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CALIFORNIA MONEY FUND
and
CALIFORNIA INTERMEDIATE MUNICIPAL FUND
Investment Portfolios Offered By
Municipal Fund for California Investors, Inc.
Statement of Additional Information
May 31, 1995
(as revised August 9, 1995)
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Table of Contents
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THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . 2
MUNICIPAL OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . 8
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . 30
MANAGEMENT OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . 35
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . 43
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 55
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . FS-1
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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This Statement of Additional Information is meant to be read
in conjunction with the Prospectuses for California Money Fund and California
Intermediate Municipal Fund dated May 31, 1995, and is incorporated by
reference in its entirety into those Prospectuses. Because this Statement of
Additional Information is not itself a prospectus, no investment in shares of
California Money Fund or California Intermediate Municipal Fund should be made
solely upon the information contained herein. Copies of the Prospectuses for
California Money Fund and California Intermediate Municipal Fund may be
obtained by calling 800-821-7432. Capitalized terms used but not defined
herein have the same meanings as in the Prospectuses.
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THE COMPANY
Municipal Fund for California Investors, Inc. (the "Company")
is a no-load, non-diversified, open-end investment company presently offering
two separate investment portfolios -- California Money Fund ("California Money")
and California Intermediate Municipal Fund ("California Intermediate")
(individually, a "Fund," collectively, the "Funds"). California Money is a
money market fund. Substantially all of California Money's assets are invested
in obligations which have remaining maturities of 13 months or less at the time
of purchase. California Intermediate is an intermediate-term bond fund.
Substantially all of California Intermediate's assets are invested in
tax-exempt obligations having remaining maturities of ten years or less at the
time of purchase. The Funds will not knowingly purchase securities the
interest on which is subject to regular Federal income tax; however, the Funds
may hold uninvested cash reserves pending investment during temporary defensive
periods of, if in the opinion of the Funds' investment adviser, suitable
tax-exempt obligations are unavailable. Although both Funds have the same
investment adviser and comparable investment objectives, their yields normally
will differ due to their differing cash flows and differences in the specific
portfolio securities held.
INVESTMENT OBJECTIVE AND POLICIES
As stated in California Money's Prospectuses, the investment
objective of California Money is to provide investors with as high a level of
current interest income that is exempt from Federal income tax and, to the
extent possible, from California state personal income tax as is consistent
with the preservation of capital and relative stability of principal. The
investment objective of California Intermediate is to provide investors with a
high level of current interest income that is exempt from Federal income tax
and, to the extent possible, from California state personal income tax. The
following policies supplement the description of California Money's and
California Intermediate's investment objectives and policies in their
respective Prospectuses.
Additional Information on Investment Practices.
Variable and Floating Rate Demand Instruments. Variable and
floating rate demand instruments held by California Money may have maturities
of more than 13 months, provided: (i) California Money is entitled to the
payment of principal at any time or during specified intervals not exceeding 13
months, subject to notice of no more than 30 days, and (ii) the rate of
interest on such instruments is adjusted (based upon a pre-selected market
sensitive index such as the prime rate of a major commercial bank) at periodic
intervals not exceeding 13 months.
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In determining California Money's average weighted portfolio maturity and
whether a variable or floating rate demand instrument has a remaining maturity
of 13 months or less, the maturity of each instrument will be computed in
accordance with guidelines established by the Securities and Exchange
Commission (the "SEC").
Variable or floating rate demand instruments held by
California Intermediate may have maturities of more than ten years, provided:
(i) California Intermediate is entitled to the payment of principal, at any
time or during specified intervals within a prescribed period after California
Intermediate's demand for payment, and (ii) the rate of interest on such
instruments is adjusted at periodic intervals according to the terms of the
instrument. In determining California Intermediate's average weighted
portfolio maturity and whether a variable or floating rate demand instrument
has a remaining maturity of 10 years or less, each instrument will be deemed by
California Intermediate to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand.
In determining whether an unrated variable rate demand
instrument is of comparable quality at the time of purchase to instruments with
minimal credit risk, the Funds' investment adviser will consider the earning
power, cash flow and other liquidity ratios of the issuer of the instrument and
will continuously monitor its financial condition. In addition, the Funds
sometimes require that the issuer's obligation to pay the principal of the
instrument be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.
Variable and floating rate notes that do not provide for
payment within seven days may be deemed illiquid and subject to the 10%
limitation on such investments.
California Money and California Intermediate may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. A number of different structures have been used. For example,
interests in long-term fixed-rate Municipal Obligations, held by a bank as
trustee or custodian, are coupled with tender option, demand and other features
when the tax-exempt derivatives are created. Together, these features entitle
the holder of the interest to tender (or put), the underlying Municipal
Obligation to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, Municipal Obligations are represented by
custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option
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to tender the underlying municipal securities at its face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate that would cause the bond, coupled with the tender option, to trade at
par on the date of a rate adjustment. California Money and California
Intermediate may hold tax-exempt derivatives, such as participation interests
and custodial receipts, for Municipal Obligations which give the holder the
right to receive payment of principal subject to the conditions described
above. The Internal Revenue Service has not ruled on whether the interest
received on tax-exempt derivatives in the form of participation interests or
custodial receipts is tax-exempt, and accordingly, purchases of any such
interests or receipts are based on the opinion of counsel to the sponsors of
such derivative securities. Neither a Fund nor its investment adviser will
review the proceedings related to the creation of any tax-exempt derivatives or
the bases for such options.
When-Issued Securities. As stated in the Funds' Prospectuses,
the Funds may purchase Municipal Obligations on a "when-issued" basis (i.e.,
for delivery beyond the normal settlement date at a stated price and yield).
When the Funds agree to purchase when-issued securities, their custodian will
set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and in such a case the
Funds may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of each Fund's commitment. It may be expected that the Funds' net
assets will fluctuate to a greater degree when they set aside portfolio
securities to cover such purchase commitments than when they set aside cash.
Because the Funds will set aside cash or liquid assets to satisfy their
purchase commitments in the manner described, the Funds' liquidity and ability
to manage their portfolios might be affected in the event their commitments to
purchase when-issued securities ever exceeded 25% of the value of their assets.
When the Funds engage in when-issued transactions, they rely
on the seller to consummate the trade. Failure of the seller to do so may
result in the Funds incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
Stand-By Commitments. The Funds may acquire "stand-by
commitments" with respect to Municipal Obligations held in their portfolios.
Under a stand-by commitment, a dealer agrees to purchase at a Fund's option
specified Municipal Obligations at their amortized cost value to such Fund plus
accrued interest, if any. (Stand-by commitments acquired by the Funds may also
be
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referred to as "put" options.) Stand-by commitments may be sold, transferred
or assigned by the Funds only with the underlying instruments.
The Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Funds may pay for a stand-by commitment
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid
in either manner for outstanding stand-by commitments held by a Fund is not
expected to exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the investment adviser's opinion,
present minimal credit risks. In evaluating the creditworthiness of the issuer
of a stand-by commitment, the investment adviser will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
The Funds would acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. Stand-by commitments acquired by the Funds
would be valued at zero in determining net asset value. Where a Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by that Fund.
Portfolio Transactions.
Subject to the general control of the Company's Board of
Directors, PNC Institutional Management Corporation ("PIMC"), the Funds'
investment adviser, is responsible for, makes decisions with respect to and
places orders for all purchases and sales of portfolio securities for the
Funds. Purchases and sales of portfolio securities are usually principal
transactions without brokerage commissions. The cost of securities purchased
from the underwriters includes an underwriting commission or concession, and
the prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down. In transactions with dealers, PIMC seeks to
obtain the best net price and the most favorable execution of orders. To the
extent that the execution and price offered by more than one dealer are
comparable, PIMC may, in its discretion, effect transactions in portfolio
securities with dealers who provide the Company with
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research advice or other services such as information relating to the price of
portfolio securities.
Investment decisions for the Funds are made independently from
those for other investment company portfolios advised by PIMC. Such other
investment company portfolios may invest in the same securities as the Funds.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other investment company portfolios, transactions are
averaged as to price, and available investments allocated as to amount, in a
manner which PIMC believes to be equitable to each investment company
portfolio, including the Funds. In some instances, this investment procedure
may adversely affect the price paid or received by the Funds or the size of the
position obtained for the Funds. To the extent permitted by law, PIMC may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for such other investment companies in order to obtain best
execution.
Portfolio securities will not be purchased from or sold to
PIMC, PNC Bank, National Association ("PNC Bank"), PFPC Inc. ("PFPC"),
Provident Distributors, Inc. ("PDI"), or any affiliated person of any of them
(as such term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")), except to the extent permitted by the SEC. In addition, the
Funds will not purchase Municipal Obligations during the existence of any
underwriting or selling group relating thereto of which PNC Bank is a member,
except to the extent permitted by the SEC. Under certain circumstances, the
Funds may be at a disadvantage because of these limitations in comparison with
other investment company portfolios which have a similar investment objective
but are not subject to such limitations. Furthermore, with respect to such
transactions, securities and deposits, the Funds will not give preference to
Service Organizations with whom the Funds enter into agreements concerning the
provision of support services to customers who beneficially own shares of
California Money Dollar or California Intermuni Dollar ("Dollar shares") or
California Money Plus or California Intermuni Plus ("Plus shares"). See the
Prospectuses, "Management of the Fund--Service Organizations."
The Funds may participate, if and when practicable, in bidding
for the purchase of Municipal Obligations directly from an issuer in order to
take advantage of the lower purchase price available to members of a bidding
group. The Funds will engage in this practice, however, only when PIMC, in its
sole discretion, believes such practice to be otherwise in the Funds'
interests.
The Funds do not intend to seek profits through short-term
trading. The Funds' annual portfolio turnover rate is not expected to have a
material effect on their net income.
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California Money's portfolio turnover is expected to be zero for regulatory
reporting purposes and California Intermuni's portfolio turnover is not
expected to exceed 100%. The portfolio turnover rate for California Intermuni
is disclosed in its Prospectus under "Financial Highlights."
Other Investment Limitations.
The Prospectuses for the Funds set forth certain investment
limitations that may not be changed with respect to California Money or
California Intermediate without the affirmative vote of the holders of a
majority of that Fund's outstanding shares (as defined below under "Additional
Information - Miscellaneous"). Similarly, the following additional investment
limitations may not be changed without such a vote of shareholders.
The Funds may not:
1. Make loans except that the Funds may purchase or hold
debt obligations in accordance with their investment objective, policies and
limitations.
2. Underwrite any issue of securities except to the
extent that the purchase of Municipal Obligations directly from the issuer
thereof in accordance with the Funds' investment objective, policies and
limitations may be deemed to be underwriting.
3. Purchase or sell real estate except that the Funds
may invest in Municipal Obligations secured by real estate or interests
therein.
4. Purchase securities on margin, make short sales of
securities or maintain a short position.
5. Write or sell puts, calls, straddles, spreads or
combinations thereof.
6. Purchase or sell commodities or commodity contracts,
or invest in oil, gas or mineral exploration or development programs.
7. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition or
reorganization.
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MUNICIPAL OBLIGATIONS
In General.
Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities. Private activity
bonds that are issued by or on behalf of public authorities to finance various
privately-operated facilities are included within the term Municipal
Obligations if the interest paid to shareholders is (subject to the Federal
alternative minimum tax) exempt from regular Federal income tax.
California Money may hold tax-exempt derivatives which may be
in the form of tender option bonds, participations, beneficial interests in a
trust, partnership interests or other forms. A number of different structures
have been used. For example, interests in a long-term fixed-rate Municipal
Obligation, held by a bank as trustee or custodian, are coupled with tender
option, demand and other features when the tax-exempt derivatives are created.
Together, these features entitle the holder of the interest to tender (or put)
the underlying Municipal Obligation to a third party at periodic intervals and
to receive the principal amount thereof. In some cases, Municipal Obligations
are represented by custodial receipts evidencing rights to receive specific
future interest payments, principal payments, or both, on the underlying
municipal securities held by the custodian. Under such arrangements, the
holder of the custodial receipt has the option to tender the underlying
municipal securities at its face value to the sponsor (usually a bank or broker
dealer or other financial institution), which is paid periodic fees equal to
the difference between the bond's fixed coupon rate and the rate that would
cause the bond, coupled with the tender option, to trade at par on the date of
a rate adjustment. The Fund may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for Municipal Obligations which
give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor its
investment adviser will independently review the underlying proceedings related
to the creation of any tax-exempt derivatives or the bases for such opinions.
Before purchasing a tax-exempt derivative for the Fund, PIMC is
required by the Fund's procedures to conclude that the
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tax-exempt security and the supporting short-term obligation involve minimal
credit risks and are Eligible Securities under the Fund's Rule 2a-7 procedures.
In evaluating the creditworthiness of the entity obligated to purchase the
tax-exempt security, PIMC will review periodically the entity's relevant
financial information. Currently, the Directors have authorized the purchase
of tax- exempt derivatives by the Fund so long as after any purchase not more
than 15% of the Fund's assets are invested in such securities.
As described in the Prospectuses for the Funds, the two
principal classifications of Municipal Obligations consist of "general
obligation" and "revenue" issues, and the Funds' portfolios may include "moral
obligation" issues, which are normally issued by special purpose authorities.
There are, of course, variations in the quality of Municipal Obligations, both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend upon a variety of factors, including general
money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"),
Fitch Investors Service, Inc. ("Fitch") and Duff & Phelps ("Duff") represent
their opinions as to the quality of Municipal Obligations. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest rate and
rating may have different yields while Municipal Obligations of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to their purchase by the Funds, issues of Municipal Obligations may
cease to be rated or their ratings may be reduced below the minimum rating
required for purchase by the Funds. The Funds' investment adviser will
consider such an event in determining whether the Funds should continue to hold
the obligation.
An issuer's obligations under its Municipal Obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by Federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its Municipal
Obligations may be materially adversely affected by litigation or other
conditions.
Among other types of Municipal Obligations, the Funds may
purchase short-term General Obligation Notes, Tax Anticipation Notes, Bond
Anticipation Notes, Revenue Anticipation
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Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and other forms of
short-term loans. Such instruments are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues. In addition, the Funds may invest in other types of tax-exempt
instruments, including general obligation and private activity bonds, provided
they have remaining maturities of 13 months or less, in the case of California
Money, or ten years or less, in the case of California Intermediate, at the
time of purchase.
Special Considerations Relating to California Municipal Obligations.
Economic Factors. The Governor's 1993-1994 Budget, introduced
on January 8, 1993, proposed general fund expenditures of $37.3 billion, with
projected revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in state
spending.
The Department of Finance of the State of California's May
Revision of General Fund Revenues and Expenditures (the "May Revision"),
released on May 20, 1993, projected the State would have an accumulated deficit
of about $2.75 billion by June 30, 1993, essentially unchanged from the prior
year. The Governor proposed to eliminate this deficit over an 18-month period.
Unlike previous years, the Governor's Budget and May Revision did not calculate
a "gap" to be closed, but rather set forth revenue and expenditure forecasts
and proposals designed to produce a balanced budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed
by the Governor on June 30, 1993, along with implementing legislation. The
Governor vetoed about $71 million in spending.
The 1993-94 Budget Act is predicated on general fund revenues
and transfers estimated at $40.6 billion, $400 million below 1992-93 (and the
second consecutive year of actual decline). The principal reasons for
declining revenue were the continued weak economy and the expiration (or
repeal) of three fiscal steps taken in 1991 -- a half cent temporary sales tax,
a deferral of operating loss carryforwards, and repeal by initiative of a sales
tax on candy and snack foods.
The 1993-94 Budget Act also assumes special fund revenues of
$11.9 billion, an increase of 2.9 percent over 1992- 93.
The 1993-94 Budget Act includes general fund expenditures of
$38.5 billion (a 6.3 percent reduction from projected 1992-93 expenditures of
$41.1 billion), in order to
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keep a balanced budget within the available revenues. The 1993-94 Budget Act
also includes special fund expenditures of $12.1 billion, a 4.2 percent
increase. The 1993-94 Budget Act reflects the following major adjustments:
1. Changes in local government financing to shift about
$2.6 billion in property taxes from cities, counties, special
districts and redevelopment agencies to school and community college
districts, thereby reducing general fund support by an equal amount.
About $2.5 billion is permanent, reflecting termination of the
State's "bailout" of local governments following the property tax cuts
of Proposition 13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties are
offset in part by additional sales tax revenues and mandate relief.
2. The 1993-94 Budget Act keeps K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-93 by
providing schools a $609 million loan payable from future years'
Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692
million of aid to the State from the federal government to offset
health and welfare costs associated with foreign immigrants living in
the State, which would reduce a like amount of General Fund
expenditures. About $411 million of this amount was one-time funding.
Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare
programs and $400 million in support for higher education (partly
offset by fee increases at all three units of higher education) and
various miscellaneous cuts (totalling approximately $150 million) in
State government services in many agencies, up to 15 percent.
5. A 2-year suspension of the renters' tax credit ($390
million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of
payment to the Public Employees Retirement Fund ($339 million) and a
change in accounting for debt service from accrual to cash basis,
saving $107 million.
The 1993-94 Budget Act contains no general fund tax/revenue
increases other than a two-year suspension of the renters' tax credit. The
1993-94 Budget Act suspended the 4 percent automatic reduction trigger, as was
done in 1992-1993, so cuts could be focused.
