As filed with the Securities and Exchange Commission on August 24, 1999
Registration Nos. 2-83024
811-3714
================================================================================
- --------------------------------------------------------------------------------
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. 23 [X]
and/or
REGISTRATION STATEMENT
Under the
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24
[X]
(Check appropriate box or boxes.)
-------------
Phoenix-Goodwin California Tax Exempt Bonds, Inc.
(Exact Name of Registrant as Specified in Articles of Incorporation)
-------------
101 Munson Street, Greenfield, Massachusetts 01301
(Address of Principal Executive Offices) (Zip Code)
c/o Phoenix Equity Planning Corporation--Shareholder Services
(800) 243-1574
(Registrant's Telephone Number, including Area Code)
-------------
Pamela S. Sinofsky
Assistant Vice President and Assistant Counsel
Phoenix Investment Partners, Ltd.
56 Prospect Street
Hartford, Connecticut 06115-0479
(name and address of Agent for Service)
-------------
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on August 27, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
PHOENIX-GOODWIN CALIFORNIA TAX EXEMPT BONDS, INC.
CROSS REFERENCE SHEET PURSUANT TO RULE 495(a)
UNDER THE SECURITIES ACT OF 1933
Part A:
Information Required in Prospectus
<TABLE>
<CAPTION>
Item Number Form N-1A Part A Prospectus Caption
---------------------------- ------------------
<S> <C> <C>
1. Front and Back Cover Pages ....................... Cover Page, Back Cover Page
2. Risk/Return Summary: Investments, Risks,
Performance ...................................... Investment Risk and Return Summary
3. Risk/Return Summary: Fee Table ................... Fund Expenses
4. Investment Objectives, Principal Investment
Strategies, and Related Risks .................... Investment Risk and Return Summary
5. Management's Discussion of Fund Performance ...... Performance Tables
6. Management, Organization, and Capital Structure Management of the Fund
7. Shareholder Information .......................... Pricing of Fund Shares; Sales Charges; Your Account;
How to Buy Shares; How to Sell Shares; Things You
Should Know When Selling Shares; Account Policies;
Investor Services; Tax Status of Distributions
8. Distribution Arrangements ........................ Sales Charges
9. Financial Highlights Information ................. Financial Highlights
</TABLE>
Part B:
Information Required in Statement of Additional Information
<TABLE>
<CAPTION>
Item Number Form N-1A, Part B Statement of Additional Information Caption
----------------------------- -------------------------------------------
<S> <C> <C>
10. Cover Page and Table of Contents .................. Cover Page, Table of Contents
11. Fund History ...................................... The Fund
12. Description of the Fund and Its Investment Risks Investment Objectives and Policies; Investment
Restrictions
13. Management of the Fund ............................ Management of the Fund
14. Control Persons and Principal Holders of
Securities ........................................ Management of the Fund
15. Investment Advisory and Other Services ............ Services of the Adviser; The Distributor; Distribution
Plans; Other Information
16. Brokerage Allocation and Other Practices .......... Portfolio Transactions and Brokerage
17. Capital Stock and Other Securities ................ Other Information
18. Purchase, Redemption, and Pricing of Shares ....... Net Asset Value; How to Buy Shares; Investor Account
Services; Redemption of Shares; Tax Sheltered
Retirement Plans
19. Taxation of the Fund .............................. Dividends, Distributions and Taxes
20. Underwriters ...................................... The Distributor
21. Calculation of Performance Data ................... Performance Information
22. Financial Statements .............................. Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
Phoenix Investment Partners
Prospectus
August 27, 1999
Goodwin
Phoenix-Goodwin
California Tax Exempt
Bonds
[Graphic; Phoenix Investment Partners logo]
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus contains important information that you should know before
investing in Phoenix-Goodwin California Tax Exempt Bonds, Inc.
Our distinctive managers' names are now part of our Fund names. Please note the
name of your Fund is now Phoenix-Goodwin California Tax-Exempt Bonds. Look for
it under the Phoenix-Goodwin heading in newspapers.
<PAGE>
Table of Contents
- -----------------------------------------
<TABLE>
<S> <C>
Investment Risk and Return Summary ......... 1
Fund Expenses .............................. 4
Management of the Fund ..................... 6
Pricing of Fund Shares ..................... 7
Sales Charges .............................. 8
Your Account ............................... 10
How to Buy Shares .......................... 11
How to Sell Shares ......................... 11
Things You Should Know When
Selling Shares ............................. 12
Account Policies ........................... 13
Investor Services .......................... 14
Tax Status of Distributions ................ 15
Financial Highlights ....................... 16
Additional Information ..................... 18
</TABLE>
> Phoenix-Goodwin
California
Tax Exempt
Bonds, Inc.
<PAGE>
Investment Risk and Return Summary
- -------------------------------------------------
Investment Objective
Phoenix-Goodwin California Tax Exempt Bonds, Inc. has an
investment objective to obtain a high level of current income
exempt from California state and local income taxes, as well as
federal income tax, consistent with the preservation of capital.
There is no guarantee that the fund will achieve its objective.
Principal Investment Strategies
> The fund invests in municipal securities that are tax exempt
in California. California law requires that at least 50% of
the Fund's total assets be invested in California tax exempt
state and local issues or tax exempt federal obligations at
the end of each quarter of its taxable year in order to be
eligible to pay dividends to California residents that are
exempt from California income taxes. The fund will invest at
least 80% of its net assets in municipal securities that are
tax exempt in California and may invest 100% of its assets in
such securities.
> Securities in which the fund may invest include municipal
bonds, notes and lease obligations and tax exempt commercial
paper. Issuers include states, territories and possessions of
the United States and their political subdivisions, agencies
authorities and instrumentalities, including Puerto Rico, Guam
and the U.S. Virgin Islands.
> Debt obligations will be rated within the four highest rating
categories at the time of investment and may be of any
maturity.
> Securities are selected using an analytical approach that
focuses on the:
o relative value of the security considering its credit
rating; and
o the security's coupon rate, call features, maturity and
average life.
> Issuers are selected based on:
o sector (utility, healthcare, transportation, etc.) and
o the geographic opportunity presented by areas and regions
that are experiencing economic growth.
> The remaining 20% of fund assets may be invested in taxable
fixed income securities. Income from these investments may be
subject to federal, state and local taxes.
Temporary Defensive Strategy: When, in the adviser's opinion,
abnormal market or economic conditions warrant the fund may hold
taxable securities, retain cash or invest part or all of its
assets in cash equivalents. In such instances, the fund may not
achieve its stated objective.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 1
<PAGE>
Principal Risks
If you invest in this fund, you risk that you may lose your
investment.
General
Generally, the value of fixed income securities is inversely
related to changes in interest rates. If interest rates rise,
the value of fixed income securities falls. This may cause the
value of your shares to decrease.
If the adviser misjudges the return potential of fixed income
securities, or the ability of issuers to make scheduled
principal and interest payments, the fund's returns may be lower
than prevailing returns and the fund's income available for
distribution may be less than other funds of this type.
Municipal Securities
Principal and interest payments on municipal securities may not
be guaranteed by the issuing body and may be payable only from
monies (revenue) derived from a particular source. If the source
does not perform as expected, principal and income payments may
not be made on time or at all. In addition, the market for
municipal securities is often thin and can be temporarily
affected by large purchases and sales, including those by the
fund.
California Bonds
Certain California Constitutional amendments, legislative
measures, executive orders, administrative regulations and voter
initiatives could impair the ability of some California bond
issuers to maintain debt service on their obligations or their
ability to maintain tax-exempt income. This could negatively
affect the fund's level of income, capital appreciation and
liquidity.
Puerto Rico Bonds
Certain federal tax credits currently offered to qualifying U.S.
manufacturing firms operating in Puerto Rico will be phased out
by January 1, 2006. The effect this will have on Puerto Rico's
economy is still uncertain.
Tax-Exempt Securities
Tax-exempt securities may not provide a higher after-tax return
than taxable securities.
Long-Term Maturities
Fixed income securities with longer maturities may be subject to
greater price fluctuations due to interest rate, tax law and
general market changes.
Lower Rated Securities
Fixed income securities in lower credit rating categories have a
greater risk that the issuer will not pay interest and principal
payments on time or at all.
2 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
Impact of the Year 2000 Issue on Fund Investments
The Year 2000 issue is the result of computer programs being
written using two rather than four digits to define the
applicable year. There is the possibility that some or all of an
entity's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the
year 2000. If an entity whose securities are held by the fund
does not "fix" its Year 2000 issue, it is possible that its
operations and financial results would be hurt. Also, the cost
of modifying computer programs to become Year 2000 compliant may
hurt the financial performance and market price of entities
whose securities are held by the fund.
Performance Tables
The bar chart and table below provide some indication of the
risks of investing in Phoenix-Goodwin Tax Exempt Bonds, Inc. The
bar chart shows changes in the fund's Class A Shares performance
from year to year over the last ten years.(1) The table shows
how the fund's average annual returns for one, five and ten
years, and for the life of the fund compare to those of a
broad-based securities market index. The fund's past performance
is not necessarily an indication of how the fund will perform in
the future.
<TABLE>
<CAPTION>
Annual Return % [BAR GRAPH]
Calendar Year
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.89 7.17 11.16 6,89 9,74 -5.18 19.16 2.69 8.37 5.06
</TABLE>
(1) The fund's average annual returns in the chart above do not
reflect the deduction of any sales charges. The returns would
have been less than those shown if sales charges were deducted.
During the period shown in the chart above, the highest return
for a quarter was 8.35% (quarter ending March 31, 1995) and the
lowest return for a quarter was (3.83)% (quarter ending March 31,
1994). Year to date performance (through June 30, 1999) was
(1.18)%.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 3
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Returns(1) One Five Ten
(for the periods ending 12/31/98) Year Years Years Life of the Fund(2)
- ------------------------------------------------------------------------------------------------------------
Class A Class B
<S> <C> <C> <C> <C> <C>
Class A Shares 0.08% 4.70% 6.81% 7.78% --
- ------------------------------------------------------------------------------------------------------------
Class B Shares 0.50% N/A N/A -- 5.82%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index(3) 6.48% 6.23% 8.22% 9.32%(4) 7.71%(5)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund's average annual returns in the table above reflect
the deduction of the maximum sales charge for an investment in
the fund's Class A Shares and a full redemption in the fund's
Class B Shares.
(2) Class A Shares since May 17, 1983; Class B Shares since July
26, 1994.
(3) The Lehman Brothers Municipal Bond Index is an unmanaged but
commonly used measure of long-term, investment-grade, tax-exempt
municipal bond total return performance. The Lehman Brothers
Municipal Bond Index performance does not reflect sales charges.
(4) Index performance since May 31, 1983.
(5) Index performance since July 31, 1994.
Fund Expenses
- ----------------------------
This table illustrates all fees and expenses that you may pay if
you buy and hold shares of the fund.
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
------ ------
<S> <C> <C>
Shareholder Fees (fees paid directly from your
investment)
Maximum Sales Charge (load) Imposed on Purchases (as a
percentage of offering price) 4.75% None
Maximum Deferred Sales Charge (load) (as a percentage of None 5%(a)
the lesser of the value redeemed or the amount invested)
Maximum Sales Charge (load) Imposed on Reinvested Dividends None None
Redemption Fee None None
Exchange Fee None None
Class A Class B
Shares Shares
------ ------
Annual Fund Operating Expenses (expenses
that are deducted from fund assets)
Management Fees 0.45% 0.45%
Distribution and Service (12b-1) Fees(b) 0.25% 1.00%
Other Expenses 0.30% 0.30%
---- ----
Total Annual Fund Operating Expenses 1.00% 1.75%
==== ====
</TABLE>
----------------
(a) The maximum deferred sales charge is imposed on Class B
Shares redeemed during the first year; thereafter, it decreases
1% annually to 2% during the fourth and fifth years and to 0%
after the fifth year.
(b) Distribution and Service Fees represent an asset-based sales
charge that, for a long-term shareholder, may be higher than the
maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc. ("NASD").
4 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
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. In the case of Class B
Shares, it is assumed that your shares are converted to Class A
after eight years. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- -------------------------------------------------------
Class 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A $572 $778 $1,001 $1,641
- -------------------------------------------------------
Class B $578 $751 $ 949 $1,864
- -------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your
shares:
<TABLE>
<CAPTION>
- -------------------------------------------------------
Class 1 year 3 years 5 years 10 years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Class B $178 $551 $949 $1,864
- -------------------------------------------------------
</TABLE>
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 5
<PAGE>
Management of The Fund
- -------------------------------------
The Adviser
Phoenix Investment Counsel, Inc. ("Phoenix") is the investment
adviser to the fund and is located at 56 Prospect Street,
Hartford, CT 06115. Phoenix also acts as the investment adviser
for 14 other mutual funds, as subadviser to three mutual funds
and as adviser to institutional clients. As of December 31,
1998, Phoenix had $23.9 billion in assets under management.
Phoenix has acted as an investment adviser for over sixty years.
Subject to the direction of the fund's Board of Trustees,
Phoenix is responsible for managing the fund's investment
program, the general operations and the day-to-day management of
the fund. Phoenix manages the fund's assets to conform with the
investment policies as described in this prospectus. The fund
pays Phoenix a monthly investment management fee that is accrued
daily against the value of the fund's net assets at the
following rates.
<TABLE>
<CAPTION>
$1+ billion
1st billion through $2 billion $2+ billion
<S> <C> <C> <C>
Management Fee 0.45% 0.40% 0.35%
</TABLE>
During the fund's last fiscal year, the fund paid total
management fees of $455,088. The ratio of management fees to
average net assets for the fiscal year ended April 30, 1999 was
0.45%.
Portfolio Management
Timothy Heaney is the portfolio manager of the fund and as such
is primarily responsible for the day-to-day management of the
fund's portfolio. Mr. Heaney has managed the fund since
September 1997 and previously co-managed the fund from March
1996. Mr. Heaney has been a Vice President of the fund since May
1996. He is Managing Director, Fixed Income (since December
1997) of Phoenix, and was previously Director, Fixed Income
Research (September 1996 to December 1997) and Investment
Analyst (January 1995 to September 1996). He served as
Investment Analyst of Phoenix Home Life from November 1992 until
December 1994. Mr. Heaney is also portfolio manager of Phoenix
Tax-Exempt Bond Fund of Phoenix Multi-Portfolio Fund.
Impact of the Year 2000 Issue on Fund Operations
The Trustees have directed management to ensure that the systems
used by service providers (Phoenix and its affiliates) in
support of the funds' operations be assessed and brought into
Year 2000 compliance. Based upon its assessments, Phoenix
determined that they would be required to modify or replace
portions of their software so that their computer systems would
properly utilize dates beyond December 31, 1999. Phoenix
management believes that the majority of these systems are
already Year 2000 compliant. Phoenix believes that with
modifications to existing software and conversions to new
software, the Year 2000 issue will be mitigated. However, if the
problem is not fully addressed, the fund may be negatively
impacted.
6 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
Phoenix is utilizing both internal and external resources to
reprogram, or replace, and test the software for Year 2000
modifications. As of June 30, 1999 Phoenix mission-critical
systems have been upgraded and tested for Year 2000 compliance.
The total cost to become Year 2000 compliant is not an expense
of the fund and is not expected to have a material impact on the
operating results of Phoenix.
Pricing of Fund Shares
- ---------------------------------------
How is the Share Price determined?
The fund calculates a share price for each class of its shares.
The share price is based on the net assets of the fund and the
number of outstanding shares. In general, the fund calculates
net asset value by:
o adding the values of all securities and other assets of the
fund,
o subtracting liabilities, and
o dividing by the total number of outstanding shares of the
fund.
Asset Value: The fund's investments are valued at market value.
If market quotations are not available, the fund determines a
"fair value" for an investment according to rules and procedures
approved by the Trustees. Foreign and domestic debt securities
(other than short-term investments) are valued on the basis of
broker quotations or valuations provided by a pricing service
approved by the Trustees when such prices are believed to
reflect the fair value of such securities. Foreign and domestic
equity securities are valued at the last sale price or, if there
has been no sale that day, at the last bid price, generally.
Short-term investments having a remaining maturity of sixty days
or less are valued at amortized cost, which the Trustees have
determined approximates market value.
Liabilities: Class specific expenses, distribution fees, service
fees and other liabilities are deducted from the assets of each
class. Expenses and liabilities that are not class specific
(such as management fees) are allocated to each class in
proportion to each class's net assets, except where an
alternative allocation can be more fairly made.
Net Asset Value: The liability allocated to a class plus any
other expenses are deducted from the proportionate interest of
such class in the assets of the fund. The resulting amount for
each class is then divided by the number of shares outstanding
of that class to produce each class's net asset value per share.
The net asset value per share of each class of the fund is
determined on days when the New York Stock Exchange (the "NYSE")
is open for trading as of the close of trading (normally 4:00 PM
eastern time). The fund will not calculate its net asset values
per share on days when
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 7
<PAGE>
the NYSE is closed for trading. Trading of securities held by
the fund in foreign markets may negatively or positively impact
the value of such securities on days when the fund neither
trades securities nor calculates its net asset values (i.e.,
weekends and certain holidays).
At what price are shares purchased?
All investments received by the fund's authorized agents prior
to the close of regular trading on the NYSE (normally 4:00 PM
eastern time) will be executed based on that day's net asset
value. Shares credited to your account from the reinvestment of
fund distributions will be in full and fractional shares that
are purchased at the closing net asset value on the next
business day on which the fund's net asset value is calculated
following the dividend record date.
Sales Charges
- ------------------------------
What are the classes and how do they differ?
The fund presently offers two classes of shares that have
different sales and distribution charges (see "Fund Expenses"
previously in this prospectus). The fund has adopted
distribution and service plans allowed under Rule 12b-1 of the
Investment Company Act of 1940 that authorize the fund to pay
distribution and service fees for the sale of its shares and for
services provided to shareholders.
What arrangement is best for you?
The different classes permit you to choose the method of
purchasing shares that is most beneficial to you. In choosing a
class, consider the amount of your investment, the length of
time you expect to hold the shares, whether you decide to
receive distributions in cash or to reinvest them in additional
shares, and any other personal circumstances. Depending upon
these considerations, the accumulated distribution and service
fees and contingent deferred sales charges of one class may be
more or less than the initial sales charge and accumulated
distribution and service fees of another class of shares bought
at the same time. Because distribution and service fees are paid
out of the fund's assets on an ongoing basis, over time these
fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
Class A Shares. If you purchase Class A Shares, you will pay a
sales charge at the time of purchase equal to 4.75% of the
offering price (4.99% of the amount invested). The sales charge
may be reduced or waived under certain conditions. Class A
Shares are not subject to any charges by the fund when redeemed.
Class A Shares have lower distribution and service fees (0.25%)
and pay higher dividends than Class B Shares.
Class B Shares. If you purchase Class B Shares, you will not pay
a sales charge at the time of purchase. If you sell your Class B
Shares within the first 5 years after they are purchased, you
will pay a sales charge of up to 5% of your shares' value. See
"Deferred Sales Charge Alternative--Class B Shares" below. This
charge declines to 0% over a period of 5 years and may be waived
under certain conditions. Class B shares have higher
distribution and service fees (1.00%) and pay lower dividends
than Class A Shares. Class B Shares automatically
8 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
convert to Class A Shares eight years after purchase. Purchases
of Class B Shares may be inappropriate for any investor who may
qualify for reduced sales charges of Class A Shares and anyone
who is over 85 years of age. The underwriter may decline
purchases in such situations.
Initial Sales Charge Alternative--Class A Shares
The public offering price of Class A Shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase (see "Class A Shares--Reduced Sales Charges:
Combination Purchase Privilege" in the Statement of Additional
Information). Shares purchased based on the automatic
reinvestment of income dividends or capital gains distributions
are not subject to any sales charges. The sales charge is
divided between your investment dealer and the funds'
underwriter (Phoenix Equity Planning Corporation or "PEPCO").
Sales Charge you may pay to purchase Class A Shares
<TABLE>
<CAPTION>
Sales Charge as
a percentage of
----------------------
Amount of Net
Transaction Offering Amount
at Offering Price Price Invested
- ------------------------------------------------------
<S> <C> <C>
Under $50,000 4.75% 4.99%
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 3.00 3.09
$500,000 but under $1,000,000 2.00 2.04
$1,000,000 or more None None
</TABLE>
Deferred Sales Charge Alternative--
Class B Shares
Class B Shares are purchased without an initial sales charge;
however, shares sold within a specified time period are subject
to a declining contingent deferred sales charge ("CDSC") at the
rates listed below. The sales charge will be multiplied by the
then current market value or the initial cost of the shares
being redeemed, whichever is less. No sales charge will be
imposed on increases in net asset value or on shares purchased
through the reinvestment of income dividends or capital gains
distributions. To minimize the sales charge, shares not subject
to any charge will be redeemed first, followed by shares held
the longest time. To calculate the amount of shares owned and
time period held, all Class B Shares purchased in any month are
considered purchased on the last day of the preceding month.
Deferred Sales Charge you may pay to sell Class B Shares
<TABLE>
Year 1 2 3 4 5 6+
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 3% 2% 2% 0%
</TABLE>
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 9
<PAGE>
Your Account
- ---------------------------
Opening an Account
Your financial advisor can assist you with your initial purchase
as well as all phases of your investment program. If you are
opening an account by yourself, please follow the instructions
outlined below.
Step 1.
Your first choice will be the initial amount you intend to
invest.
Minimum initial investments:
o $25 for individual retirement accounts, or accounts that
use the systematic exchange privilege, or accounts that use
the Investo-Matic program (see below for more information
on the Investo-Matic program).
o There is no initial dollar requirement for defined
contribution plans, profit-sharing plans, or employee
benefit plans. There is also no minimum for reinvesting
dividends and capital gains into another account.
o $500 for all other accounts.
Minimum additional investments:
o $25 for any account.
o There is no minimum for defined contribution plans,
profit-sharing plans, or employee benefit plans. There is
also no minimum for reinvesting dividends and capital gains
into an existing account.
Step 2.
Your second choice will be what class of shares to buy. The fund
offers two classes of shares for individual investors. Each has
different sales and distribution charges. Because all future
investments in your account will be made in the share class you
choose when you open your account, you should make your decision
carefully. Your financial advisor can help you pick the share
class that makes the most sense for your situation.
Step 3.
Your next choice will be how you want to receive any dividends
and capital gain distributions. Your options are:
o Receive both dividends and capital gain distributions in
additional shares;
o Receive dividends in additional shares and capital gains in
distributions in cash;
10 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
o Receive dividends in cash and capital gain distributions in
additional shares; or
o Receive both dividends and capital gain distributions in
cash.
No interest will be paid on uncashed distribution checks.
How To Buy Shares
- --------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
To Open An Account
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Through a financial advisor Contact your advisor. Some advisors may charge a fee.
- -------------------------------------------------------------------------------------------------------------
Complete a New Account Application and send it with a check payable
Through the mail to the fund. Mail them to: State Street Bank, P.O. Box 8301, Boston,
MA 02266-8301.
- -------------------------------------------------------------------------------------------------------------
Complete a New Account Application and send it with a check payable
Through express delivery to the fund. Send them to: Boston Financial Data Services, Attn:
Phoenix Funds, 66 Brooks Drive, Braintree, MA 02184.
- -------------------------------------------------------------------------------------------------------------
By Federal Funds wire Call us at (800) 243-1574 (press 1, then 0).
- -------------------------------------------------------------------------------------------------------------
Complete the appropriate section on the application and send it with your
By Investo-Matic initial investment payable to the fund. Mail them to: State Street Bank,
P.O. Box 8301, Boston, MA 02266-8301.
- -------------------------------------------------------------------------------------------------------------
By telephone exchange Call us at (800) 243-1574 (press 1, then 0).
- -------------------------------------------------------------------------------------------------------------
</TABLE>
How to Sell Shares
- ---------------------------------
You have the right to have the fund buy back shares at the net
asset value next determined after receipt of a redemption order
by the fund's Transfer Agent or an authorized agent. In the case
of a Class B Share redemption, you will be subject to the
applicable deferred sales charge, if any, for such shares.
