UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-10575
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND, INC.
(Exact name of registrant as specified in charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of principal executive offices) (Zip code)
Mark R. Manley
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 221-5672
Date of fiscal year end: October 31, 2005
Date of reporting period: April 30, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
[LOGO] ALLIANCEBERNSTEIN (R)
Investment Research and Management
Alliance California Municipal Income Fund
Closed End
April 30, 2005
SEMI-ANNUAL REPORT
Investment Products Offered
o Are Not FDIC Insured
o May Lose Value
o Are Not Bank Guaranteed
You may obtain a description of the Fund's proxy voting policies and
procedures, and information regarding how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30,
without charge. Simply visit AllianceBernstein's web site at
www.alliancebernstein.com, or go to the Securities and Exchange Commission's
(the "Commission") web site at www.sec.gov, or call AllianceBernstein at (800)
227-4618.
The Fund files its complete schedule of portfolio holdings with the Commission
for the first and third quarters of each fiscal year on Form N-Q. The Fund's
Forms N-Q are available on the Commission's web site at www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the Commission's Public Reference
Room in Washington, DC; information on the operation of the Public Reference
Room may be obtained by calling (800) SEC-0330
AllianceBernstein Investment Research and Management, Inc. is an affiliate of
Alliance Capital Management L.P., the manager of the funds, and is a member of
the NASD.
June 20, 2005
Semi-Annual Report
This report provides management's discussion of fund performance for Alliance
California Municipal Income Fund (the "Fund") for the semi-annual reporting
period ended April 30, 2005. The Fund is a closed-end fund that trades under
the New York Stock Exchange symbol "AKP".
Investment Objective and Policies
The Fund is a closed-end management investment company designed for investors
who seek high current income exempt from regular federal income tax and
California income tax. Under normal conditions, the Fund will invest at least
80%, and normally substantially all, of its net assets in municipal securities
paying interest that is exempt from regular federal and California income tax.
In addition, the Fund normally invests at least 75% of its net assets in
investment grade municipal securities. For more information regarding the
Fund's risks, please see "A Word About Risk" on page 3 and "Note G-Risks
Involved in Investing in the Fund" of the Notes to Financial Statements on page
19.
Investment Results
The table on page 4 provides performance data for the Fund and its benchmark,
the Lehman Brothers (LB) Municipal Index, for the six- and 12-month periods
ended April 30, 2005. For comparison, returns for the Lipper California
Municipal Debt Funds Average (the "Lipper Average") are also included. The
funds that comprise the Lipper Average have generally similar investment
objectives to the Fund, although some may have different investment policies
and sales and management fees.
The Fund outperformed its benchmark and its peer group, as represented by the
Lipper Average, during both the six- and 12-month periods ended April 30, 2005.
The Fund's stronger relative performance versus its benchmark during the
six-month reporting period was largely the result of security selection in the
insured, general obligation and special tax sectors. The Fund's relative
exposure to the pre-refunded sector also contributed positively to the Fund's
performance. The Fund's relative exposure to the industrial revenue bond sector
detracted from performance.
Market Review and Investment Strategy
During the six-month period ended April 30, 2005, long-term municipal bond
yields declined and short-term municipal bond yields increased. Yields moved in
a similar manner in the Treasury bond market. The rise in short-term bond
yields was in response to the U.S. Federal Reserve increasing the target for
the Federal Funds rate by 1.00% through four rate hikes over the period.
Inconclusive economic signals and moderate inflation expectations, however,
allowed longer-term bond yields to decline. On a pre-tax basis, the municipal
market outperformed the taxable bond market for the six-month period ended
April 30, 2005. The LB Municipal Index gained 1.93%, versus the LB U.S.
Aggregate Index, representing taxable bonds, which returned 0.98% during the
same time frame. As of April 30, 2005,
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 1
30-year municipal bonds were yielding approximately 97% of comparable maturity
Treasury bonds.
Interest rates are still low by historical standards versus inflation and
indications of economic growth. As such, the Fund's portfolio managers (the
"managers") continue to maintain shorter-than-benchmark portfolio durations.
The low-rate environment has led to relatively strong demand for lower-rated
bonds as investors seek higher income producing bonds. As the yield premium on
lower-rated bonds declined, making them more expensive to buy/own versus high
quality bonds, the managers sold lower-rated bonds opportunistically. Stronger
economic growth has helped boost state and local government tax revenues,
improving the creditworthiness of state and local issuers. Holdings in general
obligation bonds benefited from this trend.
2 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
HISTORICAL PERFORMANCE
An Important Note About the Value of Historical Performance
The performance on the following page represents past performance and does not
guarantee future results. Current performance may be lower or higher than the
performance information shown. Returns are annualized for periods longer than
one year. All fees and expenses related to the operation of the Fund have been
deducted. Performance assumes reinvestment of distributions and does not
account for taxes.
Alliance California Municipal Income Fund Shareholder Information
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transaction section of The Wall Street Journal under the
abbreviation "AllianceCal." The Fund's NYSE trading symbol is "AKP." Weekly
comparative net asset value (NAV) and market price information about the Fund
is published each Monday in The Wall Street Journal, each Sunday in The New
York Times and each Saturday in Barron's and other newspapers in a table called
"Closed-End Bond Funds." For additional shareholder information regarding this
Fund, please see page 33.
Benchmark Disclosure
The unmanaged Lehman Brothers (LB) Municipal Index does not reflect fees and
expenses associated with the active management of a mutual fund portfolio. The
Index is a total return performance benchmark for the long-term, investment
grade, tax-exempt bond market. For both the six- and 12-month periods ended
April 30, 2005, the Lipper California Municipal Debt Funds Average consisted of
29 funds. These funds have generally similar investment objectives to the Fund,
although some may have different investment policies and sales and management
fees. An investor cannot invest directly in an index or average, and their
results are not indicative of the performance for any specific investment,
including the Fund.
A Word About Risk
Among the risks of investing in the Fund are changes in the general level of
interest rates or changes in bond credit quality ratings. Changes in interest
rates have a greater effect on bonds with longer maturities than on those with
shorter maturities. Please note, as interest rates rise, existing bond prices
fall and can cause the value of your investment in the Fund to decline. While
the Fund invests principally in bonds and other fixed-income securities, in
order to achieve its investment objectives, the Fund may at times use certain
types of investment derivatives, such as options, futures, forwards and swaps.
These instruments involve risks different from, and in certain cases, greater
than, the risks presented by more traditional investments. The Fund will invest
substantially all of its net assets in California Municipal Bonds and is
therefore susceptible to political, economic or regulatory factors specifically
affecting California municipal bond issuers.
