As filed via EDGAR with the Securities and Exchange Commission
on March 1, 1999.
File No. 2-82143
ICA No. 811-3674
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [_]
Post-Effective Amendment No. 16 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 19 [X]
The California Muni Fund
(Exact name of registrant as specified in charter)
67 Wall Street
New York, New York 10005
(Address of principal executive office)
(212) 809-1855
(Area code and telephone number)
Copies to:
Stephen C. Leslie Carl Frischling, Esq.
Cornerstone Equity Advisors, Inc. Kramer Levin Naftalis & Frankel LLP
67 Wall Street 919 Third Avenue
New York, New York 10005 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to |_| on ( ) pursuant to
paragraph (b) paragraph (b)
|X| 60 days after filing pursuant to |_| on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)
|_| 75 days after filing pursuant to |_| on ( ) pursuant to
paragraph (a)(2) of paragraph (a)(2) rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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THE CALIFORNIA MUNI FUND
PROSPECTUS
APRIL 30, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Page
Risk/Return Summary......................................................
Financial Highlights.....................................................
Investment Objective and Policies........................................
Investment Strategies....................................................
Special Risks............................................................
Management ..............................................................
Pricing of Fund Shares...................................................
Purchase of Shares.......................................................
Redemption of Shares.....................................................
Distribution Expenses....................................................
Dividends and Tax Matters................................................
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RISK/RETURN SUMMARY
Investment Objective
The Fund seeks to provide a high level of income that is exempt from federal and
California personal income tax.
Principal Investment Strategies
The Fund will attempt to achieve its objective investing its assets in municipal
obligations of California, its political subdivisions, and its other duly
constituted authorities and corporations.
Principal Risks of Investing in the Fund
There is no guarantee that the Fund will achieve its stated objective. In fact,
you could lose money by investing in the Fund. In making your investment
decision, you should understand that the Fund's net asset value (NAV), yield,
and total return may be adversely affected by any or all of the following
factors:
o Interest rate risk - Changes in interest rates cause the prices and yields
of debt securities to fluctuate;
o Credit risk - Certain issuers of securities may fail to make timely
payments of interest and principal on the Fund's investments;
o Concentration risk - Because the Fund invests its assets mainly in the
issuers of a single state, California, it is subject to greater losses
arising from adverse political or economic events affecting California
issuers; and
o Diversification risk - Because the Fund may invest a greater percentage of
its assets in a few issuers, there is an increased likelihood that a few
issuers of securities may cause losses to the Fund.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Fund.
The bar chart shows the performance of the Fund for each of the last 10 calendar
years. The table shows how the Fund' average annual return for 1, 5, and 10
years compare with those of a broad measure of market performance.
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Bar Chart
The bar chart illustrates how the Fund' returns vary from year to year. As
always, past performance is no way to predict future performance.
1998 - 4.03%
1997 - 11.33%
1996 - (8.01)%
1995 - 32.02%
1994 - (19.86)%
1993 - 16.76%
1992 - 7.23%
1991 - 8.75%
1990 - 4.39%
1989 - 5.53%
The Fund' best performance for one quarter was 14.15% for the quarter ended
3/31/95. The Fund' worst performance for one quarter was (9.24)% for the quarter
ended 3/31/94.
Average Annual Total Returns
The table below shows the Fund' average annual total returns for the 1, 5, and
10 year periods of the Fund's existence in comparison to the Lehman Brothers
Municipal Bond Index for the same periods. The table provides some indication of
the risks of investing in the Fund by showing how the Fund's average annual
total returns for the periods noted compare with that of a broad measure of
market performance. As always, past performance is no way to predict future
performance.
Average Annual Returns as One Year 5 Years 10 Years
of 12/31/98
The California Muni Fund 4.03% 2.42% 5.39%
Lehman Brothers Municipal
Bond Index
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)......................................... __%
Maximum Deferred Sales Charge (Load) (as a percentage of __).............. __%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other Distributions]................................................. __%
Redemption Fee (as a percentage of amount redeemed, if applicable)........ __%
Exchange Fee.............................................................. __%
Maximum Account Fee....................................................... __%
Annual Fund Operating Expenses (expenses that are deducted
from Fund assets)......................................................... __%
Management Fees........................................................... __%
Distribution [and/or Service] (12b-1) Fees................................ __%
Other Expenses............................................................ __%
_____________________________ __%
_____________________________ __%
_____________________________ __%
Total Annual Fund Operating Expenses...................................... __%
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
You would pay the following expenses if you did not redeem your shares:
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1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$------- $------- $------- $-------
The Example does no reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads) were
included, your costs would be higher.
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FINANCIAL HIGHLIGHTS
The following selected per share data and ratios for each of the years
in the ten-year period ended December 31, 1998 has been audited by_____________,
independent certified public accountants: [INSERT FINANCIALS]
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's objective is to provide you with as high a level of income
that is excluded from gross income for Federal income tax purposes and exempt
from California personal income tax as is consistent with the preservation of
capital. To achieve this objective, the Fund invests only in municipal bonds,
municipal notes and municipal commercial paper (hereinafter collectively
referred to as "municipal obligations") which generate interest that is, in the
opinion of counsel to the issuer, excluded for Federal income tax purposes and
exempt from California personal income tax, and which meet the following quality
criteria (subject, of course, to the Fund's permissible "Investment Strategies"
described below).
The Fund's investment objective and policies and the investment
strategy with respect to the borrowing activities described below, unless
otherwise noted, are fundamental policies that cannot be changed without the
approval of the holders of a majority of the Fund's outstanding shares.
As used in this Prospectus the phrase "majority of the Fund's
outstanding shares" means the vote of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy at such a meeting or (2)
more than 50% of the Fund's outstanding shares.
With respect to municipal bonds, the Fund will only invest in those
issues which are rated within the four highest quality grades as determined by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff")
or which, if unrated, are judged by Fund management to be of comparable quality.
With respect to municipal notes and municipal commercial paper, the Fund will
only invest in those issues which are rated within the three highest quality
grades as determined by Moody's for municipal notes, or within the three highest
quality grades as determined by Moody's or S&P for municipal commercial paper or
which, if unrated, are (i) obligations of issuers having an issue of bonds rated
within the four highest quality grades as determined by Moody's, S&P, Fitch or
Duff or (ii) guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities. There can be no assurance that the Fund's
objective will be achieved. The Fund's ability to achieve its objective is
subject to the continuing ability of the issuers of municipal obligations to
meet their principal and interest payments, and is further subject to
fluctuations in interest rates as well as other factors.
While the municipal obligations in which the Fund may invest are
generally deemed to have adequate to very strong protection of principal and
interest, certain of the obligations rated within the lowest of the quality
grades described above (i.e., those rated by Moody's as Baa for municipal bonds,
MIG-3 for municipal notes and Prime-3 for municipal commercial paper, or those
rated by S&P, Fitch or Duff as BBB for municipal bonds, or those rated by S&P as
A-3 for municipal commercial paper) may have speculative characteristics as
well. For example, obligations rated Baa by Moody's have been determined by
Moody's to be neither
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highly protected nor poorly secured, and although interest payments and
principal security appear adequate for the present, certain protective elements
may be lacking or may be characteristically unreliable over any great length of
time. Similarly, obligations rated BBB by S&P, Fitch or Duff are regarded by
S&P, Fitch and Duff as having adequate capacity to pay interest and repay
principal, and while such obligations 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
obligations in this category than in higher rated categories.
It should be noted that ratings are general and not absolute standards
of quality or guarantees of the creditworthiness of an issuer. Subsequent to its
purchase by the Fund, an issue may cease to be rated or the rating may be
reduced. Such an event would not require the Fund to dispose of the issue, but
Fund management would consider such an event in determining whether the Fund
should continue to hold the issue in its portfolio. (See "Special
Considerations-Special Risk Factors Relating to Lower Rated Securities, Zero
Coupon Bonds and Pay-in-Kind Bonds" for a discussion on downgraded securities
that are retained by the Fund.) The purchase of unrated securities is subject to
guidelines that may be set for Fund management from time to time by the Fund's
Board of Trustees. A description of the ratings of municipal obligations as
determined by Moody's, S&P, Fitch and Duff is included in the Appendix to this
Prospectus.
Municipal Obligations
Municipal obligations include debt obligations of states, territories
and possessions of the United States and of any political subdivisions thereof,
such as counties, cities, towns, districts and authorities. Municipal
obligations are issued to raise funds for a variety of purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, obtaining funds for general operating expenses, and lending to
other public institutions and facilities. In addition, certain types of
qualified private activity bonds are issued by, or on behalf of, public
authorities to obtain funds for privately operated facilities.
Also included within the definition of municipal obligations are
short-term, tax-exempt debt obligations, known as municipal notes, which are
generally issued in anticipation of receipt by the issuer of revenues from
taxes, the issuance of longer term bonds, or other sources. States,
municipalities, and other issuers of tax-exempt securities may also issue
short-term debt, often for general purposes, known as "municipal commercial
paper". All of these obligations are included within the term "municipal
obligations", as used in this Prospectus, if their interest payments are
excluded for Federal income tax purposes.
Yields on municipal obligations depend on a variety of factors,
including the general condition of the money and municipal securities markets,
the size of a particular offering, the maturity of the obligation and the rating
of the issue. Unlike other types of securities,
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municipal obligations have traditionally not been subject to regulation by, or
registration with, the Securities and Exchange Commission.
The two principal classifications of municipal obligations are general
obligation bonds and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from only the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Qualified
private activity bonds that are municipal obligations are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of the
issuer of such bonds. The credit quality of qualified private activity bonds is
usually related to the credit standing of the industrial user involved. The Fund
reserves the right to make unlimited investments in qualified private activity
bonds, if such bonds meet the Fund's investment criteria. This policy, however,
may cause the Fund to be an inappropriate investment for entities that are
"substantial users" (or related persons thereof) of facilities financed by such
bonds (see "Dividends and Tax Status") herein for more detail.
Other types of municipal obligations include municipal lease
obligations which are issued by a state or local government or authority to
acquire land and a wide variety of equipment and facilities. These obligations
typically are not fully backed by the municipality's credit, and their interest
may become taxable if the lease is assigned. If the funds are not available for
the following years' lease payments the lease may terminate, with the
possibility of default on the lease obligation and significant loss to the Fund.
Certificates of participation in municipal lease obligations or installment
sales contracts entitle the holder to a proportionate interest in the
lease-purchase payments made. There are also a variety of hybrid and special
types of municipal obligations as well as numerous differences in the security
of municipal obligations, both within and between the two principal
classifications described above.
Portfolio Transactions and Turnover
The Manager provides the Fund with investment advice and
recommendations for the purchase and sale of portfolio securities. All orders
for the purchase and sale of portfolio securities are placed by the Manager,
subject to the general control of the Fund's trustees.
In seeking to achieve the Fund's objective, the Manager will adjust the
maturity distribution of the Fund's portfolio in anticipation of movements in
interest rates. Longer term securities have historically yielded more than
shorter term securities, but from time to time, the normal yield relationships
between longer and shorter term securities have been reversed. Furthermore,
longer term securities have historically been subject to greater and more rapid
price fluctuations. In periods of rising interest rates, the market value of
municipal obligations generally declines in order to bring the current yield in
line with prevailing interest rates. Conversely, in periods of declining
interest rates, the market value of municipal obligations generally rises.
Although fluctuating interest rates affect the
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market value of all municipal obligations, short-term obligations are generally
less sensitive to such factors than long-term obligations. The Manager will
attempt to take advantage of price variability between different sectors of the
market, i.e., long, intermediate, or short or general obligation versus revenue
bonds, in order to increase the Fund's yield by making appropriate purchases and
sales of portfolio securities.
Securities with the same general quality rating and maturity, but
having different purposes for issuance, often tend to trade at different yields.
Similarly, securities issued for similar purposes and with the same general
maturity characteristics, but which vary according to the creditworthiness of
their respective issuers, tend to trade at different yields. These yield
differentials tend to fluctuate in response to political and economic
developments as well as temporary imbalances in normal supply and demand
relationships. The Manager monitors these fluctuations closely and will adjust
the Fund's portfolio to take advantage of disparities that may arise. The
Manager may also engage in short-term trading when it believes it is consistent
with the Fund's investment objective.
The frequency of portfolio transactions-the Fund's turnover rates-will
vary from year to year depending upon market conditions. While it is impossible
to predict the number of transactions that will be effected by the Fund, it is
anticipated that the Fund's portfolio turnover rate will not exceed 300%.
However, when Fund management deems it appropriate due to market or other
conditions, the Fund's turnover rate may be greater than anticipated. A high
turnover rate increases transaction costs and the possibility of taxable
short-term gains (see "Dividends and Tax Matters") which, in turn, will reduce
the Fund's return. Therefore, the Manager weighs the added costs of short-term
investment against anticipated gains.
INVESTMENT STRATEGIES
In seeking to achieve its investment objective, the Fund utilizes
certain investment strategies, such as borrowing to purchase additional
securities, investing in participation interests and variable rate instruments
and purchasing municipal obligations that are offered on a "when-issued" basis.
When-Issued Purchases
Municipal securities are frequently offered on a "when-issued" basis.
When so offered, the price and coupon rate are fixed at the time the commitment
to purchase is made, but delivery and payment for the when-issued securities
take place at a later date. Normally, the settlement date occurs between 15-45
days from the date of purchase. During the period between purchase and
settlement, no interest accrues to the purchase. The price that the Fund would
be required to pay may be in excess of the market value of the security on the
settlement date. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities for the purpose of actually acquiring
them unless a sale becomes desirable for investment reasons. At the time the
Fund makes a commitment to purchase a municipal
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security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. That value may
fluctuate from day to day in the same manner as values of other municipal
securities held by the Fund. The Fund will establish a segregated account with
its custodian bank in which it will maintain cash or liquid debt securities
determined daily to be equal in value to its commitments for when-issued
securities. Generally, both the when-issued securities and the securities held
in the segregated account will tend to experience appreciation when interest
rates decline and depreciation when interest rates increase. Accordingly, the
purchase of when-issued securities may increase the volatility of the Fund's net
asset value. The Fund may invest in when-issued securities without limitation.