Subject to certain restrictions, shares may be redeemed by
telephone or in writing. In addition, shares may be sold through
securities dealers, brokers or agents who may charge customary
commissions or fees for their services. The fund does not charge
any redemption fees. Payment for shares redeemed is made within
seven days; however, redemption proceeds will not be disbursed
until each check used for purchases of shares has been cleared
for payment by your bank, which may take up to 15 days after
receipt of the check.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 11
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
To Sell Shares
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Through a financial advisor Contact your advisor. Some advisors may charge a fee.
- -----------------------------------------------------------------------------------------------------------
Send a letter of instruction and any share certificates (if you hold
certificate shares) to: State Street Bank, P.O. Box 8301, Boston, MA
Through the mail 02266-8301. Be sure to include the registered owner's name, fund and
account number, number of shares or dollar value you wish to sell.
- -----------------------------------------------------------------------------------------------------------
Send a letter of instruction and any share certificates (if you hold
certificate shares) to: Boston Financial Data Services, Attn: Phoenix
Through express delivery Funds, 66 Brooks Drive, Braintree, MA 02184. Be sure to include the
registered owner's name, fund and account number.
- -----------------------------------------------------------------------------------------------------------
For sales up to $50,000, requests can be made by calling
By telephone (800) 243-1574.
- -----------------------------------------------------------------------------------------------------------
By telephone exchange Call us at (800) 243-1574 (press 1, then 0).
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Things You Should Know When Selling Shares
- ---------------------------------------------------------
You may realize a taxable gain or loss (for federal income tax
purposes) if you redeem shares of the fund. The fund reserves
the right to pay large redemptions "in-kind" (in securities
owned by the fund rather than in cash). Large redemptions are
those over $250,000 or 1% of the fund's net assets. Additional
documentation will be required for redemptions by organizations,
fiduciaries, or retirement plans, or if redemption is requested
by anyone but the shareholder(s) of record. Transfers between
broker-dealer "street" accounts are governed by the accepting
broker-dealer. Questions regarding this type of transfer should
be directed to your financial advisor. Redemption requests will
not be honored until all required documents in proper form have
been received. To avoid delay in redemption or transfer,
shareholders having questions about specific requirements should
contact the fund's Transfer Agent at (800) 243-1574.
Redemptions by Mail
> If you are selling shares held individually, jointly, or as
custodian under the Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act.
Send a clear letter of instructions if all of these apply:
o The proceeds do not exceed $50,000.
o The proceeds are payable to the registered owner at the
address on record.
Send a clear letter of instructions with a signature
guarantee when any of these apply:
o You are selling more than $50,000 worth of shares.
12 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
o The name or address on the account has changed within
the last 60 days.
o You want the proceeds to go to a different name or
address than on the account.
> If you are selling shares held in a corporate or fiduciary
account, please contact the fund's Transfer Agent at (800)
243-1574.
If required, the signature guarantee on your request must be by
an eligible guarantor institution as defined by the fund's
Transfer Agent in accordance with its signature guarantee
procedures. Currently, such procedures generally permit
guarantees by banks, broker dealers, credit unions, national
securities exchanges, registered securities associations,
clearing agencies and savings associations.
Selling Shares by Telephone
The Transfer Agent will use reasonable procedures to confirm
that telephone instructions are genuine. Address and bank
account information are verified, redemption instructions are
taped, and all redemptions are confirmed in writing.
The individual investor bears the risk from instructions given
by an unauthorized third party that the Transfer Agent
reasonably believed to be genuine.
The Transfer Agent may modify or terminate the telephone
redemption privilege at any time with 60 days notice to
shareholders.
During times of drastic economic or market changes, telephone
redemptions may be difficult to make or temporarily suspended.
Account Policies
- --------------------------------
Account Reinstatement Privilege
For 180 days after you sell your Class A or B Shares, you can
purchase Class A Shares of any fund at net asset value, with no
sales charge, by reinvesting all or part of your proceeds, but
not more. Send your written request to State Street Bank, P.O.
Box 8301, Boston, MA 02266-8301. You can call us at (800)
243-1574 for more information.
Please remember, a redemption and reinvestment are considered to
be a sale and purchase for tax-reporting purposes. Class B
shareholders who have had the contingent deferred sales charge
waived because they are in the Systematic Withdrawal Program are
not eligible for this reinstatement privilege.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 13
<PAGE>
Redemption of Small Accounts
Due to the high cost of maintaining small accounts, if your
account balance is less than $200, you may receive a notice
requesting you to bring the balance up to $200 within 60 days.
If you do not, the shares in the account will be sold at net
asset value, and a check will be mailed to the address of
record.
Exchange Privileges
You should read the prospectus carefully before deciding to make
an exchange. You can obtain a prospectus from your financial
advisor or by calling us at (800) 243-4361 or accessing our Web
site at www.phoenixinvestments.com.
o You may exchange shares for another fund in the same class
of shares; e.g., Class A for Class A.
o Exchanges may be made by phone (800) 243-1574 or by mail
(State Street Bank, P.O. Box 8301, Boston, MA 02266-8301).
o The amount of the exchange must be equal to or greater than
the minimum initial investment required.
o The exchange of shares is treated as a sale and purchase
for federal income tax purposes.
o Because excessive trading can hurt fund performance and
harm other shareholders, the Fund reserves the right to
temporarily or permanently end exchange privileges or
reject an order from anyone who appears to be attempting to
time the market, including investors who request more than
one exchange in any 30-day period. The fund's underwriter
has entered into agreements with certain market timing
firms permitting them to exchange by telephone. These
privileges are limited, and the fund distributor has the
right to reject or suspend them.
Retirement Plans
Shares of the fund may be used as investments under the
following qualified prototype retirement plans: traditional IRA,
rollover IRA, SEP-IRA, SIMPLE IRA, Roth IRA, 401(k) plans,
profit-sharing, money purchase pension plans, and 403(b) plans.
For more information, call (800) 243-4361.
Investor Services
- --------------------------------
Investo-Matic is a systematic investment plan that allows you to
have a specified amount automatically deducted from your
checking or savings account and then deposited into your mutual
fund account. Just complete the Investo-Matic Section on the
application and include a voided check.
14 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
Systematic Exchange allows you to automatically move money from
one Phoenix Fund to another on a monthly, quarterly, semiannual
or annual basis. Shares of one Phoenix Fund will be exchanged
for shares of the same class of another fund at the interval you
select. To sign up, just complete the Systematic Exchange
Section on the application.
Telephone Exchange lets you exchange shares of one fund for the
same class of shares in another fund, using our customer service
telephone service. See the Telephone Exchange Section on the
application.
Systematic Withdrawal Program allows you to periodically redeem
a portion of your account on a predetermined monthly, quarterly,
semiannual, or annual basis. Sufficient shares will be redeemed
on the 15th of the month at the closing net asset value so that
the payment is made about the 20th of the month. The program
also provides for redemptions on or about the 10th, 15th, or
25th with proceeds directed through Automated Clearing House
(ACH) to your bank. The minimum withdrawal is $25, and minimum
account balance requirements continue. Shareholders in the
program must own fund shares worth at least $5,000.
Tax Status of Distributions
- ------------------------------------------
The fund plans to make distributions from net investment income
monthly and to distribute net realized capital gains, if any, at
least annually. Distributions of short-term capital gains and
net investment income are taxable to shareholders as ordinary
income. Long-term capital gains, if any, distributed to
shareholders and which are designated by the fund as capital
gains distributions, are taxable to shareholders as long-term
capital gain distributions regardless of the length of time you
have owned your shares.
The fund may invest a portion of its assets in securities that
generate income that is not exempt from federal or state income
tax. Income exempt from federal tax may be subject to state and
local income tax. Any capital gains distributed by the fund may
be taxable.
Unless you elect to receive distributions in cash, dividends and
capital gain distributions are paid in additional shares. All
distributions, cash or additional shares, are subject to federal
income tax and may be subject to state, local and other taxes.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 15
<PAGE>
Financial Highlights
- -----------------------------------
These tables are intended to help you understand the fund's
financial performance over the past five years. Certain
information reflects financial results for a single fund share.
The total returns in the tables represent the rate that an
investor would have earned or lost on an investment in the fund
(assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP,
independent accountants. Their report, together with the fund's
financial statements, are included in the fund's most recent
Annual Report, which is available upon request.
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------
Year Ended April 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.12 $12.72 $12.77 $12.63 $13.03
Income from investment operations
Net investment income 0.64 0.65 0.66 0.67 0.71
Net realized and unrealized gain 0.11 0.47 0.04 0.20 0.05
------ ------ ------ ------ ------
Total from investment operations 0.75 1.12 0.70 0.87 0.76
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (0.63) (0.65) (0.66) (0.67) (0.76)
Distributions in excess of net investment income -- -- -- (0.01) --
Distributions from net realized gains (0.06) (0.07) (0.09) (0.03) (0.31)
Distributions in excess of accumulated net realized
gains -- -- -- (0.02) (0.09)
------ ------ ------ ------ ------
Total distributions (0.69) (0.72) (0.75) (0.73) (1.16)
------ ------ ------ ------ ------
Change in net asset value 0.06 0.40 (0.05) 0.14 (0.40)
------ ------ ------ ------ ------
Net asset value, end of period $13.18 $13.12 $12.72 $12.77 $12.63
====== ====== ====== ====== ======
Total return(1) 5.92% 8.84% 5.56% 6.92% 6.34%
Ratios/supplemental data:
Net assets, end of period (thousands) $95,230 $102,312 $109,358 $113,806 $117,370
Ratio to average net asset of:
Operating expenses 1.00% 0.96% 0.93% 0.99% 0.93%
Net investment income 4.72% 4.90% 5.13% 5.15% 5.63%
Portfolio turnover rate 14% 9% 17% 20% 51%
</TABLE>
----------------
(1) Maximum sales charge is not reflected in total return calculation.
16 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
Financial Highlights (continued)
- -----------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------
From
Year Ended April 30, Inception
---------------------------------------------------- 7/26/94 to
1999 1998 1997 1996 4/30/95
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.13 $12.73 $12.77 $12.63 $13.04
Income from investment operations
Net investment income 0.54 0.56 0.56 0.56(4) 0.48
Net realized and unrealized gain (loss) 0.12 0.46 0.05 0.20 0.01
------ ------ ------ ------ ------
Total from investment operations 0.66 1.02 0.61 0.76 0.49
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (0.53) (0.55) (0.56) (0.56) (0.50)
Distributions in excess of net investment income -- -- -- (0.01) --
Distributions from net realized gains (0.06) (0.07) (0.09) (0.03) (0.31)
Distributions in excess of accumulated net realized
gains -- -- -- (0.02) (0.09)
------ ------ ------ ------ ------
Total distributions (0.59) (0.62) (0.65) (0.62) (0.90)
------ ------ ------ ------ ------
Change in net asset value 0.07 0.40 (0.04) 0.14 (0.41)
------ ------ ------ ------ ------
Net asset value, end of period $13.20 $13.13 $12.73 $12.77 $12.63
====== ====== ====== ====== ======
Total return(1) 5.11% 8.10% 4.84% 6.10% 4.10%(3)
Ratios/supplemental data:
Net assets, end of period (thousands) $1,897 $1,562 $1,359 $1,258 $460
Ratio to average net asset of:
Operating expenses 1.75% 1.71% 1.68% 1.78% 1.55%(2)
Net investment income 3.97% 4.15% 4.37% 4.32% 4.90%(2)
Portfolio turnover rate 14% 9% 17% 20% 51%
</TABLE>
----------------
(1) Maximum sales charge is not reflected in total return calculation.
(2) Annualized.
(3) Not annualized.
(4) Computed using average shares outstanding.
Phoenix-Goodwin California Tax Exempt Bonds, Inc. 17
<PAGE>
Additional Information
- -------------------------------------
Statement of Additional Information
The fund has filed a Statement of Additional Information about the fund,
dated August 27, 1999 with the Securities and Exchange Commission. The
Statement contains more detailed information about the fund. It is
incorporated into this prospectus by reference and is legally part of the
prospectus. You may obtain a free copy of the Statement:
o by writing to Phoenix Equity Planning Corporation, 100 Bright Meadow
Blvd., P.O. Box 2200, Enfield, Connecticut 06083-2200 or
o by calling (800) 243-4361.
You may also obtain information about the fund from the Securities and
Exchange Commission:
o through its internet site (http://www.sec.gov),
o by visiting its Public Reference Room in Washington, DC or
o by writing to its Public Reference Section, Washington, DC 20549-6009
(a fee may be charged).
Information about the operation of the Public Reference Room may be
obtained by calling (800) SEC-0330.
Shareholder Reports
The fund semiannually mails to its shareholders detailed reports
containing information about the fund's investments. The fund's Annual
Report contains a detailed discussion of the market conditions and
investment strategies that significantly affected the fund's performance
from May 1 through April 30. You may request a free copy of the fund's
Annual and Semiannual Reports:
o by writing to Phoenix Equity Planning Corporation, 100 Bright Meadow
Blvd., P.O. Box 2200, Enfield, Connecticut 06083-2200 or
o by calling (800) 243-4361.
Customer Service: (800) 243-1574
Marketing: (800) 243-4361
Telephone Orders: (800) 367-5877
Telecommunication Device (TTY): (800) 243-1926
SEC File Nos. 2-83024 and 811-3714
[Recycle Logo] Printed on recycled paper using soybean ink
18 Phoenix-Goodwin California Tax Exempt Bonds, Inc.
<PAGE>
Phoenix Equity Planning Corporation
PO Box 2200
Enfield CT 06083-2200
---------------
PRSRT STD
U.S. Postage
PAID
Springfield, MA
Permit No. 444
---------------
[Graphic; Phoenix Investment Partners logo]
PXP 692 (8/99)
<PAGE>
PHOENIX-GOODWIN CALIFORNIA TAX EXEMPT BONDS, INC.
101 Munson Street
Greenfield, Massachusetts 01301
Statement of Additional Information
August 27, 1999
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the current Prospectus of
Phoenix-Goodwin California Tax Exempt Bonds, Inc. (the "Fund"), dated August
27, 1999, and should be read in conjunction with it. The Fund's Prospectus may
be obtained by calling Phoenix Equity Planning Corporation ("Equity Planning")
at (800) 243-4361 or by writing to Equity Planning at 100 Bright Meadow
Boulevard, P.O. Box 2200, Enfield, CT 06083-2200.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE FUND ........................................... 2
INVESTMENT OBJECTIVE AND POLICIES .................. 2
RISK FACTORS ....................................... 5
INVESTMENT RESTRICTIONS ............................ 10
PERFORMANCE INFORMATION ............................ 11
PORTFOLIO TRANSACTIONS AND BROKERAGE ............... 12
SERVICES OF THE ADVISER ............................ 13
NET ASSET VALUE .................................... 14
HOW TO BUY SHARES .................................. 14
ALTERNATIVE PURCHASE ARRANGEMENTS .................. 14
INVESTOR ACCOUNT SERVICES .......................... 17
HOW TO REDEEM SHARES ............................... 18
DIVIDENDS, DISTRIBUTIONS AND TAXES ................. 19
TAX SHELTERED RETIREMENT PLANS ..................... 21
THE DISTRIBUTOR .................................... 21
DISTRIBUTION PLANS ................................. 22
MANAGEMENT OF THE FUND ............................. 24
ADDITIONAL INFORMATION ............................. 30
APPENDIX ........................................... 31
</TABLE>
Customer Service--(800) 243-1574
Marketing--(800) 243-4361
Telephone Orders--(800) 367-5877
Telecommunication Device (TTY)--(800) 243-1926
PXP 692B (8/99)
1
<PAGE>
THE FUND
Phoenix-Goodwin California Tax Exempt Bonds, Inc. (the "Fund") is a
diversified open-end management investment company which was organized as a
Maryland corporation in 1983. Prior to August 27, 1999, the Fund was known as
Phoenix California Tax-Exempt Bonds, Inc.
The Fund's Prospectus describes the investment objectives of the Fund and
the principal strategies that the Fund will employ in seeking to achieve its
investment objective. The following discussion describes the Fund's investment
policies and techniques and supplements the description of the Fund's principal
strategies in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain a high level of current
income exempt from California state and local income taxes, as well as federal
income tax, consistent with preservation of capital. The Fund may invest in a
diversified portfolio of obligations issued by or on behalf of the United
States, its territories and possessions and their political subdivisions,
agencies, authorities and instrumentalities, the interest from which, in the
opinion of bond counsel, is exempt from federal income tax (municipal bonds).
California law requires that at least 50% of the Fund's total assets be
invested in California tax exempt state and local issues or tax exempt federal
obligations at the end of each quarter of its taxable year in order to be
eligible to pay dividends to California residents that will be exempt from
California income taxes in ratable proportion of the exempt California
investments to the total investments of the Fund at the end of each quarter.
The Fund, as a fundamental policy, will invest at least 80% of its assets in
California tax exempt municipal securities and may invest up to 100% of its
assets in such securities. The Fund may also invest in tax-exempt "qualified"
private activity bonds, the interest on which is treated as an item of tax
preference for purposes of the Alternative Minimum Tax ("AMT Bonds"). The Fund
may also invest, without percentage limitations, in investment grade securities
having ratings by Moody's Investors Service, Inc. ("Moody's") of Aaa, Aa, A, or
Baa or by Standard & Poor's Corporation ("S&P") or Fitch Investor Services,
Inc. ("Fitch") of AAA, AA, A, or BBB, or in securities which are not rated,
provided that, in the opinion of the Adviser, such securities are comparable in
rating quality to those in which the Fund may invest. Except for temporary
investments (taxable or tax exempt) as described herein, all of the Fund's
investments consist of tax exempt bonds. Municipal bonds rated Baa by Moody's
or BBB by S&P and Fitch are medium grade investment obligations which have
certain speculative characteristics (see Appendix).
General Characteristics
Tax exempt bonds are debt obligations issued by the various states and
their subdivisions (e.g., cities, counties, towns, and school districts) to
raise funds, generally for various public improvements requiring long-term
capital investment. Purposes for which tax exempt bonds are issued include
flood control, airports, bridges and highways, housing, medical facilities,
schools, mass transportation and power, water or sewage plants, as well as
others. Tax exempt bonds also are occasionally issued to retire outstanding
obligations, to obtain funds for operating expenses or to loan to other public
or, in some cases, private sector organizations or to individuals.
The two principal classifications of tax exempt bonds are "general
obligation" and "revenue." General obligations or "G.O.s" are secured by the
issuer's general pledge of its faith, credit, and taxing power for the payment
of principal and interest. Revenue bonds are payable only from monies derived
from a specified source such as operating a particular facility or from a
guarantee, lease, specific tax or pool of assets, e.g., a portfolio of
mortgages.
Pollution control or other bonds backed by private corporations do not
generally have the pledge of the credit of the issuing public body but are
secured only by the credit of the corporation benefiting from the facilities
being financed. There are, of course, variations in the security of municipal
bonds, both within a particular classification and between classifications
depending on numerous factors.
The yields on tax exempt bonds are dependent on a variety of factors,
including general money market conditions, general conditions of the municipal
bond market, the size of a particular offering, the maturity of the obligations
and the rating of the issue. The ratings of S&P, Moody's and Fitch represent
their opinions as to the quality of the tax exempt bonds which they undertake
to rate. It should be emphasized however, that ratings are general and not
absolute standards of quality. Consequently, tax exempt bonds with the same
maturity and coupon with different ratings may have the same yield.
The ability of issuers engaged in the generation, distribution and/or sale
of electrical power and/or natural gas to make payments of principal or
interest on such obligations is dependent upon, among other things, the
continuing ability of such issuers to derive sufficient revenues from their
operations to meet debt service requirements. General problems confronting such
issuers include the difficulty in financing construction projects during
inflationary periods, restrictions on operations and increased costs and delays
attributable to applicable environmental laws, the difficulty in obtaining fuel
for energy generation at reasonable prices, the difficulty in obtaining natural
gas for resale, and the effects of present or proposed energy or natural
resource conservation programs.
There are several federal housing subsidy programs used by state housing
agencies which do not result in unconditional protection of the bondholder.
Changes enacted by Congress in these programs or administrative difficulties
may result in decreases in the present actual or future estimated debt service
coverage. A reduction in coverage may also result from economic fluctuations
2
<PAGE>
leading to changes in interest rates or operating costs. Most state housing
authority bonds are also "moral obligations" of the issuing states; however, a
few programs specifically reject the "moral obligation." In many but not all
cases, this "moral obligation" is explicitly reflected in the bond contract by
means of an option permitting the state legislature to provide debt service
support if the legislature so chooses; thus, this option provides the
bondholder with an additional source of potential support not directly related
to the specific housing program.
Subsequent to its purchase by the Fund, an issue of tax exempt bonds or a
temporary investment may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Fund. Neither event will require the
elimination of such obligation from the Fund's portfolio but the adviser will
consider such an event in its determination of whether the Fund should continue
to hold such obligation in its portfolio. To the extent that the ratings
accorded by S&P, Moody's or Fitch for tax exempt bonds or temporary investments
may change as a result of changes in such organizations, or changes in their
rating systems, the Fund will attempt to use comparable ratings as standards
for its investments in tax exempt bonds or temporary investments in accordance
with the investment policies contained herein.
The Fund may purchase municipal obligations on a when-issued basis; i.e.,
delivery and payment for the securities will take place after the transaction
date, normally within 15 to 45 days, though the payment obligation and the
interest rate that will be received on the securities are fixed at the time the
buyer enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities before the settlement date
if it is deemed advisable as a matter of investment strategy. A segregated
account of the Fund consisting of high quality interest-bearing liquid debt
securities with a market value at least equal to the amount of the Fund's
when-issued commitments will be maintained with State Street Bank & Trust
Company, the Fund's custodian, on a daily basis so that the market value of the
account will equal or, exceed the amount of such commitments by the Fund. At
such time(s) as when-issued securities must be paid, the Fund will meet its
obligations from then-available cash flow, sale of securities held in the
segregated 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 lesser than the Fund's payment obligation).
Securities purchased on a when-issued basis and the securities held in the
Fund's portfolio are subject to changes in value based upon the public's
perception of the creditworthiness of the issuer and changes in the level of
interest rates. Generally, the value of such securities will fluctuate
inversely to changes in interest rates, i.e., they will appreciate in value
when interest rates decline and decrease in value when interest rates rise.
Therefore, in order to achieve higher interest income, if the Fund remains
substantially invested at the same time that it has purchased securities on a
when-issued basis, there will be a greater possibility of fluctuation in the
Fund's net asset value.
The Fund may from time to time invest a portion of its assets on a
temporary basis in "temporary investments;" the income from which, may be
subject to federal and California income tax. Specifically, the Fund may invest
in "private activity bonds," the income from which is not exempt from federal
income taxation (the interest on which is also treated as an item of tax
preference for purposes of the Alternative Minimum Tax ("AMT Bonds"). Such
investments may be made pending the investment or reinvestment of the proceeds
from the sale of its shares or portfolio securities and will not exceed 20% of
the Fund's total assets except when made for defensive purposes. Such temporary
investments may consist of notes of issuers having, at the time of purchase, an
issue of outstanding municipal bonds rated within the three highest grades by
S&P, Moody's or Fitch (taxable or tax exempt); commercial paper rated at least
A-l by Moody's, P-l by S&P or F-l by Fitch; and U.S. Treasury and agency
securities. The Fund may invest in California bonds with any maturity and may
purchase short-term municipal notes such as tax anticipation notes, revenue
anticipation notes and bond anticipation notes.
The Fund may write call options only if they are covered and remain
covered for as long as the Fund is obligated as a writer. Thus, if the Fund
writes a call option on an individual security, the Fund must own the
underlying security or other securities that are acceptable for escrow at all
times during the option period. The Fund will write call options on indices
only to hedge in an economically appropriate way securities which are not
otherwise hedged with options or financial futures contracts. Call options on
securities indices written by the Fund will be "covered" by identifying the
specific securities being hedged.
Portfolio trading will be undertaken principally to accomplish the
objectives of the Fund in relation to anticipated movements in the general
level of interest rates, provided, however, the Fund may engage to a limited
extent in short-term trading consistent with its objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or
purchased in anticipation of a market rise (a decline in interest rates) and
later sold, but the Fund will not engage in trading merely to realize a gain.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what the Fund believes to
be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of various types of
tax exempt bonds or changes in the investment objective of investors.