The issuance of the Fund's preferred stock results in leveraging of the Common
Stock, an investment technique usually considered speculative. Leverage creates
certain risks for holders of Common Stock, including higher volatility of both
the net asset value and market value of the Common Stock, and fluctuations in
the dividend rates on the preferred stock will affect the return to holders of
Common Stock. If the Fund were fully invested in longer-term securities and if
short-term interest rates were to increase, then the amount of dividends paid
on the preferred shares would increase and both net investment income available
for distribution to the holders of Common Stock and the net asset value of the
Common Stock would decline. At the same time, the market value of the Fund's
Common Stock (that is, its price as listed on the New York Stock Exchange) may,
as a result, decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price of the
portfolio's investments, since the value of the Fund's Preferred Stock does not
fluctuate. In addition to the decline in net asset value, the market value of
the Fund's Common Stock may also decline.
(Historical Performance continued on next page)
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 3
HISTORICAL PERFORMANCE
(continued from previous page)
Returns
THE FUND VS. ITS BENCHMARK --------------------------
PERIODS ENDED APRIL 30, 2005 6 Months 12 Months
- ------------------------------------------------------------------
Alliance California Municipal
Income Fund (NAV) 5.19% 13.70%
- ------------------------------------------------------------------
LB Municipal Index 1.93% 6.81%
- ------------------------------------------------------------------
Lipper California Municipal
Debt Funds Average 4.17% 11.97%
- ------------------------------------------------------------------
The Fund's Market Price per share on April 30, 2005 was $14.27. For additional
Financial Highlights, please see page 22.
See Historical Performance and Benchmark disclosures on previous page.
4 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
PORTFOLIO SUMMARY
April 30, 2005 (unaudited)
PORTFOLIO STATISTICS
Net Assets ($mil): $131.6
BOND QUALITY RATING BREAKDOWN*
70.2% AAA
2.7% AA
16.1% A (PIE CHART OMMITED)
5.9% BBB
5.1% BB
* All data are as of April 30, 2005. The Fund's quality rating distribution is
expressed as a percentage of the Fund's total investments rated in particular
ratings categories by Standard & Poor's Rating Services and Moody's Investors
Service. The distributions may vary over time. If ratings are not available,
the Fund's Adviser will assign ratings that are considered to be of equivalent
quality to such ratings.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 5
PORTFOLIO OF INVESTMENTS
April 30, 2005 (unaudited)
Principal
Amount
(000) Value
- -------------------------------------------------------------------------------
MUNICIPAL BONDS-159.7%
Long-Term Municipal Bonds-159.7%
Arizona-3.9%
Arizona Hlth Fac Hosp Rev
(Phoenix Childrens Hosp) Ser 02A
6.00%, 2/15/32 $ 5,000 $ 5,083,350
----------
California-145.3%
Assoc Bay Area Gov MFHR
(Bijou Woods Apts) FNMA Ser 01A AMT
5.30%, 12/01/31 2,735 2,815,628
Bellflower Redev Agy MFHR
(Bellflower Terrace) FNMA Ser 02A AMT
5.50%, 6/01/35 3,000 3,166,470
California CFD
(YMCA Metro LA Proj) AMBAC Ser 01
5.25%, 2/01/32 6,295 6,726,711
California Ed Facs Auth Rev
(Lutheran University) Ser 04C
5.00%, 10/01/24 1,250 1,293,575
California GO
Ser 02
5.25%, 4/01/30 10,000 10,525,600
Ser 03
5.25%, 2/01/24 1,500 1,606,515
Ser 04
5.30%, 4/01/29 1,000 1,070,260
Veterans Housing FSA Ser 01
5.60%, 12/01/32 1,205 1,220,219
Veterans Housing MBIA Ser 01BZ AMT
5.375%, 12/01/24 4,000 4,048,920
California Hgr Ed Fac
(Univ of The Pacific) Ser 02
5.375%, 11/01/32 4,035 4,266,730
California Hlth Fac
(Sutter Health) Ser 00A
6.25%, 8/15/35 5,000 5,675,700
California Hlth Fac Hosp Rev
(Lucile Salter Packard Hosp) AMBAC Ser 03C
5.00%, 8/15/22 3,295 3,487,000
California Hlth Fac Rev
(Cottage Health Sys) MBIA Ser 03B
5.00%, 11/01/23 2,770 2,928,915
California Pub Wks Bd Lease Rev
(Dept of Hlth Svcs-Richmond Lab) XLCA
Ser 05B
5.00%, 11/01/30 3,500 3,642,100
6 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
Principal
Amount
(000) Value
- -------------------------------------------------------------------------------
California State Dept of Wtr
Ser 02A
5.375%, 5/01/22 $ 4,000 $ 4,319,680
California Statewide Cmnty Dev Auth Rev
(Daughters Of Charity Health) Ser 05A
5.25%, 7/01/24 775 819,981
California Statewide Ed Fac
(Bentley School) Ser 01
6.75%, 7/01/32 2,500 2,708,025
California Statewide Hosp Rev
(Kaiser Permanente) Ser 02
5.50%, 11/01/32 4,000 4,218,160
Cucamonga Sch Dist
Ser 02
5.125%, 6/01/23 820 839,992
Fontana Pub Fin Auth
AMBAC (No Fontana Redev Proj) Ser 03A
5.50%, 9/01/32 (a)(b) 4,800 5,221,920
Fontana Spec Tax
(Cmnty Facs Dist No 22-Sierra Hills) Ser 04
5.85%, 9/01/25 2,000 2,022,720
Golden State
Tobacco Settlement Bonds XLCA Ser 03B
5.50%, 6/01/33 5,000 5,469,700
Huntington Park Pub Fin Auth Rev
FSA Ser 04A
5.25%, 9/01/17 1,000 1,130,360
La Quinta Fin Auth Loc Agy Rev
AMBAC Ser 04A
5.25%, 9/01/24 3,000 3,267,390
Lincoln Spec Tax
(Cmnty Facs Dist No 2003-1) Ser 04
5.90%, 9/01/24 500 510,810
