- --------------------------------------------------------------------------------
[Photo] [Photo]
Michael M. Spencer Paul Marandett
Director of Fixed Portfolio Manager
Income Investments
[LOGO] TO OUR SHAREHOLDERS
At the end of 1995, prospects were bright for the fixed income markets. The
Federal Reserve had just lowered the Federal Funds rate (the overnight borrowing
rate charged by U.S. banks) to 5.50% and was widely expected to continue to
lower rates. The economy, beset by government shutdowns and severe winter
weather, was growing very slowly with no signs of any increase in inflation on
the horizon. Indeed, in January, the Federal reserve fulfilled the expectations
of many by lowering the Federal Funds rate to 5.25%, where it still remains at
the end of June.
However, the benign outlook for yields has changed. Economic growth which has
been faster than expected has led market participants to expect no further
easing from the Federal Reserve. In fact, many, including the Freedom Group of
Money Funds, expect that next move by the Federal Reserve to be to increase
rates sometimes in the third quarter of this year. As you will see in the
individual Fund summaries listed below, this has led us to shorten the average
maturity of the Freedom Group of Money Funds in anticipation of somewhat higher
short-term rates later in the year.
In one respect, however, the first half of 1996 has been quite similar to 1995.
In 1995 long-term yields showed a great deal of change which short-term yields
were stable. 1996 has seen the same thing occur. At the beginning of the year
the yield on a 91 day Treasury Bill stood at 5.07%. As of the end of June the
yield was higher, but not a great deal so at 5.19%. Long-term yields during the
same period have gone from 5.95% to 6.91%, and intermediate-term yields have
gone from 5.37% to 6.50%.
As we look to the second half of 1996 we anticipate that short-term yields will
begin to raise as the Federal Reserve needs to reassert its credentials as an
institution interested in price stability. Whereas at the end of last year we
were concerned that the markets had become too optimistic regarding the
direction of Federal Reserve policy, we now believe it likely that once the
Federal Reserve does begin to raise rates the markets could well become too
pessimistic and will be looking for opportunities to lock in higher rates once
they occur. As always we will continue to maintain the highest quality
investments in the Freedom Group of Money Funds.
Tax Exempt Money Fund yields were relatively high as we began 1996. The yield on
the Freedom California Tax Exempt Money Fund stood at 3.89% which was
approximately 77% of taxable yields. Yield levels at that time, however, were
more a result of year-end portfolio repositioning than economic conditions.
Indeed, the economy at year-end seemed to be slowing thus causing the Federal
Reserve to lower the Federal Funds rate at the end of January. This action
caused a sharp decline in money fund rates, almost 100 basis points in the tax
exempt sector.
Yields in this sector were somewhat more volatile during the first half of the
year due to seasonal supply pressures as well as the many economic uncertainties
effecting the securities markets. Proposed changes to our tax system, which
greatly effected the municipal securities markets last year, have not been a
topic so far this year. That could change as we near election time but it seems
unlikely that any radical changes to the tax codes will be offered by either
political party. At this time we are primarily concerned with supply constraints
and the overall strength of the economy as factors most effecting the tax exempt
sector.
Lack of supply in the short-term municipal market has resulted in comparatively
low yields; 3-month, 6-month and one year tax exempt yields are all
approximately 66.3% of taxable yields. At the same time, however, we anticipate
the Federal Reserve Board's next move will be to tighten, or raise short-term
interest rates, in reaction to the recently displayed economic growth. At this
time of the fiscal year most California municipalities issue twelve month notes
which are used to ameliorate cash flow problems caused by uneven revenue
collections. We expect to "roll over" some of our maturing notes during this
period but we will continue to maintain a shorter maturity than the average of
California money funds. We expected to lengthen the Fund's maturity later in the
year after interest rates have increased. We will also continue our analytical
efforts to maintain the highest credit quality of the Freedom California Tax
Exempt Money Fund.