Portfolio turnover rate for a fiscal year is the ratio of the lesser of
purchases or sales of portfolio securities to the monthly average of the value
of portfolio securities, all excluding securities with maturities at
acquisition of one year or less. The Fund's portfolio turnover rate will not be
a limiting factor when the Fund deems it desirable to purchase or sell
securities.
3
<PAGE>
Portfolio turnover may involve the payment by the Fund of dealer mark-ups
or underwriting commissions. It is impossible to predict portfolio turnover
rates; however, in periods of rapidly fluctuating interest rates, the Fund's
investment policies may lead to frequent changes in investments. Historical
portfolio turnover rates can be found under the heading "Financial Highlights"
located in the Fund's Prospectus.
The Fund may use financial futures contracts and related options to hedge
against changes in the market value of securities or securities which it
intends to purchase. Hedging is accomplished when an investor takes a position
in the futures market opposite to the investor's cash market position. There
are two types of hedges--long (or buying) and short (or selling) hedges.
Historically, prices in the futures market have tended to move in concert with
(although in inverse relation to) cash market prices, and prices in the futures
market have maintained a fairly predictable relationship to prices in the cash
market. Thus, a decline in the market value of securities may be protected
against to a considerable extent by gains realized on futures contracts sales.
Similarly, it is possible to protect against an increase in the market price of
securities which the Fund may wish to purchase in the future by purchasing
futures contracts.
The Fund may purchase or sell any financial futures contracts which are
traded on a recognized exchange or board of trade and may purchase exchange- or
board-traded put and call options on financial futures contracts as a hedge
against anticipated changes in the market value of its securities or securities
which it intends to purchase. Financial futures contracts consist of interest
rate futures contracts, securities index futures contracts and foreign currency
futures contracts. A public market presently exists in interest rate futures
contracts covering long-term U.S. Treasury bonds, U.S. Treasury notes,
three-month U.S. Treasury bills and GNMA certificates. Securities index futures
contracts are currently traded with respect to the Standard & Poor's 500
Composite Stock Price Index and such other broad-based stock market indices as
the New York Stock Exchange Composite Stock Index and the Value Line Composite
Stock Price Index. A clearing corporation associated with the exchange or board
of trade on which a financial futures contract trades assumes responsibility
for the completion of transactions and also guarantees that open futures
contracts will be performed.
In contrast to the situation in which a Fund purchases or sells a
security, no security is delivered or received by the Fund upon the purchase or
sale of a financial futures contract (although an obligation to deliver or
receive the underlying security in the future is created by such a contract).
Initially, when it enters into a financial futures contract, the Fund will be
required to deposit in a segregated account with the Fund's custodian bank an
amount of cash or U.S. Treasury bills. This amount is known as initial margin
and is in the nature of a performance bond or good faith deposit on the
contract. The current initial margin deposit required per contract is
approximately 5% of the contract amount. Brokers may establish deposit
requirements higher than this minimum. Subsequent payments, called variation
margin, will be made to and from the account on a daily basis as the price of
the futures contract fluctuates. This process is known as marking to market.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
margin account. This amount will be equal to the amount by which the market
price of the futures contract at the time of exercise exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out is accomplished by effecting an offsetting transaction. A futures
contract sale is closed out by effecting a futures contract purchase for the
same aggregate amount of securities and the same delivery date. If the sale
price exceeds the offsetting purchase price, the seller immediately would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller immediately would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same securities and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss.
The Fund will pay commissions on financial futures contracts and related
options transactions. These commissions may be higher than those which would
apply to purchases and sales of securities directly, and will be in addition to
those paid for direct purchases and sales of securities.
The Fund may not engage in transactions in financial futures contracts or
related options for speculative purposes but only as a hedge against
anticipated changes in the market value of its portfolio securities or
securities which it intends to purchase. The Fund may not purchase or sell
financial futures contracts or related options if, immediately thereafter, the
sum of the amount of initial margin deposits on the Fund's existing futures and
related options positions and the premiums paid for related options would
exceed 5% of the market value of the Fund's total assets after taking into
account unrealized profits and losses on any such contracts. At the time of
purchase of a futures contract or a call option on a futures contract, any
asset, including equity securities and non-investment grade debt so long as the
asset is liquid, unencumbered and marked to market daily equal to the market
value of the futures contract minus the Fund's initial margin deposit with
respect thereto will be deposited in a pledged account with the Fund's
custodian bank to collateralize fully the position and thereby ensure that it
is not leveraged.
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The extent to which the Fund may enter into financial futures contracts
and related options also may be limited by the requirements of the Internal
Revenue Code for qualification as a regulated investment company. See
"Dividends, Distributions & Taxes."
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specific price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time during which the bonds may not be called)
which usually lasts for 7 to 10 years, after which time such bonds may be
called away. An issuer may generally be expected to call its bonds, or a
portion of them, during periods of relatively declining interest rates, when
borrowing may be replaced at lower rates than those obtained in prior years. If
the proceeds of a bond called under such circumstances are reinvested, the
result may be lower overall yield due to lower current interest rates.
Municipal lease obligations are municipal securities that may be supported
by a lease or an installment purchase contract issued by state and local
government authorities to acquire funds to obtain the use of a wide variety of
buildings or equipment and facilities such as fire and sanitation vehicles,
computer equipment, prisons, office buildings and schools and other capital
assets. These obligations, which may be secured or unsecured, are not G.O.s
secured by unlimited taxes and have evolved to make it possible for state and
local government authorities to obtain the use of property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt. Thus, municipal lease obligations have special risks not normally
associated with G.O.s municipal bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. In addition to the non-appropriation risk,
some municipal lease obligations have not yet developed the depth of
marketability associated with other municipal bonds. Although these obligations
may be secured by the leased equipment, the disposition of collateral in the
event of the foreclosure may prove difficult. The liquidity of municipal lease
obligations purchased by the Fund will be determined pursuant to illiquid
securities guidelines approved by the Board of Directors. The Board of
Directors will be responsible for determining the credit quality of unrated
municipal leases, on an ongoing basis, including an assessment of the
likelihood that any such leases will not be canceled. Factors considered in
making such determinations may include the frequency of trades and quotes for
the obligation; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; the willingness of dealers to
undertake to make a market in the security; the nature of marketplace trades;
the obligation's ratings and, if the security is unrated, factors generally
considered by a rating agency. If a municipal lease obligation is determined to
be illiquid, it will be subject to a Fund's overall limit on investments in
illiquid securities.
RISK FACTORS
California Obligations
Certain developments regarding the California Constitution and state
statutes which limit the taxing and spending authority of California government
entities may impair the ability of California issuers to maintain debt service
on their obligations, as described more fully below. The following information
as to certain California state risk factors is provided to investors in view of
the policy of the Fund to concentrate its investments in California state and
municipal issues. Such information constitutes only a brief discussion, does
not purport to be a complete description and is based on information from
sources believed by the Fund to be reliable, including official statements
relating to securities offerings of California state and municipal issuers and
periodic publications by national rating organizations. Such information,
however, has not been independently verified by the Fund.
Certain of the California municipal securities in which the Fund may
invest may be obligations of issuers which rely in whole or in part on
California state revenues for payment of these obligations. Property tax
revenues and a portion of the state's General Fund surplus are distributed to
counties, cities and their various taxing entities and the state assumes
certain obligations theretofore paid out of local funds. Whether and to what
extent a portion of the state's General Fund will be distributed in the future
to counties, cities and various entities is unclear.
Certain of the municipal securities purchased by the Fund may be
obligations of issuers who rely in whole or in part on ad valorem real property
taxes as a source of revenue. On June 6, 1978, Proposition 13 added Article
XIIIA to the California Constitution. The effect of Article XIIIA is to limit
ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property revenues.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that,
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy maximum tax permitted by
Article XIIIA of $4.00 per $100 assessed valuation. The apportionment of
property taxes in fiscal years after 1978/79 has been revised pursuant to
Statutes of 1979, Chapter 282, which provides relief funds from state moneys
beginning in fiscal year 1979/80 and is designed to provide a permanent system
for sharing state taxes and budget funds with local agencies. Under Chapter
282, cities and counties receive more of the remaining property tax revenues
collected under Proposition 13 instead of direct state aid. School districts
receive a correspondingly reduced amount of property taxes, but receive
compensation directly from the state and are given additional relief.
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The application and interpretation of Article XIIIA has been and will
probably continue to be the subject of numerous lawsuits in the California
courts. It is not possible to predict the outcome of litigation or the ultimate
scope and impact of Article XIIIA, its implementing legislation and regulations
issued by the California State Board of Equalization. However, the outcome of
such litigation could substantially impact local property tax collections and
the ability of the state agencies, local governments and districts to make
future payments on outstanding debt obligations.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" added Article XIIIB to the California Constitution which provides
that, state and local governmental entities have an annual "appropriations
limit" and are not allowed to spend certain moneys (called "appropriations
subject to limitations") in an amount higher than the "appropriations limit."
In general terms, the "appropriations limit" is required to be based on certain
1978/79 expenditures, and is to be adjusted annually to reflect changes in
consumer prices, population and certain services provided by these entities.
Article XIIIB currently provides that if revenues of local government entities
in two consecutive fiscal year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schudules over the
subsequent two years. State governmental entities must allocate 50% of like
excess revenues to a State School Fund before implementing revision of tax
rates.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amended Article XIIIB and
Article XVI to require that (a) the California Legislature establish a prudent
state reserve fund in an amount that it shall deem reasonable and necessary,
and (b) revenues in excess of amounts permitted to be spent and which would
otherwise be returned pursuant to Article XIIIB by revision of tax rates or fee
schedules, be transferred and allocated to the State School Fund and be
expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if designated state
officials determine that annual expenditures per student and average class size
meet certain criteria set forth in Article XVI, Section 8.5.
Proposition 98 and Proposition 111, which took effect on July 1, 1990,
amended Article XVI to require that California provide a minimum level of
funding for public schools and community colleges. Currently, commencing with
the 1990-91 fiscal year, state moneys to support school districts and community
college districts may not be less than the greater of: (a) an amount equaling
the percentage of state general revenue funds appropriated under Article XIIIB
for school districts and community college districts in the fiscal year
1986-87, or (b) depending on the rate by which growth in California per capita
personal income exceeds or falls short of growth in per capita general revenue
funds, a formulaic amount determined by prior year total allocations from the
state General Fund plus local tax proceeds adjusted for criteria allowed under
Article XIIIB. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for one year.
Proposition 111 was approved by voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculates spending
limits for the state and local governments, allows greater annual increases in
the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of funding guarantee
in recession years for school districts and community college districts (but
with a floor of 40.9% of state General Fund tax revenues), removes the
provision of Proposition 98 which included excess moneys transferred to school
districts and community college districts in the base calculation for the next
year, limits the amount of state tax revenue over the limit which would be
transferred to school districts and community college districts, and exempts
increased gasoline taxes and truck weight fees from the state appropriations
limit. Additionally, Proposition 111 exempts from the state appropriations
limit funding for capital outlays.
Substantially increased General Fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets.
Articles XIIIB, like Article XIIIA, may require further interpretation by
both the California Legislature and the courts to determine their applicability
to specific situations involving the state and local taxing authorities.
Depending upon such interpretations, Article XIIIB may limit significantly a
governmental entity's ability to budget sufficient funds to meet debt service
on bonds and other obligations.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges
and assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
Proposition 218 does not affect the State or its ability to levy or
collect taxes. There are a number of ambiguities concerning the Proposition and
its impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. The State legislative analyst
estimated that enactment of Proposition 218 would reduce local government
revenues statewide by over $100 million a year, and that over time revenues to
local governments would be reduced by several hundred million dollars a year
under this Proposition.
Certain California municipal securities in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's non-judicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints
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imposed by California law upon transfer of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the home mortgage
by making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of loan servicing procedures, and the filing of the
formal notice of default does not occur unless at least three full monthly
payments have become due and remain unpaid. The power of sale is exercised by
posting and publishing a notice of sale for at least 20 days after expiration
of the three-month reinstatement period. Therefore, the effective minimum
period for foreclosing on a mortgage could be in excess of seven months after
the initial default. Such time delays in collections could disrupt the flow of
revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of home mortgages or deeds of trust securing an issuer's obligations.
Certain California municipal securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low- and
moderate-income mortgagors. These obligations may be payable solely from
revenues derived from home mortgages, and are subject to California statutory
limitations described above applicable to obligations secured by real property.
Under California antideficiency legislation, there is no personal recourse
against a mortgagor of a single family residence purchased with a loan secured
by the mortgage.
Under California law, mortgage loans secured by single family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot in
any event exceed six month's advance interest on the amount prepaid in excess
of 20% of the original principal amount of the mortgage loan. This limitation
could affect the flow of revenues available to an issuer for debt service on
outstanding debt obligations which financed such home mortgages.
After suffering through a severe recession, since the start of 1994 the
State's economy has been on a steady recovery. Employment increased by over
430,000 non-farm jobs in 1997. The strongest growth has been in export-related
industries, business services, electronics, entertainment and tourism, all of
which have offset the recession-related losses which were heaviest in aerospace
and defense-related industries, finance and insurance. The rate of economic
growth in California in 1997, in terms of job gains, exceeded that of the rest
of the United States. The unemployment rate, while still higher than the
national average, fell to 5.9% in early 1998, compared to over 10% during the
recession.
The recession seriously affected State tax revenues and caused an increase
in expenditures for health and welfare programs. As a result, the State
experienced recurring budget deficits in the late 1980's and early 1990's. The
State Controller reports that expenditures exceeded revenues for four of the
six years, and the State accumulated a budget deficit of about $2.8 billion at
its peak at June 30, 1993. The State's cash condition became so serious from
late spring 1992 until 1995, the State had to rely on the issuance of
short-term notes which matured in a subsequent fiscal year to finance its
ongoing deficit and pay current obligations. With the repayment of the last of
these deficit notes in April, 1996, the State does not plan to rely further on
external borrowing across fiscal years, but will continue its normal cash flow
borrowing.
On August 18, 1997, the Governor signed the 1997-98 Budget Act which
provides for General Fund and Special Fund expenditures of approximately $67.2
billion and projects a 97-98 fiscal year end reserve of $112 million. For the
second year in a row, the State budget contains a large increase in funding for
K-14 education, reflecting strong revenues which have exceeded initial budgeted
amounts. The Budget Act reflects a $1.235 billion pension case judgment
payment, and returns funding of the State's pension contribution to the
quarterly basis existing prior to the deferral actions invalidated by the
courts. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels. Health and welfare costs are contained,
continuing generally the grant levels from prior years, as part of the initial
implementation of the new CalWORKs welfare reform program. Unlike prior years,
this Budget Act does not depend on uncertain federal budget actions. About $300
million in federal funds, already included in the federal FY 1997 and 1998
budgets, are included in the Budget Act to offset incarceration costs for
illegal immigrants. The Budget Act contains no tax increases and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million. After enactment of the Budget Act, and prior to the
end of the Legislative Session, the Legislature and the Governor reached
certain agreements related to State expenditures and taxes. Legislation signed
by the Governor includes a variety of phased-in tax cuts, conformity with
certain provisions of the federal tax reform law passed earlier in the year,
and reform of funding for county trial courts, with the State to assume greater
financial responsibility.
The Governor's proposed budget for fiscal year 1998-1999 proposes total
State spending of $70.6 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.7% from the current year's budget. This
total includes $55.4 billion in General Fund spending (a 4.5% increase from the
current year) and $15.2 billion in special funds spending (a 5.3% increase).
The Governor's proposed budget anticipates a $296 million reserve for economic
uncertainties. The new budget reflects agreements reached in the prior year in
the areas of welfare reform, education, state tax relief, and the financial
restructuring of the State's trial court system. The budget contains no tax
changes and relatively few major programmatic changes.
The May 1998 Revision to the Governor's proposed budget increases the
General Fund revenue forecast by nearly $1.8 billion in 1997-98 and $2.5
billion in 1998-99. The May Revision provides for a balanced budget and a
budget reserve for economic
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uncertainties of $1.6 billion. In the May Revision the administration proposed,
among other things, a two-step reduction in the State's vehicle license fee
(VLF) which, when fully phased in, would reduce State revenues by more than $3
billion annually. Since VLF is a primary source of revenue for local
governments, the May Revision proposed continuous appropriation from the
General Fund to replace that loss in revenues.
The VLF proposal met significant opposition in the Legislature and
continuing disagreement over the nature and extent of the proposed tax cut
delayed final adoption of the 1998-99 budget. Local government concern about
the potential impact of the VLF proposal on local government revenues
underscores the extent to which California county and other local government
budgets are affected by State budget decisions beyond their control.
In early August, 1998 the Governor and leaders of the State Legislature
reached agreement on a $76 billion State budget that includes a $1.4 billion
tax cut. The main feature of the tax cut is a 25% reduction in the VLF, with
future reductions contingent upon higher than forecast State revenues. The
budget accord included significant additional funding for public schools and
community colleges intended, among other things, to increase the length of the
California school year and extend the class size reduction initiatives already
under way. The budget accord also included a 7.9% increase in welfare
recipients' monthly checks as well as a variety of smaller tax credits and
cuts, including an increase in the income tax credit for dependents, a modest
renters' credit and a number of tax credits and cuts aimed at specific
industries important to the California economy. The budget must be approved by
a two-thirds vote of the State Senate and Assembly. The Governor may exercise a
line-item veto to ensure the final budget includes sufficient reserves.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 200 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. The bankruptcy filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the County to pay
off the last of its creditors. On January 7, 1997, the County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%. In December, 1997, Moody's raised its ratings on $325
million of Orange County pension obligation bonds to Baa3 from Ba. In February
1998 Fitch assigned outstanding Orange County pension obligation bonds a BBB
rating.
The State is a party to numerous legal proceedings, many of which normally
recur in governmental operations. In addition, the State is involved in certain
other legal proceedings which, if decided against the State, may require the
State to make significant future expenditures or may impair future revenue
sources.
Among the more significant lawsuits pending against the State are the
following: (i) lawsuits related to the 1997 northern California floods with
potential State liability of approximately $2 billion; (ii) cases seeking to
compel the State to pay Part B ambulance and physician services co-payments
under the Medicare and Medicaid Acts; (iii) a lawsuit challenging two sections
of the State tax laws; (iv) a lawsuit seeking reimbursement for alleged
state-mandated costs involving potential State liability of over $1 billion;
(v) lawsuits related to contamination at the Stringfellow toxic waste site;
(vi) various lawsuits challenging budget appropriations and fund transfers;
(vii) a lawsuit challenging the appropriation of funds in the Cigarette and
Tobacco Products Surtax Fund for programs which were allegedly not health
education or tobacco related disease research; and (viii) lawsuits concerning
reductions in Aid to Families with Dependent Children (AFDC) with potential
State liability estimated at $831 million.
Due to the State's continuing budget problems, the State's general
obligation bonds were downgraded in July 1994 from "Aa" to "A1" by Moody's,
from "A+" to "A" by S&P, and from "AA" to "A" by Fitch. All three ratings
companies expressed uncertainty in the State's ability to balance its budget by
1996. However, in 1996, citing California's improving economy and budget
situation, both Fitch and Standard & Poor's raised their ratings from A to A+.
In October, 1997, Fitch raised its rating from A+ to AA- referring to
California's fundamental strengths, the extent of economic recovery and the
return of financial stability. There can be no assurance that such ratings will
continue for any given period of time or that they will not in the future be
further revised or withdrawn.
In October 1997 the Governor issued Executive Order W-163-97 stating that
Year 2000 solutions would be a State priority and requiring each agency of the
State, no later than December 31, 1998, to address Year 2000 problems in their
essential systems and protect those systems from corruption by non-compliant
systems, in accordance with the Department of Information Technology's
California 2000 Program. There can be no assurance that steps being taken by
state or local government agencies with respect to the Year 2000 problem will
be sufficient to avoid any adverse impact upon the budgets or operations of
those agencies or upon the California Trust.
Puerto Rico
Since 1983, Puerto Rico has experienced a wide ranging economic expansion
with growth in almost every sector of its economy and record levels of
employment. Although the increase in real gross product slowed to 0.8% in
fiscal 1992, reflecting the effects of the last recession in the U.S. economy,
the growth pattern continued thereafter with real gross domestic product
increases of
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2.8% and 7.1% for fiscal 1996 and 1997, respectively. Factors contributing to
Puerto Rico's more than decade-long expansion include Commonwealth-sponsored
economic development programs, the relatively stable prices of oil imports, the
continued growth in the U.S. economy, declines in the exchange value of the
U.S. dollar and the relatively low cost of borrowing during the period.
Puerto Rico has a diversified economy with the manufacturing and services
sectors comprising the principal sectors. Manufacturing is the largest sector
in terms of gross domestic product. In fiscal 1997, manufacturing generated
$19.8 billion or 41.2% of gross domestic product and accounted for 14.3% of
total employment; as compared with fiscal 1996, when it generated $19.1
billion, or 41.8%, of gross domestic product and accounted for 15.3% of total
employment. In the last two decades, industrial development has tended to be
more capital intensive and more dependent on skilled labor. This gradual shift
in emphasis is best exemplified by the heavy investment in the pharmaceutical,
scientific instruments, computer, microprocessor, medical product and
electrical product industries over the last decade.
One of the factors assisting the development of the manufacturing sector
was the tax incentives offered by the federal and Commonwealth governments,
most notably Section 936 of the U.S. Internal Revenue Code, under which certain
qualifying U.S. corporations were entitled to U.S. corporate income tax
credits. On August 20, 1996, President Clinton signed into law a bill that will
phase out Section 936 tax credits over a nine year period, ending January 1,
2006. The effect on Puerto Rico's economy of the phased elimination of Section
936 tax credits will not be certain for a number of years. The impact on future
investment and employment is more uncertain.
The service sector, which includes hotel and related services, and which
currently accounts for approximately 48.8% of total employment, accounted for
$18.4 billion, or 38.3%, of Puerto Rico's gross domestic product in fiscal
1997, as compared with $17.5 billion, or 38.5%, of gross domestic product in
fiscal 1996. The service sector, particularly wholesale and retail trade and
finance, insurance and real estate, has experienced significant growth partly
in response to the expansion of the manufacturing sector.
Growth in construction and tourism has also contributed to increased
economic activity in fiscal 1997. The growth in the construction industry has
been evidenced by an increase of 12.2% in construction investment for fiscal
1997 over fiscal 1996. Tourism has grown in each fiscal year since fiscal 1985.
More than 4.3 million visitors spent over $2.0 billion in Puerto Rico in fiscal
1997. San Juan has become the largest home port for cruise ships in the
Caribbean and the second largest home port for cruise ships in the world.
Twenty-five U.S. and international airlines offer scheduled service to and from
San Juan, and a major U.S. airline uses San Juan as a hub for its
intra-Caribbean operations. This reflects the importance of Puerto Rico as a
tourist destination and as a transportation hub in the Caribbean.
The Constitution of Puerto Rico provides a limitation on the amount of
general obligation debt that can be issued. The Commonwealth's policy has been
and continues to be to maintain the level of such debt within a prudent range
below the constitutional limitation. Historically, the Commonwealth has
maintained a fiscal policy which provides for a prudent relationship between
the growth of public sector debt and the growth of the economic base required
to service that debt. The Commonwealth also has sought opportunities to realize
debt service savings by refunding outstanding debt with obligations bearing
lower interest rates. In certain years, this policy has resulted in the rate of
growth of public sector debt exceeding the rate of growth of gross domestic
product. During fiscal years 1992 to 1997, public sector debt increased 38.4%,
while gross product rose 35.4%. At the end of fiscal 1997, short-term debt
outstanding relative to total debt was approximately 8.4%.
Futures and Options
Positions in futures contracts and related options may be closed out on an
exchange if the exchange provides a secondary market for such contracts or
options. The Fund will enter into a futures or futures related option position
only if there appears to be a liquid secondary market. However, there can be no
assurance that a liquid secondary market will exist for any particular option
or futures contract at any specific time. Thus, it may not be possible to close
out a futures or related option position. In the case of a futures position, in
the event of adverse price movements the Fund would continue to be required to
make daily margin payments. In this situation, if the Fund has insufficient
cash to meet daily margin requirements it may have to sell portfolio securities
to meet its margin obligations at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
securities underlying the futures contracts it holds. The inability to close
out futures positions also could have an adverse impact on the Fund's ability
to hedge its positions effectively.
