-----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, G3Ey/YNAHDCuNkmvcM87hy1pVcCugzl/nGbYZmMs7si3XTO0vAf3KbTu4xOJvXx9 07d9hjOY4kPjfRaIfbex+w== 0000717316-96-000015.txt : 19961031 0000717316-96-000015.hdr.sgml : 19961031 ACCESSION NUMBER: 0000717316-96-000015 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961030 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: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03706 FILM NUMBER: 96650271 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 N-30D 1 ANNUAL REPORT - BOOKS ONE AND TWO [Book One} BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS ================ Annual Report o August 31, 1996 [photo of the California State flag] Tax-Free Money Market Fund Municipal Money Market Fund Municipal High-Yield Fund Tax-Free Insured Fund TWENTIETH CENTURY MUTUAL FUNDS AND THE BENHAM GROUP [front cover] CONTENTS U.S. ECONOMIC REVIEW................................. 1 MUNICIPAL MARKET SUMMARY............................. 2 CALIFORNIA ECONOMIC & CREDIT ANALYSIS...................................... 3 TAX-FREE MONEY MARKET FUND Performance Information.............................. 4 Portfolio Information................................ 5 Management Discussion & Performance Comparison....... 6 Financial Highlights..................................30 Financial Statements and Notes........................34 Schedule of Investments...............................43 MUNICIPAL MONEY MARKET FUND Performance Information.............................. 8 Portfolio Information................................ 9 Management Discussion & Performance Comparison........10 Financial Highlights..................................31 Financial Statements and Notes........................34 Schedule of Investments...............................50 MUNICIPAL HIGH-YIELD FUND Performance Information...............................12 Performance Comparison & Breakdown....................13 Portfolio Information.................................14 Management Discussion.................................15 Financial Highlights..................................32 Financial Statements and Notes........................34 Schedule of Investments...............................55 TAX-FREE INSURED FUND Performance Information...............................17 Performance Comparison & Breakdown....................18 Portfolio Information.................................19 Management Discussion.................................20 Financial Highlights..................................33 Financial Statements and Notes........................34 Schedule of Investments...............................60 INVESTMENT FUNDAMENTALS...............................22 U.S. ECONOMIC REVIEW JAMES M. BENHAM [photo of James Chairman, Benham Funds M. Benham] After a slow start in January, the U.S. economy grew at a healthy pace for the first three quarters of 1996, confounding market analysts who predicted a significant slowdown in the second half of the year. During 1995, economic weakness prompted the Federal Reserve (the Fed) to make a series of short-term interest rate cuts, culminating in a quarter-of-a-percent cut in January 1996. This expansionary monetary policy helped speed the pace of U.S. economic growth from an anemic 0.3% annual rate in the fourth quarter of 1995 to a more robust 2.0% in the first quarter of 1996. Growth expanded further to an impressive 4.7% in the second quarter of the year (see the accompanying graph). [bar graph on left side of page - graph data described below] Stronger-than-expected corporate earnings provided fuel for increased corporate expansion and job growth. Nearly two million new jobs were created in the first eight months of the year, sending the national unemployment rate to a six-year low of 5.1%. Healthy employment numbers and a strong performance by U.S. stocks in general led to fears of inflationary pressure and expectations of an interest rate hike by the Fed. As a result, U.S. bonds overall gave a lackluster performance for the period. But the expected surge in inflation failed to materialize. For the first eight months of the year, inflation, as measured by the consumer price index (CPI), grew at an annualized rate of 3.2%, as compared to a 2.8% rate for the first eight months of 1995. (The 2.5% inflation rate for all of 1995 was the lowest annual rate since 1986.) Because of this apparent lack of inflationary pressure, the Fed held interest rates steady through September. Nevertheless, some market participants believe that the Fed will raise interest rates before the end of the year. Signs of wage inflation have surfaced--in June, the Labor Department reported the largest average hourly earnings increase in more than 30 years. In spite of higher interest rates for most of this year, the housing market has remained robust, and consumer confidence is at a six-year high, indicating that the U.S. consumer may still have some spending power. Whatever the Fed's plans, however, it is unlikely that we will see a Fed move in interest rates until the November elections are safely past. [graph data] Quarterly Economic Growth (GDP) vs. Inflation (Consumer Price Index) July 1994 - August 1996 GDP CPI Jan-94 2.52 Feb-94 2.51 Mar-94 2.50 2.51 Apr-94 2.36 May-94 2.29 Jun-94 4.90 2.56 Jul-94 2.70 Aug-94 2.90 Sep-94 3.50 3.03 Oct-94 2.68 Nov-94 2.60 Dec-94 3.00 2.60 Jan-95 2.87 Feb-95 2.79 Mar-95 0.40 2.86 Apr-95 2.98 May-95 3.12 Jun-95 0.70 3.04 Jul-95 2.83 Aug-95 2.62 Sep-95 3.80 2.54 Oct-95 2.74 Nov-95 2.67 Dec-95 0.30 2.67 Jan-96 2.72 Feb-96 2.72 Mar-96 2.00 2.84 Apr-96 2.90 May-96 2.96 Jun-96 4.70 2.75 Jul-96 2.95 Aug-96 2.88 Source: Bloomberg Financial Markets 1 MARKET SUMMARY MUNICIPAL SECURITIES by Dave MacEwen, Vice President & Senior Municipal Portfolio Manager NOTE: Terms marked with an asterisk (*) are defined in the Investment Fundamentals section (pages 22-28). Although 1995 saw the strongest U.S. bond returns in a decade, the first quarter of 1996 marked a major shift in bond market expectations. A surprising economic recovery led by unexpectedly strong employment growth (discussed on page 1) caused investors to fear that inflation--the great eroder of bond returns--would rear its ugly head. As a result, the bond market sold off and the yield curve* rose dramatically from February to April. Since then, the yield on the 30-year municipal bond has ranged from 5.45% to 6.00%. Municipal bond (muni) prices followed the downward trend of the broader bond market as yields rose (see the accompanying graph). Though the bear market mentality that prevailed caused muni bond prices to fall, Treasury securities (Treasuries) fell farther. As a result, munis significantly outperformed Treasuries during the first eight months of the year. Some of this outperformance can be attributed to dissipating flat-tax fears, which had a negative effect on munis in 1995 and caused them to be inexpensively priced compared to Treasuries. Munis' strong showing was more surprising given that Jack Kemp, a strong advocate of the flat-tax initiative, was added to the Republican presidential ticket as Bob Dole's running mate. Nonetheless, flat-tax fears seem to have largely evaporated, emphasizing the market's belief that President Clinton will remain in office. [line graph on left side of page - graph data described below] Other factors also supported muni prices during the period. Though muni issuance this year is slightly ahead of the pace seen in 1995, new supply--especially in the shorter-maturity sector--remains at historically low levels. Low levels of supply, combined with an upsurge of demand, helped support muni prices during the period. Muni issuance is expected to remain sluggish in the near term, which should help limit market gyrations. However, the economic environment remains uncertain--further signs of economic strength could fuel inflation concerns, while faltering economic growth would likely benefit all fixed-income securities. [graph data] The Shifting Municipal Yield Curve Years 8/30/96 2/29/96 "1" 3.87% 3.35% "2" 4.12 3.65 "3" 4.32 3.85 4.47 3.97 "5" 4.57 4.09 4.67 4.2 "7" 4.77 4.309 4.87 4.409 4.97 4.509 "10" 5.07 4.609 5.152 4.707 5.234 4.805 5.316 4.903 5.398 5.001 "15" 5.48 5.099 5.514 5.137 5.548 5.175 5.582 5.213 5.616 5.251 "20" 5.65 5.289 5.658 5.299 5.666 5.309 5.674 5.319 5.682 5.329 "25" 5.69 5.339 5.694 5.345 5.698 5.351 5.702 5.357 5.706 5.363 "30" 5.71 5.369 Source: Bloomberg Financial Markets 2 CALIFORNIA CREDIT ANALYSIS STATE ECONOMIC AND CREDIT REVIEW by Steven Permut, Manager of Municipal Credit Analysis, and the Benham Municipal Credit Analysis Team: Joe Crowley, Scott Lord and Bill McClintock California's economic recovery has been the driving force behind an improvement in the state's credit quality. As we anticipated in our last report, the state's credit rating was upgraded by two rating agencies. This improvement in credit quality resulted in higher net asset values and higher total returns for Benham California bond fund shareholders. The state's economic turnaround, which began in the fourth quarter of 1993, continued through the six months ended August 31, 1996. With employment growth exceeding the national average, California's unemployment rate fell to 7.1% in June from a 1993 recessionary high of more than 9%. California's economy has more than replaced the jobs lost during the recession (see the accompanying graph), with significant growth in the technology, tourism and entertainment sectors. [mountain graph on left side of page - graph data described below] Underscoring the state's economic turnaround has been the strong growth in sales tax revenues. We've also witnessed statewide improvement in the real estate sector. The San Francisco Bay Area has seen property values rise appreciably, while the southern California real estate market has bottomed out and begun to exhibit positive characteristics. Real estate prices in many regions have surpassed their 1989 highs, indicating the regional vitality of California's real estate market. Despite these generally positive trends, California and its municipalities face fiscal challenges from welfare reform, funding for education infrastructure and rising criminal justice expenditures. Regionally, the San Francisco Bay Area continues to show impressive growth. The state's Central Valley is stable and enjoying moderate growth. Southern California in general and the Los Angeles basin in particular have exhibited the first real signs of an economic turnaround, indicating that the effects of cutbacks in defense spending and military base closures have largely run their course. Though local governments such as cities and school districts have generally benefited from the state's economic strength, individual disparities point to a continued need for thorough case-by-case credit analysis. [graph data] California Employment (non-farm, seasonally adjusted, 6-mo. moving average, in thousands) 1/31/91 12505.6 2/28/91 12487.2 3/31/91 12466.7 4/30/91 12445.7 5/31/91 12423.3 6/30/91 12398.5 7/31/91 12383.1 8/31/91 12371.7 9/30/91 12361.5 10/31/91 12349.8 11/30/91 12335.1 12/31/91 12318.5 1/31/92 12293.3 2/29/92 12262.8 3/31/92 12241.9 4/30/92 12223.2 5/31/92 12207.3 6/30/92 12192.3 7/31/92 12187.5 8/31/92 12181.4 9/30/92 12163.9 10/31/92 12146.9 11/30/92 12130.8 12/31/92 12113.9 1/31/93 12099.5 2/28/93 12088.3 3/31/93 12078 4/30/93 12063.6 5/31/93 12051.5 6/30/93 12046 7/31/93 12039.6 8/31/93 12037.3 9/30/93 12037.9 10/31/93 12039.3 11/30/93 12039.2 12/31/93 12044.1 1/31/94 12042.7 2/28/94 12047.8 3/31/94 12060.7 4/30/94 12075.4 5/31/94 12093.9 6/30/94 12108.5 7/31/94 12126.2 8/31/94 12142 9/30/94 12156.5 10/31/94 12170.5 11/30/94 12187.1 12/31/94 12208.9 1/31/95 12225.9 2/28/95 12252 3/31/95 12275 4/30/95 12303.1 5/31/95 12331.3 6/30/95 12355.1 7/31/95 12388.6 8/31/95 12414.9 9/30/95 12445.4 10/31/95 12472.2 11/30/95 12497.2 12/31/95 12521.2 1/31/96 12545.1 2/96 12620.2 3/96 12657.4 4/96 12671.1 5/96 12722.7 6/96 12755.2 Source: U.S. Department of Labor, Bureau of Labor Statistics 3 TAX-FREE MONEY MARKET FUND CURRENT YIELD* As of August 31, 1996 7-Day 7-Day 7-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- Current Effective 34.70% 37.42% 41.95% 42.40% Yield Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 2.85% 2.89% 4.36% 4.55% 4.91% 4.95% The 7-Day Current Yield is calculated based on the income generated by an investment in the Fund over a seven-day period and is expressed as an annual percentage rate. The 7-Day Effective Yield is calculated similarly, although this figure is slightly higher than the Fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the Fund's investments is reinvested and generating additional income. The 7-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 7-Day Current Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $1.00 3.12% 2.84% 2.73% 3.71% Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 30. The Fund commenced operations on November 9, 1983. * Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's yields and total returns will vary. The U.S. government neither insures nor guarantees investments in the Fund. The Fund is managed to maintain a stable $1.00 share price, but, as with all money market funds, there is no assurance that the Fund will be able to do so. 4 TAX-FREE MONEY MARKET FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 PORTFOLIO VALUE: $422,621,155 $427,320,472 Number of Issues: 91 100 Average Maturity: 39 days 33 days For definitions of these terms, see page 23. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 SP1 23% SP1 33% SP1+ 77% SP1+ 66% D 1% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. Some of the Fund's securities do not carry SP1+ or SP1 ratings, but they have received equivalent ratings from Moody's or other rating services. For display purposes, we have converted the equivalent ratings to SP1+ or SP1. Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 25. For more information on the securities rated "D," see page 7. PORTFOLIO COMPOSITION BY SECURITY TYPE [pie charts] 8/31/96 2/29/96 VRDNs: 76% VRDNs: 76% Municipal Notes: 9% Municipal Notes: 13% Bonds less than 1 year: 7% Put Bonds: 5% Commercial Paper: 4% Bonds less than 1 year: 4% Put Bonds: 4% Commercial Paper: 2% For definitions of these security types, see page 22. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 0-7 Days: 78% 0-7 Days: 76% 8-90 Days: 7% 8-90 Days: 9% 91-180 Days: 3% 91-180 Days: 10% 181-397 Days: 12% 181-397 Days: 5% The Fund generally maintains an average maturity between 30 and 60 days, with 45 days considered a "neutral" position. 5 TAX-FREE MONEY MARKET FUND MANAGEMENT DISCUSSION with Todd Pardula, Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 22-28). Q: How did the Fund perform? A: The Fund continued to perform very well. For the fiscal year ended August 31, 1996, the Fund's total return was 3.12%, which exceeded the 2.99% average total return for the 53 funds in Lipper's "California Tax-Exempt Money Market Funds" category over the same period. (See the Lipper Performance Comparison below for the Fund's one-year, three-year, five-year and ten-year returns relative to its peers.) Q: How was the Fund positioned over the past six months? A: The Fund's average maturity was shorter than neutral for the entire period. (The Fund's neutral maturity is 45 days.) After being only slightly short of neutral early in the period, the gap between the Fund and other California money market funds began widening in June as the majority of the Fund's peers took advantage of the heaviest note issuance period of the year. We were only minor participants in June because yields usually become more attractive later in the period when market demand wanes. As a result, we allowed the Fund's average maturity to drift down to about 25 days in early July. When yields became more attractive in late July and early August, we extended the Fund's average maturity by purchasing several blocks of attractively priced state tax and revenue anticipation notes* (TRANs). Although the Fund's average maturity increased to about 40 days as a result of these purchases, it was still shorter than neutral. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on AVERAGE ANNUAL TOTAL RETURNS for the periods ended 8/31/96 for the funds in Lipper's "California Tax-Exempt Money Market Funds" category. 1 Year 3 Years 5 Years 10 Years The Fund: 3.12% 2.84% 2.73% 3.71% Category Average: 2.99% 2.77% 2.70% 3.78% The Fund`s Ranking: 17 out of 53 15 out of 46 14 out of 41 7 out of 7 Total returns are based on historical performance and do not guarantee future results. 6 TAX-FREE MONEY MARKET FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: Did the Fund's Orange County securities pay off on their maturity date? A: Yes. About 1% of the Fund's assets were in Orange County TRANs that paid off at full value in June. Despite the fact that the bonds were rated "D" (for default) by several rating agencies, our credit research staff correctly felt that the bonds would pay off at full value. Q: Speaking of credit research, Twentieth Century/Benham recently implemented rigid credit guidelines. What changes have been made? A: Our California tax-exempt money market funds operate under strict credit criteria that limit the funds' exposure and maximum maturity to any single issuer. The Fund has also benefited from the recent expansion of our credit research staff and improved analytical tools. Q: How has the strong growth of the California economy affected the Fund? A: The state's economic turnaround has influenced the type of securities the Fund holds. We are now more comfortable buying certain TRANs, as well as the state's own notes, which this year came unenhanced (i.e., not backed by a letter of credit from a bank or insurance company). Even though California's fiscal position has greatly improved, the state has pushed many of its problems down to the county level; therefore, we will only selectively buy county debt. With a questionable credit outlook for most counties, our supply of creditworthy TRANs is limited--another factor that worked to hold down the Fund's average maturity during the period. (See the State Economic and Credit Review on page 3 for an overview of California's ongoing recovery.) Q: How will you position the Fund going forward? A: Looking forward, we will likely extend the Fund's average maturity to a more neutral position due to uncertainty regarding the direction of interest rates. Currently, the economy is experiencing the unusual combination of strong employment growth and low inflation. Until we know which of these is going to prevail, we will try to stay neutral. 7 MUNICIPAL MONEY MARKET FUND CURRENT YIELD* As of August 31, 1996 7-Day 7-Day 7-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- Current Effective 34.70% 37.42% 41.95% 42.40% Yield Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 2.96% 3.01% 4.53% 4.73% 5.10% 5.14% The 7-Day Current Yield is calculated based on the income generated by an investment in the Fund over a seven-day period and is expressed as an annual percentage rate. The 7-Day Effective Yield is calculated similarly, although this figure is slightly higher than the Fund's 7-Day Current Yield because of the effects of compounding. The 7-Day Effective Yield assumes that income earned from the Fund's investments is reinvested and generating additional income. The 7-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 7-Day Current Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years Life of Fund - -------------------------------------------------------------------------------- $1.00 3.23% 2.91% 2.92% 3.12% Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 31. The Fund commenced operations on December 31, 1990. * Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's yields and total returns will vary. The U.S. government neither insures nor guarantees investments in the Fund. The Fund is managed to maintain a stable $1.00 share price, but, as with all money market funds, there is no assurance that the Fund will be able to do so. 8 MUNICIPAL MONEY MARKET FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Portfolio Value: $192,430,207 $194,154,025 Number of Issues: 61 72 Average Maturity: 42 days 32 days For definitions of these terms, see page 23. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 SP1 19% D 1% SP1+ 81% SP2 1% SP1 34% SP1+ 64% "SP1+" and "SP1" are Standard & Poor's highest credit ratings for short-term municipal securities. Some of the Fund's securities do not carry SP1+ or SP1 ratings, but they have received equivalent ratings from Moody's or other rating services. For display purposes, we have converted the equivalent ratings to SP1+ or SP1. Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 25. For more information about the securities rated "D," see page 10. PORTFOLIO COMPOSITION BY SECURITY TYPE 8/31/96 2/29/96 VRDNs: 76% VRDNs: 75% Put Bonds: 13% Municipal Notes: 15% Municipal Notes: 7% Commercial Paper: 4% Bonds less than 1 Year: 3% Bonds less than 1 Year: 3% Commercial Paper: 1% Put Bonds: 3% For definitions of these security types, see page 22. PORTFOLIO COMPOSITION BY MATURITY 8/31/96 2/29/96 0-7 Days: 80% 0-7 Days: 75% 8-90 Days: 6% 8-90 Days: 10% 91-180 Days: 2% 91-180 Days: 12% 181-397 Days: 12% 181-397 Days: 3% The Fund generally maintains an average maturity between 30 and 60 days, with 45 days considered a "neutral" position. 9 MUNICIPAL MONEY MARKET FUND MANAGEMENT DISCUSSION with Todd Pardula, Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 22-28). Q: How did the Fund perform? A: The Fund continued to perform very well. For the fiscal year ended August 31, 1996, the Fund's total return was 3.23%, which exceeded the 2.99% average total return for the 53 funds in Lipper's "California Tax-Exempt Money Market Funds" category over the same period. (See the Lipper Performance Comparison on the following page for the Fund's one-year, three-year, five-year and life-of-fund returns relative to its peers.) Q: How was the Fund positioned over the past six months? A: The Fund's average maturity was shorter than neutral for the entire period. (The Fund's neutral maturity is 45 days.) After being only slightly short of neutral early in the period, the gap between the Fund and other California money market funds began widening in June as the majority of the Fund's peers took advantage of the heaviest note issuance period of the year. We were only minor participants in June because yields usually become more attractive later in the period when market demand wanes. As a result, we allowed the Fund's average maturity to drift down to about 25 days in early July. When yields became more attractive in late July and early August, we extended the Fund's average maturity by purchasing several blocks of attractively priced state tax and revenue anticipation notes* (TRANs). Although the Fund's average maturity increased to about 40 days as a result of these purchases, it was still shorter than neutral. Another factor that limited the Fund's average maturity was a shortage of one-year AMT paper.* With only a limited supply of AMT securities with maturities of 6-13 months in the market, we overweighted the Fund in variable rate demand notes* (VRDNs). Q: Did the Fund's Orange County securities pay off on their maturity date? A: Yes. About 1.5% of the Fund's assets were in Orange County TRANs that paid off at full value in June. Despite the fact that the bonds were rated "D" (for default) by several rating agencies, our credit research staff correctly felt that the bonds would pay off at full value. 10 MUNICIPAL MONEY MARKET FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: Speaking of credit research, Twentieth Century/Benham recently implemented rigid credit guidelines. What changes have been made? A: Our California tax-exempt money market funds operate under strict credit criteria that limit the funds' exposure and maximum maturity to any single issuer. The Fund has also benefited from the recent expansion of our credit research staff and improved analytical tools. Q: How has the strong growth of the California economy affected the Fund? A: The state's economic turnaround has influenced the type of securities the Fund holds. We are now more comfortable buying certain TRANs, as well as the state's own notes, which this year came unenhanced (i.e., not backed by a letter of credit from a bank or insurance company). Even though California's fiscal position has greatly improved, the state has pushed many of its problems down to the county level; therefore, we will only selectively buy county debt. With a questionable credit outlook for most counties, our supply of creditworthy TRANs is limited--another factor that worked to hold down the Fund's average maturity during the period. (See the State Economic and Credit Review on page 3 for an overview of California's ongoing recovery.) Q: How will you position the Fund going forward? A: Looking forward, we will likely extend the Fund's average maturity to a more neutral position due to uncertainty regarding the direction of interest rates. Currently, the economy is experiencing the unusual combination of strong employment growth and low inflation. Until we know which of these is going to prevail, we will try to stay neutral. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on AVERAGE ANNUAL TOTAL RETURNS for the periods ended 8/31/96 for the funds in Lipper's "California Tax-Exempt Money Market Funds" category. 1 Year 3 Years 5 Years Life of Fund The Fund: 3.23% 2.91% 2.92% 3.12% Category Average: 2.99% 2.77% 2.70% 2.83% The Fund`s Ranking: 11 out of 53 10 out of 46 6 out of 41 7 out of 37 Total returns are based on historical performance and do not guarantee future results. 11 HIGH-YIELD FUND CURRENT YIELD* As of August 31, 1996 30-Day 30-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 5.63% 8.62% 9.00% 9.70% 9.77% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. The 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Range Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years Life of Fund - -------------------------------------------------------------------------------- $9.04-$9.54 8.02% 5.28% 7.66% 6.30% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 32. The Fund commenced operations on December 30, 1986. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 12 HIGH-YIELD FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 12/31/86 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [line graph] Index Fund 12/31/86 10000 10000 1/31/87 10336 10171 2/28/87 10365 10228 3/31/87 10212 10259 4/30/87 9639 9010 5/31/87 9533 8821 6/30/87 9229 9060 7/31/87 9315 9117 8/31/87 9356 9134 9/30/87 8974 8658 10/31/87 8973 8474 11/30/87 9260 8724 12/31/87 9381 8891 1/31/88 9755 9206 2/29/88 9870 9319 3/31/88 9729 9217 4/30/88 9806 9282 5/31/88 9816 9322 6/30/88 10007 9436 7/31/88 10074 9506 8/31/88 10114 9607 9/30/88 10343 9758 10/31/88 10579 9903 11/30/88 10465 9898 12/31/88 10647 9998 1/31/89 10898 10159 2/28/89 10745 10181 3/31/89 10754 10178 4/30/89 11069 10309 5/31/89 11326 10512 6/30/89 11498 10625 7/31/89 11650 10740 8/31/89 11473 10650 9/30/89 11438 10663 10/31/89 11589 10746 11/30/89 11835 10924 12/31/89 11923 10963 1/31/90 11802 10924 2/28/90 11935 11075 3/31/90 11948 11078 4/30/90 11802 10939 5/31/90 12135 11251 6/30/90 12254 11365 7/31/90 12471 11576 8/31/90 12174 11264 9/30/90 12155 11219 10/31/90 12412 11329 11/30/90 12727 11527 12/31/90 12783 11582 1/31/91 12954 11772 2/28/91 13045 11819 3/31/91 13077 11852 4/30/91 13279 12049 5/31/91 13435 12186 6/30/91 13410 12179 7/31/91 13617 12350 8/31/91 13813 12474 9/30/91 14013 12644 10/31/91 14160 12745 11/30/91 14177 12742 12/31/91 14515 12847 1/31/92 14506 12833 2/29/92 14529 12942 3/31/92 14566 13030 4/30/92 14705 13128 5/31/92 14920 13284 6/30/92 15208 13490 7/31/92 15766 13903 8/31/92 15554 13736 9/30/92 15623 13820 10/31/92 15362 13544 11/30/92 15795 13875 12/31/92 16000 14025 1/31/93 16151 14125 2/28/93 16902 14593 3/31/93 16698 14504 4/30/93 16927 14704 5/31/93 17067 14851 6/30/93 17388 15119 7/30/93 17405 15129 8/31/93 17851 15467 9/30/93 18083 15670 10/31/93 18117 15759 11/30/93 17898 15630 12/31/93 18360 15874 1/31/94 18576 16084 2/28/94 17961 15773 3/31/94 16889 15153 4/29/94 17019 15096 5/31/94 17218 15297 6/30/94 17012 15271 7/29/94 17449 15584 8/31/94 17485 15602 9/30/94 17080 15422 10/31/94 16555 15191 11/30/94 16118 14803 12/30/94 16691 15023 1/31/95 17425 15444 2/28/95 18134 15821 3/31/95 18352 16102 4/28/95 18343 16107 5/31/95 19124 16592 6/30/95 18772 16423 7/31/95 18868 16490 8/31/95 19134 16708 9/30/95 19283 16826 10/31/95 19750 17083 11/30/95 20259 17464 12/31/95 20575 17771 1/31/96 20664 17789 2/29/96 20412 17721 3/31/96 20038 17502 4/30/96 19958 17461 5/31/96 19968 17551 6/30/96 20275 17823 7/31/96 20476 17996 8/31/96 20450 18044 Past performance does not guarantee future results. This graph compares the Fund's performance with a broad-based market index, the Lehman Brothers, Inc. Long-Term Municipal Bond Index, over the life of the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on AVERAGE ANNUAL TOTAL RETURNS for the periods ended 8/31/96 for the funds in Lipper's "California Municipal Debt Funds" category. 1 Year 3 Years 5 Years Life of Fund+ The Fund: 8.02% 5.28% 7.66% 6.30% Category Average: 5.67% 3.82% 6.86% 6.73% The Fund`s Ranking: 1 out of 96 4 out of 62 3 out of 47 24 out of 30 + from December 31, 1986, to August 31, 1996 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1996 % From Realized % From and Unrealized Gains One-Year Income + on Investments = Total Return 6.23% + 1.79% = 8.02% 13 HIGH-YIELD FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Market Value: $142,114,909 $124,390,827 Number of Issues: 90 81 Average Coupon: 6.37% 6.57% Average Maturity: 20.68 years 21.67 years Average Duration: 7.50 years 7.00 years For definitions of these terms, see page 23. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 Unrated: 32% Unrated: 29% BBB: 16% BBB: 24% A: 27% A: 30% AA: 2% AA: 3% AAA: 23% AAA: 14% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 25. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] 8/31/96 2/29/96 Tax Allocation: 17% Tax Allocation: 20% COPs: 13% COPs: 18% Electric: 12% Electric: 12% Mello-Roos: 12% Mello-Roos: 12% Hospital: 9% Hospital: 6% 1915 Act: 8% 1915 Act: 5% Other: 29% Other: 27% For definitions of these security types, see page 22. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 less than 1 Year: 2% 1-5 Years: 3% 1-5 Years: 3% 10-20 Years: 35% 5-10 Years: 2% 20-30 Years: 61% 10-20 Years: 33% greater than 30 Years: 1% 20-30 Years: 58% greater than 30 Years: 2% The Fund invests primarily in intermediate- and long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. 14 HIGH-YIELD FUND MANAGEMENT DISCUSSION with Steven Permut, Senior Portfolio Manager and Manager of Municipal Credit Analysis NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 22-28). Q: How did the Fund perform? A: The Fund performed very well, ranking #1 out of the 96 funds in Lipper's "California Municipal Debt Funds" category. For the fiscal year ended August 31, 1996, the Fund's total return was 8.02%, compared to the 5.67% average total return of its peers over the same period. The Fund's longer-term performance has also been strong. For example, the Fund's three-year average annual return of 5.28% exceeds the 3.82% three-year average annual return of its peer group. (See the Lipper Performance Comparison on page 13 for the Fund's one-year, three-year, five-year and life-of-fund returns relative to its peers.) Q: The Fund tends to invest in lower-quality bonds in order to generate a high level of tax-exempt income. Has the Fund been meeting this objective? A: Yes, the Fund continues to provide shareholders with a substantial amount of tax-free income. During the fiscal year, the Fund produced 6.23% in tax-free income. In addition, as of August 31, 1996, the Fund's 30-day SEC yield was 5.63%, compared to the 4.72% average yield of its peer group.+ Q: To what do you attribute the Fund's strong performance? A: A number of factors combined to produce the Fund's strong performance during the period. First, the Fund benefited from the impressive security selection process we have employed over the life of the Fund. In the past six months, a number of the Fund's portfolio holdings received ratings upgrades, and several others were prerefunded. Consequently, the market value of these securities increased, boosting the Fund's returns. Second, the Fund's neutral duration helped its returns because the past year was a period of high interest rate volatility. By remaining neutral, the Fund limited its vulnerability to interest rate fluctuations. Third, the Fund's strong performance can also be attributed to the compression of credit quality spreads (the difference in the value of two securities) between nonrated bonds and bonds rated AAA. The Fund, which holds a relatively high position in lower-rated securities, greatly benefited from this trend. + Although the Fund's yield may be significantly higher than the yields of other fixed-income funds that purchase higher-rated securities, this higher yield is generally based upon the greater credit risk of the securities in the Fund's portfolio. 15 HIGH-YIELD FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: Can you elaborate on the security selection process that resulted in such strong performance by the Fund? A: We use a bottom-up, value-oriented approach to security selection. Our team of municipal credit analysts examines securities we feel to be undervalued by virtue of their credit rating or market valuation. As a result of our thorough research process, we are able to purchase securities that we feel are undervalued, but will likely appreciate in value because of rating upgrades and improvements in credit quality. Q: One-third of the Fund's assets are in nonrated securities. Why such a high percentage? A: Our heavy weighting in nonrated bonds fits our value-oriented, high- yield investment approach. During the last six months of the fiscal year, we were able to purchase a number of nonrated securities that fit our credit criteria. We feel these securities have improving credit outlooks and will represent good value in the future. We expect the continued improvement of the state's economy to help the performance of nonrated California bonds. Q: How will you position the Fund going forward? A: We expect to keep the Fund's duration neutral relative to its peer group, pursuing the same neutral strategy we used successfully over the past six months. We will look to increase our holdings of nonrated bonds when we find issues that meet our credit criteria and represent good value. We will also likely maintain or increase our holdings of highly liquid, insured bonds rated AAA. We believe this overall strategy should result in high levels of tax-free income to our shareholders. 16 INSURED FUND CURRENT YIELD* As of August 31, 1996 30-Day 30-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 4.88% 7.47% 7.80% 8.41% 8.47% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. The 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Range Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND - -------------------------------------------------------------------------------- $9.74-$10.53 6.60% 4.25% 7.55% 6.63% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 33. The Fund commenced operations on December 30, 1986. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 17 INSURED FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 12/31/86 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [line graph] Index Fund 12/31/86 10000 10000 1/31/87 10336 10375 2/28/87 10365 10407 3/31/87 10212 10316 4/30/87 9639 9245 5/31/87 9533 9125 6/30/87 9229 9377 7/31/87 9315 9424 8/31/87 9356 9492 9/30/87 8974 8807 10/31/87 8973 8905 11/30/87 9260 9217 12/31/87 9381 9404 1/31/88 9755 9781 2/29/88 9870 9906 3/31/88 9729 9619 4/30/88 9806 9695 5/31/88 9816 9647 6/30/88 10007 9860 7/31/88 10074 9883 8/31/88 10114 9927 9/30/88 10343 10129 10/31/88 10579 10347 11/30/88 10465 10222 12/31/88 10647 10360 1/31/89 10898 10616 2/28/89 10745 10508 3/31/89 10754 10499 4/30/89 11069 10764 5/31/89 11326 11018 6/30/89 11498 11171 7/31/89 11650 11350 8/31/89 11473 11122 9/30/89 11438 11045 10/31/89 11589 11147 11/30/89 11835 11372 12/31/89 11923 11429 1/31/90 11802 11247 2/28/90 11935 11426 3/31/90 11948 11412 4/30/90 11802 11178 5/31/90 12135 11579 6/30/90 12254 11676 7/31/90 12471 11919 8/31/90 12174 11563 9/30/90 12155 11519 10/31/90 12412 11831 11/30/90 12727 12151 12/31/90 12783 12201 1/31/91 12954 12344 2/28/91 13045 12387 3/31/91 13077 12352 4/30/91 13279 12526 5/31/91 13435 12644 6/30/91 13410 12595 7/31/91 13617 12761 8/31/91 13813 12936 9/30/91 14013 13140 10/31/91 14160 13290 11/30/91 14177 13229 12/31/91 14515 13576 1/31/92 14506 13519 2/29/92 14529 13552 3/31/92 14566 13539 4/30/92 14705 13662 5/31/92 14920 13853 6/30/92 15208 14152 7/31/92 15766 14695 8/31/92 15554 14446 9/30/92 15623 14483 10/31/92 15362 14158 11/30/92 15795 14666 12/31/92 16000 14823 1/31/93 16151 15008 2/28/93 16902 15745 3/31/93 16698 15474 4/30/93 16927 15648 5/31/93 17067 15727 6/30/93 17388 16015 7/30/93 17405 15960 8/31/93 17851 16431 9/30/93 18083 16654 10/31/93 18117 16626 11/30/93 17898 16449 12/31/93 18360 16818 1/31/94 18576 17034 2/28/94 17961 16531 3/31/94 16889 15694 4/29/94 17019 15778 5/31/94 17218 15887 6/30/94 17012 15810 7/29/94 17449 16144 8/31/94 17485 16155 9/30/94 17080 15910 10/31/94 16555 15600 11/30/94 16118 15337 12/30/94 16691 15716 1/31/95 17425 16204 2/28/95 18134 16703 3/31/95 18352 16816 4/28/95 18343 16835 5/31/95 19124 17455 6/30/95 18772 17145 7/31/95 18868 17259 8/31/95 19134 17463 9/30/95 19283 17626 10/31/95 19750 17995 11/30/95 20259 18431 12/31/95 20575 18706 1/31/96 20664 18776 2/29/96 20412 18635 3/31/96 20038 18185 4/30/96 19958 18069 5/31/96 19968 18095 6/30/96 20275 18316 7/31/96 20476 18569 8/31/96 20450 18612 Past performance does not guarantee future results. This graph compares the Fund's performance with a broad-based market index, the Lehman Brothers, Inc. Long-Term Municipal Bond Index, over the life of the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on AVERAGE ANNUAL TOTAL RETURNS for the periods ended 8/31/96 for the funds in Lipper's "California Insured Municipal Debt Funds" category. 