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Administration reports during the course of the 1993-94 Fiscal
Year indicated that while economic recovery appeared to have started in the
second half of the fiscal year, recessionary conditions continued longer than
had been anticipated when the 1993-94 Budget Act was adopted. Overall,
revenues for the 1993-94 Fiscal Year were about $800 million lower than
original projections, and expenditures were about $780 million higher,
primarily because of higher health and welfare caseloads, lower property taxes
which require greater State support for K-14 education to make up the
shortfall, and lower than anticipated federal government payments for
immigration-related costs. The reports in May and June, 1994, indicated that
revenues in the second half of the 1993-94 Fiscal Year have been very close to
the projections made in the Governor's Budget of January 10, 1994, which is
consistent with a slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the
final June receipts, reported that June revenues were $114 million (2.5
percent) above projection, with final end-of-year results at $377 million
(about 1 percent) above the May Revision projections. Part of this result was
due to end-of-year adjustments and reconciliations. Personal income tax and
sales tax continued to track projections very well. The largest factor in the
higher than anticipated revenues was from bank and corporation taxes, which
were $140 million (18.4 percent) above projection in June. While the higher
June receipts are reflected in the actual 1993-94 Fiscal Year cash flow
results, and help the starting cash balance for the 1994-95 Fiscal Year, the
Department of Finance has not adjusted any of its revenue projections for the
1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the
deficit retirement plan, which was part of the 1993-94 Budget Act, by issuing
$1.2 billion of revenue anticipation warrants in February 1994 maturing
December 21, 1994. This borrowing reduced the cash deficit at the end of the
1993-94 Fiscal Year. Nevertheless, because of the $1.5 billion variance from
the original 1993-94 Budget Act assumptions, the General Fund ended the fiscal
year at June 30, 1994 carrying forward an accumulated deficit of approximately
$2 billion.
Because of the revenue shortfall and the State's reduced
internal borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the State
issued an additional $2.0 billion of revenue anticipation warrants, maturing
July 26, 1994, which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated
6.8 on the Richter Scale struck Los Angeles. Significant property damage to
private and public facilities
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occurred in a four-county area including northern Los Angeles County, Ventura
County, and parts of Orange and San Bernardino Counties, which were declared as
State and federal disaster areas by January 18. Current estimates of total
property damage (private and public) are in the range of $20 billion, but these
estimates are still subject to change.
Despite such damage, on the whole, the vast majority of
structures in the areas, including large manufacturing and commercial buildings
and all modern high-rise offices, survived the earthquake with minimal or no
damage, validating the cumulative effect of strict building codes and thorough
preparation for such an emergency by the State and local agencies.
Damage to state-owned facilities included transportation
corridors and facilities such as Interstate Highways 5 and 10 and State
Highways 14, 118 and 210. Major highways have now been reopened. The campus
of California State University at Northridge (very near the epicenter) suffered
an estimated $350 million damage, resulting in temporary closure of the campus.
It has reopened using borrowed facilities elsewhere in the area and many
temporary structures. There was also some damage to the University of
California at Los Angeles, and to an office building in Van Nuys (now open
after a temporary closure). Overall, except for the temporary road and bridge
closures, and CSU - Northridge, the earthquake did not and is not expected to
significantly affect State government operations.
The State in conjunction with the federal government is
committed to providing assistance to local governments, individuals and
businesses suffering damage as a result of the earthquake, as well as to
provide for the repair and replacement of State-owned facilities. The federal
government provided substantial earthquake assistance.
The President immediately allocated some available disaster
funds, and Congress has approved additional funds for a total of at least $9.5
billion of federal funds for earthquake relief, including assistance to
homeowners and small businesses, and costs for repair of damaged public
facilities. The Governor originally proposed that the State will have to pay
about $1.9 billion for earthquake relief costs, including a 10 percent match to
some of the federal funds, and costs for some programs not covered by the
federal aid. The Governor proposed to cover $1.05 billion of these costs from
a general obligation bond issue which was on the June, 1994 ballot, but it was
not approved by the voters. The Governor subsequently announced that the
State's share for transportation projects would come from existing Department
of Transportation funds (thereby delaying other, non-earthquake related
projects), that the State's share for certain other costs (including local
school building repairs) would come
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from reallocating existing bond funds, and that a proposed program for
homeowner and small business aid supplemental to federal aid would have to be
abandoned. Some other costs will be borrowed from the federal government in a
manner similar to that used by the State of Florida after Hurricane Andrew;
pursuant to Senate Bill 2383, repayment will have to be addressed in 1995-96 or
beyond. The 1995-96 Governor's Budget includes $60 million as the first
repayment of an estimated $121.4 million in loans prior to June 30, 1995.
The 1994-95 Fiscal Year will represent the fourth consecutive
year the Governor and Legislature will be faced with a very difficult budget
environment to produce a balanced budget. Many program cuts and budgetary
adjustments have already been made in the last three years. The Governor's
Budget proposal, as updated in May and June, 1994, recognized that the
accumulated deficit could not be repaid in one year and proposed a two-year
solution. The budget proposal sets forth revenue and expenditure forecasts and
revenue and expenditure proposals which result in operating surpluses for the
budget for both 1994-95 and 1995-96, and lead to the elimination of the
accumulated budget deficit, estimated at about $1.8 billion at June 30, 1994,
by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projects revenues and transfers of $41.9 billion, $2.1 billion higher
than revenues in 1993-94. This reflects the Administration's forecast of an
improving economy. Also included in this figure is a projected receipt of
about $360 million from the Federal Government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994. The
Legislature took no action on a proposal in the January 1994-95 Governor's
Budget to undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the State's
current sales tax.
The 1994-95 Budget Act projects Special Fund revenues of $12.1
billion, a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of
$40.9 billion, an increase of $1.6 billion over 1993- 94. The 1994-95 Budget
Act also projects Special Fund expenditures of $12.3 billion, a 4.7% decrease
from 1993-94 estimated expenditures. The principal features of the 1994-95
Budget Act were the following:.
1. Receipt of additional federal aid in 1994-95 of about
$400 million for costs of refugee assistance and
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medical care for undocumented immigrants, thereby offsetting a similar
General Fund cost. The State will not know how much of these funds it
will receive until the Federal FY 1995 Budget is passed.
2. Reductions of approximately $1.1 billion in health
and welfare costs. A 2.3% reduction in Aid to Family with Dependent
Children payments (equal to about $56 million for the entire fiscal
year) has been suspended by court order.
3. A General Fund increase of approximately $38 million
in support for the University of California and $65 million for
California State University. It is anticipated that student fees for
both the University of California and the California State University
will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased
by $526 million from 1993-94 levels, representing an increase for
enrollment growth and inflation. Consistent with previous budget
agreements, Proposition 98 funding provides approximately $4,217 per
student for K-12 schools, equal to the level in the past three years.
5. Legislation enacted with the Budget clarifies laws
passed in 1992 and 1993 which require counties and other local
agencies to transfer funds to local school districts, thereby reducing
State aid. Some counties had implemented a method of making such
transfers which provided less money for schools if there were
redevelopment agency projects. The new legislation bans this method
of transfer. If all counties had implemented this method, General
Fund aid to K-12 schools would have been $300 million higher in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for
anticipated growth in the State's prison inmate population, including
provisions for implementing recent legislation (the so-called "Three
Strikes" law) which requires mandatory life prison terms for certain
third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund
transfers ($255 million) totalling in the aggregate approximately $755
million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax credit was
suspended for two years (1993 and 1994). A ballot proposition to permanently
restore the renters' tax credit after this year failed at the June, 1994
election. The Legislature enacted a further one-year suspension of the
renters' tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal
Year.
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The 1994-95 Budget assumes that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and two-year
warrants, which have now been issued. Issuance of warrants allows the State to
defer repayment of approximately $1.0 billion of its accumulated budget deficit
into the 1995-96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal
year included the issuance of $4.0 billion of revenue anticipation warrants on
July 26, 1994, to mature on April 25, 1996, as part of a two-year plan to
retire the accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96
Fiscal Year necessarily entails greater risks of variance from assumptions, and
because the Governor's two-year budget plan assumes receipt of a large amount
of federal aid in the 1995-96 Fiscal Year for immigration-related costs which
is uncertain, the Legislature enacted a backup budget adjustment mechanism to
mitigate possible deviations from projected revenues, expenditures or internal
borrowable resources which might reduce available cash resources during the
two-year plan, so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code,
enacted by Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the
State Controller was required to make a report by November 15, 1994 on whether
the projected cash resources for the General Fund as of June 30, 1995 will
decrease more than $430 million from the amount projected by the State in its
official statement in July, 1994 for the sale of $4,000,000,000 of Revenue
Anticipation Warrants. On November 15, 1994, the State Controller issued the
report on the State's cash position required by the Budget Adjustment Law. The
report indicated that the cash position of the General Fund on June 30, 1995
would be $581 million better than was estimated in the July, 1994 cash flow
projections and therefore, no budget adjustment procedures will be invoked for
the 1994-95 Fiscal Year. As explained earlier, the Law would only be
implemented if the State Controller estimated that borrowable resources on June
30, 1995 would be at least $430 million lower than projected.
The State Controller's report identified a number of factors
which have led to the improved cash position of the State. Estimated revenues
and transfers for the 1994-95 Fiscal Year other than federal reimbursement for
immigration costs were up about $650 million. The largest portion of this was
in higher bank and corporation tax receipts, but all major tax sources were
above original projections. However, most of the federal immigration aid
revenues projected in connection with the 1994-95 Budget Act and in the July,
1994 cash flows will not be received,
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as indicated above, leaving a net increase in revenues of $322 million.
On the expenditure side, the State Controller reported that
estimated reduced caseload growth in health and welfare programs, reduced
school enrollment growth, and an accounting adjustment reducing a transfer from
the General Fund to the Special Fund for Economic Uncertainties resulted in
overall General Fund expenditure reductions (again before adjusting for federal
aid) of $672 million. However, the July, 1994 cash flows projected that
General Fund health and welfare and education expenditures would be offset by
the anticipated receipt of $407 million in federal aid for illegal immigrant
costs. The State Controller now estimates that none of these funds will be
received, so the net reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of
balances in special funds available for internal borrowing resulted in an
estimated reduction of such borrowable resources of $6 million. The
combination of these factors results in the estimated improvement of the
General Fund's cash position of $581 million. The State Controller's revised
cash flow projections for 1994-95 have allocated this improvement to two line
items: an increase from $0 to $427 million in the estimated ending cash
balance of the General Fund on June 30, 1995, and an increase in unused
borrowable resources of $154 million.
The State Controller's report indicated that there was no
anticipated cash impact in the 1994-95 Fiscal Year for recent initiatives on
"three strikes" criminal penalties and illegal immigration which were approved
by voters on November 8, 1994. At a hearing before a committee of the
Legislature on November 15, 1994, both the Legislative Analyst and the
Department of Finance concurred in the reasonableness of the State Controller's
report. (The Legislative Analyst had issued a preliminary analysis on November
1, 1994 which reached a conclusion very close to that of the State Controller.)
The State Controller's report makes no projections about whether the Law may
have to be implemented in 1995-96. However, both the State Controller and the
Legislative Analyst in the November 15 hearing noted that the July, 1994 cash
flows for the 1995-96 Fiscal Year place continued reliance on large amounts of
federal assistance for immigration costs, which did not materialize this year,
indicating significant budget pressures for next year. The Department of
Finance indicated that the budgetary issues identified in the hearing would be
addressed in the Governor's Budget proposal for the 1995-96 Fiscal Year, which
will be released in early January, 1995.
The 1995-96 Governor's Budget, discussed below, contains a
reforecast of revenues and expenditures for the 1994-
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95 Fiscal Year. The Department of Finance Bulletins for February and March
1995 report that combined General Fund revenues for February, 1995 were about
$356 million below forecast, but combined revenues for January and February
were only about $82 million (or 0.3 percent) below the 1995-96 Governor's
Budget forecast. The largest component of the decrease is attributable to
personal income tax receipts, which were about $131 million (or 1.1 percent)
below the two months' forecast. This decrease in personal income tax receipts
appears to be largely attributable to fourth quarter 1994 activity, probably in
the anticipation of tax reform, with some taxpayers shifting income into 1995
to the extent possible. The withholding component comprised $77 million of
this shortfall, but the Department of Finance does not yet view this as
significant. Additionally, sales and use tax receipts were very close to
forecast for the two-month period, while bank and corporation tax receipts were
about $42 million (or 1.5 percent) below the two months' forecast.
Miscellaneous revenues were about $117 million (or 6.2 percent) above forecast
for the two months, but the Department of Finance is not yet able to determine
whether this gain is real, or is instead attributable to cash flow factors.
Initial analysis of the federal Fiscal Year 1995 budget by the
Department of Finance indicates that about $98 million was appropriated for
California to offset costs of incarceration of undocumented and refugee
immigrants, less than the $356 million which was assumed in the State's 1994-95
Budget Act. Because of timing considerations in applying for these federal
funds, the Department estimates that about $33 million of these funds will be
received during the State's 1994-95 Fiscal Year, with the balance received in
the following fiscal year. It does not appear that the federal budget contains
any of the additional $400 million in funding for refugee assistance and health
costs which were also assumed in the 1994-95 Budget Act, but the Department
expects the State to continue its efforts to obtain some or all of these
federal funds.
On January 10, 1995, the Governor presented his 1995-96 Fiscal
Year Budget Proposal (the "Proposed Budget"). The Proposed Budget estimates
General Fund revenues and transfers of $42.5 billion (an increase of 0.2
percent over 1994-95). This nominal increase from the 1994-95 Fiscal Year
reflects the Governor's realignment proposal and the first year of his tax cut
proposal (see principal features of the Proposed Budget below for further
discussions). Without these two proposals, General Fund revenues would be
projected at approximately $43.8 billion, or an increase of 3.3 percent over
1994-95. Expenditures are estimated at $41.7 billion (essentially unchanged
from 1994-95). Special Fund revenues are estimated at $13.5 billion (10.7
percent higher than 1994-95) and Special Fund expenditures are estimated at
$13.8 billion (12.2 percent higher than 1994-95). The Proposed Budget projects
that the General Fund will end the fiscal year at
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June 30, 1996 with a budget surplus in the Special Fund for Economic
Uncertainties of about $92 million, or less than 1 percent of General Fund
expenditures, and will have repaid all of the accumulated budget deficits.
The following are the principal features of the Proposed
Budget:
1. The principal feature of the Proposed Budget is a
proposed 15 percent cut in personal income and corporate tax rates,
which would be phased in at 5 percent per year starting in 1996.
Existing personal income tax rates, which are scheduled to drop from
11 percent top rate to 9.3 percent in 1996, would be continued during
the time the overall tax cut takes effect. This proposal would reduce
General Fund revenues by $225 million in 1995-96, but the revenue
reduction would reach $3.6 billion by 1998-99.
2. The Governor has proposed an expansion of the
realignment program between the State and counties, so that counties
will take on greater responsibility for welfare and social services,
while the State will take on increased funding of trial court costs.
The proposal includes transfer of about $1 billion of State revenues,
from sales taxes and trial court funding moneys, to counties. The net
effect of the shifts, however, is estimated to save the General Fund
about $240 million.
3. The Governor proposes further cuts in health and
welfare costs totaling about $1.4 billion. Some of these cuts would
require federal legislative approval.
4. Proposition 98 funding for schools and community
colleges will increase by about $1.2 billion, reflecting strong
General Fund revenue growth. Per-pupil expenditures are projected to
increase by $61 to $4,292. For the first time in several years, a
cost-of-living increase (2.2 percent) is added to the enrollment
growth factor. The Governor proposes to set aside about $514 million
of the Proposition 98 funding increase to repay prior years' loans
from the General Fund to schools. As the legality of these loans is
currently being challenged in a lawsuit, the Governor proposes to set
the amount aside in escrow until the litigation is resolved.
5. The Proposed Budget includes increases in funding for
the University of California ($63 million General Fund) and the
California State University system ($3 million General Fund). The
Governor has proposed a four-year funding "company" for the higher
education units which includes both annual increases in State funding
and increases in student fees.
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6. The Proposed Budget assumes receipt of $830 million
in new federal aid for costs of undocumented and refugee immigrants,
above commitments already made by the federal government. This amount
is much less than an estimated $2.8 billion which had been included in
the Governor's pro-forma two-year plan from last summer.
The Proposed Budget contains a cash flow projection (based on
all the assumptions described above) which shows about $1 billion of unused
borrowable resources at June 30, 1996, providing this amount of "cushion"
before the budget "trigger" would have to be invoked.
However, a report issued by the Legislative Analyst in
February, 1995 notes that the Proposed Budget is subject to a number of major
risks, including receipt of the expected federal immigration aid and other
federal actions to allow health and welfare costs, and the outcome of several
lawsuits concerning previous budget actions which the State has lost at the
trial court level, and which are under appeal. This Analyst's Report also
estimates that, despite more favorable revenues, the two-year budget estimates
made in July, 1994 are about $2 billion out of balance, principally because
federal immigration aid appears likely to be much lower than previously
estimated. This shortfall is much smaller than the State has faced in recent
years, and has been addressed in the Governor's Budget.