Sincerely,
/s/ Michael M. Spencer
Michael M. Spencer
Director of Fixed Income Investments
/s/ Paul Marandett
Paul Marandett
Portfolio Manager
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
INVESTMENTS AS OF JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION VALUE
<S> <C> <C>
SHORT TERM MUNICIPAL
SECURITIES -- 109.8%
$2,290,000 Alameda County Mortgage Notes (Quail Run
Apts.) (FNMA-Insured) 3.10% 7-03-96 $ 2,290,000
2,100,000 Alameda County TRANS 4.50% 6-30-97 2,111,046
1,300,000 Anaheim MFHA (Harbor Cliff) (Bank of America
LOC) 2.90% 7-05-96 1,300,000
California School Cash Reserve Program
2,000,000 (MBIA-Insured) 4.75% 7-03-96 2,000,105
3,000,000 4.75% 7-02-97 3,025,920
California Statewide CDA
3,000,000 (FNMA Insured) 3.25% 7-03-96 3,000,000
4,300,000 (Dresdner LOC) 3.30% 7-01-96 4,300,000
3,000,000 (Kaiser Permanente) 3.00% 7-03-96 3,000,000
1,500,000 California HFA Revenue Bonds (Catholic West
B) (MBIA/Rabobank LOC) 3.00% 7-03-96 1,500,000
3,100,000 California HFA Revenue Bonds (Catholic West
C) (MBIA/Morgan Guaranty LOC) 3.00% 7-03-96 3,100,000
1,000,000 California HFA Revenue Bonds (Kaiser
Permanente) 3.00% 7-03-96 1,000,000
500,000 California HFA Revenue Bonds (Pooled Loan
Program) Series 90A (Swiss Bank LOC) 2.80%
7-03-96 500,000
500,000 California PCFA Revenue Bonds (Chevron) 3.70%
5-15-97 500,000
California PCFA Revenue Bonds (Pacific Gas
& Electric)
1,400,000 (Credit Suisse LOC) 3.20% 7-25-96 1,400,000
1,000,000 (Credit Suisse LOC) 3.60% 7-31-96 1,000,000
1,000,000 (United Bank of Switzerland LOC) 3.30% 8-02-96 1,000,000
$1,000,000 California PCFA Revenue Bonds (San Diego Gas
& Electric) 4.00% 9-01-96 $ 1,000,000
1,000,000 California PCFA Revenue Bonds (Shell Oil)
3.00% 7-01-96 1,000,000
1,350,000 California PCFA Revenue Bonds (Southern
California Edison Company) 3.60% 7-23-96 1,350,000
2,000,000 City of Santa Clara Electric Revenue (National
Westminster LOC) 3.20% 7-03-96 2,000,000
1,750,000 Contra Costa County TRANS 4.50% 7-03-96 1,750,078
1,000,000 County of Sacramento MFHA Revenue Bonds
(Grouse Run) (Bank of America LOC) 3.10%
7-05-96 1,000,000
1,300,000 Duarte Redevelopment Agency (Bank of America
LOC) 3.20% 7-05-96 1,300,000
3,000,000 Foothill/Eastern Transportation Agency
(Morgan Guaranty LOC) 3.00% 7-05-96 3,000,000
1,800,000 Independent Cities (National Westminster LOC)
3.20% 7-03-96 1,800,000
2,000,000 Irvine Assessment District Improvement Bonds
(Kredeitbank NV LOC) 3.30% 7-01-96 2,000,000
Irvine Ranch Water District Revenue Bonds
1,800,000 (Bank of America LOC) 3.30% 7-01-96 1,800,000
1,000,000 (Commerzbank LOC) 3.30% 7-01-96 1,000,000
2,000,000 (Landesbank Hessen LOC) 3.30% 7-01-96 2,000,000
3,900,000 Kern County U.H.S.D. (UBS LOC) 3.00% 7-03-96 3,900,000
3,100,000 Los Angeles County IDA, (Hon Industries
Project) (Morgan Guaranty LOC) 3.05% 7-03-96 3,100,000
3
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
INVESTMENTS AS OF JUNE 30, 1996 - (CONTINUED)
(UNAUDITED)
PRINCIPAL
AMOUNT DESCRIPTION VALUE
$2,000,000 Los Angeles County Pension Obligation Bonds
(AMBAC-Insured/Bank of Nova Scotia LOC)
3.15% 7-03-96 $ 2,000,000
1,000,000 Los Angeles County TRANS 4.50% 7-01-96 1,000,000
Los Angeles USD TRANS
3,000,000 4.50% 7-03-96 3,000,119
1,500,000 4.50% 6-30-97 1,510,080
3,300,000 Mountainview Housing Authority (Villa
Mariposa Project) (FGIC-SPI) 3.00% 7-05-96 3,300,000
1,900,000 Orange County Sanitation District (Societe
Generale LOC) 3.30% 7-01-96 1,900,000
5,200,000 Palm Springs Community Redevelopment Agency
(Citibank LOC) 3.30% 7-03-96 5,200,000
2,000,000 Riverside County Certificates of
Participation (National Westminster LOC)
2.95% 7-02-96 2,000,000
2,000,000 Riverside County TRANS 4.50% 6-30-97 2,011,500
Sacramento Municipal Utilities District
(Bayerische Landesbank Girocentrale LOC)
1,000,000 3.25% 7-12-96 1,000,000
1,400,000 3.30% 8-12-96 1,400,000
San Diego County TRANS
1,000,000 4.50% 9-30-96 1,002,487
3,000,000 4.50% 7-02-97 3,021,660
300,000 San Jose Housing Revenue (Foxchase Apts.) 300,000
(FGIC-SPI Insured) 3.00% 7-05-96
500,000 San Jose MFHA (Fairway Glen Apts.) (FGIC-SPI
Insured) 3.00% 7-05-96 500,000
3,000,000 Santa Clara County Financing Authority (UBS
LOC) 3.00% 7-03-96 3,000,000
4,000,000 Santa Clara County MFHA (Foxchase Apts.)