At such time as the Fund is required to pay for when-issued securities,
it will meet its obligation from then-available cash flow, sale of the
securities held in the separate account, sale of other securities, or (although
it would not normally expect to do so) from the sale of the when-issued
securities themselves (which may have a market value greater or less than the
Fund's payment obligation). Sale of securities to meet such obligations carries
with it a greater potential for the realization of capital gains, which are not
excluded from gross income for Federal, state or local income tax purposes.
Participation Interests, Variable and Inverse Floating Rate Instruments
The Fund may purchase participation interests from financial
institutions. These participation interests give the purchaser an undivided
interest in one or more underlying municipal obligations.
The Fund may also invest in municipal obligations which have variable
interest rates that are readjusted periodically. Such readjustment may be based
either upon a predetermined standard, such as a bank prime rate or the U.S.
Treasury bill rate, or upon prevailing market conditions. Many variable rate
instruments are subject to redemption or repurchase at par on demand by the Fund
(usually upon no more than seven days' notice). All variable rate instruments
must meet the quality standards of the Fund. The Manager will monitor the
pricing, quality and liquidity of the variable rate municipal obligations held
by the Fund.
The Fund may purchase inverse floaters which are instruments whose
interest rates bear an inverse relationship to the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed-rate bond. For example, a
municipal issuer may decide to issue two variable rate instruments instead of a
single long-term, fixed-rate bond. The interest rate on one instrument reflects
short-term interest rates, while the interest rate on the other instrument (the
inverse floater) reflects the approximate rate the issuer would have paid on a
fixed-rate bond, multiplied by two, minus the interest rate paid on the
short-term instrument. Depending on market availability, the two
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portions may be recombined to form a fixed-rate municipal bond. (See "Special
Risk Factors Relating to Inverse Floating Rate Instruments").
The Fund may invest in municipal securities that pay interest at a
coupon rate equal to a base rate, plus additional interest for a certain period
of time if short-term interest rates rise above a predetermined level or "cap."
The amount of such an additional interest payment typically is calculated under
a formula based on a short-term interest rate index multiplied by a designated
factor.
Borrowing For Investment
The Fund may borrow money to purchase additional portfolio securities
but only from banks in amounts up to 20% of its total assets. The Fund is also
permitted to pledge up to 10% of the value of its total assets to secure such
borrowings. Borrowing for investment increases both investment opportunity and
investment risk. Such borrowings in no way affect the Federal or California
State tax status of the Fund or its dividends. If the investment income on
securities purchased with borrowed money exceeds the interest paid on the
borrowing, the net asset value of the Fund's shares will rise faster than would
otherwise be the case. On the other hand, if the investment income fails to
cover the Fund's costs, including the interest on borrowings or if there are
losses, the net asset value of the Fund's shares will decrease faster than would
otherwise be the case. This is the speculative factor known as leverage.
The Investment Company Act of 1940 (the "1940 Act") requires the Fund
to maintain asset coverage of at least 300% for all such borrowings, and should
such asset coverage at any time fall below 300%, the Fund would be required to
reduce its borrowings within three days to the extent necessary to meet the
requirements of the 1940 Act. To reduce its borrowings, the Fund might be
required to sell securities at a time when it would be disadvantageous to do so.
In addition, because interest on money borrowed is a Fund expense that
it would not otherwise incur, the Fund may have less net investment income
during periods when its borrowings are substantial. The interest paid by the
Fund on borrowings may be more or less than the yield on the securities
purchased with borrowed funds, depending on prevailing market conditions.
SPECIAL RISKS
Special Risk Factors Relating to California Issuers
Because the Fund intends to limit its investments to municipal
obligations which generate interest that is excluded for Federal income tax
purposes and exempt from California personal income tax, you should carefully
consider the special risks inherent in the investment
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of municipal obligations of California issuers. Between October 1991 and July
1994 the State of California's bond ratings were lowered from AAA to A by S&P,
from AAA to A by Fitch and from Aaa to A1 by Moody's. From mid-1990 to late
1993, California experienced its deepest recession since the 1930's. As a
consequence of large budget imbalances, the State of California has depleted its
available cash resources and has had to use a series of external borrowings to
meet its cash needs. Risks also result from certain amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, as well as from the general financial
condition of the State of California. These circumstances may have the effect of
impairing the ability of California issuers to pay interest on, or repay the
principal of, their municipal obligations. Recently, Moody's upgraded the debt
rating on California general obligation bonds to Aa3. The rating reflects a
stable credit outlook based on the State's recovery from the 1990's recession
and an improved financial condition. If in the future an adequate supply of
municipal obligations of California issuers ceased to be available, the Fund's
Board of Trustees would consider recommending alternatives to shareholders, such
as changing the Fund's investment objective or liquidating the Fund. The Manager
does not believe that the current economic conditions in California will have a
significant adverse effect on the Fund's ability to invest in municipal
obligations.
Special Risk Factors Relating to Lower Rated Securities, Zero Coupon Bonds and
Pay-in-Kind Bonds
You should carefully consider the relative risks of the Fund's
retaining downgraded securities in its investment portfolio. These are bonds
such as those rated Ba or lower by Moody's or BB or lower by S&P, Fitch or Duff.
They generally are not meant for short-term investing and may be subject to
certain risks with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed-income securities.
Bonds rated Ba by Moody's are judged to have speculative elements; their future
cannot be considered as well assured and often the protection of interest and
principal payments may be very moderate. Bonds rated BB by S&P, Fitch or Duff
are regarded as having predominantly speculative characteristics and, while such
obligations have less near-term vulnerability to default than other speculative
grade debt, they face 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. Bonds rated CC by S&P,
Fitch or Duff are regarded as having the highest degree of speculation; while
such bonds may have some small degree of quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions. Bonds rated as low as Caa by Moody's may be in default or may
present elements of danger with respect to principal or interest.
Retention of downgraded bonds rated Ba or lower by Moody's and BB or
lower by S&P, Fitch or Duff, while generally providing greater income and
opportunity for gain than investments in higher rated bonds, usually entail
greater risk of principal and income (including the possibility of default or
bankruptcy of the issuers of such bonds), and may involve greater
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volatility of price (especially during periods of economic uncertainty or
change) than investments in higher rated bonds. However, since yields may vary
over time, no specific level of income can ever be assured. These lower rated,
high yielding securities generally tend to reflect economic changes and
short-term corporate and industry developments to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates. These lower rated securities will also be affected by the
market's perception of their credit quality (especially during times of adverse
publicity) and the outlook for economic growth. In the past, economic downturns
or an increase in interest rates have under certain circumstances caused a
higher incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices for
these securities may be affected by legislative and regulatory developments. For
example, new Federal rules require that savings and loan associations gradually
reduce their holdings of high-yield securities. An effect of such legislation
may be to significantly depress the prices of outstanding lower rated high
yielding fixed income securities. Factors adversely affecting the market price
and yield of these securities will adversely affect the Fund's net asset value.
In addition, the retail secondary market for these securities may be less liquid
than that of higher rated bonds; adverse conditions could make it difficult at
times for the Fund to sell certain securities or could result in lower prices
than those used in calculating the Fund's net asset value. Therefore, judgment
may at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during certain adverse market conditions to sell these lower rated securities at
their fair value to meet redemption requests or to respond to changes in the
market.
The Fund may invest in zero coupon securities and pay-in-kind bonds
(bonds which pay interest through the issuance of additional bonds), which
involve special considerations. These securities may be subject to greater
fluctuations in value due to changes in interest rates than interest-bearing
securities and thus may be considered more speculative than comparably rated
interest-bearing securities. In addition, current Federal income tax law
requires the holder of a zero coupon security or of certain pay-in-kind bonds to
accrue income with respect to these securities prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability for Federal income taxes, the Fund may be required to distribute
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements. Fund management anticipates
that investments in zero coupon securities and pay-in-kind bonds will not
ordinarily exceed 25% of the value of the Fund's total assets. (See "Additional
Information Relating to Lower Rated Securities" in the Statement of Additional
Information.)
Special Risk Factors Relating to Inverse Floating Rate Instruments
Changes in interest rates inversely affect the rate paid on inverse
floating rate instruments ("inverse floaters"). The inverse floater's price will
be more volatile than that of a fixed rate
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bond. Additionally, some inverse floater's contain a "leverage factor" whereby
the interest rate moves inversely by a "factor" to the benchmark. For example,
the rates on the inverse floating rate note may move inversely at three times
the benchmark rate. Certain interest rate movements and other market factors can
substantially affect the liquidity of inverse floaters. These instruments are
designed to be highly sensitive to interest rate changes and may subject the
holders thereof to extreme reductions of yield and possibly loss of principal.
Special Risk Factors Relating to Non-Diversification
The Fund's portfolio is non-diversified and may have greater risk than
a diversified portfolio. As a non-diversified investment company, the Fund could
conceivably invest all of its assets in one issuer. However, in order to qualify
as a "regulated investment company" for Federal income tax purposes, the Fund
must comply with the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), which limit the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code), each of which
exceeds 5% of the Fund's total assets, to an aggregate amount of 50% of such
assets, and which further limit the holdings of a single issuer (with the same
exceptions) to 25% of the Fund's total assets. Therefore, for our purposes,
non-diversification means that, with regard to the Fund's total assets, 50% of
such assets may be invested in as few as two single issuers. (These limits are
measured at the end of each quarter.) In the event of decline of
creditworthiness or default on the obligations of one or more such issuers
exceeding 5%, an investment in the Fund will involve greater risk than in a fund
that has a policy of diversification.
Many of the Fund's portfolio securities will be obligations which are
related in such a way that an economic, business or political development or
change affecting one such security also would affect the other portfolio
securities (e.g., securities the interest on which is paid from revenues of
similar types of projects). As a result, the Fund's portfolio may be subject to
greater risk as compared to a portfolio composed of more varied obligations or
issuers. Furthermore, the relatively high degree of similarities among the
issuers of obligations in the Fund's portfolio may result in a greater degree of
fluctuation in the market value of the portfolio.
Other Considerations
Because the Fund intends to be as fully invested as practicable in
municipal obligations of California issuers and will not invest in taxable
obligations, there may be occasions when the Fund may hold cash that is not
earning income. In addition, there may be occasions when in order to raise cash
to meet redemptions, the Fund might be required to sell securities at a loss.
It is expected that a substantial portion of the assets of the Fund
will be derived from professional money managers and investors who intend to
invest in the Fund as part of an asset-allocation or market-timing investment
strategy. These investors are likely to redeem or exchange their Fund shares
frequently to take advantage of anticipated changes in market
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<PAGE>
conditions. The strategies employed by investors in the Fund may result in
considerable assets moving in and out of the Fund. Consequently, the Trust
expects that the Fund will generally experience significant portfolio turnover,
which will likely cause higher expenses and additional costs and affect the
Fund's performance.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Funds that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone" or the
"Manager"). Cornerstone's principal business address is 67 Wall Street, New
York, New York 10005. Cornerstone is an investment adviser registered with the
Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone's advisory contract with the Fund was approved at a Special Meeting
shareholders held on March ___, 1999. At that meeting, shareholders also
ratified Cornerstone's advisory fees of $___________, which amounted to ____% of
the Fund's average net assets for the period from September 29, 1998 to December
31, 1998. Cornerstone's advisory fee was based on the following table:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and Chief
Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
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<PAGE>
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of Fund shares is based on the Fund's net asset value. The
net asset value per share is determined as of the close of trading on the New
York Stock Exchange (currently 4:00 P.M., New York time) on each day that both
the New York Stock Exchange and the Fund's custodian bank are open for business
and on any other day during which there is a sufficient degree of trading in the
Fund's portfolio securities that the Fund's net asset value might be materially
affected by changes in the value of its portfolio securities, unless there have
been no shares tendered for redemption or orders to purchase shares received.
The Fund's shares will not be priced on the following days when the New York
Stock Exchange is closed: New Year's Day, Dr. Martin Luther King Jr.'s Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The net asset value per share is computed
by taking the value of all assets of the Fund, subtracting the liabilities of
the Fund, and dividing by the number of outstanding shares. Fur purposes of
determining net asset value, expenses of the Fund are accrued daily and taken
into account.
The value used by the Fund in computing the current price per share for
the purpose of purchase and redemption of Fund shares (the net asset value per
share) means an amount which reflects calculations to the nearest 1/10th of one
cent.
The Fund's portfolio securities are valued on the basis of prices
provided by an independent pricing service when, in the opinion of persons
designated by the Fund's Board of Trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt ion upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other assets are
valued by persons designated by the Fund's trustees using methods which the
trustees believe accurately reflects fair value. The prices realized from the
sale of these securities could be less than those originally paid by the Fund or
less than what may b considered the fair value of such securities.
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<PAGE>
Included in the portfolio of the Fund in determining net asset value is
the value of all when-issued securities that the Fund has committed itself to
purchase. However, the Fund's ability to purchase such securities remains
constant (see "Investment Objective and Policies").
The Fund's most recent asset value can be obtained by calling
1-800-322-6864 7 days a week, 24 hours a day. To obtain more detailed
information on the Fund's net asset value, yield, performance and portfolio
composition you can call 1-800-322-6864 weekdays 9:00 AM-8:00 PM Eastern time.