The Director of Finance is required to include updated
cash-flow statements for the 1994-95 and 1995-96 Fiscal Years in the May
revision to the 1995-96 Fiscal Year budget proposal. By June 1, 1995, the
State Controller must concur with these updated statements or provide a revised
estimate of the cash condition of the General Fund for the 1994-95 and the
1995-96 Fiscal Years. For the 1995-96 Fiscal Year, Chapter 135 prohibits any
external borrowing as of June 30, 1996, thereby requiring the State to rely
solely on internal borrowable resources, expenditure reductions or revenue
increases to eliminate any projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the estimated cash
condition of the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall" shall be the amount necessary to bring the balance of unused
borrowable resources on June 30, 1996 to zero. On or before December 1, 1995,
legislation must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996 cash shortfall
identified by the State Controller. If such legislation is not enacted, within
five days thereafter the Director of Finance must reduce all General Fund
appropriations for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996
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cash shortfall to total remaining General Fund appropriations for the 1995-96
Fiscal Year, excluding the Required Appropriations.
On December 6, 1994, Orange County, California and its
Investment Pool (the "Pool") filed for bankruptcy under Chapter 9 of the United
States Bankruptcy Code. Approximately 187 California public entities,
substantially all of which are public agencies within the County, invested
funds in the Pool. Many of the agencies have various bonds, notes or other
forms of indebtedness outstanding, in some instances the proceeds of
which were invested in the Pool. Various investment advisors were employed by
the County to restructure the Pool. Such restructuring led to the sale of
substantially all of the Pool's portfolio, resulting in losses estimated to be
approximately $1.7 billion or approximately 22% of amounts deposited by the
Pool investors, including the County. It is anticipated that such losses may
result in delays or failures of the County as well as investors in the Pool to
make scheduled debt service payments. Further, the County expects substantial
budget deficits to occur in Fiscal Year 1995 with possibly similar effects
upon operations of investors in the Pool.
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Investor access to monies in the Pool subsequent to the
filing was pursuant to Court order only and severely limited. On May 2, 1995,
the Bankruptcy Court approved a comprehensive settlement agreement (the "CSA")
between the County and Pool investors which, among other things, (i)
established a formula for distribution of all available cash and securities
from the Pool to the Pool investors, including the County, (ii) established
formulas for distribution among certain settling Pool investors of several
tranches of new County obligations to be payable from, and in some instances
secured by, certain designated sources of potential recoveries on Pool related
claims, and (iii) designated certain outstanding short term note obligations
of the County to be senior to or on a parity with certain of the new County
obligations.
By order dated May 22, 1995, following distribution of all
available cash and securities from the Pool to the Pool investors, including
the County, the Bankruptcy Court dismissed the bankruptcy filing of the Pool
based upon the Court's finding that the Pool was not eligible for relief under
Chapter 9 of the Bankruptcy Code because it is not a municipality and it has
not been specifically authorized to file under Chapter 9 as required by the
Bankruptcy Code.
Following its bankruptcy filing, the County has, with
Bankruptcy Court approval, made payments of scheduled principal and interest on
its outstanding obligations where no alternative source of payment (such as
reserve funds on deposit with indenture trustees, letters of credit, municipal
bond insurance policies or other alternative payment sources) were available.
The County has not replenished such reserve funds or reimbursed the issuers of
such letters of credit or municipal bond insurance policies. In addition, the
County ceased making set aside deposits for repayment of certain of its short
term indebtedness. The Bankruptcy Court subsequently ruled that the rights of
the holders of such short term indebtedness to require the set aside deposits
from County revenues received following the filing were cut off by operation of
the Bankruptcy Code. In addition, the County has failed to satisfy its
obligation to accept tenders of its $110,200,000 aggregate principal amount of
Taxable Pension Obligation Bonds, Series B used to finance County pension
obligations. Interest at a rate set pursuant to the bond documents has been
timely paid on such Pension Bonds. The failure to satisfy the contractual
obligations discussed above may constitute defaults under the documents
governing such securities.
To June 30, 1995 there has been no default in payment of
scheduled interest and principal (excluding the tender payment described above)
to holders of County securities, although certain note issues are scheduled to
mature at various times thereafter and the Fund is unable to predict whether or
to what extent such notes will be timely paid by the County. On June 27, 1995,
the Bankruptcy Court approved a Stipulation and an Extension Agreement that, if
they both become effective, would offer to holders of certain short term note
obligations of the County ("Note Debt") who elect to be treated thereunder: (i)
extension of maturity dates to June 30, 1996; (ii) payment of monthly interest
at a rate below existing contract rates; (iii) accrual of monthly interest
equal to the difference between the amount paid and the contract rate, plus a
settlement adjustment of 0.95%; (iv) waiver of post-bankruptcy interest
recapture or disallowance; (v) waiver of defenses to repayment of the Note Debt
claims based on California limitations on municipal indebtedness; and (vi)
allowance of the Note Debt claims, subject to certain reserved rights. The
treatment described in the preceding sentence will be available to electing
holders of Note Debt provided that holders of at least 50% of the then issued
and outstanding aggregate principal amount of all Note Debt obligations elect
such treatment. If holders of at least 90% of the outstanding aggregate
principal amount of all Note Debt obligations elect such treatment, all of the
Note Debt obligations will be so treated. The Funds are unable to predict
whether and to what extent holders of Note Debt will elect to be treated under
the Extension Agreement.
On June 27, 1995, the voters of Orange County rejected, by a
substantial majority of those voting, an increase of 0.50% in the sales tax
imposed throughout the County. Prior to the election, spokespersons for the
County had indicated that passage of the sales tax increase was an important
factor in the County's ability to restructure its finances in a manner that
would permit eventual payment in full of all County securities. The Funds are
unable to predict the effect of the defeat of the sales tax increase on the
ability of the County to restructure its obligations and otherwise manage its
affairs.
Both S&P and Moody's have suspended or downgraded ratings on
various debt securities of the County and certain of the investors in the Pool
and, following the defeat of the proposition submitted to the voters on June
27, announced their intention to downgrade the County's debt to default status,
regardless of whether the Stipulation and Extension Agreement receives approval
by holders of the Note Debt. Such suspensions or downgradings could affect
both price and liquidity of such securities. The Funds are unable to predict
(i) the occurrence of covenant and/or payment defaults with respect to
obligations of the County and/or investors in the Pool or (ii) the financial
impact of any such defaults or credit rating suspensions or downgradings upon
the value of such securities.
Constitutional, Legislative and Other Factors.
Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could result in the adverse effects described below. The following information
constitutes only a brief summary, does not purport to be a complete
description, and is based on information drawn from official statements and
prospectuses relating to securities offerings of the State of California and
various local agencies in California, available as of the date of this
Statement of Additional Information. While the Funds have not independently
verified such information, they have no reason to believe that such information
is not correct in all material respects.
Certain California Municipal Obligations in the Funds'
Portfolio may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes
certain obligations theretofore paid out of local funds. Whether and to what
extent a portion of the State's general fund will be distributed in the future
to counties, cities and their various entities, is unclear.
In 1988, California enacted legislation providing for a
water's-edge combined reporting method if an election fee was paid and other
conditions met. On October 6, 1993, California Governor Pete Wilson signed
Senate Bill 671 (Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on a water's-edge
basis pay a fee and file a domestic disclosure spreadsheet and instead
requiring an annual information return. Significantly, the Franchise Tax Board
can no longer disregard a taxpayer's election. The Franchise Tax Board is
reported to have estimated state revenue losses from the Legislation as growing
from $27 million in 1993-94 to $616 million in 1999-2000, but others,
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including Assembly Speaker Willie Brown, disagree with that estimate and assert
that more revenue will be generated for California, rather than less, because
of an anticipated increase in economic activity and additional revenue
generated by the incentives in the Legislation.
Certain California Municipal Obligations held by the Funds may
be obligations of issuers who rely in whole or in part on ad valorem real
property taxes as a source of revenue. On June 6, 1978, California voters
approved an amendment to the California Constitution known as Proposition 13,
which added Article XIIIA to the California Constitution. The effect of
Article XIIIA is to limit ad valorem taxes on real property and to restrict the
ability of taxing entities to increase real property tax revenues. On November
7, 1978, California voters approved Proposition 8, and on June 3, 1986,
California voters approved Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem tax
on real property to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law; provided that the
1% limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges on (i) any indebtedness approved by the
voters prior to July 1, 1978, or (ii) any bonded indebtedness for the
acquisition or improvement of real property approved on or after July 1, 1978,
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975/76 tax bill under
'full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement
Article XIIIA (Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy the maximum tax permitted
by Article XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the assessed
value for tax purposes). The legislation further provided that, for the
1978/79 fiscal year
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only, the tax levied by each county was to be apportioned among all taxing
agencies within the county in proportion to their average share of taxes levied
in certain previous years. The apportionment of property taxes for fiscal
years after 1978/79 has been revised pursuant to Statutes of 1979, Chapter 282
which provides relief funds from State moneys beginning in fiscal year 1979/80
and is designed to provide a permanent system for sharing State taxes and
budget funds with local agencies. Under Chapter 282, cities and counties
receive more of the remaining property tax revenues collected under Proposition
13 instead of direct State aid. School districts receive a correspondingly
reduced amount of property taxes, but receive compensation directly from the
State and are given additional relief. Chapter 282 does not affect the
derivation of the base levy ($4.00 per $100 assessed valuation) and the bonded
debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or
the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation"
in an amount higher than the "appropriations limit." Article XIIIB does not
affect the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
At the November 8, 1988 general election, California voters
approved an initiative known as Proposition 98. This initiative amends Article
XIIIB to require that (i) the California Legislature establish a prudent state
reserve fund in an amount as it shall deem reasonable and necessary and (ii)
revenues in excess of amounts permitted to be spent and which would otherwise
be returned pursuant to Article XIIIB by revision of tax rates or fee
schedules, be transferred and allocated (up to a maximum of 4%) to the State
School Fund and be expended solely for purposes of instructional improvement
and accountability. No such transfer or allocation of funds will be required
if certain designated state officials determine that annual student
expenditures and class size meet certain criteria as set forth in Proposition
98. Any funds allocated to the State School Fund shall cause the appropriation
limits established in
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Article XIIIB to be annually increased for any such allocation made in the
prior year.
Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 fiscal year, state monies to
support school districts and community college districts shall equal or exceed
the lesser of (i) an amount equalling the percentage of state general revenue
bonds for school and community college districts in fiscal year 1986-87, or
(ii) an amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions
of Proposition 98. Senate Constitutional Amendment 1, on the June 5, 1990
ballot as Proposition 111, was approved by the voters and took effect on July
1, 1990. Among a number of important provisions, Proposition 111 recalculates
spending limits for the State and for local governments, allows greater annual
increases in the limits, allows the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduces the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax
revenues), removes the provision of Proposition 98 which included excess moneys
transferred to school districts and community college districts in the base
calculation for the next year, limits the amount of State tax revenue over the
limit which would be transferred to school districts and community college
districts, and exempts increased gasoline taxes and truck weight fees from the
State appropriations limit. Additionally, Proposition 111 exempts from the
State appropriations limit funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to determine its
applicability to specific situations involving the State and local taxing
authorities. Depending upon the interpretation, Article XIIIB may limit
significantly a governmental entity's ability to budget sufficient funds to
meet debt service on bonds and other obligations.
On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative (i) requires that any tax for
general governmental purposes imposed by local governments be approved by
resolution or ordinance
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<PAGE> 26
adopted by a two-thirds vote of the governmental entity's legislative body and
by a majority vote of the electorate of the governmental entity, (ii) requires
that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction, (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments, (vi) requires that any tax imposed
by a local government on or after August 1, 1985 be ratified by a majority vote
of the electorate within two years of the adoption of the initiative or be
terminated by November 15, 1988, (vii) requires that, in the event a local
government fails to comply with the provisions of this measure, a reduction in
the amount of property tax revenue allocated to such local government occurs in
an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative, and (viii) permits these provisions to
be amended exclusively by the voters of the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal.
Ct. App. 1988), held that Proposition 62 is unconstitutional to the extent that
it requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition
87. Proposition 87 amended Article XVI, Section 16, of the California
Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989. It is not
possible to predict whether the California Legislature will enact such a
prohibition nor is it possible to predict the impact of Proposition 87 on
redevelopment agencies and their ability to make payments on outstanding debt
obligations.
Certain California Municipal Obligations held by the Funds may
be obligations which are payable solely from the revenues of health care
institutions. Certain provisions under
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<PAGE> 27
California law may adversely affect these revenues and, consequently, payment
on those Municipal Obligations.
The Federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided for a
cost-based system of reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by any hospital wanting to participate in the Medi-Cal program,
provided such hospital met applicable requirements for participation.
California law now provides that the State of California shall selectively
contract with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute inpatient services.
Generally, such selective contracting is made on a flat per diem payment basis
for all services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs or other factors. Other reductions or
limitations may be imposed on payment for services rendered to Medi-Cal
beneficiaries in the future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual
payments only to the extent the California legislature appropriates adequate
funding therefor.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known
as "preferred provider organizations" ("PPOs"), which offer financial
incentives for subscribers who use only the hospitals which contract with the
plan. Under an exclusive provider plan, which includes most health maintenance
organizations ("HMOs"), private payors limit coverage to those services
provided by selected hospitals. Discounts offered to HMOs and PPOs may result
in payment to the contracting hospital of less than actual cost and the volume
of patients directed to a hospital under an HMO or PPO contract may vary
significantly from projections. Often, HMO or PPO contracts are enforceable
for a stated term, regardless of provider losses or of bankruptcy of the
respective HMO or PPO. It is expected that failure to execute and maintain
such PPO and HMO contracts would reduce a hospital's patient base or gross
revenues. Conversely, participation may maintain or increase the patient base,
but may result in reduced payment and lower net income to the contracting
hospitals.
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<PAGE> 28
These California Municipal Obligations may also be insured by
the State of California pursuant to an insurance program implemented by the
Office of Statewide Health Planning and Development for health facility
construction loans. If a default occurs on insured California Municipal
Obligations, the State Treasurer will issue debentures payable out of a reserve
fund established under the insurance program or will pay principal and interest
on an unaccelerated basis from unappropriated State funds. At the request of
the Office of Statewide Health Planning and Development, Arthur D. Little,
Inc., prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study
and concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur
D. Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Certain California Municipal Obligations held by the Funds may
be obligations which are secured in whole or in part by a mortgage or deed of
trust on real property. California has five principal statutory provisions
which limit the remedies of a creditor secured by a mortgage or deed of trust.
Two limit the creditor's right to obtain a deficiency judgment, one limitation
being based on the method of foreclosure and the other on the type of debt
secured. Under the former, a deficiency judgment is barred when the
foreclosure is accomplished by means of nonjudicial trustee's sale. Under the
latter, a deficiency judgment is barred when the foreclosed mortgage or deed of
trust secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires creditors secured by
real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the outstanding
debt over the fair value of the property at the time of the sale, thus
preventing the creditor from obtaining a large deficiency judgment against the
debtor as the result of low bids at a judicial sale. The fifth statutory
provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
Upon the default of a mortgage or deed of trust with respect
to California real property, the creditor's nonjudicial
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<PAGE> 29
foreclosure rights under the power of sale contained in the mortgage or deed of
trust are subject to the constraints imposed by California law upon transfers
of title to real property by private power of sale. During the three-month
period beginning with the filing of a formal notice of default, the debtor is
entitled to reinstate the mortgage by making any overdue payments. Under
standard loan servicing procedures, the filing of the formal notice of default
does not occur unless at least three full monthly payments have become due and
remain unpaid. The power of sale is exercised by posting and publishing a
notice of sale for at least 20 days after expiration of the three-month
reinstatement period. Therefore, the effective minimum period for foreclosing
on a mortgage could be in excess of seven months after the initial default.
Such time delays in collections could disrupt the flow of revenues available to
an issuer for the payment of debt service on the outstanding obligations if
such defaults occur with respect to a substantial number of mortgages or deeds
of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property securing a
mortgage for such private sale to constitute "state action," and could hold
that the private-right-of-sale proceedings violate the due process requirements
of the Federal or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.
Certain California Municipal Obligations in the Funds'
portfolios may be obligations which finance the acquisition of single family
home mortgages for low and moderate income mortgagors. These obligations may
be payable solely from revenues derived from the home mortgages, and are
subject to California's statutory limitations described above applicable to
obligations secured by real property. Under California antideficiency
legislation, there is no personal recourse against a mortgagor of a single
family residence purchased with the loan secured by the mortgage, regardless of
whether the creditor chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family,
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary prepayments
made during the first five years during the term of the mortgage loan, and
cannot in any event exceed six months' advance interest on the amount prepaid
in excess of 20% of the original principal amount of the mortgage loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
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<PAGE> 30
Other Considerations.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the Federal income tax
exemption for interest on Municipal Obligations. For example, under the Tax
Reform Act of 1986, enacted in October 1986, interest on certain private
activity bonds must be included in an investor's alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in the
calculation of adjusted current earnings for purposes of determining the
corporation's alternative minimum tax liability. (See the Funds' Prospectuses,
"Taxes.") The Company cannot predict what legislation or regulations, if any,
may be proposed in Congress or promulgated by the Department of Treasury as
regards the Federal income tax exemption of interest on such obligations or the
impact of such legislative and regulatory activity on such exemption.