Long Beach Bond Fin Auth Rev
(Redev Hsg & Gas Util Fin) AMBAC Ser 05A-1
5.00%, 8/01/25 450 477,378
Los Angeles Cmnty Coll Dist
(Election 2001) FSA Ser 05A
5.00%, 8/01/24 500 535,565
Los Angeles Cmnty Redev Agy
Ser 04L
5.00%, 3/01/18 1,000 1,016,110
Los Angeles Cnty Metro Tran Auth
FGIC Ser 00A
5.25%, 7/01/30 4,700 5,102,132
Los Angeles Cnty Pub Works Fin Auth Lease Rev
(Master Ref Proj) MBIA Ser 05A
5.00%, 12/01/27-12/01/28 4,870 5,141,386
Los Angeles Dept of Wtr & Pwr
Elec Rev FGIC Ser 01A
5.125%, 7/01/41 10,000 10,392,300
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 7
Principal
Amount
(000) Value
- -------------------------------------------------------------------------------
Los Angeles Spec Tax
(Grand Central Square) AMBAC Ser 02 AMT
5.375%, 12/01/26 $ 6,635 $ 6,652,052
Los Angeles Uni Sch Dist
MBIA Ser 02E
5.125%, 1/01/27 10,000 10,578,900
Mount San Antonio Cmnty College
MBIA Ser 04B
5.25%, 8/01/24 1,510 1,643,575
Murrieta Valley Uni Sch Dist CFD
(Rancho Mira Mosa) Ser 02
6.375%, 9/01/32 1,000 1,071,950
Murrieta Valley Uni Sch Dist CFD
Ser 02 ETM
6.375%, 9/01/32 985 1,048,769
Napa MFHR
(Vintage at Napa Apts) FNMA Ser 01A AMT
5.20%, 6/15/34 4,500 4,778,415
Orange Cnty
(San Joaquin Hills Transp) MBIA Ser 97
5.25%, 1/15/30 5,000 5,274,500
Palo Alto Assess Dist
(University Ave Area Off Street Parking) Ser 02A
5.875%, 9/02/30 8,020 8,195,237
Perris Union Hgh Sch Dist
FGIC Ser 05A
5.00%, 9/01/24 1,200 1,282,800
Pomona COP
AMBAC Ser 03
5.50%, 6/01/34 1,640 1,814,053
Port of Oakland
FGIC Ser 02L AMT
5.375%, 11/01/27 5,000 5,288,650
Riverside Cnty Pub Fin Auth Tax Alloc Rev
(Redev Proj) XLCA Ser 04
5.00%, 10/01/23-10/01/24 2,860 3,017,611
Salinas Valley Sld Waste
(Transfer Station) AMBAC Ser 02 AMT
5.25%, 8/01/31 3,930 4,100,287
San Diego Uni Port Dist Rev
MBIA Ser 04B
5.00%, 9/01/24 1,030 1,097,887
San Diego Uni Sch Dist
(Election 1998) MBIA Ser 04E-1
5.00%, 7/01/23-7/01/24 2,000 2,157,000
San Francisco City & Cnty Arpt Rev
(Int'l Arpt) FGIC Ser 03
5.125%, 5/01/19 1,000 1,088,430
(Int'l Arpt) MBIA Ser 02-28A AMT
5.125%, 5/01/32 2,500 2,585,250
8 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
Principal
Amount
(000) Value
- -------------------------------------------------------------------------------
San Francisco City & Cnty Lease Rev
(San Bruno Jail #3) AMBAC Ser 00
5.25%, 10/01/33 $ 5,000 $ 5,407,950
San Ramon Valley Uni Sch Dist
(Election 2002) FSA Ser 04
5.00%, 8/01/24 1,425 1,518,223
Sequoia Uni Sch Dist
FSA Ser 02
5.125%, 7/01/31 1,770 1,883,262
Temecula Redev Agy
MBIA Ser 02
5.25%, 8/01/36 6,270 6,763,512
Torrance COP
(Ref & Pub Impt Proj) AMBAC Ser 04A
5.00%, 6/01/24 2,275 2,412,842
(Ref & Pub Impt Proj) AMBAC Ser 05B TBD
5.00%, 6/01/24 665 705,292
Yorba Linda
(Black Gold Golf Course Proj Rev) Ser 00
7.50%, 10/01/30 4,500 5,183,370
-----------
191,217,769
-----------
Ohio-0.4%
Port Auth of Columbiana Cnty SWR
(Apex Environmental Llc) Ser 04A AMT
7.125%, 8/01/25 500 506,005
-----------
Puerto Rico-10.1%
Puerto Rico Elec Pwr Auth Rev
XLCA Ser 02-2
5.25%, 7/01/31 6,000 6,457,200
Puerto Rico Hwy & Trans Auth
Ser 02D
5.375%, 7/01/36 6,450 6,901,629
-----------
13,358,829
-----------
Total Investments-159.7%
(cost $198,898,602) 210,165,953
Other assets less liabilities-1.8% 2,393,705
Preferred Stock, at redemption value-(61.5%) (81,000,000)
------------
Net Assets Applicable to
Common Shareholders-100%(c) $131,559,658
------------
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 9
INTEREST RATE SWAP TRANSACTIONS (see Note C)
Rate Type
-----------------------
Payments Payments
Notional made by received Unrealized
Swap Amount Termination the by the Appreciation/
Counterparty (000) Date Portfolio Portfolio (Depreciation)
- -----------------------------------------------------------------------------------------------
Goldman Sachs $10,900 02/03/06 76.48% of BMA* $ (6,679)
1 Month LIBOR+
Merrill Lynch 10,900 02/03/06 BMA* 85.10% of 33,476
1 Month LIBOR+
* BMA (Bond Market Association)
+ LIBOR (London Interbank Offered Rate)
FINANCIAL FUTURES CONTRACTS SOLD (see Note C)
Value at
Number of Expiration Original April 30, Unrealized
Type Contracts Month Value 2005 (Depreciation)
- --------------------------------------------------------------------------------------------
U.S. T-Note
10 Yr Future 38 June 2005 $4,195,592 $4,234,031 $ (38,439)
Swap 10 Yr
Future 31 June 2005 3,402,133 3,424,531 (22,398)
----------
$ (60,837)
----------
(a) Position, or portion thereof, with a market value of $212,141 has been
segregated to collateralize margin requirements for open futures contracts.
(b) Represents entire or partial position as collateral for interest rate
swaps.
(c) Portfolio percentages are calculated based on net assets applicable to
common shareholders.
Glossary of Terms:
AMBAC - American Municipal Bond Assurance Corporation
AMT - Alternative Minimum Tax- (subject to)
CFD - Community Facilities District
COP - Certificate of Participation
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Company
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance, Inc.
GO - General Obligation
MBIA - Municipal Bond Investors Assurance
MFHR - Multi-Family Housing Revenue
SWR - Solid Waste Revenue
TBD - To be determined
XLCA - XL Capital Assurance
See notes to financial statements.