There are several risks in connection with the use of futures contracts as
a hedging device. While hedging can provide protection against an adverse
movement in market prices, it can also limit a hedger's opportunity to benefit
fully from favorable market movement. In addition, investing in futures
contracts and options on futures contracts will cause the Fund to incur
additional brokerage commissions and may cause an increase in the Fund's
turnover rate.
The successful use of futures contracts and related options depends on the
ability of the Adviser to forecast correctly the direction and extent of market
movements within a given time frame. To the extent market prices remain stable
during the period a futures contract or option is held by the Fund or such
prices move in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction which is not offset by an increase in the value
of its portfolio securities. As a result, the Fund's total return for the
period may be less than if it had not engaged in the hedging transaction.
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Utilization of futures contracts involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities or currencies which are being hedged. If the price of
the futures contract moves more or less than the price of the securities being
hedged, the Fund will experience a gain or loss which will not be completely
offset by movements in the price of the securities or currency. It is possible
that, where the Fund has sold futures contracts to hedge against decline in the
market, the market may advance and the value of securities held in the Fund may
decline. If this occurred, the Fund would lose money on the futures contract
and would also experience a decline in value in its portfolio securities. Where
futures are purchased to hedge against a possible increase in the prices of
securities before the Fund is able to invest its cash (or cash equivalents) in
securities (or options) in an orderly fashion, it is possible that the market
may decline; if the Fund then determines not to invest in securities (or
options) at that time because of concern as to possible further market decline
or for other reasons, the Fund will realize a loss on the futures that would
not be offset by a reduction in the price of the securities purchased.
The market prices of futures contracts may be affected if participants in
the futures market elect to close out their contracts through offsetting
transactions rather than to meet margin deposit requirements. In such cases,
distortions in the normal relationship between the cash and futures markets
could result. Price distortions could also result if investors in futures
contracts opt to make or take delivery of the underlying securities or
currencies rather than to engage in closing transactions because such action
would reduce the liquidity of the futures market. In addition, because, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the underlying securities
market, increased participation by speculators in the futures market could
cause temporary price distortions. Because of the possibility of price
distortions in the futures market and of the imperfect correlation between
movements in the prices of securities and movements in the prices of futures
contracts, a correct forecast of market trends may still not result in a
successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase of put
or call options on futures contracts involves less potential risk because the
maximum amount at risk is the premium paid for the options plus transaction
costs. However, there may be circumstances when the purchase of an option on a
futures contract would result in a loss (i.e., the loss of the premium paid)
while the purchase or sale of the futures contract would not have resulted in
loss, such as when there is no movement in the price of the underlying
securities.
INVESTMENT RESTRICTIONS
Fundamental Policies
The Fund has adopted the following investment restrictions which, in
addition to the investment objective set forth under Investment Objective and
Policies, are fundamental policies which cannot be changed without the consent
of the holders of a majority of the shares of the Fund. A majority of the
shares as used in this Statement means (1) 67% or more of the shares present at
a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
The Fund may not:
(1) issue senior securities, as such term is defined in the Investment
Company Act of 1940, as amended, except as otherwise permitted under these
fundamental investment restrictions;
(2) make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions; provided, however, the deposit or payment of an initial or
maintenance margin in connection with financial futures contracts or related
options transactions is not considered the purchase of a security on margin;
(3) borrow money in excess of 5% of the value of its total assets, or
pledge its assets to an extent greater than 5% of the value of its total
assets. Any such borrowings shall be from banks and shall be undertaken only as
a temporary measure or for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered call options or in connection
with the purchase or sale of financial futures contracts and related options
shall not be deemed to be a pledge or other encumbrance;
(4) engage in the business of underwriting the securities of others except
in connection with the purchase of securities for its portfolio of municipal
bonds;
(5) concentrate its investments in the securities of issuers all of which
conduct their principal business activities in the same industry provided that
this restriction shall not apply to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
(6) make any investment in real estate, real estate mortgage loans and/or
commodities, except that the Fund may (a) purchase or sell readily marketable
securities which are secured by interests in real estate, or issued by
companies which deal in real estate including real estate investment and
mortgage investment trusts, and (b) engage in financial futures contracts and
related options transactions, provided that the sum of the initial margin
deposits on the Fund's futures and related options positions and the premiums
paid for related options do not exceed 5% of the value of the Fund's total
assets; and
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(7) make loans, except that the Fund may (a) invest up to 15% of its total
assets in repurchase agreements of a type regarded as "liquid" which are fully
collateralized as to principal and interest and which are entered into only
with commercial banks, brokers and dealers considered by the Fund to be
creditworthy and (b) loan its portfolio securities in amounts up to one-third
of the value of its total assets.
If a percentage restriction on investment or utilization of assets as set
forth is adhered to at the time an investment is made, a later change in the
percentage resulting from a change in the values or costs of the Fund's assets
will not be considered a violation of the restriction.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to shareholders or prospective investors. Performance
information in advertisements and sales literature may be expressed as yield of
a class and as total return of a class.
Standardized quotations of average annual total return for Class A or Class
B Shares will be expressed in terms of the average annual compounded rate of
return for a hypothetical investment in either Class A or Class B Shares over
periods of 1, 5 and 10 years or up to the life of the class of shares,
calculated for each class separately pursuant to the following formula:
P(1+T)(n) = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, (n) = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures reflect the deduction of a proportional share
of each Class's expenses (on an annual basis), deduction of the maximum initial
sales load in the case of Class A Shares and the maximum contingent deferred
sales charge applicable to a complete redemption of the investment in the case
of Class B Shares, and assume that all dividends and distributions are on Class
A and Class B Shares reinvested when paid.
The Fund may from time to time include in advertisements containing total
return the ranking of those performance figures relative to such figures for
groups of mutual funds having similar investment objectives as categorized by
ranking services such as Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc., Weisenberger Financial Services, Inc. and Morningstar, Inc.
Additionally, the Fund may compare its performance results to other investment
or savings vehicles (such as certificates of deposit) and may refer to results
published in various publications such as Changing Times, Forbes, Fortune,
Money, Barrons, Business Week and Investor's Daily, Stanger's Mutual Fund
Monitor, The Stanger Register, Stanger's Investment Adviser, The Wall Street
Journal, The New York Times, Consumer Reports, Registered Representative,
Financial Planning, Financial Services Weekly, Financial World, U.S. News and
World Report, Standard & Poor's The Outlook, and Personal Investor. The Fund
may from time to time illustrate the benefits of tax deferral by comparing
taxable investments to investments made through tax-deferred retirement plans.
The total return may also be used to compare the performance of the Fund
against certain widely acknowledged outside standards or indices for stock and
bond market performance, such as the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"), Dow Jones Industrial Average, Europe Australia Far
East Index (EAFE), Consumer Price Index, Lehman Brothers Aggregate Bond Index,
Lehman Brothers Municipal Bond Index, Lehman Brothers Corporate Index and
Lehman Brothers T-Bond Index.
Advertisements, sales literature and other communications may contain
information about the Fund and Adviser's current investment strategies and
management style. Current strategies and style may change to allow the Fund to
respond quickly to changing market and economic conditions. From time to time
the Fund may include specific portfolio holdings or industries in such
communications. To illustrate components of overall performance, the Fund may
separate its cumulative and average annual returns into income and capital
gains components; or cite separately as a return figure the equity or bond
portion of the Fund's portfolio; or compare the Fund's bond return future to
well-known indices of market performance, including, but not limited to: the
S&P 500 Index, Dow Jones Industrial Average, Lehman Brothers Aggregate Bond
Index, Lehman Brothers Municipal Bond Index, CS First Boston High Yield Index
and Salomon Brothers Corporate and Government Bond Indices.
Average annual return and yield are computed separately for Class A and
Class B Shares in accordance with the formulas specified by the Commission. The
yield will be computed by dividing the Fund's net investment income over a
30-day period by an average value (using the average number of shares entitled
to receive dividends and the maximum offering price per share at the end of the
period), all in accordance with applicable regulatory requirements. Such amount
will be compounded for six months and then annualized for a 12-month period to
derive the Fund's yield. For the 30-day period ending April 30, 1999, the Class
A Shares yield was 4.22% and the Class B Shares yield was 3.67%.
For the 1, 5 and 10 year periods ended April 30, 1999, the average annual
total return of the Class A Shares was 0.89%, 5.68% and 6.62%, respectively.
For the one year period ended April 30, 1999, and since inception (July 26,
1994) for Class B Shares, the average annual total return was 1.27% and 5.60%
respectively. Performance information reflects only the performance of a
hypothetical investment in each class during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Fund's investment objectives and policies, characteristics and
quality of the portfolio, and the market condition during the given time
period, and should not be considered as a representation of what may be
achieved in the future.
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The Fund may also compute aggregate total return for specified periods
based on a hypothetical Class A or Class B account with an assumed initial
investment of $10,000. The aggregate total return is determined by dividing the
net asset value of this account at the end of the specified period by the value
of the initial investment and is expressed as a percentage. Calculation of
aggregate total return reflects payment of the Class A Shares's maximum sales
charge of 4.75% and assumes reinvestment of all income dividends and capital
gain distributions during the period. Based on the foregoing, the Class A
share's aggregate total return quotation for the period commencing May 17, 1983
and ending April 30, 1999 was 238.46%.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, for both classes of shares of the
Fund, both as a percentage and as a dollar amount based on a hypothetical
$10,000 investment for various periods other than those noted below. Such data
will be computed as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charge will not be included with respect to annual, annualized or aggregate
rate of return calculations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser places orders for the purchase and sale of securities,
supervises their execution and negotiates brokerage commissions on behalf of
the Fund. It is the practice of the Adviser to seek the best prices and
execution of orders and to negotiate brokerage commissions which in its opinion
are reasonable in relation to the value of the brokerage services provided by
the executing broker. Brokers who have executed orders for the Fund will be
asked to quote a fair commission for their services. If the execution is
satisfactory and if the requested rate approximates rates currently being
quoted by the other brokers selected by the Adviser, the rate is deemed by the
Adviser to be reasonable. Brokers may ask for higher rates of commission if all
or a portion of the securities involved in the transaction are positioned by
the broker, if the broker believes it has brought the Fund an unusually
favorable trading opportunity, or if the broker regards its research services
as being of exceptional value, and payment of such commissions is authorized by
the Adviser after the transaction has been consummated. If the Adviser more
than occasionally differs with the broker's appraisal of opportunity or value,
the broker would not be selected to execute trades in the future.
The Adviser believes that the Fund benefits with a securities industry
comprised of many and diverse firms and that the long-term interests of
shareholders of the Fund are best served by its brokerage policies which will
include paying a fair commission rather than seeking to exploit its leverage to
force the lowest possible commission rate. The primary factors considered in
determining the firms to which brokerage orders will be given are the Adviser's
appraisal of the firm's ability to execute the order in the desired manner, the
value of research services provided by the firm, and the firm's attitude toward
and interest in mutual funds in general, including those managed and sponsored
by the Adviser. The Adviser does not offer or promise to any broker an amount
or percentage of brokerage commissions as an inducement or reward for the sale
of shares of the Fund. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those circumstances where, in
the opinion of the Adviser, better prices and execution are available
elsewhere. In the over-the-counter market, securities are usually traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually contains a profit
to the dealer. The Fund also expects that securities will be purchased at times
in underwritten offerings where the price includes a fixed amount of
compensation, usually referred to as the underwriter's concession or discount.
In general terms, the nature of research services provided by brokers
encompasses statistical and background information, forecasts and
interpretations with respect to U.S. and foreign economies, U.S. and foreign
money markets, fixed income markets and equity markets, specific industry
groups, and individual issues. Research services will vary from firm to firm
with broadest coverage generally from the large full-line firms. Smaller firms
in general tend to provide information and interpretations on a smaller scale,
frequently with a regional emphasis. In addition, several firms monitor
federal, state, local and foreign political developments; many of the brokers
also provide access to outside consultants. The outside research assistance is
particularly useful to the Adviser's staff since the brokers as a group tend to
monitor a broader universe of securities and other matters than the Adviser's
staff can follow. In addition, it provides the Adviser with a diverse
perspective on financial markets. Research and investment information is
provided by these and other brokers at no cost to the Adviser and is available
for the benefit of other accounts advised by the Adviser and its affiliates and
not all of this information will be used in connection with the Fund. While
this information may be useful in varying degrees and may tend to reduce the
Adviser's expenses, it is not possible to estimate its value and in the opinion
of the Adviser it does not reduce the Adviser's expenses in a determinable
amount. The extent to which the Adviser makes use of statistical, research and
other services furnished by brokers will be considered by the Adviser in the
allocation of brokerage business, but there is no formula by which such
business is allocated. The Adviser will do so in accordance with its judgment
of the best interest of the Fund and its shareholders.
The Fund has adopted a policy and procedures governing the execution of
aggregated advisory client orders ("bunching procedures") in an attempt to
lower commission costs on a per-share and per-dollar basis. According to the
bunching procedures, the Adviser shall aggregate transactions unless it
believes in its sole discretion that such aggregation is inconsistent with its
duty to seek best execution (which shall include the duty to seek best price)
for the Fund. No advisory account of the Adviser is to be favored over any
other account and each account that participates in an aggregated order is
expected to participate at the average
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share price for all transactions of the Adviser in that security on a given
business day, with all transaction costs shared pro rata based on the Fund's
participation in the transaction. If the aggregated order is filled in its
entirety, it shall be allocated among the Adviser's accounts in accordance with
the allocation order, and if the order is partially filled, it shall be
allocated pro rata based on the allocation order. Notwithstanding the
foregoing, the order may be allocated on a basis different from that specified
in the allocation order if all accounts of the Adviser whose orders are
allocated receive fair and equitable treatment and the reason for such
different allocation is explained in writing and is approved in writing by the
Adviser's compliance officer as soon as practicable after the opening of the
markets on the trading day following the day on which the order is executed. If
an aggregated order is partially filled and allocated on a basis different from
that specified in the allocation order, no account that is benefited by such
different allocation may intentionally and knowingly effect any purchase or
sale for a reasonable period following the execution of the aggregated order
that would result in it receiving or selling more shares than the amount of
shares it would have received or sold had the aggregated order been completely
filled. The Directors will annually review these procedures or as frequently as
shall appear appropriate.
SERVICES OF THE ADVISER
The investment adviser to the Fund is Phoenix Investment Counsel, Inc.
("PIC" or "Adviser"), which is located at 56 Prospect Street, Hartford,
Connecticut 06115-0480. PIC also acts as the investment adviser for 14 other
mutual funds, as subadviser to three mutual funds, and as adviser to
institutional clients. PIC has acted as an investment adviser for over sixty
years. PIC was originally organized in 1932 as John P. Chase, Inc. As of
December 31, 1998, PIC had approximately $23.9 billion in assets under
management. Philip R. McLoughlin, a Director and officer of the Fund, is a
director of PIC. All other executive officers of the Fund are officers of PIC.
All of the outstanding stock of PIC is owned by Phoenix Equity Planning
Corporation ("Equity Planning" or "Distributor"), a subsidiary of Phoenix
Investment Partners, Ltd. ("PXP"). PXP is a New York Stock Exchange traded
company that provides investment management and related services to
institutional investors, corporations and individuals through operating
subsidiaries. Phoenix Home Life Mutual Insurance Company ("Phoenix Home Life")
of Hartford, Connecticut is a majority shareholder of PXP. Phoenix Home Life is
in the business of writing ordinary and group life and health insurance and
annuities. Its principal offices are located at One American Row, Hartford,
Connecticut 06115-2520. Equity Planning, a mutual fund distributor, acts as the
national distributor of the Fund's shares and as Financial Agent of the Fund.
The principal office of Equity Planning is located at 100 Bright Meadow
Boulevard, Enfield, Connecticut 06082.
PXP is a publicly-traded independent registered investment advisory firm
and has served investors for over 70 years. It manages over $59.5 billion in
assets (as of June 30, 1999) through its investment partners: Aberdeen Fund
Managers, Inc. (Aberdeen) in Aberdeen, London, Singapore and Fort Lauderdale;
Duff & Phelps Investment Management Co. (Duff & Phelps) in Chicago and
Cleveland; Roger Engemann & Associates, Inc. (Engemann) in Pasadena; Seneca
Capital Management LLC (Seneca) in San Francisco; Zweig/Glaser Advisers (Zweig)
in New York; and Phoenix Investment Counsel, Inc. (Goodwin, Hollister, and
Oakhurst divisions) in Hartford, Sarasota and Scotts Valley, CA, respectively.
The Adviser provides certain services and facilities required to carry on
the day-to-day operations of the Fund (for which it receives a management fee)
other than the costs of printing and mailing proxy materials, reports and
notices to shareholders; legal and auditing services; regulatory filing fees
and expenses of printing the Fund's registration statements (but the
Distributor purchases such copies of the Fund's prospectuses and reports and
communications to shareholders as it may require for sales purposes;
association membership dues; brokerage fees; and taxes.
For services provided and the expenses assumed pursuant to the Investment
Advisory Agreement, the Fund will pay to the Adviser as compensation a monthly
fee at the annual rate of 0.45% of the Fund's average daily net assets up to $1
billion, 0.40% of the Fund's average daily net assets from $1 to $2 billion,
and 0.35% of the Fund's average daily net assets in excess of $2 billion. The
Adviser's fee will be accrued daily against the value of the Fund's net assets
and will be payable monthly by the Fund. Total management fees for the fiscal
years ended April 30, 1997, 1998 and 1999 amounted to $521,952, $488,031 and
$455,088, respectively.
The current Investment Advisory Agreement was approved by the Board of
Directors on November 19, 1996 and by the shareholders on March 14, 1997.
Effective June 1, 1998, National Securities & Research Corporation ("National")
assigned its investment advisory agreement to PIC and PIC now serves as the
Adviser for the Fund. PIC and National are both subsidiaries of PXP. The
Investment Advisory Agreement will continue in effect from year to year if
specifically approved annually by a majority of the Directors who are not
interested persons of the parties thereto, as defined in the 1940 Act, and by
either (a) the Board of Directors or (b) the vote of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). The
Agreement may be terminated without penalty at any time by the Directors or by
a vote of a majority of the outstanding voting securities of the Fund or by the
Adviser upon 60 days' written notice and will automatically terminate in the
event of its "assignment" as defined in Section 2(a)(4) of the 1940 Act.
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NET ASSET VALUE
The net asset value per share of the Fund is determined as of the close of
trading of the New York Stock Exchange (the "Exchange") on days when the
Exchange is open for trading. The Exchange will be closed on the following
observed national holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset value per share of the Fund
is determined by adding the values of all securities and other assets of the
Fund, subtracting liabilities, and dividing by the total number of outstanding
shares of the Fund. Assets and liabilities are determined in accordance with
generally accepted accounting principles and applicable rules and regulations
of the Securities and Exchange Commission. The total liability allocated to a
class, plus that class's distribution fee and any other expenses allocated
solely to that class, are deducted from the proportionate interest of such
class in the assets of the Fund, and the resulting amount of each is divided by
the number of shares of that class outstanding to produce the net asset value
per share.
A security that is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary exchange for such
security by the Directors or their delegates. Any assets and liabilities
initially expressed in foreign currency values will be converted into United
States dollar values at the mean between the bid and ask quotations of such
currencies against United States dollars as last quoted by any recognized
dealer. If an event were to occur after the value of an investment was so
established but before the net asset value per share was determined, which was
likely to materially change the net asset value, then the instrument would be
valued using fair value considerations by the Directors or their delegates. If
at any time the Fund has investments where market quotations are not readily
available, such investments are valued at the fair value thereof as determined
in good faith by the Directors although the actual calculations may be made by
persons acting pursuant to the direction of the Directors.
HOW TO BUY SHARES
The minimum initial investment is $500 and the minimum subsequent
investment is $25. However, both the minimum initial and subsequent investment
amounts are $25 for investments pursuant to the "Investo-Matic" plan, a bank
draft investing program administered by Distributor, or pursuant to the
Systematic Exchange privilege or for an individual retirement account (IRA). In
addition, there are no subsequent investment minimum amounts in connection with
the reinvestment of dividend or capital gain distributions. Completed
applications for the purchase of shares should be mailed to: Phoenix Funds, c/o
State Street Bank and Trust Company, P.O. Box 8301, Boston, MA 02266-8301. See
the Fund's current Prospectus for more information.
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts
the order. Customer orders will be priced at the Fund's net asset value next
computed after they are accepted by an authorized broker or the broker's
authorized designee.
ALTERNATIVE PURCHASE ARRANGEMENTS
Shares may be purchased from investment dealers at a price equal to their
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a contingent deferred basis (the
"deferred sales charge alternative"). Orders received by dealers prior to the
close of trading on the New York Stock Exchange are confirmed at the offering
price effective at that time, provided the order is received by the Authorized
Agent prior to its close of business.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is more beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, whether
the investor wishes to receive distributions in cash or to reinvest them in
additional shares of the Fund, and other circumstances. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated continuing distribution and services fees and contingent
deferred sales charges on Class B Shares would be less than the initial sales
charge and accumulated distribution services fee on Class A Shares purchased at
the same time.
Dividends paid by the Fund, if any, with respect to each Class of Shares
will be calculated in the same manner at the same time on the same day, except
that fees such as higher distribution and services fees and any incremental
transfer agency costs relating to each Class of Shares will be borne
exclusively by that class. See "Dividends, Distributions and Taxes."
Class A Shares
Class A Shares incur a sales charge when they are purchased and enjoy the
benefit of not being subject to any sales charge when they are redeemed. Class
A Shares are subject to ongoing distribution and services fees at an annual
rate of 0.25% of the Fund's aggregate average daily net assets attributable to
the Class A Shares. In addition, certain purchases of Class A Shares qualify
for reduced initial sales charges.
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Class B Shares
Class B Shares do not incur a sales charge when they are purchased, but
they are subject to a sales charge if they are redeemed within five years of
purchase. The deferred sales charge may be waived in connection with certain
qualifying redemptions.
Class B Shares are subject to ongoing distribution and services fees at an
aggregate annual rate of up to 1.00% of the Fund's aggregate average daily net
assets attributable to the Class B Shares. Class B Shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment
is made. The higher ongoing distribution and services fees paid by Class B
Shares will cause such shares to have a higher expense ratio and to pay lower
dividends, to the extent any dividends are paid, than those related to Class A
Shares. Class B Shares will automatically convert to Class A Shares eight years
after the end of the calendar month in which the shareholder's order to
purchase was accepted. The purpose of the conversion feature is to relieve the
holders of the Class B Shares that have been outstanding for a period of time
sufficient for the adviser and the Distributor to have been compensated for
distribution expenses related to the Class B Shares from most of the burden of
such distribution related expenses.
Class B Shares include all shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
eight years after the end of the month in which the shares were issued. At the
end of this period, Class B Shares will automatically convert to Class A Shares
and will no longer be subject to the higher distribution and services fees.
Such conversion will be on the basis of the relative net asset value of the two
classes without the imposition of any sales load, fee or other charge.
For purposes of conversion to Class A Shares, shares purchased through the
reinvestment of dividends and distributions paid in respect of Class B Shares
in a shareholder's Fund account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's Fund account
(other than those in the sub-account) convert to Class A, an equal pro rata
portion of the Class B Share dividends in the sub-account will also convert to
Class A Shares.
Class A Shares--Reduced Initial Sales Charges
Investors choosing Class A Shares may be entitled to reduced sales
charges. The ways in which sales charges may be avoided or reduced are
described below.