Additionally, with respect to Municipal Obligations issued by the State of
California and political subdivisions thereof, the Company cannot predict what
legislation, if any, may be proposed in the California Legislature as regards
the California state personal income tax status of interest on such
obligations, or which proposals, if any, might be enacted. Such proposals,
while pending or if enacted, might materially adversely affect the availability
of California Municipal Obligations, in particular, and Municipal Obligations
generally, for investment by the Funds and the liquidity and value of each
Fund's portfolio. In such an event, the Company would re-evaluate the
investment objectives and policies of the Funds and consider changes in their
structures or possible dissolution.
Moreover, if the Company's Board of Directors, after
consultation with the Funds' investment adviser, should for any reason
determine that it is impracticable to invest at least 50% of California Money's
or California Intermediate's assets in California Municipal Obligations at the
close of each quarter of the Company's taxable year (and thereby to qualify
such Funds to pay dividends that are exempt from California state personal
income tax), the Board would consider changing the Funds' investment objectives
and policies (and recommending to shareholders a change in the Funds' names),
or possibly dissolving the Funds.
The payment of principal and interest on most securities
purchased by the Funds will depend upon the ability of the issuers to meet
their obligations. The value of the Funds' portfolio securities can be
expected to vary inversely with changes in prevailing interest rates.
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<PAGE> 31
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
In General.
Information on how to purchase and redeem shares of California
Money and California Intermediate, and how such shares are priced, is included
in their Prospectuses. The issuance of shares is recorded on the books of the
Funds, and share certificates are not issued unless expressly requested in
writing. Certificates are not issued for fractional shares.
The regulations of the Comptroller of the Currency provide
that funds held in a fiduciary capacity by a national bank approved by the
Comptroller to exercise fiduciary powers must be invested in accordance with
the instrument establishing the fiduciary relationship and local law. The
Company believes that the purchase of California Money or California
Intermediate shares by such national banks acting on behalf of their fiduciary
accounts is not contrary to applicable regulations if consistent with the
particular account and proper under the law governing the administration of the
account. With respect to Dollar and Plus shares, conflict of interest
restrictions may apply to an institution's receipt of compensation paid by the
Funds in connection with the investment of fiduciary funds in Dollar and Plus
shares. Institutions, including banks regulated by the Comptroller of the
Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal advisers before investing
fiduciary funds in Dollar and Plus shares.
Prior to effecting a redemption of shares represented by
certificates, PFPC must have received such certificates at its principal
office. All such certificates must be endorsed by the redeeming shareholder or
accompanied by a signed stock power, in each instance with the signature
guaranteed by a bank or other eligible guarantor institution unless other
arrangements satisfactory to the Funds have previously been made. The Funds
may require any additional information reasonably necessary to evidence that a
redemption has been duly authorized.
Under the 1940 Act, the Funds may suspend the right of
redemption or postpone the date of payment upon redemption for any period
during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which trading on said Exchange is
restricted, or during which (as determined by the SEC by rule or regulation) an
emergency exists as a result of which disposal or valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit. (The Funds may also suspend or postpone the recordation of the
transfer of their shares upon the occurrence of any of the foregoing
conditions.)
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<PAGE> 32
In addition, if, in the opinion of the Board of Directors of
the Company, ownership of shares has or may become concentrated to an extent
which would cause the Funds to be deemed a personal holding company, the
Company may compel the redemption of, reject any order for or refuse to give
effect on the books of the Funds to the transfer of the Funds' shares in an
effort to prevent that consequence. The Funds may also redeem shares
involuntarily if such redemption otherwise appears appropriate in light of the
Funds' responsibilities under the 1940 Act. If the Company's Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable, the Funds may make payment
wholly or partly in securities or other property. In certain instances, the
Funds may redeem shares pro rata from each shareholder of record without
payment of monetary consideration. See "Portfolio Valuation -- California
Money" below.
Any institution purchasing shares on behalf of separate
accounts will be required to hold the shares in a single nominee name (a
"Master Account"). Institutions investing in more than one of the Company's
portfolios or series of shares must maintain a separate Master Account for each
portfolio and series of shares. Institutions may arrange with PFPC for certain
sub- accounting services (such as purchase, redemption and dividend
recordkeeping) paid for by the Company, if PFPC is provided with the
information necessary for sub-accounting. Sub-accounts may be established by
name or number.
Net Asset Value.
As stated in the Prospectuses for California Money and
California Intermediate, the net asset value per share for California Money and
California Intermediate is calculated by adding the value of all of a Fund's
portfolio securities and other assets belonging to that Fund, subtracting the
liabilities charged to that Fund including dividends that have been declared
but not paid, and dividing the result by the number of the Fund shares
outstanding (irrespective of series). The value of the assets of California
Money is calculated using the amortized cost method pursuant to procedures
adopted by the Board of Directors under Rule 2a-7. "Assets belonging to" a
Fund consist of the consideration received upon the issuance of that Fund's
shares together with all income, earnings, profits and proceeds derived from
the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any re-investment of such
proceeds, and the portion of any general assets of the Company not belonging to
either California Money or California Intermediate. Assets belonging to a Fund
are charged with the direct liabilities of that Fund and with a share of the
general liabilities of the Company allocated in proportion to the relative net
assets of the Fund and the Company's other portfolio. The determinations by
the Board of Directors as to
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<PAGE> 33
the direct and allocable liabilities, and allocable portion of general assets,
with respect to each Fund are conclusive.
Portfolio Valuation.
California Money. California Money's portfolio securities are
valued on the basis of amortized cost. In connection with its use of amortized
cost valuation, California Money limits the dollar-weighted average maturity of
its portfolio to not more than 90 days and does not purchase any instrument
with a remaining maturity of more than 13 months (with certain exceptions).
The Company's Board of Directors has also established procedures that are
intended to stabilize the net asset value per share of each of California
Money's series of shares for purposes of sales and redemptions at $1.00. Such
procedures include the determination, at such intervals as the Board deems
appropriate, of the extent, if any, to which California Money's net asset value
per share calculated by using available market quotations deviates from $1.00
per share. In the event such deviation exceeds 1/2 of 1%, the Board will
promptly consider what action, if any, should be initiated. If the Board
believes that the amount of any deviation from California Money's $1.00
amortized cost price per share may result in material dilution or other unfair
results to investors or existing shareholders, it will take such steps as it
considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity; shortening California Money's
average portfolio maturity; withholding or reducing dividends; redeeming shares
in kind; reducing the number of California Money's outstanding shares without
monetary consideration; or utilizing a net asset value per share determined by
using available market quotations.
California Intermediate. California Intermediate's portfolio
securities for which market quotations are readily available (other than debt
securities with remaining maturities of 60 days or less) are valued at the mean
of the most recent quoted bid and asked prices provided by investment dealers.
Debt securities with remaining maturities of 60 days or less are valued on an
amortized cost basis (unless the Board of Directors determines that such basis
does not represent fair value at the time). Other securities and assets for
which market quotations are not readily available are valued at their fair
value in the best judgment of PIMC under procedures established by, and under
supervision of, the Company's Board of Directors. PIMC may use a pricing
service to value portfolio securities where the prices provided are believed to
reflect the fair market value of such securities. In valuing California
Intermediate's securities, the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances and other factors it deems
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<PAGE> 34
relevant in determining valuations for normal institutionalized trading units
of debt securities and would not rely exclusively on quoted prices. The
methods used by the pricing service and the valuation so established will be
reviewed by PIMC under the general supervision of the Company's Board of
Directors. Several pricing services are available, one or more of which may be
used by PIMC at its own expense from time to time.
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<PAGE> 35
MANAGEMENT OF THE COMPANY
Board of Directors.
The Company's directors and executive officers, their
addresses, principal occupations during the past 5 years and other affiliations
are as follows:
<TABLE>
<CAPTION>
Principal Occupations
during last 5 years
Name and Address Position and Other Affiliations(4)
- ---------------- -------- -------------------------
<S> <C> <C>
G. Willing Pepper(1)(2) Chairman of Retired; Chairman of the Board,
128 Springton Lake Rd. the Board The Institute of Cancer Re-
Media, PA 19063 and President search until 1979; Director,
Age 87 Philadelphia National Bank until
1978; President, Scott Paper Company,
1971 to 1973; Chairman of the Board,
Specialty Composites Corp. until
May, 1984.
Rodney D. Johnson(2) Director President, Fairmount Capital
Fairmount Capital Advisors, Inc. (financial
Advisors, Inc. advising), since 1987; Chair,
1435 Walnut Street Board of Advocates, Fox Chase
Drexel Building Cancer Center, since 1993;
Philadelphia, PA 19102 Treasurer, North Philadelphia
Age 53 Health System (formerly Girard
Medical Center), 1988 to 1993.
William R. Howell(3) Director Retired; Vice Chairman,
73-350 Calliandra Street Union Bank, Los Angeles,
Palm Desert, CA 92260 until September, 1982; Director,
Age 73 Current Income Shares, Inc.
Rudolph A. Peterson(2)(3) Director Honorary Director, President
BankAmerica Corporation and Chief Executive Officer
555 California Street (Retired), BankAmerica
Suite 500 Corporation and Bank of America,
San Francisco, CA 94104 NT & SA.
Age 90
</TABLE>
- ----------------
(1) This director may be deemed to be an "interested person" of the
Company as defined in the 1940 Act.
(2) Executive Committee Member.
(3) Audit Committee Member.
(4) Additional affiliations with investment companies advised by PIMC or
PNC Bank are set forth below.
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<PAGE> 36
<TABLE>
<CAPTION>
Principal Occupations
during last 5 years
Name and Address Position and Other Affiliations(4)
- ---------------- -------- -------------------------
<S> <C> <C>
Anthony M. Santomero(3) Director Richard K. Mellon
310 Keithwood Road Professor of Finance, since
Wynnewood, PA 19096 April 1984 and Dean's Advisory
Age 48 Council Member since July 1984, The Wharton School,
University of Pennsylvania; Associate Editor,
Journal of Banking and Finance, since June 1978;
Associate Editor, Journal of Economics and
Business, since October 1979; Associate Editor,
Journal of Money, Credit and Banking, since January
1980; Research Associate, New York University
Center for Japan-US Business and Economic Studies,
since July 1989; Editorial Advisory Board, Open
Economics Review, since November 1990; Director,
The Zweig Fund and The Zweig Total Return Fund.
Edward J. Roach Vice Certified Public Accountant;
Bellevue Park Corporate President Vice Chairman of the Board, Fox
Center and Treas- Chase Cancer Center; President
400 Bellevue Parkway urer or Vice President and Treasurer
Suite 100 of various investment companies
Wilmington, DE 19809 advised by PNC Institutional
Age 70 Management Corporation.
Morgan R. Jones Secretary Partner of the law firm of
PNB Building Drinker Biddle & Reath.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age 55
</TABLE>
- ----------------
(3) Audit Committee Member.
(4) Additional affiliations with investment companies advised by PIMC or
PNC Bank are set forth below.
---------------
During intervals between meetings of the Board, the Executive
Committee may exercise the authority of the Board of Directors in the
management of the business of the Company to the extent permitted by law.
Messrs. Pepper, Johnson and Santomero serve as trustees of
Municipal Fund for Temporary Investment ("MuniFund"), Portfolios for
Diversified Investment ("Diversified"), Trust for Federal Securities
("FedFund") and The PNC(R) Fund ("PNC") and as
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<PAGE> 37
directors of Temporary Investment Fund, Inc. ("TempFund") and Provident
Institutional Funds, Inc. ("PIF"). In addition, Mr. Pepper serves as a
director of Independence Square Income Securities, Inc. ("ISIS") and Managing
General Partner of Chestnut Street Exchange Fund ("Chestnut"); and Mr. Johnson
is a director of Municipal Fund for New York Investors, Inc. ("New York
Money"). Each of the investment companies named above receives various
advisory or other services from PIMC or PNC Bank.
Mr. Pepper is Chairman of the Board and President and Mr.
Roach is Vice President and Treasurer of TempFund, Diversified, MuniFund,
FedFund and PIF. In addition, Mr. Roach is Treasurer of Chestnut, President
and Treasurer of The RBB Fund, Inc. ("RBB") and New York Money and Vice
President and Treasurer of ISIS and PNC; Mr. Pepper is Chairman of the Board
and President of PNC; Mr. Jones is Secretary of Chestnut, MuniFund, New York
Money, PNC and RBB. Mr. Johnson is a director of International Dollar Reserve
Fund. Of the above-mentioned funds, PDI provides distribution services and
PFPC and PDI provide administration services to TempFund, PIF, FedFund,
Diversified, MuniFund, New York Money and PNC.
Each director who is not affiliated with PNC Bank, PIMC, PFPC
or PDI receives $5,000 annually from the Company for his services as a director
plus $250 for each Board meeting attended, $250 for each Committee meeting
attended and is reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings. The Chairman of the Board is entitled to receive an
additional $5,000 per annum for services in such capacity.
For the fiscal year ended January 31, 1995, the Company paid
or accrued for the account of its directors and officers a total of $48,140
(exclusive of expense reimbursements) for services in all capacities. In
addition, the Company contributed $1,002 for its last fiscal year to its
retirement plan for employees (who included Mr. Roach). No employee of PDI,
PIMC, PFPC or PNC Bank receives any compensation from the Company for acting as
an officer or director of the Company. The directors and officers of the
Company own less than 1% of the Company's shares.
By virtue of the responsibilities assumed by PDI, PIMC, PNC
Bank and PFPC under their respective agreements with the Company, the Company
itself requires only one part-time employee in addition to its officers.
Drinker Biddle & Reath, of which Mr. Jones is a partner, receives legal fees as
counsel to the Company.
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<PAGE> 38
The table below sets forth information about the fees received
by the Company's directors in the most recently completed fiscal year.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Benefits Annual from Company
Aggregate Accrued as Benefits and Fund
Name of Person Compensation Part of Fund Upon Complex(1) Paid
Position from Company Expenses Retirement to Directors
- -------------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
William R. Howell $6,250 0.00 N/A (1)(2) $6,250
Director
Rodney D. Johnson $6,000 0.00 N/A (7)(2) $54,375
Director
G. Willing Pepper, $11,000 0.00 N/A (8)(2) $97,875
Director, Chairman
and President
Rudolph A. Peterson $6,250 0.00 N/A (1)(2) $6,250
Director
Anthony M. Santomero, $6,000 0.00 N/A (6)(2) $49,625
Director
$35,500 0.00 $208,125
</TABLE>
- -----------------------
(1) A "fund complex" means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser
or have an investment adviser that is an affiliated person of the
investment adviser of any of the other investment companies.
(2) Total number of such other investment companies director serves on
within the fund complex.
Adviser and Administrators.
The advisory and administrative services provided and the
expenses assumed by PIMC and the administrators, as well as the fees payable to
each of them, are described in the Pros-
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<PAGE> 39
pectuses. For California Money Fund's fiscal year ended January 31, 1995 and
1994, PIMC received fees for advisory services (net of waivers) in the amounts
of $250,983 and $209,402. For the same period, PFPC and PDI received fees for
administration services (net of waivers) of $250,983 and $209,402 in the
aggregate. For California Money Fund's fiscal year ended January 31, 1993,
PIMC and The Boston Company Advisors, Inc. ("Boston Advisors"), the Company's
former Administrator, each received fees for advisory and administration
services (net of waivers), in the amount of $474,812 and $623,533,
respectively. For California Money Fund's fiscal year ended January 31, 1995
and 1994, PIMC waived advisory fees of $582,744 and $555,359 and PFPC and PDI
waived administration fees of $582,744 and $555,359 in the aggregate. For
California Money Fund's fiscal year ended January 31, 1993, PIMC and Boston
Advisors each waived fees of $429,879 and $494,145, respectively, with respect
to that Fund, although the expense reimbursement limitations described in the
following paragraph were not exceeded. For California Intermediate Municipal
Fund's fiscal years ended January 31, 1995 and 1994, PIMC received fees for
advisory services (net of waivers) in the amounts of $6,382 and $8,238. For
the same period, PFPC and PDI received fees for administration services (net of
waivers) of $6,382 and $8,238 in the aggregate. For California Intermediate
Municipal Fund, for the fiscal year ended January 31, 1993, PIMC and Boston
Advisors each received fees for advisory and administration services,
respectively (each net of waivers), of $23,243 and $13,645, respectively. For
California Intermediate Municipal Fund's fiscal years ended January 31, 1995
and 1994, PIMC waived advisory fees of $30,987 and $26,591 and PFPC and PDI
waived administration fees of $30,987 and $26,591 in the aggregate. For
California Intermediate Municipal Fund's fiscal years ended January 31, 1993,
PIMC and Boston Advisors each waived fees of $20,751 and $19,099, respectively,
although the expense reimbursement limitations described in the following
paragraph were not exceeded.