10 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF ASSETS & LIABILITIES
April 30, 2005 (unaudited)
Assets
Investments in securities, at value (cost $198,898,602) $210,165,953
Interest receivable 3,053,880
Unrealized appreciation of swap agreements 33,476
Prepaid expenses 27,416
Receivable for variation margin on futures contracts 20,156
------------
Total assets 213,300,881
------------
Liabilities
Due to custodian 501,762
Dividends payable--preferred shares 70,822
Advisory fee payable 62,574
Unrealized depreciation of swap agreements 6,679
Transfer Agent fee payable 3,583
Accrued expenses and other liabilities 95,803
------------
Total liabilities 741,223
------------
Preferred Stock, at redemption value
$.001 par value per share; 3,240 shares Auction
Preferred Stock authorized, issued and outstanding
at $25,000 per share liquidation preference 81,000,000
------------
Net Assets Applicable to Common Shareholders $131,559,658
------------
Composition of Net Assets Applicable to
Common Shareholders
Common stock, $.001 par value per share;
1,999,996,760 shares authorized, 8,519,002 shares
issued and outstanding $ 8,519
Additional paid-in capital 120,705,531
Undistributed net investment income 1,896,930
Accumulated net realized loss on investment transactions (2,284,657)
Net unrealized appreciation of investments 11,233,335
------------
Net Assets Applicable to Common Shareholders $131,559,658
------------
Net Asset Value Applicable to Common Shareholders
(based on 8,519,002 common shares outstanding) $15.44
------------
See notes to financial statements.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 11
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2005 (unaudited)
Investment Income
Interest $5,187,485
Expenses
Advisory fee $682,578
Auction Preferred Stock-auction
agent's fees 101,321
Custodian 55,243
Audit 31,190
Legal 20,661
Directors' fees and expenses 16,060
Transfer agency 12,395
Registration fees 10,890
Printing 9,679
Miscellaneous 14,109
---------
Total expenses 954,126
Less: expenses waived by the Adviser
(see Note B) (315,036)
---------
Net expenses 639,090
---------
Net investment income 4,548,395
---------
Realized and Unrealized Gain (Loss)
on Investment Transactions
Net realized gain/(loss) on:
Investment transactions 230,261
Futures (64,760)
Swaps 9,604
Net change in unrealized
appreciation/depreciation of:
Investments 2,158,601
Futures 94,991
Swaps (2,416)
---------
Net gain on investment transactions 2,426,281
---------
Dividends to Auction Preferred
Shareholders from
Net investment income (660,516)
---------
Net Increase in Net Assets Applicable
to Common Shareholders Resulting
from Operations $6,314,160
----------
See notes to financial statements.
12 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS
Six Months
Ended Year Ended
April 30, 2005 October 31,
(unaudited) 2004
-------------- ------------
Increase (Decrease) in Net Assets
Applicable to Common Shareholders
Resulting from Operations
Net investment income $4,548,395 $9,398,627
Net realized gain (loss) on
investment transactions 175,105 (629,446)
Net change in unrealized
appreciation/depreciation
of investments 2,251,176 6,628,994
Dividends to Auction Preferred
Shareholders from
Net investment income (660,516) (1,073,234)
------------ ------------
Net increase in net assets applicable
to Common Shareholders resulting
from operations 6,314,160 14,324,941
Dividends to Common
Shareholders from
Net investment income (4,089,121) (8,144,161)
------------ ------------
Total increase 2,225,039 6,180,780
Net Assets Applicable to
Common Shareholders
Beginning of period 129,334,619 123,153,839
------------ ------------
End of period (including undistributed
net investment income of $1,896,930
and $2,098,172, respectively) $131,559,658 $129,334,619
------------ ------------
See notes to financial statements.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 13
NOTES TO FINANCIAL STATEMENTS
April 30, 2005 (unaudited)
NOTE A
Significant Accounting Policies
Alliance California Municipal Income Fund, Inc. (the "Fund"), was incorporated
in the state of Maryland on November 9, 2001 and is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. The financial statements have been prepared in conformity
with U.S. generally accepted accounting principles which requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities in the financial statements and amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
followed by the Fund.
1. Security Valuation
Portfolio securities are valued at their current market value determined on the
basis of market quotations or, if market quotations are not readily available
or are deemed unreliable, at "fair value" as determined in accordance with
procedures established by and under the general supervision of the Fund's Board
of Directors.
In general, the market value of securities which are readily available and
deemed reliable are determined as follows. Securities listed on a national
securities exchange or on a foreign securities exchange are valued at the last
sale price at the close of the exchange or foreign securities exchange. If
there has been no sale on such day, the securities are valued at the mean of
the closing bid and asked prices on such day. Securities listed on more than
one exchange are valued by reference to the principal exchange on which the
securities are traded; securities not listed on an exchange but traded on The
NASDAQ Stock Market, Inc. ("NASDAQ") are valued in accordance with the NASDAQ
Official Closing Price; listed put or call options are valued at the last sale
price. If there has been no sale on that day, such securities will be valued at
the closing bid prices on that day; open futures contracts and options thereon
are valued using the closing settlement price or, in the absence of such a
price, the most recent quoted bid price. If there are no quotations available
for the day of valuation, the last available closing settlement price is used;
securities traded in the over-the-counter market, ("OTC") (but excluding
securities traded on NASDAQ) are valued at the mean of the current bid and
asked prices as reported by the National Quotation Bureau or other comparable
sources; U.S. Government securities and other debt instruments having 60 days
or less remaining until maturity are valued at amortized cost if their original
maturity was 60 days or less; or by amortizing their fair value as of the 61st
day prior to maturity if their original term to maturity exceeded 60 days;
fixed-income securities, including mortgage backed and asset backed securities,
may be valued on the basis of prices provided by a pricing service or at a
price obtained from one or more of the major broker/dealers. In cases where
broker/dealer quotes are obtained, Alliance Capital Management, L.P. (the
"Adviser") may establish procedures whereby changes in market yields or spreads
14 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
are used to adjust, on a daily basis, a recently obtained quoted price on a
security; and OTC and other derivatives are valued on the basis of a quoted bid
price or spread from a major broker/dealer in such security.
Securities for which market quotations are not readily available (including
restricted securities) or are deemed unreliable are valued at fair value.
Factors considered in making this determination may include, but are not
limited to, information obtained by contacting the issuer, analysts, analysis
of the issuer's financial statements or other available documents. In addition,
the Fund may use fair value pricing for securities primarily traded in non-U.S.
markets because, most foreign markets close well before the Fund values its
securities at 4:00 p.m., Eastern Time. The earlier close of these foreign
markets gives rise to the possibility that significant events, including broad
market moves, may have occurred in the interim and may materially affect the
value of those securities.