Qualified Purchasers. If you fall within any one of the following
categories, you will not have to pay a sales charge on your purchase of Class A
Shares: (1) trustee, director or officer of the Phoenix Funds, the
Phoenix-Engemann Funds, Phoenix-Seneca Funds or any other mutual fund advised,
subadvised or distributed by the Adviser, Distributor or any of their corporate
affiliates (an "Affiliated Phoenix Fund"); (2) any director or officer, or any
full-time employee or sales representative (for at least 90 days) of the
Adviser or Distributor; (3) registered representatives and employees of
securities dealers with whom Distributor has sales agreements; (4) any
qualified retirement plan exclusively for persons described above; (5) any
officer, director or employee of a corporate affiliate of the Adviser or
Distributor; (6) any spouse, child, parent, grandparent, brother or sister of
any person named in (1), (2), (3) or (5) above; (7) employee benefit plans for
employees of the Adviser, Distributor and/or their corporate affiliates; (8)
any employee or agent who retires from Phoenix Home Life, Distributor and/or
their corporate affiliates; (9) any account held in the name of a qualified
employee benefit plan, endowment fund or foundation if, on the date of the
initial investment, the plan, fund or foundation has assets of $10,000,000 or
more or at least 100 eligible employees; (10) any person with a direct rollover
transfer of shares from an established Phoenix Fund or any other Affiliated
Phoenix Fund qualified plan; (11) any Phoenix Home Life separate account which
funds group annuity contracts offered to qualified employee benefit plans; (12)
any state, county, city, department, authority or similar agency prohibited by
law from paying a sales charge; (13) any fully matriculated student in any U.S.
service academy; (14) any unallocated account held by a third party
administrator, registered investment adviser, Fund company, or bank Fund
department which exercises discretionary authority and holds the account in a
fiduciary, agency, custodial or similar capacity, if in the aggregate such
accounts held by such entity equal or exceed $1,000,000; (15) any person who is
investing redemption proceeds from investment companies other than the Phoenix
Funds or any other Affiliated Phoenix Fund if, in connection with the purchases
or redemption of the redeemed shares, the investor paid a prior sales charge
provided such investor supplies verification that the redemption occurred
within 90 days of the Phoenix Fund purchase and that a sales charge was paid;
(16) any deferred compensation plan established for the benefit of any Phoenix
Fund or any other Affiliated Phoenix Fund trustee or director; provided that
sales to persons listed in (1) through (16) above are made upon the written
assurance of the purchaser that the purchase is made for investment purposes
and that the shares so acquired will not be resold except to the Fund; (17)
purchasers of Class A Shares bought through investment advisers and financial
planners who charge an advisory, consulting or other fee for their services and
buy shares for their own accounts or the accounts of their clients; (18)
retirement plans and deferred compensation plans and trusts used to fund those
plans (including, for example, plans qualified or created under sections
401(a), 403(b) or 457 of the Internal Revenue Code), and "rabbi trusts" that
buy shares for their own accounts, in each case if those purchases are made
through a broker or agent or other financial intermediary that has made special
arrangements with the Distributor for such purchases; or (19) 401(k)
participants in the Merrill Lynch Daily K Plan (the "Plan") if the Plan has at
least $3 million in assets or 500 or more eligible employees; or clients of
investment advisors or financial planners
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who buy shares for their own accounts but only if their accounts are linked to
a master account of their investment advisor or financial planner on the books
and records of the broker, agent or financial intermediary with which the
Distributor has made such special arrangements (each of the investors described
in (17) through (19) may be charged a fee by the broker, agent or financial
intermediary for purchasing shares).
Combination Purchase Privilege. Your purchase of any class of shares of
this or any other Affiliated Phoenix Fund (other than Phoenix Money Market Fund
Series Class A Shares), if made at the same time by the same "person," will be
added together to determine whether the combined sum entitles you to an
immediate reduction in sales charges. A "person" is defined in this and the
following sections as (a) any individual, their spouse and minor children
purchasing shares for his or their own account (including an IRA account)
including his or their own trust; (b) a trustee or other fiduciary purchasing
for a single trust, estate or single fiduciary account (even though more than
one beneficiary may exist); (c) multiple employer trusts or Section 403(b)
plans for the same employer; (d) multiple accounts (up to 200) under a
qualified employee benefit plan or administered by a third party administrator;
or (e) trust companies, bank trust departments, registered investment advisers,
and similar entities placing orders or providing administrative services with
respect to funds over which they exercise discretionary investment authority
and which are held in a fiduciary, agency, custodial or similar capacity,
provided all shares are held of record in the name, or nominee name, of the
entity placing the order.
An "Affiliated Phoenix Fund" means any other mutual fund advised,
subadvised or distributed by the Adviser or Distributor or any corporate
affiliate of either or both the Adviser and Distributor provided such other
mutual fund extends reciprocal privileges to shareholders of the Phoenix Fund.
Letter of Intent. If you sign a Letter of Intent, your purchase of any
class of shares of this or any other Affiliated Phoenix Fund (other than
Phoenix Money Market Fund Series Class A Shares), if made by the same person
within a 13-month period, will be added together to determine whether you are
entitled to an immediate reduction in sales charges. Sales charges are reduced
based on the overall amount you indicate that you will buy under the Letter of
Intent. The Letter of Intent is a mutually non-binding arrangement between you
and the Distributor. Since the Distributor doesn't know whether you will
ultimately fulfill the Letter of Intent, shares worth 5% of the amount of each
purchase will be set aside until you fulfill the Letter of Intent. When you buy
enough shares to fulfill the Letter of Intent, these shares will no longer be
restricted. If, on the other hand, you do not satisfy the Letter of Intent, or
otherwise wish to sell any restricted shares, you will be given the choice of
either buying enough shares to fulfill the Letter of Intent or paying the
difference between any sales charge you previously paid and the otherwise
applicable sales charge based on the intended aggregate purchases described in
the Letter of Intent. You will be given 20 days to make this decision. If you
do not exercise either election, the Distributor will automatically redeem the
number of your restricted shares needed to make up the deficiency in sales
charges received. The Distributor will redeem restricted Class A Shares before
Class C or B Shares, respectively. Oldest shares will be redeemed before
selling newer shares. Any remaining shares will then be deposited to your
account.
Right of Accumulation. Your purchase of any class of shares of this or any
other Affiliated Phoenix Fund, if made over time by the same person may be
added together to determine whether the combined sum entitles you to a
prospective reduction in sales charges. You must provide certain account
information to the Distributor to exercise this right.
Associations. Certain groups or associations may be treated as a "person"
and qualify for reduced Class A Share sales charges. The group or association
must: (1) have been in existence for at least six months; (2) have a legitimate
purpose other than to purchase mutual fund shares at a reduced sales charge;
(3) work through an investment dealer; or (4) not be a group whose sole reason
for existing is to consist of members who are credit card holders of a
particular company, policyholders of an insurance company, customers of a bank
or a broker-dealer or clients of an investment adviser.
Class B Shares--Waiver of Sales Charges
The CDSC is waived on the redemption (sale) of Class B Shares if the
redemption is made (a) within one year of death (i) of the sole shareholder on
an individual account, (ii) of a joint tenant where the surviving joint tenant
is the deceased's spouse, or (iii) of the beneficiary of a Uniform Gifts to
Minors Act (UGMA), Uniform Transfers to Minors Act (UTMA) or other custodial
account; (b) within one year of disability, as defined in Code Section
72(m)(7); (c) as a mandatory distribution upon reaching age 70-1/2 under any
retirement plan qualified under Code Sections 401, 408 or 403(b) or resulting
from the tax-free return of an excess contribution to an IRA; (d) by 401(k)
plans using an approved participant tracking system for participant hardships,
death, disability or normal retirement, and loans which are subsequently
repaid; (e) from the Merrill Lynch Daily K Plan ("Plan") invested in Class B
Shares, in which such shares the Distributor has not paid the dealer the Class
B sales commission; (f) based on the exercise of exchange privileges among
Class B Shares of this or any other Affiliated Phoenix Fund; (g) based on any
direct rollover transfer of shares from an established Affiliated Phoenix Fund
qualified plan into an Affiliated Phoenix Fund IRA by participants terminating
from the qualified plan; and (h) based on the systematic withdrawal program.
If, as described in condition (a) above, an account is transferred to an
account registered in the name of a deceased's estate, the CDSC will be waived
on any redemption from the estate account occurring within one year of the
death. If the Class B Shares are not redeemed within one year of the death,
they will remain subject to the applicable CDSC.
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Conversion Features--Class B Shares
Class B Shares will automatically convert to Class A Shares of the same
Portfolio eight years after they are purchased. Conversion will be on the basis
of the then prevailing net asset value of Class A and B Shares. There is no
sales load, fee or other charge for this feature. Class B Shares acquired
through dividend or distribution reinvestments will be converted into Class A
Shares at the same time that other Class B Shares are converted based on the
proportion that the reinvested shares bear to purchased Class B Shares. The
conversion feature is subject to the continuing availability of an opinion of
counsel or a ruling of the Internal Revenue Service that the assessment of the
higher distribution fees and associated costs with respect to Class B Shares
does not result in any dividends or distributions constituting "preferential
dividends" under the Code, and that the conversion of shares does not
constitute a taxable event under federal income tax law. If the conversion
feature is suspended, Class B Shares would continue to be subject to the higher
distribution fee for an indefinite period. Even if the Fund was unable to
obtain such assurances, it might continue to make distributions if doing so
would assist in complying with its general practice of distributing sufficient
income to reduce or eliminate federal taxes otherwise payable by the Fund.
INVESTOR ACCOUNT SERVICES
The Fund offers accumulation plans, withdrawal plans and reinvestment and
exchange privileges. Certain privileges may not be available in connection with
all classes. In most cases, changes to account services may be accomplished
over the phone. Inquiries regarding policies and procedures relating to
shareholder account services should be directed to Shareholder Services at
(800) 243-1574.
Exchanges. Under certain circumstances, shares of any Affiliated Phoenix
Fund may be exchanged for shares of the same Class of another Affiliated
Phoenix Fund on the basis of the relative net asset values per share at the
time of the exchange. Exchanges are subject to the minimum initial investment
requirement of the designated Series or Fund except if made in connection with
the Systematic Exchange privilege. Shareholders may exchange shares held in
book-entry form for an equivalent number (value) of the same class of shares of
any other Affiliated Phoenix Fund, if currently offered. Exchanges will be
based upon each Fund's net asset value per share next computed following
receipt of a properly executed exchange request, without sales charge. On
exchanges with Share Classes that carry a contingent deferred sales charge, the
CDSC schedule of the original shares purchased continues to apply. The exchange
of shares is treated as a sale and purchase for federal income tax purposes
(see also "Dividends, Distributions and Taxes").
Systematic Exchanges. If the conditions above have been met, you or your
broker may, by telephone or written notice, elect to have shares exchanged for
the same class of shares of another Affiliated Phoenix Fund automatically on a
monthly, quarterly, semi-annual or annual basis or may cancel this privilege at
any time. If you maintain an account balance of at least $5,000, or $2,000 for
tax qualified retirement benefit plans (calculated on the basis of the net
asset value of the shares held in a single account), you may direct that shares
be automatically exchanged at predetermined intervals for shares of the same
class of another Affiliated Phoenix Fund. This requirement does not apply to
Phoenix "Self Security" program participants. Systematic exchanges will be
executed upon the close of business on the 10th day of each month or the next
succeeding business day. Systematic exchange forms are available from the
Distributor.
Dividend Reinvestment Across Accounts. If you maintain an account balance
of at least $5,000, or $2,000 for tax qualified retirement benefit plans
(calculated on the basis of the net asset value of the shares held in a single
account), you may direct that any dividends and distributions paid with respect
to shares in that account be automatically reinvested in a single account of
one of the other Affiliated Phoenix Funds at net asset value. You should obtain
a current prospectus and consider the objectives and policies of each fund
carefully before directing dividends and distributions to another fund.
Reinvestment election forms and prospectuses are available from Equity
Planning. Distributions may also be mailed to a second payee and/or address.
Requests for directing distributions to an alternate payee must be made in
writing with a signature guarantee of the registered owner(s). To be effective
with respect to a particular dividend or distribution, notification of the new
distribution option must be received by the Transfer Agent at least three days
prior to the record date of such dividend or distribution. If all shares in
your account are repurchased or redeemed or transferred between the record date
and the payment date of a dividend or distribution, you will receive cash for
the dividend or distribution regardless of the distribution option selected.
Invest-by-Phone. This expedited investment service allows a shareholder to
make an investment in an account by requesting a transfer of funds from the
balance of their bank account. Once a request is phoned in, Equity Planning
will initiate the transaction by wiring a request for monies to the
shareholder's commercial bank, savings bank or credit union via Automated
Clearing House (ACH). The shareholder's bank, which must be an ACH member, will
in turn forward the monies to Equity Planning for credit to the shareholder's
account. ACH is a computer based clearing and settlement operation established
for the exchange of electronic transactions among participating depository
institutions.
To establish this service, please complete an Invest-by-Phone Application
and attach a voided check if applicable. Upon Equity Planning's acceptance of
the authorization form (usually within two weeks) shareholders may call toll
free (800) 367-5877 prior to 3:00 p.m. (New York time) to place their purchase
request. Instructions as to the account number and amount to be invested
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must be communicated to Equity Planning. Equity Planning will then contact the
shareholder's bank via ACH with appropriate instructions. The purchase is
normally credited to the shareholder's account the day following receipt of the
verbal instructions. The Fund may delay the mailing of a check for redemption
proceeds of Fund shares purchased with a check or via Invest-by-Phone service
until the Fund has assured itself that good payment has been collected for the
purchase of the shares, which may take up to 15 days. The Fund and Equity
Planning reserve the right to modify or terminate the Invest-by-Phone service
for any reason or to institute charges for maintaining an Invest-by-Phone
account.
Systematic Withdrawal Program. The Systematic Withdrawal Program allows
you to periodically redeem a portion of your account on a predetermined
monthly, quarterly, semiannual or annual basis. A sufficient number of full and
fractional shares will be redeemed so that the designated payment is made on or
about the 20th day of the month. Shares are tendered for redemption by the
Transfer Agent, as agent for the shareowner, on or about the 15th of the month
at the closing net asset value on the date of redemption. The Systematic
Withdrawal Program also provides for redemptions to be tendered on or about the
10th, 15th or 25th of the month with proceeds to be directed through Automated
Clearing House (ACH) to your bank account. In addition to the limitations
stated below, withdrawals may not be less than $25 and minimum account balance
requirements shall continue to apply.
Shareholders participating in the Systematic Withdrawal Program must own
shares of a Fund worth $5,000 or more, as determined by the then current net
asset value per share, and elect to have all dividends reinvested. The purchase
of shares while participating in the withdrawal program will ordinarily be
disadvantageous to the Class A Shares investor since a sales charge will be
paid by the investor on the purchase of Class A Shares at the same time as
other shares are being redeemed. For this reason, investors in Class A Shares
may not participate in an automatic investment program while participating in
the Systematic Withdrawal Program.
Through the Program, Class B shareholders may withdraw up to 1% of their
aggregate net investments (purchases, at initial value, to date net of
non-Program redemptions) each month or up to 3% of their aggregate net
investments each quarter without incurring otherwise applicable contingent
deferred sales charges. Class B shareholders redeeming more shares than the
percentage permitted by the withdrawal program will be subject to any
applicable contingent deferred sales charge on all shares redeemed.
Accordingly, the purchase of Class B Shares will generally not be suitable for
an investor who anticipates withdrawing sums in excess of the above limits
shortly after the purchase.
HOW TO REDEEM SHARES
Under the 1940 Act, payment for shares redeemed must ordinarily be made
within seven days after tender. The right to redeem shares may be suspended and
payment therefor postponed during periods when the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or if permitted by
rules of the Securities and Exchange Commission, during periods when trading on
the Exchange is restricted or during any emergency which makes it impracticable
for the Fund to dispose of its securities or to determine fairly the value of
its net assets or during any other period permitted by order of the Securities
and Exchange Commission for the protection of investors. Furthermore, the
Transfer Agent will not mail redemption proceeds until checks received for
shares purchased have cleared, which may take up to 15 days, but payment will
be forwarded immediately upon demand. See the Fund's current Prospectus for
further information.
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts
the order. Customer orders will be priced at the Fund's net asset value next
computed after they are accepted by an authorized broker or the broker's
authorized designee.
Redemptions by Class B shareholders will be subject to the applicable
deferred sales charge, if any.
Redemption of Small Accounts. Each shareholder account in the Fund which
has been in existence for at least one year and has a value of less than $200
may be redeemed upon the giving of not less than 30 days' written notice to the
shareholder mailed to the address of record. During the 30-day period the
shareholder has the right to add to the account to bring its value to $200 or
more. See the Fund's current Prospectus for more information.
By Mail. Shareholders may redeem shares by making written request,
executed in the full name of the account, directly to Phoenix Funds, c/o State
Street Bank and Trust Company, P.O. Box 8301, Boston, MA 02266-8301. However,
when certificates for shares are in the possession of the shareholder, they
must be mailed or presented, duly endorsed in the full name of the account,
with a written request to Equity Planning that the Fund redeem the shares. See
the Fund's current Prospectus for more information.
Telephone Redemption. Shareholders who do not have certificated shares
may redeem up to $50,000 worth of their shares by telephone. See the Fund's
current Prospectus for additional information.
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By Check. You may elect to redeem shares held in your account by check.
Checks will be sent to you upon receipt by Equity Planning of a completed
application and signature card (attached to the application). If the signature
card accompanies your initial account application, the signature guarantee
section of the form may be disregarded. However, the Fund reserves the right to
require that all signatures be guaranteed prior to the establishment of a check
writing service account. When an authorization form is submitted after receipt
of the initial account application, all signatures must be guaranteed
regardless of account value.
Checks may be drawn payable to any person in an amount of not less than
$500, provided that immediately after the payment of redemption proceeds the
balance in your account is $500 or more.
When a check is presented to Equity Planning for payment, a sufficient
number of full and fractional shares in your account will be redeemed to cover
the amount of the check. The number of shares to be redeemed will be determined
on the date the check is received by the Transfer Agent. Presently there is no
charge to you for the check writing service, but this may be changed or
modified in the future upon two weeks written notice to shareholders. Checks
drawn from Class B accounts are subject to the applicable deferred sales
charge, if any.
The checkwriting procedure for redemption enables you to receive income
accruing on the shares to be redeemed until such time as the check is presented
to Equity Planning for payment. Inasmuch as canceled checks are returned to
shareholders monthly, no confirmation statement is issued at the time of
redemption.
Shareholders utilizing withdrawal checks will be subject to Equity
Planning's rules governing checking accounts. You should make sure that there
are sufficient shares in your account to cover the amount of any check drawn.
If insufficient shares are in the account and the check is presented to Equity
Planning on a banking day on which the Fund does not redeem shares (for
example, a day on which the New York Stock Exchange is closed), or if the check
is presented against redemption proceeds of an investment made by check which
has not been in the account for at least fifteen calendar days, the check may
be returned marked "Non-sufficient Funds" and no shares will be redeemed. You
may not close your account by a withdrawal check because the exact value of the
account will not be known until after the check is received by Equity Planning.
Redemption in Kind. To the extent consistent with state and federal law,
the Fund may make payment of the redemption price either in cash or in kind.
However, the Fund has elected to pay in cash all requests for redemption by any
shareholder of record, limited in respect to each shareholder during any 90-day
period to the lesser of $250,000 or 1% of the net asset value ofthe Fund at the
beginning of such period. This election has been made pursuant to Rule 18f-1
under the Investment Act of 1940 and is irrevocable while the Rule is in effect
unless the Securities and Exchange Commission, by order, permits the withdrawal
thereof. In case of a redemption in kind, securities delivered in payment for
shares would be readily marketable and valued at the same value assigned to
them in computing the net asset value per share of the Fund. A shareholder
receiving such securities would incur brokerage costs when selling the
securities.
Reinvestment Privilege. Shareholders who may have overlooked features of
their investment at the time they redeemed have a privilege of reinstatement of
their investment at net asset value. See the Fund's current Prospectus for more
information and conditions attached to the privilege.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to remain qualified as a regulated investment company
under certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, the Fund will not be subject to federal income
tax on such part of its ordinary income and net realized capital gains which it
distributes to shareholders provided it meets certain distribution
requirements. To qualify for treatment as a regulated investment company, the
Fund must, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividends, interest and gains from the sale or other
disposition of securities and (b) diversify its holdings so that, at the end of
each quarter of the taxable year (i) at least 50% of the market value of the
Fund's assets are represented by cash, U.S. Government Securities, securities
of other regulated investment companies and other securities of any one issuer
limited for purposes of this calculation to an amount not greater than 5% of
the Fund's total assets and 10% of the outstanding voting securities of any one
issuer and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies). If, in any taxable
year, the Fund does not qualify as a regulated investment company, all of its
taxable income will be taxed to the Fund at corporate rates and the Fund would
not be eligible to pay exempt interest dividends.
Interest on certain "qualified private activity bonds" issued after August
7, 1986, although otherwise tax-exempt, is treated as a tax preference item for
alternative minimum tax purposes. Under regulations to be promulgated, the
Fund's exempt interest dividends will be treated as a tax preference item for
purposes of computing the alternative minimum tax liability of shareholders to
the extent attributable to interest paid on "private activity" bonds.
The Fund declares a daily dividend, which is accrued and is paid monthly.
Income dividends and capital gains are reinvested automatically in additional
shares at net asset value unless the shareholder elects to receive
distributions in cash. If a shareholder withdraws the entire amount in the
account at any time during the month, all dividends accrued to the date of
liquidation will be paid to the shareholder along with the proceeds from the
redemption of shares.
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Distribution by the Fund of interest income from tax exempt bonds will not
be taxable to shareholders and will not be included in their respective gross
incomes for federal income tax purposes provided that certain conditions are
met. Distributions or parts thereof derived from interest received on
California state and local issues and U.S. Government Obligations held in the
portfolio will be exempt from California personal income taxes in ratable
proportion of the California investments and U.S. Government Obligations of the
Fund, provided that the Fund has complied with the requirement that at least
50% of its assets be invested in California state and local issues and U.S.
Government issues at the end of each fiscal quarter. The Fund intends to comply
with this standard since at least 80% of the assets of the Fund will normally
be invested in California municipal securities. Distributions derived from
other earnings will be subject to California personal income tax for California
residents and other persons subject to California income tax. Distributions, if
any, of the excess of net long-term capital gain over net short-term capital
loss will be made at least annually and will be taxable to shareholders (and
not the Fund) as long-term capital gain regardless of how long shareholders
have held the Fund shares. The maximum federal capital gains rate for
individuals is 20% with respect to capital assets held more than 12 months. The
maximum capital gains rate for corporate shareholders is the same as the
maximum tax rate for ordinary income. The Fund has no plans to make a
distribution of capital gains realized during any year in which there is a tax
loss carry forward available to offset such gains; however, this is subject to
review in the future. All net realized long- or short-term capital gains, if
any, are declared and distributed to the Fund's shareholders annually.
Distributions of net income from certain temporary investments (such as net
interest income from taxable commercial paper) and short-term capital gains, if
any, will be taxable as ordinary income whether received in cash or in shares.
Any gain or loss realized by a shareholder on the sale or redemption of shares
will be long- or short-term capital gain or loss, depending upon the length of
the shareholder's holding period. However, any loss realized on the sale of
shares held for six months or less will be long-term loss to the extent of long
term capital gains received by the shareholder. A shareholder will not be
permitted to deduct for federal income tax purposes interest on indebtedness
incurred to purchase or carry shares.
The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98% of the Fund's net ordinary income,
with certain adjustments, for such calendar year, plus 98% of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. In addition, an amount equal to any undistributed investment
company taxable income or capital gain net income from the previous reporting
year must also be distributed to avoid the excise tax. The excise tax will not,
however, generally apply to a regulated investment company such as the Fund
that invests substantially in tax-exempt investments. In addition, if the Fund
has taxable income that would be subject to the excise tax, the Fund intends to
distribute such income so as to avoid payment of the excise tax.
Pursuant to Code section 852(b)(7), any dividend declared by a fund to
shareholders of record in October, November and 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, and will be taxable to, shareholders as of
December 31 of such year, provided that the dividend is actually paid by the
Fund in January of the following year.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on
the disposition of those shares. This rule applies where shares of the Fund are
disposed of within 90 days after the date on which they were acquired and new
shares of a regulated investment company are acquired without a sales charge or
at a reduced sales charge. In that case, the gain or loss realized on the
disposition will be determined by excluding from the tax basis of the shares
disposed of all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result
of the shareholder having incurred a sales charge initially. The portion of the
sales charge affected by this rule will be treated as a sales charge paid for
the new shares.