(FGIC-SPI Insured) 3.00% 7-05-96 4,000,000
$1,000,000 Santa Cruz County TRANS 4.50% 7-11-96 $ 1,000,269
2,000,000 Simi Valley Housing Authority (Bank of America
LOC) 2.90% 7-05-96 2,000,000
Southern California Public Power District
1,000,000 6.00% 7-01-96 1,000,000
1,295,000 8.125% 7-01-96 1,333,850
4,000,000 Southern California Public Power District
Bonds 3.10% 7-03-96 4,000,000
2,000,000 Tahoe-Truckee USD 4.70% 9-05-96 2,004,774
1,510,000 University of California 8.00% 11-01-96 1,562,591
2,485,000 Vallejo County Housing Authority (FNMA
Insured) 3.10% 7-03-96 2,485,000
2,000,000 West Basin Municipal Water District 3.45%
8-06-96 2,000,000
---------
TOTAL INVESTMENTS -- 109.8% ................................. $112,559,479(a)
Other Assets & Liabilities, Net -- (9.8%) ................... (10,015,310)
-----------
TOTAL NET ASSETS -- 100.0% .................................. $102,544,169
============
Legend:
CDA -- Communities Development Authority
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
LOC -- Letter of Credit
MFHA -- Multifamily Housing Authority
PCFA -- Pollution Control Finance Authority
TRANS -- Tax and Revenue Anticipation Notes
UBS -- United Bank of Switzerland
USD -- Unified School District
VRD -- Variable Rate Demand
Insurance Abbreviations:
FGIC -- Federal Guaranty Insurance Corporation
FGIC-SPI -- Federal Guaranty Insurance Corporation-
Securities Purchased Inc.
FNMA -- Federal National Mortgage Association
MBIA -- Municipal Bond Investors Assurance
Maturity dates for many bonds and notes represent the next scheduled date
at which the interest rate may be adjusted or a "demand" or "put" feature
may be exercised.
(a) Cost for tax purposes is the same.
See Notes to Financial Statements
</TABLE>
4
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at amortized cost $112,559,479
Cash 488,661
Receivable for Fund shares sold 501,396
Interest receivable 887,606
Prepaid expenses 1,201
Other assets 696
-----------
114,439,039
-----------
LIABILITIES
Payable for Investments purchased 11,680,206
Payable for Fund shares redeemed 53,194
Dividends payable 116,930
Accrued expenses:
Investment adviser's fee 29,789
Shareholder servicing fee 10,305
Trustees' fee 4,446
-----------
11,894,870
-----------
NET ASSETS $102,544,169
============
NET ASSETS CONSIST OF:
Capital paid in $102,541,961
Accumulated net realized gain 2,208
-----------
$102,544,169
============
SHARES ISSUED AND OUTSTANDING (UNLIMITED SHARES AUTHORIZED) 102,541,961
-----------
NET ASSET VALUE PER SHARE $ 1.00
===========
</TABLE>
See Notes to Financial Statements
5
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
INTEREST INCOME $ 1,601,877
-----------
EXPENSES
Investment adviser's fee 241,290
Transfer agent and shareholder services 24,115
Custodian 1,365
Compensation of Trustees 3,620
Audit 6,385
Legal 3,660
Printing, postage and stationery 8,230
Membership dues 2,248
Registration expense 1,720
Insurance expense 1,936
Other 367
-----------
Total expenses 294,936
Less: fees waived by adviser (72,388)
-----------
222,548
-----------
INVESTMENT INCOME -- NET 1,379,329
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,379,329
==========
</TABLE>
See Notes to Financial Statements
6
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996* DECEMBER 31, 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 1,379,329 $ 2,827,034
Dividends to shareholders (1,379,329) (2,827,034)
---------- ----------
-- --
---------- ----------
FROM CAPITAL TRANSACTIONS:
(At Net Asset Value of $1 per share)
Proceeds from sale of shares 200,019,574 304,441,189
Net asset value of shares issued to
shareholders in reinvestment of
dividends 1,258,670 2,768,062
Cost of shares redeemed (183,938,559) (294,663,687)
---------- ----------
Increase in net assets derived from
capital share transactions 17,339,685 12,545,564
---------- ----------
Net increase in net assets 17,339,685 12,545,564
NET ASSETS:
Beginning of period 85,204,484 72,658,920
---------- ----------
End of period $ 102,544,169 $ 85,204,484
============= =============
DIVIDENDS TO SHAREHOLDERS PER SHARE $ 0.0142 $ 0.0325
============= =============
- --------------
* Unaudited
</TABLE>
See Notes to Financial Statements.
