State, and the State has no obligation to make payments on local debt obligations in the event of default. As described below, the State's fiscal problems have placed considerable pressure on local governments. Finally, the State is involved in certain legal proceedings that, if decided against the State, may require the State to make significant future expenditures or substantially impair revenues. OBLIGATIONS OF OTHER ISSUERS Property tax revenues received by local governments declined more than 50% following passage of Proposition 13 in 1978. Subsequently, the California legislature enacted measures to provide for the redistribution of the State's General Fund surplus to local agencies, the reallocation of certain State revenues to local agencies, and the assumption of certain government functions by the State to assist the State's municipalities. However, in response to the fiscal crisis at the State level, the Legislature in 1992-93 and 1993-94 effectively reversed the post-Proposition 13 "bailout" aid and directed over $3 billion of city, county, and special district property taxes to school districts, which enabled the State to reduce its aid to schools by the same amount. Part of this shortfall is to be covered by a 0.5% sales tax allocated to local government public safety purposes. The 0.5% sales tax increase was imposed by Proposition 172, which was approved by a majority of voters at the statewide election on November 2, 1993. 15 Even with these cuts and property tax shifts, over 70% of the State General Fund expenditures are for local government assistance. To the extent that the State is constrained by its Article XIIIB appropriations limit, its obligation to conform to Proposition 98, or other fiscal considerations, the absolute level or rate of growth of State assistance to local governments may be reduced. Any such reductions in State aid could compound the serious fiscal constraints already experienced by many local governments, particularly counties. ORANGE COUNTY BANKRUPTCY On December 6, 1994, Orange County, California (the "County") together with the pooled investment funds (the "Pools") filed for protection under Chapter 9 of the federal Bankruptcy Code, after reports that the Pools had suffered significant market losses in its investments caused a liquidity crisis for the Pools and the County. More than 180 other public entities, most but not all located in the County, were also depositors in the Pools. The County estimated the Pools' loss at about $1.69 billion, or 23% of its initial deposits of around $7.5 billion. Many of the entities which kept moneys in the Pools, including the County, faced cash flow difficulties because of the bankruptcy filing and may be required to reduce programs or capital projects. Moody's and Standard and Poor's have suspended, reduced to below investment grade levels, or placed on "Credit Watch" various securities of the County and the entities participating in the Pools. On May 2, 1995, the Bankruptcy Court approved a settlement agreement covering claims of the other participating entities against the County and the Pools. Most participants have received in cash 80% (90% for school districts) of their Pools' investment; the balance is to be paid in the future. The County succeeded in deferring, by consent, until June 30, 1996, the repayment of $800 million of short-term obligations due in July and August, 1995; these notes are, however, considered to be in default by Moody's and S&P. On June 27, 1995, County voters turned down a proposal for temporary 0.5% increase in local sales tax, making the County's fiscal recovery much harder. A new financial plan has been implemented based largely on transfer of moneys to the County from other local government entities, and further expenditure cuts. The State of California has no obligation with respect to any obligations or securities of the County or any of the other participating entities. CALIFORNIA ASSESSMENT AND SPECIAL TAX BONDS may be adversely affected by a general decline in real estate values or a further slowdown in real estate sales activity. In many cases, such bonds are secured by land that is undeveloped at the time of issuance but is expected to be developed within a few years. In the event of continued reductions or slowdowns, development may not occur or may be delayed, thereby increasing the risk of default on the bonds. Because the special assessments or taxes securing these bonds are not the personal liability of the owners of the property assessed, the lien on the property is the only security for the bonds. Moreover, in most cases, the issuer of these bonds is not required to make payments on the bonds in the event of delinquency in the payment of assessments or taxes, except from amounts, if any, in a reserve fund established for the bonds. Certain CALIFORNIA LONG-TERM LEASE OBLIGATIONS, though typically payable from a municipality's general fund, are subject to "abatement" in the event the facility being leased is unavailable for beneficial use and occupancy by the municipality during the term of the lease. Abatement is not a default, and there may be no remedies available to the holders of the certificates in the event abatement occurs and available reserves and insurance are inadequate. For example, several years 16 ago the Richmond Unified School District entered into a lease transaction in which certain existing properties of the District were sold and leased back in order to obtain funds to cover operating deficits. Following a fiscal crisis in which the District's finances were taken over by a State receiver, the District failed to make rental payments on this lease, resulting in a lawsuit by the trustee for the certificate of participation holders in which the State was named a defendant (on the grounds that it controlled the District's finances). One of the defenses raised in answer to this lawsuit was the invalidity of the original lease transaction. The trial court ruled in favor of the trustee. Although a settlement of this case is now expected, any ultimate judgment against the trustee may have adverse implications for lease transactions of a similar nature issued by other California municipalities. The repayment of INDUSTRIAL DEVELOPMENT BONDS secured by real property may be affected by California laws limiting foreclosure rights of creditors. Securities backed by health care and hospital revenues may be affected by changes in State regulations governing cost reimbursements to health care providers under Medi-Cal (the State's Medicaid program), including the policy of awarding exclusive contracts to certain hospitals. Limitations on ad valorem property taxes may particularly affect "TAX ALLOCATION" BONDS issued by California redevelopment agencies. Such bonds are secured solely by the increase in assessed valuation of a redevelopment project area after the start of redevelopment activity. In the event that assessed values in the redevelopment project area decline (e.g., because of a natural disaster such as an earthquake), the tax increment revenue may be insufficient to make principal and interest payments on these bonds. Both Moody's and S&P suspended ratings on California tax allocation bonds after the enactment of Articles XIIIA and XIIIB and have only resumed such ratings on a selective basis. In addition, Proposition 87, approved by California voters in 1988, requires that any increase in project area property tax revenues produced by an increase in the property tax rate go directly to the taxing entity on whose behalf the taxes are levied to repay that entity's general obligation indebtedness. As a result, although redevelopment agencies (typical issuers of tax allocation bonds) continue to receive additional taxes collected on increases in the assessed value of the taxable property in the project area, they no longer receive that portion of any increase attributable to an increase in the property tax rate. The effect of these various constitutional and statutory changes upon the ability of California municipal issuers to pay interest and principal on their obligations remains unclear. Other measures affecting the taxing or spending authority of California or its political subdivisions may be approved or enacted in the future. Legislation may be introduced that would modify existing taxes or other revenue-generating measures, or that would further limit or, alternatively, increase the ability of state and local governments to impose new taxes or increase existing taxes. It is not possible to determine the effect of such legislation on the ability of state or local government entities to pay the interest on, or repay the principal of, California municipal obligations. Most of California is within an active geologic region subject to major seismic activity. California municipal obligations held by the Funds could be affected by interruptions of revenues due to damaged facilities, income tax deductions for casualty losses, or property tax assessment reductions. Compensatory financial assistance could be constrained by the inability of (i) an issuer to have obtained earthquake insurance coverage at reasonable rates, (ii) an insurer to perform on its contracts of insurance in the event of widespread losses, or (iii) the federal or state governments to appropriate sufficient funds within their respective budget limitations. 17 INVESTMENT RESTRICTIONS The Funds' investment restrictions set forth below. Except for those designated as operating policies, the restrictions are fundamental and may not be changed without approval of "a majority of the outstanding votes of shareholders" of the Fund, as determined in accordance with the Investment Company Act of 1940. EACH MONEY MARKET FUND MAY NOT: (1) Borrow money in excess of 33 % of the market value of its total assets, and then only from a bank and as a temporary measure to satisfy redemption requests for extraordinary or emergency purposes, and provided that immediately after any such borrowing there is an asset coverage of at least 300 per centum for all such borrowings. To secure any such borrowing, each Money Market Fund may not mortgage, pledge, or hypothecate in excess of 33 % of the value of its total assets. Each Money Market Fund will not purchase any security while borrowings representing more than 5% of its total assets are outstanding. (2) Act as an underwriter of securities issued by others, except to the extent that the purchase of municipal securities or other permitted investments directly from the issuer thereof or from an underwriter for an issuer, and the later disposition of such securities in accordance with the Fund's investment policies and techniques, may be deemed to be an underwriting. (3) Purchase, sell, or invest in real estate, commodities, commodity contracts, foreign exchange, or interests in oil, gas, or other mineral exploration or development programs, provided that this limitation will not prohibit the purchase of municipal securities and other debt securities secured by real estate or interests therein. (4) Engage in any short-selling operations. (5) Make loans to others, except in accordance with the Fund's investment objective and policies. (6) Purchase any equity securities in any companies, including warrants or bonds with warrants attached, or any preferred stocks, convertible bonds, or convertible debentures. (7) Engage in margin transactions or in transactions involving puts, calls, straddles, or spreads, except that it may purchase and hold securities with rights to put securities to the seller (standby commitments) in accordance with its investment techniques. (8) Invest in securities that are not readily marketable or the disposition of which is restricted under federal securities laws (collectively, "illiquid securities") if, as a result, more than 10% of the Fund's net assets would be invested in illiquid securities. (9) Issue or sell any class of senior security as defined in the Investment Company Act of 1940 except to the extent that notes evidencing temporary borrowings or the purchase of securities on a when-issued or delayed-delivery basis might be deemed such. (10) Acquire or retain the securities of any other investment company except in connection with a merger, consolidation, acquisition, or reorganization. 