2. Taxes
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. Investment Income and Investment Transactions
Interest income is accrued daily. Investment transactions are accounted for on
the trade date securities are purchased or sold. Investment gains and losses
are determined on the identified cost basis. The Fund amortizes premiums and
accretes original issue discounts and market discounts as adjustments to
interest income.
4. Dividends and Distributions
Dividends and distributions to shareholders, if any, are recorded on the
ex-dividend date. Income dividends and capital gains distributions are
determined in accordance with federal tax regulations and may differ from those
determined in accordance with U.S. generally accepted accounting principles. To
the extent these differences are permanent, such amounts are reclassified
within the capital accounts based on their federal tax basis treatment;
temporary differences do not require such reclassification.
NOTE B
Advisory Fees and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Fund pays the Adviser,
an advisory fee at an annual rate of .65 of 1% of the Fund's average daily net
assets applicable to common and preferred shareholders. Such fee is accrued
daily and paid monthly. The Adviser has voluntarily agreed to waive a portion
of its fees or reimburse the Fund for expenses in the amount of 0.30% of the
Fund's average daily net assets applicable to common and preferred shareholders
for the first 5 full years of the Fund's operations, 0.25% of the Fund's
average daily net
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 15
assets applicable to common and preferred shareholders in year 6, 0.20% in year
7, 0.15% in year 8, 0.10% in year 9, and 0.05% in year 10. For the six-months
ended April 30, 2005, the amount of such fees waived was $315,036.
Under the terms of a Shareholder Inquiry Agency Agreement with Alliance Global
Investor Services, Inc. (AGIS), an affiliate of the Adviser, the Fund
reimburses AGIS for costs relating to servicing phone inquiries for the Fund.
During the six-months ended April 30, 2005, there was no reimbursement paid to
AGIS.
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short-term investments)
for the six-months ended April 30, 2005 were as follows:
Purchases Sales
------------ ---------
Investment securities (excluding
U.S.government securities) $15,380,890 $5,190,845
U.S. government securities -0- -0-
The cost of investments for federal income tax purposes was substantially the
same as the cost for financial reporting purposes. Accordingly, gross
unrealized appreciation and unrealized depreciation (excluding swap and futures
transactions) are as follows:
Gross unrealized appreciation $11,293,610
Gross unrealized depreciation (26,259)
-----------
Net unrealized appreciation $11,267,351
-----------
1. Swap Agreements
The Portfolio may enter into swaps to hedge its exposure to interest rates and
credit risk or for investment purposes. A swap is an agreement that obligates
two parties to exchange a series of cash flows at specified intervals based
upon or calculated by reference to changes in specified prices or rates for a
specified amount of an underlying asset. The payment flows are usually netted
against each other, with the difference being paid by one party to the other.
Risks may arise as a result of the failure of the counterparty to the swap
contract to comply with the terms of the swap contract. The loss incurred by
the failure of a counterparty is generally limited to the net interim payment
to be received by the Portfolio, and/or the termination value at the end of the
contract. Therefore, the Portfolio considers the creditworthiness of each
counterparty to a swap contract in evaluating potential credit risk.
Additionally, risks may arise from unanticipated movements in interest rates or
in the underlying securities.
As of November 1, 2003, the Fund has adopted the method of accounting for
interim payments on swap contracts in accordance with the Financial Accounting
16 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
Standards Board Statement No. 133. The Fund accrues for the interim payments on
swap contracts on a daily basis, with the net amount recorded within unrealized
appreciation/depreciation of swap contracts on the statement of assets and
liabilities. Once the interim payments are settled in cash, the net amount is
recorded as realized gain/loss on swaps, in addition to realized gain/loss
recorded upon the termination of swap contracts on the statement of operations.
Prior to November 1, 2003, these interim payments were reflected within
interest income/expense in the statement of operations. Fluctuations in the
value of swap contracts are recorded as a component of net change in unrealized
appreciation/depreciation of investments.
2. Financial Futures Contracts
The Fund may buy or sell financial futures contracts for the purpose of hedging
the portfolio against adverse effects of anticipated movements in the market.
The Fund bears the market risk that arises from changes in the value of these
financial instruments and the imperfect correlation between movements in the
price of the futures contracts and movements in the price of the securities
hedged or used for cover.
At the time the Fund enters into a futures contract, the Fund deposits and
maintains as collateral an initial margin as required by the exchange on which
the transaction is effected. 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 the value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
Risks may arise from the potential inability of the counterparty to meet the
terms of the contract. 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 time it was closed.
NOTE D
Common Stock
The Fund has 1,999,996,760 shares of $.001 par value common stock authorized.
There are 8,519,002 shares of common stock outstanding at April 30, 2005.
NOTE E
Preferred Stock
The Fund has authorized, issued and outstanding 3,240 shares of Auction
Preferred Stock, consisting of 1,620 shares each of Series M and Series T. The
preferred shares have a liquidation value of $25,000 per share plus
accumulated, unpaid dividends. The dividend rate on the Auction Preferred Stock
may change generally every 7 days as set by the auction agent for Series M. The
dividend rate on the Series M is 2.00% effective through May 9, 2005. The
dividend rate on Series T is 1.62% effective through August 2, 2005.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 17
At certain times, the Preferred Shares are redeemable by the Fund, in whole or
in part, at $25,000 per share plus accumulated, unpaid dividends.
Although the Fund will not ordinarily redeem the Preferred Shares, it may be
required to redeem shares if, for example, the Fund does not meet an asset
coverage ratio required by law or to correct a failure to meet a rating agency
guideline in a timely manner. The Fund voluntarily may redeem the Preferred
Shares in certain circumstances.
The Preferred Shareholders, voting as a separate class, have the right to elect
at least two Directors at all times and to elect a majority of the Directors in
the event two years' dividends on the Preferred Shares are unpaid. In each
case, the remaining Directors will be elected by the Common Shareholders and
Preferred Shareholders voting together as a single class. The Preferred
Shareholders will vote as a separate class on certain other matters as required
under the Fund's Charter, the Investment Company Act of 1940 and Maryland law.