PURCHASE OF SHARES
You may purchase shares directly from the Fund without a sales charge
on any day the New York Stock Exchange is open for business. The publicoffering
price for shares purchased is the net asset value per share of the Fund next
determined after a purchase order becomes effective. Orders for the purchase of
Fund shares become effective (i) immediately, if received prior to 4:00 P.M. New
York time on any business day. Shares being purchased will begin accruing
dividends on the day following the date of purchase and continue to earn
dividends until the date of redemption. Information regarding transmittal of
funds by bank wire and procurement of a Federal Reserve Draft may be obtained
from your bank. All payments (including checks from individual investors) must
be in U.S. dollars. If your check does not clear, Firstar Trust Company will
cancel your purchase and charge you a $20 fee. Moreover, you could be liable for
any losses incurred.
The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $100. Subsequent investments are made in the same manner as an
initial purchase is made.
All shares purchased are confirmed to you and credited to your account
at the net asset value determined as described herein under the heading "Pricing
of Fund Shares". Share certificates are issued only on written request by you to
Fundamental Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701. There is no charge for share certificates.
Certificates are not issued for fractional shares. Certificates will
only be issued in amounts of 1,000 or more shares. The issuance of certificates
may be discontinued at any time without prior notice. The Fund reserves the
right to reject any purchase order. The Fund reserves the right to limit the
number of checks processed at any one time and will notify investors prior to
exercising this right.
Although shares of the Fund may be purchased without a sales charge if
you purchase them directly from the Fund, you may be charged a fee for effecting
transactions in the Fund's shares through securities dealers, banks, or other
financial institutions.
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<PAGE>
The Fundamental Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Fundamental Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program,shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, he account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign Section F of the Purchase Application and send it to the Transfer Agent.
Shareholders may cancel this privilege or change the amount of purchase at any
time by calling 1-800-322-6864 or by mailing written notification to:
Fundamental Family of Funds, c/o Firstar Trust Company, P.O. Box 701, Milwaukee,
WI 53201-0701. The change will be effective five business days following receipt
of notification by the Transfer Agent. A Fund may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. However, a $20 fee will be imposed by Firstar Trust Company if
sufficient funds are not available in the shareholder's account at the time of
the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, neither Fundamental Service Corporation nor the
Transfer Agent will monitor the amount of contributions to ensure that they do
not exceed the amount allowable for Federal tax purposes. Firstar Mutual Fund
Services, LLC will assume that all retirement plan contributions are being made
for the tax year in which they are received.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
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<PAGE>
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Bank Milwaukee, N.A.
Account # 112952137
Further credit: The Fundamental Family of Funds
Name of shareholder and account number (if known)
(Wired funds must be received prior to 4:00 p.m. Eastern time to be
eligible for same day pricing.)
The establishment of a new account or any additional purchases for an
existing account by wire transfer should be preceded by a phone call to Firstar
Mutual Fund Services, LLC, 1-800-322-6864 to provide information for the
account. A properly signed share purchase application marked "Follow Up" must be
sent for all new accounts opened by wire transfer. Applications are subject to
acceptance by the Fund, and are not binding until so accepted.
Instructions for new accounts should specify the name, address, and
social security number of each person in whose name the shares are to be
registered and the name of the Fund. If you are an existing shareholder, you
need only furnish your account number and the name of the Fund. Failure to
submit required information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail or otherwise to Fundamental Family of
Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI
53201-0701. Checks should be made payable to Fundamental Family of Funds.
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at (800) 322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner as the
value of the Fund's portfolio securities is determined (see "Determination of
Net Asset Value"); the specific method of
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<PAGE>
determining the value will be provided to you on request. The Fund reserves the
right to refuse any such exchange, even if the securities offered by an investor
meet the general investment criteria of the Fund. An investor may recognize
capital gain or loss for Federal income tax purposes upon such exchange.
Maturing bonds or detached coupons submitted within five (5) business days of
the payment date are credited on the payment date.
Exchange Privilege. For your convenience, the Exchange Privilege
permits you to purchase shares in any of the other funds for which Fundamental
Portfolio Advisors, Inc. acts as the investment manager in exchange for shares
of the Fund at respective net asset values per share. Exchange instructions may
be given in writing to Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701,
Milwaukee, WI 53201-0701, the Fund's transfer agent, and must specify the number
of shares of the Fund to be exchanged and the fund into which the exchange is
being made. The telephone exchange privilege will be made available to
shareholders automatically. You may telephone exchange instructions by calling
Firstar Trust Company at (800) 322-6864. Before any exchange, you must obtain,
and should review, a copy of the current prospectus of the fund into which your
exchange is being made. Prospectuses may be obtained by calling or writing the
Fund. See also "Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for Federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
REDEMPTION OF SHARES
Shares of the Fund are redeemable at your option without charge at the
next determined net asset value following receipt by Firstar Trust Company of a
redemption request in proper order. To effect a redemption, you may utilize the
Check Redemption Privilege, the Telephone Redemption Privilege, the Expedited
Redemption Privilege, or the regular redemption procedure. Due to the cost of
maintaining an account, the Fund reserves the right to redeem an account
involuntarily, on not less than 60 days' written notice, at any time an investor
has reduced his or her account to less than $100. During the
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<PAGE>
60-day period, a shareholder may increase his or her holdings to $100 or more,
and thereby avoid an involuntary redemption.
When redemption requests are received by Firstar Mutual Fund Services,
LLC by 4:00 P.M. New York time on any day during which the net asset value is
determined (see "Pricing of Fund Shares"), the redemption will be effective on
such day, and payment will be made on the next business day based on the net
asset value next determined after receipt of the redemption instruction. If a
redemption notice is received after 4:00 P.M. New York time, the redemption will
be effective on the next business day, and payment will be made thereafter on
the second business day. In the event you wish to liquidate your holdings, you
will be entitled to all dividends declared through the date of redemption. At
times, the Fund may be requested to redeem shares for which it has not yet
received good payment. The Fund may delay, or cause to be delayed, the mailing
of a redemption check until such time as it has assured itself that good payment
has been received from the purchase of such shares, which may take up to 15
days. In the case of payment by check, the determination of whether the check
has been paid by the paying institution generally takes up to seven days, but
may take longer. You may avoid this delay by purchasing shares by wire or by
using a certified or official bank check drawn on a U.S. bank. In the event of
delays in payment of redemption proceeds, the Fund will take all available steps
to expedite collection of the investment check. If shares were purchased by
check, you may write checks against such shares only after 15 days from the date
the purchase was executed. Shareholders who draw against shares purchased fewer
than 15 days from the date of original purchase, will be charged usual and
customary bank fees. The Fund reserves the right to suspend the right of
redemption or postpone the day of payment (1) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (2) when the trading markets normally used by the Fund are restricted
or an emergency exists as determined by the Securities and Exchange Commission
(the "Commission") as to make the disposal of the Fund's investments or
determination of its net asset value unreasonably impracticable, or (3) for such
other periods as the Commission by order may permit to protect the Fund's
shareholders.
You may realize a taxable capital gain or loss when shares are
redeemed, depending on their net asset value. On all redemption requests
(including redemption checks) for joint accounts, the signatures of all joint
owners are required unless shareholders have designated otherwise.
Check Redemption Privilege
You may request that the Fund provide you with redemption checks
("Checks") drawn on the Fund's account by either (i) completing the appropriate
section of the application order form or (ii) subsequent written request to the
Fund. These Checks will be sent only to the individuals in whose name the
account is registered and only to the address of record with the Fund. You may
use the Checks in any lawful manner and make them payable to the order of any
person or company in an amount of $100 or more. Dividends continue to be
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<PAGE>
earned until the Check clears the Fund account and is paid by Firstar Mutual
Fund Services, LLC. The Fund may delay, or cause to be delayed, payment of
redemption proceeds until such time as it or Firstar Trust Company has assured
itself that good payment has been collected for the purchase of such shares. In
addition, the Fund reserves the right not to honor Check redemption requests if
the shares to be redeemed have been purchased by check within seven days prior
to the date the redemption request is received by Firstar Trust Company unless
the check used for investment has been cleared for payment by your bank. You
will be subject to the same rules and regulations that the Bank applies to
checking accounts in general. There is currently no charge to you for the use of
Checks, except that Firstar Mutual Fund Services, LLC imposes a $20 charge if an
investor requests that it stop payment of a Check or if it cannot honor a Check
due to insufficient funds or other valid reasons.
When a Check is presented to Firstar Trust Company for payment, Firstar
Mutual Fund Services, LLC, as your agent, will cause the Fund to redeem a
sufficient number of shares in your account to cover the amount of the Check.
Shares for which certificates have been issued may not be redeemed by Check.
Since the net asset value of the Fund's shares changes daily, you should make
certain that the total value of your account is sufficient to cover the amount
of your Check. Otherwise, the Check will be returned marked insufficient funds.
Checks may not be used to close an account. The Check Redemption Privilege may
be modified or terminated at any time by either the Fund or Firstar Mutual Fund
Services, LLC.
Telephone Redemption Privilege
You may direct redemptions of up to $150,000 worth of shares per day by
telephone by either (i) completing the appropriate section of the application
form or (ii) subsequent signature guaranteed* written request. (Available only
if established on the account application and if there has been no change of
address by telephone within the preceding 30 days.) Telephone calls will be
recorded. Firstar Trust Company will act on instructions that it reasonably
believes to be genuine. The proceeds of the redemption will only be mailed to
the address of record with the Fund, provided that your account registration has
not changed within the last 30 days. The Fund reserves the right to refuse a
telephone redemption and may limit the amount and frequency. The Telephone
Redemption Privilege may be modified or terminated at any time by either the
Fund or Firstar Mutual Fund Services, LLC.
Neither the Fund nor its transfer agent will be liable for following
instructions that they reasonably believe to be genuine. It is the Fund's policy
to provide that a written confirmation statement of all telephone call
transactions be mailed to shareholders at their address of record within three
business days after the telephone call transaction. You should verify the
accuracy of telephone call transactions immediately upon receipt of your
confirmation statement. As a result of this policy, you will bear the risk of
loss in the event of a fraudulent telephone exchange or redemption transaction.
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<PAGE>
- --------------
*A signature guarantee must be from an eligible guarantor institution approved
by Firstar Mutual Fund Services, LLC. Signature guarantees in proper form
generally will be accepted from domestic banks, a member of a national
securities exchange, credit unions and savings associations, as well as from
participants in the Securities Transfer Agents Municipal Program ("STAMP"). If
you have any questions with respect to signature guarantees, please call the
transfer agent at (800) 322-6864.
Expedited Redemption Privilege
Requests for expedited redemption may be made by wire, letter or
telephone if you have previously filed with Firstar Trust Company a signed
telephone authorization form available from the Fund. If the request is for more
than $5,000, proceeds of the expedited redemption will be transferred by Federal
Reserve wire to the bank specified in the authorization form or to a
correspondent bank if your bank is not a member of the Federal Reserve System.
Firstar Trust Company charges a $12 service fee for each payment of redemption
proceeds made by Federal wire. This fee will be deducted from your account. If
the correspondent bank fails to notify your bank immediately, there could be a
delay in crediting the funds to your bank account. Proceeds of less than $5,000
will be mailed to your address. The Fund reserves the right to refuse an
expedited redemption and may limit the amount and frequency. This procedure may
be modified or terminated at any time without prior notice by either the Fund or
Firstar Trust Company. Any time funds are wired by the Bank, the proceeds of
redemption may be subject to the deduction of the Bank's usual and customary
charges for wiring funds.
In order to qualify to use the Expedited Redemption Privilege, you must
complete the appropriate portion of the new account application and your initial
payment for purchase of the Fund's shares must be drawn on, and redemption
proceeds paid to, the same bank and account as designated on the application.
In order to change the commercial bank or account designated to receive
the redemption proceeds, you must send a written request to Fundamental Family
of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI
53201-0701. Such request must be signed by each shareholder with each signature
guaranteed by an eligible guarantor (see above).
Regular Redemption Procedure
You may redeem your shares by sending a written request, together with
duly endorsed share certificates, if any, to Fundamental Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. All
certificates and all written requests for redemption must be endorsed by you.
For redemptions exceeding $50,000 (and for all written redemption requests,
regardless of amount, made within 30 days following any change in account
registration), your endorsement must be signature guaranteed, as described
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<PAGE>
above. Firstar Mutual Fund Services, LLC may, at its option, request further
documentation from corporations, executors, administrators, trustees or
guardians. If requested, redemption proceeds of more than $5,000 will be wired
into any member bank of the Federal Reserve System. However, such transaction
may be subject to a deduction of the Bank's usual and customary charges for
wiring funds. The Fund will accept other suitable verification arrangements for
foreign investors. The U.S. Postal Service and other independent delivery
services are not agents of the Fund. Therefore, deposit of purchase requests in
the mail or with such services does not constitute receipt by Firstar Trust
Company or the Fund. Please do not mail letters by overnight courier to the post
office box address. Purchase requests sent by overnight or express mail should
be directed to: Fundamental Family of Funds, c/o Firstar Mutual Fund Services,
LLC, Mutual Fund Services, Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202. Redemptions by mail will not become effective until all
documents in the form required have been received by Firstar Mutual Fund
Services, LLC.
How to Transfer Shares
Shares may be transferred from one person to another by sending to
Firstar Trust Company a written request for such transfer, signed by the
registered owner(s) exactly as the account is registered with each signature
guaranteed as described above, with (i) the name(s) of the new registered
owner(s), (ii) the social security number or taxpayer identification number for
the new registration, and (iii) the redemption option elected. If the shares
being transferred are represented by certificates in the possession of the
investor, such certificates, properly signed with signature guarantees, must
also be forwarded to Firstar Mutual Fund Services, LLC. In addition, Firstar
Mutual Fund Services, LLC reserves the right to request any additional documents
that may be required for transfer by corporations, executors, administrators,
trustees, and guardians.
Reopening an Account
You may reopen an account with a minimum investment of $100 or more
without filing a new application form during the year in which your account was
closed or during the following calendar year, provided that the information on
your original form is still applicable. The Fund may require you to file a
statement that all information on the original account application form remains
applicable.