18 (11) Purchase or retain securities of any issuer if, to the knowledge of the Trust's management, those officers and trustees of the Trust and of its investment advisor, who each own beneficially more than 0.5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities. However, such restrictions will not apply to holdings of issuers of industrial development bonds. (12) Acquire securities for the purpose of exercising control over management of the issuer. (13) As an operating policy, purchase any security if, as a result, more than 5% of the value of the Fund's total assets would be invested in the securities of issuers that at the time of purchase had been in operation for less than three years, except obligations issued or guaranteed by the U.S. government or its agencies and municipal securities (for this purpose, the period of operation of any issuer will include the period of operation of any predecessor or unconditional guarantor of such issuer), provided, however, that for the purpose of this limitation, industrial development bonds issued by non-governmental users will not be deemed municipal securities. (14) Purchase any security if, as a result, 25% or more of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry. However, this limitation does not apply to securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or to municipal securities of any type. EACH VARIABLE-PRICE FUND MAY NOT: (1) Borrow money in excess of 33 % of the market value of its total assets, and then only from a bank and as a temporary measure to satisfy redemption requests for extraordinary or emergency purposes, and provided that immediately after any such borrowing there is an asset coverage of at least 300% for all such borrowings. To secure any such borrowing, each Variable-Price Fund may not mortgage, pledge, or hypothecate in excess of 33 % of the value of its total assets. (The deposit of assets in escrow in connection with the writing of covered put and call options and collateral arrangements with respect to initial or variation margin deposits for futures contracts will not be deemed to be a pledge of the Fund's assets.) Each Variable-Price Fund will not purchase any security while borrowings representing more than 5% of its total assets are outstanding. (2) Act as an underwriter of securities issued by others, except to the extent that the purchase of municipal securities, or other permitted investments, directly from the issuer thereof or from an underwriter for an issuer, and the later disposition of such securities in accordance with the Fund's investment policies and techniques, may be deemed to be an underwriting. (3) Purchase, sell, or invest in real estate, commodities, commodity contracts, foreign exchange, or interests in oil, gas, or other mineral exploration or development programs, provided that this limitation will not prohibit the purchase of municipal securities and other debt securities secured by real estate or interests therein and will not prohibit the Fund from purchasing, selling, or entering into options on securities or indexes of securities, futures contracts, options on futures contracts, or any other interest rate hedging instrument, subject to the Fund's compliance with applicable provisions of the federal securities or commodities laws. 19 (4) Engage in any short-selling operations, except that the Fund may purchase, sell, or enter into short positions in options on securities or indexes of securities, futures contracts, options on futures contracts, and any other interest rate hedging instrument as may be permitted under the federal securities or commodities laws. (5) Make loans to others, except in accordance with the Fund's investment objective and policies. (6) Purchase any equity securities in any company, including warrants or bonds with warrants attached, or any preferred stocks, convertible bonds, or convertible debentures. (7) Engage in margin transactions, except that it may purchase, sell, or enter into positions in options on securities or indexes of securities, futures contracts, options on futures contracts, and other interest rate hedging instruments, and may make margin deposits in connection therewith, and may purchase and hold securities with rights to put securities to the seller (standby commitments) in accordance with its investment policies. (8) Invest in securities that are not readily marketable or the disposition of which is restricted under federal securities laws (collectively "illiquid securities") if, as a result, more than 10% of the Fund's net assets would be invested in illiquid securities. (9) Issue or sell any class of senior security as defined in the Investment Company Act of 1940 except to the extent that transactions in options, futures, options on futures, and other interest rate hedging instruments, notes evidencing temporary borrowings, or the purchase of securities on a when-issued or delayed-delivery basis might be deemed such. (10) Acquire or retain the securities of any other investment company except that the Fund may, for temporary purposes, purchase shares of a money market mutual fund, subject to such restrictions as may be imposed by (i) the Investment Company Act of 1940 and rules thereunder, or (ii) any State in which shares of the Fund are registered, and may acquire shares of any investment company in connection with a merger, consolidation, acquisition, or reorganization. (11) Purchase or retain securities of any issuer if, to the knowledge of the Trust's management, those officers and trustees of the Trust and of its investment advisor, who each beneficially own more than 0.5% of the outstanding securities of such issuer, together beneficially own more than 5% of such securities. However, such restrictions will not apply to holdings of the issuers of industrial development bonds. (12) Acquire securities for the purpose of exercising control over management of the issuer. (13) As an operating policy, purchase any security if, as a result, more than 5% of the value of the Fund's total assets would be invested in the securities of issuers that at the time of purchase had been in operation for less than three years, except obligations issued or guaranteed by the U.S. government or its agencies and municipal securities (for this purpose, the period of operation of any issuer will include the period of operation of any predecessor or unconditional guarantor of such issuer), provided, however, that for the purpose of this limitation, industrial development bonds issued by non-governmental users will not be deemed municipal securities. 20 (14) Purchase any security if, as a result, 25% or more of the value of the Fund's total assets would be invested in the securities of issuers having their principal business activities in the same industry. However, this limitation does not apply to securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or to municipal securities of any type. Unless otherwise indicated, with the exception of the percentage limitations on borrowing, the restrictions apply at the time transactions are entered into. Accordingly, any later increase or decrease beyond the specified limitation resulting from a change in the Fund`s net assets will not be considered in determining whether it has complied with its investment restrictions. For purposes of the Funds' investment restrictions, the party identified as the "issuer" of a municipal security depends on the form and conditions of the security. When the assets and revenues of a political subdivision are separate from those of the government that created the subdivision and the security is backed only by the assets and revenues of the subdivision, the subdivision is deemed the sole issuer. Similarly, in the case of an IDB, if the bond were backed only by the assets and revenues of a non-governmental user, the non-governmental user would be deemed the sole issuer. If, in either case, the creating government or some other entity were to guarantee the security, the guarantee would be considered a separate security and treated as an issue of the guaranteeing entity. PORTFOLIO TRANSACTIONS Each Fund's assets are invested by BMC in a manner consistent with the Fund's investment objectives, policies, and restrictions and with any instructions the board of trustees may issue from time to time. Within this framework, BMC is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Funds. In placing orders for the purchase and sale of portfolio securities, BMC will use its best possible price and execution and will otherwise place orders with broker-dealers subject to and in accordance with any instructions the board of trustees may issue from time to time. BMC will select broker-dealers to execute portfolio transactions on behalf of the Funds solely on the basis of best price and execution. Under normal conditions, the Variable-Price Funds' annual portfolio turnover rates are not expected to exceed 100%. Because a higher turnover rate increases transaction costs and may increase taxable capital gains, BMC carefully weighs the potential benefits of short-term investing against these considerations. The Variable-Price Funds' portfolio turnover rates for the fiscal years ended August 31, 1995 and 1994, are indicated in the following table. PORTFOLIO TURNOVER RATES FISCAL YEAR FISCAL YEAR FUND 1995 1994 Tax-Free Limited-Term Fund 49.75% 65.66% Tax-Free Intermediate-Term Fund 25.44 43.80 Tax-Free Long-Term Fund 59.92 61.93 Municipal High-Yield Fund 40.00 42.55 Tax-Free Insured Fund 40.45 47.12 21 Investment decisions are made for each Fund independently from those made for other funds advised by BMC. From time to time, however, two or more funds advised by BMC may hold the same security. When two or more funds are simultaneously engaged in purchasing or selling a security, the prices and amounts are allocated in a manner believed by BMC to be equitable to each of the funds involved. In some instances, simultaneous transactions could have a detrimental effect on the price or value of a security as far as the participating funds are concerned. In other instances, however, the ability to participate in volume transactions will produce better prices and executions for the funds. VALUATION OF PORTFOLIO SECURITIES Each Fund's net asset value per share ("NAV") is calculated by Twentieth Century Services, Inc. (TCS), as of the close of business of the New York Stock Exchange (the "Exchange") each day the Exchange is open for business, usually at 3:00 p.m. Central Time. The Exchange has designated the following holiday closings for 1996: New Year's Day (observed), Presidents` Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed). Although TCS expects the same holiday schedule to be observed in the future, the Exchange may modify its holiday schedule at any time. BMC typically completes its trading on behalf of each Fund in various markets before the Exchange closes for the day. Each Fund's share price is calculated by adding the value of all portfolio securities and other assets, deducting liabilities, and dividing the result by the number of shares outstanding. Expenses and interest earned on portfolio securities are accrued daily. MONEY MARKET FUNDS. Securities held by the Money Market Funds are valued at amortized cost. This method involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium paid at the time of purchase. Although this method provides certainty in valuation, it generally disregards the effect of fluctuating interest rates on an instrument's market value. Consequently, the instrument's amortized cost value may be higher or lower than its market value, and this discrepancy may be reflected in the Funds' yields. During periods of declining interest rates, for example, the daily yield on Fund shares computed as described above may be higher than that of a fund with identical investments priced at market value. The converse would apply in a period of rising interest rates. The amortized cost valuation method is permitted in accordance with Rule 2a-7 under the Investment Company Act of 1940. Under the Rule, a fund holding itself out as a money market fund must adhere to certain quality and maturity criteria. In particular, such a fund must limit is investments to U.S. dollar-denominated instruments determined by its directors or trustees to present minimal credit risks and that are (a) high-grade obligations rated in accordance with applicable rules in one of the two highest rating categories for short-term obligations by at least two rating agencies (or by one if only one has rated the obligation) or (b) unrated obligations judged by the advisor, under the direction of the fund's directors or trustees, to be of comparable quality. Further, pursuant to Rule 2a-7, a money market fund must maintain a dollar-weighted average portfolio maturity of 90 days or less and purchase instruments with remaining maturities of 397 days or less. The trustees have established procedures designed to stabilize the Money Market Funds' NAV at $1.00 per share, to the extent reasonably possible. These procedures require the Trust's chief financial officer to notify the trustees immediately if, at any time, the Funds' weighted average maturity exceeds 90 days, or its NAV, as determined by using available market quotations, deviates 22 from its amortized cost per share by .25% or more. If such deviation exceeds .40%, a meeting of the board of trustees' audit committee will be called to consider what actions, if any, should be taken. If such deviation exceeds .50%, the Trust's chief financial officer is instructed to adjust daily dividend distributions immediately to the extent necessary to reduce the deviation to .50% or lower and to call a meeting of the board of trustees to consider further action. The Board of Trustees monitors the levels of illiquid securities, however if the levels are exceeded, they will take action to rectify these levels. Actions the board may consider under these circumstances include (a) selling portfolio securities prior to maturity, (b) withholding dividends or distributions from capital, (c) authorizing a one-time dividend adjustment, (d) discounting share purchases and initiating redemptions in kind, or (e) valuing portfolio securities at market price for purposes of calculating NAV. VARIABLE-PRICE FUNDS. Securities held by the Variable-Price Funds normally are priced by an independent pricing service, provided that such prices are believed by BMC to reflect the fair market value of portfolio securities. Because there are hundreds of thousands of municipal issues outstanding, and the majority of them do not trade daily, the prices provided by pricing services are generally determined without regard to bid or last sale