NOTE F
Distributions To Common Shareholders
The tax character of distributions to be paid to common shareholders for the
year ending October 31, 2005 will be determined at the end of the current
fiscal year. The tax character of distributions paid to common shareholders
during the fiscal years ended October 31, 2004 and October 31, 2003 were as
follows:
2004 2003
--------- ----------
Distributions paid from:
Ordinary income $ 6,720 $ 8,867
Tax exempt income 8,137,441 7,112,978
---------- ----------
Total distributions paid $8,144,161 $7,121,845
---------- ----------
As of October 31, 2004, the components of accumulated earnings/(deficit)
applicable to common shareholders on a tax basis were as follows:
Undistributed tax exempt income $ 2,164,020
Accumulated capital and other losses (2,615,590)(a)
Unrealized appreciation/(depreciation) 9,137,962(b)
-----------
Total accumulated earnings/(deficit) $ 8,686,392(c)
-----------
(a) On October 31, 2004, the Fund had a net capital loss carryforward of
$2,615,590 of which $448,177 expires in the year 2010, $1,382,341 expires
in the year 2011 and $785,072 expires in the year 2012. To the extent future
capital gains are offset by capital loss carryforward, such gains will not be
distributed.
(b) The differences between book-basis and tax-basis unrealized
appreciation/(depreciation) are attributed primarily to the difference between
the book and tax treatment of swap income and the realization for tax purposes
of gain/losses on certain derivative instruments.
(c) The difference between book-basis and tax-basis components of accumulated
earnings/(deficit) is attributable primarily to dividends payable.
18 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
NOTE G
Risks Involved in Investing in the Fund
Interest Rate Risk and Credit Risk--Interest rate risk is the risk that changes
in interest rates will affect the value of the Fund's investments in
fixed-income debt securities such as bonds or notes. Increases in interest
rates may cause the value of the Fund's investments to decline. Credit risk is
the risk that the issuer or guarantor of a debt security, or the counterparty
to a derivative contract, will be unable or unwilling to make timely principal
and/or interest payments, or to otherwise honor its obligations. The degree of
risk for a particular security may be reflected in its credit risk rating.
Credit risk is greater for medium quality and lower-rated securities.
Lower-rated debt securities and similar unrated securities (commonly known as
"junk bonds") have speculative elements or are predominantly speculative risks.
Concentration of Credit Risk--The Fund invests primarily in securities issued
by the State of California and its various political subdivisions, and the
performance of the Fund is closely tied to economic conditions within the
State and the financial condition of the State and its agencies and
municipalities.
Indemnification Risk--In the ordinary course of business, the Fund enters into
contracts that contain a variety of indemnifications. The Fund's maximum
exposure under these arrangements is unknown. However, the Fund has not had
prior claims or losses pursuant to these indemnification provisions and expects
the risk of loss thereunder to be remote.
NOTE H
Legal Proceedings
As has been previously reported, the staff of the U.S. Securities and Exchange
Commission ("SEC") and the Office of the New York Attorney General ("NYAG")
have been investigating practices in the mutual fund industry identified as
"market timing" and "late trading" of mutual fund shares. Certain other
regulatory authorities have also been conducting investigations into these
practices within the industry and have requested that the Adviser provide
information to them. The Adviser has been cooperating and will continue to
cooperate with all of these authorities. The shares of the Fund are not
redeemable by the Fund, but are traded on an exchange at prices established by
the market. Accordingly, the Fund and its shareholders are not subject to the
market timing and late trading practices that are the subject of the
investigations mentioned above or the lawsuits described below. Please see
below for a description of the agreements reached by the Adviser and the SEC
and NYAG in connection with the investigations mentioned above.
Numerous lawsuits have been filed against the Adviser and certain other
defendants in which plaintiffs make claims purportedly based on or related to
the same practices that are the subject of the SEC and NYAG investigations
referred to above. Some of these lawsuits name the Fund as a party. The
lawsuits are now
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 19
pending in the United States District Court for the District of Maryland
pursuant to a ruling by the Judicial Panel on Multidistrict Litigation
transferring and centralizing all of the mutual fund cases involving market and
late trading in the District of Maryland. Management of the Adviser believes
that these private lawsuits are not likely to have a material adverse effect on
the results of operations or financial condition of the Fund.
On December 18, 2003, the Adviser confirmed that it had reached terms with the
SEC and the NYAG for the resolution of regulatory claims relating to the
practice of "market timing" mutual fund shares in some of the AllianceBernstein
Mutual Funds. The agreement with the SEC is reflected in an Order of the
Commission ("SEC Order"). The agreement with the NYAG is memorialized in an
Assurance of Discontinuance dated September 1, 2004 ("NYAG Order"). Among the
key provisions of these agreements are the following:
(i) The Adviser agreed to establish a $250 million fund (the "Reimbursement
Fund") to compensate mutual fund shareholders for the adverse effects of market
timing attributable to market timing relationships described in the SEC Order.
According to the SEC Order, the Reimbursement Fund is to be paid, in order of
priority, to fund investors based on
(i) their aliquot share of losses suffered by the fund due to market timing,
and (ii) a proportionate share of advisory fees paid by such fund during the
period of such market timing;
(ii) The Adviser agreed to reduce the advisory fees it receives from some of
the AllianceBernstein long-term, open-end retail funds, commencing January 1,
2004, for a period of at least five years; and
(iii) The Adviser agreed to implement changes to its governance and compliance
procedures. Additionally, the SEC Order contemplates that the Adviser's
registered investment company clients, including the Fund, will introduce
governance and compliance changes.
The shares of the Fund are not redeemable by the Fund, but are traded on an
exchange at prices established by the market. Accordingly, the Fund and its
shareholders are not subject to the market timing practices described in the
SEC Order and are not expected to participate in the Reimbursement Fund. Since
the Fund is a closed-end fund, it will not have its advisory fee reduced
pursuant to the terms of the agreements mentioned above.
The Adviser and approximately twelve other investment management firms were
publicly mentioned in connection with the settlement by the SEC of charges that
an unaffiliated broker/dealer violated federal securities laws relating to its
receipt of compensation for selling specific mutual funds and the disclosure of
such compensation. The SEC indicated publicly that, among other things, it was
considering enforcement action in connection with mutual funds' disclosure of
such
20 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
arrangements and in connection with the practice of considering mutual fund
sales in the direction of brokerage commissions from fund portfolio
transactions. The SEC issued subpoenas to the Adviser, and the NASD issued
requests for information in connection with this matter and the Adviser
provided documents and other information to the SEC and NASD and cooperated
fully with the investigations. On June 8, 2005 the NASD announced that it had
reached a settlement with AllianceBernstein Investment Research and Management,
Inc., a wholly owned subsidiary of the Adviser and the distributor of the
open-end mutual funds sponsored by the Adviser, in connection with this matter.
Management of the Adviser expects that the settlement has resolved both
regulatory inquires described above.