7
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
(A SERIES OF FREEDOM GROUP OF TAX EXEMPT FUNDS)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES. The Freedom Group of Tax Exempt Funds (the
"Trust") is a Massachusetts business trust registered under the Investment
Company Act of 1940, as amended, as an open-end management company. The
Agreement and Declaration of Trust permits the issuance of an un-limited number
of shares of beneficial interest in separate series, with shares of each series
representing interests in a separate portfolio of assets and operating as a
separate distinct fund. The Trust consists of two series: the Freedom California
Tax Exempt Money Fund (the "Fund") and the Freedom Tax Exempt Money Fund. The
financial statements of the Freedom Tax Exempt Money Fund are included in a
separate semi-annual report for that Fund.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security Valuation and Transactions. The Fund values its portfolio
securities utilizing the amortized cost valuation method. This method involves
valuing a portfolio security at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. Cost is determined and
gains and losses are based upon the specific identification method for both
financial statement and federal income tax purposes. Investment securities
transactions are accounted for on the date the securities are purchased or sold.
The Fund may purchase or sell securities on a when-issued basis. Payment and
delivery may take place more than a week after the date of the transaction. The
price that will be paid for the underlying securities is fixed at the time the
transaction is negotiated.
Expenses. The majority of the expenses of the Trust are directly
identifiable to an individual fund. Expenses which are not readily identifiable
as belonging to a specific fund are allocated in such manner as deemed equitable
by the Trustees, taking into consideration, among other things, the nature and
type of expense and the relative size of the funds.
Trustees' fees of $6,000 per year, plus $250 per meeting of the Board of
Trustees and $350 per meeting of any committee thereof, are paid by the Trust to
each Trustee who is not an interested person of the Trust. No remuneration is
paid by the Trust to any Trustee or officer of the Trust who is affiliated with
Freedom Capital Management Corporation, the Trust's adviser.
The Trust has entered into an insurance agreement with ICI Mutual Insurance
Company, under which the Trust pays both an annual insurance premium and a
one-time reserve premium, and is committed to provide additional funds of up to
300% of its initial annual premium if and when called upon.
8
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
(A SERIES OF FREEDOM GROUP OF TAX EXEMPT FUNDS)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Federal Income Tax. It is the Fund's policy to comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its income to its shareholders. It is also the intention of
the Fund to make sufficient distributions to shareholders to avoid imposition of
excise tax on undistributed amounts under the Internal Revenue Code. Therefore,
no federal income or excise tax provision is required.
Interest Income and Dividends to Shareholders. Interest income is accrued as
earned. Dividends to shareholders are declared daily from net investment income,
which consists of interest accrued or discount earned (including original issue
and market discount) less amortization of premium and the estimated expenses of
the Fund applicable to the dividend period.
Other. There are certain risks arising from geographic concentration in any
state. Certain revenue or tax related events in a state may impair the ability
of certain issuers of municipal securities to pay principal and interest on
their obligations. The Fund may focus its investments in certain industries. As
a result, the Fund may be subject to a greater risk than a fund that is more
fully diversified in various industries.
NOTE 2. INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS.
Freedom Capital Management Corporation ("FCMC") is the investment advisor of the
Trust and also furnishes the Fund with administration and other services and
office facilities in Boston. For these services and facilities, the Fund pays a
monthly fee, based upon the average daily net asset value of the Fund, at the
annual rate of one half of one percent (.50%) on the first $500 million of
average daily net assets and forty-five hundredths of one percent (.45%) for
average daily net assets in excess of that amount. The Fund itself pays no
salaries or compensation to any of its officers.