prices. In valuing securities, the pricing services generally take into account institutional trading activity, trading in similar groups of securities, and any developments related to specific securities. The methods used by the pricing service and the valuations so established are reviewed by BMC under the general supervision of the board of trustees. There are a number of pricing services available, and BMC, on the basis of ongoing evaluation of these services, may use other pricing services or discontinue the use of any pricing service in whole or in part. Securities not priced by a pricing service are valued at the mean between the most recently quoted bid and ask prices provided by broker-dealers. The municipal bond market is typically a "dealer market"; that is, dealers buy and sell bonds for their own accounts rather than for customers. As a result, the spread, or difference between bid and asked prices, for certain municipal bonds may differ substantially among dealers. Securities maturing within 60 days of the valuation date may be valued at cost, plus or minus any amortized discount or premium, unless the trustees determine that this would not result in fair valuation of a given security. Other assets and securities for which quotations are not readily available are valued in good faith at their fair value using methods approved by the board of trustees. PERFORMANCE The Funds may quote performance in various ways. Historical performance information will be used in advertising and sales literature. For the MONEY MARKET FUNDS, yield quotations are based on the change in the value of a hypothetical investment (excluding realized gains and losses from the sale of securities and unrealized appreciation and depreciation of securities) over a seven-day period (base period) and stated as a percentage of the investment at the start of the base period (base-period return). The base-period return is then annualized by multiplying by 365/7 with the resulting yield figure carried to at least the nearest hundredth of one percent. 23 Calculations of effective yield begin with the same base-period return used to calculate yield, but the return is then annualized to reflect weekly compounding according to the following formula: 365/7 Effective Yield = [(Base-Period Return) + 1) ] - 1 The Money Market Funds' yields and effective yields for the seven-day period ended June 30, 1996, were as follows: Money Market Fund 7-Day Yield Effective Yield Tax-Free Money Market Fund 2.86% 2.90% Municipal Money Market Fund 2.93 2.97 For the Variable-Price Funds, yield quotations are based on the investment income per share earned during a particular 30-day period, less expenses accrued during the period (net investment income), and are computed by dividing the Fund's net investment income by its share price on the last day of the period according to the following formula: 6 YIELD = 2 [(a - b + 1) - 1] ----- cd where a = dividends and interest earned during the period, b = expenses accrued for the period (net of reimbursements), c = the average daily number of shares outstanding during the period that were entitled to receive dividends, and d = the maximum offering price per share on the last day of the period. The Variable-Price Funds' yields for the 30-day period ended June 30, 1996, were as follows: Variable-Price Fund 30-Day Yield Tax-Free Limited-Term Fund 3.91% Tax-Free Intermediate-Term Fund 4.57 Tax-Free Long-Term Fund 5.16 Municipal High-Yield Fund 5.74 Tax-Free Insured Fund 5.15 Total returns quoted in advertising and sales literature reflect all aspects of a Fund's return, including the effect of reinvesting dividends and capital gain distributions and any change in the Fund's NAV during the period. Average annual total returns are calculated by determining the growth or decline in value of a hypothetical historical investment in a Fund over a stated period and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline in value had been constant throughout the period. For example, a cumulative total return of 100% over 10 years would produce an average annual return of 7.18%, which is the steady annual rate that would equal 100% growth on a compounded basis in 10 years. While average annual total returns are a convenient means of comparing investment alternatives, investors should realize that the Funds' performance is not constant over time but changes from year-to-year and that average annual total returns represent averaged figures as opposed to actual year-to-year performance. 24 The Funds' average annual total returns for the one-year, five-year, and ten-year or life-of-fund periods ended June 30, 1996, are indicated in the table below. AVERAGE ANNUAL TOTAL RETURNS Fund One-Year Five-Year Ten-Year Life-of-Fund* Tax-Free Money Market Fund(1) 3.18% 2.76% 3.70% 3.92% Municipal Money Market Fund(2) 3.29 2.98 - 3.12 Tax-Free Limited-Term Fund(3) 4.14 - - 4.56 Tax-Free Intermediate-Term Fund(1) 5.64 6.66 6.47 6.91 Tax-Free Long-Term Fund(1) 7.69 7.73 7.39 8.39 Municipal High-Yield Fund(4) 8.53 7.91 - 6.27 Tax-Free Insured Fund(4) 6.83 7.78 - 6.58 (1) Commenced operations on November 9, 1983. (2) Commenced operations on December 31, 1990. (3) Commenced operations on June 1, 1992. (4) Commenced operations on December 30, 1986. In addition to average annual total returns, each Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Average annual and cumulative total returns may be quoted as percentages or as dollar amounts and may be calculated for a single investment, a series of investments, or a series of redemptions over any time period. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) to illustrate the relationship of these factors and their contributions to total return. The Funds' performance may be compared with the performance of other mutual funds tracked by mutual fund rating services or with other indexes of market performance. This may include comparisons with funds that, unlike Twentieth Century funds, are sold with a sales charge or deferred sales charge. Sources of economic data that may be considered in making such comparisons may include, but are not limited to, U.S. Treasury bill, note, and bond yields, money market fund yields, U.S. government debt and percentage held by foreigners, the U.S. money supply, net free reserves, and yields on current-coupon GNMAs (source: Board of Governors of the Federal Reserve System); the federal funds and discount rates (source: Federal Reserve Bank of New York); yield curves for U.S. Treasury securities and AA/AAA-rated corporate securities (source: Bloomberg Financial Markets); yield curves for AAA-rated tax-free municipal securities (source: Telerate); yield curves for foreign government securities (sources: Bloomberg Financial Markets and Data Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan Securities Inc.); various U.S. and foreign government reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures Index (source: Commodity Index Report); the price of gold (sources: London a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings published in major, nationally distributed periodicals; data provided by the Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market performance; and indexes and historical data supplied by major securities brokerage or investment advisory firms. The Fund may also utilize reprints from newspapers and magazines furnished by third parties to illustrate historical performance. 25 The Fund's shares are sold without a sales charge (load). No-load funds offer an advantage to investors when compared to load funds with comparable investment objectives and strategies. If an investor pays $10,000 to buy shares of a load fund with an 8.5% sales charge, $850 of that $10,000 is paid as a commission to a salesperson, leaving only $9,150 to put to work for the investor. Over time, the difference between paying a sales load and not paying one can have a significant effect on an investor's total return. The Mutual Fund Education Alliance provides a comparison of $10,000 invested in each of two mutual funds, one with an 8.5% sales load and one without a sales load. Assuming a compounded annual growth rate of 10% for both investments, the no-load fund investment is worth $25,937 after ten years, and the load fund investment is worth only $23,732. TAXES FEDERAL INCOME TAX Each Fund intends to qualify annually as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By so qualifying, a Fund will be exempt from federal and California income taxes to the extent that it distributes substantially all of its net investment income and net realized capital gains to shareholders. The tax rules applicable to regulated investment companies include, among others, a requirement that gains from the sale of securities held less than three months constitute less than 30% of a Fund's gross income for each taxable year. Certain of the bonds purchased by the Funds may be treated as bonds that were originally issued at a discount. Original issue discount represents interest for federal income tax purposes and can generally be defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Original issue discount, although no cash is actually received by a Fund until the maturity of the bond, is treated for federal income tax purposes as income earned by a Fund over the term of the bond, and therefore is subject to the distribution requirements of the Code. The annual amount of income earned on such a bond by a Fund generally is determined on the basis of a constant yield to maturity that takes into account the semiannual compounding of accrued interest. Original issue discount on an obligation with interest exempt from federal income tax will constitute tax-exempt interest income to the Fund. In addition, some of the bonds may be purchased by a Fund at a discount that exceeds the original issue discount on such bonds, if any. This additional discount represents market discount for federal income tax purposes. The gain realized on the disposition of any bond having market discount generally will be treated as taxable ordinary income to the extent it does not exceed the accrued market discount on such bond (unless a Fund elects to include market discount in income in tax years to which it is attributable). Generally, market discount accrues on a daily basis for each day the bond is held by a Fund on a straight line basis over the time remaining to the bond's maturity. In the case of any debt security having a fixed maturity date of not more than one year from date of issue, the gain realized on disposition generally will be treated as short-term capital gain. In general, gain realized on disposition of a security held less than one year is treated as short-term capital gain. It is intended that each Fund's assets will be sufficiently invested in municipal securities so that each Fund will be eligible to pay "exempt-interest dividends" (as defined in the Code) to shareholders. A Fund's dividends payable from net tax-exempt interest earned from municipal securities will qualify to be designated as exempt-interest dividends if, at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets consists of municipal securities. 26 Exempt-interest dividends distributed to shareholders are not included in shareholders' gross income for regular federal income tax purposes. The percentage of income that is tax-exempt is applied uniformly to all distributions made during each calendar year. This percentage may differ from the actual percentage of tax-exempt income received during any particular month. Distributions of net investment income received by a Fund from investment in debt securities other than municipal securities, of ordinary income realized upon the disposition of tax-exempt market discount bonds, and any net realized short-term capital gains distributed by the Fund will be taxable to shareholders as ordinary income. Because the Funds' investment income is derived from interest rather than dividends, no portion of such distributions is eligible for the dividends-received deduction available to corporations. Under the Code, any distribution of a Fund's net realized long-term capital gains designated by the Fund as a capital gain dividend is taxable to shareholders as long-term capital gains, regardless of the length of time shares are held. If a capital gain dividend is paid with respect to any shares of a Fund sold at a loss after being held for six months or less, the loss will be treated as a long-term capital loss for tax purposes. The Code also provides that if a shareholder holds shares of a Fund for six months or less, the deduction of any loss on the sale or exchange of those shares is disallowed to the extent that the shareholder received exempt-interest dividends with respect to those shares. As of August 31, 1995, the Funds' had the following capital loss carryovers: Tax-Free Money Market Fund $740,889 scheduled to expire on August 31, 1996, and Municipal Money Market Fund $3,865, Tax-Free Limited-Term Fund $608,877, Tax-Free Intermediate-Term Fund $1,686,723, Tax-Free Long-Term Fund $498,209, Municipal High-Yield Fund $425,261, and Tax-Free Insured Fund $1,230,778 scheduled to expire on August 31, 2003. When a Fund has a capital loss carryover, it does not make capital gain distributions until the loss has been offset or expired. Interest on certain types of industrial development bonds (small issues and obligations issued to finance certain exempt facilities that may be leased to or used by persons other than the issuer) is not exempt from federal income tax when received by "substantial users" or persons related to substantial users as defined in the Code. The term "substantial user" includes any "non-exempt person" who regularly uses in trade or business part of a facility financed from the proceeds of industrial development bonds. The Funds may invest periodically in industrial development bonds and, therefore, may not be appropriate investments for entities that are substantial users of facilities financed by industrial development bonds or "related persons" of substantial users. Generally, an individual will not be a related person of a substantial user under the Code unless he or his immediate family (spouse, brothers, sisters, ancestors and lineal descendants) owns directly or indirectly in aggregate more than 50% in the equity value of the substantial user. From time to time, proposals have been introduced in Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal securities, and similar proposals may be introduced in the future. If such a proposal were enacted, the availability of municipal securities for investment by the Funds and the Funds' NAVs would be adversely affected. Under these circumstances, the trustees would re-evaluate the Funds' investment objectives and policies and would consider either changes in the structure of the Trust or its dissolution. 