PIMC and the administrators have agreed that if, in any fiscal
year, the expenses borne by each Fund exceed the applicable expense limitations
imposed by the securities regulations of any state in which shares of a Fund
are registered or qualified for sale to the public, they will each reimburse
that Fund for one-half of any excess to the extent required by such
regulations. To the Funds' knowledge, as of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to
the Funds provides that annual expenses (as defined by statute) may not exceed
2.5% of the first $30 million of a portfolio's average annual net assets, 2% of
the next $70 million of the average annual net assets and 1.5% of the remaining
average annual net assets.
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Banking Laws.
Certain banking laws and regulations with respect to
investment companies are discussed in the Funds' Prospectuses. PIMC, PFPC and
PNC Bank believe that PIMC may perform the advisory services for the Funds
contemplated by the Company's Advisory Agreement, the Funds' Prospectuses and
this Statement of Additional Information, that PFPC may perform the transfer
agency services for the Funds contemplated by the Company's Transfer Agency
Agreement, the Funds' Prospectuses and this Statement of Additional
Information, and that PNC Bank may perform the custodial services for the Funds
contemplated by the Company's Custodian Agreement, the Funds' Prospectuses and
this Statement of Additional Information, and the sub-advisory services for the
Funds contemplated by the Company's Sub-Advisory Agreement, the Funds'
Prospectuses and this Statement of Additional Information, without violation of
the Glass-Steagall Act or applicable banking laws or regulations. It should be
noted, however, that changes in legal requirements relating to the permissible
activities of banks and their affiliates, as well as further interpretations of
present and future requirements, could prevent PIMC, PNC Bank and PFPC from
continuing to perform such services for the Funds. If PIMC, PFPC or PNC Bank
were prohibited from continuing to perform such services, it is expected that
the Board of Directors would recommend that the Company enter into new
agreements with other qualified firms. Any new advisory agreement would be
subject to shareholder approval.
In addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Custodian and Transfer Agent.
As custodian of the Funds' assets, PNC Bank (i) maintains a
separate account or accounts in the name of the Funds, (ii) holds and disburses
portfolio securities on account of the Funds, (iii) makes receipts and
disbursements of money on behalf of the Funds, (iv) collects and receives all
income and other payments and distributions on account of the Funds' portfolio
securities, (v) responds to correspondence from security brokers and others
relating to its duties and (vi) makes periodic reports to the Company's Board
of Directors concerning the Funds' operations. PNC Bank is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Funds, provided that PNC Bank remains responsible for the performance of
all its duties under its Custodian Agreement with the Funds and holds the Funds
harmless from the acts and omissions of any sub-custodian. Each Fund pays PNC
Bank a fee
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for its custodial services equal to $.25 per annum for each $1,000 of that
Fund's average gross assets.
As the Funds' transfer and dividend disbursing agent, PFPC (i)
issues and redeems shares of the Funds, (ii) addresses and mails all
communications by the Funds to its shareholders, including reports to
shareholders, dividend and distribution notices and proxy material for its
meetings of shareholders, (iii) responds to correspondence by shareholders and
others relating to its duties, (iv) maintains shareholder accounts and
sub-accounts, (v) provides installation and other services in connection with
the Funds' computer access program maintained to facilitate shareholder access
to the Funds, and (vi) makes periodic reports to the Board of Directors
concerning the Funds' operations. PFPC may, on 30 days' notice to the Company,
assign its duties thereunder to any other affiliate of PNC Bank Corp. For its
transfer agency, dividend disbursing and sub-accounting services, each Fund
pays PFPC $12.00 per account and sub-account per annum plus $1.00 for each
purchase or redemption transaction by an account (other than a purchase
transaction made in connection with the automatic reinvestment of dividends).
PFPC sends each shareholder of record a monthly statement
showing the total number of shares owned as of the last business day of the
month (as well as the dividends paid during the current month and year), and
provides each shareholder of record with a daily transaction report for each
day on which a transaction occurs in the shareholder's Master Account with each
of the Funds. Further, an institution establishing sub-accounts with PFPC is
provided with a daily transaction report for each day on which a transaction
occurs in a sub-account and, as of the last calendar day of each month, a
report which sets forth the share balance for the sub-account at the beginning
and end of the month and income paid or reinvested during the month.
Service Organizations.
As stated in the Funds' Prospectuses, the Funds enter into
agreements with institutional investors ("Service Organizations") requiring
them to provide support services to their customers who beneficially own Dollar
or Plus shares. In consideration of such services, California Money pays
Service Organizations .25% (on an annualized basis) of the average daily net
asset value of the California Money Dollar or California Money Plus shares held
by the Service Organizations for the benefit of their customers. California
Intermediate pays such Service Organizations the same fee based on the average
daily net asset value of the California Intermuni Dollar or California
Intermuni Plus shares held by the Service Organizations for the benefit of
their customers. Such services include: (i) aggregating and processing
purchase and redemption requests from
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customers and placing net purchase and redemption orders with the transfer
agent; (ii) providing customers with a service that invests the assets of their
accounts in Dollar or Plus shares; (iii) processing dividend payments from the
Funds on behalf of customers; (iv) providing information periodically to
customers showing their positions in Dollar and Plus shares; (v) arranging for
bank wires; (vi) responding to customer inquiries relating to the services
performed by the Service Organizations; (vii) providing sub-accounting with
respect to Dollar and Plus shares beneficially owned by customers or the
information necessary for sub- accounting; (viii) forwarding shareholder
communications from the Company (such as proxies, shareholder reports, annual
and semi- annual financial statements and dividend, distribution and tax
notices) to customers, if required by law; and (ix) other similar services if
requested by the Company. In addition, broker/dealers purchasing Plus shares
may be requested to provide from time to time assistance (such as the
forwarding of sales literature and advertising to customers) in connection with
the distribution of Plus shares. For the fiscal year ended January 31, 1995,
California Money paid a total of $43,771 to Service Organizations with respect
to California Money Dollar shares, 3.7% of which was paid to an affiliate.
California Money made no payments to Service Organizations with respect to
California Money Plus shares for such period because no such shares had been
sold during the fiscal year ended January 31, 1995. California Intermuni made
no payments to Service Organizations for such period because no California
Intermuni Dollar or California Intermuni Plus shares had been sold during the
fiscal year ended January 31, 1995.
Each Fund's agreements with Service Organizations are governed
by Plans (called "Non-12b-1 Shareholder Services Plan" and "12b-1 Services
Plan" for the Dollar shares and Plus shares, respectively), which have been
adopted by the Board of Directors pursuant to applicable rules and regulations
of the SEC and an exemptive order granted by the SEC in connection with the
creation of the Dollar and Plus shares. Pursuant to each Plan, the Board of
Directors reviews, at least quarterly, a written report of the amounts expended
under the Fund's agreements with Service Organizations and the purposes for
which the expenditures were made. In addition, the Funds' arrangements with
Service Organizations must be approved annually by a majority of the Fund's
directors, including a majority of the directors who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Directors").
The Board of Directors has approved the Funds' arrangements
with Service Organizations based on information provided by the Funds' service
contractors that there is a reasonable likelihood that the arrangements will
benefit the Funds and their shareholders by affording the Funds greater
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flexibility in connection with the servicing of the accounts of the beneficial
owners of their shares in an efficient manner. Any material amendment to the
Funds' arrangements with Service Organizations must be approved by a majority
of the Board of Directors (including a majority of the Disinterested
Directors), and any amendment to increase materially the costs under the 12b-1
Services Plan adopted by the Board with respect to Plus shares must be approved
by the holders of a majority of the outstanding Plus shares. (It should be
noted that while the annual service fee with respect to Plus shares is
currently set at .25%, the plan adopted by the Board of Directors permits the
Board to increase this fee to .40% without shareholder approval.) So long as
the Funds' arrangements with Service Organizations are in effect, the selection
and nomination of the members of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of the Company will be committed to the
discretion of such noninterested directors.
Expenses.
Except as noted in the Funds' Prospectuses, the Funds' service
contractors bear the expenses incurred in connection with the performance of
their services. Similarly, the Funds bear the expenses incurred in their
operations. Fund expenses include taxes, interest, fees and salaries of its
directors and officers, SEC fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for
distribution to shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, Service Organization
fees, costs of the Funds' computer access program, certain insurance premiums,
outside auditing and legal expenses, cost of independent pricing service, costs
of shareholder reports and shareholder meetings and any extraordinary expenses.
The Funds also pay for brokerage fees and commissions (if any) in connection
with the purchase of portfolio securities.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional Federal, state and
local tax considerations generally affecting the Funds and their shareholders
that are not described in the Funds' Prospectuses. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
shareholders, and the discussion here and in the Funds' Prospectuses is not
intended as a substitute for careful tax planning. Investors should consult
their tax advisers with specific reference to their own tax situations.
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<PAGE> 44
General.
Each Fund is treated as a separate corporate entity under the
Code, and has qualified, and intends to continue to qualify, as a regulated
investment company.
As described above and in the Funds' Prospectuses, the Funds
are designed to provide California institutional investors and their customers
with current tax-exempt interest income. The Funds are not intended to
constitute a balanced investment program and are not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Funds would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Internal Revenue Code, H.R. 10 plans and individual
retirement accounts since such plans and accounts are generally tax-exempt and,
therefore, would not only not gain any additional benefit from the Funds'
dividends being tax-exempt, but such dividends would be ultimately taxable to
the beneficiaries when distributed to them. In addition, the Funds may not be
an appropriate investment for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business and (i) whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues
derived by all users of such facilities, or (ii) who occupies more than 5% of
the usable area of such facilities or (iii) for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
The percentage of total dividends paid by each Fund with
respect to any taxable year which qualify as Federal exempt-interest dividends
will be the same for all shareholders receiving dividends for such year. In
order for a Fund to pay exempt-interest dividends for any taxable year, at the
close of each fiscal quarter at least 50% of the aggregate value of the Fund's
portfolio must consist of exempt-interest obligations. In addition, a Fund
must distribute with respect to each taxable year an amount that is at least
equal to the sum of 90% of the exempt-interest income net of certain deductions
and 90% of the investment company taxable income for the taxable year. Not
later than 60 days after the close of its taxable year, each Fund will notify
each shareholder of the portion of the dividends paid by that Fund to the
shareholder with respect to such taxable year which constitutes an
exempt-interest dividend. The aggregate amount of dividends so designated
cannot, however, exceed the
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<PAGE> 45
excess of the amount of interest exempt from tax under Section 103 of the Code
received by that Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry a Fund's shares, equal to the percentage of
total non-capital gain dividends distributed during the shareholder's taxable
year that are exempt-interest dividends, is not deductible for Federal income
tax purposes.
While the Funds do not expect to earn any investment company
taxable income, any taxable income earned by the Funds will be distributed to
shareholders. In general, a Fund's investment company taxable income will be
its taxable income, subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Such distributions would be taxable to
shareholders as ordinary income (whether made in cash or additional shares).
Similarly, while the Funds do not expect to realize long-term
capital gains, any net realized long-term capital gains will be distributed at
least annually. A Fund will generally have no tax liability with respect to
such gains, and the distributions (whether paid in cash or additional shares)
will be taxable to shareholders as long-term capital gain, regardless of how
long a shareholder has held shares of the Fund. Such distributions will be
designated as capital gain dividends in a written notice mailed by the Funds to
shareholders not later than 60 days after the close of the Funds' taxable year.
Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
Dividends declared in October, November or December of any year and made
payable to a Fund's shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the Funds
on December 31 of such year, if such dividends are actually paid during
January of the following year.
A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to distribute currently an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income with respect to each calendar year to
avoid liability for this excise tax.
Although each Fund expects to qualify as a "regulated
investment company" and to be relieved of all or substantially
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<PAGE> 46
all liability for Federal income taxes, a Fund may be subject to the tax laws
of certain states or localities, depending upon the extent of its activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which it is deemed to be
conducting business.
If for any taxable year a Fund does not qualify for the
special Federal income tax treatment afforded regulated investment companies,
all of its taxable income would be subject to Federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (including amounts derived from interest
on Municipal Obligations) would be taxable to shareholders to the extent of a
Fund's current or accumulated earnings and profits and would be eligible for
the dividends received deduction allowed to corporations under the Code.
To the extent that a Fund's dividends distributed to
shareholders are derived from interest income exempt from Federal income tax
and are properly designated as "exempt-interest dividends" by a Fund, they will
be excludable from a shareholder's gross income for Federal income tax
purposes. Under the Code, shareholders that receive exempt-interest dividends
may be required to treat as taxable income a portion of certain otherwise
nontaxable social security and railroad retirement benefit payments.
A shareholder of California Intermediate should be aware that
a redemption of such shares is a taxable event, and, accordingly, a capital
gain or loss may be recognized. If a shareholder of California Intermediate
receives an exempt-interest dividend with respect to any share and such share
has been held for six months or less, any loss on a redemption of such shares
will be disallowed to the extent of such exempt-interest dividend. Similarly,
if a shareholder receives a distribution taxable as long-term capital gain and
redeems shares before he has held them for more than six months, any loss on
the redemption (not otherwise disallowed as attributable to an exempt-interest
dividend) will be treated as long-term capital loss.
California.
Assuming each Fund qualifies as a "regulated investment
company," it will be relieved of California franchise and income taxes to the
extent it distributes its exempt-interest income, investment company taxable
income and any excess of net long-term capital gain over net short-term
capital loss. It is anticipated that each Fund will be relieved of all or
substantially all of
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California franchise and income taxes by making such distributions.
If, at the close of each quarter of its taxable year, at least
50% of the value of the total assets of a regulated investment company, or
series thereof, consists of obligations which when held by an individual, the
interest therefrom is exempt from California personal income taxation
("California Tax-Exempt Obligations") then the regulated investment company, or
series of that company, will be qualified to pay dividends exempt from
California state personal income tax to its non-corporate shareholders
(hereinafter referred to as "California exempt-interest dividends"). Series of
a regulated investment company is defined as a segregated portfolio of assets,
the beneficial interest in which is owned by the holders of an exclusive class
or series of stock of the company. California Tax-Exempt Obligations are
limited to California Municipal Obligations and certain U.S. Government
obligations the interest on which is exempt from state income taxation as
provided by federal law. Each of the Funds intends to qualify under the above
50% by value requirement so that it can pay California exempt-interest
dividends. If the Funds fail to so qualify, no part of their dividends will be
exempt from California state personal income tax.
Not later than 60 days after the close of its taxable year,
each Fund will notify each shareholder of the portion of the dividends paid by
that Fund to the shareholder with respect to such taxable year which is exempt
from California state personal income tax. The total amount of California
exempt-interest dividends paid by each Fund to its shareholders with respect to
any taxable year cannot exceed the excess of the amount of interest received by
the Fund during such year on California Tax-Exempt Obligations over any amounts
that, if the Fund were treated as an individual, would be considered expenses
related to tax exempt income and would thus not be deductible under Federal
income or California state personal income tax law. The percentage of total
dividends paid by the Fund with respect to any taxable year which qualifies as
California exempt-interest dividends will be the same for all shareholders
receiving dividends from the Fund with respect to such year.
In cases where shareholders are "substantial users" or
"related persons" with respect to California Municipal Obligations held by the
Funds, such shareholders should consult their tax advisers to determine whether
California exempt-interest dividends paid by the Funds with respect to such
obligations retain their California state personal income tax exclusion. In
this connection rules similar to those regarding the possible unavailability of
Federal exempt-interest dividend treatment to "substantial users" are
applicable for California
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state tax purposes. See "Additional Information Concerning Taxes - General"
above.
To the extent any dividends paid to shareholders are derived
from long-term and short-term capital gains, such dividends will not constitute
California exempt-interest dividends. Rules similar to those regarding the
treatment of such dividends for Federal income tax purposes are also applicable
for California state personal income tax purposes. See "Additional Information
Concerning Taxes - General." Moreover, interest on indebtedness incurred by a
shareholder to purchase or carry shares of the Funds is not deductible for
California state personal income tax purposes if the particular Fund
distributes California exempt-interest dividends to the shareholder during his
or her taxable year.
The foregoing is only a summary of some of the important
California state personal income tax considerations generally affecting the
Funds and their shareholders. No attempt is made to present a detailed
explanation of the California state personal income tax treatment of the Funds
or their shareholders, and this discussion is not intended as a substitute for
careful planning. Further, it should be noted that the portion of each Fund's
dividends constituting California exempt-interest dividends is excludable from
income for California state personal income tax purposes only. Any dividends
paid to shareholders of the Funds subject to California state franchise tax or
California state corporate income tax will be taxed as ordinary dividends to
such shareholders, notwithstanding that all or a portion of such dividends is
exempt from California state personal income tax. Accordingly, potential
investors in the Funds, including, in particular, corporate investors which may
be subject to either California franchise tax or California corporate income
tax, should consult their tax advisers with respect to the application of such
taxes to the receipt of the Funds' dividends and as to their own California
state tax situation, in general.
DIVIDENDS
General.
Net income for dividend purposes for each of the Funds
consists of (i) interest accrued and original issue discount earned on the
Fund's assets for the applicable dividend period, less (ii) amortization of
market premium on such assets, accrued expenses directly attributable to the
Fund and the general expenses (e.g. legal, accounting and director's fees) of
the Company prorated to the Fund on the basis of its relative net assets. Net
income for each Fund's three series of shares is determined in the same manner
except that Dollar and Plus shares bear the fees payable to Service
Organizations for the services
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to the beneficial owners of such shares. (See the Fund's Prospectus under
"Dividends.") Realized and unrealized gains and losses on portfolio securities
are reflected in net asset value.