1 Year 3 Years 5 Years Life of Fund+ The Fund: 6.60% 4.25% 7.55% 6.63% Category Average : 5.82% 3.51% 7.26% 6.76% The Fund`s Ranking: 5 out of 28 3 out of 18 2 out of 8 6 out of 7 + from December 31, 1986, to August 31, 1996 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1996 % From Realized % From and Unrealized Gains One-Year Income + on Investments = Total Return 5.47% + 1.13% = 6.60% 18 INSURED FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Market Value: $189,391,294 $185,315,439 Number of Issues: 69 66 Average Coupon: 6.29% 6.26% Average Maturity: 17.07 years 17.91 years Average Duration: 7.78 years 8.20 years For definitions of these terms, see page 23. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 AAA: 100% AAA: 100% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 25. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] 8/31/96 2/29/96 COPs: 26% COPs: 26% Water/Sewer: 12% Water/Sewer: 16% Tax Allocation: 10% Tax Allocation: 10% Electric: 10% Hospital: 9% GO: 9% Sales Tax: 9% Prerefunded: 9% Electric: 9% Other: 24% Other: 21% For definitions of these security types, see page 22. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 less than 1 Year: 2% less than 1 Year: 2% 1-5 Years: 4% 1-5 Years: 3% 5-10 Years: 2% 5-10 Years: 2% 10-20 Years: 64% 10-20 Years: 58% 20-30 Years: 28% 20-30 Years: 35% The Fund invests primarily in long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. 19 INSURED FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President and Senior Municipal Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 22-28). Q: How did the Fund perform? A: The Fund managed a strong performance in comparison to its peers. For the fiscal year ended August 31, 1996, the Fund's total return ranked it in the top 18% of the 28 funds in Lipper's "California Insured Municipal Debt Funds" category. The Fund's total return of 6.60% was 78 basis points* higher than the 5.82% average total return for its Lipper category (see the Lipper Performance Comparison on page 18). Q: Why did the Fund perform well against its peers? A: One contributing factor was the Fund's large contingent of long-term premium non-callable bonds,* which tend to outperform in a down market because they typically have shorter durations than par* or discount* bonds with comparable maturities. These securities performed very well as the muni yield curve reversed direction and steepened in early 1996. As a result, we were able to maintain much of the Fund's 1995 gains and mitigate losses as the bond market mentality shifted from bullish to bearish. Q: Why and how did you change the Fund's positioning? A: During late 1995, we began shifting the Fund's portfolio from a bullet structure* toward a barbell structure.* We also extended the Fund's duration* (a measure of the price sensitivity of a bond or bond fund to changes in interest rates) from 8.4 years at the start of the fiscal period to 8.6 years by the beginning of February. This positioning allowed the Fund to pick up some extra yield and enabled the Fund to outperform many of its peers as the muni yield curve flattened in late 1995 and early 1996. Shortly after February, we began to shorten the Fund's duration as evidence of a strengthening economy caused the market to sell off. We also shifted the Fund toward more of a ladder structure.* This neutral posture allows the Fund to be more quickly adjusted in the event that the yield curve changes. By the end of the period, we had shortened the Fund's duration to 7.8 years. 20 INSURED FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: What is the outlook for munis for the remainder of 1996? A: Though the outlook for bonds in general is rather uncertain, in the muni market we expect supply and demand factors to continue working in favor of munis for the near future. Historically low muni issuance among short-term securities, combined with strong demand, have been major factors helping to support prices. In addition, the muni market has fully recovered from flat-tax fears as the likelihood of the Republican presidential-election ticket winning the race to the White House has decreased. The flat-tax initiative, touted by Republican presidential running mate Jack Kemp, would eliminate the tax-exempt advantage munis currently enjoy and effectively spell bad news for muni investors. Though some type of limited tax reform may still occur if President Clinton remains in office, the exact nature of the reform and when it will take place remains in question. Q: Given this situation, what are your plans for the Fund over the next six months? A: We will likely maintain the Fund's neutral posture until a more clear market direction becomes apparent, opportunistically lengthening or shortening the Fund's duration in a narrow range around this stance. We will also continue to favor a bias toward a laddered structure until the market breaks out of its current trading range. If the economic outlook does change dramatically, the Fund will be positioned to respond appropriately. 21 INVESTMENT FUNDAMENTALS DEFINITIONS Common California Municipal Securities (Munis) AMT Paper--instruments with income subject to the federal alternative minimum tax. Certificates of Participation (COPs)--securities issued to finance public property improvements (such as city halls and police stations). Development Bonds--securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. General Obligation (GO) bonds--securities backed by the taxing power of the issuer. Guaranteed Investment Contracts (GICs)--securities backed by a guarantee from an insurance company. Municipal Commercial Paper (CP)--high-grade short-term securities backed by a line of credit from a bank. Municipal Notes--securities with maturities of two years or less. Prerefunded Bonds--securities refinanced by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. Put Bonds--securities that provide the right to sell to a specified buyer at a specified time and price. Revenue Bonds--securities backed by revenues from sales taxes or from a specific project, system or facility (such as a hospital, electric utility or water system). Tax Allocation Bonds--securities issued to finance improvements in redevelopment areas (such as urban neighborhoods). Tax and Revenue Anticipation Notes (TRANs)--securities backed by the general tax revenues of the issuer. Variable-Rate Demand Notes (VRDNs)--securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. Municipal Derivatives Inverse Floaters--securities bearing interest rates that move inversely to market interest rates. Unlike most bonds, their yields increase as interest rates decline. However, if interest rates rise, they lose considerably more value than a regular fixed-rate bond. Therefore, each Benham California Tax-Free and Municipal Fund limits its investment in inverse floaters to a maximum of 10% of net assets (except for the Money Market Funds, which cannot own inverse floaters at all). 22 INVESTMENT FUNDAMENTALS DEFINITIONS (Continued from the previous page) Tender Option Bonds--intermediate- or long-term fixed-rate securities with put options attached (which give the holder the option to sell the bonds at face value at a specified time). Tender option bonds purchased by the Funds are typically structured with seven-day put features attached and pay interest at rates that are reset weekly. Each Fund limits its investment in tender option bonds to 15% of net assets. Tender option bonds are not leveraged and have risk characteristics that are similar to VRDNs. Portfolio Statistics Portfolio Value (money market funds)--the amortized cost of a fund's investments on a given date. Market Value (bond funds)--the market value of a fund's investments on a given date. Number of Issues--the number of different securities issuances held by a fund on a given date. Average Coupon--a weighted average of all coupons held in a bond fund's portfolio. Average Maturity--a weighted average of all bond maturities in a fund's portfolio (see also page 26). Average Duration--a weighted average of all bond durations in a fund's portfolio (see also page 26). Investment Terms Basis Points--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equals one percentage point (or 1%). Basis points are used to clearly describe interest rate changes. For example, if a news report indicates that interest rates rose 1%, does that mean 1% of the previous rate or one percentage point? It is more accurate to state that interest rates rose by 100 basis points. Coupon--the stated interest rate on a security. Discount Bonds--bonds with interest coupons that are lower than prevailing interest rates (see also page 27). Par Bonds--bonds that trade or are priced at their face value. Premium Bonds-- bonds with interest coupons that are higher than prevailing interest rates (see also page 27). 23 INVESTMENT FUNDAMENTALS THE YIELD CURVE One of the fundamental tenets of investing is the relationship between risks and returns--the greater the risks, the greater the chances of earning higher returns over time. The downside is the correspondingly higher potential for short-term losses--an investment that generates a high return probably has a greater likelihood of significant fluctuations in value or return, especially in the short run. Bonds are no exception. The riskiest bonds--those with the greatest exposure to interest rate movements and price fluctuations--generally have the highest yields and returns over time but can experience severe short-term losses. On the other hand, bonds with less exposure to interest rate movements and less price fluctuation generally have lower yields and returns but are more stable. The yield curve is a graphic representation of the relationship between bond risks and returns at a point in time. Yield curve graphs plot bond maturities (which represent risk since longer maturities increase risk) along the horizontal axis and rising yields (which represent return) on the vertical axis. Therefore, the lower left corners of yield curve graphs have the lowest risks and the lowest potential returns, while the upper right corners have the highest risks and the highest potential returns. Yield curves can have several different shapes, depending on interest rate levels and the economic environment: Normal (Upward Sloping) Yield Curve--a yield curve that shows a normal risk/ return relationship--short-term securities have lower yields than long-term securities. Most normal yield curves start in the lower left corner of the graph and rise to the upper right corner. Steep Yield Curve--a normal yield curve that shows a large difference between short-term yields and long-term yields. This typically occurs when the bond market is responding to inflation fears (causing high long-term bond yields) and the Fed hasn't raised short-term interest rates enough (or the economy hasn't slowed down enough) to quell those fears. Flat Yield Curve--a yield curve that shows short-term securities having almost the same yields as long-term securities. This typically occurs after the Fed has raised short-term interest rates several times (to fight inflation when the economy is strong) or when the bond market expects the Fed to lower short-term interest rates (in a weaker economic environment). Inverted Yield Curve--a yield curve that shows short-term securities having higher yields than long-term securities. This typically develops from a flat yield curve if the Fed continues to raise short-term interest rates (when the economy is strong) or if it fails to lower short-term rates when the market expects it to do so (in a weaker economic environment). 24 INVESTMENT FUNDAMENTALS MUNI RISK FACTORS Credit Quality and Credit Ratings Bond credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in bond investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. In turn, credit quality and ratings greatly influence bond prices and yields--high ratings mean higher prices and less current income (yield) as compensation for risk. But credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality, as the Orange County bankruptcy in 1994 made painfully clear. In that case, highly rated munis issued by a wealthy county still suffered defaults. Furthermore, in addition to the credit risk, there is still market risk. High credit ratings do not guarantee good investment performance. They do not reflect the price stability of a muni when economic or market conditions change. Callability Many munis are callable, which means they can be redeemed by the issuer before maturity. When interest rates fall, municipalities find it financially rewarding to refinance the bonds they've issued because they can reduce their interest payments. The municipalities exercise their "call" options to refinance the bonds. Calls are bad for muni investors--calls reduce the life of a municipal portfolio and force the portfolio manager to reinvest in lower-yielding munis. The durations of munis effectively shorten as rates fall. Calls also boost supply and help drive down muni prices. Call options can only be exercised on specific "call dates," which don't always coincide with periods of low interest rates when refinancing is desirable. As a result, municipalities will issue new bonds when interest rates are low and use the proceeds to buy Treasuries, which offset the old bonds (now known as prerefunded bonds) on their balance sheets until the bonds can be retired on the call date. When the call date arrives, the Treasuries mature, and the prerefunded bonds are retired. During this process, there is a period of time when both the newly issued bonds and the prerefunded bonds remain outstanding. This situation doubles the municipal bond supply, which can depress prices. Duration Extension Duration extension occurs when interest rates increase significantly, as they did in 1994. Higher interest rates reduce calls, which is good for municipal investors, but the lower level of calls causes the durations of munis to extend longer, which is bad when rates are rising. Muni funds become more susceptible to price declines at a time when greater price stability would be desirable. By contrast, Treasury durations generally shorten slightly when interest rates experience a large increase. Because of their higher coupons, premium bonds experience less duration extension than par or discount bonds. 25 INVESTMENT FUNDAMENTALS PORTFOLIO SENSITIVITY MEASUREMENTS Duration Duration measures the price sensitivity of a bond or bond fund to changes in interest rates. Specifically, duration represents the approximate percentage change in the price of a bond or bond fund if interest rates move up or down by 100 basis points (defined on page 23). For example, as of August 31, 1996, the California High-Yield Fund's duration was 7.5 years, while the California Insured Fund's duration was 7.8 years. If interest rates were to rise by 100 basis points, the High-Yield Fund's share price would be expected to decline by 7.5%, while the Insured Fund's share price would decline by 7.8%. Conversely, if interest rates were to fall by 100 basis points, the High-Yield Fund's share price would be expected to increase by 7.5%, while the Insured Fund's share price would increase by 7.8%. As this example illustrates, the longer the duration, the more bond or bond fund prices will move in response to interest rate changes. Therefore, portfolio managers generally lengthen durations when interest rates fall (to maximize the effects of bond price increases) and shorten durations when interest rates rise (to minimize the effects of bond price declines), taking into account the objectives of the portfolio. Duration, measured in years, also approximates (but understates) the weighted average life of a bond or bond portfolio. To calculate duration, the future interest and principal payments are added together and weighted in proportion to their time value (early payments are valued more than later payments because early payments can be reinvested and compound additional returns). Average Maturity Average maturity is another measurement of the interest rate sensitivity of a bond portfolio. Average maturity measures the average amount of time that will pass until a bond portfolio receives its principal payments from matured bonds. The longer a portfolio's average maturity is, the more interest rate exposure and interest rate sensitivity it has. For example, a portfolio with a ten-year average maturity has much more potential exposure to interest rate changes than a portfolio with a one-year average maturity. Portfolio managers generally lengthen average maturities when interest rates fall (to maximize exposure and capture as much price appreciation as possible) and reduce average maturities when interest rates rise (to minimize exposure and avoid as much price depreciation as possible), as long as this strategy is compatible with the objectives of the portfolio. Reducing the average maturity in a rising interest rate environment allows the portfolio manager to more quickly reinvest matured assets in higher-yielding securities. 26 INVESTMENT FUNDAMENTALS BOND PRICING Premium and Discount Bonds Municipal bonds are generally priced at a premium or at a discount. Premium bonds are bonds that trade or are priced above par (face value), typically because their interest coupons are higher than the prevailing market interest rate. Discount bonds are bonds that trade or are priced below par, typically because their interest coupons are lower than the prevailing market interest rate. A bond may be both a premium bond and a discount bond during its life, depending on changing market conditions. As market rates rise and bond prices fall, the price of a premium bond can fall below par, and the bond becomes a discount bond. Conversely, as market rates fall and bond prices rise, the price of a discount bond can rise above par, and the bond becomes a premium bond. Premium munis tend to have more price stability than discount munis--premium munis depreciate less when interest rates rise (they experience less duration extension), but they appreciate less when interest rates fall (they experience more calls). Discount munis behave more like long-term Treasury securities. Tax Treatment of Discount Bonds In 1993, new rules were passed regarding the tax treatment of long-term gains on discount munis. In the past, any gain earned from the market discount was treated as a capital gain, which is taxed at a maximum rate of 28%. However, the newer law requires that any gain attributable to the market discount must be treated as taxable ordinary income, which is taxed at the same rate as an individual's tax bracket (up to 39.6%). Small market discounts (according to a formula based on the price of the bond and the maturity date) are not subject to the new law. This tax treatment has made discount bonds less attractive in the muni market because most municipal investors prefer to avoid incurring taxable income. Discount munis also tend to have relatively low prices to make up for the expected tax liability. As a result, when the price of a muni falls to the point where it is traded at a market discount, the combination of reduced desirability and added tax liability tends to lead to further price declines. 27 INVESTMENT FUNDAMENTALS PORTFOLIO STRUCTURES & TAXABLE DISTRIBUTIONS Bond Portfolio Structures Barbell Structure--a structure that overweights a portfolio in short- and long-term securities and underweights intermediate-term securities. This structure tends to outperform a bullet structure when the yield curve is moving from steep to flat (short-term rates are rising faster than long-term rates, or long-term rates are falling faster than short-term rates). In a rising interest rate environment, the short-term securities capture the higher yields with little price depreciation. In a declining interest rate environment, the short-term securities provide a relatively steady yield, while the long bonds produce more price appreciation than intermediate-term securities. Bullet Structure--a structure that clusters a portfolio's bond maturities around a single maturity (usually an intermediate-term maturity). This structure tends to outperform a barbell structure when the yield curve is moving from flat to steep (long-term rates are rising faster than short-term rates, or short-term rates are falling faster than long-term rates). In a rising interest rate environment, intermediate-term securities experience less price depreciation than long-term securities. In a declining interest rate environment, intermediate-term securities provide significantly more price appreciation than short-term securities. Ladder Structure--a balanced structure that staggers bond maturities so they occur at regular intervals. This structure tends to be effective when interest rates are relatively stable, and it provides a regular schedule of maturing securities. Taxable Distributions It's important to remember for your tax planning that tax-free funds often generate taxable year-end distributions. These distributions typically result from short-term and long-term capital gains. The taxable distributions usually happen under favorable circumstances (the capital gains reflect bond appreciation), but such distributions understandably attract attention simply because they are taxable instead of tax free. Although we manage our California tax-free and municipal funds to earn tax-exempt income, they may realize taxable capital gains as we pursue higher total returns. By law, the funds must distribute these capital gains to shareholders each year. Under current tax law, each fund must distribute net short-term capital gains realized by the fund as taxable ordinary income. Each fund distributes net long-term capital gains to shareholders as a taxable capital gains distribution. 28 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Trustees Benham California Tax-Free and Municipal Funds: We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund and Tax-Free Insured Fund (four of the series comprising Benham California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1996, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund and Tax-Free Insured Fund of Benham California Tax-Free and Municipal Funds as of August 31, 1996, the results of their operations, the changes in their net assets and the financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Kansas City, Missouri October 4, 1996 29
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE MONEY MARKET FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ...... .0308 .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 ............. .0308 .0325 .0207 .0209 .0298 .0420 .0510 .0559 .0411 .0383 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income ................... (.0308) (.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* ................ 3.12% 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) ...$425,846 414,099 371,074 338,731 321,307 361,007 463,130 490,700 328,532 318,095 Ratio of Expenses to Average Daily Net Assets+ .. .49% .52% .50% .51% .54% .56% .56% .59% .63% .67% Ratio of Net Investment Income to Average Daily Net Assets+ .. 3.12% 3.28% 2.07% 2.09% 2.98% 4.20% 5.10% 5.59% 4.10% 3.83% - --------------------------- + The ratio for the year ended August 31, 1996, includes expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions. See the accompanying notes to financial statements.
30
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - ------------------------------------------------------------------------------------------------------------------------------------ MUNICIPAL MONEY MARKET FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991+ -------- -------- -------- -------- -------- -------- PER-SHARE DATA - -------------- NET ASSET VALUE AT BEGINNING OF PERIOD ............................ $ 1.00 1.00 1.00 1.00 1.00 1.00 Income From Investment Operations Net Investment Income ........................................... .0318 .0331 .0213 .0221 .0344 .0293 Net Realized and Unrealized Losses on Investments ............... 0 (.0003) 0 0 0 0 -------- -------- -------- -------- -------- -------- Total Income From Investment Operations ....................... .0318 .0328 .0213 .0221 .0344 .0293 -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income ............................ (.0318) (.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* ..................................................... 3.23% 3.35% 2.15% 2.25% 3.63% 3.04% - ------------- SUPPLEMENTAL DATA AND RATIOS - ---------------------------- Net Assets at End of Period (in thousands of dollars) ............. $ 196,520 191,722 243,701 247,621 254,823 136,860 Ratio of Expenses to Average Daily Net Assets++ ................... .53% .53% .51% .46% .07% 0% Ratio of Net Investment Income to Average Daily Net Assets++ ...... 3.20% 3.31% 2.13% 2.21% 3.44% 4.39%** - --------------------------- + From December 31, 1990 (commencement of operations) through August 31, 1991. ++ The ratio for the year ended August 31, 1996, includes expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - ------------------------------------------------------------------------------------------------------------------------------------ MUNICIPAL HIGH-YIELD FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ...... .5554 .5612 .5629 .5703 .5809 .5879 .6266 .6611 .6527 .4509 Net Realized and Unrealized Gains (Losses) on Investments .. .1600 .0497 (.4793) .5401 .2800 .3000 (.1400) .2300 (.2400) (1.3100) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income (Loss) From Investment Operations .... .7154 .6109 .0836 1.1104 .8609 .8879 .4866 .8911 .4127 (.8591) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income ......... (.5554) (.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 ...... (.5554) (.5609) (.6836) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE AT END OF PERIOD ..........$ 9.27 9.11 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69 ====== ==== ==== ==== ==== ==== ==== ==== ==== ==== TOTAL RETURN* ................ 8.02% 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)...$144,675 116,166 116,000 114,564 79,949 65,741 44,602 32,631 13,169 8,434 Ratio of Expenses to Average Daily Net Assets++ ......... .51% .51% .51% .55% .56% .50% .24% 0% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets++.. 5.99% 6.30% 6.02% 6.14% 6.54% 6.79% 7.23% 7.67% 7.85% 7.50%** Portfolio Turnover Rate ...... 35.98% 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 year ended August 31, 1996, includes expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE INSURED FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+ ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ...... .5342 .5320 .5267 .5470 .5705 .5733 .5889 .6026 .6246 .4370 Net Realized and Unrealized Gains (Losses) on Investments ......... .1100 .2200 (.6922) .7588 .5000 .4700 (.2300) .4300 (.2700) (.9300) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income (Loss) From Investment Operations .. .6442 .7520 (.1655) 1.3058 1.0705 1.0433 .3589 1.0326 .3546 (.4930) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income .................... (.5342) (.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 ...... (.5342) (.5320) (.8045) (.6358) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE AT END OF PERIOD .................. $ 10.00 9.89 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07 ======= ==== ==== ===== ===== ===== ==== ===== ==== ==== TOTAL RETURN* ................ 6.60% 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) ..$191,811 178,913 189,439 223,440 145,965 94,951 59,870 42,569 29,531 12,748 Ratio of Expenses to Average Daily Net Assets++ ......... .49% .50% .49% .52% .55% .59% .61% .66% 0% 0% Ratio of Net Investment Income to Average Daily Net Assets++ 5.30% 5.54% 5.20% 5.37% 5.90% 6.18% 6.43% 6.62% 7.39% 7.11%** Portfolio Turnover Rate ...... 42.71% 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 ratio for the year ended August 31, 1996, includes expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
33
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES August 31, 1996 TAX-FREE MUNICIPAL MUNICIPAL TAX-FREE MONEY MARKET MONEY MARKET HIGH-YIELD INSURED FUND FUND FUND FUND --------- --------- --------- --------- ASSETS Investment securities at value (cost of $422,621,155, $192,430,207, $138,234,308 and $183,138,086, respectively) ...$422,621,155 192,430,207 142,114,909 189,391,294 Cash. ........................................................ 1,119,680 1,502,994 300,450 185,822 Interest receivable .......................................... 2,190,371 830,973 2,532,963 2,984,139 Receivable for fund shares sold .............................. 347,792 2,019,298 56,330 137,633 Prepaid expenses and other assets ............................ 2,302 1,019 723 973 ------------ ----------- ----------- ---------- Total assets ............................................... 426,281,300 196,784,491 145,005,375 192,699,861 ------------ ----------- ----------- ---------- LIABILITIES Payable for fund shares redeemed ............................. 216,522 170,015 41,557 521,941 Dividends payable ............................................ 44,710 17,402 219,737 285,057 Fees payable to affiliates (Note 2) .......................... 162,111 76,421 58,865 76,441 Accrued expenses and other liabilities ....................... 11,551 651 9,973 5,456 ------------ ----------- ----------- ---------- Total liabilities .......................................... 434,894 264,489 330,132 888,895 ------------ ----------- ----------- ---------- NET ASSETS ......................................................$425,846,406 196,520,002 144,675,243 191,810,966 ============ =========== =========== ========== Net assets consist of: Capital paid in .............................................. 425,773,728 196,563,510 141,148,896 186,207,554 Accumulated net realized loss on investments ................. (398,251) (158,606) (359,660) (654,342) Undistributed net investment income .......................... 470,929 115,098 5,406 4,546 Net unrealized appreciation on investments ................... 0 0 3,880,601 6,253,208 ------------ ----------- ----------- ---------- Net assets ......................................................$425,846,406 196,520,002 144,675,243 191,810,966 ============ =========== =========== ========== Shares of beneficial interest outstanding (unlimited number of shares authorized). ..................... 425,773,728 196,563,510 15,604,622 19,177,330 ============ =========== =========== ========== Net asset value, offering price and redemption price per share .............................................. $1.00 1.00 9.27 10.00 ===== ==== ==== ==== - --------------------------- See the accompanying notes to financial statements.
34
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF OPERATIONS For the Year Ended August 31, 1996 TAX-FREE MUNICIPAL MUNICIPAL TAX-FREE MONEY MARKET MONEY MARKET HIGH-YIELD INSURED FUND FUND FUND FUND --------- --------- --------- --------- INVESTMENT INCOME Interest income ...................................... $15,393,401 7,200,968 8,498,662 10,848,379 ----------- ----------- ----------- ---------- EXPENSES (NOTE 2) Investment advisory fees ............................. 1,240,288 563,912 379,805 544,813 Administrative fees .................................. 409,257 186,076 125,323 179,812 Transfer agency fees ................................. 229,922 145,450 70,036 91,516 Printing and postage ................................. 98,440 47,089 26,925 39,867 Custodian fees ....................................... 67,346 34,041 22,116 28,688 Auditing and legal fees .............................. 67,320 35,931 11,480 12,541 Registration and filing fees ......................... 3,093 3,580 11,425 6,156 Directors' fees and expenses ......................... 11,221 7,897 6,973 7,801 Other operating expenses ............................. 25,920 22,831 23,422 31,445 ----------- ----------- ----------- ---------- Total expenses ..................................... 2,152,807 1,046,807 677,505 942,639 ----------- ----------- ----------- ---------- Custodian earnings credits (Note 5) ..................... (47,859) (28,612) (13,104) (20,456) ----------- ----------- ----------- ---------- Net expenses ......................................... 2,104,948 1,018,195 664,401 922,183 ----------- ----------- ----------- ---------- Net investment income .............................. 13,288,453 6,182,773 7,834,261 9,926,196 ----------- ----------- ----------- ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 4) Net realized gain on investments ........................ 5,024 3,762 1,514,159 576,436 Change in net unrealized appreciation on investments .... 0 0 798,655 1,358,411 ----------- ----------- ----------- ---------- Net realized and unrealized gain on investments ...... 5,024 3,762 2,312,814 1,934,847 ----------- ----------- ----------- ---------- Net increase in net assets resulting from operations . $13,293,477 6,186,535 10,147,075 11,861,043 =========== =========== =========== ========== - --------------------------- See the accompanying notes to financial statements.
35
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS For the Years Ended August 31, 1996 and 1995 TAX-FREE MUNICIPAL MUNICIPAL TAX-FREE MONEY MARKET FUND MONEY MARKET FUND HIGH-YIELD FUND INSURED FUND ------------------ ------------------ ------------------ ------------------ 1996 1995 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- FROM INVESTMENT ACTIVITIES: Net investment income .................$13,288,453 12,490,536 6,182,773 7,186,611 7,834,261 6,816,691 9,926,196 9,528,498 Net realized gain (loss) on investments ......... 5,024 (285,303) 3,762 (162,368) 1,514,159 (1,873,070) 576,436 232,451 Net change in unrealized appreciation on investments ............ 0 0 0 0 798,655 1,850,452 1,358,411 3,002,263 ---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Change in net assets derived from investment activities. 13,293,477 12,205,233 6,186,535 7,024,243 10,147,075 6,794,073 11,861,043 12,763,212 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- FROM DISTRIBUTIONS TO SHAREHOLDERS: Net investment income .................(13,076,367) (12,368,993) (6,134,579) (7,127,335) (7,832,946) (6,813,446) (9,925,479) (9,528,450) ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
36
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE MUNICIPAL MUNICIPAL TAX-FREE MONEY MARKET FUND MONEY MARKET FUND HIGH-YIELD FUND INSURED FUND ------------------ ------------------ ------------------ ------------------ 1996 1995 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- FROM CAPITAL SHARE TRANSACTIONS (NOTE 3): Proceeds from sales of shares ........... 417,665,171 466,211,495 221,042,487 310,209,174 69,487,545 58,165,774 65,937,524 51,954,200 Net asset value of dividends reinvested. 12,497,339 11,717,045 5,897,189 6,894,430 5,609,354 4,776,705 6,845,811 6,459,209 Cost of shares redeemed ............(418,632,419) (434,739,843) (222,193,970) (368,979,533) (48,901,653) (62,756,859) (61,820,496) (72,174,227) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Change in net assets derived from capital share transactions. 11,530,091 43,188,697 4,745,706 (51,875,929) 26,195,246 185,620 10,962,839 (13,760,818) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in net assets .... 11,747,201 43,024,937 4,797,662 (51,979,021) 28,509,375 166,247 12,898,403 (10,526,056) NET ASSETS: Beginning of year ....... 414,099,205 371,074,268 191,722,340 243,701,361 116,165,868 115,999,621 178,912,563 189,438,619 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- End of year .............$425,846,406 414,099,205 196,520,002 191,722,340 144,675,243 116,165,868 191,810,966 178,912,563 =========== =========== =========== =========== =========== =========== =========== =========== Undistributed net investment income .....$ 470,929 975,117 115,098 66,904 5,406 4,091 4,546 3,829 =========== =========== =========== =========== =========== =========== =========== =========== - --------------------------- See the accompanying notes to financial statements.