Some shareholders may be subject to withholding of federal income tax on
dividends and redemption payments from the Fund ("backup withholding") at the
rate of 31%. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. Generally,
shareholders subject to backup withholding will be (i) those for whom a
certified taxpayer identification number is not on file with the Fund, (ii)
those about whom notification has been received (either by the shareholder or
the Fund) from the Internal Revenue Service that they are subject to backup
withholding or (iii) those who, to the Fund's knowledge, have furnished an
incorrect taxpayer identification number. Generally, to avoid backup
withholding, an investor must, at the time an account is opened, certify under
penalties of perjury that the taxpayer identification number furnished is
correct and that he or she is not subject to backup withholding.
The Fund furnishes all shareholders, within 31 days after the end of the
calendar year, with information which is required by the Internal Revenue
Service for preparing federal income tax returns (the percentage of all income
distributions made during a fiscal year designated as tax exempt will be
uniform).
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of tax exempt bonds
for investment by the Fund and the value of the Fund's portfolio would be
affected. The Directors would then re-evaluate the Fund's investment objective
and policies.
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TAX SHELTERED RETIREMENT PLANS
Shares of the Fund are offered in connection with the following qualified
prototype retirement plans: IRA, Rollover IRA, SEP-IRA, SIMPLE IRA, Roth IRA,
401(k), Profit-Sharing, Money Purchase Pension Plans and 403(b) Retirement
Plans. Write or call Equity Planning (800) 243-4361 for further information
about the plans.
Merrill Lynch Daily K Plan
Class A Shares of a Fund are made available to Merrill Lynch Daily K Plan
(the "Plan") participants at NAV without an initial sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch
and, on the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management L.P. ("MLAM")
that are made available pursuant to a Service Agreement between Merrill Lynch
and the fund's principal underwriter or distributor and in funds advised or
managed by MLAM (collectively, the "Applicable Investments").
(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as determined by a
Merrill Lynch plan conversion manager, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Alternatively, Class B Shares of a Fund are made available to Plan
participants at NAV without a CDSC if the Plan conforms with the requirements
for eligibility set forth in (i) through (iii) above but either does not meet
the $3 million asset threshold or does not have 500 or more eligible employees.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing
in Class B Shares of a Fund convert to Class A Shares once the Plan has reached
$5 million invested in Applicable Investments, or after the normal holding
period of seven years from the initial date of purchase.
THE DISTRIBUTOR
Phoenix Equity Planning Corporation ("Equity Planning") acts as the
Distributor for the Fund and as such will conduct a continuous offering
pursuant to a "best efforts" arrangement requiring the Distributor to take and
pay for only such securities as may be sold to the public. Equity Planning is
an indirect less than wholly-owned subsidiary of Phoenix Home Life and an
affiliate of the Adviser. Shares of the Fund may be purchased through
investment dealers who have sales agreements with the Distributor. The
Distributor purchases such number of copies of the Fund's Prospectus, Statement
of Additional Information and reports to shareholders as it may require for
sales purposes. During the fiscal years ended April 30, 1997, 1998, and 1999,
purchasers of Fund shares paid aggregate sales charges of $96,217, $69,141 and
$42,581, respectively, of which the Distributor received net commissions of
$18,320, $15,777 and $7,674, respectively, for its services, the balance being
paid to dealers. For the fiscal year ended April 30, 1999, the Distributor
received net commissions of $4,593 for Class A Shares and deferred sales
charges of $3,081 for Class B Shares.
The Underwriting Agreement may be terminated at any time on not more than
60 days written notice, without payment of a penalty, by the Distributor, by
vote of a majority of the outstanding voting securities of the Fund, or by vote
of a majority of the Fund's Directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Distribution Plans or in any related agreements. The Underwriting Agreement
will terminate automatically in the event of its assignment.
Dealer Concessions
Dealers with whom the Distributor has entered into sales agreements
received a discount or commission as set forth below:
<TABLE>
<CAPTION>
Amount of
Transaction Sales Charge as a percentage of Sales Charge as a percentage of Dealer Discount
at Offering Price Offering Price Amount Invested Percentage of Offering Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $50,000 4.75% 4.99% 4.25%
$50,000 but under $100,000 4.50 4.71 4.00
$100,000 but under $250,000 3.50 3.63 3.00
$250,000 but under $500,000 3.00 3.09 2.75
$500,000 but under $1,000,000 2.00 2.04 1.75
$1,000,000 or more None None None
</TABLE>
21
<PAGE>
In addition to the dealer discount on purchases of Class A Shares, the
Distributor intends to pay investment dealers a sales commission of 4% of the
sale price of Class B Shares sold by such dealers. This sales commission will
not be paid to dealers for sales of Class B or Class C Shares purchased by
401(k) participants of the Merrill Lynch Daily K Plan (the "Plan") due to
waiver of the CDSC for these Plan participants' purchases. Your broker, dealer
or investment adviser may also charge you additional commissions or fees for
their services in selling shares to you provided they notify the Distributor of
their intention to do so.
Dealers and other entities who enter into special arrangements with the
Distributor may receive compensation for the sale and promotion of shares of
the Funds and/or for providing other shareholder services. Such fees are in
addition to the sales commissions referenced above and may be based upon the
amount of sales of fund shares by a dealer; the provision of assistance in
marketing of fund shares; access to sales personnel and information
dissemination services; provision of recordkeeping and administrative services
to qualified employee benefit plans; and other criteria as established by the
Distributor. Depending on the nature of the services, these fees may be paid
either from the Funds through distribution fees, service fees or transfer agent
fees or, in some cases, the Distributor may pay certain fees from its own
profits and resources. From its own profits and resources, the Distributor does
intend to: (a) sponsor training and educational meetings and provide additional
compensation to qualifying dealers in the form of trips, merchandise or expense
reimbursements; (b) from time to time pay special incentive and retention fees
to qualified wholesalers, registered financial institutions and third party
marketers; (c) pay broker/dealers an amount equal to 1% of the first $3 million
of Class A Share purchases by an account held in the name of a qualified
employee benefit plan with at least 100 eligible employees, 0.50% on the next
$3 million, plus 0.25% on the amount in excess of $6 million; and (d) excluding
purchases as described in (c) above, pay broker/dealers an amount equal to 1%
of the amount of Class A Shares sold above $1 million but under $3 million,
0.50% on the next $3 million, plus 0.25% on the amount in excess of $6 million.
If part or all of such investment, including investments by qualified employee
benefit plans, is subsequently redeemed within one year of the investment date,
the broker-dealer will refund to the Distributor such amounts paid with respect
to the investment. In addition, the Distributor may pay the entire applicable
sales charge on purchases of Class A Shares to selected dealers and agents.
From its own profits and resources, the Distributor intends to pay the
following additional compensation to Merrill Lynch, Pierce, Fenner & Smith,
Inc., 0.25% on sales of Class A and B shares, 0.10% on sales of Class C shares,
0.10% on sales of Class A shares sold at net asset value, and 0.10% annually on
the average daily net asset value of fund shares on which Merrill Lynch is
broker of record and which such shares exceed the amount of assets on which
Merrill Lynch is broker of record as of July 1, 1999. Any dealer who receives
more than 90% of a sales charge may be deemed to be an "underwriter" under the
Securities Act of 1933. Equity Planning reserves the right to discontinue or
alter such fee payment plans at any time.
Administrative Services
Equity Planning also acts as financial agent of the Fund and as such
performs administrative, bookkeeping and pricing functions for the Fund. For
its services as financial agent, Equity Planning will be paid a fee equal to
the sum of (1) the documented cost of fund accounting and related services
provided by PFPC, Inc., as subagent, to the financial agent, plus (2) the
documented cost to the financial agent to provide financial reporting and tax
services and oversight of the subagent's performance. The current fee schedule
of PFPC, Inc. is based upon the average of the aggregate daily net asset values
of the Fund, at the following incremental annual rates.
<TABLE>
<S> <C>
First $200 million .085%
$200 million to $400 million .05%
$400 million to $600 million .03%
$600 million to $800 million .02%
$800 million to $1 billion .015%
Greater than $1 billion .0125%
</TABLE>
Percentage rates are applied to the aggregate daily net asset values of
the Fund. PFPC, Inc. also charges minimum fees and additional fees for each
additional class of fund shares. Equity Planning retains PFPC, Inc. as subagent
for each of the funds for which Equity Planning serves as financial agent.
PFPC, Inc. agreed to a modified fee structure and waived certain charges.
Because PFPC, Inc.'s arrangement would have favored smaller funds over larger
funds, Equity Planning reallocates PFPC, Inc.'s overall asset-based charges
among all funds for which it serves as financial agent on the basis of the
relative net assets of each fund. As a result, the PFPC, Inc. charges to the
Fund are expected to be slightly less than the amount that would be found
through direct application of the table illustrated above. For its services
during the Fund's fiscal year ended April 30, 1999, Equity Planning received
$106,837.
DISTRIBUTION PLANS
The Fund has adopted separate amended and restated distribution plans
under Rule 12b-1 of the 1940 Act for each class of shares of the Fund (the
"Class A Plan," the "Class B Plan" and collectively the "Plans"). The Plans
permit the Fund to reimburse the Distributor for expenses incurred in
connection with activities intended to promote the sale of Fund shares and to
pay for the furnishing of shareholder services.
22
<PAGE>
Pursuant to the Plans, the Fund will pay the Distributor 0.25% annually of
the average daily net assets of each Class of the Fund for providing services
to shareholders (the "Service Fee"). Under the Class B Plan, the Fund may
reimburse the Distributor for actual expenses of the Distributor related to
that Class up to 0.75% annually of the average daily net assets of the Fund.
Expenditures under the Plans shall consist of: (i) commissions to sales
personnel for selling shares of the Fund including underwriting commissions and
financing expenses incurred in connection with the payment of commissions; (ii)
compensation, sales incentives and payments to sales, marketing and service
personnel; (iii) payments to broker-dealers and other financial institutions
which have entered into agreements with the Underwriter in the form of the
Dealer Agreement for Phoenix Funds for services rendered in connection with the
sale and distribution of shares of the Fund; (iv) payment of expenses incurred
in sales and promotional activities, including advertising expenditures related
to the Fund; (v) the costs of preparing and distributing promotional materials;
(vi) the cost of printing the Fund's Prospectus and Statement of Additional
Information for distribution to potential investors; and (vii) such other
similar services that the Directors of the Fund determine are reasonably
calculated to result in the sale of shares of the Fund.
From the Service Fee, the Distributor expects to pay a quarterly fee to
qualifying broker-dealer firms, as compensation for providing personal services
and/or the maintenance of shareholder accounts, with respect to shares sold by
such firms. This fee will not exceed on an annual basis 0.25% of the average
annual net asset value of such shares, and will be in addition to sales charges
on Fund shares which are reallowed to such firms. To the extent that the entire
amount of the Service Fee is not paid to such firms, the balance will serve as
compensation for personal and account maintenance services furnished by the
Distributor.
From its own resources or pursuant to the Plan, and subject to the
dealers' prior approval, the Distributor may provide additional compensation to
registered representatives of dealers in the form of travel expenses, meals,
and lodging associated with training and educational meetings sponsored by the
Distributor. The Distributor may also provide gifts amounting in value to less
than $100, and occasional meals or entertainment, to registered representatives
of dealers. Any such travel expenses, meals, lodging, gifts or entertainment
paid will not be preconditioned upon the registered representatives' or
dealers' achievement of a sales target. The Distributor may, from time to time,
reallow the entire portion of the sales charge on Class A Shares which it
normally retains to individual selling dealers. However, such additional
reallowance generally will be made only when the selling dealer commits to
substantial marketing support such as internal wholesaling through dedicated
personnel, internal communications and mass mailings.
On a quarterly basis, the Fund's Directors review a report on expenditures
under each Plan and the purposes for which expenditures were made. The
Directors conduct an additional, more extensive review annually in determining
whether each Plan will be continued. By its terms, continuation of each Plan
from year to year is contingent on annual approval by a majority of the Fund's
Directors and by a majority of the Directors who are not "interested persons"
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of either Plan or any related agreements (the "Plan
Directors"). Each Plan provides that it may not be amended to increase
materially the costs which the Fund may bear without approval of the applicable
class of shareholders of the Fund and that other material amendments to such
Plan must be approved by a majority of the Plan Directors by vote cast in
person at a meeting called for the purpose of considering such amendments. Each
Plan further provides that while it is in effect, the selection and nomination
of Directors who are not "interested persons" shall be committed to the
discretion of the Directors who are not "interested persons." Each Plan may be
terminated at any time by vote of a majority of the Plan Directors or a
majority of the outstanding shares of the applicable class of the Fund. The
Directors have concluded that there is a reasonable likelihood that each Plan
will benefit the Fund and each affected class of shareholders.
For the fiscal year ended April 30, 1999, the Fund paid Rule 12b-1 fees in
the amount of $266,069 of which the Distributor received $30,420, unaffiliated
broker-dealers received $235,500 and W.S. Griffith & Co., Inc., an affiliate,
received $149. The Rule 12b-1 payments were used for: compensating dealers
($245,650), compensating sales personnel ($174,772), advertising ($73,536),
printing and mailing prospectuses to other than current shareholders ($8,600),
service costs ($33,084) and other costs ($31,061). The Distributor's expenses
from selling and servicing Class B Shares may be more than the payments
received from contingent deferred sales charges collected on redeemed shares
and from the Fund under the Class B Plan. Those expenses may be carried over
and paid in future years. At April 30, 1999, the end of the last Plan year,
Distributor had incurred unreimbursed expenses under the Class B Plan of
$445,509 (equal to 0.46% of the Fund's net assets) which have been carried over
into the present Class B Plan year.
No interested person of the Fund and no Director who is not an interested
person of the Fund, as that term is defined in the Investment Company Act of
1940, had any direct or indirect financial interest in the operation of the
Plan.
The National Association of Securities Dealers, Inc. ("NASD") regards
certain distribution fees as asset-based sales charges subject to NASD sales
load limits. The NASD's maximum sales charge rule may require the Directors to
suspend distribution plan fees or amend the Plans.
23
<PAGE>
MANAGEMENT OF THE FUND
The Fund is an open-end management investment company known as a mutual
fund. The Directors of the Fund ("Directors") are responsible for the overall
supervision of the Fund and perform the various duties imposed on Directors by
the Investment Company Act of 1940 and Maryland General Corporation Law.
Directors and Officers
The Directors and Officers of the Fund and their business affiliations for
the past five years are set forth below and, unless otherwise noted, the
address of each Director and executive officer is 56 Prospect Street, Hartford,
Connecticut, 06115-0480.
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Robert Chesek (65) Director Trustee/Director (1981-present) and Chairman (1989-1994),
49 Old Post Road Phoenix Funds. Trustee, Phoenix-Aberdeen Series Fund and
Wethersfield, CT 06109 Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present). Director (1981-1994) and Chairman (1992-1994),
Phoenix Investment Counsel, Inc. Vice President, Common
Stock, Phoenix Home Life Mutual Insurance Company (1980-
1994).
E. Virgil Conway (70) Director Chairman, Metropolitan Transportation Authority (1992-
9 Rittenhouse Road present). Trustee/Director, Consolidated Edison Company
Bronxville, NY 10708 of New York, Inc. (1970-present), Pace University (1978-
present), Atlantic Mutual Insurance Company (1974-present),
HRE Properties (1989-present), Greater New York Councils,
Boy Scouts of America (1985-present), Union Pacific Corp.
(1978-present), Blackrock Freddie Mac Mortgage Securities
Fund (Advisory Director) (1990-present), Centennial Insurance
Company (1974-present), Josiah Macy, Jr., Foundation (1975-
present), The Harlem Youth Development Foundation (1987-
present) (Chairman, 1998-present), Accuhealth (1994-present),
Trism, Inc. (1994-present), Realty Foundation of New York
(1972-present), New York Housing Partnership Development
Corp. (Chairman) (1981-present) and Academy of Political
Science (Vice Chairman) (1985-present). Director/Trustee,
Phoenix Funds (1993-present). Trustee, Phoenix-Aberdeen
Series Fund and Phoenix Duff & Phelps Institutional Mutual
Funds (1996-present). Director, Duff & Phelps Utilities Tax-
Free Income Inc. and Duff & Phelps Utility and Corporate
Bond Trust Inc. (1995-present). Member, Audit Committee of
the City of New York (1981-1996). Advisory Director,
Blackrock Fannie Mae Mortgage Securities Fund (1989-1996)
and Fund Directions (1993-1998). Chairman, Financial
Accounting Standards Advisory Council (1992-1995).
Harry Dalzell-Payne (70) Director Director/Trustee, Phoenix Funds (1983-present). Trustee,
330 East 39th Street Phoenix-Aberdeen Series Fund and Phoenix Duff & Phelps
Apartment 29G Institutional Mutual Funds (1996-present). Director, Duff &
New York, NY 10016 Phelps Utilities Tax-Free Income Inc. and Duff & Phelps
Utility and Corporate Bond Trust Inc. (1995-present). Director,
Farragut Mortgage Co., Inc. (1991-1994). Formerly a Major
General of the British Army.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
*Francis E. Jeffries (68) Director Director/Trustee, Phoenix Funds (1995-present). Trustee,
6585 Nicholas Blvd. Phoenix-Aberdeen Series Inc. and Phoenix Duff & Phelps
Apt. 1601 Institutional Mutual Funds (1996-present). Director,
Naples, FL 33963 Duff & Phelps Utilities Income Inc. (1987-present), Duff &
Phelps Utilities Tax-Free Income Inc. (1991-present) and Duff
& Phelps Utility and Corporate Bond Trust Inc. (1993-
present). Director, The Empire District Electric Company
(1984-present). Director (1989-1997), Chairman of the Board
(1993-1997), President (1989-1993), and Chief Executive
Officer (1989-1995), Phoenix Investment Partners, Ltd.
Leroy Keith, Jr. (60) Director Chairman and Chief Executive Officer, Carson Products
Chairman and Chief Company (1995-present). Director/Trustee, Phoenix Funds
Executive Officer (1980-present). Trustee, Phoenix-Aberdeen Series Fund and
Carson Products Company Phoenix Duff & Phelps Institutional Mutual Funds (1996-
64 Ross Road present). Director, Equifax Corp. (1991-present) and
Savannah, GA 30750 Evergreen International Fund, Inc. (1989-present). Trustee,
Evergreen Liquid Trust, Evergreen Tax Exempt Trust,
Evergreen Tax Free Fund, Master Reserves Tax Free Trust,
and Master Reserves Trust. President, Morehouse College
(1987-1994). Chairman and Chief Executive Officer, Keith
Ventures (1992-1994).
*Philip R. McLoughlin (52) Director and Chairman (1997-present), Director (1995-present), Vice
President Chairman (1995-1997) and Chief Executive Officer, (1995-
present), Phoenix Investment Partners, Ltd. Director (1994-
present) and Executive Vice President, Investments (1988-
present), Phoenix Home Life Mutual Insurance Company.
Director/Trustee and President, Phoenix Funds (1989-present).
Trustee and President, Phoenix-Aberdeen Series Fund and
Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present). Director, Duff & Phelps Utilities Tax-Free Income
Inc. (1995-present) and Duff & Phelps Utility and Corporate
Bond Trust Inc. (1995-present). Director (1983-present) and
Chairman (1995-present), Phoenix Investment Counsel, Inc.
Director (1984-present) and President (1990-present), Phoenix
Equity Planning Corporation. Director, PXRE Corporation
(Delaware) (1985-present) and World Trust Fund (1991-
present). Director and Executive Vice President, Phoenix Life
and Annuity Company (1996-present). Director and Executive
Vice President, PHL Variable Insurance Company (1995-
present). Director, Phoenix Charter Oak Trust Company (1996-
present). Director and Vice President, PM Holdings, Inc.
(1985-present). Director and President, Phoenix Securities
Group, Inc. (1993-1995). Director (1992-present) and
President (1992-1994), W.S. Griffith & Co., Inc. Director,
Townsend Financial Advisers, Inc. (1992-present), Director
PHL Associates, Inc. (1995-present).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Everett L. Morris (71) Director Vice President, W.H. Reaves and Company (1993-present).
164 Laird Road Director/Trustee, Phoenix Funds (1995-present). Trustee,
Colts Neck, NJ 07722 Phoenix-Aberdeen Series Fund and Phoenix Duff & Phelps
Institutional Mutual Funds (1996-present). Director, Duff &
Phelps Utilities Tax-Free Income Inc. (1991-present) and Duff
& Phelps Utility and Corporate Bond Trust Inc. (1993- present).
*James M. Oates (53) Director Chairman, IBEX Capital Markets, Inc. (formerly IBEX Capital
Managing Director Markets LLC) (1997-present). Managing Director, Wydown
The Wydown Group Group (1994-present). Director, Phoenix Investment Partners,
IBEX Capital Markets Inc. Ltd. (1995-present). Director/Trustee, Phoenix Funds (1987-
60 State Street present). Trustee, Phoenix-Aberdeen Series Fund and Phoenix
Suite 950 Duff & Phelps Institutional Mutual Funds (1996-present).
Boston, MA 02109 Director, AIB Govett Funds (1991-present), Blue Cross and
Blue Shield of New Hampshire (1994-present), Investors
Financial Service Corporation (1995-present), Investors Bank
& Trust Corporation (1995-present), Plymouth Rubber Co.
(1995-present), Stifel Financial (1996-present), Command
Systems Inc. (1998-present) and Connecticut River Bancorp
(1998-present). Vice Chairman, Massachusetts Housing-
Partnership (1998-present). Member, Chief Executives
Organization (1996-present). Director (1984-1994), President
(1984-1994) and Chief Executive Officer (1986-1994),
Neworld Bank.
*Calvin J. Pedersen (57) Director Director (1986-present), President (1993-present) and
Phoenix Investment Executive Vice President (1992-1993), Phoenix Investment
Partners, Ltd. Partners, Ltd. Director/Trustee, Phoenix Funds (1995-
55 East Monroe Street present). Trustee, Phoenix-Aberdeen Series Fund and Phoenix
Suite 3600 Duff & Phelps Institutional Mutual Funds (1996-present).
Chicago, IL 60603 President and Chief Executive Officer, Duff & Phelps Utilities
Tax-Free Income Inc. (1995-present), Duff & Phelps Utilities
Income Inc. (1994-present) and Duff & Phelps Utility and
Corporate Bond Trust Inc. (1995-present).
Herbert Roth, Jr. (70) Director Director/Trustee, Phoenix Funds (1980-present). Trustee,
134 Lake Street Phoenix-Aberdeen Series Fund and Phoenix Duff & Phelps
P.O. Box 909 Institutional Mutual Funds (1996-present). Director, Boston
Sherborn, MA 01770 Edison Company (1978-present), Landauer, Inc. (medical
services) (1970-present), Tech Ops./Sevcon, Inc. (electronic
controllers) (1987-present), and Mark IV Industries
(diversified manufacturer) (1985-present). Member, Directors
Advisory Council, Phoenix Home Life Mutual Insurance
Company (1998-present). Director, Phoenix Home Life Mutual
Insurance Company (1972-1998) and Key Energy Group (oil
rig service) (1988-1994).
Richard E. Segerson (53) Director Managing Director, Northway Management Company (1998-
102 Valley Road present), Director/Trustee, Phoenix Funds (1993-present).
New Canaan, CT 07840 Trustee, Phoenix-Aberdeen Series Fund and Phoenix Duff &
Phelps Institutional Mutual Funds (1996-present). Managing
Director, Mullin Associates (1993-1998).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Lowell P. Weicker, Jr. (68) Director Trustee/Director, Phoenix Funds (1995-present). Trustee,
731 Lake Avenue Phoenix-Aberdeen Series Fund and Phoenix Duff & Phelps
Greenwich, CT 06830 Institutional Mutual Funds (1996-present). Director, UST Inc.
(1995-present), HPSC Inc. (1995-present), and Compuware
(1996-present) and Burroughs Wellcome Fund (1996-present).
Visiting Professor, University of Virginia (1997-present).
Director, Duty Free International, Inc. (1997). Chairman,
Dresing, Lierman, Weicker (1995-1996). Governor of the State
of Connecticut (1991-1995).