Should a Fund incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the income of
the Fund for a particular period, the Board of Directors would at that time
consider whether to adhere to the present dividend policy with respect to the
Fund or to revise it in order to mitigate to the extent possible the
disproportionate effect of such expense or loss on the income of the Fund.
Such expense or loss may result in the shareholder's receiving no dividends for
the period during which it held shares of the Fund and in it receiving upon
redemption a price per share lower than that which it paid.
Yield Information.
Yields are computed separately for each series of each Fund.
California Money. The "yields," "effective yields" and
"tax-equivalent yields" for each of California Money's three series of shares
as described and shown in the Prospectuses are calculated according to formulas
prescribed by the SEC. The standardized seven-day yield for each of California
Money's three series of shares is computed separately for each series by
determining the net change in the value of a hypothetical pre-existing account
in California Money having a balance of one share of the series involved at the
beginning of the period, dividing the net change by the value of the account at
the beginning of the period to obtain the base period return, and multiplying
the base period return by 365/7. The net change in the value of an account in
California Money includes the value of additional shares purchased with
dividends from the original share and dividends declared on the original share
and any such additional shares, net of all fees charged to all shareholder
accounts in proportion to the length of the base period and California Money's
average account size, but does not include gains and losses or unrealized
appreciation and depreciation. The "effective yield" of any series of shares
is calculated by compounding the unannualized base period return for the series
involved (calculated as above) by adding one to the base period return for the
series, raising that sum to a power equal to 365/7, and subtracting one from
the result. The "tax-equivalent" yield of any series of shares is computed by:
(a) dividing the portion of the yield for the series involved (calculated as
above) that is exempt from both Federal and California State income taxes by
one minus a stated combined Federal and California State income tax rate; (b)
dividing the portion of the yield for the series involved (calculated as above)
that is exempt from Federal income tax only by one minus a stated Federal
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income tax rate; and (c) adding the figures resulting from (a) and (b) above to
that portion, if any, of the yield for the series involved that is not exempt
from Federal income tax.
From time to time, in advertisements or in reports to
shareholders, the yield of California Money may be quoted and compared to those
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the yield of California Money may be compared
to the Donoghue's IBC/Money Fund Average, which is an average compiled by
Donoghue's MONEY FUND REPORT(R) of Holliston, MA 01746, a widely recognized
independent publication that monitors the performance of money market funds, or
to the data prepared by Lipper Analytical Services, Inc. ("Lipper"), a
widely-recognized independent service that monitors the performance of mutual
funds.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Materials"),
discussions or illustrations of the effects of compounding. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Funds may also include in Materials discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of a Fund, economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Materials may summarize the substance of information contained in shareholder
reports (including the investment composition of a Fund), as well as the views
of the advisers as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Funds and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of a Fund and/or other mutual
funds. Materials may include a discussion of
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certain attributes or benefits to be derived by an investment in a Fund and/or
other mutual funds (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
instruments. Such Materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
California Money's yield will fluctuate and any quotation of
California Money's yield should not be considered as representative of the
future performance of California Money. Since yields fluctuate, yield data
cannot necessarily be used to compare an investment in California Money's
shares with bank deposits, savings accounts, and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that yield is generally a
function of kind and quality of the investments held in a portfolio, portfolio
maturity, operating expenses, and market conditions. Any fees charged by banks
or other financial institutions with respect to customer accounts investing in
shares of California Money will not be included in calculations of yield; such
fees, if charged, would reduce the actual yield from that quoted.
California Intermediate. From time to time, the yield of
California Intermediate may be quoted in advertisements, shareholder reports or
other communications to shareholders. The yield of California Intermediate
will be calculated by dividing the net investment income per share (as
described below) earned by California Intermediate during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. California Intermediate's net investment
income per share earned during the period will be based on the average daily
number of shares outstanding during the period entitled to receive dividends
and will include dividends and interest earned during the period minus expenses
accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b (6)
Yield = 2 [ (----- + 1) - 1]
cd
Where: a = dividends and interest earned during
the period.
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b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = net asset value per share on the last day of the period.
Except as noted below, for the purpose of determining net
investment income earned during the period (variable "a" in the formula),
interest earned on debt obligations held by California Intermediate will be
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by California Intermediate. For purposes of
this calculation, it is assumed that each month contains 30 days. The maturity
of an obligation with a call provision will be the next call date on which the
obligation reasonably may be expected to be called or, if none, the maturity
date.
Interest earned on tax-exempt obligations that are issued
without original issue discount and have a current market discount will be
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt obligations that are issued with original
issue discount but which have discounts based on current market value that
exceed the then-remaining portion of the original issue discount (market
discount), the yield to maturity will be the imputed rate based on the original
issue discount calculation. On the other hand, in the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that are less than the then-remaining
portion of the original issue discount (market premium), the yield to maturity
will be based on the market value.
Undeclared earned income will be subtracted from the net asset
value per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
-52-
<PAGE> 53
The "tax-equivalent" yield of any series of shares is computed
by: (a) dividing the portion of the yield for the series involved (calculated
as above) that is exempt from both Federal and California state income taxes by
one minus a stated combined Federal and California state income tax rate; (b)
dividing the portion of the yield for the series involved (calculated as above)
that is exempt from Federal income tax only by one minus a stated Federal
income tax rate; and (c) adding the figures resulting from (a) and (b) above to
that portion, if any, of the yield for the series involved that is not exempt
from Federal income tax.
Total Return Calculations -- California Intermediate.
California Intermediate will compute its average annual total
return by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This will be done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
ERV (1/n)
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the
end of the period covered by
the computation of a
hypothetical $1,000 payment
made at the beginning of the
period.
P = hypothetical initial payment of
$1,000.
n = period covered by the computation, expressed
in terms of years.
California Intermediate will compute its aggregate total
returns by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
-53-
<PAGE> 54
ERV
Aggregate Total Return = [(-----) - 1]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions at California Intermediate's net asset value as described in the
Prospectus on the reinvestment dates during the period. The ending redeemable
value (variable "ERV" in each formula) is determined by assuming complete
redemption of the hypothetical investment and the deduction of all nonrecurring
charges at the end of the period covered by the computations.
Since performance will fluctuate, performance data for
California Intermediate cannot necessarily be used to compare an investment in
California Intermediate's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and market
conditions. The time periods used in advertising will be updated no less
frequently than through the last day of the most recent calendar quarter prior
to submission of the advertising for publication and will cover one, five and
ten year periods or a shorter period dating from the commencement of California
Intermediate's operations.
The total return and yield of the Fund may be compared to
those of other mutual funds with similar investment objectives and to bond and
other relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the total return and yield of the Fund's shares may be
compared to data prepared by Lipper. Total return and yield data as reported
in national financial publications such as MONEY MAGAZINE, FORBES, BARRON'S,
THE WALL STREET JOURNAL and THE NEW YORK TIMES, or in publications of a local
or regional nature, may also be used in comparing the performance of the Fund.
Based on the foregoing calculations, the average annual total
return for California Intermuni shares for the one-year period ended January
31, 1995 was (2.51)%, for the five year period ended January 31, 1995 was
6.52% and for the period from commencement of operations (September 12, 1988)
to January 31, 1995 was 6.61%. No shares of California Intermuni Dollar or
Plus had been sold during the period ended January 31, 1995.
-54-
<PAGE> 55
COUNSEL
Drinker Biddle & Reath, 1100 Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107, of which Mr.
Jones, Secretary of the Company, is a partner, will pass upon certain legal
matters for the Company as its counsel. O'Melveny & Myers, 400 South Hope
Street, Los Angeles, California 90071, act as special California counsel for
the Company and have reviewed the portions of this Statement of Additional
Information and the Funds' Prospectuses concerning California taxes and the
description of the special considerations relating to California Municipal
Obligations.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company which appear in this
Statement of Additional Information and the information included in the
Financial Highlights tables which appear in the Funds' Prospectuses have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon appears elsewhere herein, and have been included herein and in the
Funds' Prospectuses in reliance upon the report of said firm of independent
accountants given upon their authority as experts in accounting and auditing.
Coopers & Lybrand L.L.P. has offices at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103.
MISCELLANEOUS
The Company was organized as a Maryland corporation on
September 20, 1982 under the name of California Municipal Fund for Temporary
Investment, Inc. On February 10, 1983, the Company changed its name to
Municipal Fund for California Investors, Inc.
As used in this Statement of Additional Information and the
Funds' Prospectuses, a "majority of the outstanding shares" of the Company or
either Fund means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the lesser of (1) 67% of the Company's or the Fund's shares, irrespective of
series, represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Company or the Fund are present in person or by
proxy, or (2) more than 50% of the Company's or a Fund's outstanding shares,
irrespective of series.
As stated in the Prospectuses for California Money, holders of
such Fund's Money, Dollar and Plus shares will vote in the aggregate and not by
series on all matters, except where otherwise required by law, except that only
Dollar shares will be entitled to vote on matters submitted to a vote of
shareholders
-55-
<PAGE> 56
pertaining to such Fund's arrangements with Service Organizations with respect
to Dollar shares and only Plus shares will be entitled to vote on matters
submitted to a vote of shareholders pertaining to such Fund's arrangements with
Service Organizations with respect to Plus shares. As stated in California
Intermediate's Prospectus, holders of that Fund's Intermuni, Dollar and Plus
shares will vote in the aggregate and not by series on all matters, except
where otherwise required by law and except that only Dollar shares will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
such Fund's arrangements with Service Organizations with respect to Dollar
shares and only Plus shares will be entitled to vote on matters submitted to a
vote of shareholders pertaining to such Fund's arrangements with Service
Organizations with respect to Plus shares. (See the Fund's Prospectuses
"Management of the Fund - Service Organizations.") Further, shareholders of
both of the Company's portfolios will vote in the aggregate and not by
portfolio except as otherwise required by law or when the Board of Directors
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular portfolio.
Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted by the provisions of such Act or applicable state law,
or otherwise, to the holders of the outstanding securities of an investment
company such as the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by the matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that
the interests of each portfolio in the matter are identical or that the matter
does not affect any interest of the portfolio. Under the Rule, the approval of
an investment advisory agreement or any change in a fundamental investment
policy would be effectively acted upon with respect to a portfolio only if
approved by the holders of a majority of the outstanding voting securities of
such portfolio. However, the Rule also provides that the ratification of the
selection of independent accountants, the approval of principal underwriting
contracts and the election of directors are not subject to the separate voting
requirements and may be effectively acted upon by shareholders of the
investment company voting without regard to portfolio.
As of May 17, 1995, the name, address and percentage of
ownership of each institutional investor that owned of record 5% or more of
the outstanding shares of California Money were as follows: Bank of America
National Trust & Savings Association as Fiduciary for Various Accounts, Trust
Operations, 701 South Western Avenue, Glendale, California 91201, 31.5%; Union
Bank, Jessica Hickman, Trust Fund Accounting, P.O. Box 109, San Diego,
California 92112,
-56-
<PAGE> 57
8.3%; U.S. Trust Company of New York, 114 West 47th Street, 5th Floor, New
York, New York 10036, 6.4%; SANBARCO, Santa Barbara Bank & Trust, P.O. Box
2340, Santa Barbara, California 93120, 5.7%, and Santa Monica Bank, P.O. Box
1320, Santa Monica, California 90406, 5.4%. As of May 17, 1995, the name,
address and percentage of ownership of each institutional investor that owned
of record 5% or more of the outstanding shares of California Intermediate were
as follows: SANBARCO, Santa Barbara Bank & Trust, P.O. Box 2340, Santa
Barbara, California 93102, 42.6%; University Bank & Trust Company, Principal
Account, Attn: Trust Department, P.O. Box 89, Palo Alto, California 94302,
13.3%; Exchange Bank, P.O. Box 208, Santa Rosa, California 95402, 6.4%; Laird
Norton Trust Company, Drial & Co., 801 2nd Avenue, Seattle, Washington 98104,
6.1%, and Union Safe Deposit Bank, P.O. Box 201076, Stockton, California
95201, 6.0%. Bank of America National Trust & Saving Association is a
subsidiary of BankAmerica Corporation and is a corporation organized and
existing under the laws of the United States as a national banking
association. The Company does not know whether the entities named above are
the beneficial owners of the shares held by them.
The Company does not presently intend to hold annual meetings
of shareholders except as required by the 1940 Act or other applicable law.
The law under certain circumstances provides shareholders with the right to
call for a meeting of shareholders to consider the removal of one or more
directors. To the extent required by law, the Company will assist in
shareholder communication in such matters.
Notwithstanding any provision of Maryland law requiring a
greater vote of the Company's shares in connection with any corporate action,
unless otherwise provided by law or by the Company's Charter, the Company may
take or authorize such action upon the favorable vote of the holders of more
than 50% of the Company's outstanding shares voting without regard to class or
series. (See, however, the Funds' Prospectuses under "Description of Shares"
regarding certain special voting rights of Dollar and Plus shares on matters
pertaining to the Funds' arrangements with Service Organizations.)