On June 22, 2004, a purported class action complaint entitled Aucoin, et al. v.
Alliance Capital Management L.P., et al. ("Aucoin Complaint") was filed against
the Adviser, Alliance Capital Management Holding L.P., Alliance Capital
Management Corporation, AXA Financial, Inc., AllianceBernstein Investment
Research & Management, Inc., certain current and former directors of the
AllianceBernstein Mutual Funds, and unnamed Doe defendants. The Aucoin
Complaint names certain of the AllianceBernstein mutual funds as nominal
defendants. The Aucoin Complaint was filed in the United States District Court
for the Southern District of New York by an alleged shareholder of an
AllianceBernstein mutual fund. The Aucoin Complaint alleges, among other
things, (i) that certain of the defendants improperly authorized the payment of
excessive commissions and other fees from fund assets to broker-dealers in
exchange for preferential marketing services, (ii) that certain of the
defendants misrepresented and omitted from registration statements and other
reports material facts concerning such payments, and (iii) that certain
defendants caused such conduct as control persons of other defendants. The
Aucoin Complaint asserts claims for violation of Sections 34(b), 36(b) and
48(a) of the Investment Company Act, Sections 206 and 215 of the Advisers Act,
breach of common law fiduciary duties, and aiding and abetting breaches of
common law fiduciary duties. Plaintiffs seek an unspecified amount of
compensatory damages and punitive damages, rescission of their contracts with
the Adviser, including recovery of all fees paid to the Adviser pursuant to
such contracts, an accounting of all fund-related fees, commissions and soft
dollar payments, and restitution of all unlawfully or discriminatorily obtained
fees and expenses.
Since June 22, 2004, numerous additional lawsuits making factual allegations
substantially similar to those in the Aucoin Complaint were filed against the
Adviser and certain other defendants, and others may be filed.
The Adviser believes that these matters are not likely to have a material
adverse effect on the Fund or the Adviser's ability to perform advisory
services relating to the Fund.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 21
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Common Stock Outstanding Throughout Each Period
Six Months Year Ended January 29,
Ended October 31, 2002(b) to
April 30, 2005 -------------------- October 31,
(unaudited) 2004(a) 2003 2002
------------------------------------------------------
Net asset value, beginning of period $15.18 $14.46 $14.68 $14.33
------------------------------------------------------
Income from Investment Operations
Net investment income(c)(d) .53 1.10 1.15 .73
Net realized and unrealized gain (loss) on
investment transactions .29 .70 (.40) .46
Dividends to preferred shareholders from
net investment income (common stock
equivalent basis) (.08) (.13) (.12) (.08)
------------------------------------------------------
Net increase in net asset value from
operations .74 1.67 .63 1.11
------------------------------------------------------
Less: Dividends to common
shareholders from
Net investment income (.48) (.95) (.84) (.61)
Common stock offering costs -0- -0- -0- (.03)
Preferred stock offering costs and
sales load -0- -0- (.01) (.12)
------------------------------------------------------
Net asset value, end of period $15.44 $15.18 $14.46 $14.68
------------------------------------------------------
Market value, end of period $14.27 $14.20 $13.18 $13.78
------------------------------------------------------
Discount (7.58)% (6.46)% (8.85)% (6.13)%
Total Return
Total investment return based on:(e)
Market value 3.93% 15.48% 1.67% (4.08)%
Net asset value 5.19% 12.52% 4.70% 6.93%
Ratios/Supplemental Data:
Net assets applicable to common
shareholders, end of period
(000's omitted) $131,560 $129,335 $123,154 $125,054
Preferred Stock, at redemption value
($25,000 per share liquidation
preference) (000's omitted) $81,000 $81,000 $81,000 $81,000
Ratio to average net assets applicable to
common shareholders of:
Expenses, net of fee waivers(f) .99%(g) 1.03% 1.04% 1.07%(g)
Expenses, before fee waivers(f) 1.48%(g) 1.52% 1.53% 1.53%(g)
Net investment income, before
preferred stock dividends(d)(f) 7.04%(g) 7.45% 7.88% 6.69%(g)
Preferred stock dividends 1.02%(g) .85% .85% .72%(g)
Net investment income, net of
preferred stock dividends(d) 6.02%(g) 6.60% 7.03% 5.97%(g)
Portfolio turnover rate 3% 15% 18% 20%
Asset coverage ratio 262% 260% 252% 254%
See footnote summary on page 23.
22 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
(a) As of November 1, 2003, the Fund has adopted the method of accounting for
interim payments on swap contracts in accordance with Financial Accounting
Standards Board Statement No. 133. These interim payments are reflected within
net realized and unrealized gain (loss) on swap contracts, however, prior to
November 1, 2003, these interim payments were reflected within interest
income/expense on the statement of operations. For the year ended October 31,
2004, the effect of this change to the net investment income and the net
realized and unrealized gain (loss) on investment transactions was less than
$0.01 per share and the ratio of net investment income to average net assets
was 0.00%.
(b) Commencement of operations. Net asset value immediately after the closing
of the first public offering was $14.30.
(c) Based on average shares outstanding.
(d) Net of fees waived by the Adviser.
(e) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day of
the period reported. Dividends and distributions, if any, are assumed for
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease in
the premium of the market value to net asset value from the beginning to the
end of such periods. Conversely, total investment return based on net asset
value will be lower than total investment return based on market value in
periods where there is a decrease in the discount or an increase in the premium
of the market value to the net asset value from the beginning to the end of the
period. Total investment return calculated for a period of less than one year
is not annualized.
(f) These expense and net investment income ratios do not reflect the effect
of dividend payments to preferred shareholders.