27 ALTERNATIVE MINIMUM TAX While the interest on bonds issued to finance essential state and local government operations is generally exempt from regular federal income tax, interest on certain "private activity" bonds issued after August 7, 1986, while exempt from regular federal income tax, constitutes a tax-preference item for taxpayers in determining alternative minimum tax liability under the Code and income tax provisions of several states. Municipal Money Market Fund and Municipal High-Yield Fund may each invest in private activity bonds. The interest on private activity bonds could subject a shareholder to, or increase liability under, the federal alternative minimum tax, depending on the shareholder's tax situation. The interest on California private activity securities is not subject to the California alternative minimum tax when it is earned (either directly or through investment in a mutual fund) by a California taxpayer. However, if either Fund were to invest in private activity securities of non-California issuers (due to a limited supply of appropriate California municipal obligations, for example), the interest on those securities would be included in California alternative minimum taxable income. All distributions derived from interest exempt from regular federal income tax may subject corporate shareholders to, or increase their liability under, the alternative minimum tax because these distributions are included in the corporation's "adjusted current earnings." In addition, a deductible "environmental tax" of 0.12% is imposed on a corporation's modified alternative minimum taxable income in excess of $2 million. The environmental tax will be imposed even if the corporation is not required to pay an alternative minimum tax. To the extent that exempt-interest dividends paid by a Fund are included in alternative minimum taxable income, corporate shareholders may be subject to the environmental tax. The Trust will inform Municipal Money Market Fund and Municipal High-Yield Fund shareholders annually of the amount of distributions derived from interest payments on private activity bonds. STATE AND LOCAL TAXES California law concerning the payment of exempt-interest dividends is similar to federal law. Assuming each Fund qualifies to pay exempt-interest dividends under federal and California law, and to the extent that dividends are derived from interest on tax-exempt bonds of California state or local governments, such dividends will also be exempt from California personal income tax. The Trust will inform shareholders annually as to the amount of distributions from each Fund that constitute exempt-interest dividends and dividends exempt from California personal income tax. The Funds' dividends are not exempt from California state franchise or corporate income taxes. The Funds' dividends may not qualify for exemption under income or other tax laws of state or local taxing authorities outside California. Shareholders should consult their tax advisors or state or local tax authorities about the status of distributions from the Funds in this regard. The information above is only a summary of some of the tax considerations affecting the Funds and their shareholders; no attempt has been made to discuss individual tax consequences. A prospective investor should consult his or her tax advisor or state or local tax authorities to determine whether the Funds are suitable investments based on his or her tax situation. 28 ABOUT THE TRUST Benham California Tax-Free and Municipal Funds (the Trust) is a registered open-end management investment company that was organized as a Massachusetts business trust on February 18, 1983. (The Trust was formerly known as "Benham California Tax-Free Trust"). Currently, there are seven series of the Trust, as follows: Tax-Free Money Market Fund, Municipal Money Market Fund, Tax-Free Limited-Term Fund (formerly known as Tax-Free Short-Term Fund), Tax-Free Intermediate-Term Fund, Tax-Free Long-Term Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund. The board of trustees may create additional series from time to time. The Declaration of Trust permits the trustees to issue an unlimited number of full and fractional shares of beneficial interest without par value, which may be issued in series (funds). Shares issued are fully paid and nonassessable and have no preemptive, conversion, or similar rights. Each series votes separately on matters affecting that series exclusively. Voting rights are not cumulative, so that investors holding more than 50% of the Trust's (i.e., all series') outstanding shares may elect a board of trustees. The Trust has instituted dollar-based voting, meaning that the number of votes you are entitled to is based upon the dollar value of your investment. The election of trustees is determined by the votes received from all Trust shareholders, without regard to whether a majority of shareholders of any one series voted in favor of a particular nominee or all nominees as a group. Shareholders have equal rights as to dividends and distributions declared by their series and in the net assets of such series upon its liquidation or dissolution. Shares of each series have equal voting rights, although each series votes separately on matters affecting that series exclusively. Shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust. The Declaration of Trust also provides for indemnification and reimbursement of expenses of any shareholder held personally liable for obligations of the Trust. The Declaration of Trust provides that the Trust will, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. The Declaration of Trust further provides that the Trust may maintain appropriate insurance (for example, fidelity, bonding, and errors and omissions insurance) for the protection of the Trust, its shareholders, trustees, officers, employees, and agents to cover possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance exists and the Trust itself is unable to meet its obligations. CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02101, is custodian of the Trust's assets. Services provided by the custodian bank include (a) settling portfolio purchases and sales, (b) reporting failed trades, (c) identifying and collecting portfolio income, and (d) providing safekeeping of securities. The custodian takes no part in determining the Fund's investment policies or in determining which securities are sold or purchased by the Fund. Effective October 7, 1996, Chase Manhattan Bank, 4 Chase Metrotech Center, Brooklyn, NY 11245 will provide the custodian services for the Fund. INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas City, Missouri 64106, serves as the Trust's independent auditors. KPMG audits the annual report and provides tax and other services. 29 TRUSTEES AND OFFICERS The Trust's activities are overseen by a board of trustees, including seven independent trustees. The individuals listed below whose names are marked by an asterisk (*) are "interested persons" of the Trust (as defined in the Investment Company Act of 1940) by virtue of, among other considerations, their affiliation with either the Trust; the Trust's investment advisor, Benham Management Corporation (BMC); the Trust's agent for transfer and administrative services, Twentieth Century Services, Inc. (TCS); the Trust's distribution agent, Twentieth Century Securities, Inc.; the parent corporation, Twentieth Century Companies, Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. The trustees listed below serve as trustees or directors of other funds managed by BMC. Unless otherwise noted, a date in parentheses indicates the date the trustee or officer began his or her service in a particular capacity. The trustees' and officers' address with the exception of Mr. Stowers III and Ms. Roepke is 1665 Charleston Road, Mountain View, California 94043. The address of Mr. Stowers III and Ms. Roepke is 4500 Main Street, Kansas City, Missouri 64111. TRUSTEES *JAMES M. BENHAM, chairman of the board of trustees (1985), president and chief executive officer (1996). Mr. Benham is also chairman of the boards of Benham Financial Services, Inc. (BFS) (1985), BMC (1971), and Benham Distributors, Inc. (BDI) (1988); president of BMC (1971), and BDI (1988); and a member of the board of governors of the Investment Company Institute (1988). Mr. Benham has been in the securities business since 1963, and he frequently comments through the media on economic conditions, investment strategies, and the securities markets. ALBERT A. EISENSTAT, independent trustee (1995). Mr. Eisenstat is an independent director of each of Commercial Metals Co. (1982), Sungard Data Systems (1991) and Business Objects S/A (1994). Previously, he served as vice president of corporate development and corporate secretary of Apple Computer and served on its Board of Directors (1985 to 1993). RONALD J. GILSON, independent trustee (1995). Mr. Gilson is the Charles J. Meyers Professor of Law and Business at Stanford Law School (1979) and the Mark and Eva Stern Professor of Law and Business at Columbia University School of Law (1992); counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984). MYRON S. SCHOLES, independent trustee (1983). Mr. Scholes is a principal of Long-Term Capital Management (1993). He is also Frank E. Buck Professor of Finance at the Stanford Graduate School of Business (1983) and a director of Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992). From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon Brothers Inc. (securities brokerage). 30 KENNETH E. SCOTT, independent trustee (1983). Mr. Scott is Ralph M. Parsons Professor of Law and Business at Stanford Law School (1972) and a director of RCM Capital Funds, Inc. (June 1994). EZRA SOLOMON, independent trustee (1983). Mr. Solomon is Dean Witter Professor of Finance Emeritus at the Stanford Graduate School of Business, where he served as Dean Witter Professor of Finance from 1965 to 1990, and a director of Encyclopedia Britannica. ISAAC STEIN, independent trustee (1992). Mr. Stein is former chairman of the board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de Corp. (clothing manufacturer). He is a member of the board of Raychem Corporation (electrical equipment, 1993), president of Waverley Associates, Inc. (private investment firm, 1983), and a director of ALZA Corporation (pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and chairman of Stanford Health Services (hospital, 1994). *JAMES E. STOWERS III, trustee (1995). Mr. Stowers III is president and director of Twentieth Century Investors, Inc., TCI Portfolios, Inc., Twentieth Century World Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century Capital Portfolios, Inc., Twentieth Century Institutional Portfolios, Inc., Twentieth Century Companies, Inc., Investors Research Corporation and Twentieth Century Services, Inc. JEANNE D. WOHLERS, independent trustee (1985). Ms. Wohlers is a private investor and an independent director and partner of Windy Hill Productions, LP. Previously, she served as vice president and chief financial officer of Sybase, Inc. (software company, 1988 to 1992). OFFICERS *JAMES M. BENHAM, president and chief executive officer (1996). *DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel (1990); secretary, vice president and general counsel of BMC, BFS, BDI and all of the funds in the Benham Group. *ANN N. McCOID, CPA, controller (1987); controller of BFS and all of the funds in the Benham Group. *MARYANNE ROEPKE, CPA, chief financial officer and treasurer (1995); vice president, treasurer and principal accounting officer, Twentieth Century Strategic Asset Allocations; vice president and treasurer, Twentieth Century Investors, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc., Twentieth Century Premium Reserves, Inc. and TCI Portfolios, Inc.; vice president, Twentieth Century Services, Inc. 31 The table below summarizes the compensation that the trustees of the Funds received for the Funds' fiscal year ended August 31, 1995, as well as the compensation received for serving as a director or trustee of all other funds managed by BMC.