37 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--Benham California Tax-Free and Municipal Funds (BCTFMF) is registered under the Investment Company Act of 1940 as an open-end management investment company. Tax-Free Money Market Fund, Municipal Money Market Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund (collectively the "Funds") are four of the seven Funds composing BCTFMF. With the exception of the Municipal Money Market Fund, each Fund is a "diversified company" as defined in the Investment Company Act of 1940. Each Fund invests primarily in municipal debt securities that pay interest exempt from federal and California income taxes. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the State of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Securities held by the Tax-Free Money Market Fund and Municipal Money Market Fund (collectively the "Money Market Funds") are valued at amortized cost, which approximates current market value. Securities held by the Municipal High-Yield and Tax-Free Insured Funds (collectively the "Variable-Price Funds") are valued at current market value as provided by an independent commercial pricing service. When valuations are not readily available, securities are valued at fair value as determined in good faith by or under the direction of the Board of Trustees. SECURITY TRANSACTIONS--Security transactions are accounted for on the date purchased or sold. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME--Interest income is recorded on the accrual basis and includes amortization of premiums and discounts. Premium and original issue discount is amortized daily using the effective interest rate method for the Variable-Price Funds. Market discount is recognized as income upon the sale or maturity of the security for the Variable-Price Funds. Premium and discount are amortized daily on a straight-line basis for securities held by the Money Market Funds. INCOME TAX STATUS--It is the policy of the Funds to distribute all net investment income and net realized capital gains to shareholders and to 38 otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state taxes. DISTRIBUTIONS TO SHAREHOLDERS--Net investment income from all Funds except the Money Market Funds are declared daily and distributed monthly. The Money Market Funds' dividends are declared and credited daily from the total of net investment income, plus or minus realized gains or losses on portfolio securities and distributed monthly. The Money Market Funds do not expect to realize any long-term capital gains, and accordingly, do not expect to pay any capital gain distributions. Net realized gains in excess of available capital loss carryovers for all other Funds will be distributed each December. At August 31, 1996, accumulated net realized capital loss carryovers of $298,508 for Tax-Free Money Market Fund, $158,606 for Municipal Money Market Fund, $359,444 for Municipal High-Yield Fund, and $654,341 for Tax-Free Insured Fund (expiring 1998 through 2004) may be used to offset future taxable gains. Distributions from net investment income for the Funds for the year ended August 31, 1996, are exempt from federal and California state taxes. However, a portion of the Municipal Money Market and Municipal High-Yield Fund's dividends are subject to the federal alternative minimum tax (AMT). The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes due to differences in the recognition of income and expense items for financial reporting and tax purposes. On the Statements of Assets and Liabilities for the Tax-Free Money Market Fund, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $716,274 with a corresponding adjustment to accumulated net realized loss on investments. FUTURES CONTRACTS--The Variable-Price Funds may use futures 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. Some futures contract strategies present a substantial risk of loss, due to both the low margin deposits required and the high degree of leverage involved in futures pricing. A relatively small movement in a futures contract may result in immediate, substantial gains or losses to the contract holder. Gains from futures transactions are subject to federal income tax when distributed to shareholders. Upon entering into a futures contract, the Fund is required to deposit either cash or securities (initial margin) in an amount equal to a certain 39 percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund. The variation margin is equal to the daily change in the contract value and is recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from these estimates. (2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth Century Companies, Inc. (TCC). Each Fund pays BMC a monthly investment advisory fee based on its pro rata share of the dollar amount derived from applying BCTFMF's average daily net assets to the following annualized investment advisory fee schedule. .50% of the first $100 million .45% of the next $100 million .40% of the next $100 million .35% of the next $100 million .30% of the next $100 million .25% of the next $1 billion .24% of the next $1 billion .23% of the next $1 billion .22% of the next $1 billion .21% of the next $1 billion .20% of the next $1 billion .19% of average daily net assets over $6.5 billion BMC provides BCTFMF with all investment advice. TCC pays all compensation of BCTFMF officers and trustees who are officers or directors of TCC or any of its subsidiaries. In addition, promotion and distribution expenses are paid by BMC. BCTFMF has an Administrative Services and Transfer Agency Agreement with Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under the agreement, BFS provides substantially all administrative and transfer agency services necessary to operate the Funds. Fees for these services are based on transaction volume, number of accounts, and average net assets of all funds in The Benham Group. Effective September 3, 1996, Twentieth Century Services, Inc., a wholly- 40 owned subsidiary of TCC, replaced BFS in the Administrative Services and Transfer Agency Agreement. There were no other changes made to the existing agreement. BCTFMF has an additional agreement with BMC pursuant to which BMC established a contractual expense guarantee that limits each Fund's expenses (excluding expenses such as brokerage commissions, taxes, interest, custodian earnings credits, and extraordinary expenses) to .53% of average daily net assets for the Tax-Free Money Market Fund, .60% of average daily net assets for the Municipal Money Market Fund, and .59% of average daily net assets for the Variable-Price Funds. The agreement provides that BMC may recover amounts (representing expenses in excess of the Fund's expense guarantee rate) absorbed during the preceding 11 months, if, and to the extent that, for any given month, the Fund's expenses were less than the expense guarantee rate in effect at that time. The expense guarantee rate is subject to renewal in June 1997. The payables to affiliates as of August 31, 1996, based on the above agreements were as follows: TAX-FREE MUNICIPAL MUNICIPAL TAX-FREE MONEY MARKET MONEY MARKET HIGH-YIELD INSURED FUND FUND FUND FUND ----------- ---------- --------- ----------- Investment Advisor .......$104,909 47,693 35,515 47,316 Administrative Services .. 34,635 15,746 11,725 15,621 Transfer Agent ........... 22,567 12,982 11,625 13,504 ------- ----- ----- ----- $162,111 76,421 58,865 76,441 ======= ====== ====== ====== BCTFMF has a distribution agreement with Benham Distributors, Inc. (BDI), which is responsible for promoting sales of and distributing the Funds' shares. BMC pays all costs incurred by BDI. BDI is a wholly owned subsidiary of TCC. Effective September 3, 1996, Twentieth Century Securities, Inc., a wholly-owned subsidiary of TCC, replaced BDI. (3) SHARE TRANSACTIONS Share transactions for each of the Funds for the years ended August 31, 1996 and 1995, were as follows: TAX-FREE MUNICIPAL MONEY MARKET Fund MONEY MARKET Fund ------------------- ------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Shares sold .................417,665,171 466,211,495 221,042,487 310,209,174 Reinvestment of dividends ... 12,497,339 11,717,045 5,897,189 6,894,430 ----------- ----------- ----------- ----------- 430,162,510 477,928,540 226,939,676 317,103,604 Less shares redeemed .......(418,632,419)(434,739,843)(222,193,970)(368,979,533) ----------- ----------- ----------- ----------- Net increase (decrease) in shares .... 11,530,091 43,188,697 4,745,706 (51,875,929) =========== =========== =========== =========== 41 MUNICIPAL TAX-FREE HIGH-YIELD Fund INSURED Fund ------------------- ------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Shares sold ................ 7,510,749 6,551,021 6,546,262 5,419,808 Reinvestment of dividends ................ 604,403 537,231 678,581 673,481 ----------- ----------- ----------- ----------- 8,115,152 7,088,252 7,224,843 6,093,289 Less shares redeemed ....... (5,267,312) (7,132,653) (6,132,458)(7,600,045) ----------- ----------- ----------- ----------- Net increase (decrease) in shares ..... 2,847,840 (44,401) 1,092,385 (1,506,756) =========== =========== =========== =========== (4) INVESTMENT TRANSACTIONS Investment transactions (excluding short-term securities) for the year ended August 31, 1996, were as follows: MUNICIPAL TAX-FREE HIGH-YIELD INSURED Fund Fund ---------------- ---------------- Purchases ........................... $ 70,537,664 85,127,347 =========== ========== Proceeds from sales ................. $ 45,976,129 78,194,523 =========== ========== As of August 31, 1996, unrealized appreciation (depreciation) was as follows: MUNICIPAL TAX-FREE HIGH-YIELD INSURED Fund Fund ---------------- ---------------- Appreciated securities .............. $ 4,614,836 7,359,041 Depreciated securities .............. (734,235) (1,105,833) ----------- ---------- Net unrealized appreciation ......... $ 3,880,601 6,253,208 =========== ========== The cost of securities for financial reporting and federal income tax purposes is the same. (5) EXPENSE OFFSET ARRANGEMENTS Each Fund's Statement of Operations reflects custodian earnings credits. These amounts are used to offset the custody fees payable by the Funds to the custodian bank. The credits are earned when the Fund maintains a balance of uninvested cash at the custodian bank. Beginning with the year ended August 31, 1996, the ratio of expenses to average daily net assets shown in the Financial Highlights are calculated as if these credits had not been earned. 42
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Money Market Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-100.0% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 4,445,540 Agoura Hills Multifamily Housing Rev., (Oakridge Apartments), VRDN, (LOC: Continental Casualty Co.) .............................3.65% 09/04/96* $4,445,540 NR/A1 4,900,000 Anaheim Housing Auth. Rev., Series A, (Heritage Village Apartments), VRDN, (LOC: Barclay's Bank) .......................................3.55 09/05/96* 4,900,000 VMIG1/NR 3,500,000 Anaheim Unified High School District Tax and Rev. Anticipation Notes, (LOC: Bank of America) ..................5.00 09/05/96 3,500,330 MIG1/NR 4,000,000 Auburn Unified School District Certificates of Participation, Series 1993, (Capital Improvement Financing Project), VRDN, (LOC: Union Bank of California) ...................................3.60 09/05/96* 4,000,000 VMIG1/A1+ 4,200,000 Auburn Unified School District Certificates of Participation, Series 1993, (Capital Improvement Financing Project), VRDN, (LOC: Union Bank of California) .............................3.60 09/05/96* 4,200,000 VMIG1/A1+ 7,800,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments), VRDN, (LOC: Continental Casualty Co.) ................3.75 09/05/96* 7,800,000 NR/A1 100,000 Bay Area Government Association Lease Rev., (Pooled Projects), VRDN, (LOC: National Westminster PLC) ..........3.25 09/05/96* 100,000 VMIG1/NR 4,000,000 Brea Redevelopment Agency Area AB Tax Allocation Notes, Prerefunded at 102.50% of Par ...................8.50 09/15/96 4,106,610 NR/AAA 3,000,000 California GO Commercial Paper .......................................3.45 10/18/96 3,000,000 P1/A1 1,015,000 California Health Facilities Financing Auth. Rev., Series A, (Pooled Loan Program), VRDN, (LOC: Rabobank Nederland) ............3.35 09/05/96* 1,015,000 VMIG1/NR 2,600,000 California Health Facilities Financing Auth. Rev., (Pooled Project), Series 1990 A, VRDN, (LOC: Rabobank Nederland) ....................3.35 09/04/96* 2,600,000 VMIG1/A1+ 6,000,000 California Health Facilities Financing Auth. Rev., Series 1985 B, (Scripps Memorial Hospital), VRDN, (MBIA) .........................3.35 09/05/96* 6,000,000 VMIG1/A1+ 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), (Guaranteed: Chevron Corporation) ....4.00 11/15/96 1,000,000 Aa2/NR 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA, Inc. Project), (Guaranteed: Chevron Corporation) ....3.70 05/15/97 10,500,000 Aa2/AA
43
Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 5,000,000 California Pollution Control Rev., (Pacific Gas and Electric), (LOC: Morgan Guaranty) ............................................3.55% 11/08/96 $ 5,000,000 NR/A1+ 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series C, (LOC: National Westminster PLC) ............3.65 09/15/96 5,000,000 VMIG1/NR 10,000,000 California School Cash Reserve Program Auth. Notes, Series A, (MBIA) ...........................................4.75 07/02/97 10,064,842 MIG1/SP1+ 4,035,000 California State Department Water Reserve Rev., Series B, Prerefunded at 101.5% of Par ......................................7.75 12/01/96 4,136,511 Aaa/AA 4,100,000 California State Economic Development Financing Auth. Rev., (KQED Inc. Project), VRDN, (LOC: Wells Fargo) .........3.35 09/04/96* 4,100,000 NR/A1 14,000,000 California State Rev. Anticipation Notes .............................4.50 06/30/97 14,058,210 MIG1/SP1+ 5,000,000 California State Weekly Rev. Anticipation Notes, Series C-3, VRDN, (SBBPA: Bank of America, Bank of Nova Scotia, Commerzbank, National Westminster PLC) ............................3.40 09/04/96* 5,000,000 NR/A1+ 3,000,000 California Statewide Communities Apartment Development Auth. Rev., (Whispering Winds Apartments), VRDN, (LOC: Continental Casualty Co.) ................3.65 09/04/96* 3,000,000 NR/A1 8,000,000 California Statewide Certificates of Participation, (Covenant Retirement Community), VRDN, (LOC: LaSalle National Bank) ......................................3.45 09/05/96* 8,000,000 NR/A1+ 2,445,000 Central Unified School District Certificates of Participation, VRDN, (LOC: Bank of Tokyo) .........................3.85 09/04/96* 2,445,000 VMIG1/NR 1,215,000 Coronado Community Redevelopment Agency Tax Allocation, (Coronado Community Development Project), (FSA) .......4.10 09/01/96 1,215,000 Aaa/AAA 1,000,000 Countywide Public Financing Auth. Rev., (MBIA) .......................4.10 08/01/97 1,001,772 Aaa/AAA 2,700,000 Covina Redevelopment Agency Multifamily Housing Rev., (Shadowhills Apartments), VRDN (LOC: Continental Casualty Co.) .................3.75 09/05/96* 2,700,000 NR/A1 6,500,000 Foothill/Eastern Transportation Corridor Agency Rev., Series B, VRDN, (LOC: Morgan Guaranty) .....................3.20 09/05/96* 6,500,000 NR/A1+ 4,650,000 Gardena Financing Agency Rev., (Public Parking Project), VRDN, (LOC: Industrial Bank of Japan) ..................3.45 09/05/96* 4,650,000 VMIG1/NR 3,000,000 Hanford Sewer Rev., Series 1996 A, VRDN, (LOC: Union Bank of California) ...................................3.85 09/05/96* 3,000,000 NR/A1 12,100,000 Hayward Multifamily Housing Rev., (Shorewood Apartments), VRDN, (LOC: FGIC) ....................................3.20 09/05/96* 12,100,000 VMIG1/NR
44
Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 3,900,000 Indio Housing Auth. Multifamily Rev., (Smoketree Apartments), VRDN, (LOC: Bank of Tokyo - Mitsubishi) ..............3.55% 09/04/96* $3,900,000 VMIG1/NR 4,530,000 Irvine Industrial Development Auth. Rev., (Shimano American Corporation), VRDN, (LOC: Bank of Tokyo - Mitsubishi) .............3.95 09/04/96* 4,530,000 Aa2/NR 3,400,000 Kern County Public Facilities Project Certificates of Participation, Series 1986 C, VRDN, (LOC-Union Bank of Switzerland) ..............3.25 09/04/96* 3,400,000 VMIG1/NR 2,100,000 Lemore Certificates of Participation, Series 1995, (Golf Course Project), VRDN, (LOC: Union Bank of California) ...................3.45 09/05/96* 2,100,000 NR/A1 6,000,000 Livermore Certificates of Participation, (Reverse Osmosis Project), VRDN, (LOC: National Westminster PLC) ...........3.45 09/04/96* 6,000,000 VMIG1/A1+ 3,000,000 Loma Linda Water Rev., VRDN, (LOC: Union Bank of California) .........3.85 09/04/96* 3,000,000 VMIG1/NR 5,000,000 Long Beach Multifamily Housing Rev., (Channel Point Apartments), VRDN, (LOC: Union Bank of California) ................3.55 09/04/96* 5,000,000 VMIG1/NR 1,000,000 Los Angeles County G.O., Series A ....................................4.75 09/01/96 1,000,000 Aa1/AA 10,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series A, VRDN, (MBIA) ............................3.20 09/05/96* 10,000,000 VMIG1/A1+ 5,000,000 Los Angeles County Redevelopment Agency Multifamily Housing Rev., (Promenade Towers), VRDN, (LOC: Barclay's Bank) ...................3.40 09/05/96* 5,000,000 VMIG1/NR 5,000,000 Los Angeles County Transportation Tax Rev. Anticipation Notes, Series A, (LOC: Bank of America, Credit Suisse, Morgan Guaranty, Union Bank of Switzerland, Westdeutsche Landesbank) ...............4.50 06/30/97 5,025,886 MIG1/SP1+ 2,750,000 Los Angeles Public Works Financing Auth. Lease Rev., Series A, (MBIA) ............................................................4.25 09/01/97 2,767,293 Aaa/AAA 3,300,000 Los Angeles Public Works Financing Auth. Lease Rev., Series B, (MBIA) ............................................................4.50 09/01/97 3,319,476 Aaa/AAA 1,500,000 Merced County Construction Lease Financing Program Certificates of Participation, Series A, (FSA) ............4.75 10/01/96 1,501,840 Aaa/AAA 2,000,000 Milpitas Redevelopment Agency Tax Allocation Notes, (MBIA) ...........4.40 01/15/97 2,006,832 Aaa/AAA 2,000,000 Modesto Multifamily Housing Rev. (Shadowbrook Apartments), VRDN (LOC: Bank of America) ..........................3.45 09/04/96* 2,000,000 VMIG1/NR 8,500,000 Oceanside Multifamily Housing Rev. Refunding (Lakeridge Apartments Project), VRDN, (LOC: Continental Casualty Co.) ........3.75 09/04/96* 8,500,000 NR/A1 18,500,000 Orange County Apartment Development Rev., (Bear Brands Apartments), VRDN, (LOC: Credit Suisse) ....................3.30 09/05/96* 18,500,000 VMIG1/NR 9,000,000 Orange County Apartment Development Rev., (Seaside Meadows), VRDN, (LOC: Credit Suisse) ..............................3.30 09/05/96* 9,000,000 VMIG1/NR
45
Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 6,500,000 Orange County Apartment Development Rev., Series 1991 A, (The Lakes Project), VRDN, (LOC: Citibank) .......................3.55% 09/05/96* $6,500,000 NR/A1+ 1,100,000 Orange County Apartment Development Rev., (Park Ridge Project), VRDN, (LOC: Bank of America) .....................3.30 09/05/96* 1,100,000 VMIG1/NR 4,200,000 Orange County Apartment Development Rev., Series 1984 E, (Vintage Woods Project), VRDN, (LOC: Bank of Tokyo - Mitsubishi) .................3.30 09/05/96* 4,200,000 VMIG1/NR 4,850,000 Orange County Assessment District No. 88-1, VRDN, (LOC: Kredietbank N.V.) ...........................................3.65 09/03/96* 4,850,000 VMIG1/A1+ 10,310,000 Orange County Housing Auth. Apartment Development Rev., VRDN, (LOC: Bank of America) ................................3.35 09/04/96* 10,310,000 VMIG1/NR 9,200,000 Orange County Sanitation District Certificates of Participation, Series C, VRDN, (LOC: FGIC) .......................3.65 09/03/96* 9,200,000 VMIG1/A1+ 7,600,000 Orange County Water Commercial Paper (LOC: Union Bank of Switzerland) ........................................3.45 09/11/96 7,600,000 P1/A1+ 900,000 Palm Springs Redevelopment Agency Certificates of Participation, VRDN, (LOC: Citibank) ..............................3.45 09/04/96* 900,000 NR/A1+ 455,000 Pasadena Certificates of Participation, (Multi-purpose Projects), (AMBAC Insured) ........................................4.25 02/01/97 456,219 NR/AAA 6,100,000 Pico Rivera Certificates of Participation, (Redevelopment Agency Project), VRDN, (LOC: Wachovia Bank of Georgia) ...........3.45 09/03/96* 6,100,000 NR/A1+ 2,300,000 Redlands Certificates of Participation, (Water Treatment Facilities Project), (LOC: FGIC) .......................4.50 11/01/96 2,302,267 VMIG1/NR 6,140,000 Riverside County Multifamily Housing Rev., (Ambergate Apartments), VRDN, (LOC: Union Bank of California) .............................3.50 09/05/96* 6,140,000 VMIG1/NR 1,715,000 Rohnert Park Multifamily Housing Rev., VRDN, (Crossbrook Apartments), (FNMA Collateral Agreement) .......................................3.45 09/04/96* 1,715,000 NR/A1+ 3,400,000 Sacramento County Multifamily Housing Rev., Series A, VRDN, (LOC: California State Teachers Retirement System) ..........3.50 09/04/96* 3,400,000 NR/A1+ 1,500,000 Sacramento County Multifamily Housing Rev., Series 1985 C, VRDN, (LOC: Dai-Ichi Kangyo Bank) .........................3.50 09/05/96* 1,500,000 VMIG1/A1 8,200,000 Sacramento County Multifamily Housing Rev., (River Oaks), VRDN, (LOC: Dai-Ichi Kangyo Bank) ..........................3.50 09/05/96* 8,200,000 VMIG1/NR 2,090,000 Sacramento County Special Tax Rev., (Laguna Community Facilities District), (FGIC) ............................4.50 12/01/96 2,093,989 Aaa/AAA
46
Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $10,000,000 San Bernardino County Certificates of Participation, VRDN, (SBBPA: Merrill Lynch) (MBIA) ...............................3.75% 09/05/96*$10,000,000 VMIG1/NR 3,200,000 San Bernardino County Certificates of Participation, VRDN, (LOC: Sumitomo Bank Ltd.) .........................................3.90 09/05/96* 3,200,000 NR/A1 12,450,000 San Bernardino Multifamily Housing Rev., Series A, (Castle Park Apartments), VRDN, (LOC: Bank of Tokyo - Mitsubishi) ...........................3.95 09/04/96* 12,450,000 VMIG1/NR 1,370,000 San Diego County Multifamily Housing Rev., (Country Hills), VRDN, (FNMA Collateral Agreement) ................3.30 09/04/96* 1,370,000 NR/A1+ 4,565,000 San Diego Housing Multifamily Housing Auth. Rev., Series 1985 G, (Market Project), VRDN, (LOC: Barclay's Bank) .....................3.65 09/04/96* 4,565,000 VMIG1/NR 4,300,000 San Diego Multifamily Housing Rev., Series A, (Coral Point Apartments), VRDN, (LOC: Continental Casualty Co.) ................3.75 09/05/96* 4,300,000 NR/A1 2,510,000 San Diego Regional Transportation Commission Sales Tax Rev., Series A, (FGIC) ........................................4.00 04/01/97 2,517,057 Aaa/AAA 6,500,000 San Diego Unified School District Tax Rev. Anticipation Notes, Series A, (LOC: Westdeutsche Landesbank) ...................4.75 10/10/96 6,506,163 MIG1/NR 4,700,000 San Dimas Regional Development Agency Certificates of Participation, (Diversified Shop), VRDN, (LOC: Morgan Guaranty) ..................3.20 09/05/96* 4,700,000 NR/A1+ 2,400,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, (LOC: National Westminster PLC) .......3.40 09/04/96* 2,400,000 VMIG1/A1+ 1,400,000 San Jose Financing Auth. Rev., (Hayes Mansion Project), VRDN, (LOC: Sumitomo Bank Ltd.) ..................................3.55 09/04/96* 1,400,000 VMIG1/A1 3,900,000 San Leandro Multifamily Housing Rev., (Parkside Project), VRDN, (FNMA Collateral Agreement) .................................3.30 09/04/96* 3,900,000 NR/A1+ 800,000 Santa Clara County Multifamily Housing Rev., (Grove Garden Project), VRDN, (LOC: Citibank) ...........................3.40 09/04/96* 800,000 VMIG1/NR 3,100,000 Santa Clara Electric System Rev., Series B, VRDN, (LOC: National Westminister PLC) ..................................3.30 09/04/96* 3,100,000 VMIG1/NR 4,300,000 Santa Clara Electric System Rev., Series C, VRDN, (LOC: National Westminster PLC) ...................................3.30 09/04/96* 4,300,000 VMIG1/NR 4,200,000 Santa Clara Multifamily Housing Rev., (Foxchase Apartments), VRDN, (LOC: FGIC) ....................................3.20 09/05/96* 4,200,000 VMIG1/NR 7,400,000 Santa Paula Public Financing Auth. Rev., Series 1996, VRDN, (LOC: Sumitomo Bank Ltd.) ...................................3.85 09/04/96* 7,400,000 NR/A1
47
Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 300,000 South San Francisco Certificates of Participation, (Quality Control Plant Project), VRDN, (LOC: National Westminster PLC) .............3.45% 09/05/96* $ 300,000 VMIG1/A1+ 5,400,000 Three Valleys Municipal Water District Certificates of Participation, (Miramar Water Treatment), VRDN, (LOC: Barclay's Bank) ............3.55 09/04/96* 5,400,000 VMIG1/A1+ 1,600,000 Triunfo Sanitation District Refunding Rev., VRDN, (LOC: Banque National de Paris) ...................................3.55 09/04/96* 1,600,000 NR/A1 1,510,000 University of California Medial Center Rev., (UCLA Medical Center), (MBIA) ...........................................8.00 12/01/96 1,525,318 Aaa/AAA 825,000 Upland Community Redevelopment Agency Multifamily Housing Rev., (Northwoods Project), VRDN, (LOC: Sanwa Bank) .....................3.90 09/04/96* 825,000 NR/A1 4,705,000 Vallejo Community Development Rev., Series A, (Vallejo Center Project), VRDN, (LOC: Bank of Tokyo - Mitsubishi) ...........................3.45 09/04/96* 4,705,000 NR/A1 6,300,000 Victor Valley Community College Certificates of Participation, VRDN, (LOC: Banque National de Paris, Dia-Ichi Kangyo Bank) .............3.60 09/05/96* 6,300,000 VMIG1/A1 2,600,000 West Sacramento Financing Auth. Special Tax Rev., Series C, VRDN, (LOC: Wells Fargo & Co.) ..........................3.45 09/05/96* 2,600,000 NR/NR** - ------------ ------------ $422,180,540 Total Investment Securities (cost $422,621,155) $422,621,155 ============ ============ - --------------------------- * These variable interest rate securities have maturities greater than one year but are redeemable upon demand. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. ** Rated F1 by Fitch. AMBAC = AMBAC Indemnity Corp. FGIC = Financial Guaranty Insurance Company FHA = Federal Housing Authority FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown were effective 08-31-96. 48 Schedule of Investment Securities--Tax-Free Money Market Fund ==================================================================================================================================== PORTFOLIO COMPOSITION BY SECURITY TYPE VRDNs .......................... 76% Put Bonds .................. 4 Municipal Notes ................ 9 ______ Bonds less than 1 Year ......... 7 TOTAL ...................... 100% Commerical Paper ............... 4 ______ ------
49
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Municipal Money Market Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-100.0% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,500,000 Anaheim Union High School District Tax Rev. Anticipation Notes, (LOC: Bank of America) ....................... 5.00% 09/05/96 $1,500,143 MIG1/NR 2,000,000 Agoura Hills Multifamily Housing Rev., VRDN, (Oakridge Apartments Project), (LOC: Continental Casualty Co.) ........................ 3.65 09/04/96* 2,000,000 NR/A1 2,000,000 Alameda County Industrial Development Auth. Rev., VRDN, (Scientific Technology Project Series 1994 A), (LOC: Banque National de Paris) ........................................................ 3.55 09/04/96* 2,000,000 NR/A1 2,300,000 Auburn Industrial Development Auth. Rev., VRDN, (Coherent Income Project), (LOC: Bank of Tokyo - Mitsubishi) ...................... 3.65 09/04/96* 2,300,000 Aa2/NR 2,815,000 Azusa Multifamily Housing Rev., VRDN, (Pacific Glen Apartments Project), (LOC: Continental Casualty Co.) ............ 3.75 09/05/96* 2,815,000 NR/A1 4,600,000 Big Bear Lake Industrial Rev., VRDN, (Southwest Gas Project Series 1993 A), (LOC: Union Bank of Switzerland) ........................ 3.30 09/04/96* 4,600,000 VMIG1/A1+ 1,255,000 California Counties Industrial Development Auth. Rev., VRDN, (S & P Investments Project), (LOC: California State Teachers' Retirement System) ..................................... 3.40 09/04/96* 1,255,000 NR/A1+ 5,500,000 California Educational Facilities Auth. Rev., VRDN, (Point Nazarene College), (LOC: California State Teachers' Retirement System) .... 3.25 09/05/96* 5,500,000 P1/A1+ 3,535,000 California Housing Financing Agency Rev., VRDN, (SBBPA: Credit Suisse), (MBIA) ........................................... 3.65 09/05/96* 3,535,000 NR/AAA 2,500,000 California Housing Financing Agency Rev., (Home Mortgage Series 1995 E) ................................................... 3.50 02/01/97 2,500,000 VMIG1/A1+ 4,000,000 California Housing Financing Agency Rev., (Home Mortgage Series 1996 D) ................................................... 3.55 04/01/97 4,000,000 VMIG1/A1+ 2,300,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project Series 1988 C), (LOC: National Westminster PLC) .......... 3.65 09/15/96 2,300,000 VMIG1/NR
50
Schedule of Investment Securities--Municipal Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,500,000 California Pollution Control Financing Auth. Rev., VRDN, (Burney Forest Products Project A), (LOC: Fleet Bank) .................... 3.70% 09/03/96* $1,500,000 P1/`NR 13,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Pacific Gas and Electricity Series 1996 A), (LOC: Swiss Bank, NY) ............ 3.45 09/04/96* 13,000,000 NR/A1+ 12,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Pacific Gas and Electricity Series 1996 B), (LOC: Rabobank Nederland, NY) ........ 3.35 09/04/96* 12,000,000 NR/A1+ 5,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Solid Waste Disposal, Colmac Energy Project Series 1990 B), (LOC: Swiss Bank) 3.30 09/04/96* 5,000,000 VMIG1/A1+ 2,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Solid Waste Disposal, Contra Costa Waste Service Series 1995 A), (LOC: Bank of America) ........................................... 3.35 09/04/96* 2,000,000 NR/NR** 2,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Solid Waste Disposal, CR&R Inc Project Series 1995 A), (LOC: Wells Fargo & Co) 3.40 09/04/96* 2,000,000 NR/NR*** 5,000,000 California Pollution Control Financing Auth. Rev., VRDN, (Sanger Project Series 1990 A), (LOC: Credit Suisse) ............................. 3.30 09/04/96* 5,000,000 Aa2/NR 4,400,000 California Pollution Control Financing Auth. Rev., VRDN, (Oms Equity Stanislaus Project), (LOC: Swiss Bank) .............. 3.70 09/03/96* 4,400,000 VMIG1/A1+ 6,800,000 California Rural Home Mortgage Financing Auth. Rev., VRDN, (Single Family Mortgage, Series 1996 B) .............. 3.70 09/03/96* 6,800,000 NR/A1+ 2,000,000 California School Cash Reserve Program Auth. Rev., Series 1996 A, (MBIA) ............................................ 4.75 07/02/97 2,014,432 MIG1/Sp1+ 3,100,000 California State Housing Financing Agency Rev., (Home Mortgage Series 1996 J) .......................................... 4.00 07/24/97 3,100,000 VMIG1/A1+ 7,000,000 California State Rev. Anticipation Notes Series 1996 A .............. 4.50 06/30/97 7,028,552 MIG1/Sp1+ 3,500,000 California State Rev. Anticipation Notes Series 1996 C-2, VRDN, (SBBPA: Bank of America, Bank of Nova Scotia - NY, Commerzbank Aktiengesel - NY, National Westminster PLC) ...................... 3.45 09/04/96* 3,500,000 MIG1/A1+ 3,000,000 California Statewide Communities Development Auth. Rev., VRDN, (Series 1995 A-1), (FNMA Collateral Agreement) ............. 3.30 09/04/96* 3,000,000 NR/A1+ 2,000,000 California Statewide Communities Development Auth. Rev., VRDN, (Whispering Winds Apartments Series 1995 D), (LOC: Continental Casualty Co.) .................................. 3.65 09/04/96* 2,000,000 NR/A1
51
Schedule of Investment Securities--Municipal Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,500,000 California Statewide Communities Development Auth. Rev., VRDN, (Lansmont Property Series 1996 G), (LOC: Wells Fargo & Co) . 3.55% 09/04/96* $1,500,000 NR/NR*** 1,625,000 California Statewide Communities Development Auth. Rev., VRDN, (Fulton Property Series 1996 F), (LOC: Wells Fargo & Co) ... 3.55 09/04/96* 1,625,000 NR/NR*** 4,000,000 California Statewide Communities Development Auth. Rev., VRDN, (Levecke Property Series 1996 H), (LOC: Union Bank of California) ...................................................... 3.60 09/04/96* 4,000,000 NR/NR** 1,210,000 California Statewide Communities Development Corporate Rev., VRDN, (Pacific Handy), (LOC: Union Bank of California) ................. 3.50 09/04/96* 1,210,000 NR/A1 1,540,000 California Statewide Communities Development Corporate Rev., VRDN, (Diamond Food), (LOC: Union Bank of California) .................. 3.50 09/04/96* 1,540,000 NR/A1 3,755,000 Contra Costa County Certificates of Participation, VRDN, (Concord Healthcare Center), (LOC: Boatmens First National Bank) .......... 3.70 09/04/96* 3,755,000 VMIG1/NR 4,000,000 Contra Costa County Multifamily Housing Rev., VRDN, (Del Norte Apartments Series 1994 A), (LOC: Sumitomo Bank) ................. 3.90 09/03/96* 4,000,000 NR/A1 2,000,000 Fowler Industrial Development Auth. Rev., VRDN, (Bee Sweet Citrus Inc), (LOC: Bank of America) ................... 3.60 09/05/96* 2,000,000 Aa3/NR 1,000,000 Glenn Industrial Development Auth. Rev., VRDN, (Land O'Lakes Income Project), (LOC: Sanwa Bank) ................. 4.10 09/06/96* 1,000,000 NR/A 2,500,000 Lassen Municipal Utility District Rev., VRDN, (FSA) ................. 3.35 09/05/96* 2,500,000 NR/A1+ 1,000,000 Livermore Multifamily Rev., VRDN, (Portola Meadows Apartments Series 1989 A), (LOC: Bank of America) ........................... 3.45 09/05/96* 1,000,000 VMIG1/NR 500,000 Long Beach Harbor Rev., Series 1989 A ............................... 6.80 05/15/97 509,602 Aa/AA- 2,000,000 Long Beach Harbor Commercial Paper .................................. 3.55 09/20/96 2,000,000 P1/A1+ 1,050,000 Los Angeles Certificates of Participation, (Municipal Improvement Corporation Real Estate Property), (AMBAC) ....................... 3.70 02/01/97 1,050,000 Aaa/AAA 2,900,000 Los Angeles County Industrial Development Auth. Rev., VRDN, (Tulip Corporate Project Series 1989 A), (LOC: La Salle National Bank) ................................................... 3.65 09/04/96* 2,900,000 Aa3/NR 1,250,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, (MBIA) ................................ 4.50 09/01/97 1,257,861 Aaa/AAA 1,570,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 B, (MBIA) ................................ 4.50 09/01/97 1,579,266 MIGI/Sp1+