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<PAGE>
DISTRIBUTION EXPENSES
The Board of Directors and shareholders of the Fund have approved a
plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to
the Plan, the Fund may pay certain promotional and advertising expenses and may
compensate certain registered securities dealers and financial institutions for
services provided in connection with processing orders for the purchase or
redemption of Fund shares, and for furnishing other shareholder services.
Payments by the Fund shall not, in the aggregate, in any fiscal year of
the Fund, exceed one-half of 1% of daily net assets of the Fund for expenses
incurred in distributing and promoting the Fund's shares. The Plan will make
payments only for expenses actually incurred by such dealers and financial
institutions. If the Plan is terminated in accordance with its terms, the
obligation of the Fund to make payments pursuant to the Plan, including any
prior expenses carried forward, will cease and the Fund will not be required to
make any payments for expenses incurred after the date the Plan terminates.
Because these payments are paid out of the Fund's assets on a continual basis
over time, these fees will increase the cost of your investment and may cost you
more than other types of sales charges.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
All of the Fund's net investment income, consisting of interest income
accrued less all expenses, is calculated daily and declared as a dividend to
shareholders of record of the Fund at the close of business on the previous day.
Dividends are distributed monthly. Net capital gains, if any, will normally be
distributed annually, before the close of the Fund's tax year and prior to
filing the Fund's tax return.
Dividends and capital gains distributions are normally paid in
additional shares of the Fund. If you wish to receive dividends or distributions
in cash, you must file an election with Firstar Mutual Fund Services, LLC, which
election will remain in effect until Firstar Trust Company is notified by you in
writing to change the election, at least ten (10) days prior to payment date.
Tax Matters
The Fund intends to qualify as a regulated investment company, which
means that it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.
o Exempt-interest dividends from the Fund will be exempt from federal
regular income tax and California income tax.
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<PAGE>
o Ordinary dividends from the Fund are taxable as ordinary income and
dividends from the Fund's long-term capital gains are taxable as
capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or additional
shares. They may also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they
had been paid the previous December.
o We will mail you tax statements annually showing the amounts and tax
status of the distributions you received.
o When you sell (redeem) or exchange shares of the Fund, you must
recognize any gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
o You should review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
Fund.***
- 28 -
<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
THE CALIFORNIA MUNI FUND(R)
67 Wall Street
New York NY 10005
1-800-___-____
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC- 0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(___-____)
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is _________.
- 29 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE CALIFORNIA MUNI FUND
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus, a copy of which may be obtained
by writing to The Fund at (________________), or by calling (800) (_________).
Shareholder inquiries may also be placed through this number.
THIS STATEMENT IS DATED APRIL 30, 1999 AND
SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
<PAGE>
TABLE OF CONTENTS
Page
----
FUND HISTORY.................................................................
INVESTMENT OBJECTIVE AND POLICIES............................................
INVESTMENT LIMITATIONS.......................................................
MANAGEMENT OF THE FUND.......................................................
OWNERSHIP OF SECURITIES......................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES ....................................
DISTRIBUTION PLAN............................................................
PORTFOLIO TRANSACTIONS.......................................................
TAXES........................................................................
DESCRIPTION OF SHARES........................................................
CERTAIN LIABILITIES..........................................................
PURCHASE OF SHARES...........................................................
PRICING OF SHARES............................................................
CALCULATION OF YIELD.........................................................
FINANCIAL STATEMENTS.........................................................
APPENDIX.....................................................................A-1
Special Factors Affecting California Issuers
Information on Securities Ratings
<PAGE>
FUND HISTORY
The California Muni Fund (the "Company") is a Massachusetts business
trust that was organized on January 26, 1983. The Company is a non-diversified
management investment company and has one series bearing the same name The
California Muni Fund (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
The objective of the Fund is to provide investors with as high a level
of income that is excluded from gross income for federal income tax purposes and
exempt from California personal income tax as is consistent with the
preservation of capital. There can be no assurance that the Fund will achieve
this objective. In attempting to achieve this objective, the Fund will, as a
fundamental policy, invest only in (1) municipal bonds that are rated within the
four highest quality grades (as determined by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Fitch Investors Service,
Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff"), the nationally recognized
statistical rating organizations currently rating instruments of the type the
Fund may purchase), or, if unrated, are judged by Fund management to be of
comparable quality, and (2) municipal notes and municipal commercial paper that
are rated within the three highest quality grades as determined by Moody's for
municipal notes, or within the three highest quality grades as determined by
Moody's or S&P for municipal commercial paper or, if unrated, are (i)
obligations of issuers having an issue of bonds rated within the four highest
quality grades as determined by Moody's, S&P, Fitch or Duff or (ii) guaranteed
as to principal and interest by the U.S. Government, its agencies or
instrumentalities. Fundamental policies of the Fund can be changed only by a
majority vote of the shareholders of the Fund (as defined in the Prospectus). (A
"majority shareholder vote" means, in the Prospectus, the affirmative vote of
the holders of the lesser of (1) more than 50% of the outstanding shares of the
Fund or (2) 67% or more of the shares present at a meeting if more than 50% of
the outstanding shares are represented at the meeting in person or by proxy.)
See "Additional Information Relating to Municipal Obligations" contained herein
for more detailed descriptions of the various types of municipal obligations.
The Fund may invest up to 100% of its assets in qualified private
activity bonds, and accordingly, the Fund's shares may not be an appropriate
investment for "substantial users" of facilities financed by industrial
development bonds or for investors who are "related persons" with respect to
such users. Generally, an individual will not be a "related person" under the
Internal Revenue Code of 1986, as amended (the "Code") unless he or his
immediate family (spouse, brothers, sisters, ancestors and lineal descendants)
own directly or indirectly in the aggregate more than (i) 50% in value of the
outstanding stock of a corporation or (ii) 50% of the capital or profits
interest in a partnership which is a "substantial user" of a facility financed
-3-
<PAGE>
from the proceeds of industrial development bonds. A "Substantial user" of such
facilities is defined generally in Section 1.103-11(b) of the Treasury
Regulations as a "nonexempt person who regularly uses a part of [a] facility"
financed from the proceeds of a qualified private activity bond in his trade or
business.
For more detailed information concerning the Investment Objective and
Investment Policies of the Fund, see the Fund's Prospectus at "Investment
Objective and Policies".
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Fund as
fundamental policies, which means they can be changed for the Fund only by a
majority shareholder vote. The Fund may not:
(1) Invest in securities other than the municipal obligations described
in the Fund's Prospectus under "Investment Objective and Policies".
(2) Make short sales of securities or purchase securities on margin,
except that the Fund may obtain such short-term credits as are necessary for the
clearance of purchases and sales of portfolio securities.
(3) Borrow money, except from banks, and only in an amount not to
exceed 20% of the Fund's total assets, with such value determined at the time of
borrowing, excluding the amount borrowed.
(4) Pledge, assign or otherwise encumber its assets, except that the
Fund may pledge securities having a market value determined at the time of
pledge of up to 10% of the value of its total assets for the purpose of securing
the borrowings referred to in restriction (3) above.
(5) Underwrite securities, except to the extent that the purchase of
municipal obligations directly from an issuer may be deemed to be an
underwriting, or purchase any securities as to which registration under the
Securities Act of 1933 would be required for resale to the public.
(6) Make loans of money or securities, except that the purchase of a
portion of an issue of publicly-distributed debt securities is not considered
the making of a loan.
(7) Invest for the purpose of exercising control or management of
another company.
-4-
<PAGE>
(8) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
(9) Write puts, calls or combinations thereof, or purchase or sell
commodities or commodity futures contracts.
(10) Purchase or sell real estate, although the Fund may purchase
municipal obligations secured by interest in real estate.
(11) Purchase industrial revenue bonds if, as a result, more than 5% of
the Fund's total assets would be invested in industrial revenue bonds where
payment of principal and interest would be the responsibility of companies with
less than three years of operating history.
(12) Purchase or retain the securities of any one issuer if officers or
Trustees of the Fund or the Fund's investment adviser beneficially owning more
than 1/2 of the 1% of the securities of the issuer together beneficially own
more than 5% of the securities of the issuer.
(13) Issue senior securities, as defined in the Investment Company Act
of 1940, except to the extent the Fund may be deemed to have issued securities
by reason of any borrowings permitted by restriction (3) or by purchasing
securities on a when-issued or delayed delivery basis.
(14) Invest 25% or more of the value of its respective total assets in
securities of nongovernmental issuers in the same industry. The identification
of the issuer of the municipal obligations depends on the terms and conditions
of the obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the subdivision and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision is regarded as the sole
issuer. Similarly, in the case of an industrial development revenue bond or
pollution control bond, if the bond is backed only by the assets and revenues of
the nongovernmental user, the nongovernmental user is regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guaranty is regarded as a separate security and treated as an
issue of such guarantor.
Although it is not a fundamental policy, the Fund may not invest more
than 10% of its total assets in municipal obligations of California issuers
which are illiquid or which have limited marketability.
-5-
<PAGE>
ADDITIONAL INFORMATION RELATING TO MUNICIPAL OBLIGATIONS
Municipal Bonds
Municipal bonds are long-term debt obligations, generally with a
maturity at the time of issuance of greater than three years, of states and
their political subdivisions issued to obtain funds for various public purposes,
including construction of a wide range of public facilities, such as airports,
bridges, highways, housing, hospital, mass transportation, schools, streets and
water and sewer works. Other purposes for which municipal bonds may be issued
include refunding outstanding obligations; obtaining funds for general operating
expenses; or obtaining funds to lend to public or private institutions for
construction of such facilities as educational, hospital and housing facilities.
In addition, certain types of bonds may be issued by public authorities to
finance privately operated housing facilities, sports facilities, convention or
trade show facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Other types of qualified private
activity bonds, the proceeds of which are used for the construction, equipment,
repair or improvement of privately operated industrial or commercial facilities,
may constitute municipal bonds, although current Federal tax laws place
substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are general
obligation and revenue bonds. General obligation bonds are secured by the
issuer's pledge of faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from only revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue sources such as from the user
of the facility being financed. Qualified private activity bonds are in most
cases revenue bonds and do not generally constitute the pledge of the credit or
taxing power of the issuer of such bonds. The payment of the principal and
interest on such bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
Municipal Notes
Municipal notes are short-term obligations, generally with a maturity
at the time of issuance of from six months to three years. The principal types
of municipal notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes, and project notes. Tax anticipation notes are sold
to provide working capital to states and municipalities in anticipation of
collection of taxes. Bond anticipation notes are issued to provide funds
temporarily in anticipation of a bond sale. Revenue anticipation notes are sold
in expectation of receipt of other revenues, such as funds under the Federal
Revenue Sharing Program. Project notes are issued by local agencies in
connection with such programs as construction of low-income housing in order to
provide construction financing prior to permanent financing. Project notes are
guaranteed by the U.S. Department of Housing and Urban Development and
consequently are secured by the full faith and credit of the United States.
Municipal notes also include obligations issued at a discount, frequently
referred to as municipal commercial paper, which are likely to be issued to meet
seasonal working capital needs of a municipality or to provide interim
construction financing and are to be paid from general revenues of the
-6-
<PAGE>
municipality or refinanced with long-term debt. In most cases, municipal
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements, or other credit facility agreements offered by banks or
other institutions. The Fund would be able to draw on these agreements on a
default under the terms of the documents of the security.
Variable Rate Instruments
Municipal bonds and notes are sometimes issued with a variable interest
rate ("variable rate instruments"). The interest rate on variable rate
instruments is usually tied to an objective standard, such as the 90-day
Treasury Bill rate or the prime rate of a bank involved in the financing. Prime
rates can change daily; the auction for 90-day Treasury Bill rates is held
weekly. In addition to having a variable interest rate, any such instruments are
subject to repayment of principal on demand by the Fund, usually in not more
than five business days. Both the variable rate feature and the principal
repayment on demand feature tend to reduce fluctuations in the price of variable
rate instruments; these instruments are generally of interest and sold to
institutional investors. Also available are participation interests in loans to
municipal issuers, which are similar except that these loan participations are
made available through a commercial bank that arranges the tax-exempt loan.
Participation interests are frequently backed by an irrevocable bank letter of
credit or a guarantee by a financial institution and give the Fund the right to
demand, on short notice (usually not more than seven days), payment of all or
any part of the principal amount and accrued interest. The Board of Trustees
will determine that the participation interest in the municipal securities meets
the Fund's prescribed quality standards. The Fund's management has been
instructed by the Board of Trustees to monitor the pricing, quality and
liquidity of any variable rate demand instruments held, including participation
interests supported by letters of credit or guarantee, on the basis of published
financial information and reports of the rating agencies and other analytical
sources. The Fund's management will also monitor the creditworthiness of the
guarantor. Banks retain fees for their role in an amount equal to the excess of
the interest paid on the municipal securities over the negotiated yield at which
the participation interests were purchased. In the event that the participation
interest that the Fund acquires includes the right to demand payment of
principal and accrued interest from the issuer of the participation interest
pursuant to a letter of credit or other commitment, the maturity will be deemed
to be equal to the time remaining until the principal amount can be recovered
from the issuer through demand, although the stated maturity may be in excess of
one year. To the extent that variable rate instruments and loan participations
may lack liquidity (unless payable on demand or within seven days), they are
subject to the restriction on illiquid securities, described herein under the
caption "Investment Restrictions".
-7-
<PAGE>
ADDITIONAL INFORMATION RELATING TO
LOWER RATED SECURITIES
Downgraded securities (i.e., those rated lower than Baa by Moody's or
BBB by S&P, Fitch or Duff or determined by Fund management to be a comparable
quality if unrated) that are retained in the Fund's investment portfolio
generally produce a higher current yield than do securities of higher ratings.