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED August 31, 1995 - --------------------------------------------------------------------------------------------------------------------------- Name of Aggregate Pension or Estimated Total Trustee* Compensation Retirement Benefits Annual Benefits Compensation From Accrued As Part of Upon Retirement From Fund and The Fund Fund Expenses Fund Complex** Paid to Trustees - --------------------------------------------------------------------------------------------------------------------------- Ronald J. Gilson $0 Not Applicable Not Applicable $0 - --------------------------------------------------------------------------------------------------------------------------- Myron S. Scholes $1649 (Money Market) Not Applicable Not Applicable $64,375 1324 (MuniMM) 1091 (Limited-Term) 1730 (Inter.-Term)) 1413 (Long-Term) 1077 (High-Yield) 1216 (Insured) - --------------------------------------------------------------------------------------------------------------------------- Kenneth E. Scott $1669 (Money Market) Not Applicable Not Applicable $64,626 1427 (MuniMM) 1017 (Limited-Term) 1745 (Inter.-Term)) 1582 (Long-Term) 1386 (High-Yield) 1408 (Insured) - --------------------------------------------------------------------------------------------------------------------------- Ezra Solomon $1948 (Money Market) Not Applicable Not Applicable $66,794 1437 (MuniMM) 1123 (Limited-Term) 2042 (Inter.-Term)) 1615 (Long-Term) 1247 (High-Yield) 1370 (Insured) - --------------------------------------------------------------------------------------------------------------------------- Isaac Stein $1787 (Money Market) Not Applicable Not Applicable $65,626 1349 (MuniMM) 1079 (Limited-Term) 1883 (Inter.-Term)) 1637 (Long-Term) 1149 (High-Yield) 1306 (Insured) - --------------------------------------------------------------------------------------------------------------------------- Jeanne D. Wohlers $1836 (Money Market) Not Applicable Not Applicable $66,876 1428 (MuniMM) 1142 (Limited-Term) 1927 (Inter.-Term)) 1542 (Long-Term) 1130 (High-Yield) 1298 (Insured) - ---------------------------------------------------------------------------------------------------------------------------
* Interested trustees receive no compensation for their services as such. ** Twentieth Century family of funds includes 66 no-load mutual funds. 32 As of July 31, 1996, the Trust's officers and trustees, as a group, owned less than 1% of each Fund's total shares outstanding except for the Tax-Free Money Market Fund of which they owned as a group, 2.68% of the Fund's total shares outstanding. INVESTMENT ADVISORY SERVICES Each Fund has an investment advisory agreement with Benham Management Corporation (BMC) dated June 1, 1995, that was approved by shareholders on May 31, 1995. BMC is a California corporation and a wholly owned subsidiary of Twentieth Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI, became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of Benham Management International (BMI), the former parent of BFS and BDI, into TCC. BMC has served as investment advisor to the Funds since the Funds' inception. TCC is a holding company that owns all of the stock of the operating companies that provide the investment management, transfer agency, shareholder service, and other services for the Twentieth Century funds. James E. Stowers, Jr., controls TCC by virtue of his ownership of a majority of its common stock. BMC has been a registered investment advisor since 1971 and is investment advisor to other funds in managed by BMC. Each Fund's agreement with BMC continues for an initial period of two years and thereafter from year to year provided that, after the initial two year period, it is approved at least annually by vote of either a majority of the Fund's outstanding voting securities or by vote of a majority of the Trust's trustees, including a majority of those trustees who are neither parties to the agreement nor interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. Each Fund's agreement is terminable on 60 days' written notice, either by the Fund or by BMC, to the other party, and terminates automatically in the event of its assignment. Pursuant to the investment advisory agreement, BMC provides the Fund with investment advice and portfolio management services in accordance with the Fund's investment objectives, policies, and restrictions. BMC determines what securities will be purchased and sold by the Fund and assist the Trust's officers in carrying out decisions made by the board of trustees. For these services, each Fund pays BMC a monthly investment advisory fee based on its prorata share of the dollar amount derived from applying a percentage of the Fund's average daily net assets to the following 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 net assets over $6.5 billion 33 Investment advisory fees paid by each Fund for the fiscal periods ended August 31, 1995, 1994, and 1993, are indicated in the following table. Fee amounts are net of reimbursements as described under the section titled "Net Reimbursements (Recoupments)." INVESTMENT ADVISORY FEES Fiscal Fiscal Fiscal Fund 1995 1994 1993 Tax-Free Money Market Fund 1,118,609 1,077,091 971,085 Municipal Money Market Fund 638,989 717,967 641,024 Tax-Free Limited-Term Fund 320,571 351,908 93,724 Tax-Free Intermediate-Term Fund 1,219,371 1,329,806 1,063,698 Tax-Free Long-Term Fund 788,383 883,146 896,034 Municipal High-Yield Fund 317,026 325,337 278,723 Tax-Free Insured Fund 505,500 601,906 516,661 TRANSFER AND ADMINISTRATIVE SERVICES Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri, 64111, (TCS) acts as transfer, administrative services and dividend paying agent for the Funds. TCS provides facilities, equipment and personnel to the Funds and is paid for such services by the Fund. For administrative services, each Fund pays TCS a monthly fee equal to its pro rata share of the dollar amount derived from applying the average daily net assets of all of the Fund managed by the Manager to the following administrative fee rate schedule: Group Assets Administrative Fee Rate up to $4.5 billion .11% up to $6 billion .10 up to $9 billion .09 over $9 billion .08 For transfer agent services, each Fund pays BFS monthly fees of $1.1875 for each shareholder account maintained and $1.35 for each shareholder transaction executed during the month. Administrative service and transfer agent fees paid by each Fund to BFS for the fiscal years ended August 31, 1995, 1994, and 1993, are indicated in the following table. Fee amounts are net of expense limitations as described below. ADMINISTRATIVE FEES FISCAL FISCAL FISCAL FUND 1995 1994 1993 Tax-Free Money Market Fund 372,776 367,012 299,721 Municipal Money Market Fund 213,037 244,617 244,111 Tax-Free Limited-Term Fund 106,880 119,911 79,630 Tax-Free Intermediate-Term Fund 406,453 453,129 330,077 Tax-Free Long-Term Fund 262,741 300,842 277,267 Municipal High-Yield Fund 105,659 110,808 86,440 Tax-Free Insured Fund 168,491 205,042 160,502 34 TRANSFER AGENT FEES FISCAL FISCAL FISCAL FUND 1995 1994 1993 Tax-Free Money Market Fund 245,317 254,089 246,329 Municipal Money Market Fund 157,812 183,077 197,083 Tax-Free Limited-Term Fund 60,682 64,485 49,061 Tax-Free Intermediate-Term Fund 195,808 198,370 161,303 Tax-Free Long-Term Fund 125,758 127,791 131,512 Municipal High-Yield Fund 66,032 64,349 58,189 Tax-Free Insured Fund 95,075 105,575 94,213 DIRECT FUND EXPENSES Each Fund pays certain operating expenses that are not assumed by BMC or TCS. These include fees and expenses of the independent trustees; custodian, audit, tax preparation, and pricing fees; fees of outside counsel and counsel employed directly by the Trust; costs of printing and mailing prospectuses, statements of additional information, proxy statements, notices, confirmations, and reports to shareholders; fees for registering the Fund's shares under federal and state securities laws; brokerage fees and commissions (if any); trade association dues; costs of fidelity and liability insurance policies covering the Fund; costs for incoming WATS lines maintained to receive and handle shareholder inquiries; and organizational costs. EXPENSE LIMITATION AGREEMENT BMC may recover amounts absorbed on behalf of the Fund during the preceding 11 months if, and to the extent that, for any given month, the Fund's expenses were less than the expense limitation in effect at that time. Each Fund's contractual expense limitation is subject to annual renewal. The expense limits in effect until May 31, 1997 are as follows: Tax-Free Money Market Fund .53%, Municipal Money Market Fund .60%, Tax-Free Limited-Term Fund .59%, Tax-Free Intermediate-Term Fund .59%, Tax-Free Long-Term Fund .59%, Municipal High-Yield Fund .59%, and Tax-Free Insured Fund .59% of average daily net assets. Net reimbursements for the fiscal years ended August 31, 1995, 1994 and 1993, are indicated in the table below. NET REIMBURSEMENTS (RECOUPMENTS) FISCAL FISCAL FISCAL FUND 1995 1994 1993 Tax-Free Money Market Fund 0 0 0 Municipal Money Market Fund 0 0 152,087 Tax-Free Limited-Term Fund 0 (11,338) 161,581 Tax-Free Intermediate-Term Fund 0 0 0 Tax-Free Long-Term Fund 0 0 0 Municipal High-Yield Fund 0 0 (18,372) Tax-Free Insured Fund 0 0 0 35 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION While the Funds are designed for California investors, they are also offered for sale to investors in certain other western states. The Funds' shares are continuously offered at net asset value. Share certificates are issued (without charge) only when requested in writing. Certificates are not issued for fractional shares. Dividend and voting rights are not affected by the issuance of certificates. The Benham Group may reject or limit the amount of an investment to prevent any one shareholder or affiliated group from controlling the Trust or one of its series; to avoid jeopardizing a series' tax status; or whenever, in management's opinion, such rejection is in the Trust's or a series' best interest. The Benham Group charges neither fees nor