52
Schedule of Investment Securities--Municipal Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,500,000 Los Angeles County Tax and Rev. Anticipation Notes, (LOC: Bank of America, Credit Suisse - NY, Morgan Guaranty, Union Bank of Switzerland, Westdeutsche Landesbank Girozentrale ) .............. 4.50% 06/30/97 $ 2,512,943 MIGI/Sp1+ 3,000,000 Los Angeles Multifamily Rev., VRDN, (Lucas Studios Project Series 1991 D), (LOC: Bank of America) .................. 3.60 09/05/96* 3,000,000 VMIG1/NR 4,950,000 Los Angeles Multifamily Rev., VRDN, (Oakwood Apartments), (LOC: Sumitomo Bank, LTD) .......................... 3.90 09/03/96* 4,950,000 NR/A1 485,000 Los Angeles Wastewater System Rev., Series 1996 A, (FGIC) ........... 4.50 02/01/97 487,408 Aaa/AAA 5,500,000 Oceanside Multifamily Rev., VRDN, (Lakeridge Apartments Project), (LOC: Continental Casualty Co.) ....................... 3.75 09/04/96* 5,500,000 NR/A1 2,500,000 Ontario Industrial Development Auth. Rev., VRDN, (Winsford Partners Series 1988 A), (LOC: Bank of America) ....... 3.65 09/04/96* 2,500,000 Aa3/NR 2,660,000 Pleasant Hill Redevelopment Agency Rev., VRDN, (Multifamily Housing, Chateau III Project Series 1996 A), (LOC: Commerzbank Aktiengesel) ..................................................... 3.65 09/04/96* 2,660,000 NR/A1+ 500,000 Rancho Mirage Redevelopment Agency Certificates of Participation, VRDN, (Rancho Mirage), (LOC: Bank of America) .................... 3.65 09/05/96* 500,000 VMIG1/NR 1,015,000 Riverside County Housing Auth. Rev., (Multifamily Housing Tyler Village Project Series 1986 A), (LOC: Chemical Bank) ............ 3.45 09/04/96* 1,015,000 VMIG1/NR 1,700,000 Riverside County Industrial Development Auth. Rev., VRDN, (Rockwin Corporate Project Series II), (LOC: Royal Bank of Canada) ........ 3.65 09/04/96* 1,700,000 Aa2/NR 9,500,000 Sacramento County Housing Auth. Rev., VRDN, (Shadowood Apartments Project Issue 1992 A), (LOC: GE Capital Corp) .................... 3.65 09/04/96* 9,500,000 NR/A1+ 900,000 San Diego Industrial Development Rev., VRDN, (Kaiser Aerospace and Electricity Series 1987 A), (LOC: ABN-Amro Bank) ................. 3.70 09/05/96* 900,000 P1/NR 2,500,000 San Francisco City and County Redevelopment Financing Auth. Rev., VRDN, (Yerba Buena Garden), (LOC: National Westminster PLC) ........................................ 3.40 09/04/96* 2,500,000 VMIG1/A1+ 1,400,000 San Joaquin County Industrial Development Auth. Rev., VRDN, (Modtech Inc), (LOC: Union Bank of California) ............ 3.75 09/04/96* 1,400,000 VMIG1/NR 3,500,000 San Jose Multifamily Housing Rev., VRDN, (Siena at Renaissance Series 1996 A), (LOC: Bank One) ..................... 3.60 09/04/96* 3,500,000 VMIG1/NR 5,730,000 Tri-City Housing Finance Agency Rev., VRDN, (Single Family Mortgage), (FNMA/GNMA Collateral Agreement) ............... 3.75 09/03/96* 5,730,000 NR/A1+
53
Schedule of Investment Securities--Municipal Money Market Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 4,000,000 Vallejo Industrial Development Auth. Rev., VRDN, (Meyer Cookware Industries Project 1993 A), VRDN, (LOC: Bank of Tokyo - Mitsubishi) ...................................................... 3.70% 09/04/96* $4,000,000 NR/A1 - ------------ ------------ $192,345,000 Total Investment Securities (Cost $192,430,207) ........................................ $192,430,207+ ============ ============ - --------------------------- * These variable interest rate securities have maturities greater than one year but are redeemable upon demand. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. ** Rated F1+ by Fitch. *** Rated F1 by Fitch. + The Municipal Money Market Fund had 42.89% invested in private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal alternative minimum tax liability. AMBAC = AMBAC Indemnity Corp. FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown were effective 08-31-96. PORTFOLIO COMPOSITION BY SECURITY TYPE VRDNs .......................... 76% Commercial Paper ............ 1 Put Bonds ...................... 13 _____ Municipal Notes ................ 7 TOTAL ....................... 100% Bond less than 1 Year .......... 3 _____ -----
54
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Municipal High-Yield Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-100.0% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,000,000 Alameda Public Financing Auth. Local Agency Rev., (Community Facility District Number 1, Series 1996 A) ........... 7.000% 08/01/19 $2,032,640 NR/NR 1,000,000 Albany Unified School District GO, (Series 1995 C), FSA Insured .... 5.000 08/01/19 890,520 Aaa/AAA 700,000 Bishop Escalon and Lemoore Cities Certificates of Participation, (California Cities Financing Corporation, Series 1991 A) .................... 7.700 05/01/11 744,261 Baa/NR 1,540,000 Brisbane Certificates of Participation, (Capital Improvement Refinancing Project) ................................ 6.000 04/01/18 1,477,907 NR/BBB+ 5,350,000 California Educational Facilities Auth. Rev., (St. Mary's College) . 4.750 10/01/20 4,447,134 A/NR 1,800,000 California Educational Facilities Auth. Rev., (Pooled College and University Projects, Series 1995 A) ................. 5.600 12/01/20 1,689,876 A/NR 1,000,000 California Educational Facilities Auth. Rev., (Mills College) ...... 6.875 09/01/22 1,061,160 A/NR 1,000,000 California Educational Facilities Auth. Rev., (Pooled College and University Financings, Series 1993 B) ............... 6.125 06/01/09 998,130 Baa/NR 500,000 California Educational Facilties Auth. Rev., (California Lutheran University) ..................................................... 7.375 12/01/16 537,770 Baa1/NR 2,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente, Series 1993 C), (MBIA) .............................. 5.600 05/01/33 1,874,740 Aaa/AAA 4,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente, Series 1989 A), (AMBAC) ..................... 5.880** 10/01/12 1,574,720 Aaa/AAA 2,015,000 California Health Facilities Financing Auth. Rev., (Pomona Valley Community Hospital, Series 1986 A) ....................... 7.000 01/01/17 2,057,738 NR/A- 175,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1988 B ....................................... 8.600 08/01/19 183,545 Aa/AA- 685,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1989 B ....................................... 8.000 08/01/29 715,832 Aa/AA- 510,000 California Housing Finance Agency Home Mortgage Rev. Bonds, Series 1990 C ................................................... 7.600 08/01/30 536,857 Aa/AA- 3,500,000 California Housing Finance Agency Multi-Unit Mortgage Revenue Bonds, Series 1992 C ........................... 6.875 08/01/24 3,606,155 A1/A+ 1,500,000 California Maritime Infrastructure Auth. Airport Rev., (San Diego Unified Port District Airport), (AMBAC) .............. 5.000 11/01/20 1,308,915 Aaa/AAA 400,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project, Series 1988 A) ................................. 8.500% 03/01/18 426,884 Baa/NR
55
Schedule of Investment Securities--Municipal High-Yield Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 500,000 California State Department of Veterans Affairs Home Purchase Rev., (Series 1988 A) .................................. 8.300% 08/01/19 $ 521,945 Aa/A+ 3,665,000 California State GO, (Principal Municipal Receipts) ................ 5.780** 09/01/09 1,747,032 A1/A+ 2,000,000 California State Public Works Board Lease Rev., (Department of Corrections, Series 1993D), (FSA) ................ 5.250 06/01/15 1,891,460 Aaa/AAA 1,000,000 California Statewide Communities Development Auth. Rev., Certificates of Participation, (Insurance Health Facility, San Gabriel Valley Series 1996 A), (California Mortgage Insurance) .......... 5.500 09/01/14 949,100 NR/A 625,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District) .................................. 8.000 09/02/14 646,550 NR/NR 145,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District, Series 1988 A) ................... 8.400 09/02/10 149,997 NR/NR 4,500,000 Colton Public Financing Auth. Rev., (Electric System Series 1995) .. 7.500 10/01/20 4,585,140 NR/NR 750,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., (Series 1992 A) ........................................... 7.100 08/01/22 792,405 NR/BBB 700,000 Corcoran Certificates of Participation+ ............................ 8.750 06/01/16 713,755 NR/NR 500,000 Cucamonga School District Certificates of Participation, (Series 1990) ........................................................... 7.600 12/01/15 527,780 Baa/NR 1,000,000 Davis Community Facility District Number 1991-2 Assessment, (Series 1992 B) ................................................. 7.800 09/01/22 1,065,470 NR/NR 1,500,000 Del Mar Race Track Auth. Rev. ...................................... 6.200 08/15/11 1,470,345 NR/NR 1,000,000 El Dorado County Board Auth. Lease Rev., (Capital Facility Project) 7.400 11/01/09 1,093,420 A/A- 350,000 Folsom Redevelopment Agency Tax Allocation Rev., (Series 1987 A) ... 8.600 02/01/13 366,111 NR/NR 1,500,000 Folsom Special Tax (Community Facility District Number 7) .......... 7.250 09/01/21 1,472,760 NR/NR 2,350,000 Fontana Community Facility District Number 2 Special Assessment, (Series 1988 B) ............................. 8.500 09/01/17 2,479,415 NR/NR 2,000,000 Fontana Public Financing Auth. Tax Allocation Rev., (Series 1993 A), (MBIA) ................................................. 5.000 09/01/20 1,778,680 Aaa/AAA 1,000,000 Fontana Redevelopment Agency Tax Allocation, (Jurupa Hills Project) 8.000 01/01/98 1,019,910 NR/NR 2,500,000 Fontana Redevelopment Agency Tax Allocation, (Jurupa Hills Project, Series 1994 B) ................................... 7.700 01/01/19 2,652,375 NR/NR 1,040,000 Foothill-De Anza Community College District Certificates of Participation, (Campus Center Project, Series 1992) ............. 7.350 03/01/07 1,145,498 NR/A- 2,500,000 Foster City Redevelopment Agency Tax Allocation, (Housing Set Aside, Metro Center) ............................... 6.750 09/01/20 2,583,300 NR/A- 1,185,000 Gateway Improvement Auth. Rev., (Marin City Community Facility, Series 1995 A) .............................. 7.750 09/01/25 1,225,041 NR/NR 1,250,000 Hollister Redevelopment Agency Tax Allocation, (Hollister Community Development Project, Series 1989) .......... 7.550 10/01/13 1,325,850 NR/BBB+
56
Schedule of Investment Securities--Municipal High-Yield Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $2,000,000 Industry Urban Redevelopment Agency Tax Allocation, (Transportation District, Project 3) ............................ 6.900% 11/01/16 $ 2,110,980 NR/A- 985,000 Irvine Improvement Bond 1915 Special Assessment, (District Number 89-9, Series 1992 A) ........................... 7.400 09/02/17 1,011,221 NR/NR 1,000,000 Lake Elsinore Unified School District Community Facilities District Special Tax, (Number 88-1, Series 1991) ..... 8.250 09/01/16 1,069,600 NR/NR 2,000,000 Long Beach Harbor Rev., (MBIA) ..................................... 5.250 05/15/25 1,794,360 Aaa/AAA 120,000 Los Angeles County Single Family Mortgage Rev., (GNMA Mortgage, Issue B), (GNMA Collateral) ..................... 9.000 12/01/20 124,541 NR/AAA 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series 1991 B) ................................. 6.500 07/01/13 1,044,960 A1/AA- 2,500,000 Los Angeles County Wastewater System Rev., (Series 1993 D) ......... 4.700 11/01/19 2,102,700 Aaa/AAA 3,000,000 Los Angeles Department of Water and Power Electricity Plant Rev., (Series 1994), (MBIA) ............................... 4.750 08/15/14 2,619,480 Aaa/AAA 40,000 Los Angeles Home Mortgage Rev. ..................................... 9.000 06/15/18 41,068 NR/A 4,925,000 Northern California Power Agency Rev., (Hydroelectric Project 1, Series E) ....................................................... 7.150 07/01/24 5,164,651 A/A- 2,000,000 Norwalk Community Facilities Financing Auth. Tax Allocation, (Series 1995 B) ................................................. 7.400 09/15/25 2,093,080 NR/NR 2,000,000 Novato Community Facility District Number 1 Special Tax, (Vintage Oaks Project) .......................................... 7.200 08/01/15 2,067,800 NR/NR 1,000,000 Orange County Community Facilities District Special Tax, (Number 87-5E, Series 1993 A) ................................... 7.300 08/15/18 1,009,540 NR/NR 1,500,000 Orange Cove Irrigation District Certificiates of Participation, (Series 1992) ................................................... 7.000 02/01/15 1,668,105 NR/BBB 1,000,000 Pioneer Union Elementary School District GO, Series 1990 ........... 7.500 08/01/14 1,064,790 NR/BBB+ 1,500,000 Pittsburg Assessment District 92-1 Special Assessment, (Village at New York Landing) ................................... 8.000 09/02/22 1,552,185 NR/NR 880,000 Pittsburg Assessment District 90-1 Special Assessment, (Oak Hills) . 7.750 09/02/20 911,856 NR/NR 2,240,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Project, Series 1993 A), (AMBAC) ........................ 5.000 08/01/17 1,998,214 Aaa/AAA 5,000,000 Pomona Improvement Bond Act 1915 Special Assessment, (Rio Rancho Assessment District 294) ................ 7.500 09/02/21 5,003,450 NR/NR 4,000,000 Pomona Public Financing Auth. Rev., (Southwest Pomona Redevelopment-Series 1993 L) ............................. 5.700 02/01/13 3,766,120 Baa/BBB+ 2,250,000 Rancho Mirage Joint Powers Financing Auth. Certificates of Participation, (Eisenhower Memorial Hospital) ................ 7.000 03/01/22 2,407,950 A/NR
57
Schedule of Investment Securities--Municipal High-Yield Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,000,000 Redding Joint Powers Financing Auth. Electric Systems Rev., (Series 1996 A), (MBIA) ................................... 5.250% 06/01/15 $ 1,878,320 Aaa/AAA 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment Project) ................................... 7.125 07/01/26 1,814,746 NR/NR 1,000,000 Richmond Joint Powers Financing Auth. Rev., (Series 1995 A) ........ 5.250 05/15/13 916,520 NR/A 1,000,000 Rocklin Stanford Ranch Community Facilities District Special Tax, Prerefunded at 102% of par ......................... 8.100 11/01/00 1,146,840 NR/NR 500,000 Roseville Community Facilities District Number 2 Special Tax ....... 8.250 09/01/21 533,320 NR/NR 3,000,000 Sacramento School Insurance Auth. Rev., (Workers Compensation Program, Series 1993 C) ............................ 5.750 06/01/03 3,135,570 NR/AAA 500,000 St. Helena Certificates of Participation, (Series 1991 C) .......... 7.875 06/01/11 538,765 NR/BBB 2,000,000 Salinas Assessment District 94-1, (Harden Ranch) ................... 6.875 09/02/11 2,043,260 NR/NR 1,780,000 San Jose Finance Auth. Rev., (Convention Center, Series 1993 C) .... 6.300 09/01/09 1,850,417 A1/A+ 1,000,000 San Diego Community Facilities District Number 1 Special Tax, (Series 1995 B) ................................................. 7.100 09/01/20 1,015,630 NR/NR 2,800,000 Santa Ana Health Facility Rev., VRDN, (Town & Country) (LOC: Banque National de Paris) ........................ 3.650 09/03/96* 2,800,000 NR/A1 3,250,000 Sierra Sands Unified School District Certificates of Participation, (Capital Improvement Refinancing Project, Series 1993) .......... 5.750 02/01/23 2,991,885 Baa1/NR 3,000,000 South Orange County Public Financing Auth. Special Tax, (Jr. Lien, Series 1994 B) .......................... 7.250 09/01/13 3,063,600 NR/NR 1,615,000 South San Francisco Redevelopment Agency Tax Allocation, (Gateway Redevelopment Project) ................. 7.600 09/01/18 1,692,213 NR/NR 480,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., (GNMA & FNMA Mortgage-Backed Securities, Series A) .............. 7.350 09/01/24 499,814 NR/AAA 500,000 Southern California Public Power Auth. Rev. Pooled Project ......... 6.750 07/01/10 554,045 A/A 2,000,000 Southern California Public Power Auth. Rev., (Series 1993 A) (AMBAC) ......................................................... 5.000 07/01/15 1,795,740 Aaa/AAA 2,400,000 Southern California Public Power Auth. Rev., (Transmission Project), (MBIA) .................................. 5.980** 07/01/14 839,040 Aaa/AAA 2,000,000 Southern California Public Power Auth. Rev., (Transmission Project), (MBIA) .................................. 6.030** 07/01/15 653,200 Aaa/AAA 1,000,000 Standard Elemetary School District Certificates of Participation, (Series 1991) ................................................... 7.375 06/01/11 1,063,420 NR/A- 1,770,000 Tehama Community Certificates of Participation, (Social Services Building Project) .............................. 7.000 10/01/20 1,906,485 NR/A 1,740,000 Torrance Hospital Rev., (Little County of Mary Hospital) ........... 6.875 07/01/15 1,830,010 NR/A 1,565,000 Twentynine Palms Water District Certificates of Participation ...... 7.100 08/01/22 1,637,553 NR/BBB 4,000,000 Victor Valley Joint Union High School District GO, (MBIA) .......... 6.030** 09/01/18 1,082,360 Aaa/AAA
58
Schedule of Investment Securities--Municipal High-Yield Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 950,000 Vista Joint Powers Financing Auth. Rev., (Series 1990 A) ........... 7.500% 01/01/16 $ 1,002,288 Baa1/NR 2,000,000 West Contra Costa Unified School District Certificates of Participation, (St. Aid Withholding) ......................... 7.125 01/01/24 2,082,920 Ba1/BBB+ 1,520,000 Windsor Redevelopment Agency Tax Allocation ........................ 6.875 09/01/15 1,602,004 NR/BBB 1,000,000 Yosemite Community College District Certificates of Participation, (Series 1991) ................................................... 7.750 07/01/11 1,150,170 NR/BBB - ------------ ------------ $152,360,000 Total Investment Securities (cost $138,234,308) ........................................ $142,114,909*** ============ ============ - --------------------------- * These variable interest rate securities have maturities greater than the indicated maturity dates but are redeemable upon demand at the date indicated. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. ** These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. *** The High-Yield Fund had 8.36% invested in private activity municipal securities. The interest from these securities is treated as a tax-preference item in calculating federal alternative minimum tax liability. + Private placement security which cannot be offered for public sale without first being registered under the Securities Act of 1933. The value of the security was $713,755, which represents .5% of the net assets of the High-Yield Fund. AMBAC = AMBAC Indemnity Corp. FGIC = Financial Guaranty Insurance Company FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown were effective 08-31-96. PORTFOLIO COMPOSITION BY MARKET SECTOR Tax Allocation ................. 16.5% 1915 Act .................... 7.7 Certificates of Participation .. 13.4 Other ....................... 29.2 Electric ....................... 12.1 _____ Mello-Roos ..................... 11.8 TOTAL ....................... 100.0% Hospital ....................... 9.3 _____ -----
59
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Insured Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-93.6% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,000,000 Banning Certificates of Participation (Wastewater System, Reference and Improvement Project), (AMBAC) .............. 8.00% 01/01/19 $1,277,130 Aaa/AAA 1,000,000 Berkeley Certificates of Participation, (Series 1989), (AMBAC) ................................................... 7.50 06/01/19 1,066,930 Aaa/AAA 1,095,000 California Health Facilities Financing Auth. Rev., (Mills Peninsula Health, Series 1995 B), (Connie Lee) ............ 5.75 01/15/15 1,076,035 NR/AAA 1,250,000 California Health Facilities Financing Auth. Rev., (Adventist Health, Series 1991 A), (MBIA) ........................ 7.00 03/01/13 1,355,725 Aaa/AAA 2,500,000 California Health Facilities Financing Auth. Rev., (Sutter Hospital, Series 1989 A), (AMBAC) ........................ 6.70 01/01/13 2,620,575 Aaa/AAA 1,560,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project, Series 1988 B), (BIGI) .............. 8.10 03/01/18 1,641,916 Aaa/AAA 4,250,000 California State Public Works Board Lease Rev., (Department of Corrections, State Prisons, Series 1993 A), (AMBAC) ........................... 5.00 12/01/19 3,856,280 Aaa/AAA 1,000,000 California State University and Colleges Rev., (Housing System), (AMBAC) ........................................ 7.00 11/01/15 1,108,590 Aaa/AAA 3,925,000 California Statewide Communities Development Auth. Rev., (Gemological Institute), (Connie Lee) ...................... 6.75 05/01/10 4,343,837 NR/AAA 6,500,000 California State GO, (MBIA) ......................................... 6.00 10/01/10 6,890,780 Aaa/AAA 6,000,000 California State Public Works Board Lease Rev., (Department of Corrections, Series 1993 D), (FSA) ................ 5.25 06/01/15 5,674,380 Aaa/AAA 1,520,000 Castaic Lake Water Agency Certificates of Participation, (Water System Improvement Project, Series 1994 A), (MBIA) ........ 7.00 08/01/12 1,741,297 Aaa/AAA 1,000,000 Contra Costa County Public Facility Auth. Certificates of Participation, (BIGI) ......................................... 7.80 06/01/07 1,091,090 Aaa/AAA
60
Schedule of Investment Securities--Tax-Free Insured Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,000,000 Contra Costa Water District Rev., (Series 1992 E), (AMBAC) .......... 6.25% 10/01/12 $ 1,073,230 Aaa/AAA 1,000,000 East Valley Water District Certificates of Participation, (Treatment Plant Project), (AMBAC) ............................... 6.60 12/01/14 1,084,130 Aaa/AAA 5,750,000 Encino Joint Powers Financing Auth. Wastewater Rev., (Phase IV Expansion Project, Series 1989 A), (AMBAC) ............. 6.88 08/01/11 6,167,163 Aaa/AAA 2,000,000 Escondido Joint Powers Financing Auth. Rev., (AMBAC) ................ 6.13 09/01/11 2,063,060 Aaa/AAA 4,100,000 Foothill-De Anza Community College District Certificates of Participation, (Connie Lee) ................................... 6.25 09/01/13 4,222,180 NR/AAA 1,240,000 Fresno Sewer Rev., (Series 1993 A-1), (AMBAC) ....................... 4.75 09/01/21 1,072,922 Aaa/AAA 1,725,000 Fresno Sewer Rev., (Series 1993 A-1), (AMBAC) ....................... 6.25 09/01/14 1,854,203 Aaa/AAA 5,000,000 Glendale Hospital Rev., (Adventist Health, Series 1991 A), (MBIA) ... 6.75 03/01/13 5,442,700 Aaa/AAA 4,830,000 Glendale Unified School District Certificates of Participation, (Series 1994 A), (AMBAC) ......................................... 6.50 03/01/12 5,178,243 Aaa/AAA 3,630,000 Kern High School District GO, (Series 1993 D), (MBIA) ............... 7.00 08/01/03 4,224,267 Aaa/AAA 1,340,000 Kern High School District, GO, (Series 1993 C), (MBIA) .............. 6.25 08/01/13 1,442,764 Aaa/AAA 790,000 Lake Elsinore Public Financing Auth. Tax Allocation Rev., (Redevelopment Projects, Series 1992 C), (FGIC) .................. 6.63 02/01/17 844,099 Aaa/AAA 1,500,000 Lakewood Redevelopment Agency Tax Allocation, Rev., (Project Number 1, Series 1992 A), (FSA) ................... 6.50 09/01/17 1,606,620 Aaa/AAA 1,900,000 Loma Linda Hospital Rev., (University Medical Center, Series B), (MBIA) ................................................ 7.00 12/01/10 2,108,962 Aaa/AAA 2,000,000 Los Angeles Community College District Certificates of Participation, (FSA) .......................................... 6.90 08/15/00 2,208,440 Aaa/AAA 1,555,000 Los Angeles Community Redevelopment Agency Housing Rev., (Series 1994 C), (AMBAC, FHA) ...................... 7.00 01/01/14 1,660,756 Aaa/AAA 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., (Bunker Hill, Series 1993 H), (FSA) ......... 6.50 12/01/15 4,297,120 Aaa/AAA 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation Rev., (Bunker Hill, Series 1993 H), (FSA) ......... 6.50 12/01/14 3,754,730 Aaa/AAA 5,000,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev., (Series 1993 A), (MBIA) .................................... 5.13 08/15/21 4,476,000 Aaa/AAA 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., (AMBAC) 6.50 07/01/13 1,065,820 Aaa/AAA 1,100,000 Los Angeles Wastewater System Rev., (Series 1991 C), (AMBAC) ........ 7.00 06/01/11 1,182,830 Aaa/AAA
61
Schedule of Investment Securities--Tax-Free Insured Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,915,000 Midpeninsula Regional Open Space District Financing Auth. Rev., (AMBAC) .............................................. 5.90% 09/01/14 $ 1,925,858 Aaa/AAA 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., (San Juan Project, Series 1989 D), (MBIA) .......................................... 6.75 07/01/20 5,668,650 Aaa/AAA 1,200,000 National City Joint Powers Auth. Lease Rev., (Police Facilities Project), (AMBAC) ..................................... 6.75 10/01/17 1,308,204 Aaa/AAA 2,000,000 Oakland Joint Powers Financing Auth. Lease Rev., (Administration Buildings), (AMBAC) .............................. 5.90 08/01/16 2,004,120 Aaa/AAA 2,810,000 Oakland Redevelopment Agency Tax Allocation Rev., (Central District), (AMBAC) ...................................... 5.50 02/01/14 2,755,908 Aaa/AAA 1,925,000 Oakland Refunding Pension Financing Rev., (Series 1988 A), (FGIC) ... 7.60 08/01/21 2,068,990 Aaa/AAA 1,700,000 Orange County Improvement Bond, VRDN, (Assessment District Number 88-1) (LOC: Societe Generale) .................. 3.65 09/03/96* 1,700,000 VMIG1/A2 1,000,000 Orange County Apartment Development Rev., VRDN, (Laguna Summit Apartments Series 1985 X), (LOC: Tokai BK LTD) ................... 3.40 09/03/96* 1,000,000 VMIG2/NR 2,000,000 Orange County Certificates of Participation, (Civic Center Expansion Project), (AMBAC) ...................................... 6.70 08/01/18 2,218,560 Aaa/AAA 1,000,000 Pasadena Certificates of Participation, (Refunding and Capital Projects), (AMBAC) ....................................... 5.00 02/01/16 901,540 Aaa/AAA 3,600,000 Perris Public Financing Auth. Local Agency Rev., (Parity Series 1996 F), (FSA) ............................................ 5.85 09/01/24 3,558,456 Aaa/AAA 1,500,000 Pittsburg Multifamily Mortgage Rev., VRDN, (Fountain, Series 1988 A), (FNMA) ........................................... 3.40 09/04/96* 1,500,000 NR/A1+ 1,950,000 Ramona Municipal Water District Certificates of Participation, (AMBAC) .......................................................... 7.20 10/01/10 2,126,807 Aaa/AAA 1,100,000 Redlands Unified School District Certificates of Participation, (FSA) ............................................................ 6.00 09/01/12 1,113,794 Aaa/AAA 580,000 Redondo Beach Redevelopment Agency Tax Allocation Rev., (South Bay Center Redevelopment), (FGIC) ................... 8.63 05/01/14 601,976 Aaa/AAA 2,505,000 Sacramento Redevelopment Agency Tax Allocation Rev., (Merged ` Downtown Redevelopment Project, Series 1990 A), (MBIA) ........... 6.50 11/01/13 2,685,886 Aaa/AAA 3,000,000 Saddleback Community College District Certificates of Participation, (BIGI) ............................................ 7.00 08/01/19 3,217,560 Aaa/AAA 10,000,000 San Francisco City and County International Airport Rev., (Refunding, Second Series Issue 2), (MBIA) ....................... 6.75 05/01/20 10,925,200 Aaa/AAA
62
Schedule of Investment Securities--Tax-Free Insured Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 5,250,000 San Francisco Bay Area Rapid Transportation District Sales Tax Rev., (AMBAC) .......................................... 6.75% 07/01/09 $ 5,743,238 Aaa/AAA 1,000,000 San Mateo County Transportation District Sales Tax Rev., (Series 1993 A), (MBIA) .......................................... 5.25 06/01/18 945,990 Aaa/AAA 3,535,000 San Mateo County Joint Powers Financing Auth. Lease Rev., (Refunding Capital Projects Program), (MBIA) ..................... 6.50 07/01/15 3,860,821 Aaa/AAA 1,000,000 Santa Clara Electric Rev., (Series 1991 A), (MBIA) .................. 6.25 07/01/19 1,024,150 Aaa/AAA 2,000,000 Santa Margarita/Dana Point Auth. Rev., (Improvement Districts 3, 3A, 4, 4A, Series 1994 B), (MBIA) ................... 7.25 08/01/14 2,354,300 Aaa/AAA 3,685,000 Simi Valley Unified School District, GO, (FGIC) ..................... 5.00 08/01/15 3,350,844 Aaa/AAA 2,500,000 South Coast Air Quality Management District Building Rev., (Installment Sale Headquarters), (AMBAC) ................... 6.00 08/01/11 2,624,675 Aaa/AAA 7,000,000 Southern California Public Power Auth. Rev., (Refunding Series 1993 A), (FSA) ............................................ 5.50 07/01/12 6,819,050 Aaa/AAA 80,000 Thousand Oaks Redevelopment Agency Rev., (Single Family Residential Mortgage Rev.), (AMBAC) ............... 7.90 01/01/16 82,131 Aaa/AAA 2,500,000 Ukiah Electric Rev., (MBIA) ......................................... 6.25 06/01/18 2,668,300 Aaa/AAA 3,250,000 Vallejo Rev., (Water Improvement Project, Series 1992 B), (FGIC) .... 6.50 11/01/14 3,625,310 Aaa/AAA 1,445,000 Walnut Valley Unified School District, GO, (Series 1992 B), (AMBAC) . 6.00 08/01/10 1,523,926 Aaa/AAA 4,525,000 Woodland Certificates of Participation, (Wastewater System Reference Project), (AMBAC) ...................................... 5.75 03/01/12 4,578,304 Aaa/AAA - ------------ ------------ $169,115,000 Total Municipal Securities ............................................................ $ 177,257,352 - ------------ ------------ MUNICIPAL DERIVATIVES-6.4% 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., Yield Curve Notes, Inverse Floater1, (AMBAC) ..................... 7.07 06/01/13 1,822,500 Aaa/AAA 1,000,000 San Diego County Water Auth. Certificates of Participation, (Reg Rites), Yield Curve Notes, Inverse Floater1, (FGIC) ...................... 7.43 05/01/09 1,026,250 Aaa/AAA 7,000,000 San Diego County Certificates of Participation, (Auction Rate Certificates and Yield Curve Certificates), Inverse Floater1, (AMBAC) ......... 5.49 09/01/12 6,923,630 Aaa/AAA
63
Schedule of Investment Securities--Tax-Free Insured Fund ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,750,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater1, (FGIC) ...................... 6.79% 07/01/17 $ 2,361,562 Aaa/AAA - ------------ ------------ 12,750,000 Total Municipal Derivatives ........................................................... 12,133,942 - ------------ ------------ $181,865,000 Total Investment Securities (cost $183,138,086) ....................................... $ 189,391,294 ============ ============ - --------------------------- 1 Inverse floaters bear interest rates that move inversely to market interest rates. Inverse floaters typically have durations twice as long as long-term bonds, which may cause their value to be twice as volatile as long-term bonds when market interest rates change. The Insured Fund is limited to 10% of its net assets in inverse floaters. * These variable interest rate securities have maturities greater than one year but are redeemable upon demand. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. AMBAC = AMBAC Indemnity Corp. BIGI = Bond Investor's Guaranty, Inc. FGIC = Financial Guaranty Insurance Company FHA = Federal Housing Authority FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown were effective 08-31-96. PORTFOLIO COMPOSITION BY MARKET SECTOR Certificates of Participation .. 26.2% Hospital ..................... 6.4% Water/Sewer .................... 12.0 Transportation ............... 5.7 Tax Allocation ................. 9.9 Other ........................ 12.7 Electric ....................... 9.7 _____ Prerefunded .................... 8.9 TOTAL ........................ 100.0% General Obligation ............. 8.5 _____ -----