-57-
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Municipal Fund for California Investors, Inc:
We have audited the accompanying statements of net assets of Municipal Fund
for California Investors, Inc. (comprised of California Money Fund and
California Intermediate Municipal Fund Portfolios) as of January 31, 1995, and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Company's
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 investments owned as of
January 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting Municipal Fund for California
Investors, Inc. as of January 31, 1995, the results of their operations for the
year then ended, the changes in their net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 10, 1995
FS-1
<PAGE> 59
CALIFORNIA MONEY FUND
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Statement of Net Assets
January 31, 1995
<TABLE>
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
CALIFORNIA -- 95.75%
ABAG Finance Authority
Certificates of Participation
(Lucile Salter Parker Childrens
Hospital at Sanford) DN (AMBAC
Insurance) (A-1+, VMIG-1)**
3.30%..................02/07/95
$18,050 $18,050,000
Bay Area Government Association
(Lease Revenue Pooled Projects)
Series 1987 DN (National
Westminster LOC) (VMIG-1)**
3.55%..................02/07/95
8,797 8,797,000
California Educational
Facilities Financing Authority
(Occidental College Project)
Series 1985B (Morgan Guaranty
LOC) (A-1+)
4.15%..................06/01/95
10,100 10,100,000
California Health Facilities
(Sutter Health) Series 1990B DN
(Morgan Guaranty LOC)
(A-1+, VMIG-1)**
3.80%..................02/01/95
1,100 1,100,000
California Health Facilities
Financing Authority (Adventist
Health System/West-Sutter
Health) Series 1991A DN
(Toronto Dominion LOC)
(A-1+, VMIG-1)**
3.55%..................02/07/95
6,000 6,000,000
California Health Facilities
Financing Authority (Adventist
Health System/West-Sutter
Health) Series 1991B DN
(Toronto Dominion LOC)
(A-1+, VMIG-1)**
3.50%..................02/07/95
2,500 2,500,000
California Health Facilities
Financing Authority (Catholic
Healthcare West) Series 1988B
DN (MBIA Insurance) (VMIG-1)**
3.35%..................02/07/95
1,000 1,000,000
California Health Facilities
Financing Authority (Enloe
Memorial Hospital) DN (Bank of
America LOC) (A-1)**
2.70%..................02/07/95
500 500,000
California Health Facilities
Financing Authority (Health
Dimensions, Inc.) Series A
(A-1, VMIG-1)
3.40%..................02/01/95
6,055 6,055,000
California Health Facilities
Financing Authority (O'Connor
Hospital) DN (A-1+, VMIG-1)**
3.40%..................02/07/95
7,317 7,316,533
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
California Health Facilities
Financing Authority (Pooled
Loan Program) Series 1987A DN
(Sanwa Bank LOC) (VMIG-1)**
3.70%..................02/07/95
$ 2,700 $ 2,700,000
California Health Facilities
Financing Authority (Scripps
Memorial Hospital) Series 1985B
DN (MBIA Insurance) (A-1+,
VMIG-1)**
3.70%..................02/07/95
6,500 6,500,000
California PCR (Pacific Gas &
Electric) Series 1988E TECP
(Long Term Credit Bank of
Japan LOC)
3.75%..................02/28/95
4,000 4,000,000
California Pollution Control
Finance Authority DN (Societe
Generale LOC) (A-1+, VMIG-1)**
3.45%..................02/15/95
3,100 3,100,000
California Pollution Control
Finance Authority PCRB (Shell
Oil Company Project) Series A
DN (A-1+, VMIG-1)**
3.70%..................02/01/95
600 600,000
California Pollution Control
Finance Authority PCRB TECP
(A-1, P-1) 4.05%.......03/14/95
3,000 3,000,000
California Pollution Control
Finance Authority (Pacific Gas
& Electric) TECP Series C
2.70%..................02/15/95
4,300 4,300,000
California Pollution Control
Finance Authority TECP (Banque
Nationale de Paris LOC) (A-1+)
3.10%..................02/16/95
5,000 5,000,000
3.15%..................02/16/95
6,000 6,000,000
City of Anaheim Certificates of
Participation Series 1993 DN
(Industrial Bank of Japan LOC)
(A-1+, VMIG-1)**
3.85%..................02/07/95
800 800,000
City of Loma Linda (Loma Linda
University Medical Center)
Series 1985C DN (A-1+)**
3.70%..................02/07/95
2,875 2,875,000
City of Loma Linda Hospital
Revenue Bonds DN (Industrial
Bank of Japan LOC) (A-1+)**
3.70%..................02/07/95 2,400 2,400,000
City of Stockton IDRB (La Quinta
Motor Inns) DN (NationsBank
LOC) (A-1)**
3.75%..................02/07/95
2,790 2,790,000
</TABLE>
FS-2
<PAGE> 60
CALIFORNIA MONEY FUND
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
Corona Multifamily Housing
Revenue Refunding Bonds
(Country Hills Apartment
Project) DN (Union Bank of
Switzerland LOC) (A-1)**
3.60%..................02/07/95
$ 7,045 $ 7,045,000
County of Sacramento (Courthouse
Project - Administration
Center) DN (Union Bank of
Switzerland LOC) (A-1+,
VMIG-1)**
3.45%..................02/07/95
12,000 12,000,000
Eastern Municipal Water District
Facilities Corporation
(Riverside County) Certificates
of Participation DN (FGIC
Insurance) (A-1+, VMIG-1)**
3.50%..................02/07/95
900 900,000
Fremont Multifamily Housing
Bonds (Mission Wells Project)
Series 1985E DN (Industrial
Bank of Japan LOC) (A-1+,
VMIG-1)**
3.65%..................02/07/95
5,100 5,100,000
Golden Empire Schools Financing
Authority (Kern High School
District Project) DN (A-1+)**
3.75%..................02/07/95
1,700 1,700,000
Golden Empire Schools Financing
Authority (Kern High School
District Project) Series 1989
DN (Barclays Bank LOC)
(VMIG-1)**
3.75%..................02/07/95
2,000 2,000,000
Los Angeles County Housing
Authority (Malibu Woods
Project) DN (Sumitomo Bank
LOC)**
3.65%..................02/07/95
2,129 2,129,000
Los Angeles County Housing
Authority Multifamily Housing
Revenue Bonds (Sand Canyon
Ranch Project) Series 1985F DN
(Citibank LOC) (A-1)**
2.95%..................02/07/95
4,000 4,000,000
Los Angeles County Metropolitan
Transportation Authority Second
Subordinate Sales Tax Revenue
Notes Series A DN (A-1+)**
3.50%..................02/07/95
12,000 12,000,000
Los Angeles County Multifamily
Mortgage Revenue Bonds
Series 1984B DN (Citibank LOC)
(A-1+, VMIG-1)**
4.16%..................02/07/95
4,100 4,100,000
Los Angeles County TRAN
Series 1994-95 (SP-1+, MIG-1+)
4.50%..................06/30/95
11,900 11,923,878
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
Los Angeles Unified School
District TRAN (SP-1+)
4.50%..................07/10/95
$12,000 $12,045,379
Moorpark Multifamily Revenue
Bonds (Le Club Apartments
Project) Series A DN (Citibank
LOC) (A-1)**
2.75%..................02/07/95
2,700 2,700,000
Oakland Certificates of
Participation (Capital
Improvement Project)
DN (Mitsubishi Bank LOC)
(A-1+, VMIG-1)**
4.10%..................02/07/95
26,200 26,200,000
Oakland Economic Development
Revenue Bonds (Leamington
Project) Series 1994A DN (First
Interstate LOC) (A-1)**
3.70%..................02/07/95
4,300 4,300,000
Orange County TRAN (Citibank
LOC) (SP-1+, MIG-1)***
4.50%..................07/19/95
7,900 7,924,290
Pasadena Certificates of
Participation (Rose Bowl
Improvements) DN (Industrial
Bank of Japan LOC)
(A-1, VMIG-1)**
3.80%..................02/07/95
5,400 5,400,000
Placer IDRB (Chesapeake
Industries, Inc.) DN (Barclays
Bank LOC) (VMIG-1)**
3.40%..................02/07/95
1,200 1,200,000
Redlands City Multifamily
Revenue Refunding Bonds DN
(Bank of America LOC)
(VMIG-1)**
3.55%..................02/07/95
3,600 3,600,000
Riverside County Certificates of
Participation (Riverside County
Public Facility) Series 1985C
DN (Sanwa Bank LOC)
(A-1+, VMIG-1)**
3.40%..................02/07/95
1,400 1,400,000
Riverside County TRAN
Series 1994-95 (SP-1+, MIG-1)
4.25%..................06/30/95
3,000 3,007,675
Riverside County Transportation
Commission Sales Tax Revenue
Bonds TECP (Industrial Bank of
Japan LOC) (A-1, P-1)
3.25%..................02/01/95
9,400 9,400,000
San Francisco City and County
Housing Authority Multifamily
Housing Revenue Bonds
(Winterland Project) Series
1985C DN (Citibank LOC)
(A-1, VMIG-1)**
3.35%..................02/07/95
1,200 1,200,000
</TABLE>
FS-3
<PAGE> 61
CALIFORNIA MONEY FUND
Statement of Net Assets (Continued)
<TABLE>
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
San Francisco City and County
Redevelopment Agency
Multifamily Housing Revenue
Bonds (Bayside Village Project)
Series A DN (Industrial Bank of
Japan LOC) (A-1+, VMIG-1)**
3.525%.................02/07/95
$ 4,600 $ 4,600,000
San Francisco City and County
Redevelopment Agency
Multifamily Housing Revenue
Bonds (Bayside Village Project)
Series B DN (Industrial Bank of
Japan LOC) (A-1+, VMIG-1)**
3.525%.................02/07/95
5,500 5,500,000
San Francisco City and County
Redevelopment Agency
Multifamily Housing Revenue
Bonds (South Harbor Project) DN
(VMIG-1)**
3.50%..................02/07/95
12,080 12,080,000
San Jose Multifamily Housing
Bonds DN (FGIC Insurance)
(VMIG-1)**
3.55%..................02/07/95
4,980 4,980,000
San Ramon Valley Unified School
District TRAN (MIG-1)
3.50%..................02/16/95
5,000 5,000,055
Santa Clara Multifamily Housing
Bonds (Fox Chase Project) DN
(FGIC Insurance)
(A-1+, VMIG-1)**
3.55%..................02/07/95
1,600 1,600,000
Santa Clara TRAN (SP-1+, MIG-1)
4.25%..................07/07/95 5,000 5,013,254
Santa Margarita/Dana Point
Authority (Orange County)
Series 1994B RB (MBIA
Insurance)
4.50%..................08/01/95
3,595 3,599,385
Southern California (Public
Power Authority Transportation
Project) Subordinate Refunding
Revenue Bonds Series 1991 DN
(FGIC Insurance) (A-1+,
VMIG-1)** 3.25%........02/07/95
11,600 11,600,000
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
State of California Department
of Water Resources Series 1
TECP (A-1+, VMIG-1)
3.55%..................02/14/95
$ 6,000 $ 6,000,000
3.60%..................03/02/95
4,727 4,727,000
State of California GO DN**
6.625%.................02/01/95
5,795 5,795,000
State of California RAN
Series 1994-95A (SP-1, MIG-1)
5.00%..................06/28/95
13,490 13,539,091
State of California RAN
Series 1994-95B DN
(A-1, VMIG-1)**
4.32%..................02/01/95
35,000 35,000,000
Triunfo Sanitation District
Revenue Bonds DN (Banque
National de Paris LOC) (A-1+)**
3.75%..................02/07/95
2,400 2,400,000
Ventura County Certificates of
Participation (Channel Islands
Beach Community Services
District) Series 1990 DN (Swiss
Bank LOC) (A-1+, VMIG-1)**
3.40%..................02/07/95
2,000 2,000,000
Washington Township Hospital
District (Alameda County) DN
(Industrial Bank of Japan LOC)
(VMIG-1)**
3.60%..................02/07/95
9,800 9,800,000
-----------
379,992,540
-----------
PUERTO RICO -- 3.81%
Puerto Rico Government
Development Bank Series 1985 DN
(Credit Suisse LOC)
(A-1+, VMIG-1)**
2.95%..................02/07/95
7,100 7,100,000
Puerto Rico Maritime Shipping
Authority TECP (Credit Suisse
LOC) (A-1, P-1)
2.90%..................02/15/95
3,000 3,000,000
3.50%..................02/27/95
5,000 5,000,000
-----------
15,100,000
-----------
</TABLE>
FS-4
<PAGE> 62
CALIFORNIA MONEY FUND
Statement of Net Assets (Concluded)
<TABLE>
<CAPTION>
VALUE
------------
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $395,092,540*)...............99.56% $395,092,540
OTHER ASSETS IN EXCESS OF
LIABILITIES..........................0.44 1,757,474
--- ------------
NET ASSETS (Equivalent to $1.00
per share based on
385,958,121 California Money,
100 California Plus,
and 11,028,469
California Dollar shares
outstanding.......................100.00% $396,850,014
------ ------------
------ ------------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
($396,850,014 / 396,986,690)............. $1.00
-----
-----
</TABLE>
- -------------
* Aggregate cost for federal income tax purposes is
$395,092,540.
** Variable rate demand notes -- the interest rate shown
is as of January 31, 1995, and the maturity date shown
is the longer of (i) the next interest readjustment
date or (ii) the date on which the principal amount
owed can be recovered through demand.
*** With respect to this security, PNC Institutional
Management Corporation, the Investment Adviser,
through PNC Bank Corp., has obtained an $8,300,000
irrevocable letter of credit from Citibank, N.A.. This
letter of credit provides additional support for the
valuation of this security. The marked to market
valuation of this security has at no time adversely
affected the maintenance of a net asset value of
$1.00. The letter of credit expires on July 31, 1995.
The Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group, Division of McGraw-Hill, Inc.
ratings are believed to be the most recent ratings
available at January 31, 1995. The ratings have not
been verified by the Independent Accountants and,
therefore, are not covered by the Report of the
Independent Accountants.
- --------------------------------------------------------
CALIFORNIA MONEY FUND
SUPPLEMENTARY INFORMATION
Maturity Schedule of Portfolio
January 31, 1995
<TABLE>
<CAPTION>
MATURITY
PERIOD PAR PERCENTAGE
------------ ------------ ----------
<S> <C> <C>
1-30 Days $324,939,533 82.3%
31-60 Days 3,000,000 0.8%
Over 60 Days 66,985,000 16.9%
Average Weighted Maturity of Portfolio -- 33 days
- --------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
FS-5
<PAGE> 63
CALIFORNIA INTERMEDIATE MUNICIPAL FUND
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Statement of Net Assets
January 31, 1995
<TABLE>
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
CALIFORNIA -- 91.22%
Alameda County Transit Authority
(Sales Tax Revenue) RB (FGIC
Insurance) (Aaa)
5.50%..................11/01/01
$ 1,000 $ 991,250
Anaheim Electric Revenue
Refunding Bonds RB (Aa)
4.75%..................10/01/01
800 726,000
California Education Authority
(Pepperdine University) RB
(MBIA Insurance) (Aaa)
6.80%..................11/01/00
500 537,500
California Education Authority
(Stanford University) RB (Aaa)
5.50%..................11/01/00 800 813,000
California Health Facilities
Financing Authority
(Cedars-Sinai Hospital) Series
1990 RB (Aa)
6.50%..................11/01/00
600 624,750
California Health Facilities
Financing Authority DN
(Industrial Bank of Japan LOC)
(Aa3, VMIG-1)**
3.95%..................02/01/95
100 100,000
City of Sacramento Sanitation
District RB (Aa)
4.30%..................12/01/00
500 468,125
East Bay Municipal Utility
District RB (AMBAC Insurance)
(Aaa)
7.00%..................06/01/00
800 858,000
Elk Grove Unified School
District Pre-Refunded 12/01/98
@ 103 RB (FGIC Insurance) (Aaa)
9.00%..................12/01/07
700 805,875
Los Angeles County Public Works
RB (Aa1)
4.70%..................03/01/03
1,000 906,250
Los Angeles County
Transportation Commission Sales
Tax Revenue Series A
Pre-Refunded 07/01/98 @ 102 RB
(Aaa)
8.00%..................07/01/18
800 880,000
Los Angeles Department of Water
and Power (Electric Plant) RB
(Aa)
9.00%..................02/01/01
500 585,625
Los Angeles Department of Water
and Power (Electric Plant)
Series 1990 RB (Aa)
6.75%..................05/15/99
500 528,125
<CAPTION>
INVESTMENTS IN MATURITY PAR
SECURITIES DATE (000) VALUE
- ---------------------------------- ------- -----------
<S> <C> <C>
Los Angeles State Building
Authority General Services
Series A RB (Aa)
6.75%..................03/01/99
$ 500 $ 521,250
Metropolitan Water District of
Southern California RB (Aa)
6.25%..................07/01/01
1,000 1,037,500
San Elijo Joint Power Water
Authority PCRB (FGIC
Insurance) (Aaa)
4.90%..................03/01/01
500 475,000
San Francisco Bay Area Rapid
Transit District Sales Tax RB
(A1)
6.60%..................07/01/99
600 629,250
San Francisco GO (Aa)
5.70%..................06/15/01
500 503,750
San Francisco Various Purpose
Unlimited Tax GO Series A RB
(Aa)
6.20%..................12/15/99
700 728,000
Southern California Public Power
Authority (Joint Power Project)
RB (A)
6.75%..................07/01/00
600 632,250
Southern California Public Power
Authority (Transmission
Project) RB (Aa)
6.80%..................07/01/98
400 418,000
State of California GO (Aa)
4.10%..................09/01/01
1,000 878,750
University of California (Multi-
Purpose Projects) Series C RB
(AMBAC Insurance) (Aaa)
4.125%..................9/01/00
800 730,000
West Sacramento Redevelopment
Agency RB (MBIA Insurance)
(Aaa)
6.25%..................09/01/01
500 523,125
-----------
15,901,375
-----------
VIRGIN ISLANDS -- 6.30%
Virgin Islands Public Finance
Authority Pre-Refunded
10/01/00 @ 101 RB (Aaa)
7.25%..................10/01/07
1,000 1,098,750
-----------
</TABLE>
FS-6
<PAGE> 64
CALIFORNIA INTERMEDIATE MUNICIPAL FUND
Statement of Net Assets (Concluded)
<TABLE>
<CAPTION>
VALUE
-----------
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $17,176,376*)................ 97.52%
$17,000,125
OTHER ASSETS IN EXCESS OF
LIABILITIES...........................2.48
432,094
--- -----------
NET ASSETS (Equivalent to $10.02
per share based on 1,739,014
California Intermuni shares
outstanding........................100.00%
$17,432,219
------ -----------
------ -----------
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE
($17,432,219 / 1,739,014).........................$10.02
------
------
</TABLE>
- -------------
* Aggregate cost for federal income tax purposes is
$17,176,376. The aggregate gross unrealized
depreciation (excess of tax cost over market value) is
$(176,251) (comprised of $264,816 appreciation and
$441,067 depreciation.)
** Variable rate demand notes -- the interest rate shown
is as of January 31, 1995, and the maturity date shown
is the longer of (i) the next interest readjustment
date or (ii) the date on which the principal amount
owed can be recovered through demand.
The Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group, Division of McGraw-Hill, Inc.
ratings are believed to be the most recent ratings
available at January 31, 1995. The ratings have not
been verified by the Independent Accountants and,
therefore, are not covered by the Report of the
Independent Accountants.
- --------------------------------------------------------
CALIFORNIA INTERMEDIATE
MUNICIPAL FUND
Supplementary Information
January 31, 1995
Average Weighted Maturity of Portfolio -- 5.59 Years
- ---------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT ABBREVIATIONS:
<S> <C>
DN Demand Notes (Variable Rate)
GO General Obligation
IDA Industrial Development Authority
IDRB Industrial Development Revenue Bond
LOC Letter of Credit
PCR Pollution Control Revenue
PCRB Pollution Control Revenue Bond
RAN Revenue Anticipation Notes
RB Revenue Bonds
TECP Tax-Exempt Commercial Paper
TRAN Tax and Revenue Anticipation Notes
</TABLE>
See accompanying notes to financial statements.
FS-7
<PAGE> 65
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Statements of Operations
For the Year Ended January 31, 1995
<TABLE>
<CAPTION>
CALIFORNIA CALIFORNIA
MONEY INTERMEDIATE
FUND MUNICIPAL FUND
----------- --------------
<S> <C> <C>
Investment income:
Interest.................................................. $12,450,075 $ 981,929
----------- --------------
Expenses:
Investment advisory fee................................... 833,727 37,369
Administration fee........................................ 833,727 37,369
Service Organization fees:
Dollar shares.......................................... 43,771 --
Custodian fees............................................ 104,373 5,158
Legal fees................................................ 32,800 1,500
Transfer agent fees....................................... 47,500 2,725
Audit fees................................................ 42,750 2,070
Directors' and Officers' fees and expenses................ 46,250 1,890
Registration and filing fees.............................. 4,800 --
Printing.................................................. 19,350 4,950
Other..................................................... 34,060 6,313
----------- --------------
2,043,108 99,344
Fees waived by Investment Adviser and Administrators...... (1,165,487) (61,973)
----------- --------------
Total expenses......................................... 877,621 37,371
----------- --------------
Net investment income................................ 11,572,454 944,558
----------- --------------
Realized and unrealized gain (loss) on investments:
Net realized loss on investments sold..................... (39,944) (43,055)
Decrease in unrealized appreciation of investments........ -- (1,416,126)
Increase in amortized market discount..................... -- 3,617
----------- --------------
Net loss on investments.............................. (39,944) (1,455,564)
----------- --------------
Net increase (decrease) in net assets resulting from
operations................................................ $11,532,510 $ (511,006)
============ ============
</TABLE>
See accompanying notes to financial statements.