commissions on the purchase and sale of Benham fund shares. BFS may, however, charge fees for special services requested by a shareholder or necessitated by acts or omissions of a shareholder. For example, BFS may charge a fee for processing dishonored investment checks or stop-payment requests. BFS charges $10 per hour for account research requested by investors. This charge will be assessed, for example, when a shareholder request requires more than one hour of research on historical account records. The fees charged are based on the estimated costs of performing shareholder-requested services and are not intended to increase income to BFS. Share purchases and redemptions are governed by California law. OTHER INFORMATION The Funds' investment advisor has been continuously registered with the SEC under the Investment Advisers Act of 1940 since December 14, 1971. The Trust has filed a registration statement under the Securities Act of 1933 and the Investment Company Act of 1940 with respect to the shares offered. Such registrations do not imply approval or supervision of the Trust or the advisor by the SEC. For further information, please refer to the registration statement and exhibits on file with the SEC in Washington, D.C. These documents are available upon payment of a reproduction fee. Statements in the Prospectus and in this Statement of Additional Information concerning the contents of contracts or other documents, copies of which are filed as exhibits to the registration statement, are qualified by reference to such contracts or documents. MUNICIPAL SECURITIES RATINGS Securities rating descriptions provided under this heading are excerpted from publications of Moody's Investors Service, Inc. and Standard & Poor's Corporation. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS: Aaa: Bonds rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they compose what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make long-term risks appear somewhat larger than in Aaa securities. A: Bonds rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future. Baa: Bonds rated "Baa" are considered medium-grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. Ba: Bonds rated "Ba" are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times in the future. Uncertainty of position characterizes bonds in this class. B: Bonds rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be limited. Caa: Bonds rated "Caa" are of poor standing. Such issues may be in default, or there may be elements of danger present with respect to principal or interest. Ca: Bonds rated "Ca" represent obligations that are speculative to a high degree. Such issues are often in default or have other marked shortcomings. C: Bonds rated "C" are the lowest-rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. NOTE: Moody's may apply the numerical modifier "1" for municipally-backed bonds and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The modifier "1" indicates that the security ranks in the higher end of its generic rating category; the modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that the issue ranks in the lower end of its generic rating category. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND VARIABLE-RATE DEMAND OBLIGATIONS: Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade or MIG. Such ratings recognize the differences between short-term credit and long-term risk. Short-term ratings on issues with demand features (variable-rate demand obligations) are differentiated by the use of the VMIG symbol to reflect such characteristics as payment upon periodic demand rather than on fixed maturity dates and payments relying on external liquidity. 37 MIG 1/VMIG 1: This designation denotes best quality. There is strong protection present through established cash flows, superior liquidity support, or demonstrated broad-based access to the market for refinancing. MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample, although not as large as in the preceding group. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TAX-EXEMPT COMMERCIAL PAPER RATINGS: Moody's commercial paper ratings are opinions of the ability of issuers to punctually repay those promissory obligations that have an original maturity not exceeding nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act of 1933, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. The following designations, all judged to be investment grade, indicate the relative repayment ability of rated issuers of securities in which the Funds may invest. PRIME - 1: Issuers rated "Prime - 1" (or supporting institutions) have a superior ability for repayment of senior short-term promissory obligations. PRIME - 2: Issuers rated "Prime - 2" (or supporting institutions) have a strong ability for repayment of senior short-term promissory obligations. DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR MUNICIPAL BONDS: INVESTMENT GRADE AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA: Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A: Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. SPECULATIVE BB, B, CCC, CC: Debt rated in these categories is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. 38 BB: Debt rated "BB" has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The "BB" rating category is also used for debt subordinated to senior debt assigned an actual or implied "BBB-" rating. B: Debt rated "B" has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The "B" rating category is also used for debt subordinated to senior debt assigned an actual or implied "BB" or "BB-" rating. CCC: Debt rated "CCC" has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, "CCC" debt is not likely to have the capacity to pay interest and repay principal. The "CCC" rating category is also used for debt subordinated to senior debt assigned an actual or implied "B" or "B-" rating. CC: The rating "CC" typically is applied to debt subordinated to senior debt assigned an actual or implied "CCC" debt rating. C: The "C" rating is typically applied to debt subordinated to senior debt assigned an actual or implied "CCC-" debt rating. The "C" rating may be used to cover a situation in which a bankruptcy petition has been filed, but debt service payments are continued. CI: The "CI" rating is reserved for income bonds for which no interest is being paid. D: Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR INVESTMENT-GRADE MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS: SP-1: Issues carrying this designation have a very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2: Issues carrying this designation have a satisfactory capacity to pay principal and interest. DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS AND TAX-EXEMPT COMMERCIAL PAPER: A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The two rating categories for securities in which the Funds may invest are as follows: 39 A-1: This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) designation. A-2: Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1." DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS FOR MUNICIPAL BONDS: INVESTMENT GRADE AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal that is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category. SPECULATIVE BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified that could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin or safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. 40 CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD/DD/D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "DDD," "DD," or "D" categories. DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS FOR INVESTMENT-GRADE MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS: F-1+: EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+." QUALITY OF PORTFOLIO SECURITIES HELD BY THE VARIABLE PRICE FUNDS The table below provides a summary of ratings assigned to obligations held by each of the Variable Price Funds. These figures are dollar-weighted averages of month-end holdings during fiscal 1995, presented as a percentage of total investments. For obligations with different ratings assigned by different rating agencies, the highest rating assigned is the one relied upon to create this table. The percentages are historical and are not necessarily indicative of current or future portfolio holdings, which may vary in quality. AAA/AAA AA/AA A BAA/BBB NR Tax-Free Short-Term 53% 24% 23% - - Tax-Free Intermediate-Term 54 22 24 - - Tax-Free Long-Term 29 23 48 - - Municipal High-Yield 6 4 32 31 27 Tax-Free Insured 100 - - - - 41 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS 1933 Act Post-Effective Amendment No. 23 1940 Act Amendment No. 27 - -------------------------------------------------------------------------------- PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) FINANCIAL STATEMENTS. Audited financial statements for each series of the Trust for the fiscal year ended August 31, 1995, are filed herein as included in the Trust's Statement of Additional Information by reference to the Annual Report dated August 31, 1995, filed on October 27, 1995 (Accession # 717316-95-000008). (b) EXHIBITS. (1) Amended Declaration of Trust dated May 31, 1995, is incorporated herein by reference to Exhibit 1(d) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). (2) Amended and Restated Bylaws dated May 17, 1995 are incorporated herein by reference to Exhibit 2(d) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). (3) Not applicable. (4) Specimen copy of Tax-Free Short-Term Fund's share certificate is incorporated herein by reference to Exhibit 4 to Post-Effective Amendment No. 16. (5) Investment Advisory Agreement between Benham California Tax-Free and Municipal Funds: Tax-Free Short-Term Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Money Market Fund, Benham California Tax-Free and Municipal Funds: Municipal Money Market Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Intermediate-Term Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Long-Term Fund, Benham California