64 TRUSTEES James M. Benham Albert A. Eisenstat Ronald J. Gilson Myron S. Scholes Kenneth E. Scott Ezra Solomon Isaac Stein James E. Stowers, III Jeanne D. Wohlers OFFICERS James M. Benham Chairman of the Board Maryanne Roepke Treasurer and Chief Financial Officer Douglas A. Paul Vice President, Secretary and General Counsel Ann N. McCoid Controller Twentieth Century Mutual Funds and The Benham Group - ------------------------------ P.O. Box 419200 o Kansas City, Missouri 64141-6200 Person-to-person assistance: 1-800-345-2021 or 816-531-5575 Internet: http://www.twentieth-century.com For more information on risks, management fees and expenses, call 1-800-345-2021 for a free prospectus. Read the prospectus carefully before investing or sending money. (C) 1996 Twentieth Century Services, Inc. Twentieth Century Securities, Inc. BN-BKT-6000 10/96 [Book Two] BENHAM CALIFORNIA TAX-FREE BOND FUNDS ================ Annual Report o August 31, 1996 [photo of the California State flag] Tax-Free Limited-Term Fund Tax-Free Intermediate-Term Fund Tax-Free Long-Term Fund TWENTIETH CENTURY MUTUAL FUNDS AND THE BENHAM GROUP [front cover] CONTENTS U.S. ECONOMIC REVIEW.................................. 1 MUNICIPAL MARKET SUMMARY.............................. 2 CALIFORNIA ECONOMIC & CREDIT ANALYSIS....................................... 3 TAX-FREE LIMITED-TERM FUND Performance Information............................... 4 Performance Comparisons & Total Return Breakdown...... 5 Portfolio Information................................. 6 Management Discussion................................. 7 Financial Highlights...................................28 Financial Statements and Notes.........................31 Schedule of Investments................................38 TAX-FREE INTERMEDIATE-TERM FUND Performance Information............................... 9 Performance Comparisons & Total Return Breakdown.......10 Portfolio Information..................................11 Management Discussion .................................12 Financial Highlights...................................29 Financial Statements and Notes.........................31 Schedule of Investments................................41 TAX-FREE LONG-TERM FUND Performance Information................................14 Performance Comparisons & Total Return Breakdown.......15 Portfolio Information..................................16 Management Discussion .................................17 Financial Highlights...................................30 Financial Statements and Notes.........................31 Schedule of Investments................................49 INVESTMENT FUNDAMENTALS Definitions............................................19 The Yield Curve........................................21 Muni Risk Factors......................................22 Portfolio Sensitivity Measures.........................23 Bond Pricing...........................................24 Portfolio Structures & Taxable Distributions...........25 U.S. ECONOMIC REVIEW JAMES M. BENHAM [photo of James Chairman, Benham Funds M. Benham] After a slow start in January, the U.S. economy grew at a healthy pace for the first three quarters of 1996, confounding market analysts who predicted a significant slowdown in the second half of the year. During 1995, economic weakness prompted the Federal Reserve (the Fed) to make a series of short-term interest rate cuts, culminating in a quarter-of-a-percent cut in January 1996. This expansionary monetary policy helped speed the pace of U.S. economic growth from an anemic 0.3% annual rate in the fourth quarter of 1995 to a more robust 2.0% in the first quarter of 1996. Growth expanded further to an impressive 4.7% in the second quarter of the year (see the accompanying graph). [bar graph on left side of page - graph data described below] Stronger-than-expected corporate earnings provided fuel for increased corporate expansion and job growth. Nearly two million new jobs were created in the first eight months of the year, sending the national unemployment rate to a six-year low of 5.1%. Healthy employment numbers and a strong performance by U.S. stocks in general led to fears of inflationary pressure and expectations of an interest rate hike by the Fed. As a result, U.S. bonds overall gave a lackluster performance for the period. But the expected surge in inflation failed to materialize. For the first eight months of the year, inflation, as measured by the consumer price index (CPI), grew at an annualized rate of 3.2%, as compared to a 2.8% rate for the first eight months of 1995. (The 2.5% inflation rate for all of 1995 was the lowest annual rate since 1986.) Because of this apparent lack of inflationary pressure, the Fed held interest rates steady through September. Nevertheless, some market participants believe that the Fed will raise interest rates before the end of the year. Signs of wage inflation have surfaced--in June, the Labor Department reported the largest average hourly earnings increase in more than 30 years. In spite of higher interest rates for most of this year, the housing market has remained robust, and consumer confidence is at a six-year high, indicating that the U.S. consumer may still have some spending power. Whatever the Fed's plans, however, it is unlikely that we will see a Fed move in interest rates until the November elections are safely past. [graph data] Quarterly Economic Growth (GDP) vs. Inflation (Consumer Price Index) July 1994 - August 1996 GDP CPI Jan-94 2.52 Feb-94 2.51 Mar-94 2.50 2.51 Apr-94 2.36 May-94 2.29 Jun-94 4.90 2.56 Jul-94 2.70 Aug-94 2.90 Sep-94 3.50 3.03 Oct-94 2.68 Nov-94 2.60 Dec-94 3.00 2.60 Jan-95 2.87 Feb-95 2.79 Mar-95 0.40 2.86 Apr-95 2.98 May-95 3.12 Jun-95 0.70 3.04 Jul-95 2.83 Aug-95 2.62 Sep-95 3.80 2.54 Oct-95 2.74 Nov-95 2.67 Dec-95 0.30 2.67 Jan-96 2.72 Feb-96 2.72 Mar-96 2.00 2.84 Apr-96 2.90 May-96 2.96 Jun-96 4.70 2.75 Jul-96 2.95 Aug-96 2.88 Source: Bloomberg Financial Markets 1 MARKET SUMMARY MUNICIPAL SECURITIES by Dave MacEwen, Vice President & Senior Municipal Portfolio Manager NOTE: Terms marked with an asterisk (*) are defined in the Investment Fundamentals section (pages 19-25). Although 1995 saw the strongest U.S. bond returns in a decade, the first quarter of 1996 marked a major shift in bond market expectations. A surprising economic recovery led by unexpectedly strong employment growth (discussed on page 1) caused investors to fear that inflation--the great eroder of bond returns--would rear its ugly head. As a result, the bond market sold off and the yield curve* rose dramatically from February to April. Since then, the yield on the 30-year municipal bond has ranged from 5.45% to 6.00%. Municipal bond (muni) prices followed the downward trend of the broader bond market as yields rose (see the accompanying graph). Though the bear market mentality that prevailed caused muni bond prices to fall, Treasury securities (Treasuries) fell farther. As a result, munis significantly outperformed Treasuries during the first eight months of the year. Some of this outperformance can be attributed to dissipating flat-tax fears, which had a negative effect on munis in 1995 and caused them to be inexpensively priced compared to Treasuries. Munis' strong showing was more surprising given that Jack Kemp, a strong advocate of the flat-tax initiative, was added to the Republican presidential ticket as Bob Dole's running mate. Nonetheless, flat-tax fears seem to have largely evaporated, emphasizing the market's belief that President Clinton will remain in office. [line graph on left side of page - graph data described below] Other factors also supported muni prices during the period. Though muni issuance this year is slightly ahead of the pace seen in 1995, new supply--especially in the shorter-maturity sector--remains at historically low levels. Low levels of supply, combined with an upsurge of demand, helped support muni prices during the period. Muni issuance is expected to remain sluggish in the near term, which should help limit market gyrations. However, the economic environment remains uncertain--further signs of economic strength could fuel inflation concerns, while faltering economic growth would likely benefit all fixed-income securities. [graph data] The Shifting Municipal Yield Curve Years 8/30/96 2/29/96 "1" 3.87% 3.35% "2" 4.12 3.65 "3" 4.32 3.85 4.47 3.97 "5" 4.57 4.09 4.67 4.2 "7" 4.77 4.309 4.87 4.409 4.97 4.509 "10" 5.07 4.609 5.152 4.707 5.234 4.805 5.316 4.903 5.398 5.001 "15" 5.48 5.099 5.514 5.137 5.548 5.175 5.582 5.213 5.616 5.251 "20" 5.65 5.289 5.658 5.299 5.666 5.309 5.674 5.319 5.682 5.329 "25" 5.69 5.339 5.694 5.345 5.698 5.351 5.702 5.357 5.706 5.363 "30" 5.71 5.369 Source: Bloomberg Financial Markets 2 CALIFORNIA CREDIT ANALYSIS STATE ECONOMIC AND CREDIT REVIEW by Steven Permut, Manager of Municipal Credit Analysis, and the Benham Municipal Credit Analysis Team: Joe Crowley, Scott Lord and Bill McClintock California's economic recovery has been the driving force behind an improvement in the state's credit quality. As we anticipated in our last report, the state's credit rating was upgraded by two rating agencies. This improvement in credit quality resulted in higher net asset values and higher total returns for Benham California bond fund shareholders. The state's economic turnaround, which began in the fourth quarter of 1993, continued through the six months ended August 31, 1996. With employment growth exceeding the national average, California's unemployment rate fell to 7.1% in June from a 1993 recessionary high of more than 9%. California's economy has more than replaced the jobs lost during the recession (see the accompanying graph), with significant growth in the technology, tourism and entertainment sectors. [mountain graph on left side of page - graph data described below] Underscoring the state's economic turnaround has been the strong growth in sales tax revenues. We've also witnessed statewide improvement in the real estate sector. The San Francisco Bay Area has seen property values rise appreciably, while the southern California real estate market has bottomed out and begun to exhibit positive characteristics. Real estate prices in many regions have surpassed their 1989 highs, indicating the regional vitality of California's real estate market. Despite these generally positive trends, California and its municipalities face fiscal challenges from welfare reform, funding for education infrastructure and rising criminal justice expenditures. Regionally, the San Francisco Bay Area continues to show impressive growth. The state's Central Valley is stable and enjoying moderate growth. Southern California in general and the Los Angeles basin in particular have exhibited the first real signs of an economic turnaround, indicating that the effects of cutbacks in defense spending and military base closures have largely run their course. Though local governments such as cities and school districts have generally benefited from the state's economic strength, individual disparities point to a continued need for thorough case-by-case credit analysis. [graph data] California Employment (non-farm, seasonally adjusted, 6-mo. moving average, in thousands) 1/31/91 12505.6 2/28/91 12487.2 3/31/91 12466.7 4/30/91 12445.7 5/31/91 12423.3 6/30/91 12398.5 7/31/91 12383.1 8/31/91 12371.7 9/30/91 12361.5 10/31/91 12349.8 11/30/91 12335.1 12/31/91 12318.5 1/31/92 12293.3 2/29/92 12262.8 3/31/92 12241.9 4/30/92 12223.2 5/31/92 12207.3 6/30/92 12192.3 7/31/92 12187.5 8/31/92 12181.4 9/30/92 12163.9 10/31/92 12146.9 11/30/92 12130.8 12/31/92 12113.9 1/31/93 12099.5 2/28/93 12088.3 3/31/93 12078 4/30/93 12063.6 5/31/93 12051.5 6/30/93 12046 7/31/93 12039.6 8/31/93 12037.3 9/30/93 12037.9 10/31/93 12039.3 11/30/93 12039.2 12/31/93 12044.1 1/31/94 12042.7 2/28/94 12047.8 3/31/94 12060.7 4/30/94 12075.4 5/31/94 12093.9 6/30/94 12108.5 7/31/94 12126.2 8/31/94 12142 9/30/94 12156.5 10/31/94 12170.5 11/30/94 12187.1 12/31/94 12208.9 1/31/95 12225.9 2/28/95 12252 3/31/95 12275 4/30/95 12303.1 5/31/95 12331.3 6/30/95 12355.1 7/31/95 12388.6 8/31/95 12414.9 9/30/95 12445.4 10/31/95 12472.2 11/30/95 12497.2 12/31/95 12521.2 1/31/96 12545.1 2/96 12620.2 3/96 12657.4 4/96 12671.1 5/96 12722.7 6/96 12755.2 Source: U.S. Department of Labor, Bureau of Labor Statistics 3 LIMITED-TERM FUND CURRENT YIELD* As of August 31, 1996 30-Day 30-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 3.72% 5.70% 5.94% 6.41% 6.46% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Range Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years Life of Fund - -------------------------------------------------------------------------------- $10.13-$10.38 3.87% 3.69% N/A 4.58% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 28. The Fund commenced operations on June 1, 1992. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 4 LIMITED-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 6/1/92 in the Fund and in the Lehman Brothers, Inc. Three-Year Municipal Bond Index [line graph data - described below] Index Fund 5/31/92 10000 10000 6/30/92 10122 10074 7/31/92 10319 10249 8/31/92 10273 10222 9/30/92 10357 10277 10/31/92 10317 10251 11/30/92 10389 10347 12/31/92 10451 10413 1/31/93 10530 10497 2/28/93 10695 10673 3/31/93 10663 10616 4/30/93 10725 10679 5/31/93 10754 10699 6/30/93 10823 10754 7/30/93 10838 10733 8/31/93 10897 10850 9/30/93 10945 10913 10/31/93 10967 10923 11/30/93 10953 10925 12/31/93 11068 11029 1/31/94 11158 11095 2/28/94 11054 10986 3/31/94 10920 10881 4/29/94 10984 10903 5/31/94 11036 10929 6/30/94 11039 10942 7/29/94 11131 11029 8/31/94 11171 11057 9/30/94 11143 11037 10/31/94 11116 11008 11/30/94 11096 10946 12/30/94 11144 10962 1/31/95 11237 11059 2/28/95 11356 11206 3/31/95 11458 11290 4/28/95 11497 11337 5/31/95 11673 11468 6/30/95 11701 11518 7/31/95 11825 11581 8/31/95 11917 11646 9/30/95 11950 11683 10/31/95 12008 11749 11/30/95 12085 11835 12/31/95 12135 11874 1/31/96 12230 11977 2/29/96 12233 11970 3/31/96 12203 11904 4/30/96 12218 11925 5/31/96 12229 11945 6/30/96 12302 11995 7/31/96 12370 12077 8/31/96 12388 12096 Past performance does not guarantee future results. This graph compares the Fund's performance with a broad-based market index, the Lehman Brothers, Inc. Three-Year Municipal Bond Index, over the life of the Fund. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/96 for the funds in Lipper's "California Short-Term Municipal Debt Funds" category. 1 Year 3 Years Life of Fund+ The Fund: 3.87% 3.69% 4.49% Category Average: 3.73% 3.69% 4.84% The Fund's Ranking: 4 out of 12 5 out of 6 2 out of 2 + from June 30, 1992, through August 31, 1996 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1996 % From Realized % From and Unrealized Losses One-Year Income + on Investments = Total Return 4.27% + (0.40)% = 3.87% 5 LIMITED-TERM FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Market Value: $101,541,532 $100,157,096 Number of Issues: 55 52 Average Coupon: 5.77% 5.75% Average Maturity: 2.95 years 3.22 years Average Duration: 2.55 years 2.80 years For definitions of these terms, see page 20. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 A 21.4% A 22.0% AA 13.6% AA 20.0% AAA 65.0% AAA 58.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 22. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] 8/31/96 2/29/96 Prerefunded: 18.5% Prerefunded: 19.5% GO: 14.2% COPs: 12.9% COPs: 12.1% Hospital: 11.3% Sales Tax: 10.1% GO: 11.3% Hospital: 9.6% Water/Sewer: 11.0% Water/Sewer: 6.1% Sales Tax: 9.3% Electric: 5.4% Electric: 6.2% Other: 24.0% Other: 18.5% For definitions of these security types, see page 19. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 less than 1 Year: 16.5% less than 1 Year: 10.0% 1-5 Years: 63.0% 1-5 Years: 68.0% 5-10 Years: 20.5% 5-10 Years: 22.0% The Fund invests primarily in short-term California municipal obligations. The Fund's weighted average portfolio maturity is typically one to five years, with three years considered a "neutral" position. 6 LIMITED-TERM FUND MANAGEMENT DISCUSSION with Joel Silva, Municipal Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 19-25). Q: How did the Fund perform? A: The Fund managed a solid performance in comparison with its peers. For the fiscal year ended August 31, 1996, the Fund's total return placed it in the top third of the 12 funds in Lipper's "California Short Municipal Debt Funds" category. The Fund's total return of 3.87% was 14 basis points* higher than the 3.73% average total return for its Lipper category (see the Lipper Performance Comparison on page 5). Q: Why did the Fund perform well against its peers? A: One contributing factor was the Fund's relatively conservative positioning during the period, compared with many of the funds in its Lipper category. This conservative approach allowed the Fund to perform well in comparison with its category average as interest rates rose throughout 1996. In addition, we should acknowledge the contribution of our strong credit research team, which made many accurate assessments of specific credit situations in California. California is a complex, dynamic state, making thorough research vital. Finding California municipal securities that we feel are undervalued in places others have passed over has enhanced our ability to stay in front of what we call the "upgrade curve" (the chance for securities to appreciate in value relative to their current prices due to a credit upgrade). Q: Why and how did you change the Fund's positioning? A: When the fiscal period began, we had just finished shifting the Fund from a bullet structure* to more of a barbell structure* to take advantage of the flattening yield curve. We also lengthened the Fund's average maturity* from 2.5 years at the start of the fiscal period to 3.2 years by February, as securities with maturities of one to five years had become less attractive than securities in the five- to ten-year maturity range. This positioning produced some price appreciation and enabled the Fund to pick up extra yield. Shortly after February, when the market did an abrupt about-face, we lowered the Fund's average maturity to 2.9 years. Around April, we shifted the Fund toward more of a ladder structure* as the one- to ten-year portion of the muni curve flattened. This neutral posture allows the Fund to be more quickly adjusted in the event that the yield curve changes. 7 LIMITED-TERM FUND MANAGEMENT DISCUSSION (Continued from the previous page) Q: The Fund's board of trustees recently approved a change to allow the Fund to invest in the entire spectrum of investment-grade securities (BBB- and above rated). Previously, the Fund could only invest in securities rated A or higher. Why the change? A: The ability to invest in the full range of investment-grade securities will help us better compete with the Fund's peers, most of which already have the ability to invest in these securities. By fully utilizing our strong credit staff, we will selectively add these securities to the Fund's portfolio with the aim of improving the Fund's total return. Q: Will this result in any significant change in the way you manage the Fund? A: No. The Fund's management strategy and objectives will remain essentially the same. We will continue to maintain our long-term objectives and "hunt value" along the yield curve. Q: What is the outlook for munis for the remainder of 1996? A: Though the outlook for bonds in general is rather uncertain, we expect supply and demand factors to continue working in munis' favor for the near future. Historically low muni issuance, especially among short-term securities, combined with strong demand has been a major factor helping to support prices. Q: Given this situation, what are your plans for the Fund over the next six months? A: We will likely maintain the Fund's neutral posture until we have a clearer picture of the market's direction. We will also continue to favor a bias toward a laddered structure until the market breaks out of its current trading range. This positioning will allow us to either lengthen or shorten the Fund's average maturity if the economic outlook changes dramatically. In addition, we will continue to utilize our strong credit research team to search for securities with undervalued credit ratings. 8 INTERMEDIATE-TERM FUND CURRENT YIELD* As of August 31, 1996 30-Day 30-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 4.43% 6.78% 7.08% 7.63% 7.69% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Range Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $10.89-$11.44 4.79% 4.30% 6.46% 6.28% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 29. The Fund commenced operations on November 9, 1983. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 9 INTERMEDIATE-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 9/1/86 in the Fund and in the Lehman Brothers, Inc. Five-Year Municipal General Obligation Index [line graph data - described below] Index Fund 8/31/86 10000 10000 9/30/86 10128 10064 10/31/86 10301 10268 11/30/86 10427 10351 12/31/86 10395 10309 1/31/87 10596 10532 2/28/87 10692 10597 3/31/87 10632 10514 4/30/87 10317 10038 5/31/87 10316 10056 6/30/87 10534 10217 7/31/87 10655 10360 8/31/87 10676 10352 9/30/87 10317 10003 10/31/87 10469 10109 11/30/87 10595 10283 12/31/87 10711 10389 1/31/88 10975 10645 2/29/88 11086 10741 3/31/88 11044 10682 4/30/88 11145 10765 5/31/88 11010 10686 6/30/88 11090 10740 7/31/88 11141 10781 8/31/88 11108 10757 9/30/88 11216 10876 10/31/88 11314 10986 11/30/88 11254 10913 12/31/88 11285 11002 1/31/89 11447 11128 2/28/89 11325 11028 3/31/89 11253 10977 4/30/89 11447 11165 5/31/89 11654 11329 6/30/89 11782 11443 7/31/89 11954 11592 8/31/89 11908 11539 9/30/89 11913 11527 10/31/89 11924 11623 11/30/89 12075 11785 12/31/89 12174 11876 1/31/90 12179 11895 2/28/90 12271 11973 3/31/90 12232 11939 4/30/90 12192 11884 5/31/90 12415 12101 6/30/90 12506 12195 7/31/90 12655 12344 8/31/90 12612 12250 9/30/90 12638 12284 10/31/90 12824 12497 11/30/90 13009 12680 12/31/90 13058 12706 1/31/91 13249 12905 2/28/91 13370 12998 3/31/91 13339 12956 4/30/91 13506 13112 5/31/91 13575 13189 6/30/91 13573 13159 7/31/91 13708 13279 8/31/91 13885 13443 9/30/91 14055 13624 10/31/91 14162 13701 11/30/91 14207 13710 12/31/91 14526 14025 1/31/92 14554 14026 2/29/92 14563 13993 3/31/92 14514 13956 4/30/92 14642 14059 5/31/92 14773 14214 6/30/92 14986 14428 7/31/92 15379 14908 8/31/92 15264 14678 9/30/92 15360 14810 10/31/92 15310 14656 11/30/92 15495 14886 12/31/92 15603 15020 1/31/93 15771 15248 2/28/93 16183 15764 3/31/93 15999 15515 4/30/93 16102 15634 5/31/93 16159 15679 6/30/93 16377 15931 7/30/93 16389 15882 8/31/93 16611 16207 9/30/93 16731 16442 10/31/93 16756 16460 11/30/93 16708 16327 12/31/93 16936 16625 1/31/94 17096 16807 2/28/94 16776 16397 3/31/94 16402 15964 4/29/94 16567 16027 5/31/94 16660 16142 6/30/94 16622 16088 7/29/94 16803 16331 8/31/94 16884 16388 9/30/94 16757 16242 10/31/94 16663 16053 11/30/94 16557 15831 12/30/94 16702 16006 1/31/95 16863 16309 2/28/95 17107 16619 3/31/95 17379 16846 4/28/95 17426 16911 5/31/95 17808 17284 6/30/95 17822 17197 7/31/95 18072 17379 8/31/95 18254 17549 9/30/95 18309 17681 10/31/95 18386 17869 11/30/95 18542 18053 12/31/95 18644 18171 1/31/96 18866 18379 2/29/96 18802 18319 3/31/96 18702 18047 4/30/96 18674 18059 5/31/96 18652 18067 6/30/96 18784 18168 7/31/96 18908 18396 8/31/96 18948 18387 Past performance does not guarantee future results. This graph compares the Fund's performance with a broad-based market index, the Lehman Brothers, Inc. Five-Year Municipal General Obligation Index, over the past 10 years. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/96 for the funds in Lipper's "California Intermediate Municipal Debt Funds" category. 1 Year 3 Years 5 Years 10 Years The Fund: 4.79% 4.30% 6.46% 6.28% Category Average: 4.35% 4.08% 6.28% 6.28% The Fund`s Ranking: 11 out of 29 5 out of 15 2 out of 5 1 out of 1 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1996 % From Realized % From and Unrealized Losses One-Year Income + on Investments = Total Return 4.88% + (0.09)% = 4.79% 10 INTERMEDIATE-TERM FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Market Value: $425,195,712 $429,337,052 Number of Issues: 142 146 Average Coupon: 6.08% 5.96% Average Maturity: 7.70 years 8.11 years Average Duration: 5.40 years 5.60 years For definitions of these terms, see page 20. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 A 16.8% A 18.0% AA 14.2% AA 14.0% AAA 69.0% AAA 66.0% BBB 2.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 22. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] 8/31/96 2/29/96 COPs: 22.1% COPs: 25.5% Water/Sewer: 16.6% Water/Sewer: 20.5% Sales Tax: 13.0% Electric: 12.5% Electric: 12.1% Sales Tax: 11.4% GO: 6.4% GO: 7.4% Hospital: 6.1% Hospital: 6.0% Other: 23.7% Other: 16.7% For definitions of these security types, see page 19. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 less than 1 Year: 1.5% less than 1 Year: 3.0% 1-5 Years: 21.6% 1-5 Years: 12.0% 5-10 Years: 59.6% 5-10 Years: 55.0% 10-20 Years: 17.3% 10-20 Years: 30.0% The Fund invests primarily in intermediate-term California municipal obligations. The Fund's weighted average portfolio maturity is typically five to ten years, with seven years considered a "neutral" position. 11 INTERMEDIATE-TERM FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President & Senior Municipal Portfolio Manager, and Colleen Denzler, Senior Municipal Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 19-25). Q: How did the Fund perform? A: The Fund managed a solid performance in comparison with its peers. For the fiscal year ended August 31, 1996, the Fund's total return ranked it 11 out of the 29 funds in Lipper's "California Intermediate Municipal Debt Funds" category. The Fund's total return of 4.79% was 44 basis points* higher than the 4.35% average total return for its Lipper category (see the Lipper Performance Comparison on page 10). Q: Why did the Fund perform well against its peers? A: Our policy of using moderate duration* management, good portfolio structure and competitive yield was a significant contributing factor. As the muni yield curve reversed directions and steepened in early 1996, our neutral average maturity* helped mitigate Fund losses. As a result, we were able to retain much of the Fund's 1995 gains as the bond market mentality shifted from bullish to bearish. In addition, we should acknowledge the contribution of our strong credit research team, which made many accurate assessments of specific credit situations in California. California is a complex, dynamic state, making thorough research vital. Finding California municipal securities that we feel are undervalued in places others have passed over has enhanced our ability to stay in front of what we call the "upgrade curve" (the chance for securities to appreciate in value relative to their current prices due to a credit upgrade). Q: Why and how did you change the Fund's positioning? A: During late 1995 and early 1996, we shifted the Fund from a bullet structure* toward a barbell structure* as the yield curve flattened. We also lengthened the Fund's average maturity* from 7.4 years at the start of the fiscal period to 8.1 years by February. We accomplished this shift by reducing our holding of securities with maturities between one and ten years and purchasing securities in the ten- to 13-year maturity range and securities maturing in less than one year. This positioning produced some price appreciation and enabled the Fund to pick up extra yield. After the end of the first quarter, we began to shorten the Fund's average maturity as evidence of a strengthening economy caused the 12 INTERMEDIATE-TERM FUND MANAGEMENT DISCUSSION (Continued from the previous page) market to sell off. At that time, we started selling some of the Fund's discount bonds,* which typically underperform in a bear market. The proceeds were used to purchase premium non-callable bonds,* which tend to suffer minimal depreciation in a down market because they typically have shorter durations than par* or discount bonds* with comparable maturities. Despite market gyrations, the premium bonds performed very well. Since July, we have moved the Fund toward a ladder structure.* This neutral posture allows the Fund to be quickly adjusted in the event that the yield curve changes. The Fund's average maturity finished the period at 7.7 years, slightly longer than where it began. Q: The Fund's board of trustees recently approved a change to allow the Fund to invest in the entire spectrum of investment-grade securities (BBB- and above rated). Previously, the Fund could only invest in securities rated A or higher. Why the change? A: The ability to invest in the full range of investment-grade securities will help us better compete with the Fund's peers, most of which already have the ability to invest in these securities. By fully utilizing our strong credit staff, we will selectively add these securities to the Fund. Q: Will this result in any significant change in the way you manage the Fund? A: No. The Fund's management strategy and objectives will remain essentially the same. We will continue to maintain our long-term objectives and "hunt value" along the yield curve. Q: What is the outlook for munis for the remainder of 1996? A: Though the outlook for bonds in general is rather uncertain, in the muni market we expect supply and demand factors to continue working in munis' favor for the near future. Historically low muni issuance, especially among short-term securities, combined with strong demand has been a major factor helping to support prices. Q: Given this situation, what are your plans for the Fund over the next six months? A: We will likely maintain the Fund's neutral posture until we have a clearer picture of the market's direction. We will also continue to favor a bias toward a laddered structure until the market breaks out of its current trading range. If the economic outlook does change dramatically, the Fund is positioned to respond appropriately. In addition, we will continue to utilize our strong credit research team to search out securities with undervalued credit ratings. 13 LONG-TERM FUND CURRENT YIELD* As of August 31, 1996 30-Day 30-Day Tax-Equivalent Yields - -------------------------------------------------------------------------------- SEC 34.70% 37.42% 41.95% 42.40% Yield Tax Bracket Tax Bracket Tax Bracket Tax Bracket - -------------------------------------------------------------------------------- 5.03% 7.70% 8.04% 8.66% 8.73% Yields are a way of showing the rate of income the Fund earns on its investments as a percentage of its share price. The 30-Day SEC Yield represents net investment income earned by the Fund over a 30-day period, expressed as an annualized percentage rate based on the Fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the Fund's rate of investment income, and it may not equal the Fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the Fund's financial statements. 30-Day Tax-Equivalent Yields show the taxable yields that investors in the following combined federal and California state income tax brackets would have to earn before taxes to equal the Fund's tax-free 30-Day SEC Yield: 34.70% -- joint taxable income of $63,401 to $96,900 37.42% -- joint taxable income of $96,901 to $147,700 41.95% -- joint taxable income of $147,701 to $219,872 42.40% -- joint taxable income of $219,873 to $263,750 NAV AND AVERAGE ANNUAL TOTAL RETURNS* For Periods Ended August 31, 1996 Net Asset Value Range Average Annual Total Returns - -------------------------------------------------------------------------------- (9/1/95-8/31/96) 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- $10.81-$11.65 6.77% 4.33% 7.44% 6.93% Net Asset Value (NAV) Range indicates the Fund's share price movements over the stated period and can be used to gauge the stability of the Fund's share price. Total Return figures show the overall dollar or percentage change in the value of a hypothetical investment in the Fund and assume that all of the Fund's distributions are reinvested. Average Annual Total Returns illustrate the annually compounded returns that would have produced the Fund's cumulative total returns if the Fund's performance had been constant over the entire period. Average annual total returns smooth out variations in a fund's return; they are not the same as year-by-year results. For fiscal year-by-year total returns, please refer to the Fund's "Financial Highlights" on page 30. The Fund commenced operations on November 9, 1983. *Yields and total returns are based on historical Fund performance and do not guarantee future results. The Fund's share price, yields and total returns will vary, so that shares, when redeemed, may be worth more or less than their original cost. 14 LONG-TERM FUND SEC PERFORMANCE COMPARISON Comparative Performance of $10,000 Invested on 9/1/86 in the Fund and in the Lehman Brothers, Inc. Long-Term Municipal Bond Index [line graph data - described below] Fund Index 8/31/86 10000 10000 9/30/86 9977 9961 10/31/86 10148 10153 11/30/86 10391 10348 12/31/86 10378 10375 1/31/87 10727 10676 2/28/87 10756 10675 3/31/87 10598 10627 4/30/87 10003 9743 5/31/87 9893 9623 6/30/87 9578 9886 7/31/87 9666 9955 8/31/87 9709 9969 9/30/87 9313 9488 10/31/87 9312 9405 11/30/87 9610 9741 12/31/87 9735 9898 1/31/88 10124 10325 2/29/88 10243 10464 3/31/88 10096 10292 4/30/88 10176 10317 5/31/88 10187 10331 6/30/88 10385 10450 7/31/88 10455 10499 8/31/88 10496 10528 9/30/88 10734 10670 10/31/88 10978 10877 11/30/88 10860 10776 12/31/88 11049 10931 1/31/89 11309 11154 2/28/89 11151 11057 3/31/89 11160 11051 4/30/89 11488 11283 5/31/89 11754 11492 6/30/89 11932 11652 7/31/89 12090 11815 8/31/89 11906 11621 9/30/89 11870 11573 10/31/89 12027 11707 11/30/89 12282 11913 12/31/89 12373 11997 1/31/90 12248 11835 2/28/90 12386 11986 3/31/90 12399 11985 4/30/90 12248 11793 5/31/90 12594 12147 6/30/90 12717 12268 7/31/90 12942 12476 8/31/90 12634 12163 9/30/90 12614 12133 10/31/90 12881 12441 11/30/90 13207 12743 12/31/90 13266 12789 1/31/91 13444 12966 2/28/91 13538 13006 3/31/91 13571 13012 4/30/91 13781 13245 5/31/91 13943 13366 6/30/91 13917 13297 7/31/91 14132 13485 8/31/91 14335 13655 9/30/91 14543 13877 10/31/91 14695 14000 11/30/91 14713 13943 12/31/91 15063 14297 1/31/92 15054 14247 2/29/92 15078 14289 3/31/92 15116 14289 4/30/92 15260 14412 5/31/92 15483 14599 6/30/92 15783 14871 7/31/92 16361 15365 8/31/92 16142 15100 9/30/92 16214 15200 10/31/92 15943 14824 11/30/92 16392 15260 12/31/92 16604 15464 1/31/93 16761 15620 2/28/93 17540 16355 3/31/93 17329 16133 4/30/93 17566 16378 5/31/93 17711 16464 6/30/93 18044 16773 7/30/93 18062 16764 8/31/93 18525 17218 9/30/93 18766 17451 10/31/93 18801 17452 11/30/93 18574 17231 12/31/93 19053 17590 1/31/94 19278 17835 2/28/94 18640 17421 3/31/94 17527 16586 4/29/94 17662 16556 5/31/94 17869 16764 6/30/94 17654 16688 7/29/94 18108 17044 8/31/94 18146 17083 9/30/94 17725 16786 10/31/94 17181 16474 11/30/94 16727 16159 12/30/94 17321 16445 1/31/95 18083 16969 2/28/95 18819 17450 3/31/95 19045 17618 4/28/95 19035 17631 5/31/95 19846 18233 6/30/95 19481 17921 7/31/95 19581 18041 8/31/95 19857 18315 9/30/95 20011 18480 10/31/95 20496 18874 11/30/95 21025 19364 12/31/95 21353 19701 1/31/96 21444 19744 2/29/96 21183 19589 3/31/96 20795 19140 4/30/96 20712 19025 5/31/96 20722 19061 6/30/96 21041 19299 7/31/96 21250 19534 8/31/96 21222 19552 Past performance does not guarantee future results. This graph compares the Fund's performance with a broad-based market index, the Lehman Brothers, Inc. Long-Term Municipal Bond Index, over the past 10 years. Although the investment characteristics of the Index are similar to those of the Fund, the securities owned by the Fund and those composing the Index are likely to be different, and securities that the Fund and the Index have in common are likely to have different weightings in the respective portfolios. Investors cannot invest directly in the Index. PLEASE NOTE: The line representing the Fund's total return includes operating expenses (such as transaction costs and management fees) that reduce returns, while the Index's total return line does not. LIPPER PERFORMANCE COMPARISON Lipper Analytical Services (Lipper) is an independent mutual fund ranking service located in Summit, NJ. Rankings are based on average annual total returns for the periods ended 8/31/96 for the funds in Lipper's "California Municipal Debt Funds" category. 