FS-8
<PAGE> 66
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
CALIFORNIA INTERMEDIATE
CALIFORNIA MONEY FUND MUNICIPAL FUND
----------------------------- -------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net investment income.......... $ 11,572,454 $ 8,495,814 $ 944,558 $ 881,270
Net realized and
unrealized gain (loss)
on investments............... (39,944) (3,743) (1,455,564) 655,629
------------ ------------ ----------- -----------
Net increase (decrease) in net
assets resulting from
operations................... 11,532,510 8,492,071 (511,006) 1,536,899
------------ ------------ ----------- -----------
Distributions to shareholders
from:
Net investment income:
Money shares.............. (11,142,146) (8,242,936) -- --
Plus shares............... -- -- -- --
Dollar shares............. (430,308) (252,878) -- --
Intermuni shares.......... -- -- (944,558) (881,270)
Net realized capital gains... -- -- (64,692) (446,415)
------------ ------------ ----------- -----------
Total distributions............ (11,572,454) (8,495,814) (1,009,250) (1,327,685)
------------ ------------ ----------- -----------
Increase (decrease) in net
assets from capital share
transactions................. 21,291,148 4,659,031 (1,108,779) 2,533,686
------------ ------------ ----------- -----------
Net increase (decrease) in net
assets....................... 21,251,204 4,655,288 (2,629,035) 2,742,900
Net assets:
Beginning of period.......... 375,598,810 370,943,522 20,061,254 17,318,354
------------ ------------ ----------- -----------
End of period................ $396,850,014 $375,598,810 $17,432,219 $20,061,254
============= ============= ============ ============
</TABLE>
See accompanying notes to financial statements.
FS-9
<PAGE> 67
CALIFORNIA MONEY FUND
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MONEY SHARES
-------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
01/31/95 01/31/94 01/31/93 01/31/92 01/31/91
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ---------
Income From Investment Operations:
Net Investment Income....................................... 0.0281 0.0223 0.0251 0.0375 0.0509
-------- -------- -------- -------- ---------
Less Distributions:
Dividends to Shareholders From Net Investment Income........ (0.0281) (0.0223) (0.0251) (0.0375) (0.0509)
-------- -------- -------- -------- ---------
Net Asset Value, End of Period.................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return.................................................... 2.84% 2.25% 2.54% 3.82% 5.21%
Ratios/Supplemental Data:
Net Assets, End of Period $(000).............................. 385,824 356,501 359,193 490,141 629,001
Ratio of Expenses to Average Net Assets(1).................... .20% .20% .30% .30% .29%
Ratio of Net Investment Income to Average Net Assets.......... 2.79% 2.23% 2.52% 3.75% 5.10%
</TABLE>
- ---------------
(1) Operating expense ratios before waivers of Investment Adviser and
Administrator fees for Money shares for the years ended January 31, 1995,
1994, 1993, 1992 and 1991 were .48%, .49%, .48%, .48%, and .46%, respectively.
See accompanying notes to financial statements.
FS-10
<PAGE> 68
CALIFORNIA MONEY FUND
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
PLUS SHARES
--------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
01/31/95(4) 01/31/94(4) 01/31/93(4) 01/31/92 01/31/91
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- -------- -------- --------
Income From
Investment
Operations:
Net Investment
Income........ -- -- 0.0191 0.0350 0.0484
------- ------- -------- -------- --------
Less
Distributions:
Dividends to
Shareholders
From Net
Investment
Income........ -- -- (0.0191) (0.0350) (0.0484)
------- ------- -------- -------- --------
Net Asset Value,
End of Period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======== ======== ========
Total Return........ -- -- 1.93% 3.57% 4.96%
Ratios/Supplemental
Data:
Net Assets, End of
Period $(000)... -- -- -- 27,656 19,872
Ratio of Expenses
to
Average Net
Assets(3)....... -- -- .55% .55% .54%
Ratio of Net
Investment
Income to
Average Net
Assets.......... -- -- 2.27% 3.50% 4.85%
</TABLE>
<TABLE>
<CAPTION>
DOLLAR SHARES
----------------------------------------------------------------------------
YEAR YEAR YEAR YEAR 01/09/91(1)
ENDED ENDED ENDED ENDED TO
01/31/95 01/31/94 01/31/93 01/31/92 01/31/91
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income From
Investment
Operations:
Net Investment
Income........ 0.0256 0.0198 0.0226 0.0350 0.0024
-------- -------- -------- -------- --------
Less
Distributions:
Dividends to
Shareholders
From Net
Investment
Income........ (0.0256) (0.0198) (0.0226) (0.0350) (0.0024)
-------- -------- -------- -------- --------
Net Asset Value,
End of Period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return........ 2.59% 2.00% 2.29% 3.57% 3.87%(2)
Ratios/Supplemental
Data:
Net Assets, End of
Period $(000)... 11,026 19,098 11,750 6,599 1,126
Ratio of Expenses
to
Average Net
Assets(3)....... .45% .45% .55% .55% .54%(2)
Ratio of Net
Investment
Income to
Average Net
Assets.......... 2.54% 1.98% 2.27% 3.50% 3.85%(2)
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Annualized.
(3) Operating expense ratios before waivers of Investment Adviser and
Administrator fees for Plus shares for the years ended January 31, 1993,
1992 and 1991 were .64%, .73%, and .71%, respectively. Operating
expense ratios before waivers of Investment Adviser and Administrator fees
for Dollar shares for the years ended January 31, 1995, 1994, 1993 and 1992
were .73%, .74%, .73%, and .73%, respectively, and for the period ended
January 31, 1991 was .71%.
(4) Only 100 Plus shares were outstanding during the period from December 1,
1992 to January 31, 1995.
See accompanying notes to financial statements.
FS-11
<PAGE> 69
CALIFORNIA INTERMEDIATE MUNICIPAL FUND
MUNICIPAL FUND FOR CALIFORNIA INVESTORS, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
INTERMUNI SHARES
-----------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
01/31/95 01/31/94 01/31/93 01/31/92 01/31/91
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 10.85 $ 10.72 $ 10.61 $ 10.34 $ 10.05
------------- ------------- ------------- ------------- -------------
Income From Investment Operations:
Net Investment Income......................... 0.5165 0.5480 0.5655 0.6070 0.6199
Net Realized and Unrealized Gain (Loss) on
Investments................................. (0.7959) 0.4110 0.2219 0.3296 0.2915
------------- ------------- ------------- ------------- -------------
Total From Investment Operations............ (0.2794) 0.9590 0.7874 0.9366 0.9114
------------- ------------- ------------- ------------- -------------
Less Distributions:
Dividends From Net Investment Income.......... (0.5165) (0.5480) (0.5655) (0.6070) (0.6199)
Distributions From Net Capital Gains.......... (0.0341) (0.2810) (0.1119) (0.0596) (0.0015)
------------- ------------- ------------- ------------- -------------
Total Distributions......................... (0.5506) (0.8290) (0.6774) (0.6666) (0.6214)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of Period.................... $ 10.02 $ 10.85 $ 10.72 $ 10.61 $ 10.34
========= ========= ========= ========= =========
Total Return...................................... (2.51)% 9.26% 7.68% 9.34% 9.40%
Ratios/Supplemental Data:
Net Assets, End of Period $(000)................ 17,432 20,061 17,318 19,516 14,131
Ratio of Expenses to Average Net Assets(1)...... .20% .20% .30% .30% .30%
Ratio of Net Investment Income to Average
Net Assets.................................... 5.06% 5.06% 5.31% 5.80% 6.14%
Portfolio Turnover Rate........................... 3% 23% 52% 63% 39%
</TABLE>
- ---------------
(1) Operating expense ratios before waivers of Investment Adviser and
Administrator fees for the years ended January 31, 1995, 1994, 1993, 1992 and
1991 were .53%, .51%, .48%, .53% and .57%, respectively.
See accompanying notes to financial statements.
FS-12
<PAGE> 70
Notes to Financial Statements
1. General Information
Municipal Fund for California Investors, Inc. (the "Company") is a no-load,
non-diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended. The Company consists of two separate
portfolios: California Money Fund and California Intermediate Municipal Fund.
California Money Fund offers three series of shares: California Money ("Money"),
California Money Dollar ("Dollar"), and California Money Plus ("Plus").
California Intermediate Municipal Fund also offers three series of shares:
California Intermuni ("Intermuni"), California Intermuni Dollar ("Intermuni
Dollar"), and California Intermuni Plus ("Intermuni Plus"). Shares of each
series represent equal pro rata interests in a single investment portfolio and
are identical in all respects except that the Dollar and Plus shares of each
portfolio bear the service fees described below and are entitled to vote
separately on matters relating to these fees.
Dollar shares and Intermuni Dollar shares are sold pursuant to a non-12b-1
shareholder services plan to institutions other than broker/dealers, and Plus
shares and Intermuni Plus shares are sold pursuant to a 12b-1 services plan only
to broker/dealers which enter into agreements with each portfolio requiring them
to provide certain support services to their customers in consideration of the
portfolio's payment of .25% (on an annualized basis) of the average daily net
asset value of such shares held by the institutions on behalf of their
customers. Dividends paid to Plus and Dollar shareholders are reduced by such
fees. In addition, broker/dealers purchasing Plus shares and Intermuni Plus
shares may be requested to provide assistance in connection with the
distribution of such shares. Money and Intermuni shares are sold to
institutional investors who choose not to enter into such servicing agreements
with the portfolio. No Intermuni Dollar shares or Intermuni Plus shares have
been sold as of January 31, 1995.
Certain California municipal obligations in the Company's portfolios may be
obligations of issuers which rely in whole or in part on California State
revenues, real property taxes, revenues from health care institutions, or
obligations secured by mortgages on real property. Consequently, the possible
effect of economic conditions in California or of California law on these
obligations must be considered.
2. Significant Accounting Policies
Portfolio valuation--California Money Fund: Portfolio securities are valued
at amortized cost which approximates market value. Amortized cost valuation
involves valuing an instrument at its cost initially and, thereafter, assuming a
constant amortization to maturity of any discount or premium.
Portfolio valuation--California Intermediate Municipal Fund: Portfolio
securities for which market quotations are readily available (other than debt
securities with remaining maturities of 60 days or less) are valued at the mean
of the most recent quoted bid and asked prices provided by investment dealers.
Market or fair value may be determined by a matrix pricing system which is used
to determine the value of municipal obligations based on factors such as yield,
price, maturities, call features and ratings on comparable securities. Debt
securities with remaining maturities of 60 days or less are valued on an
amortized cost basis.
Securities transactions and investment income: Securities transactions are
recorded on the trade date. Realized gains and losses on investments sold are
recorded on the identified cost basis. Interest income is recorded on the
accrual basis.
Dividends and distributions to shareholders: It is the policy of each
portfolio to declare dividends from net investment income daily and to pay such
dividends within five business days of the end of each month. Net realized
capital gains, if any, are distributed at least annually.
FS-13
<PAGE> 71
Federal taxes: No provision is made for federal income or excise taxes
because the Company intends to have each portfolio continue to qualify as a
regulated investment company by complying with the applicable requirements of
the Internal Revenue Code and by distributing all of its earnings to its
shareholders.
3. Investment Advisory Fee, Administration Fee and Other Related Party
Transactions
The Company has entered into an Investment Advisory Agreement with PNC
Institutional Management Corporation (the "Investment Adviser"), a subsidiary of
PNC Bank, National Association ("PNC Bank"). PNC Bank serves as the Company's
sub-investment adviser pursuant to a Sub-Advisory Agreement between the
Investment Adviser and PNC Bank. Under the Investment Advisory Agreement, the
Investment Adviser is entitled to receive a fee from the Company, computed daily
and payable monthly, at an annual rate of .20% of the value of each portfolio's
average daily net assets.
Provident Distributors, Inc. ("PDI"), serves as the Company's Distributor.
No compensation is payable by the Company to PDI for its distribution services.
The Company has entered into an Administration Agreement with PFPC Inc.
("PFPC") and PDI (the "Administrators"), for certain administrative services.
Pursuant to their administrative agreement with the Company, PFPC and PDI
jointly are entitled to receive a fee at an annual rate of .20% of each
portfolio's daily net assets.
The Investment Adviser and the Administrators have agreed to reduce the
advisory and administration fees otherwise payable to them and to reimburse the
Portfolios for their operating expenses to the extent necessary to ensure that
their annual operating expense ratios (excluding fees paid to Service
Organizations pursuant to Servicing Agreements) do not exceed .20% of each
portfolio's average daily net assets.
For the year ended January 31, 1995, with respect to California Money Fund,
the Investment Adviser and the Administrators voluntarily waived fees, on an
equal basis, totaling $1,165,487.
For the year ended January 31, 1995, with respect to California
Intermediate Municipal Fund, the Investment Adviser and the Administrators
voluntarily waived fees, on an equal basis, totaling $61,973.
Expenses include legal fees paid to counsel to the Company, a partner of
which is secretary of the Company.
PNC Bank also serves as the Company's custodian and PFPC, a subsidiary of
PNC Bank, serves as transfer agent.
4. Fund Shares
Since California Money Fund has sold, issued as reinvestments of dividends
and redeemed shares only at a constant net asset value of $1.00 per share, the
number of shares represented by such sales, reinvestments and redemptions is the
same as the dollar amounts shown below for such transactions.
<TABLE>
<CAPTION>
CALIFORNIA MONEY FUND
----------------------------------
YEAR YEAR
ENDED ENDED
JANUARY 31, JANUARY 31,
1995 1994
--------------- ---------------
<S> <C> <C>
Sold
Money shares....... $ 1,362,734,998 $ 1,329,959,674
Plus shares........ -- --
Dollar shares...... 175,135,239 116,172,785
Issued as
reinvestments of
dividends
Money shares....... 412,873 450,944
Plus shares........ -- --
Dollar shares...... 308,417 155,154
Redeemed
Money shares....... (1,333,786,669) (1,333,097,037)
Plus shares........ -- --
Dollar shares...... (183,513,710) (108,982,489)
--------------- ---------------
Net increase......... $ 21,291,148 $ 4,659,031
=============== ===============
</TABLE>
FS-14
<PAGE> 72
<TABLE>
<CAPTION>
CALIFORNIA INTERMEDIATE MUNICIPAL FUND
-----------------------------------------------
YEAR ENDED YEAR ENDED
JANUARY 31, 1995 JANUARY 31, 1994
---------------------- ----------------------
SHARES VALUE SHARES VALUE
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Sold
Intermuni
shares........... 375,627 $ 3,840,132 600,624 $ 6,501,944
Issued as
reinvestments of
dividends
Intermuni
shares........... 2,718 27,667 23,062 247,846
Redeemed
Intermuni
shares........... (488,982) (4,976,578) (388,842) (4,216,104)
-------- ----------- -------- -----------
Net increase
(decrease)....... (110,637) $(1,108,779) 234,844 $ 2,533,686
========== ============= ========== =============
</TABLE>
The authorized capital of the Company consists of 2.3 billion Money shares,
300 million Dollar shares, and 300 million Plus shares, 80 million Intermuni
shares, 10 million Intermuni Dollar shares and 10 million Intermuni Plus shares,
each with a par value of $.001 per share.
5. Capital Loss Carryover
At January 31, 1995, California Money Fund had a capital loss carryover
amounting to $136,676 which expires in the years 2001 and 2002, and is available
to offset possible future capital gains.
At January 31, 1995 California Intermediate Municipal Fund had a capital
loss carryover amounting to $43,055 which expires in 2002, and is available to
offset possible future capital gains.
6. Purchases and Sales of Securities
For the year ended January 31, 1995, purchases and sales of investment
securities (excluding short-term investments) of California Intermediate
Municipal Fund were $505,865 and $1,081,648 respectively.
7. Net assets
At January 31, 1995, net assets consisted of the following:
<TABLE>
<CAPTION>
CALIFORNIA
INTERMEDIATE
CALIFORNIA MUNICIPAL
MONEY FUND FUND
------------ -----------
<S> <C> <C>
Paid-in capital............. $396,986,690 $17,642,942
Accumulated net realized
loss on investments....... (136,676) (43,055)
Amortized market discount... -- 8,583
Net unrealized appreciation
of investments............ -- (176,251)
------------ -----------
Total Net Assets............ $396,850,014 $17,432,219
============= ===========
</TABLE>
FS-15
<PAGE> 73
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
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<PAGE> 75
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE> 76
year or less which is issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker- dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-4
<PAGE> 77
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE> 78
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
A-6
<PAGE> 79
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
A-7
<PAGE> 80
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A-8
<PAGE> 81
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business,
A-9
<PAGE> 82
economic or financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non- United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term
A-10
<PAGE> 83
debt. Such issues are regarded as having speculative characteristics regarding
the likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades.
A-11
<PAGE> 84
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