Tax-Free and Municipal Funds: Municipal High-Yield Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Insured Fund and BMC, dated June 1, 1995, is incorporated herein by reference to Exhibit 5(a) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). (6) Distribution Agreement between Benham California Tax-Free and Municipal Funds and Twentieth Century Securities, Inc. dated as of September 3, 1996, is incorporated herein by reference to Exhibit 6 of Post-Effective Amendment No. 29 to the Registration Statement of the Benham Government Income Trust filed on August 30, 1996 (Accession # 773674-96-000007). (7) Not applicable. (8) 1993 Omnibus Custodian Agreement between the Benham Group of Funds (including Benham California Tax-Free and Municipal Funds) and State Street Bank and Trust Company, dated August 10, 1993, is incorporated herein by reference to Exhibit 8 to Post-Effective Amendment No. 20 filed on October 27, 1995. (9) Administrative Services and Transfer Agency Agreement between Benham California Tax-Free and Municipal Funds and Twentieth Century Services, Inc. dated as of September 3, 1996, is incorporated herein by reference to Exhibit 9 of Post-Effective Amendment No. 29 to the Registration Statement of the Benham Government Income Trust filed on August 30, 1996 (Accession # 773674-96-000007). (10) Opinion and consent of counsel as to the legality of the securities being registered, dated October 25, 1996 is incorporated herein by reference to Rule 24f-2 Notice filed on October 31, 1995 (Accession # 717316-95-000011). (11) Consent of KPMG Peat Marwick, LLP, independent auditors, is included herein. (12) Not applicable. (13) Not applicable. (14) Not applicable. (15) Not applicable. (16) Schedule for computation of each performance quotation provided in response to Item 22 is included herein. (17) Power of Attorney dated August 22, 1995, is incorporated herein by reference to Exhibit 17 of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). Item 25. Persons Controlled by or Under Control with Registrant. Not applicable Item 26. Number of Holders of Securities. As of July 31, 1996, each Series of the Registrant had the following number of record shareholders. Municipal Money Market Fund 4120 Tax-Free Money Market Fund 7140 Tax-Free Limited-Term Fund 1748 Tax-Free Intermediate-Term Fund 7306 Tax-Free Long-Term Fund 4956 Municipal High-Yield Fund 2559 Tax-Free Insured Fund 3702 Item 27. Indemnification. As stated in Article VII, Section 3 of the Declaration of Trust, incorporated herein by reference to Exhibit 1 to the Registration Statement, "The Trustees shall be entitled and empowered to the fullest extent permitted by law to purchase insurance for and to provide by resolution or in the Bylaws for indemnification out of Trust assets for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit, or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust. The provisions, including any exceptions and limitations concerning indemnification, may be set forth in detail in the Bylaws or in a resolution adopted by the Board of Trustees." Registrant hereby incorporates by reference, as though set forth fully herein, Article VI of the Registrant's Bylaws, amended on May 17, 1995, appearing as Exhibit 2 of this Post-Effective Amendment No. 23. Item 28. Business and Other Connections of Investment Advisor. The Registrant's investment advisor, Benham Management Corporation, provides investment advisory services for various collective investment vehicles and institutional clients and serves as investment advisor to a number of open-end investment companies. Item 29. Principal Underwriters. The Registrant's distribution agent, Twentieth Century Securities, Inc., is distribution agent to Capital Preservation Fund, Inc., Capital Preservation Fund II, Inc., Benham California Tax-Free and Municipal Funds, Benham Government Income Trust, Benham Municipal Trust, Benham Target Maturities Trust, Benham Equity Funds, Benham International Funds, Benham Investment Trust, Benham Manager Funds, TCI Portfolios, Inc., Twentieth Century Capital Portfolios, Inc., Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century Strategic Allocations, Inc. and Twentieth Century World Investors, Inc. The information required with respect to each director, officer or partner of Twentieth Century Securities is incorporated herein by reference to Twentieth Century Securities' Form B-D filed on November 21, 1985 (SEC File No. 8-35220; Firm CRD No. 17437). Item 30. Location of Accounts and Records. Benham Management Corporation, the Registrant's investment advisor, maintains its principal office at 1665 Charleston Road, Mountain View, CA 94043. The Registrant and its agent for transfer and administrative services, Twentieth Century Services, maintain their principal office at 4500 Main St., Kansas City, MO 64111. Twentieth Century Services maintains physical possession of each account, book, or other document, and shareholder records as required by ss.31(a) of the 1940 Act and rules thereunder. The computer and data base for shareholder records are located at Central Computer Facility, 401 North Broad Street, Sixth Floor, Philadelphia, PA 19108. Item 31. Management Services. Not applicable. Item 32. Undertakings. Registrant undertakes to furnish each person to whom a Prospectus is delivered with a copy of the Registrant's latest report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment No. 23/Amendment No. 27 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, and State of California, on the 30th day of August, 1996. I hereby certify that this Amendment meets the requirements for immediate effectiveness pursuant to Rule 485(b). BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS By: /s/ Douglas A. Paul Douglas A. Paul Vice President, Secretary, and General Counsel Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 23/Amendment No. 27 has been signed below by the following persons in the capacities and on the dates indicated.
Date * Chairman of the Board of Directors, President, August 30, 1996 - --------------------------------- and Chief Executive Officer James M. Benham * Director August 30, 1996 - --------------------------------- Albert A. Eisenstat * Director August 30, 1996 - --------------------------------- Ronald J. Gilson * Director August 30, 1996 - --------------------------------- Myron S. Scholes * Director August 30, 1996 - --------------------------------- Kenneth E. Scott * Director August 30, 1996 - --------------------------------- Ezra Solomon * Director August 30, 1996 - --------------------------------- Isaac Stein * Director August 30, 1996 - --------------------------------- James E. Stowers III * Director August 30, 1996 - --------------------------------- Jeanne D. Wohlers * Chief Financial Officer, Treasurer August 30, 1996 - --------------------------------- Maryanne Roepke
/s/ Douglas A. Paul *by Douglas A. Paul, Attorney in Fact (pursuant to a Power of Attorney dated March 4, 1996). EX-99 2 EXHIBIT INDEX EXHIBIT DESCRIPTION EX-99.B1 Amended Declaration of Trust dated May 31, 1995, is incorporated herein by reference to Exhibit 1(d) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). EX-99.B2 Amended and Restated Bylaws dated May 17, 1995 are incorporated herein by reference to Exhibit 2(d) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). EX-99.B4 Specimen copy of Tax-Free Short-Term Fund's share certificate is incorporated herein by reference to Exhibit 4 to Post-Effective Amendment No. 16. EX-99.B5 Investment Advisory Agreement between Benham California Tax-Free and Municipal Funds: Tax-Free Short-Term Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Money Market Fund, Benham California Tax-Free and Municipal Funds: Municipal Money Market Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Intermediate-Term Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Long-Term Fund, Benham California Tax-Free and Municipal Funds: Municipal High-Yield Fund, Benham California Tax-Free and Municipal Funds: Tax-Free Insured Fund and BMC, dated June 1, 1995, is incorporated herein by reference to Exhibit 5(a) of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). EX-99.B6 Distribution Agreement between Benham California Tax-Free and Municipal Funds and Twentieth Century Securities, Inc. dated as of September 3, 1996, is incorporated herein by reference to Exhibit 6 of Post-Effective Amendment No. 29 to the Registration Statement of the Benham Government Income Trust filed on August 30, 1996 (Accession # 773674-96-000007). EX-99.B8 1993 Omnibus Custodian Agreement between the Benham Group of Funds (including Benham California Tax-Free and Municipal Funds) and State Street Bank and Trust Company, dated August 10, 1993, is incorporated herein by reference to Exhibit 8 to Post-Effective Amendment No. 20). EX-99.B9 Administrative Services and Transfer Agency Agreement between Benham California Tax-Free and Municipal Funds and Twentieth Century Services, Inc. dated as of September 3, 1996,. is incorporated herein by reference to Exhibit 9 of Post-Effective Amendment No. 29 to the Registration Statement of the Benham Government Income Trust filed on August 30, 1996 (Accession # 773674-96-000007). EX-99.B10 Opinion and consent of counsel as to the legality of the securities being registered, dated October 25, 1996 is incorporated herein by reference to Rule 24f-2 Notice filed on October 31, 1995 (Accession # 717316-95-000011). EX-99.B11 Consent of KPMG Peat Marwick, LLP, independent auditors, is included herein. EX-99.B16 Schedule for computation of each performance quotation provided in response to Item 22 is included herein. EX-99.B17 Power of Attorney dated August 22, 1995, is incorporated herein by reference to Exhibit 17 of Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession # 717316-95-000007). EX-27.4.1 FDS - California Tax-Free Money Market Fund EX-27.4.2 FDS - Municipal Money Market Fund EX-27.5.3 FDS - California Tax-Free Intermediate-Term Fund EX-27.5.4 FDS - California Tax-Free Long-Term Fund EX-27.5.5 FDS - California Municipal High-Yield Fund