1 Year 3 Years 5 Years 10 Years The Fund: 6.77% 4.33% 7.44% 6.93% Category Average: 5.67% 3.82% 6.86% 6.88% The Fund`s Ranking: 14 out of 96 18 out of 62 7 out of 47 14 out of 25 Total returns are based on historical performance and do not guarantee future results. ONE-YEAR TOTAL RETURN BREAKDOWN For the Period Ended August 31, 1996 % From Realized % From and Unrealized Gains One-Year Income + on Investments = Total Return 5.66% + 1.11% = 6.77% 15 LONG-TERM FUND KEY PORTFOLIO STATISTICS 8/31/96 2/29/96 Market Value: $285,296,703 $288,641,618 Number of Issues: 85 87 Average Coupon: 6.16% 6.06% Average Maturity: 18.77 years 19.50 years Average Duration: 8.04 years 8.30 years For definitions of these terms, see page 20. PORTFOLIO COMPOSITION BY CREDIT RATING [pie charts] 8/31/96 2/29/96 A 37.7% A 38.0% AA 15.0% AA 15.0% AAA 47.3% AAA 47.0% Credit ratings reflect the financial strength of the debt issuer and the likelihood of repayment. For more information about credit quality and credit ratings, see page 22. PORTFOLIO COMPOSITION BY MARKET SECTOR [pie charts] 8/31/96 2/29/96 COPs: 20.5% COPs: 25.3% Hospital: 15.8% Hospital: 14.4% Prerefunded: 8.8% Electric: 12.9% GICs: 8.4% GICs: 8.4% Tax Allocation: 7.6% Tax Allocation: 6.6% Electric: 7.4% Water/Sewer: 5.8% Other: 31.5% Other: 26.6% For definitions of these security types, see page 19. PORTFOLIO COMPOSITION BY MATURITY [pie charts] 8/31/96 2/29/96 less than 1 Year: 0.5% less than 1 Year: 2.0% 1-5 Years: 6.9% 1-5 Years: 1.0% 5-10 Years: 4.9% 5-10 Years: 7.0% 10-20 Years: 47.0% 10-20 Years: 39.0% 20-30 Years: 40.7% 20-30 Years: 51.0% The Fund invests primarily in long-term California municipal obligations. The Fund's weighted average portfolio maturity is typically ten or more years. 16 LONG-TERM FUND MANAGEMENT DISCUSSION with Dave MacEwen, Vice President & Senior Municipal Portfolio Manager NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT FUNDAMENTALS SECTION (PAGES 19-25). Q: How did the Fund perform? A: The Fund managed a strong performance in comparison with its peers. For the fiscal year ended August 31, 1996, the Fund's total return ranked it in the top 15% of the 101 funds in Lipper's "California Municipal Debt Funds" category. The Fund's total return of 6.77% was 110 basis points* higher than the 5.67% average total return for its Lipper category (see the Lipper Performance Comparison on page 15). Q: Why did the Fund perform well against its peers? A: One contributing factor was the Fund's large contingent of premium bonds,* which tend to suffer minimal depreciation in a down market because they typically have shorter durations than par* or discount bonds* with comparable maturities. These securities performed very well as the muni yield curve reversed direction and steepened in early 1996. As a result, we were able to retain much of the Fund's 1995 gains as the bond market mentality shifted from bullish to bearish. In addition, we should acknowledge the contribution of our strong credit research staff, which made many accurate assessments of specific credit situations in California. California is a complex, dynamic state, making thorough research vital. Finding California municipal securities that we feel are undervalued in places others have passed over has enhanced our ability to stay in front of what we call the "upgrade curve" (the chance for securities to appreciate in value relative to their current prices due to a credit upgrade). Q: Why and how did you change the Fund's positioning? A: During late 1995, we began shifting the Fund's portfolio from a bullet structure* toward a barbell structure.* We also extended the Fund's duration* (a measure of the price sensitivity of a bond or bond fund to changes in interest rates) from 8.25 years at the start of the fiscal period to 8.75 years by February. This positioning allowed the Fund to pick up some extra yield and enabled the Fund to outperform many of its peers as the muni yield curve flattened in late 1995 and early 1996. After the end of the first quarter, we began to shorten the Fund's average maturity as evidence of a strengthening economy caused the market to sell off. At that time, we started selling some of the Fund's long-term discount bonds,* which typically underperform in a bear market. 17 LONG-TERM FUND MANAGEMENT DISCUSSION (Continued from the previous page) The proceeds were used to purchase premium bonds, which performed very well. We also shifted the Fund toward more of a ladder structure.* This neutral posture allows the Fund to be more quickly adjusted in the event that the yield curve changes. By the end of the period, we had shortened the Fund's duration to eight years, slightly shorter than where it began. Q: The Fund's board of trustees recently approved a change to allow the Fund to invest in the entire spectrum of investment-grade securities (BBB- and above rated). Previously, the Fund could only invest in securities rated A or higher. Why the change? A: The ability to invest in the full range of investment-grade securities will help us better compete with the Fund's peers, most of which already have the ability to invest in these securities. By fully utilizing our strong credit staff, we will selectively add these securities to the Fund's portfolio with the aim of improving the Fund's total return. Q: Will this result in any significant change in the way you manage the Fund? A: No. The Fund's management strategy and objectives will remain essentially the same. We will continue to maintain our long-term objectives and "hunt value" along the yield curve. Q: What is the outlook for munis for the remainder of 1996? A: Though the outlook for bonds in general is rather uncertain, in the muni market we expect supply and demand factors to continue working in munis' favor for the near future. Historically low muni issuance, especially among short-term securities, combined with strong demand, has been a major factor helping to support prices. Q: Given this situation, what are your plans for the Fund over the next six months? A: We will likely maintain the Fund's neutral posture until a more clear market direction becomes apparent, lengthening or shortening the Fund's duration in a narrow range around this stance. We will also continue to favor a bias toward a laddered structure until the market breaks out of its current trading range. If the economic outlook does change dramatically, the Fund is positioned to respond appropriately. In addition, we will continue to utilize our strong credit research team to search out securities with undervalued credit ratings. 18 INVESTMENT FUNDAMENTALS DEFINITIONS Common California Municipal Securities (Munis) AMT Paper--instruments with income subject to the federal alternative minimum tax. Certificates of Participation (COPs)--securities issued to finance public property improvements (such as city halls and police stations). Development Bonds--securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. General Obligation (GO) bonds--securities backed by the taxing power of the issuer. Guaranteed Investment Contracts (GICs)--securities backed by a guarantee from an insurance company. Municipal Commercial Paper (CP)--high-grade short-term securities backed by a line of credit from a bank. Municipal Notes--securities with maturities of two years or less. Prerefunded Bonds--securities refinanced by the issuer because of their premium coupons (higher-than-market interest rates). These bonds tend to have higher credit ratings because they are backed by Treasury securities. Put Bonds--securities that provide the right to sell to a specified buyer at a specified time and price. Revenue Bonds--securities backed by revenues from sales taxes or from a specific project, system or facility (such as a hospital, electric utility or water system). Tax Allocation Bonds--securities issued to finance improvements in redevelopment areas (such as urban neighborhoods). Tax and Revenue Anticipation Notes (TRANs)--securities backed by the general tax revenues of the issuer. Variable-Rate Demand Notes (VRDNs)--securities that track market interest rates and stabilize their market values using periodic (daily or weekly) interest rate adjustments. Municipal Derivatives Inverse Floaters--securities bearing interest rates that move inversely to market interest rates. Unlike most bonds, their yields increase as interest rates decline. However, if interest rates rise, they lose considerably more value than a regular fixed-rate bond. Therefore, each Benham California Tax-Free and Municipal Fund limits its investment in inverse floaters to a maximum of 10% of net assets (except for the Money Market Funds, which cannot own inverse floaters at all). 19 INVESTMENT FUNDAMENTALS DEFINITIONS (Continued from the previous page) Tender Option Bonds--intermediate- or long-term fixed-rate securities with put options attached (which give the holder the option to sell the bonds at face value at a specified time). Tender option bonds purchased by the Funds are typically structured with seven-day put features attached and pay interest at rates that are reset weekly. Each Fund limits its investment in tender option bonds to 15% of net assets. Tender option bonds are not leveraged and have risk characteristics that are similar to VRDNs. Portfolio Statistics Market Value--the market value of a fund's investments on a given date. Number of Issues--the number of different securities issuances held by a fund on a given date. Average Coupon--a weighted average of all coupons held in a fund's portfolio. Average Maturity--a weighted average of all bond maturities in a fund's portfolio (see also page 23). Average Duration--a weighted average of all bond durations in a fund's portfolio (see also page 23). Investment Terms Basis Points--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equals one percentage point (or 1%). Basis points are used to avoid confusion about interest rate changes. For example, if an economist says that interest rates rose 1%, does that mean 1% of the previous rate, or one percentage point? Saying that interest rates rose by 100 basis points is a more precise way of describing the change. Coupon--the stated interest rate on a security. Discount Bonds--bonds with interest coupons that are lower than prevailing interest rates (see also page 24). Par Bonds--bonds that trade or are priced at their face value. Premium Bonds-- bonds with interest coupons that are higher than prevailing interest rates (see also page 24). 20 INVESTMENT FUNDAMENTALS THE YIELD CURVE One of the fundamental tenets of investing is the relationship between risks and returns--the greater the risks, the greater the chances of earning higher returns over time. The downside is the correspondingly higher potential for short-term losses--an investment that generates a high return probably has a greater likelihood of significant fluctuations in value or return, especially in the short run. Bonds are no exception. The riskiest bonds--those with the greatest exposure to interest rate movements and price fluctuations--generally have the highest yields and returns over time but can experience severe short-term losses. On the other hand, bonds with less exposure to interest rate movements and less price fluctuation generally have lower yields and returns but are more stable. The yield curve is a graphic representation of the relationship between bond risks and returns at a point in time. Yield curve graphs plot lengthening bond maturities (which represent risk because longer maturities increase risk) along the horizontal axis and rising yields (which represent return) on the vertical axis. Therefore, the lower left corner of yield curve graphs have the lowest risks and the lowest potential returns, while the upper right corners have the highest risks and the highest potential returns. Yield curves can have several different shapes, depending on interest rate levels and the economic environment: Normal (Upward Sloping) Yield Curve--a yield curve that shows a normal risk/ return relationship--short-term securities have lower yields than long-term securities. Most normal yield curves start in the lower left corner of the graph and rise to the upper right corner. Steep Yield Curve--a normal yield curve that shows a large difference between short-term yields and long-term yields. This typically occurs when the bond market is responding to inflation fears (causing high long-term bond yields) and the Fed hasn't raised short-term interest rates enough (or the economy hasn't slowed down enough) to quell those fears. Flat Yield Curve--a yield curve that shows short-term securities having almost the same yields as long-term securities. This typically occurs after the Fed has raised short-term interest rates several times--to fight inflation and slow down the economy--and long-term bond yields begin to fall. Inverted Yield Curve--a yield curve that shows short-term securities having higher yields than long-term securities. It's the next step after a flat yield curve if the Fed continues to raise short-term interest rates and long-term rates stay flat or fall. 21 INVESTMENT FUNDAMENTALS MUNI RISK FACTORS Credit Quality and Credit Ratings Bond credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in bond investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. In turn, credit quality and ratings greatly influence bond prices and yields--high ratings mean higher prices and less current income (yield) as compensation for risk. But credit ratings are subjective. They reflect the opinions of the rating agencies that issue them and are not absolute standards of quality, as the Orange County bankruptcy in 1994 made painfully clear. In that case, highly rated munis issued by a wealthy county still suffered defaults. Furthermore, in addition to the credit risk, there is still market risk. High credit ratings do not guarantee good investment performance. They do not reflect the price stability of a muni when economic or market conditions change. Callability Many munis are callable, which means they can be redeemed by the issuer before maturity. When interest rates fall, municipalities find it financially rewarding to refinance the bonds they've issued because they can reduce their interest payments. The municipalities exercise their "call" options to refinance the bonds. Although calls are good for the bond issuers, they're bad for investors in munis--calls reduce the life of a municipal portfolio and force the portfolio manager to reinvest in lower-yielding munis. The durations of munis effectively shorten as rates fall. Calls also boost supply and help drive down muni prices. Call options can only be exercised on specific "call dates," which don't always coincide with periods of low interest rates when refinancing is desirable. As a result, municipalities will issue new bonds when interest rates are low and use the proceeds to buy Treasuries, which offset the old bonds (now known as prerefunded bonds) on their balance sheets until the bonds can be retired on the call date. When the call date arrives, the Treasuries mature, and the prerefunded bonds are retired. During this process, there is a period of time when both the newly issued bonds and the prerefunded bonds remain outstanding. This situation doubles the municipal bond supply, which can depress prices. Duration Extension Duration extension occurs when interest rates increase significantly, as they did in 1994. Higher interest rates reduce calls, which is good for municipal investors, but the lower level of calls causes the durations of munis to extend longer, which is bad when rates are rising. Muni funds become more susceptible to price declines at a time when greater price stability would be desirable. By contrast, Treasury durations generally shorten slightly when interest rates experience a large increase. Because of their higher coupons, premium bonds experience less duration extension than par or discount bonds. 22 INVESTMENT FUNDAMENTALS PORTFOLIO SENSITIVITY MEASUREMENTS Duration Duration measures the price sensitivity of a bond or bond fund to changes in interest rates. Specifically, duration represents the approximate percentage change in the price of a bond or bond fund if interest rates move up or down by 100 basis points (defined on page 21). For example, as of August 31, 1996, the California Tax-Free Limited-Term Fund's duration was approximately 2.5 years, while the California Tax-Free Long-Term Fund's duration was approximately eight years. If interest rates were to rise by 100 basis points, the Limited-Term Fund's share price would be expected to decline by 2.5%, while the Long-Term Fund's share price would decline by 8%. Conversely, if interest rates were to fall by 100 basis points, the Limited-Term Fund's share price would be expected to increase by 2.5%, while the Long-Term Fund's share price would increase by 8%. As this example illustrates, the longer the duration, the more bond or bond fund prices will move in response to interest rate changes. Therefore, portfolio managers generally lengthen durations when interest rates fall (to maximize the effects of bond price increases) and shorten durations when interest rates rise (to minimize the effects of bond price declines), taking into account the objectives of the portfolio. Duration, measured in years, also approximates (but understates) the weighted average life of a bond or bond portfolio. To calculate duration, the future interest and principal payments are added together and weighted in proportion to their time value (early payments are valued more than later payments because early payments can be reinvested and compound additional returns). Average Maturity Average maturity is another measurement of the interest rate sensitivity of a bond portfolio. Average maturity measures the average amount of time that will pass until a bond portfolio receives its principal payments from matured bonds. The longer a portfolio's average maturity is, the more interest rate exposure and interest rate sensitivity it has. For example, a portfolio with a ten-year average maturity has much more potential exposure to interest rate changes than a portfolio with a one-year average maturity. Portfolio managers generally lengthen average maturities when interest rates fall (to maximize exposure and capture as much price appreciation as possible) and reduce average maturities when interest rates rise (to minimize exposure and avoid as much price depreciation as possible), as long as this strategy is compatible with the objectives of the portfolio. Reducing the average maturity in a rising interest rate environment allows the portfolio manager to more quickly reinvest matured assets in higher-yielding securities. 23 INVESTMENT FUNDAMENTALS BOND PRICING Premium and Discount Bonds Municipal bonds are generally priced at a premium or at a discount. Premium bonds are bonds that trade or are priced above par (face value), typically because their interest coupons are higher than the prevailing market interest rate. Discount bonds are bonds that trade or are priced below par, typically because their interest coupons are lower than the prevailing market interest rate. A bond may be both a premium bond and a discount bond during its life, depending on changing market conditions. As market rates rise and bond prices fall, the price of a premium bond can fall below par, and the bond becomes a discount bond. Conversely, as market rates fall and bond prices rise, the price of a discount bond can rise above par, and the bond becomes a premium bond. Premium munis tend to have more price stability than discount munis--premium munis depreciate less when interest rates rise (they experience less duration extension), but they appreciate less when interest rates fall (they experience more calls). Discount munis behave more like long-term Treasury securities. Tax Treatment of Discount Bonds In 1993, new rules were passed regarding the tax treatment of long-term gains on discount munis. In the past, any gain earned from the market discount was treated as a capital gain, which is taxed at a maximum rate of 28%. However, the newer law requires that any gain attributable to the market discount must be treated as taxable ordinary income, which is taxed at the same rate as an individual's tax bracket (up to 39.6%). Small market discounts (according to a formula based on the price of the bond and the maturity date) are not subject to the new law. This tax treatment has made discount bonds less attractive in the muni market because most municipal investors prefer to avoid incurring taxable income. Discount munis also tend to have relatively low prices to make up for the expected tax liability. As a result, when the price of a muni falls to the point where it is traded at a market discount, the combination of reduced desirability and added tax liability tends to lead to further price declines. 24 INVESTMENT FUNDAMENTALS PORTFOLIO STRUCTURES & TAXABLE DISTRIBUTIONS Bond Portfolio Structures Barbell Structure--a structure that overweights a portfolio in short- and long-term securities and underweights intermediate-term securities. This structure tends to outperform a bullet structure when the yield curve is moving from steep to flat (short-term rates are rising faster than long-term rates, or long-term rates are falling faster than short-term rates). In a rising interest rate environment, the short-term securities capture the higher yields with little price depreciation. In a declining interest rate environment, the short-term securities provide a relatively steady yield, while the long bonds produce more price appreciation than intermediate-term securities. Bullet Structure--a structure that clusters a portfolio's bond maturities around a single maturity (usually an intermediate-term maturity). This structure tends to outperform a barbell structure when the yield curve is moving from flat to steep (long-term rates are rising faster than short-term rates, or short-term rates are falling faster than long-term rates). In a rising interest rate environment, intermediate-term securities experience less price depreciation than long-term securities. In a declining interest rate environment, intermediate-term securities provide significantly more price appreciation than short-term securities. Ladder Structure--a balanced structure that staggers bond maturities so they occur at regular intervals. This structure tends to be effective when interest rates are relatively stable, and it provides a regular schedule of maturing securities. Taxable Distributions It's important to remember for your tax planning that tax-free funds often generate taxable year-end distributions. These distributions typically result from short-term and long-term capital gains. The taxable distributions usually happen under favorable circumstances (the capital gains reflect bond appreciation), but such distributions understandably attract attention simply because they are taxable instead of tax free. Although we manage our California tax-free and municipal funds to earn tax-exempt income, they may realize taxable capital gains as we pursue higher total returns. By law, the funds must distribute these capital gains to shareholders each year. Under current tax law, each fund must distribute net short-term capital gains realized by the fund as taxable ordinary income. Each fund distributes net long-term capital gains to shareholders as a taxable capital gains distribution. 25 [This page intentionally left blank] 26 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Trustees Benham California Tax-Free and Municipal Funds: We have audited the accompanying statements of assets and liabilities, including the schedules of investment securities, of Tax-Free Limited-Term Fund (formerly Tax-Free Short-Term Fund), Tax-Free Intermediate-Term Fund and Tax-Free Long-Term Fund (three of the series comprising Benham California Tax-Free and Municipal Funds) (the Funds) as of August 31, 1996, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and the financial highlights referred to above present fairly, in all material respects, the financial position of Tax-Free Limited-Term Fund, Tax-Free Intermediate-Term Fund and Tax-Free Long-Term Fund of Benham California Tax-Free and Municipal Funds as of August 31, 1996, the results of their operations, the changes in their net assets and the financial highlights for the periods indicated above in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Kansas City, Missouri October 4, 1996 27
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 (except as noted) - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE LIMITED-TERM FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992+ ------- ------- ------- ------- ------- 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 .......................................... .4309 .4148 .3766 .3840 .1012 Net Realized and Unrealized Gains (Losses) on Investments ...... (.0407) .1099 (.1832) .2227 .1200 -------- -------- -------- -------- -------- Total Income From Investment Operations ...................... .3902 .5247 .1934 .6067 .2212 -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income ........................... (.4302) (.4147) (.3761) (.3867) (.1012) Distributions in Excess of Net Realized Capital Gains .......... 0 0 (.0373) 0 0 -------- -------- -------- -------- -------- Total Distributions ........................................... (.4302) (.4147) (.4134) (.3867) (.1012) -------- -------- -------- -------- -------- NET ASSET VALUE AT END OF PERIOD ................................. $10.19 10.23 10.12 10.34 10.12 ====== ===== ===== ===== ===== TOTAL RETURN* .................................................... 3.87% 5.33% 1.90% 6.15% 1.47% - ---------------- SUPPLEMENTAL DATA AND RATIOS - ----------------------------------- Net Assets at End of Period (in thousands of dollars) ............$ 103,707 104,723 120,627 114,019 52,171 Ratio of Expenses to Average Daily Net Assets++ .................. .49% .51% .51% .36% 0% Ratio of Net Investment Income to Average Daily Net Assets++ ..... 4.20% 4.10% 3.68% 3.76% 4.08%** Portfolio Turnover Rate .......................................... 43.70% 49.75% 65.66% 54.42% 19.37% - --------------------------- + From June 1, 1992 (commencement of operations), through August 31, 1992. ++ The ratios for the year ended August 31, 1996, include expenses paid through expense offset arrangements. * Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized. ** Annualized. See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE INTERMEDIATE-TERM FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ..... .5422 .5414 .5354 .5582 .5853 .6038 .6184 .6305 .6294 .6241 Net Realized and Unrealized Gains (Losses) on Investments (.0102) .2000 (.4104) .5285 .3600 .3600 (.0100) .0800 (.2400) (.2600) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income From Investment Operations . .5320 .7414 .1250 1.0867 .9453 .9638 .6084 .7105 .3894 .3641 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income .................. (.5420) (.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 ..... (.5420) (.5414) (.6250) (.5767) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE AT END OF PERIOD ................. $11.05 11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 ====== ===== ===== ===== ===== ===== ===== ===== ===== ===== TOTAL RETURN* ............... 4.79% 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) . $430,950 417,550 448,293 444,460 304,988 241,496 191,217 167,444 157,300 166,966 Ratio of Expenses to Average Daily Net Assets+ . .48% .48% .48% .50% .52% .55% .58% .60% .64% .67% Ratio of Net Investment Income to Average Daily Net Assets+ 4.87% 5.02% 4.82% 5.05% 5.50% 5.84% 6.08% 6.25% 6.19% 5.92% Portfolio Turnover Rate ..... 35.66% 25.44% 43.80% 26.76% 48.70% 28.58% 20.05% 39.89% 47.01% 51.94% - --------------------------- * Total return figures assume reinvestment of dividends and capital gain distributions. + The ratios for the year ended August 31, 1996, include expenses paid through expense offset arrangements. See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout the Years Ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ TAX-FREE LONG-TERM FUND - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 ...... .6122 .6229 .6266 .6649 .6878 .6987 .7060 .7388 .7436 .7675 Net Realized and Unrealized Gains (Losses) on Investments .. .1198 .1183 (.7101) .8460 .4400 .5500 (.2200) .3100 (.1800) (.8011) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total Income (Loss) From Investment Operations .. .7320 .7412 (.0835) 1.5109 1.1278 1.2487 .4860 1.0488 .5636 (.0336) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less Distributions Dividends from Net Investment Income ................... (.6120) (.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 ...... (.6120) (.6812) (1.0565) (.9309) (.6878) (.6987) (.7060) (.7388) (.7436) (.8464) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- NET ASSET VALUE AT END OF PERIOD ................ $11.06 10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 ====== ===== ===== ===== ===== ===== ===== ===== ===== ===== TOTAL RETURN* ................ 6.77% 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) ..$288,022 276,085 277,477 338,075 275,880 247,244 197,394 179,737 143,191 179,523 Ratio of Expenses to Average Daily Net Assets+ .. .48% .49% .48% .49% .52% .55% .57% .58% .63% .65% Ratio of Net Investment Income to Average Daily Net Assets+ 5.48% 5.84% 5.51% 5.76% 6.14% 6.48% 6.64% 6.98% 7.19% 6.87% Portfolio Turnover Rate ...... 41.66% 59.92% 61.93% 55.11% 71.59% 37.80% 74.11% 78.08% 34.52% 81.54% - --------------------------- * Total return figures assume reinvestment of dividends and capital gain distributions. + The ratios for the year ended August 31, 1996, include expenses paid through expense offset arrangements. See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES August 31, 1996 TAX-FREE TAX-FREE TAX-FREE LIMITED-TERM INTERMEDIATE- LONG-TERM FUND TERM FUND FUND --------- --------- --------- ASSETS Investment securities at value (cost $100,863,012, $412,752,115, and $276,356,268, respectively) ...........................................$101,541,532 425,195,712 285,296,703 Cash .................................................................... 0 123,277 0 Investment in affiliated money market fund (Note 2) ..................... 901,632 32,192 0 Interest receivable ..................................................... 1,391,743 6,250,648 3,919,714 Receivable for fund shares sold ......................................... 44,470 308,169 139,200 Receivable for securities sold .......................................... 1,110,890 0 0 Prepaid expenses and other assets ....................................... 2,208 2,275 4,185 ------------ ----------- ----------- Total assets .......................................................... 104,992,475 431,912,273 289,359,802 ------------ ----------- ----------- LIABILITIES Disbursements in excess of demand deposits .............................. 41,089 0 136,161 Payable for securities purchased ........................................ 1,073,363 0 0 Payable for fund shares redeemed ........................................ 36,319 304,887 606,855 Dividends payable ....................................................... 94,200 481,919 479,916 Fees payable to affiliates (Note 2) ..................................... 39,783 167,622 109,377 Accrued expenses and other liabilities .................................. 897 8,165 5,107 ------------ ----------- ----------- Total liabilities ..................................................... 1,285,651 962,593 1,337,416 ------------ ----------- ----------- NET ASSETS .................................................................$103,706,824 430,949,680 288,022,386 ============ =========== =========== Net assets consist of: Capital paid in ......................................................... 104,166,111 417,466,597 278,793,298 Accumulated undistributed net realized gain (loss) from securities transactions ......................................................... (1,151,340) 1,033,127 282,504 Undistributed net investment income ..................................... 13,533 6,359 6,149 Net unrealized appreciation on investments .............................. 678,520 12,443,597 8,940,435 ------------ ----------- ----------- Net assets .................................................................$103,706,824 430,949,680 288,022,386 ============ =========== =========== Shares of beneficial interest outstanding (unlimited number of shares authorized) .......................................................... 10,173,566 39,017,228 26,049,588 ============ =========== =========== Net asset value, offering price and redemption price per share .......... $10.19 11.05 11.06 ====== ===== ===== - --------------------------- See the accompanying notes to financial statements.