Michael E. Haylon (41) Executive Director and Executive Vice President-Investments, Phoenix
Vice Investment Partners, Ltd. (1995-present). Executive Vice
President President, Phoenix Funds (1993-present) and Phoenix-
Aberdeen Series Fund (1996-present). Executive Vice
President (1997-present), Vice President (1996-1997),
Phoenix Duff & Phelps Institutional Mutual Funds. Director
(1994-present), President (1995-present), Executive Vice
President (1994-1995), Vice President (1991-1994), Phoenix
Investment Counsel, Inc. Director, Phoenix Equity Planning
Corporation (1995-present). Senior Vice President, Securities
Investments, Phoenix Home Life Mutual Insurance Company
(1993-1995). Various other positions with Phoenix Home Life
Mutual Insurance Company (1990-1993).
John F. Sharry (47) Executive President, Retail Division (1999-present), Executive Vice
Vice President, Retail Division (1997-1999), Phoenix Investment
President Partners, Ltd. Managing Director, Retail Distribution, Phoenix
Equity Planning Corporation (1995-present). Executive Vice
President, Phoenix Funds (1998-present) and Phoenix-
Aberdeen Series Funds (1998-present). Managing Director,
Director and National Sales Manager, Putnam Mutual Funds (1992-1995).
James D. Wehr (42) Senior Vice Senior Vice President, (1998-present), Managing Director,
President Fixed Income (1996-1998), Vice President (1991-1996),
Phoenix Investment Counsel, Inc. Senior Vice President,
(1998-present), Senior Vice President (1997-present), Vice
President (1988-1997), Phoenix Multi-Portfolio Fund; Senior
Vice President (1997-present), Vice President (1990-1997),
Phoenix Series Fund; Senior Vice President (1997-present),
Vice President (1991-1997), The Phoenix Edge Series Fund;
Senior Vice President (1997-present), Vice President (1993-
1997), Phoenix-Goodwin California Tax Exempt Bonds, Inc.,
and Senior Vice President (1997-present), Vice President
(1996-1997), Phoenix Duff & Phelps Institutional Mutual
Funds. Senior Vice President (1997-present), Phoenix Multi-
Sector Fixed Income Fund, Inc., Phoenix Multi-Sector Short
Term Bond Fund, Phoenix Income and Growth Fund and
Phoenix Strategic Allocation Fund, Inc. Managing Director,
Public Fixed Income, Phoenix Home Life Insurance Company (1991-1995).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
Timothy M. Heaney (34) Vice Managing Director, Fixed Income (1997-present), Director,
President Fixed Income Research (1996-1997), Investment Analyst
(1995-1996), Phoenix Investment Counsel, Inc. Vice
President, Phoenix-Goodwin California Tax Exempt Bonds,
Inc. and Phoenix Multi-Portfolio Fund (1996-present).
Investment Analyst, Phoenix Home Life Mutual Insurance
Company (1992-1994).
William R. Moyer (54) Vice Executive Vice President and Chief Financial Officer (1999-
100 Bright Meadow Blvd. President present), Senior Vice President and Chief Financial Officer
P.O. Box 2200 (1995-1999), Phoenix Investment Partners, Ltd. (1995-
Enfield, CT 06083-2200 present). Senior Vice President, Finance (1990-present),
Director (1998-present), Treasurer (1998-present and 1994-
1996), and Chief Financial Officer (1996-present), Phoenix
Equity Planning Corporation. Senior Vice President (1990-
present), Director (1998-present), Chief Financial Officer
(1996-present) and Treasurer (1994-present), Phoenix
Investment Counsel, Inc. Senior Vice President and Chief
Financial Officer, Duff & Phelps Investment Management Co.
(1996-present). Vice President, Phoenix Funds (1990-present),
Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present) and Phoenix-Aberdeen Series Fund (1996-present).
Senior Vice President and Chief Financial Officer, W.S.
Griffith & Co., Inc. (1992-1995) and Townsend Financial
Advisers, Inc. (1993-1995). Vice President, Investment
Products Finance, Phoenix Home Life Mutual Insurance
Company (1990-1995).
Leonard J. Saltiel (45) Vice Managing Director, Operations and Service (1996-present),
President Senior Vice President (1991-1996), Phoenix Equity Planning
Corporation. Vice President, Phoenix Funds (1994-present),
Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present), and Phoenix-Aberdeen Series Fund (1996-present).
Vice President, Investment Operations, Phoenix Home Life
Mutual Insurance Company (1994-1995). Various positions
with Home Life Insurance Company and Phoenix Home Life
Mutual Insurance Company (1987-1994).
Nancy G. Curtiss (46) Treasurer Vice President, Fund Accounting (1994-present) and
Treasurer (1996-present), Phoenix Equity Planning
Corporation. Treasurer, Phoenix Funds (1994-present),
Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present) and Phoenix-Aberdeen Series Fund (1996-present).
Second Vice President and Treasurer, Fund Accounting,
Phoenix Home Life Mutual Insurance Company (1994-1995).
Various positions with Phoenix Home Life Mutual Insurance
Company (1987-1994).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation(s)
Name, Address and Age With the Fund During the Past 5 Years
- --------------------- ------------- -----------------------
<S> <C> <C>
G. Jeffrey Bohne (51) Secretary Vice President and General Manager, Phoenix Home Life
101 Munson Street and Clerk Mutual Insurance Co. (1993-present). Vice President, Transfer
Greenfield, MA 01301 Agent Operations (1993-1996), Vice President, Mutual Fund
Customer Service (1996-present), Phoenix Equity Planning
Corporation. Secretary/Clerk, Phoenix Funds (1993-present),
Phoenix Duff & Phelps Institutional Mutual Funds (1996-
present) and Phoenix-Aberdeen Series Fund (1996-present).
Vice President, Home Life of New York Insurance Company
(1984-1992).
</TABLE>
- -----------
*Indicates that the Director(s) is an "interested person" of the Fund within
the meaning of the definition set forth in Section 2(a)(19)of the Investment
Company Act of 1940.
For services rendered to the Fund for the fiscal year ended April 30,
1999, the Directors received aggregate remumeration of $13,474. For services on
the Boards of the various Phoenix Funds, each Director who is not a full-time
employee of the Adviser or any of its affiliates currently receives a retainer
at the annual rate of $40,000 and $2,500 per joint meeting of the Boards. Each
Director who serves on the Audit Committee receives a retainer at the annual
rate of $2,000 and $2,000 per joint Audit Committee meeting attended. Each
Director who serves on the Nominating Committee receives a retainer at the
annual rate of $1,000 and $1,000 per joint Nominating Committee meeting
attended. Each Director who serves on the Executive Committee and who is not an
interested person of the Fund receives a retainer at the annual rate of $2,000
and $2,000 per joint Executive Committee meeting attended. The function of the
Executive Committee is to serve as a contract review, compliance review and
performance review delegate of the full Board of Directors. Costs are allocated
equally to each of the Series and Funds within the Fund Complex. The foregoing
fees do not include the reimbursement of expenses incurred in connection with
meetings attended. Officers and employees of the Adviser who are interested
persons are compensated by the Adviser and receive no compensation from the
Fund.
For the Fund's last fiscal year ending April 30, 1999, the Directors
received the following compensation:
<TABLE>
<CAPTION>
Total
Compensation
Pension or From Fund and
Aggregate Retirement Benefits Estimated Fund Complex
Compensation Accrued as Part Annual Benefits (14 Funds)
Name From Fund of Fund Expenses Upon Retirement Paid to Directors
- ------------------------ -------------- --------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Robert Chesek $1,132* $65,000
E. Virgil Conway+ $1,566 $87,750
Harry Dalzell-Payne+ $1,399 $78,750
Francis E. Jeffries $1,150* $65,500
Leroy Keith, Jr. $1,190 None None $67,500
Philip R. McLoughlin+ $ 0 for any for any $ 0
Everett L. Morris+ $1,358 Director Director $77,750
James M. Oates+ $1,358 $76,750
Calvin J. Pedersen $ 0 $ 0
Herbert Roth, Jr.+ $1,607 $88,750
Richard E. Segerson $1,358* $76,500
Lowell P. Weicker, Jr. $1,358 $75,500
</TABLE>
- --------------
*This compensation (and the earnings thereon) was deferred pursuant to the
Directors' Deferred Compensation Plan. At April 30, 1999, the total amount of
deferred compensation (including interest and other accumulation earned on the
original amounts deferred) accrued for Messrs. Chesek, Jeffries, Morris, Roth
and Segerson was $29,601, $176,390, $155,408, $151,539 and $16,816,
respectively. At present, by agreement among the Fund, the Distributor and the
electing director, director fees that are deferred are paid by the Fund to the
Distributor. The liability for the deferred compensation obligation appears
only as a liability of the Distributor.
+Messrs. Conway, Dalzell-Payne, McLoughlin, Morris, Oates and Roth are members
of the Executive Committee.
On July 28, 1999, the Directors and officers as a group owned less than 1%
of the outstanding shares of the Fund.
29
<PAGE>
Principal Shareholders
The following table sets forth information as of July 28, 1999 with
respect to each person who owns of record, or is known by the Fund to own of
record, or beneficially own 5% or more of any Class of the Fund's equity
securities.
<TABLE>
<CAPTION>
Name of Shareholder Class Number of Shares Percent of Class
- ------------------------------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith B 14,837.3390 10.72%
4800 Deer Lake Dr. E. 3rd Fl.
Jacksonville, FL 32246-6484
NFSC FEBO B 11,965.8790 8.64%
Bill & Sadaye Kasuga Trust
Hiroshi William Kasuga
29353 Quailwood Drive
Rancho Palos Verdes, CA 90275-4926
Toshio Takayama B 11,112.8610 8.03%
Joan Takayama Ttees
Takayama Family Trust DTD 4/9/88
9200 Orchid Dr.
Westminster, CA 92683-7316
Phoenix Investment Counsel B 10,515.4520 7.59%
100 Bright Meadow Blvd.
Enfield, CT 06082-1957
BA Investment Services, Inc. B 10,068.7410 7.27%
185 Berry Street, 3rd floor
San Francisco, CA 94107-1729
</TABLE>
ADDITIONAL INFORMATION
Capital Stock
The Fund was incorporated as a Maryland corporation on April 7, 1983 and
has undergone several name changes. Most recently (until August 27, 1999), the
Fund was known as Phoenix California Tax Exempt Bonds, Inc.
The Fund's Articles of Incorporation, as amended, provide that the Fund's
Directors are authorized to create an unlimited number of series and one or
more classes. The authorized capital stock of the Fund consists of 500,000,000
shares of common stock, with par value of One Cent ($0.01) each. All shares
have equal voting rights, except that only shares of the respective series or
separate classes within a series are entitled to vote on matters concerning
only that series or class. At the date of this Statement of Additional
Information, there is only one existing series of the Fund, which has two
classes of shares. The shares of the Fund, when issued, will be fully paid and
non-assessable, have no preference, preemptive, or similar rights (other than
as described in the Prospectus or herein), and will be freely transferable.
Financial Statements
The financial statements for the Fund's fiscal year ended April 30, 1999,
appearing in the Fund's 1999 Annual Report to Shareholders, are incorporated
herein by reference.
Reports to Shareholders
The fiscal year of the Fund ends on April 30. The Fund will send financial
statements to its shareholders at least semi-annually. An annual report
containing financial statements audited by the Fund's independent accountants
will be sent to shareholders each year, and is available without charge upon
request.
Independent Accountants
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, MA 02110 has been
selected as the independent accountants for the Fund. PricewaterhouseCoopers
LLP audits the Fund's annual financial statements and expresses an opinion
thereon.
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street"), P.O. Box 351,
Boston, MA 02101, serves as custodian of the Fund's assets. Equity Planning,
100 Bright Meadow Boulevard, P.O. Box 2200, Enfield, CT 06083-2200, acts as
Transfer Agent for the Fund (the "Transfer Agent"). As compensation, Equity
Planning receives a fee equivalent to $22.25 for each designated daily dividend
shareholder account, plus out-of-pocket expenses. Transfer Agent fees are also
utilized to offset costs and fees paid to subtransfer agents employed by Equity
Planning. State Street Bank and Trust Company serves as a subtransfer agent
pursuant to a Subtransfer Agency Agreement.
30
<PAGE>
APPENDIX
Moody's Investors Service, Inc. Bond Ratings
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or 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.
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 fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds 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 are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor's Corporation's Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB-B-CCC-CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
31
<PAGE>
INVESTMENTS AT APRIL 30, 1999
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
MUNICIPAL TAX-EXEMPT BONDS--96.9%
AIRPORT REVENUE--3.7%
San Francisco Airport Revenue 6.25%,
5/1/10 (FGIC Insured)................... AAA $ 1,000 $ 1,105,000
San Francisco Airport Revenue 4.50%,
5/1/28 (MBIA Insured)................... AAA 2,720 2,454,800
------------
3,559,800
------------
DEVELOPMENT REVENUE--5.6%
Culver City Redevelopment Financing
Authority Revenue 4.60%, 11/1/20
(AMBAC Insured)......................... AAA 4,500 4,190,625
San Pablo Redevelopment Agency 5%,
12/1/13 (FGIC Insured).................. AAA 1,250 1,275,000
------------
5,465,625
------------
FACILITIES REVENUE--4.0%
Contra Costa County Public Financing
Lease Revenue Series 99-A 5%, 6/1/08
(MBIA Insured).......................... AAA 1,500 1,588,125
San Francisco Building Authority Lease
Revenue Civic Center Complex A 6%,
12/1/09 (AMBAC Insured)................. AAA 2,000 2,285,000
------------
3,873,125
------------
</TABLE>
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
GENERAL OBLIGATION--8.5%
California State G.O. 5.50%, 4/1/08
(MBIA Insured).......................... AAA $ 1,500 $ 1,646,250
California State G.O. 4.50%, 12/1/21
(FGIC Insured).......................... AAA 3,000 2,760,000
Central School District San Bernardino
County Series A G.O. 7.05%, 5/1/16...... A(b) 1,000 1,073,750
Walnut Valley Unified School District
Series A G.O. 0%, 8/1/19 (MBIA
Insured)................................ AAA 8,480 2,756,000
------------
8,236,000
------------
GENERAL REVENUE--5.8%
Anaheim Public Financing Series C 6%,
9/1/16 (FSA Insured).................... AAA 2,600 2,967,250
Orange County Recovery COP Series A
5.80%, 7/1/16 (MBIA Insured)............ AAA 1,500 1,635,000
San Mateo County Lease Revenue 5.125%,
7/1/18 (MBIA Insured)................... AAA 1,000 1,031,250
------------
5,633,500
------------
MEDICAL REVENUE--3.2%
California Health Facilities Financing
Authority Series A 7.30%, 11/1/20 (CA
Mortgage Insured)....................... A+ 1,400 1,491,000
</TABLE>
4 See Notes to Financial Statements
<PAGE>
Phoenix California Tax Exempt Bonds, Inc.
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
MEDICAL REVENUE--CONTINUED
California Health Facilities Financing
Authority Series A 6.25%, 7/1/22........ A+ $ 1,500 $ 1,599,375
------------
3,090,375
------------
MULTIFAMILY REVENUE--2.2%
L.A. Community Redevelopment Agency
Series A 6.55%, 11/1/27 (AMBAC/FHA
Insured)................................ AAA 2,000 2,152,500
MUNICIPAL UTILITY DISTRICT REVENUE--9.7%
Delta Diablo Sanitation District COP 0%,
12/1/16 (MBIA Insured).................. AAA 1,070 446,725
L.A. Wastewater System Revenue Series D
4.70%, 11/1/17 (FGIC Insured)........... AAA 7,000 6,798,750
Sacramento Cogeneration Authority
Project Revenue 6.375%, 7/1/10.......... BBB 500 575,625
Sacramento Municipal Utility District
Electric Revenue Series K 5.75%, 7/1/18
(AMBAC Insured)......................... AAA 1,500 1,663,125
------------
9,484,225
------------
POWER REVENUE--0.9%
Southern California Public Power
Authority Revenue 5.50%, 7/1/20......... A 915 924,150
PRE-REFUNDED--44.4%
Covina Community Redevelopment Agency
8.80%, 1/1/08(c)........................ NR 1,150 1,407,312
Hayward Hospital Revenue (St. Rose
Hospital) 10%, 10/1/04(c)............... AAA 425 496,719
Huntington Park Redevelopment Agency 8%,
12/1/19 (FHA Insured)................... AAA 2,400 3,378,000
L.A. County Sales Tax 7%, 7/1/19........ AA- 2,500 2,564,575
L.A. Harbor Department 7.60%,
10/1/18(c).............................. AAA 1,075 1,436,469
MSR Public Power Agency Series D 6.75%
7/1/20 (MBIA Insured)(c)................ AAA 3,500 4,208,750
Northern California Power Agency Public
Power Hydro Electric 7.50%, 7/1/23
(AMBAC Insured)......................... AAA 195 256,669
</TABLE>
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
PRE-REFUNDED--CONTINUED
Orange County Water District COP 7%,
8/15/15................................. AAA $ 1,000 $ 1,066,250
Pasedena COP 6.75%, 8/1/15.............. Aaa(b) 2,000 2,125,000
Pomona Unified School District G.O.
Series C 5.60%, 8/1/12 (MBIA Insured)... AAA 1,500 1,642,500
Puerto Rico Electric Power Authority
Series N 6%, 7/1/10..................... BBB+ 1,500 1,506,345
Puerto Rico Electric Power Authority
Series P 7%, 7/1/21..................... Aaa(b) 2,500 2,728,125
Puerto Rico Highway and Transportation
Authority Revenue Series T 6.625%,
7/1/18.................................. AAA 200 220,750
Puerto Rico Highway and Transportation
Authority Revenue Series T 6.625%,
7/1/18.................................. Aaa(b) 800 883,000
Puerto Rico Public Building Authority
Series L 6.875%, 7/1/21................. AAA 3,170 3,522,662
Redlands COP Series C 7%, 12/1/22 (MBIA
Insured)................................ AAA 1,000 1,076,250
Riverside County 8.625%, 5/1/16 (GNMA
Collaterized)(c)........................ AAA 700 1,009,750
Riverside County 7.80%, 5/1/21 (GNMA
Collaterized)........................... AAA 4,000 5,480,000
Riverside Public Financing Authority
Revenue 7.80%, 2/1/08................... Baa(b) 360 366,912
Sacramento Cogeneration Authority
Project Revenue 6.375%, 7/1/10.......... BBB 500 546,250
San Bernandino County COP Series B 7%,
8/1/28.................................. AAA 2,200 2,409,000
San Bernandino School Health Care
Sisters of Charity Series A 7%,
7/1/21.................................. AA 1,500 1,636,875
San Gabriel Valley Schools Financing
Authority 7.20%, 7/1/19................. NR 1,200 1,231,356
</TABLE>
See Notes to Financial Statements 5
<PAGE>
Phoenix California Tax Exempt Bonds, Inc.
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
PRE-REFUNDED--CONTINUED
Torrance Hospital Revenue 7.10%,
12/1/15................................. AAA $ 1,665 $ 1,893,938
------------
43,093,457
------------
SINGLE FAMILY HOUSING REVENUE--1.0%
California Housing Financing Agency
Series C 7.20%, 8/1/17 (FHA Insured).... AA- 425 435,022
California Housing Financing Agency
Series D 7.25%, 8/1/17 (FHA Insured).... AA- 265 276,925
California Housing Financing Agency
Series A 7.75%, 8/1/17 (FHA Insured).... AA- 240 245,918
------------
957,865
------------
SPECIAL OBLIGATION REVENUE--1.1%
Sacramento Flood Control Agency 5.375%,
10/1/15 (FGIC Insured).................. AAA 1,000 1,041,250
WATER REVENUE--6.8%
Chino Basin Financing Authority Revenue
5.90%, 8/1/11 (AMBAC Insured)........... AAA 2,000 2,260,000
Contra Costa Water District Revenue
Series G 5.75%, 10/1/14 (MBIA Insured).. AAA 3,100 3,379,000
</TABLE>
<TABLE>
<CAPTION>
STANDARD
& POOR'S PAR
RATING VALUE
(Unaudited) (000) VALUE
------------ -------- ------------
<S> <C> <C> <C>
WATER REVENUE--CONTINUED
Metropolitan Water District Waterworks
Revenue Series A 4.75%, 7/1/22.......... AA $ 1,000 $ 950,000
------------
6,589,000
------------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL TAX-EXEMPT BONDS
(IDENTIFIED COST $86,149,310) 94,100,872
- --------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS--96.9%
(IDENTIFIED COST $86,149,310) 94,100,872
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS--1.6%
COMMERCIAL PAPER--1.6%
Goldman Sachs Group, L.P. 4.92%,
5/3/99.................................. A-1+ 1,550 1,549,576
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(IDENTIFIED COST $1,549,576) 1,549,576
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(IDENTIFIED COST $87,698,886) 95,650,448(a)
Cash and receivables, less liabilities--1.5% 1,477,124
------------
NET ASSETS--100.0% $ 97,127,572
============
</TABLE>
(a) Federal Income Tax Information: Net unrealized appreciation of investment
securities is comprised of gross appreciation of $8,160,201 and gross
depreciation of $208,639 for federal income tax purposes. At April 30,
1999, the aggregate cost of securities for federal income tax purposes was
$87,698,886.
(b) As rated by Moody's, Duff & Phelps or Fitch.
(c) Escrowed to Maturity.
At April 30, 1999, the concentration of the Fund's investments by State,
determined as a percentage of total investments, is as follows: California
91% and Puerto Rico 9%.
At April 30, 1999, 64.8% of the securities in the portfolio are backed by
insurance of financial institutions and financial guaranty assurance
agencies. Insurers with a concentration greater than 10% of net assets are
as follows: MBIA, 23%, AMBAC, 13% and FGIC, 13%.
6 See Notes to Financial Statements
<PAGE>
Phoenix California Tax Exempt Bonds, Inc.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment securities at value
(Identified cost $87,698,886) $95,650,448
Cash 3,456
Receivables
Interest 1,784,608
Prepaid expenses 2,302
-----------
Total assets 97,440,814
-----------
LIABILITIES
Payables
Fund shares repurchased 117,015
Dividend distributions 52,408
Investment advisory fee 36,152
Distribution fee 21,553
Financial agent fee 11,005
Transfer agent fee 4,954
Trustees' fee 4,514
Accrued expenses 65,641
-----------
Total liabilities 313,242
-----------
NET ASSETS $97,127,572
===========
NET ASSETS CONSIST OF:
Capital paid in on shares of common stock $88,408,721
Distributions in excess of net investment income (52,409)
Accumulated net realized gain 819,698
Net unrealized appreciation 7,951,562
-----------
NET ASSETS $97,127,572
===========
CLASS A
Shares of common stock outstanding, $0.01 par value,
250,000,000 shares authorized (Net Assets $95,230,394) 7,223,559
Net asset value per share $13.18
Offering price per share $13.18/(1-4.75%) $13.84
CLASS B
Shares of common stock outstanding, $0.01 par value,
250,000,000 shares authorized (Net Assets $1,897,178) 143,735
Net asset value and offering price per share $13.20
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $5,790,758
----------
Total investment income 5,790,758
----------
EXPENSES
Investment advisory fee 455,088
Distribution fee, Class A 248,413
Distribution fee, Class B 17,656
Financial agent fee 106,837
Transfer agent 61,143
Printing 39,539
Professional 37,676
Registration 25,539
Trustees 17,366
Custodian 10,619
Miscellaneous 6,315
----------
Total expenses 1,026,191
----------
NET INVESTMENT INCOME 4,764,567
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on securities 1,124,505
Net realized loss on futures contracts (126,725)
Net change in unrealized appreciation (depreciation) on
investments 112,639
----------
NET GAIN ON INVESTMENTS 1,110,419
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,874,986
==========
</TABLE>
See Notes to Financial Statements 7
<PAGE>
Phoenix California Tax Exempt Bonds, Inc.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
4/30/99 4/30/98
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 4,764,567 $ 5,301,229
Net realized gain (loss) 997,780 932,045
Net change in unrealized appreciation
(depreciation) 112,639 3,180,703
------------ ------------
INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 5,874,986 9,413,977
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income, Class A (4,660,039) (5,233,550)
Net investment income, Class B (69,380) (56,307)
Net realized gains, Class A (495,087) (611,301)
Net realized gains, Class B (8,845) (7,993)
------------ ------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (5,233,351) (5,909,151)
------------ ------------
FROM SHARE TRANSACTIONS
CLASS A
Proceeds from sales of shares (951,723
and 2,752,578 shares, respectively) 12,621,925 36,168,968
Net asset value of shares issued from
reinvestment of distributions
(172,258 and 198,792 shares,
respectively) 2,289,980 2,620,648
Cost of shares repurchased (1,701,261
and 3,745,317 shares, respectively) (22,628,530) (49,302,823)
------------ ------------
Total (7,716,625) (10,513,207)
------------ ------------
CLASS B
Proceeds from sales of shares (28,783
and 30,551 shares, respectively) 382,076 405,480
Net asset value of shares issued from
reinvestment of distributions
(3,219 and 2,640 shares,
respectively) 42,838 34,843
Cost of shares repurchased (7,282 and
20,974 shares, respectively) (97,065) (274,134)
------------ ------------
Total 327,849 166,189
------------ ------------
DECREASE IN NET ASSETS FROM SHARE
TRANSACTIONS (7,388,776) (10,347,018)
------------ ------------
NET DECREASE IN NET ASSETS (6,747,141) (6,842,192)
NET ASSETS
Beginning of period 103,874,713 110,716,905
------------ ------------
END OF PERIOD [INCLUDING DISTRIBUTIONS
IN EXCESS OF NET INVESTMENT INCOME
OF ($52,409) AND ($87,557),
RESPECTIVELY] $ 97,127,572 $103,874,713
============ ============
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Phoenix California Tax Exempt Bonds, Inc.