However, these obligations are considered speculative because they involve
greater price volatility and risk than do higher rated securities and the yields
on these securities will tend to fluctuate over time. Although the market value
of all fixed-income securities varies as a result of changes in prevailing
interest rates (e.g., when interest rates rise, the market value of fixed-income
securities can be expected to decline), values of lower rated securities tend to
react differently than the values of higher rated securities. The prices of
lower rated securities are less sensitive to changes in interest rates than
higher rated securities. Conversely, lower rated securities also involve a
greater risk of default by the issuer in the payment of principal and income and
are more sensitive to economic downturns and recessions than higher rated
securities. The financial stress resulting from an economic downturn could have
a greater negative effect on the ability of issuers of lower rated securities to
service their principal and interest payments, to meet projected business goals
and to obtain additional financing than on more creditworthy issuers. In the
event of an issuer's default in payment of principal or interest on such
securities, or any other securities in the Fund's portfolio, the net asset value
of the Fund will be negatively affected. Moreover, as the market for lower rated
securities is a relatively new one which has not yet been tested through a
recession, a severe economic downturn might increase the number of defaults,
thereby adversely affecting the value of all outstanding lower rated municipal
bonds and disrupting the market for such securities. Securities purchased by the
Fund as part of an initial underwriting present an additional risk due to their
lack of market history. These risks are exacerbated with respect to securities
rated CCC or lower by S&P, Fitch or Duff Caa or lower by Moody's. Unrated
securities generally carry the same risks as do lower rated securities.
The Fund may continue to hold lower rated securities that are
structured as zero coupon or pay-in-kind bonds. Such securities may be more
speculative and subject to greater fluctuation in value due to changes in
interest rates than lower rated, income-bearing securities. In addition, zero
coupon and pay-in-kind securities are also subject to the risk that in the event
of a default, a fund may realize no return on its investment, because these
securities do not pay cash interest. Zero coupon, or deferred interest,
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are issued
and traded at a discount from their face amounts or par value. Pay-in-kind
securities are securities that pay interest through the issuance of additional
securities. Holders of zero coupon securities are considered to receive each
year the portion of the original issue discount on such securities that accrues
that year and must include such amount in gross income, even though the holders
receive no cash payments during the year. Consequently, as a fund is accruing
original issue discount on these securities prior to the receipt of cash
payment, it is still subject to the requirement that it distribute substantially
all of its income to its shareholders in order to qualify as a "regulated
investment company" under applicable tax law. Therefore, such fund may have
-8-
<PAGE>
to dispose of its portfolio securities under disadvantageous circumstances or
leverage itself by borrowing to generate the cash necessary to satisfy its
distribution requirements.
Lower rated securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
rated securities tend to be institutions, rather than individuals, a factor that
further limits the secondary market. To the extent that no established retail
secondary market exists, many lower rated securities may not be as liquid as
Treasury and investment grade securities. The ability of the Fund to sell lower
rated securities will be adversely affected to the extent that such securities
are thinly traded or illiquid. Moreover, the ability of the Fund to value lower
rated securities becomes more difficult, and judgment plays a greater role in
valuation, as there is less reliable, objective data available with respect to
such securities that are thinly traded or illiquid.
Because investors may perceive that there are greater risks associated
with the medium to lower rated securities, the yields and prices of such
securities may tend to fluctuate more than those for securities with a higher
rating. Changes in perception of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner in the lower quality segments of the
fixed-income securities market than do changes in higher quality segments of
such market, resulting in greater yield and price volatility.
The general legislative environment has included discussions and
legislative proposals relating to the tax treatment of high-yield securities.
Any or a combination of such proposals, if enacted into law, could negatively
affect the value of any high-yield securities in the Fund's portfolio. The
likelihood of any such legislation being enacted is uncertain.
Temporary Defensive Investments
The Fund may invest in the following temporary defensive investments:
U.S. Government Obligations. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Short-Term Obligations. These include high quality, short-term obligations such
as domestic and foreign commercial paper (including variable-amountmasterdemand
notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreignbranches of U.S. banks and foreign banks, and
repurchase agreements.
-9-
<PAGE>
[PORTFOLIO TURNOVER]
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the Board
of Trustees. Specifically, the Board of Trustees is responsible for oversight of
the Fund by reviewing and approving necessary agreements with the Fund's service
providers, and mandating policies for the Fund's operations.
Trustees and officers of the Fund, together with information as to
their principal business occupations during the last five years, are shown
below. Each director who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March __, 1999.
-10-
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Director Vice President and Treasurer,
[Address] Ingersoll-Rand Company (5/86 -
Present); Trustee, Chase Vista
Age: 56 Funds.
- -------------------------------------------------------------------------------------------------
L. Greg Ferrone Director Senior Manager, ARC Partners
83 Ronald Court (10/97 - Present); Consultant,
Ramsey, New Jersey 07446 IntraNet, Inc. (4/90 - 10/97);
Age: 47 Sales & Marketing Director, RAV
Communications (4/85 - 4/90);
Vice President/Regional Manager,
National Westminster Bank USA
(3/78 - 4/85).
- -------------------------------------------------------------------------------------------------
Stephen C. Leslie* President Chairman and CEO,
67 Wall Street Cornerstone Equity Advisors,
New York, New York 10005 Inc. (6/97 - Present); Partner,
Age: 45 Wall Street Capital Group (3/97
- 6/97); Partner, Wall Street
Investment Corp. (11/95 -
3/97); Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- -------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
67 Wall Street Financial Officer Advisors, Inc. (4/97 - Present);
New York, New York 10005 Partner, Speer & Fulvio (3/87 -
Age: 4/97).
- -------------------------------------------------------------------------------------------------
Leroy E. Rodman Director Counsel, Morrison, Cohen,
[Address] Singer & Weinstein, LLP
(1996 - Present); Senior Partner,
Age: 85 Teitelbaum, Hiller, Rodman,
Paden & Hibsher, P.C. (1990 -
1996).
- -------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Director Executive Director and Chief
[Address] Operating Officer, Black
Leadership Forum, Inc.;
Age: 65 Director, Joint Center For
Political and Economic Studies
(1991 - Present).
=================================================================================================
</TABLE>
-11-
<PAGE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the Treasurer
of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the Trustees of
the Fund are also Trustees of The California Muni Fund and Fundamental
Fixed-Income Fund.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Fundamental Fixed-Income Fund and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Director of the Fund
who is not affiliated with the Fund's investment manager is compensated at the
rate of $6,500 per quarter prorated among the three funds based on their
respective net assets at the end of each quarter. Each such Director is also
reimbursed by the three funds, on the same basis, for actual out-of-pocket
expenses relating to his attendance at meetings. Some Trustees received
additional compensation at a rate of $125 per hour for services related to
servicing on the Portfolio Review Committee. As of the date of this Statement of
Additional Information, Trustees and officers of the Fund as a group owned
beneficially less than 1% of the Fund's outstanding shares.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
=============================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Director
=============================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
-12-
<PAGE>
OWNERSHIP OF SECURITIES
As of __________ except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the Fund. As
of that date, the officers and Board Members of the Fund beneficially owned less
than 1% of the shares of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors, Inc.
("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief Executive
Officer is Mr. Stephen C. Leslie, who is also President of the Fund. Mr. Leslie
is one of two individuals who may be considered a "control person" of
Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is the Treasurer and
Chief Financial Officer of the Fund. Mr. Fulvio is not considered a "control
person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following percentages
of the Fund's average daily net asset value:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received an
aggregate advisory fee of $____________. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$____________. From January 1, 1998 to May 30, 1998 FPA received an aggregate
advisory fee of $____________. For the fiscal year ended December 31, 1997 FPA
received an aggregate advisory fee of $____________. For the fiscal year ended
December 31, 1996 FPA received an aggregate advisory fee of $787,962.
-13-
<PAGE>
[CREDITS FOR THE ADVISORY FEE STATED SEPARATELY]. The investment
management agreement with FPA provided an expense limitation of 1.50% of the
Fund's average daily net assets. The agreement with Cornerstone also contains
such limitations, while the interim agreement with Tocqueville did not provide
such limitations.
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
WI 53201-0701 currently acts as Administrator, Transfer Agent, and Accounting
Agent of the Fund.
[Description of Services and aggregate compensation for the
administration services.]
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan Street,
Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and securities.
______________, acts as independent certified public accountants for
the Fund, performing an annual audit of the Fund's financial statements and
preparing its tax returns.
DISTRIBUTION PLAN
The Board of Directors and shareholders of the Fund have approved a
plan of distribution under Rule 12b-1 of the 1940 Act (the "Plan"). Pursuant to
the Plan, the Fund may pay certain promotional and advertising expenses and may
compensate certain registered securities dealers and financial institutions for
services provided in connection with the processing of orders for purchase or
redemption of the shares of the Fund and furnishing other shareholder services.
Payments by the Fund shall not in the aggregate in any fiscal year of the Fund
exceed 1/2 of 1% of daily net assets of the Fund. The Fund may enter into
shareholder processing and service agreements (the "Shareholder Service
Agreements") with any securities dealer who is registered under the Securities
Exchange Act of 1934 and a member in good standing of the National Association
of Securities Dealers, Inc., and with banks and other financial institutions,
who may wish to establish accounts or sub-accounts on behalf of their customers
("Shareholder Service Agents"). For processing investor purchase and redemption
orders, responding to inquiries from Fund shareholders concerning the status of
their accounts and operations of the Fund and communicating with the Fund, the
Fund may pay each such Shareholder Service Agent to cover expenditures for
advertising, sales literature and other promotional materials on behalf of the
Fund.
The fees payable to Shareholder Service Agents under Shareholder
Service Agreements will be negotiated by the Fund's management. The Fund's
management will report quarterly to the Board of Directors on the rate to be
paid under each such agreement and the
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amounts paid or payable under such agreements. It will be based upon the
management's analysis of (1) the contribution that the Shareholder Service Agent
makes to the Fund by increasing Fund assets and reducing expense ratios; (2) the
nature, quality and scope of services being provided by the Shareholder Service
Agent; (3) the cost to the Fund if shareholder services were provided directly
by the Fund or other authorized persons; (4) the costs incurred by the
Shareholder Servicing Agent in connection with providing services to
shareholders; and (5) the need to respond to competitive offers of others which
could result in assets being withdrawn from the Fund and an increase in the
expense ratio for the Fund.
No interested persons of the Fund had a direct or indirect financial
interest in the operation or plan or related agreements. The Board of Directors
of the Fund, including a majority of the "disinterested" Directors who have no
direct or indirect financial interest in the operation of the Plan or any
agreements relating thereto, authorized the Fund to enter into an agreement with
(____________________), under the Plan. The agreement provides that the Fund may
pay the usual and customary agency's commission to (______________) for
producing and placing Fund advertising in newspapers, magazines or other
periodicals, on radio or television, or in direct marketing campaigns. In
addition to the foregoing, the Fund may pay (_______________) for marketing
research and promotional services specifically relating to the distribution of
Fund shares, including office space, facilities and equipment, salaries,
training and administrative expenses, computer systems and software,
communications, supplies, photocopying and similar types of expenses.
The Plan will continue in effect from year to year if specifically
approved at least annually by the Board of Directors and the affirmative vote of
a majority of the Directors who are not parties to any Shareholder Service
Agreement or "interested persons" of any such party by votes cast in person at a
meeting called for such purpose. In approving the Plan, the Directors
determined, in the exercise of their business judgment and in light of their
fiduciary duties as Directors of the Fund, that there was a reasonable
likelihood that the Plan would benefit the Fund and its shareholders. The Plan
may only be renewed if the Directors make a similar determination for each
subsequent year. The Plan may not be amended to increase the maximum amount of
payments by the Fund to its Shareholder Service Agents without shareholder
approval, and all material amendments to the provisions of the Plan must be
approved by a vote of the Board of Directors and of the Directors who have no
direct or indirect interest in the Plan, cast in person at a meeting called for
the purpose of such vote.
The Plan provides that the Fund's management shall provide, and that
the independent Directors shall review, quarterly reports setting forth the
amounts expended pursuant to the Plan and the purpose for which the amounts were
expended. It further provides that while the Plan is in effect, the selection
and nomination of those Directors of the Fund who are not "interested persons"
of the Fund is committed to the discretion of the independent Directors.
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During the year ended December 31, 1998, the Fund paid $(_______) for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising --
$(______); printing and mailing of Prospectuses to other than current
shareholders -- $(______); and sales, and shareholder servicing support services
and other distribution services, -- $(______). Of the amount paid by the Fund
during last year, $(_______) was paid to (______________) for expenses incurred
and services rendered by it pursuant to the Plan.
CALCULATION OF YIELD
The Fund's yield quotations and average annual total return quotations
as they appear in the Prospectus, this Statement of Additional Information or in
advertising and sales material, are calculated by standard methods prescribed by
the Securities and Exchange Commission.
The Fund's yield is computed by dividing the Fund's net investment
income per share during a base period of 30 days, or one month, by the net asset
value per share of the Fund on the last day of such base period in accordance
with the following formula:
a-b 6
Yield = 2[(----- + 1) - 1]
cd
Where:
a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during
the period that were entitled to receive dividends
d= the maximum offering price per share on the last day of
the period.
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(1) The yield to maturity of each obligation held by the Fund is
computed based on the market value of the obligation (including actual accrued
interest, if any) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest, if any).
(2) The yield to maturity of each obligation is then divided by 360 and
the resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest income on
the obligation for each day of the subsequent month
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that the obligation is in the portfolio. For these purposes, it is assumed that
each month has 30 days.
(3) Interest earned on all debt obligations during the 30-day or
one-month period is then totaled.
(4) The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
(5) In the case of a tax-exempt obligation issued without original
issue discount and having a current market discount, the coupon rate of interest
of the obligation is used in lieu of yield to maturity to determine interest
income earned on the obligation.