31
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF OPERATIONS For the Year Ended August 31, 1996 TAX-FREE TAX-FREE TAX-FREE LIMITED-TERM INTERMEDIATE- LONG-TERM FUND TERM FUND FUND ---------- ---------- ---------- INVESTMENT INCOME Interest Income .......................................................... $4,753,559 22,990,105 17,067,319 ---------- ---------- ---------- EXPENSES (NOTE 2): Investment advisory fees ................................................. 294,665 1,249,491 833,863 Administrative fees ...................................................... 97,232 412,298 275,154 Transfer agency fees ..................................................... 47,787 188,108 119,915 Printing and postage ..................................................... 18,671 80,691 56,479 Custodian fees ........................................................... 18,735 60,863 40,848 Auditing and legal fees .................................................. 7,589 26,803 18,351 Registration and filing fees ............................................. 2,162 7,550 5,908 Directors' fees and expenses ............................................. 6,589 11,254 9,235 Other operating expenses ................................................. 17,646 53,569 31,747 ---------- ---------- ---------- Total expenses ......................................................... 511,076 2,090,627 1,391,500 ---------- ---------- ---------- Custodian earnings credits (Note 5) ...................................... (13,073) (43,311) (28,928) ---------- ---------- ---------- Net expenses ........................................................... 498,003 2,047,316 1,362,572 ---------- ---------- ---------- Net investment income ................................................ 4,255,556 20,942,789 15,704,747 ---------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4) Net realized gain on investments ............................................ 268,474 3,000,776 780,713 Change in net unrealized appreciation (depreciation) on investments ........ (634,911) (3,916,167) 2,019,723 ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments ................... (366,437) (915,391) 2,800,436 ---------- ---------- ---------- Net increase in net assets resulting from operations ..................... $3,889,119 20,027,398 18,505,183 ========== ========== ========== - --------------------------- See the accompanying notes to financial statements.
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BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS For the Years Ended August 31, 1996 and 1995 Tax-Free Tax-Free Tax-Free Limited-Term Fund Intermediate-Term Fund Long-Term Fund ------------------ ------------------ ------------------ 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- FROM INVESTMENT ACTIVITIES: Net investment income .......................... $4,255,556 4,472,979 20,942,789 20,853,807 15,704,747 15,676,786 Net realized gain (loss) on investments ........ 268,474 (900,112) 3,000,776 (1,365,817) 780,713 (498,209) Net change in unrealized appreciation (depreciation) on investments ............................... (634,911) 1,720,049 (3,916,167) 7,497,113 2,019,723 3,178,301 ----------- ---------- ----------- ---------- ---------- ----------- Change in net assets derived from investment activities ................................. 3,889,119 5,292,916 20,027,398 26,985,103 18,505,183 18,356,878 ----------- ---------- ----------- ---------- ---------- ----------- FROM DISTRIBUTIONS TO SHAREHOLDERS: Net investment income .......................... (4,248,485) (4,472,853) (20,936,393) (20,852,276) (15,699,168) (15,680,810) Net realized gain on investments ............... 0 0 0 0 0 (1,423,246) ----------- ---------- ----------- ---------- ---------- ----------- Total distributions to shareholders: ......... (4,248,485) (4,472,853) (20,936,393) (20,852,276) (15,699,168) (17,104,056) ----------- ---------- ----------- ---------- ---------- ----------- FROM CAPITAL SHARE TRANSACTIONS (NOTE 3): Proceeds from sale of shares ................... 34,544,488 50,256,918 89,549,209 83,210,172 87,219,622 69,814,068 Net asset value of dividends reinvested ........ 3,349,483 3,659,833 15,976,338 15,963,090 10,632,390 11,600,463 Cost of shares repurchased ..................... (38,551,043) (70,640,061) (91,217,016) (136,048,570) (88,720,686) (84,059,454) ----------- ---------- ----------- ---------- ---------- ----------- Change in net assets derived from capital share transactions ......................... (657,072) (16,723,310) 14,308,531 (36,875,308) 9,131,326 (2,644,923) ----------- ---------- ----------- ---------- ---------- ----------- Net increase (decrease) in net assets ........ (1,016,438) (15,903,247) 13,399,536 (30,742,481) 11,937,341 (1,392,101) NET ASSETS: Beginning of year .............................. 104,723,262 120,626,509 417,550,144 448,292,625 276,085,045 277,477,146 ----------- ---------- ----------- ---------- ---------- ----------- End of year ....................................$103,706,824 104,723,262 430,949,680 417,550,144 288,022,386 276,085,045 =========== ========== =========== ========== ========== =========== Undistributed net investment income ............$ 13,533 6,462 6,359 (37) 6,149 570 =========== ========== =========== ========== ========== =========== - --------------------------- See the accompanying notes to financial statements.
33 BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1996 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--Benham California Tax-Free and Municipal Funds (BCTFMF) is registered under the Investment Company Act of 1940 as an open-end management investment company. Tax-Free Limited-Term Fund, Tax-Free Intermediate-Term Fund, and Tax-Free Long-Term Fund (collectively the "Funds") are three of the seven Funds composing BCTFMF. Each Fund is a "diversified company" as defined in the Investment Company Act of 1940. Each Fund invests primarily in municipal debt securities that pay interest exempt from federal and California income taxes. The Funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the State of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with accounting policies generally accepted in the investment company industry. SECURITY VALUATIONS--Securities are valued at current market value as provided by an independent commercial pricing service. When valuations are not readily available, securities are valued at fair value as determined in good faith by or under the direction of the Board of Trustees. SECURITY TRANSACTIONS--Security transactions are accounted for on the date purchased or sold. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME--Interest income is recorded on the accrual basis and includes amortization of premiums and discounts. Premium and original issue discount is amortized daily using the effective interest rate method. Market discount is recognized as income upon the sale or maturity of the security. INCOME TAX STATUS--It is the policy of the Funds to distribute all net investment income and net realized capital gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state taxes. DISTRIBUTIONS TO SHAREHOLDERS--Net investment income from the Funds is declared daily and distributed monthly. Net realized gains 34 in excess of available capital loss carryovers for the Funds will be distributed each December. At August 31, 1996, the accumulated net realized capital loss carryover for the Tax-Free Limited-Term Fund of $1,151,341 (expiring 2003 and 2004) may be used to offset future taxable gains. Distributions from net investment income for the Funds for the year ended August 31, 1996, are exempt from federal and California state taxes. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes due to differences in the recognition of income and expense items for financial and tax purposes. FUTURES CONTRACTS--The Funds may use futures 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. Some futures contract strategies present a substantial risk of loss, due to both the low margin deposits required and the high degree of leverage involved in futures pricing. A relatively small movement in a futures contract may result in immediate, substantial gains or losses to the contact holder. Gains from futures transactions are subject to federal income tax when distributed to shareholders. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund. The variation margin is equal to the daily change in the contract value and is recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from these estimates. (2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth Century Companies, Inc. (TCC). Each Fund 35 pays BMC a monthly investment advisory fee based on its pro rata share of the dollar amount derived from applying BCTFMF's average daily net assets to the following annualized investment advisory fee schedule. .50% of the first $100 million .45% of the next $100 million .40% of the next $100 million .35% of the next $100 million .30% of the next $100 million .25% of the next $1 billion .24% of the next $1 billion .23% of the next $1 billion .22% of the next $1 billion .21% of the next $1 billion .20% of the next $1 billion .19% of average daily net assets over $6.5 billion BMC provides BCTFMF with all investment advice. TCC pays all compensation of BCTFMF officers and trustees who are officers or directors of TCC or any of its subsidiaries. In addition, promotion and distribution expenses are paid by BMC. BCTFMF has an Administrative Services and Transfer Agency Agreement with Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC. Under the agreement, BFS provides substantially all administrative and transfer agency services necessary to operate the Funds. Fees for these services are based on transaction volume, number of accounts, and average net assets of all funds in The Benham Group. Effective September 3, 1996, Twentieth Century Services, Inc., a wholly-owned subsidiary of TCC, replaced BFS in the Administrative Services and Transfer Agency Agreement. There were no other changes made to the existing agreement. BCTFMF has an additional agreement with BMC pursuant to which BMC established a contractual expense guarantee that limits each Fund's expenses (excluding expenses such as brokerage commissions, taxes, interest, custodian earnings credits, and extraordinary expenses) to .59% of average daily net assets for the Funds. The agreement provides that BMC may recover amounts (representing expenses in excess of the Fund's expense guarantee rate) absorbed during the preceding 11 months, if, and to the extent that, for any given month, the Fund's expenses were less than the expense guarantee rate in effect at that time. The expense guarantee rate is subject to renewal in June 1997. 36 The payables to affiliates as of August 31, 1996, based on the above agreements were as follows: Tax-Free Tax-Free Tax-Free Limited-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Investment Advisor ........... $ 25,187 106,366 71,247 Administrative Services ...... 8,315 35,116 23,522 Transfer Agent ............... 6,281 26,140 14,608 ------- ------- ------- $ 39,783 167,622 109,377 ======= ======= ======= As of August 31, 1996, the Limited-Term and Intermediate-Term Funds had invested in shares of Benham California Tax-Free Money Market Fund (a fund of BCTFMF). The terms of such transactions were identical to those with non-related entities except that, to avoid duplicate investment advisory fees and administrative fees, the Funds do not pay BMC investment advisory fees or BFS administrative fees with respect to assets invested in shares of Benham California Tax-Free Money Market Fund. BCTFMF has a distribution agreement with Benham Distributors, Inc. (BDI), which is responsible for promoting sales of and distributing the Funds' shares. BMC pays all costs incurred by BDI. BDI is a wholly owned subsidiary of TCC. Effective September 3, 1996, Twentieth Century Securities, Inc., a wholly-owned subsidiary of TCC replaced BDI. (3) SHARE TRANSACTIONS Share transactions for each of the Funds for the years ended August 31, 1996 and 1995, were as follows:
Tax-Free Tax-Free Tax-Free Limited-Term Intermediate-Term Long-Term Fund Fund Fund -------------------- ------------------ ----------------- 1996 1995 1996 1995 1996 1995 -------- --------- ------- ------- ------- ------- Shares sold ... 3,379,409 4,990,923 8,045,676 7,744,303 7,807,077 6,574,067 Reinvestment of dividends ... 327,171 363,362 1,435,175 1,484,142 951,174 1,093,963 --------- --------- --------- --------- -------- --------- 3,706,580 5,354,285 9,480,851 9,228,445 8,758,251 7,668,030 Less shares redeemed ......(3,766,840)(7,036,430)(8,207,114)(12,750,380) (7,947,182)(7,943,944) --------- --------- --------- ---------- --------- --------- Net increase (decrease) in shares ...... (60,260)(1,682,145) 1,273,737 (3,521,935) 811,069 (275,914) ========= ========= ========= ========= ======== =========
37 (4) INVESTMENT TRANSACTIONS Investment transactions (excluding short-term securities) for the year ended August 31, 1996, were as follows: Tax-Free Tax-Free Tax-Free Limited-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Purchases .................. $ 44,660,550 159,200,230 125,419,480 =========== ========== ========== Sales proceeds ............. $ 41,770,921 148,031,650 116,850,417 =========== ========== ========== As of August 31, 1996, unrealized appreciation (depreciation) was as follows: Tax-Free Tax-Free Tax-Free Limited-Term Intermediate-Term Long-Term Fund Fund Fund ---------- -------------- --------- Appreciated securities ....... $ 805,280 13,240,132 10,911,306 Depreciated securities ....... (126,760) (796,535) (1,970,871) ----------- ---------- ---------- Net unrealized appreciation .. $ 678,520 12,443,597 8,940,435 =========== ========== ========== The cost of securities for financial reporting and federal income tax purposes is the same. (5) EXPENSE OFFSET ARRANGEMENTS Each Fund's Statement of Operations reflects custodian earnings credits. These amounts are used to offset the custody fees payable by the Funds to the custodian bank. The credits are earned when the Fund maintains a balance of uninvested cash at the custodian bank. Beginning with the year ending August 31, 1996, the ratios of expenses to average daily net assets shown in the Financial Highlights are calculated as if these credits had not been earned. 38
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Limited-Term Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-100.0% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 3,500,000 Anaheim Redevelopment Agency Local Government Financing Joint Power Auth. Rev., Series A, Prerefunded at 102% of par ......... 7.950% 09/01/98 $ 3,820,950 Aaa/AAA 1,775,000 Burbank Redevelopment Agency West Olive Tax Allocation, Series 1994, (AMBAC) ................................ 6.000 12/01/97 1,818,381 Aaa/AAA 1,140,000 California Educational Facility Auth. Rev., (University Project Series A) ................................... 4.550 12/01/99 1,137,880 A/NR 1,080,000 California Educational Facility Auth. Rev., (Project Series A) ..... 4.950 12/01/02 1,074,762 A/NR 1,450,000 California Health Facility Financing Auth., Rev., (Mills Hospital Series B), (Connie Lee) ......................... 5.500 01/15/00 1,488,918 NR/AAA 1,400,000 California Health Facility Financing Auth. Rev., (St. Francis Memorial Hospital, Series 1993 A) .................. 5.000 11/01/98 1,414,518 A/NR 1,750,000 California Health Facility Financing Auth. Rev., (St. Francis Memorial Hospital, Series 1993 A) ................. 5.500 11/01/01 1,783,075 A/NR 1,745,000 California Health Facility Financing Auth., St. Joseph Hospital Certificate of Participation ................ 5.500 07/01/97 1,768,802 Aa/AA 1,600,000 California Public Works Board Lease Rev. (Department of Justice Building, Series A) .................................. 5.500 05/01/00 1,645,824 A/A 2,000,000 California State Rev. Anticipation Notes, Series A ................. 4.500 06/30/97 2,011,360 MIG1/SP1+ 3,175,000 City of Whittier Health Rev. (Presbyterian Intercommunity Hospital), (MBIA) ................................ 5.500 06/01/02 3,299,047 Aaa/AAA 1,700,000 Imperial Irrigation District Certificates of Participation ......... 5.625 05/01/97 1,719,907 Aa/A+ 1,000,000 Imperial Irrigation District Certificates of Participation Series 1993 ............................................................ 6.700 11/01/98 1,050,970 Aa/A+ 1,140,000 Kern High School District G.O., Series A, (MBIA) ................... 6.000 02/01/04 1,218,991 Aaa/AAA 2,250,000 Long Beach Redevelopment Agency Rev., (Downtown Redevelopment Series 1988 A), (AMBAC), Escrowed to Maturity ................... 6.750 11/01/96 2,261,633 Aaa/AAA 2,000,000 Los Angeles Airport Rev., Series 1989 A, Prerefunded at 102% of par ...................................... 7.000 05/01/98 2,081,400 Aa/AA 1,435,000 Los Angeles G.O., Series A, (FGIC) ................................. 5.000 09/01/00 1,462,853 Aaa/AAA 1,000,000 Los Angeles County Metropolitan Transit Auth. Sales Tax Rev.,(Proposition C), (AMBAC) ......................... 5.900 07/01/02 1,065,230 Aaa/AAA
39
Schedule of Investment Securities--Tax-Free Limited-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,415,000 Los Angeles County California Public Works Financing Auth. Rev., Series A .................................. 5.500% 09/01/01 $ 1,470,369 Aaa/AAA 1,000,000 Los Angeles California Convention and Exhibition Center Certificates of Participation, Series A, Prerefunded at 101.5% of par ........... 7.300 08/15/99 1,096,440 Aaa/AAA 1,000,000 Los Angeles County California Transportation Sales Tax Rev., Series A ........................................................ 6.300 07/01/01 1,065,310 A1/AA- 3,605,000 Los Angeles Municipal Improvement Corporation Sanitation Rev., (MBIA) ......................................... 5.750 02/01/98 3,685,319 Aaa/AAA 1,500,000 Los Angeles Building Auth. Lease Redevelopment Rev. ................ 4.800 05/01/02 1,491,825 A/A 2,000,000 Los Angeles University School District G.O. ........................ 4.500 09/30/97 2,010,540 MIG1/SP1+ 1,000,000 Los Angeles Waste Water System Rev. ................................ 6.700 02/01/00 1,063,100 A1/A 2,000,000 Los Angeles Waste Water System Rev., Prerefunded at 102% of par .... 6.800 08/01/98 2,136,540 Aaa/A 1,000,000 Los Angeles California Building Auth., Lease Redevelopment Rev. .... 4.900 05/01/03 991,640 A/A 1,000,000 Los Angeles California Rev. Certificates of Participation .......... 6.500 11/01/98 1,044,400 A1/AA 2,000,000 Merced County Lease Certificates of Participation, Series 1992, (FSA) ........................................................... 4.750 10/01/96 2,001,780 Aaa/AAA 1,000,000 Metropolitan Water District of Southern California Waterworks Rev. ............................................................ 6.375 07/01/02 1,086,410 Aa/AA 2,000,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1991 .................................... 6.100 07/01/99 2,093,660 Aa/AA 1,365,000 Ontario Redevelopment Financing Auth. Rev., (Center City Cimarron Project),(MBIA) ........................... 5.700 08/01/01 1,429,455 Aaa/AAA 900,000 Orange County Special Assessment Improvement Bonds (District 88-1), VRDN ..................................... 3.650 09/03/96* 900,000 A1/AA- 1,500,000 Orange County Transportation Sales Tax Rev., (AMBAC) ............... 5.500 02/15/01 1,552,605 Aaa/AAA 2,650,000 Puerto Rico Commonwealth G.O., (MBIA) .............................. 5.500 07/01/01 2,760,929 Aaa/AAA 1,000,000 Puerto Rico Commonwealth Highway and Transportation Auth., (MBIA) .. 6.000 07/01/01 1,065,140 Aaa/AAA 2,000,000 Rancho Water District Financing Auth., Rev., (LOC: Toronto Dominion) ....................................................... 4.700 09/15/01 1,993,740 NR/AA 1,000,000 Redding Joint Powers Financing Auth. Electrical System Rev., Series A (MBIA) ................................................. 5.500 06/01/01 1,039,470 Aaa/AAA 4,485,000 Sacramento Municipal Utility District Electric Rev., Series D ...... 4.600 11/15/98 4,507,156 A/A- 1,000,000 Sacramento Schools Auth. Rev., (Workers Compensation Program C), Escrowed to Maturity ............................................ 5.750 06/01/03 1,045,190 NR/AAA 2,000,000 San Bernardino County Certificates of Participation, (Medical Center Project, Series A),(MBIA) ....................... 5.200 08/01/04 2,036,280 Aaa/AAA 2,625,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, (FGIC) ........................... 5.000 04/01/99 2,667,814 Aaa/AAA
40
Schedule of Investment Securities--Tax-Free Limited-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 4,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., (AMBAC) ......................................................... 4.600% 07/01/97 $ 4,002,320 Aaa/AAA 1,085,000 San Francisco City and County G.O., (FGIC) ......................... 6.000 06/15/98 1,120,653 Aaa/AAA 2,930,000 San Francisco Port Commission Rev. Refunding ....................... 5.250 07/01/99 2,980,689 A/BBB+ 1,000,000 San Mateo Transportation Sales Tax Rev., Series A, (AMBAC) ......... 6.500 06/01/98 1,058,390 Aaa/AAA 1,135,000 Southern California Public Power Agency Pooled Transmission Auth. Joint Power Rev., Series 1989, Prerefunded at 102% of par ....... 7.000 07/01/00 1,254,481 Aaa/AAA 1,000,000 Southern California Public Power Auth. Electric Rev., Series 1989, (PNC GIC) .................................... 6.750 07/01/99 1,058,110 A/A 1,185,000 South Coast Air Quality Management District Building Corporation Rev., (AMBAC) ....................................... 5.500 08/01/01 1,233,277 Aaa/AAA 1,510,000 State of California G.O. ........................................... 6.500 11/01/97 1,551,993 A1/A+ 2,000,000 State of California G.O.,(AMBAC) ................................... 6.500 04/01/98 2,072,120 Aaa/AAA 2,325,000 State of California G.O.,(AMBAC) ................................... 6.100 02/01/02 2,483,030 Aaa/AAA 1,000,000 Turlock Irrigation District Certificates of Participation (MBIA) ... 7.300 01/01/98 1,061,970 Aaa/AAA 4,980,000 University of California Rev. Series A, (MBIA) Prerefunded at 102% of par ............................... 7.000 09/01/97 5,230,942 Aaa/AAA 2,000,000 West Basin Water District Certificates of Participation Series 1991, (AMBAC), Escrowed to Maturity ...................... 6.100 08/01/98 2,073,944 Aaa/AAA - ------------ ------------ $98,335,000 Total Investment Securities (cost $100,863,012) ........................................ $101,541,532 ============ ============ - --------------------------- * These variable interest rate securities have maturity greater than one year but are redeemable upon demand. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recovered by demand. AMBAC = AMBAC Indemnity Corp. FGIC = Financial Guaranty Insurance Company FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated VRDN = Variable Rate Demand Note. Interest reset dates are indicated and used in calculating the weighted average maturity of the portfolio. Rates shown were effective 08-31-96. 41 Schedule of Investment Securities--Tax-Free Limited-Term Fund (Continued) ==================================================================================================================================== PORTFOLIO COMPOSITION BY MARKET SECTOR Prerefunded .................... 18.5% Electric ..................... 5.4% General Obligation ............. 14.2 Transportation ............... 5.0 Certificates of Participation .. 12.1 Other ........................ 19.0 Sales Tax ...................... 10.1 ______ Hospital ....................... 9.6 TOTAL ........................100.0% Water/Sewer .................... 6.1 ______ ------
42
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Intermediate-Term Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-100.0% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,520,000 Alameda County California Certificates of Participation, (Santa Rita Jail Project), (MBIA) .............................. 5.375% 06/01/09 $ 1,505,347 Aaa/AAA 4,060,000 Burbank Redevelopment Agency West Olive Tax Allocation, Series 1994, (AMBAC) ................................ 6.500 12/01/01 4,422,883 Aaa/AAA 2,145,000 California Educational Facility Auth. Rev., (University of San Diego Series 1989), (MBIA) ................................. 6.750 10/01/02 2,339,187 Aaa/AAA 3,145,000 California Health Facilities Financing Auth. Rev., (Insured Health Facility Series A), (AMBAC) ..................... 6.000 07/01/04 3,362,351 Aaa/AAA 1,500,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente Series A) .................................... 6.700 10/01/99 1,588,710 Aa3/AA 1,500,000 California Health Facilities Financing Auth. Rev., (Pomona Valley Hospital Medical Center Series A), (MBIA) ........ 6.750 01/01/07 1,607,685 Aaa/AAA 1,280,000 California Health Facilities Financing Auth. Rev., (St. Francis Memorial Hospital Series A) ........................ 5.250 11/01/99 1,288,435 A/NR 1,660,000 California Health Facilities Financing Auth. Rev., (St. Francis Memorial Hospital Series A) ....................... 5.375 11/01/00 1,673,114 A/NR 1,745,000 California Health Facilities Financing Auth. Rev., (St. Francis Memorial Hospital Series A) ....................... 5.625 11/01/02 1,768,243 A/NR 1,560,000 California Health Facilities Financing Auth. Rev., (St. Francis Memorial Hospital Series A) ........................ 5.750 11/01/04 1,564,898 A/NR 3,250,000 California Public Works Board Energy-Efficiency Rev. (Pooled Project Series 1991 A) ............................. 6.000 09/01/99 3,379,935 A/A- 2,000,000 California Public Works Board Lease Rev., (University of California Series A) ............................. 5.070* 09/01/00 1,636,780 A1/A 4,795,000 California State Department Water Resource Center Rev., (Water System Series J-2) ....................................... 5.800 12/01/04 5,088,981 Aa/AA 2,500,000 California State Department of Veteran's Affairs Rev.,(Series A) ... 6.200 08/01/98 2,583,250 Aa/A+ 3,710,000 California State Franchise Tax Board Certificates of Participation . 6.900 10/01/06 3,952,449 A/A-
43
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 3,000,000 California State Public Works Board Lease Rev., (University of California Series A) ............................. 6.150% 11/01/09 $ 3,106,320 A1/A 4,520,000 California State Public Works Board Lease Rev., (Secretary of State), (AMBAC) ................................... 6.200 12/01/05 4,926,212 Aaa/AAA 1,000,000 California State Public Works Board Lease Rev., (University of California Project Series A), (AMBAC) ............ 5.900 12/01/03 1,068,450 Aaa/AAA 3,500,000 California State Public Works Board Lease Rev. (Department of Corrections, Series A), (AMBAC) .................. 5.250 12/01/05 3,573,010 Aaa/AAA 3,000,000 California State Public Works Board Lease Rev., (California State University Series 1992 A) ..................... 5.700 10/01/99 3,100,770 A/A 3,100,000 California Statewide Communities Development Auth. Lease Rev., (Oakland Convention Center), (AMBAC) ............... 6.125 10/01/06 3,289,255 Aaa/AAA 2,385,000 California Statewide Communities Development Auth. Certificates of Participation, (St. Joseph Health System) .................... 6.500 07/01/03 2,579,759 Aa/AA 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., (First Lien Series A), (AMBAC) ................ 6.000 09/01/06 2,719,638 Aaa/AAA 1,000,000 Castaic Lake Water Agency Certificates of Participation, (Series A), (MBIA) .............................................. 7.250 08/01/09 1,168,070 Aaa/AAA 2,945,000 Castaic Lake Water Agency Certificates of Participation (Series A), (MBIA) .............................................. 5.750 08/01/01 3,089,835 Aaa/AAA 2,075,000 Chabot Las Positas Community College District Certificates of Participation, (FSA) ............................ 5.500 12/01/10 2,071,763 Aaa/AAA 2,080,000 City of Los Angeles Equipment Acquisition Project Certificates of Participation, (Series 1989 G) .................. 7.300 10/01/96 2,080,211 A/A+ 1,465,000 City of Woodland Waste Water System Refunding Certificates of Participation, (AMBAC) .......................... 6.000 03/01/06 1,571,872 Aaa/AAA 1,000,000 Contra Costa California Transportation Auth. Sales Tax Rev. (Series A), (FGIC) ............................... 6.000 03/01/07 1,068,710 Aaa/AAA 5,835,000 Contra Costa California Transportation Auth. Sales Tax Rev., (Series A), (FGIC) .............................. 6.000 03/01/05 6,245,551 Aaa/AAA 2,500,000 Contra Costa County Public Facility Certificates of Participation (BIGI) .......................................................... 7.450 06/01/00 2,737,375 Aaa/AAA 1,065,000 Contra Costa County Water District Rev., (Series A), Prerefunded at 102% of par .......................... 7.000 10/01/00 1,178,753 NR/NR**
44
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,220,000 Coronado California Community Development Agency Tax Allocation, (FSA) .................................... 6.000% 09/01/08 $ 1,276,352 Aaa/AAA 2,000,000 East Bay Municipal Utilities District Wastewater System Rev., (MBIA) .......................................................... 5.000 06/01/06 1,985,380 Aaa/AAA 2,570,000 East Bay Municipal Utilities District Wastewater System Rev. ....... 6.000 06/01/05 2,729,032 A1/AA- 3,485,000 East Bay Municipal Utilities District Wastewater System Rev. ....... 6.100 06/01/06 3,702,116 A1/AA- 2,000,000 East Bay Municipal Utilities District Wastewater System Rev., (FGIC) .......................................................... 6.000 06/01/02 2,133,200 Aaa/AAA 6,850,000 Imperial Irrigation District Certificates of Participation, (Electrical System Project), (MBIA) ............................. 6.500 11/01/07 7,599,733 Aaa/AAA 1,750,000 Loma Linda Hospital Rev., (University Medical Center), (AMBAC) ..... 6.950 12/01/05 1,902,670 Aaa/AAA 4,000,000 Los Angeles Capital Asset Lease Rev., (AMBAC) ...................... 5.875 12/01/05 4,265,560 Aaa/AAA 2,000,000 Los Angeles Municipal Improvement Corporation Lease Rev. ........... 7.200 09/01/96 2,000,180 Aa/AA 2,070,000 Los Angeles Municipal Improvement Corporation Lease Rev., (Special Tax Series A) .............................. 4.900 09/01/02 2,068,924 Aa/NR 4,000,000 Los Angeles County Correctional Facility Project Certificates of Participation (MBIA) ............................ 6.000 09/01/99 4,185,640 Aaa/AAA 1,000,000 Los Angeles County Public Properties Certificates of Participation, (BIGI) ........................... 6.250 04/01/00 1,058,160 Aaa/AAA 1,000,000 Los Angeles County Metropolitan Transit Auth. Sales Tax Rev. (AMBAC) .................................... 5.900 07/01/06 1,067,180 Aaa/AAA 2,000,000 Los Angeles County Transportation Commission Certificates of Participation, (Series B) ....................... 6.250 07/01/04 2,147,640 A1/NR 3,900,000 Los Angeles County Transportation Commission Certificates of Participation, (Series B) ....................... 6.000 07/01/01 4,073,901 A1/NR 2,500,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series A, Proposition A) ....................... 6.400 07/01/02 2,690,775 A1/AA- 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series 1992 A),(MBIA) .......................... 5.700 07/01/01 3,139,440 Aaa/AAA 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series A, Proposition C) ....................... 6.200 07/01/04 3,771,279 A1/A+ 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series A, Proposition C) ....................... 6.400 07/01/06 4,106,109 A1/A+ 4,000,000 Los Angeles County Transportation Commission Sales Tax Rev., (FGIC) .......................................................... 5.875 07/01/02 4,243,440 Aaa/AAA