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
YEAR ENDED APRIL 30
------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 13.12 $ 12.72 $ 12.77 $ 12.63 $ 13.03
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.64 0.65 0.66 0.67 0.71
Net realized and unrealized gain
(loss) 0.11 0.47 0.04 0.20 0.05
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS 0.75 1.12 0.70 0.87 0.76
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment
income (0.63) (0.65) (0.66) (0.67) (0.76)
Distributions in excess of net
investment income -- -- -- (0.01) --
Distributions from net realized
gains (0.06) (0.07) (0.09) (0.03) (0.31)
Distributions in excess of
accumulated net realized gains -- -- -- (0.02) (0.09)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS (0.69) (0.72) (0.75) (0.73) (1.16)
----- ----- ----- ----- -----
Change in net asset value 0.06 0.40 (0.05) 0.14 (0.40)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $ 13.18 $ 13.12 $ 12.72 $ 12.77 $ 12.63
======= ======== ======== ======== ========
Total return(1) 5.92% 8.84% 5.56% 6.92% 6.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $95,230 $102,312 $109,358 $113,806 $117,370
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.00% 0.96% 0.93% 0.99% 0.93%
Net investment income 4.72% 4.90% 5.13% 5.15% 5.63%
Portfolio turnover 14% 9% 17% 20% 51%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
FROM
YEAR ENDED APRIL 30 INCEPTION
----------------------------------------------------- 7/26/94 TO
1999 1998 1997 1996 4/30/95
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $13.13 $12.73 $12.77 $12.63 $13.04
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.54 0.56 0.56 0.56(4) 0.48
Net realized and unrealized gain
(loss) 0.12 0.46 0.05 0.20 0.01
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS 0.66 1.02 0.61 0.76 0.49
----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment
income (0.53) (0.55) (0.56) (0.56) (0.50)
Distributions in excess of net
investment income -- -- -- (0.01) --
Distributions from net realized
gains (0.06) (0.07) (0.09) (0.03) (0.31)
Distributions in excess of
accumulated net realized gains -- -- -- (0.02) (0.09)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS (0.59) (0.62) (0.65) (0.62) (0.90)
----- ----- ----- ----- -----
Change in net asset value 0.07 0.40 (0.04) 0.14 (0.41)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $13.20 $13.13 $12.73 $12.77 $12.63
====== ====== ====== ====== ======
Total return(1) 5.11% 8.10% 4.84% 6.10% 4.10%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $1,897 $1,562 $1,359 $1,258 $ 460
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.75% 1.71% 1.68% 1.78% 1.55%(2)
Net investment income 3.97% 4.15% 4.37% 4.32% 4.90%(2)
Portfolio turnover 14% 9% 17% 20% 51%
</TABLE>
(1) Maximum sales charge is not reflected in total return calculation.
(2) Annualized
(3) Not annualized
(4) Computed using average shares outstanding.
See Notes to Financial Statements 9
<PAGE>
PHOENIX CALIFORNIA TAX EXEMPT BONDS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
Phoenix California Tax Exempt Bonds, Inc. (the "Fund") is organized as a
Maryland corporation and is registered under the Investment Company Act of 1940,
as amended, as a diversified open-end management investment company. The Fund's
investment objective is to obtain a high level of current income exempt from
California state and local income taxes, as well as Federal income tax,
consistent with preservation of capital. The Fund offers both Class A and Class
B shares. Class A shares are sold with a front-end sales charge of up to 4.75%.
Class B shares are sold with a contingent deferred sales charge which declines
from 5% to zero depending on the period of time the shares are held. Both
classes of shares have identical voting, dividend, liquidation and other rights
with respect to its distribution plan. Income and expenses of the Fund are borne
pro rata by the holders of both classes of shares, except that each class bears
distribution expenses unique to that class.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates.
A. SECURITY VALUATION:
Debt securities are valued on the basis of broker quotations or valuations
provided by a pricing service which utilizes information with respect to recent
sales, market transactions in comparable securities, quotations from dealers,
and various relationships between securities in determining value. Short-term
investments having a remaining maturity of 60 days or less are valued at
amortized cost which approximates market. All other securities and assets are
valued at their fair value as determined in good faith by or under the direction
of the Directors.
B. SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. Premiums and discounts are amortized to income
using the effective interest method. Realized gains and losses are determined on
the identified cost basis.
C. INCOME TAXES:
It is the policy of the Fund to comply with the requirements of the Internal
Revenue Code (the "Code") applicable to regulated investment companies and to
distribute substantially all of its taxable and tax-exempt income to its
shareholders. In addition, the Fund intends to distribute an amount sufficient
to avoid imposition of any excise tax under Section 4982 of the Code. Therefore,
no provision for federal income taxes or excise taxes has been made.
D. DISTRIBUTIONS TO SHAREHOLDERS:
Distributions to shareholders are declared and recorded daily. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences include the treatment of non-taxable dividends, expiring
capital loss carryforwards and losses deferred due to wash sales and excise tax
regulations. Permanent book and tax basis differences relating to shareholder
distributions will result in reclassification to paid in capital.
E. FUTURES CONTRACTS:
A futures contract is an agreement between two parties to buy and sell a
security at a set price on a future date. The Fund may enter into financial
futures contracts as a hedge against anticipated changes in the market value of
the portfolio securities. Upon entering into a futures contract, the Fund is
required to pledge to the broker an amount of cash and/or securities equal to
the "initial margin" requirements of the futures exchange on which the contract
is traded. Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and are
recorded by the Fund as unrealized gains or losses. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it was
closed. The potential risk to the Fund is that the change in value of the
futures contract may not correspond to the change in value of the hedged
instruments.
2. INVESTMENT ADVISORY FEE AND RELATED PARTY TRANSACTIONS
Effective June 1, 1998, National Securities and Research Corporation assigned
its investment advisory agreement to Phoenix Investment Counsel, Inc. ("PIC"),
an indirect majority-owned subsidiary of Phoenix Home Life Mutual Insurance
Company ("PHL"). PIC is entitled to a fee at an annual rate of 0.45% of the
average daily net assets of the Fund for the first $1 billion.
As Distributor of the Fund's shares, Phoenix Equity Planning Corp. ("PEPCO"),
an indirect majority-owned subsidiary of PHL, has advised the Fund that it
retained net selling commissions of $4,593 for Class A shares and deferred sales
charges of $3,081 for Class B shares for the year ended April 30, 1999. In
addition, the Fund pays PEPCO a distribution fee at an annual rate of 0.25% for
Class A shares and 1.00% for Class B shares of the average daily net assets of
the Fund. The Distributor has advised the Fund that of the total amount expensed
for the year ended April 30, 1999, $30,420 was earned by the Distributor,
$235,500 was paid to unaffiliated participants and $149 was paid to W.S.
Griffith, an indirect subsidiary of PHL.
As Financial Agent of the Fund, PEPCO received a fee for bookkeeping,
administration, and pricing services through May 31, 1998, at an annual
10
<PAGE>
PHOENIX CALIFORNIA TAX EXEMPT BONDS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999 (CONTINUED)
rate of 0.05% of average daily net assets up to $100 million, 0.04% of average
daily net assets of $100 million to $300 million, 0.03% of average daily net
assets of $300 million through $500 million, and 0.015% of average daily net
assets greater than $500 million; a minimum fee applied. Effective June 1, 1998,
PEPCO receives a financial agent fee equal to the sum of (1) the documented cost
of fund accounting and related services provided by PFPC, Inc. (subagent to
PEPCO), plus (2) the documented cost to PEPCO to provide financial reporting,
tax services and oversight of subagent's performance. The current fee schedule
of PFPC, Inc. ranges from 0.085% to 0.0125% of the average daily net asset
values of the Fund. Certain minimum fees and fee waivers may apply.
PEPCO serves as the Fund's Transfer Agent with State Street Bank and Trust as
sub-transfer agent. For the year ended April 30, 1999, transfer agent fees were
$61,143, of which PEPCO retained $16,940, which is net of fees paid to State
Street.
At April 30, 1999, PHL and affiliates held 227 Class A shares and 10,413 Class
B shares of the Fund with a combined value of $140,443.
3. PURCHASE AND SALE OF SECURITIES
Purchases and sales of securities, excluding short-term securities and
futures, for the year ended April 30, 1999, aggregated $13,618,183 and
$20,260,530, respectively. There were no purchases or sales of long-term US
Government securities.
4. ASSET CONCENTRATION
There are certain risks arising from the Fund's concentration in California
municipal securities. Certain California constitutional amendments, legislative
measures, executive orders, administrative regulations, court decisions and
voter initiatives could result in certain adverse consequences including
impairing the ability of certain issuers of California municipal securities to
pay principal and interest on their obligations.
TAX INFORMATION NOTICE (UNAUDITED)
EXEMPT-INTEREST DIVIDENDS:
For federal income tax purposes, 96.4% of the income dividends paid by the
Fund qualify as exempt-interest dividends.
LONG-TERM CAPITAL GAINS:
The Fund distributed $503,932 of long-term capital gain dividends.
This report is not authorized for distribution to prospective investors in the
Phoenix California Tax Exempt Bonds, Inc. unless preceded or accompanied by an
effective Prospectus which includes information concerning the sales charge,
Fund's record and other pertinent information.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO]
To the Board of Directors and Shareholders of
Phoenix California Tax Exempt Bonds, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for bond ratings), and the related
statements of operations and of changes in net assets, and the financial
highlights present fairly, in all material respects, the financial position of
Phoenix California Tax Exempt Bonds, Inc. (the "Fund") at April 30, 1999, the
results of its operations for the year then ended, changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 11, 1999
<PAGE>
PHOENIX-GOODWIN CALIFORNIA TAX EXEMPT BONDS, INC.
PART C--OTHER INFORMATION
Item 23. Exhibits
a.1 Articles of Incorporation of the Registrant, previously filed and filed
via EDGAR as Exhibit 1.1 with Post-Effective Amendment No. 20 on August
8, 1997, and herein incorporated by reference.
a.2 Articles of Amendment of Registrant, filed with Post-Effective Amendment
No. 16 on July 13, 1994, and filed via EDGAR as Exhibit 1.2 with
Post-Effective Amendment No. 20 on August 8, 1997 and incorporated herein
by reference.
a.3 Articles Supplementary of Registrant, filed with Post-Effective Amendment
No. 16 on July 13, 1994, and filed via EDGAR as Exhibit 1.3 with
Post-Effective Amendment No. 20 on August 8, 1997 and incorporated herein
by reference.
b.1 Revised and Restated By-laws of the Registrant, adopted November 16,
1994, amended February 15, 1995 and further amended November 15, 1995
filed via EDGAR as Exhibit 2.1 with Post-Effective Amendment No. 18 on
August 28, 1996, and incorporated herein by reference.
c. Reference is made to Article VIII Section 1 of Registrant's Revised and
Restated By-laws, as amended, and filed with the Registration Statement
referred to in Exhibit b.1.
d.1 Investment Advisory Agreement between Registrant and National Securities
& Research Corporation dated March 14, 1997, assigned to Phoenix
Investment Counsel, Inc. effective June 1, 1998, filed via EDGAR as
Exhibit 5.1 with Post-Effective Amendment No. 22 on August 18, 1998, and
incorporated herein by reference.
e.1 Underwriting Agreement between Registrant and Phoenix Equity Planning
Corporation dated November 19, 1997 filed via EDGAR as Exhibit 6.1 with
Post-Effective Amendment No. 22 on August 18, 1998, and incorporated
herein by reference.
e.2 Form of Sales Agreement between Phoenix Equity Planning Corporation and
dealers filed via EDGAR as Exhibit 6.2 with Post-Effective Amendment No.
22 on August 18, 1998, and incorporated herein by reference.
e.3 Form of Supplement to Phoenix Family of Funds Sales Agreement filed via
EDGAR as Exhibit 6.3 with Post-Effective Amendment No. 22 on August 18,
1998, and incorporated herein by reference.
e.4 Form of Financial Institution Sales Contract for the Phoenix Family of
Funds filed via EDGAR as Exhibit 6.4 with Post-Effective Amendment No. 22
on August 18, 1998, and incorporated herein by reference.
f. None.
g. Custodian Contract between Registrant and State Street Bank and Trust
Company dated May 1, 1997, filed via EDGAR as Exhibit 8 with
Post-Effective Amendment No. 22 on August 18, 1998, and incorporated
herein by reference.
h.1 Transfer Agency and Service Agreement between Registrant et al and
Phoenix Equity Planning Corporation dated June 1, 1994, filed with
Post-Effective Amendment No. 16 on July 13, 1994, and filed via EDGAR as
Exhibit 9.1 with Post-Effective Amendment No. 20 on August 8, 1997 and
incorporated herein by reference.
h.2 Sub-transfer Agent Agreement between Phoenix Equity Planning Corporation
and State Street Bank and Trust Company dated June 1, 1994, filed with
Post-Effective Amendment No. 16 on July 13, 1994 and filed via EDGAR as
Exhibit 9.2 with Post-Effective Amendment No. 20 on August 8, 1997 and
incorporated herein by reference.
h.3 Amended and Restated Financial Agent Agreement between Registrant and
Phoenix Equity Planning Corporation dated November 19, 1997 and filed via
EDGAR as Exhibit 9.3 with Post-Effective Amendment No. 22 on August 18,
1998, and incorporated herein by reference.
h.4 First Amendment to Financial Agent Agreement between Registrant and
Phoenix Equity Planning Corporation dated March 23, 1998 and filed via
EDGAR as Exhibit 9.4 with Post-Effective Amendment No. 22 on August 18,
1998, and incorporated herein by reference.
h.5 Second Amendment to Financial Agent Agreement between Registrant and
Phoenix Equity Planning Corporation dated July 31, 1998 and filed via
EDGAR as Exhibit 9.5 with Post-Effective Amendment No. 22 on August 18,
1998, and incorporated herein by reference.
i. Opinion of counsel as to legality of the Shares filed via EDGAR herewith.
C-1
<PAGE>
j. Consent of Independent Accountants filed via EDGAR herewith.*
k. Not Applicable.
l. None.
m.1 Amended and Restated Distribution Plan for Class A Shares effective
August 27, 1997, and filed via EDGAR as Exhibit 13.1 with Post-Effective
Amendment No. 22 on August 18, 1998 and incorporated herein by reference.
m.2 Amended and Restated Distribution Plan for Class B Shares effective
August 27, 1997, and filed via EDGAR as Exhibit 13.2 with Post-Effective
Amendment No. 22 on August 18, 1998 and incorporated herein by reference.
n. Financial Data Schedules.
o.1 Amended and Restated Rule 18f-3 Multi-Class Distribution Plan, effective
May 1, 1997, and filed via EDGAR with Post-Effective Amendment No. 22 on
August 18, 1998, and incorporated herein by reference.
o.2 First Amendment to the Amended and Restated Plan Pursuant to Rule 18f-3,
effective August 26, 1998, filed via EDGAR with Post-Effective Amendment
No. 23 on June 25, 1999, and incorporated herein by reference.
p.1 Powers of attorney filed via EDGAR with Post-Effective Amendment No. 23
on June 25, 1999, and incorporated herein by reference.
- -----------
* Filed herewith.
Item 24. Persons Controlled by or Under Common Control with the Fund
No person is controlled by, or under common control, with the Fund.
Item 25. Indemnification
Registrant's indemnification provision is set forth in Post-Effective
Amendment No. 13 filed with the Securities and Exchange Commission on June 30,
1993, and is incorporated herein by reference.
Item 26. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus and "Services of the
Adviser" and "Management of the Fund" in the Statement of Additional
Information. For information as to the business, profession, vocation or
employment of a substantial nature of directors and officers of Phoenix
Investment Counsel, Inc., the Adviser, reference is made to the Advisers'
current Form ADV (SEC File No. 801-5995) filed under the Investment Advisers
Act of 1940 and incorporated herein by reference.
Item 27. Principal Underwriter
(a) Phoenix Equity Planning Corporation also serves as the principal
underwriter for the following other registrants:
Phoenix-Aberdeen Series Fund, Phoenix-Aberdeen Worldwide Opportunities
Fund, Phoenix-Goodwin California Tax Exempt Bonds, Inc., Phoenix Duff &
Phelps Institutional Mutual Funds, Phoenix-Engemann Funds, Phoenix Equity
Series Fund, Phoenix-Euclid Funds, Phoenix Income & Growth Fund, Phoenix
Investment Trust 97, Phoenix Multi-Portfolio Fund, Phoenix Multi-Sector
Fixed Income Fund, Inc., Phoenix Multi-Sector Short Term Bond Fund,
Phoenix Series Fund, Phoenix-Seneca Funds, Phoenix Strategic Allocation
Fund, Inc., Phoenix Strategic Equity Series Fund, Phoenix-Zweig Trust,
Phoenix Home Life Variable Universal Life Account, Phoenix Home Life
Variable Accumulation Account, PHL Variable Accumulation Account, Phoenix
Life and Annuity Variable Universal Life Account and PHL Variable
Separate Account MVA1.
C-2
<PAGE>
(b) Directors and executive officers of Phoenix Equity Planning Corporation
are as follows:
<TABLE>
<CAPTION>
Name and Position and Offices Position and Offices
Principal Address with Distributor with Registrant
----------------- ---------------- ---------------
<S> <C> <C>
Michael E. Haylon Director Executive Vice President
56 Prospect St.
P.O. Box 150480
Hartford, CT 06115-0480
Philip R. McLoughlin Director and President Director and President
56 Prospect St.
P.O. Box 150480
Hartford, CT 06115-0480
William R. Moyer Director, Senior Vice Vice President
100 Bright Meadow Blvd. President, Chief Financial
P.O. Box 1900 Officer and Treasurer
Enfield, CT 06083-1900
John F. Sharry President, Retail Distribution Executive Vice President
100 Bright Meadow Blvd.
P.O. Box 1900
Enfield, CT 06083-1900
Leonard J. Saltiel Managing Director, Vice President
56 Prospect St. Operations and Service
P.O. Box 150480
Hartford, CT 06115-0480
G. Jeffrey Bohne Vice President, Mutual Fund Secretary
101 Munson Street Customer Service
P.O. Box 810
Greenfield, MA 01302-0810
Nancy G. Curtiss Vice President and Treasurer, Treasurer
56 Prospect St. Fund Accounting
P.O. Box 150480
Hartford, CT 06115-0480
Thomas N. Steenburg Vice President, Counsel and Assistant Secretary
56 Prospect St. Secretary
P.O. Box 150480
Hartford, CT 06115-0480
Jacqueline M. Porter Assistant Vice President, Assistant Treasurer
56 Prospect St. Financial Reporting
P.O. Box 150480
Hartford, CT 06115-0480
</TABLE>
(c) To the best of the Registrant's knowledge, no commissions or other
compensation was received be any principal underwriter who is not an
affiliated person of the Registrant or an affiliated person of such
affiliated person, directly or indirectly, from the Registrant during the
Registrant's last fiscal year.
Item 28. Location of Accounts and Records
Persons maintaining physical possession of 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 include: Registrant's
investment adviser, Phoenix Investment Counsel, Inc.; Registrant's financial
agent, transfer agent and principal underwriter, Phoenix Equity Planning
Corporation; Registrant's dividend disbursing agent and custodian, State Street
Bank and Trust Company. The address of the Secretary of the Fund is 101 Munson
Street, Greenfield, Massachusetts 01301; the address of Phoenix Investment
Counsel, Inc. is 56 Prospect Street, Hartford, Connecticut 06115-2520; the
address of Phoenix Equity Planning Corporation is 100 Bright Meadow Boulevard,
P.O. Box 2200, Enfield, Connecticut 06083-2200; and the address of the
custodian is P.O. Box 351, Boston, Massachusetts 02101.
C-3
<PAGE>
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund certifies that it meets all of the requirements for
effectiveness of this registration statement under Rule 485(b) of the
Securities Act and has duly caused this amendment to the registration statement
to be signed on its behalf by the undersigned, duly authorized, in the City of
Hartford and State of Connecticut on the 24th day of August, 1999.
PHOENIX-GOODWIN CALIFORNIA
TAX EXEMPT BONDS, INC.
ATTEST: /s/ Nancy J. Engberg By: /s/ Philip R. McLoughlin
-------------------------- -------------------------------
Nancy J. Engberg Philip R. McLoughlin
Assistant Secretary President
Pursuant to the requirements of the Securities Act, this amendment to the
registration statement has been signed below by the following persons in the
capacities indicated, on this 24th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director
- ----------------------------
Robert Chesek*
Director
- ----------------------------
E. Virgil Conway*
/s/ Nancy G. Curtiss Treasurer (Principal
- ---------------------------- Financial and
Nancy G. Curtiss Accounting Officer)
Director
- ----------------------------
Harry Dalzell-Payne*
Director
- ----------------------------
Frances E. Jeffries*
Director
- ----------------------------
Leroy Keith, Jr.*
/s/ Philip R. McLoughlin President and Director
- ---------------------------- (Principal Executive Officer)
Philip R. McLoughlin
Director
- ----------------------------
Everett L. Morris*
Director
- ----------------------------
James M. Oates*
Director
- ----------------------------
Calvin J. Pedersen*
Director
- ----------------------------
Herbert Roth, Jr.*
Director
- ----------------------------
Richard E. Segerson*
Director
- ----------------------------
Lowell P. Weicker, Jr.*
</TABLE>
*By: /s/ Philip R. McLoughlin
-------------------------
* Philip R. McLoughlin Attorney-in-fact
pursuant to powers of attorney filed
previously.
S-1
[LETTERHEAD]
THE PHOENIX FUNDS
August 24, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Phoenix California Tax Exempt Bonds, Inc. (the "Fund")
Post Effective Amendment No. 23 to Registration Statement No. 2-83024
Ladies and Gentlemen:
This opinion is furnished in connection with the registration under the
Securities Act of 1933, as amended, of shares (the "Shares") of the
above-referenced Fund. In rendering this opinion, I have examined such
documents, records and matters of law as deemed necessary for purposes of this
opinion. I have assumed the genuineness of all signatures of all parties, the
authenticity of all documents submitted as originals, the correctness of all
copies and the correctness of all written or oral statement made to me.
Based upon and subject to the foregoing, it is my opinion that the Shares
that will be issued by the Fund when sold will be legally issued, fully paid,
and non-assessable.
My opinion is rendered solely in connection with the Registration Statement
on Form N-IA under which the Shares will be registered and may not be relied
upon for any other purpose without my written consent. I hereby consent to the
use of this opinion as an exhibit to such Registration Statement.
Very truly yours,
/s/ Nancy J. Engberg
Nancy J. Engberg
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 23 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated June 11, 1999, relating to the financial
statements and financial highlights appearing in the April 30, 1999 Annual
Report to Shareholders of the Phoenix California Tax Exempt Bonds, Inc.
(currently known as Phoenix-Goodwin California Tax Exempt Bonds, Inc.), which
are also incorporated by reference into the Registration Statement. We also
consent to the reference to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Additional Information - Independent
Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 24, 1999