The Advisory Agreement provides that if, in any fiscal year, the total
expenses of the Fund (excluding taxes, interest, brokerage commissions and
extraordinary items, but including the management fee) exceed the expense
limitations applicable to the Fund imposed by the securities regulations of any
state in which it is registered to sell shares, the Adviser will pay or
reimburse the Fund for that excess up to the amount of its management fee during
that fiscal year. Although there is no certainty that these limitations will be
in effect in the future, the most restrictive limitation on an annual basis
currently applicable to the Fund is 2.5% of the first $30 million of average
daily net assets, 2.0% of the next $70 million and 1.5% of average daily net
assets over $100 million. Additionally, FCMC may voluntarily waive part or all
of its management fee for a period under the terms of the advisory agreement.
Such waivers were provided to the Fund for the six months ended June 30, 1996
and may be discontinued at any time.
Sutro & Co. Inc. ("Sutro") and Freedom Distributors Corporation act as
distributors of the Fund's shares and receive no compensation for such services.
An affiliate of Sutro, John Hancock Clearing Corporation, received
reimbursements of $10,465 for maintaining and servicing certain shareholder
accounts for the six months ended June 30, 1996.
9
FREEDOM CALIFORNIA TAX EXEMPT MONEY FUND
(A SERIES OF FREEDOM GROUP OF TAX EXEMPT FUNDS)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
John Hancock Investor Services, Inc. ("JHIS"), a wholly owned subsidiary of
the Berkeley Financial Group, an affiliate of FCMC, is transfer agent for the
Fund. JHIS received $13,650 for the six months ended June 30, 1996.
NOTE 3. Purchases and sales (including maturities) of investments for the
six months ended June 30, 1996 were as follows:
Purchases of Investments $ 180,321,196
Sales of Investments $150,970,000
10
OUR FINANCIAL HIGHLIGHTS
The table of FINANCIAL HIGHLIGHTS below represents a summary history of our
operations. The table expresses the information in terms of a single share
outstanding throughout each period:
<TABLE>
<CAPTION>
DIVIDENDS RATIO OF NET
NET ASSET FROM RATIO OF INVESTMENT
VALUE NET NET NET ASSET NET ASSETS EXPENSES INCOME
BEGINNING INVEST- INVEST- VALUE END TO AVERAGE TO AVERAGE
OF MENT MENT END OF TOTAL OF PERIOD DAILY DAILY
PERIOD ENDED PERIOD INCOME INCOME PERIOD RETURN** (THOUSANDS) NET ASSETS NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1996++ $1.00 $0.0142 $(0.0142) $1.00 1.43% $102,544 0.46%(a)+ 2.86%(a)+
December 31, 1995 1.00 0.0325 (0.0325) 1.00 3.29% 85,204 0.47% 3.25%(a)
December 31, 1994 1.00 0.0228 (0.0228) 1.00 2.32% 72,659 0.46% 2.28%(a)
December 31, 1993 1.00 0.0195 (0.0195) 1.00 1.96% 90,479 0.33% 1.95%(a)
December 31, 1992 1.00 0.0241 (0.0241) 1.00 2.45% 67,929 0.29% 2.41%(a)
December 31, 1991 1.00 0.0388 (0.0388) 1.00 3.94% 50,005 0.27% 3.89%(a)
December 31, 1990* 1.00 0.0183 (0.0183) 1.00 1.84% 32,381 0.34% 5.28%(a)+
- --------------
+ Annualized.
++ Unaudited.
(a) Net of fees waived by the Adviser which amounted to $.0015, $.0018,
$.0020, $.0028, $.0033, $.0042 and $.0017 per share, respectively.
* From commencement of operations, August 27, 1990.
** Total return would have been lower had the Advisor not waived fees.
Periods less than a year are not annualized.
</TABLE>
11
NO SALES OR REDEMPTION CHARGES
DISTRIBUTORS
Sutro & Co. Incorporated
201 California Street
San Francisco, California 94111
Freedom Distributors Corporation
One Beacon Street
Boston, Massachusetts 02108-3105
Telephone Toll Free
800-453-8206
INVESTMENT ADVISER
Freedom Capital Management Corporation
One Beacon Street
Boston, Massachusetts 02108-3105
TRANSFER AND SHAREHOLDER
SERVICES AGENT
John Hancock Investor
Services Corporation
P.O. Box 9102
Boston, Massachusetts 02205-9102
Telephone Toll Free
800-257-3336
[LOGO] FREEDOM
GROUP OF MONEY FUNDS
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus for the Freedom
California Tax Exempt Money Fund.
FCTSA 0696
--FREEDOM--
CALIFORNIA
[LOGO]
TAX EXEMPT
MONEY FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