45
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev., (Series A), (MBIA) .................................. 6.000% 08/15/10 $ 1,218,236 Aaa/AAA 1,000,000 Los Angeles Convention Center Certificates of Participation, (AMBAC) ......................................................... 6.750 08/15/01 1,095,020 Aaa/AAA 2,000,000 Los Angeles Rev. Certificates of Participation ..................... 6.400 11/01/97 2,051,860 A1/AA 1,000,000 Los Angeles Department of Water and Power Electric Rev., (MBIA) .... 5.700 01/15/05 1,047,710 Aaa/AAA 2,135,000 Los Angeles Department of Water and Power Rev. (Crossover refunded at 102% of par) ........................ 6.625 10/01/01 2,347,518 Aa/AA- 1,000,000 Los Angeles Department of Water and Power Rev., (FGIC) ............. 6.300 04/15/06 1,068,470 Aaa/AAA 4,685,000 Los Angeles Municipal Improvement Corporation Rev., (MBIA) ......... 6.000 02/01/03 4,998,895 Aaa/AAA 4,765,000 Los Angeles County Transportation Commission Certificates of Participation, (Series B) ....................... 6.200 07/01/03 5,047,040 A1/NR 4,780,000 Los Angeles Wastewater System Rev., (Series B), (AMBAC) ............ 6.200 06/01/06 5,119,093 Aaa/AAA 2,045,000 Los Angeles Wastewater System Rev., (Series A), (MBIA) ............. 6.600 02/01/00 2,180,052 Aaa/AAA 1,000,000 Los Angeles Wastewater System Rev., (Series B) ..................... 6.800 06/01/02 1,082,070 A1/A 2,500,000 Los Angeles Airport Rev., (Series A), (AMBAC) ...................... 6.000 05/15/05 2,679,100 Aaa/AAA 1,000,000 Metropolitan Water District of Southern California Rev. ............ 6.625 07/01/06 1,102,650 Aa/AA 7,190,000 Metropolitan Water District of Southern California Rev. ............ 6.500 07/01/04 7,892,823 Aa/AA 1,100,000 Mojave California Water Agency Improvement District G.O.,(Morongo Basin), (FGIC) ........................... 5.400 09/01/08 1,101,826 Aaa/AAA 10,000,000 Northern California Power Agency Rev. (Geothermal Project 3), (AMBAC) ............................................. 5.500 07/01/05 10,342,000 Aaa/AAA 1,500,000 Northern California Power Agency Capital Facilities Rev., (Series A), (MBIA) .............................................. 6.300 08/01/06 1,615,170 Aaa/AAA 2,000,000 Northern California Power Agency Capital Facilities Rev., (Series A) (MBIA) ......................................... 6.200 08/01/05 2,154,100 Aaa/AAA 2,000,000 Northern California Power Agency Rev. (Geothermal Project R), (AMBAC) ............................................. 5.600 07/01/06 2,081,940 Aaa/AAA 1,000,000 Oakland Pension Financing Auth. Rev., (Series 1988), (FGIC) ........ 7.200 08/01/00 1,068,680 Aaa/AAA 1,165,000 Ontario Redevelopment Financing Auth. Local Agency Rev. (Series A), (FSA) ................................... 5.800 09/02/06 1,222,015 Aaa/AAA 1,645,000 Orange County Transportation Sales Tax Rev. ........................ 5.750 02/15/05 1,710,603 Aa/AA 7,500,000 Orange County Transportation Sales Tax Rev., (AMBAC) ............... 5.500 02/15/01 7,763,025 Aaa/AAA 3,000,000 Orange County Transportation Sales Tax Rev., (FGIC) ................ 6.000 02/15/07 3,185,430 Aaa/AAA
46
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,250,000 Orange County Water District Certificates of Participation (Series 1990), Prerefunded at 102% of par ....................... 7.000% 08/15/00 $ 1,384,763 Aaa/AAA 1,330,000 Oxnard Harbor District Rev., (Series A), (FSA) ..................... 7.000 08/01/04 1,509,098 Aaa/AAA 1,000,000 Puerto Rico Commonwealth, (MBIA), Prerefunded at 101.5% of Par ..... 6.500 07/01/02 1,106,350 Aaa/AAA 200,000 Puerto Rico Public Buildings Auth. Rev., (Series G),(FGIC), Prerefunded at 102% of par ................... 7.600 07/01/97 210,128 Aaa/AAA 1,000,000 Ramona Municipal Water District Certificates of Participation, (AMBAC) .......................................... 6.900 10/01/01 1,101,230 Aaa/AAA 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., (Series A),(MBIA) .................................. 6.250 06/01/07 1,153,884 Aaa/AAA 1,010,000 Richmond Joint Powers Financing Auth. Rev., (Series A) ............. 5.300 05/15/06 973,832 NR/A 2,000,000 Richmond Redevelopment Agency Tax Allocation (Harbor Redevelopment), (FSA) ................................... 7.000 07/01/09 2,217,760 Aaa/AAA 4,000,000 Riverside Transit Sales Tax Rev., (Series A), (AMBAC) .............. 6.500 06/01/01 4,325,240 Aaa/AAA 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., (Series A),(MBIA) ..................................... 5.250 09/01/04 2,132,562 Aaa/AAA 1,225,000 Riverside County Transportation Commission Sales Tax Rev., (AMBAC) ......................................... 5.600 06/01/05 1,279,574 Aaa/AAA 2,000,000 Riverside County Transportation Commission Sales Tax Rev., (Series A), Prerefunded at 102% of par .......... 6.625 06/01/02 2,199,120 Aaa/A+ 5,710,000 Sacramento Municipal Utility District Electric Rev., (Series C), (MBIA) .......................................................... 5.750 11/15/07 5,899,800 Aaa/AAA 6,825,000 Sacramento Municipal Utility District Electric Rev., (Series 1991 Z),(FGIC) .......................................... 6.000 07/01/02 7,281,729 Aaa/AAA 9,000,000 Sacramento Municipal Utility District Electric Rev., (Series A), (MBIA) .......................................................... 6.200 08/15/05 9,696,510 Aaa/AAA 1,700,000 Sacramento Municipal Utility District Electric Rev., (Series A), (MBIA) .......................................................... 6.250 08/15/07 1,824,967 Aaa/AAA 10,000,000 Sacramento Schools Auth. Rev., (Workers Compensation Program C), Escrowed to Maturity ................................ 5.750 06/01/03 10,451,900 NR/AAA 5,000,000 San Bernardino County Certificates of Participation (Medical Center Project Series A),(MBIA) ........................ 5.750 08/01/07 5,186,600 Aaa/AAA 1,000,000 San Diego Auth. Lease Rev. ......................................... 5.500 09/01/07 1,008,420 Aa/AA- 1,500,000 San Diego County Regional Transportation Commission Sales Tax Rev., (Series A), Escrowed to Maturity ................ 7.750 04/01/99 1,618,440 Aaa/AA-
47
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 3,800,000 San Diego County Water Auth. Certificates of Participation, (Series A) ...................................................... 6.000% 05/01/02 $ 3,998,664 Aa/AA- 7,200,000 San Diego County Water Auth. Certificates of Participation, (Series A) ...................................................... 6.125 05/01/03 7,638,048 Aa/AA- 4,400,000 San Diego County Water Auth. Certificates of Participation, (Series A) ...................................................... 6.400 05/01/08 4,674,868 Aa/AA- 8,090,000 San Diego Public Facility Financing Auth. Sewer Rev., (Series 1995), (FGIC) ........................................... 4.875 05/15/09 7,585,589 Aaa/AAA 1,000,000 San Diego Regional Transportation Commission Sales Tax Rev., (Series 1992), (FGIC) ................................. 5.500 04/01/05 1,036,980 Aaa/AAA 3,505,000 San Diego Regional Transportation Commission Sales Tax Rev., (Series 1992), (FGIC) ................................. 5.500 04/01/04 3,644,639 Aaa/AAA 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., (Series 1994 A), (FGIC) ............................... 6.000 04/01/04 4,282,320 Aaa/AAA 2,410,000 San Francisco City And County Airport Commission Rev.,(Series issue 2), (MBIA) ................................... 6.350 05/01/01 2,587,834 Aaa/AAA 1,250,000 San Francisco Bay Area Rapid Transit Sales Tax Rev., (FGIC) ........ 6.400 07/01/05 1,361,125 Aaa/AAA 1,000,000 San Francisco Bay Area Rapid Transit Sales Tax Rev., (FGIC) ........ 5.350 07/01/07 1,007,910 Aaa/AAA 2,100,000 San Francisco City And County Airport Commission Rev. Refunding (MBIA) ........................................... 6.350 05/01/03 2,286,858 Aaa/AAA 3,405,000 San Francisco Port Commission Rev. ................................. 5.625 07/01/02 3,504,392 A/BBB+ 3,950,000 San Jose Financing Auth. Rev., (Convention Center) ................. 6.000 09/01/05 4,118,191 A1/A+ 4,580,000 San Jose Financing Auth. Rev., (Convention Center Series 1993) ..... 6.100 09/01/06 4,731,232 A1/A+ 2,000,000 San Jose Financing Auth. Rev., (Convention Center), (Project Series C) ....................................................... 6.300 09/01/09 2,079,120 A1/A+ 3,875,000 San Jose California Redevelopment Agency Tax Allocation, (Series A), (MBIA) Escrowed to Maturity ............. 6.000 08/01/02 4,077,314 Aaa/AAA 3,700,000 San Jose California Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), (MBIA) ......... 6.000 08/01/06 3,966,955 Aaa/AAA 5,400,000 San Jose California Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), (MBIA) ......... 6.000 08/01/07 5,767,794 Aaa/AAA 3,910,000 San Mateo County California Transportation Sales Tax Rev., (Series A), (MBIA) .............................. 5.000 06/01/08 3,793,091 Aaa/AAA 1,015,000 Santa Ana Police Administration Certificates of Participation, (Series A), (MBIA) ............................ 5.500 07/01/07 1,017,213 Aaa/AAA 1,230,000 Santa Clara County Multi-Facilities Project Certificates of Participation, (AMBAC) ....................................... 6.000 05/15/05 1,305,756 Aaa/AAA
48
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,000,000 Santa Clara County Multi-Facilities Project Certificates of Participation, (AMBAC) ....................................... 6.125% 05/15/04 $ 2,153,480 Aaa/AAA 2,215,000 Santa Clara County Multi-Facilities Project Certificates of Participation, (AMBAC) ....................................... 6.000 05/15/01 2,347,169 Aaa/AAA 1,000,000 Signal Hill California Redevelopment Agency Tax Allocation (Series B), Prerefunded at 100% of par ............... 7.400 10/01/00 1,107,680 NR/AAA 2,000,000 Southern California Public Power Auth. Rev., (Series A) ............ 6.750 07/01/00 2,143,680 A/A 3,000,000 Southern California Public Power Auth. Rev., (Series 1989) ......... 6.750 07/01/01 3,253,590 A/A 1,500,000 Southern California Public Power Auth. Rev., (Project Series 1988 A) ......................................................... 7.000 07/01/00 1,595,640 Aa/AA 3,090,000 Southern California Public Power Auth. Rev., (Project Series 1992), (MBIA) ................................... 5.625 07/01/03 3,243,264 Aaa/AAA 4,065,000 Southern California Rapid Transit District Certificates of Participation, (MBIA) ........................................ 6.200 07/01/02 4,367,395 Aaa/AAA 2,000,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), (MBIA) ................ 7.500 07/01/05 2,248,380 Aaa/AAA 2,000,000 Stanislaus County Refunding Certificates of Participation, (MBIA) .. 5.500 05/01/06 2,058,000 Aaa/AAA 1,500,000 Southern California Public Power Auth. Rev., (Project Series 1988 A), (MBIA) ................................. 6.500 07/01/07 1,616,580 Aaa/AAA 5,000,000 Southern California Rapid Transit District Certificates of Participation, (Workers Compensation), (MBIA) ................ 6.400 07/01/04 5,385,600 Aaa/AAA 1,785,000 South Sutter Hydroelectric Refunding Rev., (FGIC) .................. 6.800 08/01/01 1,922,766 Aaa/AAA 1,975,000 State of California G.O. (MBIA) .................................... 5.500 04/01/07 2,023,486 Aaa/AAA 2,000,000 State of California G.O. ........................................... 7.000 08/01/05 2,274,880 A1/A+ 1,855,000 State of California G.O., (FGIC) ................................... 7.000 11/01/06 2,132,582 Aaa/AAA 1,950,000 State of California G.O. ........................................... 6.750 02/01/06 2,185,852 A1/A+ 3,000,000 State of California G.O., (MBIA) ................................... 6.000 09/01/03 3,218,400 Aaa/AAA 10,000,000 State of California G.O., (AMBAC) .................................. 6.500 03/01/02 10,881,600 Aaa/AAA 1,175,000 State of California G.O., (AMBAC) .................................. 6.250 06/01/04 1,278,951 Aaa/AAA 3,000,000 State of California G.O., (AMBAC) .................................. 6.800 05/01/01 3,276,750 Aaa/AAA 1,950,000 University of California Rev., (University of California Medical Center), (AMBAC) ............................. 5.600 07/01/09 1,955,694 Aaa/AAA 3,800,000 University of California Multipurpose Project Rev., (Series A), (MBIA) .......................................................... 6.000 09/01/02 4,060,908 Aaa/AAA
49
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,510,000 Watsonville California Hospital Rev., (Watsonville Community Hospital Series A) .................................... 5.450% 07/01/03 $ 2,528,297 NR/A 3,980,000 Whittier California Health Facility Rev., (Presbyterian Intercommunity), (MBIA) ......................................... 6.000 06/01/06 4,247,449 Aaa/AAA - ------------ ------------ $402,235,000 Total Investment Securities (Cost $412,752,115) ........................................ $425,195,712 ============ ============ - --------------------------- * These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. ** Prerefunded with U.S. government securities, not re-rated. AMBAC = AMBAC Indemnity Corp. FGIC = Financial Guaranty Insurance Company FHA = Federal Housing Authority FSA = Financial Security Association GO = General Obligation LOC = Letter of Credit MBIA =Municipal Bond Insurance Association NR = Not Rated PORTFOLIO COMPOSITION BY MARKET SECTOR Certificates of Participation ... 22.1% Hospital .................... 6.1 Water/Sewer ..................... 16.6 Other ....................... 23.7 Sales Tax ....................... 13.0 ______ Electric ........................ 12.1 TOTAL .......................100.0% General Obligation .............. 6.4 ______ ------
50
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS Tax-Free Long-Term Fund Schedule of Investment Securities August 31, 1996 MUNICIPAL SECURITIES-94.9% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,300,000 Alameda County Certificates of Participation, (MBIA) ............... 6.110%** 06/15/17 $ 658,076 Aaa/AAA 2,700,000 Brea Public Financing Auth. Rev., (Project Area AB Series 1991), (MBIA) ........................... 7.000 08/01/15 2,946,051 Aaa/AAA 1,300,000 California Educational Facility Auth. Rev., (Stanford University Series I) ....................................................... 7.125 01/01/19 1,392,638 Aaa/AAA 6,000,000 California Educational Facility Auth. Rev., (Santa Clara University), (MBIA) ............................... 6.250 02/01/16 6,191,580 Aaa/AAA 2,000,000 California Educational Facility Auth. Rev., (University of Redlands) ...................................................... 6.000 10/01/25 1,952,860 A/NR 2,000,000 California Educational Facility Auth. Rev., (Loyola Marymount University) .................................................... 5.750 10/01/24 1,902,480 A1/NR 4,000,000 California Educational Facility Auth. Rev., (Pooled College & University PJS) ................................................ 5.600 12/01/20 3,755,280 A/NR 5,000,000 California Health Facilities Financing Auth. Rev., (Mills Hospital Series B), (Connie Lee) ......................... 5.750 01/15/15 4,913,400 NR/AAA 2,500,000 California Health Facilities Financing Auth. Rev., (Adventist Health Series 1985 A), (MBIA) ........................ 6.750 03/01/14 2,695,050 Aaa/AAA 2,775,000 California Health Facilities Financing Auth. Rev., (Episcopal Homes Series A) ...................................... 7.800 07/01/15 2,976,104 NR/A 1,500,000 California Health Facilities Financing Auth. Rev., (H.M. Newhall Memorial Hospital Series 1988 A) .................. 8.000 10/01/18 1,625,820 NR/A 6,420,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanete) ...................................................... 7.000 10/01/18 6,890,008 Aa3/AA 3,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente Series A) .................................... 5.930** 10/01/09 1,396,380 Aa3/AA 4,915,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanete Series A) ..................................... 6.500 12/01/20 5,081,029 Aa3/AA 2,000,000 California Health Facilities Financing Auth. Rev., (Series A) ...... 6.750 03/01/20 2,084,040 NR/A 1,730,000 California Health Facilities Financing Auth. Rev., (Gould Medical Series A) ....................................................... 7.300 04/01/20 1,957,547 NR/A 5,165,000 California Health Facilities Financing Auth. Rev., (St. Francis Memorial Hospital Series C) ........................ 5.875 11/01/23 5,049,407 A/NR 2,000,000 California Housing Finance Agency Rev., (Home Mortgage Series 1987 A) ................................... 8.200 08/01/17 2,083,540 Aa/AA- 5,125,000 California Housing Finance Agency Rev., (Home Mortgage Series 1994 G) ................................... 7.250 08/01/17 5,460,278 Aa/AA-
51
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 1,150,000 California Housing Finance Agency Rev., (Home Mortgage Series C) ........................................ 6.800% 08/01/17 $ 1,199,611 Aa/AA- 1,400,000 California Housing Finance Agency Rev., (Multi-Unit) ............... 6.750 02/01/09 1,409,674 A1/A+ 1,290,000 California Housing Finance Agency Rev., (Multi-Unit Rental) ........ 6.875 02/01/22 1,299,623 A1/A+ 1,500,000 California Pollution Control Rev., (Southern California Edison Series D) ........................... 6.850 12/01/08 1,593,150 A2/A+ 1,000,000 California State Franchise Tax Board Certificates of Participation . 6.900 10/01/06 1,065,350 A/A- 1,000,000 California State Public Works Board Lease Rev., (University of California Project) .............................. 6.625 12/01/19 1,064,170 A1/A 2,500,000 California State Public Works Board Lease Rev., (Department of Corrections State Prisons Series A), (AMBAC) ..... 5.000 12/01/19 2,268,400 Aaa/AAA 1,150,000 California State Public Works Board Lease Rev., (Department of Corrections State Prisons Series A), (AMBAC) ..... 5.250 12/01/13 1,098,998 Aaa/AAA 3,500,000 California State Public Works Board Lease Rev., (University Series 1992 A) ..................................... 6.700 10/01/17 3,704,260 A/A 4,500,000 California Statewide Community Development Auth., Certificate of Participation, (United Medical Center) ........... 6.750 12/01/21 4,723,875 NR/A 3,000,000 California State G.O., (AMBAC) ..................................... 6.125 10/01/11 3,211,080 Aaa/AAA 1,410,000 California State G.O., (New Prison Construction), (Series 1984 B) ..10.000 08/01/03 1,826,162 A1/A+ 17,000,000 California State Public Works Board Lease Rev., (Department of Corrections), (FSA) .............................. 5.250 06/01/15 16,077,410 Aaa/AAA 4,000,000 California Statewide Community Development Auth. Certificates of Participation, (Sisters of Charity Leavenworth) . 5.000 12/01/23 3,402,160 Aa/AA 5,695,000 Capistrano California School District Special Tax, (Refunding Issue 1988-1), (FSA) ................................. 6.500 09/01/14 6,161,876 Aaa/AAA 1,000,000 Coachella Valley Water District #71 Certificates of Participation, (Flood Control Project) .......................... 6.750 10/01/12 1,056,270 A/NR 8,000,000 Compton Redevelopment Agency Tax Allocation, (Series 1995 A), (FSA) 6.500 08/01/13 8,605,520 Aaa/AAA 2,580,000 Concord Joint Power Financing Auth. Lease Rev., (Police Facilities Project), (Series 1993) ...................... 5.250 08/01/13 2,387,609 A/NR 2,510,000 Fontana Public Financing Auth., Tax Allocation, (Series 1993 A), (MBIA) .......................................................... 5.000 09/01/20 2,232,243 Aaa/AAA 1,900,000 Irvine Ranch Water District Joint Powers Agency Rev., (GIC) ........ 7.875 02/15/23 1,982,232 NR/A+ 5,000,000 Irvine Ranch Water District Joint Powers Agency Rev., (GIC) ........ 7.800 02/15/08 5,224,850 NR/A+ 1,815,000 Kern County High School District G.O., (MBIA) ...................... 7.150 08/01/14 2,131,663 Aaa/AAA
52
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 2,125,000 Laverne Regional Development Agency Certificates of Participation, (Series 1988), (BIGI) ........................ 7.450% 11/01/18 $ 2,306,135 Aaa/AAA 3,555,000 Long Beach California Water Rev. ................................... 6.125 05/01/19 3,590,763 Aa/AA 1,000,000 Los Angeles California Municipal Lease Rev., (Central Library Project Series A) .............................. 7.100 06/01/10 1,089,520 NR/A+ 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., (Series A), (AMBAC) .............................. 6.450 07/01/17 3,576,540 Aaa/AAA 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., (Series A) ...................................................... 7.400 07/01/15 3,255,450 A1/AA- 4,050,000 Los Angeles County Transportation Commission Sales Tax Rev., (Capital Appreciation Series A), (MBIA) ......... 5.220** 07/01/02 2,915,150 Aaa/AAA 5,000,000 Los Angeles Department of Water & Power Electric Rev., (MBIA) ...... 4.750 11/15/19 4,235,900 Aaa/AAA 1,000,000 Los Angeles Transportation Sales Tax Rev., (MBIA) .................. 6.500 07/01/13 1,065,820 Aaa/AAA 2,420,000 Los Angeles Waste Water System Rev., (Series C) .................... 6.900 06/01/09 2,594,748 A1/A 3,050,000 Los Angeles Waste Water System Rev., (Series C) .................... 7.100 06/01/18 3,266,154 A1/A 1,865,000 Mendocino Coast Health Care Facility District Rev. ................. 5.875 02/01/20 1,782,772 NR/A+ 2,650,000 Metropolitan Water District of Southern California Rev. ............ 6.625 07/01/12 2,922,023 Aa/AA 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., (San Juan Project Series D), (MBIA) ....................... 6.750 07/01/20 6,609,646 Aaa/AAA 1,000,000 Moulton-Niguel California Water District G.O., (MBIA) .............. 5.000 09/01/19 884,630 Aaa/AAA 4,875,000 Northern California Power Agency Public Power Rev., (Hydroelectric Project #1) ..................................... 7.150 07/01/24 5,112,218 A/A- 3,000,000 Oakland California Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), (AMBAC) ....... 5.500 02/01/14 2,942,250 Aaa/AAA 5,150,000 Open Space District Midpeninsula G.O., (Santa Clara/San Mateo Counties) ............................... 7.000 09/01/14 5,558,086 NR/A+ 1,500,000 Orange County West Valley Detention Center Certificates of Participation, Prerefunded at 102% of par ....................... 7.625 06/01/99 1,650,795 NR/NR*** 4,750,000 Orange County Certificates of Participation (Civic Center Expansion), (AMBAC) .............................. 6.700 08/01/18 5,269,080 Aaa/AAA 1,350,000 Orange County Improvement Bonds (Assessment District # 88-1) ....... 3.650 09/03/96* 1,350,000 VMIG1/A1+ 3,000,000 Orange County Water District Certificates of Participation (Series 1989), (AMBAC) ......................................... 6.500 08/15/11 3,177,930 Aaa/AAA 1,630,000 Perris California Public Financing Auth. Local Agency Rev. (Series F) ..................................................... 5.650 09/01/11 1,604,115 Aaa/AAA
53
Schedule of Investment Securities--Tax-Free Long-Term Fund (Continued) ==================================================================================================================================== Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 5,750,000 Riverside County Transportation Auth. Sales Tax Rev., (Series A), Prerefunded at 102% of Par ......................... 6.500% 06/01/01 $ 6,318,043 Aaa/AAA 1,000,000 Sacramento Financing Auth. Lease Rev., (Series A), (AMBAC) ......... 5.375 11/01/14 963,980 Aaa/AAA 4,590,000 Sacramento California Schools Auth. Rev., (Workers Compensation Program C), Escrowed to Maturity ................................ 5.750 06/01/03 4,797,422 NR/AAA 3,500,000 San Diego County Regional Transportation Sales Tax Rev., (Series A), Escrowed to Maturity ...................... 5.100** 04/01/04 2,388,645 Aaa/AA- 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev.,(FSA) ... 6.750 07/01/15 1,093,360 Aaa/AAA 3,000,000 San Jose California Financing Auth. Rev., (Convention Center Project Series C) ............................ 6.375 09/01/13 3,055,830 A1/A+ 5,000,000 San Jose California Financing Auth. Rev., (Central Service Yard Series D) ................................. 5.250 10/15/23 4,448,500 A1/A+ 5,500,000 San Jose California Financing Auth. Rev., (Community Facilities Project Series B) ......................... 5.625 11/15/18 5,212,680 A/A+ 3,475,000 San Mateo Joint Power Finance Auth. Lease Rev., (MBIA) ............. 6.500 07/01/16 3,800,225 Aaa/AAA 4,000,000 San Mateo Joint Power Finance Auth. Lease Rev., (Capital Projects Program), (MBIA) ............................. 6.000 07/01/19 4,123,320 Aaa/AAA 3,500,000 Santa Ana Finance Auth. Lease Rev., (MBIA) ......................... 6.250 07/01/15 3,722,320 Aaa/AAA 3,260,000 Southern California Public Power Auth. Rev., (Series 1989) ......... 6.000 07/01/18 3,203,276 A/A 7,315,000 Southern California Public Power Auth. Rev., (Series 1989) ......... 6.750 07/01/12 8,120,601 A/A 5,000,000 Southern California Public Power Auth. Rev., (Series A) ............ 5.500 07/01/12 4,848,050 A1/AA- 1,425,000 Southern California Public Power Auth. Rev., (Transportation Auth. Project Series) ........................... 7.000 07/01/09 1,524,864 A/A 3,730,000 Southern California Public Power Auth. Rev., (Multipurpose Projects Series 1989) ............................. 6.750 07/01/13 4,139,255 A/A 3,000,000 Southern California Public Power Auth. Rev., (Series A), (AMBAC) ... 5.170** 07/01/04 2,010,990 Aaa/AAA 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., (Series A), (MBIA) ........................... 7.000 09/01/11 2,302,660 Aaa/AAA 3,020,000 Watsonville California Community Hospital Rev., (Series A) ...................................................... 6.200 07/01/12 3,099,577 NR/A - ------------ ------------ 269,670,000 Total Municipal Securities .............................................................. 270,671,077 - ------------ ------------
54
Schedule of Investment Securities--Tax-Free Intermediate-Term Fund (Continued) ==================================================================================================================================== MUNICIPAL DERIVATIVES-5.1% Value Rating Face Value Issue Coupon Maturity (Note 1) Moody's/S&P - ---------- ------------------------------------------------------------------- ------ -------- -------- ----------- $ 8,000,000 Metropolitan Water District of Southern California Rev., Inverse Floater1 .......................................... 5.750% 08/10/18 $ 7,862,720 Aa/AA 4,000,000 Northern California Transmission Rev., Inverse Floater1, (MBIA) .... 6.821 04/29/24 3,400,000 Aaa/AAA 3,400,000 San Diego County Certificates of Participation, Inverse Floater1 .. 5.485 09/01/12 3,362,906 Aaa/AAA - ------------ ------------ 15,400,000 Total Municipal Derivatives ............................................................ 14,625,626 - ------------ ------------ $285,070,000 Total Investment Securities (cost $276,356,268) ........................................ $285,296,703 ============ ============ - --------------------------- 1 Inverse floaters bear interest rates that move inversely to market interest rates. Inverse floaters typically have durations twice as long as long-term bonds, which may cause their values to be twice as volatile as long-term bonds when market interest rates change. The California Long-Term Fund is limited to 10% of its net assets in inverse floaters. * These variable interest rate securities have maturities greater than one year but are redeemable upon demand. For purposes of calculating the Fund's weighted average maturity, the length to maturity of these investments is considered to be the greater of the period until the interest rate is adjusted or until the principal can be recoverd by demand. ** These securities are zero-coupon municipal bonds. The yield to maturity at current market value is shown instead of a stated coupon rate. Zero-coupon securities are purchased at a substantial discount from their value at maturity. *** Prerefunded with U.S. government securities, not re-rated. AMBAC = AMBAC Indemnity Corp. BIGI = Bond Investor's Guaranty, Inc. FGIC = Financial Guaranty Insurance Company FSA = Financial Security Association GO = General Obligation MBIA =Municipal Bond Insurance Association NR = Not Rated PORTFOLIO COMPOSITION BY MARKET SECTOR Certificates of Participation .. 20.5% Water/Sewer ................. 6.5% Hospital ....................... 15.8 Higher Education ............ 6.3 Prerefunded .................... 8.8 Other ....................... 18.7 GICs ........................... 8.4 ______ Tax Allocation ................. 7.6 TOTAL .......................100.0% Electric ....................... 7.4 ______ ------
55 [This page intentionally left blank] 56 TRUSTEES James M. Benham Albert A. Eisenstat Ronald J. Gilson Myron S. Scholes Kenneth E. Scott Ezra Solomon Isaac Stein James E. Stowers, III Jeanne D. Wohlers OFFICERS James M. Benham Chairman of the Board Maryanne Roepke Treasurer and Chief Financial Officer Douglas A. Paul Vice President, Secretary and General Counsel Ann N. McCoid Controller Twentieth Century Mutual Funds and The Benham Group - ------------------------------ P.O. Box 419200 o Kansas City, Missouri 64141-6200 Person-to-person assistance: 1-800-345-2021 or 816-531-5575 Internet: http://www.twentieth-century.com For more information on risks, management fees and expenses, call 1-800-345-2021 for a free prospectus. Read the prospectus carefully before investing or sending money. (C) 1996 Twentieth Century Services, Inc. Twentieth Century Securities, Inc. BN-BKT-6001 10/96 -----END PRIVACY-ENHANCED MESSAGE-----