In the case of a tax-exempt obligation with original issue discount
where the discount based on the current market value of the obligation exceeds
the then remaining portion of original issue discount (i.e. market discount),
the yield to maturity used to determine interest income earned on the obligation
is the imputed rate based on the original issue discount calculation. In the
case of a tax-exempt obligation with original issue discount where the discount
based on the current market value of the obligation is less than the then
remaining portion of the original issue discount (market premium), the yield to
maturity used to determine interest income earned on the obligation is based on
the market value of the obligation.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (1) to
amortize the discount or premium on a remaining security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (2) not to amortize the discount or premium
on a remaining security.
For the purpose of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of each obligation in the Fund's
portfolio each day that the obligation is in the portfolio. The Fund does not
use equalization accounting in the calculation of yield. Expenses accrued during
any base period, if any, pursuant to the Plan are included among the expenses
accrued during the base period. Any reimbursement accrued pursuant to the Plan
during a base period, if any, will reduce expenses accrued pursuant to such
plan, but only to the extent the reimbursement does not exceed the accrued
expenses for the base period.
The Fund's yield for the one-month period ended December 31, 1997
determined in accordance with the above formula was 3.32%.
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Average annual total return quotations are computed by finding the
average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
P(1+T)(n) = ERV
Where: P= a hypothetical initial payment of $1000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1000 payment
made at the end of a designated period (or fractional
portion thereof)
For purposes of the above computation, it is assumed that all dividends
and distributions made by the Fund are reinvested at net asset value during the
designated period. The average annual return quotation is determined to the
nearest 1/100 of 1%. The average annual total return for the year ended December
31, 1998 was ______%. For the five-year period ended December 31, 1998, the
average annual total return was ________%. The average annual total return was
_______% for the ten-year period ended December 31, 1998.
In determining the average annual total return (calculated as provided
above), recurring fees, if any, that are charged to all shareholder accounts are
taken into consideration. For any account fees that vary with the size of the
account, the account fee used for purposes of the above computation is assumed
to be the fee that would be charged to the Fund's mean account size.
The Fund may also from time to time advertise its taxable equivalent
yield. The Fund's taxable equivalent yield is determined by dividing that
portion of the Fund's yield (calculated as described above) that is tax-exempt
by one minus the stated marginal Federal income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. The
taxable equivalent yield of the Fund for the one-month period ended December 31,
1998 was ________% for a taxpayer whose income was subject to the then highest
combined Federal and California State income tax rate of ______%.
The Fund's yield and average annual total return will vary from time to
time depending on market conditions, the composition of the Fund's portfolio and
operating expenses of the Fund. These factors and possible differences in the
methods used in calculating yields and returns should be considered when
comparing performance information regarding the Fund to information published
for other investment companies and other investment vehicles. Yields
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and return quotations should also be considered relative to changes in the value
of the Fund's shares and the risks associated with the Fund's investment
objective and policies. At any time in the future, yields and return quotations
may be higher or lower than past yields or return quotations and there can be no
assurance that any historical yield or return quotation will continue in the
future.
TAXES
The following is only a summary of certain additional federal income
tax considerations generally affecting the Fund and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company for
federal income tax purposes under Subchapter M of the Code. As a regulated
investment company, the Fund is not subject to federal income tax on the portion
of its net investment income (i.e., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (i.e., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Fund made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and will therefore count toward satisfaction of the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In general, gain or loss recognized by the Fund on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including municipal obligations) purchased by
the Fund at a market discount (generally, at a price less than
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its principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the Fund
held the debt obligation.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss incurred
after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of the its total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")).
(Tax-exempt interest on municipal obligations is not subject to the excise tax.)
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
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For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but will not qualify for the 70% dividends-received deduction for
corporate shareholders.
The Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. The Fund currently intends to distribute any
such amounts. Net capital gain that is distributed and designated as a capital
gain dividend will be taxable to shareholders as long-term capital gain,
regardless of the length of time a shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares.
The Fund intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the Fund's total assets consists of tax-exempt
municipal obligations. Distributions from the Fund will constitute
exempt-interest dividends to the extent of the Fund's tax-exempt interest income
(net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of the Fund are excluded by them from gross income
for federal income tax purposes. However, shareholders required to file federal
income tax returns will be required to report the receipt of exempt-interest
dividends on their returns. Moreover, while exempt- interest dividends are
excluded from gross income for federal income tax purposes, they may be subject
to alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences discussed below. Distributions by the Fund of any
investment company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
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AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed -- at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers -- on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of the Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is related to) a "substantial user"
of a facility financed by industrial development bonds held by the Fund will
likely be subject to tax on dividends paid by the Fund which are derived from
interest on such bonds. Receipt of exempt-interest dividends may result in other
collateral federal income tax consequences to certain taxpayers, including
financial institutions, property and casualty insurance companies and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own tax advisers as to such consequences.
Distributions by the Fund that do not constitute ordinary income
dividends, exempt- interest dividends or capital gain dividends will be treated
as a return of capital to the extent of (and in reduction of) the shareholder's
tax basis in his shares; any excess will be treated as gain realized from a sale
of the shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of the Fund reflects realized but
undistributed income or gain, or unrealized appreciation in the value of assets
held by the Fund, a subsequent distribution of such amounts will be taxable to
the shareholder in the manner described above, although it economically
constitutes a return of capital.
Ordinarily, shareholders are required to take distributions by the Fund
into account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by the Fund) on December
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31 of such calendar year provided such dividends are actually paid in January of
the following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder who (1) has failed to
provide a correct taxpayer identification number, (2) is subject to backup
withholding for failure properly to report the receipt of interest or dividend
income, or (3) has failed to certify to the Fund that it is not subject to
backup withholding or that it is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares. For
this purpose, the special holding period rules of Code Section 246(c)(3) and (4)
generally will apply in determining the holding period of shares. Capital losses
in any year are deductible only to the extent of capital gains plus, in the case
of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to the shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower applicable treaty rate) on the gross amount of the dividend. Such
a foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale or redemption of shares of the Fund, capital
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gain dividends and exempt-interest dividends and amounts retained by the Fund
that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income and
capital gain dividends received in respect of, and any gains realized on the
sale of, shares of the Fund will be subject to U.S. federal income tax at the
rates applicable to U.S. taxpayers.
In the case of a foreign noncorporate shareholder, the Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding (or subject to withholding at a
reduced treaty rate), unless the shareholder furnishes the Fund with proper
notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Fund.
PORTFOLIO TRANSACTIONS
The Fund's management provides the Fund with investment advice and
recommendations for the purchase and sale of portfolio securities. Newly issued
securities are usually purchased from the issuer or an underwriter, at prices
including underwriting fees; other purchases and sales are usually placed with
those dealers from whom it appears that the best price or execution will be
obtained. All orders for the purchase and sale of portfolio securities are
placed by the Fund's management, subject to the general control of the Fund's
Trustees. The Fund's management may sell portfolio securities prior to their
maturity if market conditions and other considerations indicate, in the opinion
of the Fund's management, that such sale would be advisable. In addition, the
Fund's management may engage in short-term trading when it
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believes it is consistent with the Fund's investment objective. Also, a security
may be sold and another of comparable quality may be simultaneously purchased to
take advantage of what the Fund's management believes to be a temporary
disparity in the normal yield relationship of two securities. The frequency of
portfolio transactions -- the Fund's turnover rates -- will vary from year to
year depending upon market conditions. For the years ended December 31, 1997 and
1996, the Fund's annual rate of portfolio turnover was approximately 70.86% and
89.83%, respectively. Because a high turnover rate increases transaction costs
and the possibility of taxable short-term gains (see "Dividends and Tax Status"
in the Fund's Prospectus), the Fund's management weighs the added costs of
short-term investment against anticipated gains. The Fund's management is
generally responsible for the implementation, or supervision of the
implementation, of investment decisions, including the allocation of principal
business and portfolio brokerage, and the negotiation of commissions.
It is the Fund's policy to seek execution of its purchases and sales at
the most favorable prices through responsible broker-dealers and, in agency
transactions, at competitive commission rates. When considering broker-dealers,
the Fund will take into account such factors as the price of the security, the
size and difficulty of the order, the rate of commission, if any, the
reliability, financial condition, integrity and general execution and
operational capabilities of competing broker-dealers, and the brokerage and
research services which they provide to the Fund's management. During the years
1986 through 1993, no brokerage commissions were paid by the Fund; all portfolio
transactions were conducted with dealers acting as principal.
During the last three fiscal years from 1996-98, the Fund paid
$_______, $________, and $_________, respectively, in brokerage commissions.
The Board of Trustees of the Fund is authorized to adopt a brokerage
allocation policy pursuant to the Securities Exchange Act of 1934 which would
permit the Fund to pay a broker-dealer which does not furnish research services,
or which furnishes research brokerage and research services provided by the
broker-dealer.
Section 28(e)(3) of the Securities and Exchange Act of 1934 defines
"Brokerage and Research Services" as including, among other things, advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, the availability of securities or purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement).
It will not be the Fund's practice to allocate principal business or
brokerage on the basis of sales of Fund shares which may be made through brokers
and dealers, although broker-dealers effecting purchases of Fund shares for
their customers may participate in principal transactions or brokerage
allocation as described above.
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FINANCIAL STATEMENTS
Audited financial statements of the Fund for the year ended December
31, 1998 [WILL BE ATTACHED] hereto.
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APPENDIX A
SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNI FUND
The financial condition of the State of California (the "State" or
"California"), its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of, The California Muni Fund, or result in the default
of existing obligations, including obligations which may be held by The
California Muni Fund. The following section provides only a brief summary of the
complex factors affecting the State's financial condition, and is based on
information obtained from an Official Statement dated December 9, 1998 relating
to $600,000,000 State of California General Obligation Bonds and the Governor's
Budget Summary 1999-2000. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
State's creditworthiness, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of default in the
absence of a specific guarantee or pledge provided by the State.
Limits on Spending and Taxes
Under California constitutional amendments, the State is subject to an
annual appropriations limit. The limit may be exceeded in cases of emergency.
The State's yearly appropriations limit is based on the limit for the prior
year, adjusted annually for changes in California per capita personal income and
population and any transfers of financial responsibility of providing services
to or from another unit of government.
On November 8, 1988, voters approved Proposition 98, a combined
initiative constitutional amendment and statute, which changed State funding of
public education below the university level and the operation of the State
appropriations limit, primarily by guaranteeing local schools and community
colleges ("K-14 schools") a minimum share of General Fund revenues. Under
Proposition 98, K-14 schools are guaranteed the greater of a fixed percentage of
General Fund revenues and the prior year's appropriation adjusted for growth.
During the recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' entitlements.
By implementing these actions, per-pupil funding from Proposition 98 sources
stayed almost constant at approximately $4,200 from Fiscal Year 1991-92 to
Fiscal Year 1993-94.
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In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. The
settlement in this case provides, among other things, that both the State and
K-14 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The State
share of the repayment will be reflected as an appropriation above the current
Proposition 98 base calculation. The schools' share of the repayment will count
as appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. The 1998-99
Budget Act appropriated $250 million as repayment of prior years' loans to
schools, as part of the settlement in this case.
Short-Term Borrowing of California
As part of its cash management program, the State has regularly issued
short-term obligations to meet cash flow needs. Between spring 1992 and summer
1994, the State had depended upon external borrowing, including borrowings
extending into the subsequent fiscal year, to meet its cash needs, including
repayment of maturing Notes and Warrants. The State issued $1.7 billion of
revenue anticipation notes for the 1998-99 Fiscal Year, which notes are to
mature on June 30, 1999.
The State Treasurer is working closely with the State Controller and
the Department of Finance to manage the State's cash flow on a regular basis,
with the goal of reducing the State's external cash flow borrowing. The three
offices are also working to develop programs to use commercial paper in whole or
in part for the State's cash flow borrowing needs, and for construction period
financing for both general obligation bond-funded and lease-revenue bond-funded
projects. As of March 1, 1997 the Finance Committees had authorized the issuance
of approximately $3.356 billion of commercial paper notes, but as of that date
only $367.78 million aggregate principal amount of general obligation commercial
paper notes was actually issued and outstanding.
The State has always paid the principal of and interest on its general
obligation bonds, general obligation commercial paper, lease-purchase debt and
short-term obligations, including revenue anticipation notes and revenue
anticipation warrants when due.
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount.
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. In signing the Budget Bill, the
Governor used his line-item veto
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power to reduce expenditures by $1.360 billion from the General Fund, and $160
million from Special Funds. Of this total, the Governor indicated that about
$250 million of vetoed funds were "set aside" to fund programs for education.
Vetoed items included education funds, salary increases and many individual
resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from revised 1997-98 figures. Special
Fund revenues were estimated at $14.3 billion.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projects a balance in the State's budget reserve (the
Special Fund for Economic Uncertainties or SFEU) at June 30, 1999 (but without
including the "set aside" veto amount) of $1.255 billion, a little more than 2%
of General Fund revenues. The Budget Act assumes the State will carry out its
normal intra-year cash flow borrowing in the amount of $1.7 billion of revenue
anticipation notes, which were issued on October 1, 1998.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill that provides
for a phased-in reduction of the Vehicle License Fee (VLF). Since the VLF is
currently transferred to cities and counties, the bill provides for the General
Fund to replace the lost revenues. Starting on January 1, 1999, the VLF will be
reduced by 25% at a cost to the General Fund of approximately $500 million in
the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both
temporary and permanent increases in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters' tax credit ($133 million), and various targeted business
tax credits ($106 million).
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7 billion
in General Fund moneys over revised 1997-98 levels, about $300 million higher
than the minimum Proposition 98 guaranty. An additional $600 million was
appropriated to "settle up" prior years' Proposition 98 entitlements, and was
primarily devoted to one-time uses such as block grants, deferred maintenance,
and computer and laboratory equipment. The Budget also includes $250 million as
repayment of prior years' loans to schools, as part of the settlement of
California Teachers' Association v. Gould.