EX-27.5.6 FDS - California Tax-Free Insured Fund EX-27.5.7 FDS - California Tax-Free Short-Term Fund EX-99.B11 3 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors The Board of Trustees and Shareholders Benham California Tax-Free and Municipal Funds: We consent to the inclusion in Benham California Tax-Free and Municipal Funds' Post-Effective Amendment No. 23 to the Registration Statement No. 2-82734 on Form N-1A under the Securities Act of 1933 and Amendment No. 27 to the Registration Statement No. 811-3706 filed on Form N-1A under the Investment Company Act of 1940 of our reports dated October 9, 1995 on the financial statements and financial highlights of the Benham California Municipal Money Market Fund, Benham California Tax-Free Money Market Fund, Benham California Tax-Free Limited-Term Fund, Benham California Tax-Free Intermediate-Term Fund, Benham California Tax-Free Long-Term Fund, Benham California Tax-Free Insured Fund and California Municipal High-Yield Fund (the seven funds comprising the Benham California Tax-Free and Municipal Funds) for the periods indicated therein, which reports have been incorporated by reference into the Statements of Additional Information of Benham California Tax-Free and Municipal Funds. We also consent to the reference to our firm under the heading "Financial Highlights" in the Prospectus and under the heading "About the Trust" in the Statements of Additional Information which are incorporated by reference in the Prospectus. /s/KPMG Peat Marwick LLP Kansas City, Missouri August 30, 1996 EX-16 4 SCHEDULES OF COMPUTATION BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND YIELD CALCULATION JUNE 30, 1996 365/7 Effective Yield: [ (Base Period Return) + 1) ] - 1 7 Day Yield = 2.86% 7 Day Effective Yield = 2.90% BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND YIELD CALCULATION JUNE 30, 1996 365/7 Effective Yield: [ (Base Period Return) + 1) ] - 1 7 Day Yield = 2.93% 7 Day Effective Yield = 2.97% BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND YIELD CALCULATION JUNE 30, 1996 [ ( A-B ) 6 ] Formula: Yield = 2[ (------- + 1) - 1 ] [ ( C*D ) ] A = Investment income earned during the period. B = Expenses accrued for the period (net of reimbursements). C = The average daily number of shares outstanding during the period that were entitled to receive dividends. D = The per share price on the last day of the period. Calculation: A = $1,815,854.31 B = $168,028.39 C = 39,676,428.570 D = $11.00 Yield = 4.57% BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND YIELD CALCULATION JUNE 30, 1996 [ ( A-B ) 6 ] Formula: Yield = 2[ (------- + 1) - 1 ] [ ( C*D ) ] A = Investment income earned during the period. B = Expenses accrued for the period (net of reimbursements). C = The average daily number of shares outstanding during the period that were entitled to receive dividends. D = The per share price on the last day of the period. Calculation: A = $1,316,195.31 B = $109,438.03 C = 25,743,492.889 D = $11.02 Yield = 5.16% BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND YIELD CALCULATION JUNE 30, 1996 [ ( A-B ) 6 ] Formula: Yield = 2[ (------- + 1) - 1 ] [ ( C*D ) ] A = Investment income earned during the period. B = Expenses accrued for the period (net of reimbursements). C = The average daily number of shares outstanding during the period that were entitled to receive dividends. D = The per share price on the last day of the period. Calculation: A = $705,023.01 B = $54,737.25 C = 14,865,252.386 D = $9.25 Yield = 5.74% BENHAM CALIFORNIA TAX-FREE INSURED FUND YIELD CALCULATION JUNE 30, 1996 [ ( A-B ) 6 ] Formula: Yield = 2[ (------- + 1) - 1 ] [ ( C*D ) ] A = Investment income earned during the period. B = Expenses accrued for the period (net of reimbursements). C = The average daily number of shares outstanding during the period that were entitled to receive dividends. D = The per share price on the last day of the period. Calculation: A = $870,275.61 B = $72,423.58 C = 18,932,439.178 D = $9.93 Yield = 5.15% BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND YIELD CALCULATION JUNE 30, 1996 [ ( A-B ) 6 ] Formula: Yield = 2[ (------- + 1) - 1 ] [ ( C*D ) ] A = Investment income earned during the period. B = Expenses accrued for the period (net of reimbursements). C = The average daily number of shares outstanding during the period that were entitled to receive dividends. D = The per share price on the last day of the period. Calculation: A = $361,876.06 B = $40,736.43 C = 9,764,332.770 D = $10.18 Yield = 3.91% BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,031.80 1.000000 3.18% Five Years $1,000.00 $1,145.83 5.000000 2.76% Ten Years $1,000.00 $1,438.09 10.000000 3.70% Date Of Inception* $1,000.00 $1,626.59 12.652054 3.92% TR=Total return for period. TR=(ERV/P) - 1 62.66% *Date Of Inception: November 9, 1983 BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,056.40 1.000000 5.64% Five Years $1,000.00 $1,380.41 5.000000 6.66% Ten Years $1,000.00 $1,871.86 10.000000 6.47% Date Of Inception* $1,000.00 $2,328.85 12.652054 6.91% TR=Total return for period. TR=(ERV/P) - 1 132.88% *Date Of Inception: November 9, 1983 BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,085.30 1.000000 8.53% Five Years $1,000.00 $1,463.22 5.000000 7.91% Ten Years Date Of Inception* $1,000.00 $1,783.01 9.509589 6.27% TR=Total return for period. TR=(ERV/P) - 1 78.30% *Date Of Inception: December 30, 1986 BENHAM CALIFORNIA TAX-FREE INSURED FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,068.30 1.000000 6.83% Five Years $1,000.00 $1,454.42 5.000000 7.78% Ten Years Date Of Inception* $1,000.00 $1,833.09 9.509589 6.58% TR=Total return for period. TR=(ERV/P) - 1 83.31% *Date Of Inception: December 30, 1986 BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,032.90 1.000000 3.29% Five Years $1,000.00 $1,158.15 5.000000 2.98% Ten Years Date Of Inception* $1,000.00 $1,184.24 5.504109 3.12% TR=Total return for period. TR=(ERV/P) - 1 18.42 *Date Of Inception: December 31, 1990 BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,041.40 1.000000 4.14% Five Years Ten Years Date Of Inception* $1,000.00 $1,199.79 4.084931 4.56% TR=Total return for period. TR=(ERV/P) - 1 19.98% *Date Of Inception: June 1, 1992 BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND AVERAGE ANNUAL TOTAL RETURN JUNE 30, 1996 ( ERV ) 1/N Formula: T = (-----) - 1 ( P ) P = A hypothetical initial payment of $1,000. ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. N = Number of years. T = Average annual total return. P ERV N T Calculation: --------- --------- -------- ------- One Year $1,000.00 $1,076.90 1.000000 7.69% Five Years $1,000.00 $1,451.05 5.000000 7.73% Ten Years $1,000.00 $2,040.04 10.000000 7.39% Date Of Inception* $1,000.00 $2,771.31 12.652054 8.39% TR=Total return for period. TR=(ERV/P) - 1 177.13% *Date Of Inception: November 9, 1983 EX-27.4.1 5 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 1 BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND 6-MOS AUG-31-1996 FEB-29-1996 427320472 427320472 6830471 3219177 0 437370120 2105445 0 1899736 4005181 0 433429977 430429977 363927801 0 945940 (1010978) 0 0 433364939 0 7905450 0 1047631 6857819 8829 0 6866648 0 6787253 0 0 195467763 182761215 6479791 19265734 0 0 0 0 609035 0 1076351 419052076 1.00 .016 0 0 .016 0 1.00 .52 0 0
EX-27.4.2 6 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 2 BENHAM MUNICIPAL MONEY MARKET FUND 6-MOS AUG-31-1996 FEB-29-1996 194154025 194154025 1843480 2551213 0 198548718 0 0 819831 819831 0 197808206 197808206 204350976 0 77163 (156482) 0 0 197728887 0 3764241 0 518479 3245762 5886 0 3251648 0 3235503 0 0 124657402 121776879 3109879 6006547 0 0 0 0 280889 0 536033 193270844 1.00 .017 0 0 .017 0 1.00 .56 0 0
EX-27.5.3 7 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 3 BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND 6-MOS AUG-31-1996 FEB-29-1996 396090513 412450277 8027242 1142359 0 421619878 3414772 0 654962 4069734 0 403158066 37743491 38264468 0 37 (1967649) 0 16359764 417550144 0 11370386 0 1018316 10352070 3411075 4254575 18017720 0 10341946 0 0 44505370 39300067 7972836 20853913 0 0 0 0 620974 0 1042564 427437878 11.06 .27 .21 0 .27 0 11.27 .49 0 0
EX-27.5.4 8 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 4 BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND 6-MOS AUG-31-1996 FEB-29-1996 265676227 272596939 8665495 842967 0 282105401 4676700 1343656 0 6020356 0 269661972 25238519 25571648 570 0 (498209) 0 6920712 276085045 0 8499273 0 681985 7817288 2268552 9278228 19364068 0 7811284 0 0 41419529 40625386 5297351 17644278 0 0 0 0 418164 0 698242 287925316 10.94 .307 .450 0 .307 0 11.39 .49 0 0
EX-27.5.5 9 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 5 BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND 6-MOS AUG-31-1996 FEB-29-1996 118630606 124390827 2882338 3054886 0 130328051 0 0 391024 391024 0 124966354 13850512 12015383 3874 0 (793422) 0 5760221 129937027 0 4072839 0 318679 3754160 1080397 2678275 7512832 0 3754378 0 0 30940580 23632188 2704313 13771159 0 0 0 0 182161 0 326892 125931971 9.11 .278 .270 0 .278 0 9.38 .52 0 0
EX-27.5.6 10 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 6 BENHAM CALIFORNIA TAX-FREE INSURED FUND 6-MOS AUG-31-1996 FEB-29-1996 175204532 185315439 7880240 3261329 0 196457008 5597884 386251 0 5984135 0 179728921 18529839 17684272 0 7103 645783 0 10105272 190472873 0 5375293 0 459335 4915958 1876562 5210475 12002995 0 4926891 0 0 29915511 28833903 3402599 11560310 0 0 0 0 271215 0 470702 186826532 9.89 .269 .391 0 .269 0 10.28 .51 0 0
EX-27.5.7 11 FDS
6 0000717316 BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS 7 BENHAM CALIFORNIA TAX-FREE SHORT-TERM FUND 6-MOS AUG-31-1996 FEB-29-1996 104322862 105636293 2560395 711052 0 108907740 4047666 0 136812 4184478 0 104823183 10233826 10705168 6462 0 (1419814) 0 1313431 104723262 0 2353662 0 248828 2104834 199770 475158 2779762 0 2104061 0 0 11844371 20021585 1673083 (5828430) 0 0 0 0 147704 0 256216 101699603 10.23 .213 .070 0 .213 0 10.30 .51 0 0
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