2. Funding for higher education increased substantially above the level
called for in the Governor's four- year compact. General Fund support was
increased by $340 million (15.6%) for the University of California and $267
million (14.1%) for the California State University
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system. In addition, Community Colleges received a $300 million (6.6%) increase
under Proposition 98.
3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in 9 years.
4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for local
trial courts and a rising prison population.
5. The Budget also included new funding for resources projects,
dedication of $376 million of General Fund moneys for capital outlay projects,
funding of a 3% State employee salary increase, funding of 2,000 new Department
of Transportation positions to accelerate transportation construction projects,
and funding of the Infrastructure and Economic Development Bank ($50 million).
6. The State received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of undocumented
alien felons for federal fiscal year 1997. The State anticipates receiving
approximately $195 million in federal reimbursements for federal fiscal year
1998.
After the Budget Act was signed, and prior to the close of the
Legislative session on August 31, 1998, the Legislature passed a variety of
fiscal bills. The Governor had until September 30, 1998 to sign or veto these
bills. The bills with the most significant fiscal impact that the Governor
signed include $235 million for certain water system improvements in southern
California, $243 million for the State's share of the purchase of
environmentally sensitive forest lands, $178 million for state prisons, $160
million for housing assistance ($40 million of which was included in the 1998-99
Budget Act and an additional $120 million reflected in Proposition 1A), and $125
million for juvenile facilities. The Governor also signed bills totaling $223
million for educational programs that were part of his $250 million veto "set
aside," and $32 million for local governments fiscal relief. In addition, he
signed a bill reducing by $577 million the State's obligation to contribute to
the State Teachers' Retirement System in the 1998-99 Fiscal Year.
Based solely on the legislation enacted, on a net basis, the reserve
for June 30, 1999, was reduced by $256 million. On the other hand, 1997-98
revenues have been increased by $160 million. The revised June 30, 1999, reserve
is projected to be $1,159 million or $96 million below the level projected in
the Budget Act. In November 1998, the Legislative Analyst's Office released a
report predicting that General Fund revenues for 1998-99 would be somewhat
lower, and expenditures somewhat higher, than the Budget Act forecasts, but the
net variance would be within the projected $1.2 billion year-end reserve amount.
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1995-96 through 1997-98 Fiscal Years
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years and, as a result,
the General Fund received substantially greater tax revenues (around $2.2
billion in 1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than
initially forecast when the related budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and to
make up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $639.8 million as of June 30, 1997 and $1.782 billion at June
30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase
in funding for K-14 education under Proposition 98, reflecting strong revenues
that exceeded initial budgeted amounts. Part of the nearly $1.75 billion of
increased spending was allocated to prior fiscal years.
2. The Budget Act reflected payment of $1.228 billion to satisfy a
court judgment in a lawsuit regarding payments to the State pension fund, and
brought funding of the State's pension contribution back to the quarterly basis
that existed prior to the deferral actions that were invalidated by the courts.
3. Funding from the General Fund for the University of California and
the California State University system was increased by about 6% ($121 million
and $107 million respectively), and there was no increase in student fees.
4. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already included in
the federal Fiscal Year 1997 and 1998 budgets, was included in the Budget Act,
to offset incarceration costs for illegal aliens.
5. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately $500
million.
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Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's
were caused by a combination of external economic conditions (including a
recession which began in 1990) and growth of the largest General Fund
programs--K-14 education, health, welfare and corrections--at rates faster than
the revenue base. During this period, expenditures exceeded revenues in four out
of six years up to 1992-93, and the State accumulated and sustained a budget
deficit approaching $2.8 billion at its peak on June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments;
transfer of about $3.6 billion in annual local property tax revenues from other
local governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to retire the deficit
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
Economic Overview
California's economy is the largest among the 50 states and one of the
largest in the world. Recent economic expansion has been marked by strong growth
in high technology business services (including computer software),
construction, computers and electronic components.
During 1998, California's economic growth outpaced that of the nation,
a performance that will most likely be repeated in the coming year. Even with a
slowdown in job growth, it
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is expected that employment in 1999 will increase by 2.4% in California, twice
the rate of increase for the nation as a whole.
The strong economy, along with a robust stock market, helped to
generate higher revenues to the State. In fiscal year 1997-98, revenues from
personal income tax receipts, the largest single resource of revenue to the
General Fund, grew by 20%. Overall tax receipts grew by 11%. This trend in tax
revenues is also the result of baby boomers passing through their prime earning
years. Within the next decade, however, this generation will begin to retire,
slowing the rise in personal income tax revenues.
Despite major disruptions in international markets during 1998,
California's economy has weathered the Asian financial storm with relatively
modest damage. Aerospace and electronics manufacturing employment peaked in
March, and by November had lost almost 15,000 jobs, or nearly 3% of the
industries' workforce. Total nonfarm employment started 1998 with annual growth
above 3.5%, but more recently the year-to-year pace has slowed to approximately
2.7%. Increased exports to NAFTA trading partners and Europe compensated for
declines in California's exports to Southeast Asian countries over the past
year.
The construction industry led California's employment growth in 1998.
From October 1997 to October 1998, construction jobs in the state increased by
more than 9%. By the end of 1998, residential permits reached 126,000 units, an
increase of more than 13.5% over 1997. In the previous year, permits totaled
111,000 units, topping 100,000 for the first time since 1991. Non-residential
construction activity remained quite strong, with building permit value up
almost 18%.
Apart from construction, California's economy continued to expand in
1998. Non-farm employment growth averaged 3.2% and personal income was up more
than 6%. The jobless rate was below 6% most of the year.
Rising incomes and confidence in the economy have propelled housing
sales and prices to record levels in many parts of California. The San
Francisco-San Jose metropolitan area has seen the greatest price appreciation
and is now the most expensive housing market in the nation. Statewide, sales of
existing single family homes in 1998 are expected to show a 10% increase over
1997 levels. By the end of the year, the median price should surpass the peak in
1991.
The healthy economic climate and recent revisions to the State's
welfare system have produced a major turnaround in the growth of California's
welfare population. This trend began in 1996, when there was a slight decline in
California's public assistance caseloads, the first since 1980. In 1997, there
was a drop of almost 5%. As of August 1998, caseloads were down by nearly 10%
over the previous 12 months.
California's future rests on its investments in the State's education
system. The State's economy is increasingly driven by technology-oriented
industries, and a supply of skilled
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workers is indispensable to the health of the economy. Recent increases in
funding for California's public education system represent progress in meeting
this need.
Credit Rating
Moody's has assigned a rating of Aa3 to the general obligation bonds of
the State of California. The rating reflects the state's deep and diverse
economic base, its improved credit condition, including the rebuilding of cash
and budget reserves, and long-term structural budget condition, even under
assumptions of slowing economic growth. The credit outlook is stable.
The state's Aa3 rating is the product of its robust economy, offset by
a financial condition that shows dramatic improvement, but still lags that of
most states. The California economy has fully recovered from the recession of
the early 1990's, and continues to outpace the United States in terms of
employment and personal income growth. Diversification has positioned it for
further expansion, although at a slower pace than has been realized over the
last several years. General fund balance sheet deficits accumulated during the
recession have been substantially reversed and liquidity has been restored. New
five-year financial projections based on reasonable expenditure and revenue
assumptions indicate that the state has the capacity to maintain long-term
budget balance, even if economic growth slows. Budget reserves are funded at
levels that, while still low by national standards, would preserve liquidity in
a mild economic downturn. Its debt position is moderate though slowly increasing
as the state addresses its infrastructure needs.
At Aa3, California's rating is lower than that of most of the country's
large industrialized states, including Illinois, Texas, and Florida (each rated
Aa2), Michigan, New Jersey and Ohio (all Aa1), but is higher than New York
State's A2 rating. California shares the Aa3 rating with Pennsylvania,
Massachusetts and Connecticut. California's ranking among the states reflects
its still relatively weak, though improved, balance sheet condition, and its
above average exposure to international economic uncertainty. In addition, we
expect that California would move more slowly than most states to stem financial
deterioration in the event of economic recession due to its inflexible budget
structure and complex political environment.
The Aa3 general obligation rating is based on the following factors:
Credit Strengths
- Economic recovery is now well-established and broad based, and absent
a national recession, continued, though slowing, job and income growth is
expected.
- Financial performance benefits from economic recovery's positive
impact on economically sensitive income and sales taxes.
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- Long term spending pressures from caseload driven demand in social
services, schools, and prisons have eased compared to earlier expectations and
can be funded with available revenues.
- Liquidity from cash resources outside General Fund shows strong
improvement.
- Contingent reserve position significantly improved, offering moderate
protection against economic uncertainties.
Credit Weaknesses
- Financial flexibility remains limited due to education expenditures
mandated by Proposition 98.
- Lack of formalized mid-year budget correction capabilities leaves the
state exposed in periods of revenue under-performance.
- Future capital needs could weaken debt position if debt affordability
recommendations are not adhered to.
- Economically-sensitive tax structure produces revenue volatility.
- The state faces above-average exposure to international economic
conditions, particularly in Asia.
Litigation
The State is currently involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may impair future revenue sources. Following are significant
lawsuits involving the State as of December 9, 1998:
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et
al. v. Kathleen Connell filed a complaint challenging the authority of the State
Controller to make payments from the State Treasury in the absence of a state
budget. On July 21, 1998, the trial court issued a preliminary injunction
prohibiting the State Controller from paying moneys from the State Treasury for
fiscal year 1998-99, with certain limited exceptions, in the absence of a state
budget. The preliminary injunction, among other things, prohibited the State
Controller from making any payments pursuant to any continuing appropriation.
On July 22, 1998, the State Controller asked the California Supreme
Court to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On July
29, 1998, the Supreme Court transferred the State
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Controller's request to the Court of Appeal. The matters are now pending before
the Court of Appeal.
In Hayes v. Commission on State Mandates, certain local school
districts sought reimbursements for special education programs for handicapped
children. The State Board of Control, which was succeeded by the Commission on
State Mandates (COSM), decided in favor of the local school districts. The
decision was appealed by the Director of Finance in the trial court and was
remanded to the COSM for redetermination. The COSM expanded the claim to include
supplemental claims filed by seven additional educational institutions. The
potential liability to the State has been estimated at more than $1 billion. A
final consolidated decision was expected to be issued in late 1998.
In State v. Stringfellow, the State is seeking recovery for cleanup
costs of a toxic waste site presently owned by the State. Present estimates of
the cleanup range from $300 million to $800 million.
The State is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of 1986.
The State's potential liability to all plaintiffs in this lawsuit ranges from
$800 million to $1.5 billion.
Year 2000
The State's reliance on information technology in every aspect of its
operations has made Year 2000 related information technology ("IT") issues a
high priority for the State. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000.
In the July Quarterly Report, the DOIT estimates total Year 2000 costs
identified by the departments under its supervision at about $239 million, of
which more than $100 million was projected to be expended in fiscal years
1998-99 and 1999-2000. The October Quarterly Report indicated the total costs
were then estimated to be at least $290 million, and the estimate would likely
increase in the future. These costs are part of much larger overall IT costs
incurred annually by State departments and do not include costs for remediation
for embedded technology, desktop systems and additional costs resulting from
discoveries in the testing process. For fiscal year 1998-99, the Legislature
created a $20 million fund for unanticipated Year 2000 costs, which can be
increased if necessary.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Year 2000 compliance, the task is very large
and will likely encounter unexpected difficulties. The State cannot predict
whether all mission critical systems will be ready and tested by late 1999 or
what impact failure of any particular IT system(s) or of outside interfaces with
State IT systems might have. The State Treasurer's Office and the State
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Controller's Office report that they are both on schedule to complete their Year
2000 remediation projects by December 31, 1998, allowing full testing during
1999.
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APPENDIX B
INFORMATION WITH RESPECT TO SECURITIES RATINGS*
Standard & Poor's Corporation.
A description of the applicable Standard & Poor's Corporation rating
symbols and their meanings follows:
S&P's corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations.
(1) Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
(2) Nature and provisions of the obligation.
(3) Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and
repay principal, and differ from the highest rated issue only in small degree.
- ----------
* As published by the rating companies.
A-1
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A--Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they 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
bonds in this category than for bonds in the higher rated categories.
Plus(+) or Minus(-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: the letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. Accordingly, the investor should exercise his own judgment with
respect to such likelihood and risk.
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Service, Inc.
rating symbols and their meanings follows:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large, or 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. Their safety is so
absolute that, with the occasional exception of oversupply in a few specific
instances, characteristically, their market value is affected solely by money
market fluctuations.
Aa--Bonds which are rated Aa 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 fluctuations 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. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest
A-2
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are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future. The market value of A-rated
bonds may be influenced to some degree by economic performance during a
sustained period of depressed business conditions, but, during periods of
normalcy, A-rated bonds frequently move in parallel with Aaa and Aa obligations,
with the occasional exception of oversupply in a few specific instances.
Baa--Bonds which are rated Baa are considered as lower 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. The market
value of Baa-rated bonds is more sensitive to changes in economic circumstances,
and aside from occasional speculative factors applying to some bonds of this
class, Baa market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the bond ranks at
the high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
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 (1) earnings of projects under construction, (2) earnings of
projects unseasoned in operation experience, (3) rentals which begin when
facilities are completed, or (4) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of condition.
Fitch
Ratings
A brief description of the applicable Fitch Investors Service, Inc.
rating symbols and their meanings is as follows:
AAA
Bonds rated AAA are 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.
A-3
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AA
Bonds rated AA are considered to be investment grade and of the very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are 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 rated BBB are 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
Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
A-4
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CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
DDD, DD and D
Bonds rated DDD, DD and D are in actual or imminent default of interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for recovery.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA Category covering 12-36 months or the
DDD, DD or D categories.
Duff & Phelps, Inc.
Rating
Scale Definition
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. AA- Risk is AA
modest but may vary slightly from time to time AA- because of economic
conditions.
A+ Protection factors are average but adequate. However, A risk factors
are more variable and greater in periods of A- economic stress.
BBB+ Below average protection factors but still considered BBB sufficient
for prudent investment. Considerable BBB- variability in risk during
economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
A-5
<PAGE>
BB- protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists for
frequent changes in the rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
Rating
Scale Definition
High Grade
Duff 1+ 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.
Duff 1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
Good Grade
Duff 2 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.
A-6
<PAGE>
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
Non-Investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
Default
Issuer failed to meet scheduled principal and/or interest payments.
Municipal Note Ratings
The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and
MIG 4. Notes bearing the designation MIG 1 are judged to be of the best quality,
enjoying strong protection from cash flows of funds for their servicing or form
established and broad-based access to the market for refinancing, or both. Notes
bearing the designation MIG 2 are judged to be of high quality, with margins of
protection ample although not so large as in the preceding group. Notes bearing
the designation MIG 3 are judged to be of favorable quality, with all security
elements accounted for, but lacking the undeniable strength of the preceding
grades. Market access for refinancing, in particular, is likely to be less well
established. Notes bearing the designation MIG 4 are judged to be of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
Short-Term Ratings
Fitch
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
A-7
<PAGE>
F-1+
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
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-1
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Municipal Commercial Paper Ratings
Moody's and S&P's ratings grades for commercial paper, set forth below,
are applied to municipal commercial paper as well as taxable commercial paper.
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 nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Highest Quality; Prime-2, Higher Quality; and Prime-3,
High Quality.
S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Issues assigned A ratings are
regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety. The "A-2" designation indicates that the degree of
safety regarding timely payment is very strong. The "A-2" designation indicates
that capacity for timely payment is strong. However, the relative degree of
safety is not as overwhelming as for issues designated "A-1". The "A-3"
designation indicates that the capacity for timely payment is satisfactory. Such
issues, however, are somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations. Issues rated
"B" are regarded as having only an adequate capacity for timely payment and such
capacity may be impaired by changing conditions or short-term adversities.
A-8
<PAGE>
A-9
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Declaration of Trust of Registrant [incorporated by
reference to Exhibit 1 to Registrant's Registration
Statement on Form N-l, dated March 1, 1983.]
(b) By-Laws of Registrant [incorporated by reference to
Exhibit 2 to Registrant's Registration Statement on
Form N-l, dated March 1, 1983.]
(c) Inapplicable
(d) Form of Advisory Agreement with Cornerstone Equity
Advisors, Inc.*
(e) Inapplicable
(f) Inapplicable
(g) Form of Custody Agreement with Registrant's
Custodian [incorporated by reference to Exhibit 8
to Registrant's Post-Effective Amendment No. 7 on
Form N-lA, dated April 27, 1990.]
(h) Inapplicable
(i) (a) Opinion of Counsel [incorporated by
reference to Exhibit 10 to Registrant's
Pre-Effective Amendment No. 2 on Form N-l,
dated December
20, 1983.]
(i) (b) Consent of Kramer Levin Naftalis & Frankel
LLP*
(j) Consent of Accountants**
(k)
(l)
(m) Rule 12b-1 Plan of Distribution of Registrant's
shares [incorporated by reference to exhibit 15 to
Registrant's Post-Effective Amendment No. 3 on Form
N-lA, dated November 12, 1986.]
(n) Financial Data Schedule.**
- ---------------------
* Filed as part of this document.
** To be filed by amendment
Item 24. Persons Controlled by or under Common Control with Registrant
None
Item 25. Indemnification
Reference is made to subdivision (c) of section 12 of Article SEVENTH
of Registrant's Declaration of Trust previously filed.
C-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses, incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue .
Item 26. Business and Other Connections of Investment Advisor
Cornerstone Equity Advisors, Inc. is the interim investment advisor of
Registrant. For information as to the business, profession, vocation or
employment of a substantial nature of Cornerstone Equity Advisors, Inc., its
directors and its officers, reference is made to Part I of this Registration
Statement and to Form ADV filed under the Investment Advisers Act of 1940 by
Cornerstone Equity Advisors, Inc.
Item 27. Principal Underwriters
Registrant has no principal underwriter.
Item 28. Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant, 67 Wall Street, New York, N.Y.
10005 and Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee, WI
53202, the Registrant's Custodian and Firstar Mutual Fund Services, LLC, 615
East Michigan Street, Milwaukee, WI 53202, the Registrant's Administrator and
Transfer Agent.
Item 29. Management Services
Inapplicable.
Item 30. Undertakings.
Registrant undertakes to furnish to each person to whom a prospectus
relating to The California Muni Fund is delivered, a copy of the Fund's latest
annual report to shareholders, upon request and without charge.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post
Effective Amendment to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York and State of
New York on the 1st day of March, 1999.
Registrant: THE CALIFORNIA MUNI FUND
By: /s/Stephen C. Leslie
-------------------------------
Stephen C. Leslie
President
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
*/s/L. Greg Ferrone Trustee March 1, 1999
- ---------------------------
L. Greg Ferrone
/s/ Stephen C. Leslie President (Principal March 1, 1999
- --------------------------- Executive Officer)
Stephen C. Lesie
/s/G. John Fulvio (Principal Financial March 1, 1999
- ---------------------------- and Accounting
G. John Fulvio Officer)
*By: /s/Jules Buchwald
-----------------------------------
Jules Buchwald, Attorney-in-Fact,
pursuant to a power of attorney
dated April 24, 1991, previously
filed with the Securities and
Exchange Commission
<PAGE>
Index to Exhibits
Ex-99.B5 Form of Advisory Agreement with Cornerstone Equity
Advisors, Inc.
Ex-99.B10 Consent of Kramer Levin Naftalis & Frankel LLP
C-4
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of this ___ day of ______ , by and between
(_______), (the "Fund") and (_______) (the "Investment Adviser");
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, the Investment Adviser has a pending registration as an
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Investment Advisers Act"), and engages in the business of acting as an
investment adviser; and
WHEREAS, the Fund and the Investment Adviser desire to enter into
an agreement to provide for the management of the assets of the Fund on the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
A-1
<PAGE>
1. Management. The Investment Adviser shall act as investment
adviser for the Fund and shall, in such capacity, supervise the investment and
reinvestment of the cash, securities or other properties comprising the Fund's
assets, subject at all times to the policies and control of the Fund's Board of
Directors/Trustees. The Investment Adviser shall give the Fund the benefit of
its best judgment, efforts and facilities in rendering its services as
investment adviser.
2. Duties of Investment Adviser. In carrying out its obligation
under paragraph 1 hereof, the Investment Adviser shall, subject at all times to
the policies and control of the Fund's Board of Directors/Trustees:
(a) supervise and manage all aspects of the Fund's
operations;
(b) provide the Fund or obtain for it, and thereafter
supervise, such executive, administrative, clerical
and shareholder servicing services as are deemed advisable by the Fund's Board
of Directors/Trustees;
(c) arrange, but not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material, tax returns, reports to
the Fund's shareholders and reports to and filings with the Securities and
Exchange Commission and state Blue Sky authorities;
(d) provide the Fund with, or obtain for it, adequate
office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items for
the Fund's principal office;
A-2
<PAGE>
(e) provide the Board of Directors/Trustees of the Fund on
a regular basis with financial reports and analyses on the Fund's operations and
the operations of comparable investment companies;
(f) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Fund, and
whether concerning the individual issuers whose securities are included in the
Fund or the activities in which they engage, or with respect to securities which
the Investment Adviser considers desirable for inclusion in the Fund;
(g) determine what issuers and securities shall be
represented in the Fund's portfolio and regularly report them to the Board of
Directors/Trustees of the Fund;
(h) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly report
thereon to the Board of Directors/Trustees of the Fund; and
(i) take, on behalf of the Fund, all actions which
appear to the Fund necessary to carry into effect such purchase and sale
programs and supervisory functions as aforesaid, including the placing of orders
for the purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Adviser is
responsible for decisions to buy and sell securities for the Fund, broker-dealer
selection, and negotiation of brokerage commission rates. The Investment
Adviser's primary consideration in effecting a security transaction will be
execution at a price that is reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
A-3
<PAGE>
with comparable transactions, including similar securities being purchased or
sold on a securities exchange during a comparable period of time.
In selecting a broker-dealer to execute each particular
transaction, the Investment Adviser will take the following into consideration:
the best net price available; the reliability, integrity and financial condition
of the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to the
Fund in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies and procedures as
the Board of Directors/Trustees may determine, the Investment Adviser shall not
be deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Fund to pay a
broker or dealer that provides brokerage and research services to the Investment
Adviser for the Fund's use an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Investment
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Investment Adviser's overall responsibilities with respect to the Fund. The
Investment Adviser is further authorized to allocate the orders placed by it on
behalf of the Fund to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Adviser
A-4
<PAGE>
for the Fund's use. Such allocation shall be in such amounts and proportions as
the Investment Adviser shall determine and the Investment Adviser will report on
said allocations regularly to the Board of Directors/Trustees of the Fund
indicating the brokers to whom such allocations have been made and the basis
therefor.
4. Control by Board of Directors/Trustees. Any investment program
undertaken by the Investment Adviser pursuant to this Agreement, as well as any
other activities undertaken by the Investment Adviser on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board
of Directors/Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Adviser shall at all times
conform to:
(a) all applicable provisions of the Investment
Company Act and the Investment Advisers Act and any rules and regulations
adopted thereunder as amended; and
(b) the provisions of the Registration Statements of the
Fund under the Securities Act of 1933, as amended, and the Investment Company
Act; and
(c) the provisions of the Articles of Incorporation of
the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended;
and (e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Investment Adviser as follows:
A-5
<PAGE>
(a) The Investment Adviser shall furnish, at its expense
and without cost to the Fund, the services of a President, Chief Financial
Officer, Secretary and to the extent necessary, such additional officers as may
be required by the Fund for the proper conduct of its affairs.
(b) The Investment Adviser shall further maintain, at its
expense and without cost to the Fund, a trading function in order to carry out
its obligations under subparagraph (i) of paragraph 2 hereof to place orders for
the purchase and sale of portfolio securities for the Fund.
(c) All of the ordinary business expenses incurred in the
operations of the Fund and the offering of its shares shall be borne by the Fund
unless specifically provided otherwise in this paragraph 6. These expenses
include but are not limited to brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder service agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and directors if available) of the Fund which inure to its
benefit, expenses relating to trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Fund in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders.
A-6
<PAGE>
7. Compensation. The Fund shall pay the Investment Adviser a
portfolio management fee with respect to the Fund, which fee shall be computed
on the basis of the average net asset value of the Fund as ascertained at the
close of each business day and which fee shall be paid monthly in accordance
with the following schedule:
Fundamental U.S. Government Strategic Income Fund:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
High-Yield Municipal Bond Series:
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .80%
Net asset value of $100,000,000 or more but less than $200,000,000 .78%
Net asset value of $200,000,000 or more but less than $300,000,000 .76%
Net asset value of $300,000,000 or more but less than $400,000,000 .74%
Net asset value of $400,000,000 or more but less than $500,000,000 .72%
Net asset value of $500,000,000 or more .70%
Tax-Free Money Market Series; The California Muni Fund; New York Muni Fund:
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
8. Non-Exclusivity. The services of the Investment Adviser to the
Fund are not to be deemed to be exclusive, and the Investment Adviser shall be
free to render investment advisory and corporate administrative or other
services to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers or directors of the
Investment Adviser may serve as officers or directors of the Fund, and that
officers or directors of the Fund may serve as officers or directors of the
Investment Adviser to the extent permitted by law; and that the officers and
directors of the Investment Adviser are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers, directors or trustees of any other firm or
corporation, including other investment companies.
9. Term and Approval. This Agreement shall become effective at
the close of business on the date hereof and shall remain in force and affect
for two years and thereafter from year to year, provided that such continuance
is specifically approved at least annually.
A-7
<PAGE>
10. Termination. This Agreement may be terminated upon sixty (60)
days' written notice to the Investment Adviser by vote of the Fund's Board of
Directors/Trustees or by vote of a majority of the Fund's outstanding voting
securities. This Agreement may be terminated by the Investment Adviser on sixty
(60) days' written notice to the Fund. The notice provided for herein may be
waived by either party to this Agreement. This Agreement shall automatically
terminate in the event of its assignment, the term "assignment" for the purpose
having the meaning defined in Section 2(a)(4) of the Investment Company Act.
11. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Fund and that of the Investment Adviser shall be 67 Wall Street, New York, New
York 10005. If to the Fund, an additional copy of any notice under this
Agreement shall be provided to Kramer Levin Naftalis & Frankel LLP, 919 Third
Avenue, New York, New York 10022, attention to Carl Frischling, Esq.
12. Questions of Interpretation. Any question of interpretation
of any term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Investment Company Act shall be resolved
by reference to such term or provision of the Act and to interpretations
thereof, if any, by the United States Courts or in the absence of any
controlling decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission issued pursuant to said Act. In addition,
where the effect of a requirement of the Investment Company Act reflected in any
provision of this Agreement
A-8
<PAGE>
is released by rules, regulation or order of the Securities and Exchange
Commission, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and year
first above written.
(FUND)
Attest: By:
----------------------------------------
- ----------------------
(INVESTMENT ADVISER)
Attest:
By:
----------------------------------------
- ----------------------
A-9
[KRAMER LEVIN PARTNER LETTERHEAD]
March 1, 1999
The California Muni Fund
67 Wall Street
New York, New York 10005
Re: Registration No. 2-82143
Gentlemen:
We hereby consent to the reference to our firm as counsel in
Post-Effective Amendment No. 16 to Registration Statement No. 2-82143.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
C-5