(g) Annualized.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 23
SUPPLEMENTAL PROXY INFORMATION
(unaudited)
The Special Meeting of Shareholders of Alliance California Municipal Income
Fund, Inc. was held on March 24, 2005. A description of the proposal and
number of shares voted at the meeting are as follows:
Authority
Voted For Withheld
- -------------------------------------------------------------------------------
1. Election of Directors Class One Nominee
(term expires 2007):
Director Nominee
Michael J. Downey 8,349,018 54,584
Class Two Nominees
(terms expire 2008):
Director Nominee
William H. Foulk, Jr. 8,341,751 61,852
David H. Dievler 8,335,649 67,954
24 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
BOARD OF DIRECTORS
William H. Foulk, Jr.(1), Chairman
Marc O. Mayer, President
Ruth Block(1)
David H. Dievler(1)
John H. Dobkin(1)
Michael J. Downey(1)
Dr. James M. Hester(1)
OFFICERS
Robert B. Davidson, III, Senior Vice President
Philip L. Kirstein, Senior Vice President and Independent Compliance Officer
Douglas J. Peebles, Senior Vice President
Jeffrey L. Phlegar, Senior Vice President
David M. Dowden(2), Vice President
Terrance T. Hults(2), Vice President
William E. Oliver, Vice President
Mark R. Manley, Secretary
Mark D. Gersten, Treasurer & Chief Financial Officer
Thomas R. Manley, Controller
Custodian
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Seward & Kissel LLP
One Battery Park Plaza
New York, NY 10004
Preferred Stock:
Dividend Paying Agent,
Transfer Agent and Registrar
The Bank of New York
100 Church Street
New York, NY 10286
Independent Registered
Public Accounting Firm
Ernst & Young LLP
5 Times Square
New York, NY 10036
Common Stock:
Dividend Paying Agent,
Transfer Agent and Registrar
Equiserve Trust Company, N.A.
P.O. Box 43011
Providence, RI 02940-3011
(1) Member of the Audit Committee, the Governance and Nominating Committee,
and the Independent Directors Committee.
(2) Messrs. Dowden and Hults are the persons primarily responsible for the
day-to-day management of the Fund's investment portfolio.
Notice is hereby given in accordance with Section 23(c) of the Investment
CompanyAct of 1940 that the Fund may purchase at market prices from time to
time shares of its Common Stock in the open market.
This report, including the financial statements therein, is transmitted to the
shareholders of Alliance California Municipal Income Fund for their
information.This is not a prospectus, circular or representation intended for
use in the purchase of shares of the Fund or any securities mentioned in the
report.
Annual Certifications--As required, on April 21, 2005, the Fund submitted to
the New York Stock Exchange ("NYSE") the annual certification of the Fund's
Chief Executive Officer certifying that he is not aware of any violation of the
NYSE's Corporate Governance listing standards. The Fund also has included the
certifications of the Fund's Chief Executive Officer and Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits
to the Fund's Form N-CSR filed with the Securities and Exchange Commission for
the annual period.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 25
Information Regarding the Review and Approval of the Fund's Advisory Agreement
The Fund's disinterested directors (the "directors") unanimously approved the
continuance of the Advisory Agreement between the Fund and the Adviser at a
meeting held on February 7-10, 2005.
In preparation for the meeting, the directors had requested from the Adviser
and evaluated extensive materials, including performance and expense
information for other investment companies with similar investment objectives
derived from data compiled by Lipper Inc. ("Lipper"). Prior to voting, the
directors reviewed the proposed continuance of the Advisory Agreement with
management and with experienced counsel who are independent of the Adviser and
received a memorandum from such counsel discussing the legal standards for
their consideration of the proposed continuance. The directors also discussed
the proposed continuance in two private sessions at which only the directors,
their independent counsel and the Fund's Independent Compliance Officer were
present. In reaching their determinations relating to continuance of the
Advisory Agreement, the directors considered all factors they believed
relevant, including the following:
1. information comparing the performance of the Fund to other investment
companies with similar investment objectives and to an index;
2. the nature, extent and quality of investment, compliance, administrative
and other services rendered by the Adviser;
3. payments received by the Adviser from all sources in respect of the Fund
and all investment companies in the AllianceBernstein Fund complex;
4. the costs borne by, and profitability of, the Adviser and its affiliates
in providing services to the Fund and to all investment companies in the
AllianceBernstein Fund complex;
5. comparative fee and expense data for the Fund and other investment
companies with similar investment objectives;
6. the extent to which economies of scale would be realized as the Fund
grows and whether fee levels reflect these economies of scale for the benefit
of investors;
7. the Adviser's policies and practices regarding allocation of portfolio
transactions of the Fund, including the extent to which the Adviser benefits
from soft dollar arrangements;
8. portfolio turnover rates for the Fund;
26 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
9. fall-out benefits which the Adviser and its affiliates receive from
their relationships with the Fund;
10. the Adviser's representation that it does not advise other clients with
similar investment objectives and strategies;
11. the professional experience and qualifications of the Fund's portfolio
management team and other senior personnel of the Adviser; and
12. the terms of the Advisory Agreement.
The directors also considered their knowledge of the nature and quality of the
services provided by the Adviser to the Fund gained from their experience as
directors or trustees of most of the funds advised by the Adviser, their
overall confidence in the Adviser's integrity and competence they have gained
from that experience and the Adviser's responsiveness to concerns raised by
them in the past, including the Adviser's willingness to consider and implement
organizational and operational changes designed to improve investment results
and the services provided to the AllianceBernstein Funds.
In their deliberations, the directors did not identify any particular
information that was all-important or controlling, and each director attributed
different weights to the various factors.
The directors determined that the overall arrangements between the Fund and the
Adviser, as provided in the Advisory Agreement, were fair and reasonable in
light of the services performed, expenses incurred and such other matters as
the directors considered relevant in the exercise of their business judgment.
The material factors and conclusions that formed the basis for the directors'
reaching their determinations to approve the continuance of the Advisory
Agreement (including their determinations that the Adviser should continue to
be the investment adviser for the Fund, and that the fees payable to the
Adviser pursuant to the Advisory Agreement are appropriate) were separately
discussed by the directors.
Nature, extent and quality of services provided by the Adviser
The directors noted that, under the Advisory Agreement, the Adviser, subject to
the control of the directors, administers the Fund's business and other
affairs. The Adviser manages the investment of the assets of the Fund,
including making purchases and sales of portfolio securities consistent with
the Fund's investment objective and policies. The Adviser also provides the
Fund with such office space, administrative and other services (exclusive of,
and in addition to, any such services provided by any others retained by the
Fund) and executive and other personnel as are necessary for the Fund's
operations. The Adviser pays all of the
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 27
compensation of directors of the Fund who are affiliated persons of the Adviser
and of the officers of the Fund.
The directors also considered that a provision in the Advisory Agreement for
the Fund provides that the Fund will reimburse the Adviser for the cost of
certain clerical, accounting, administrative and other services provided at the
Fund's request by employees of the Adviser or its affiliates. The directors
noted that no reimbursements had been made to date by the Fund to the Adviser
as no requests for such reimbursements had been made in light of the expense
cap for the Fund. Requests for these "at no more than cost" reimbursements are
approved by the directors on a quarterly basis for most of the open-end
AllianceBernstein funds and result in a higher rate of total compensation from
the funds to the Adviser than the stated fee rates in the funds' advisory
agreements.
The directors considered the scope and quality of services provided by the
Adviser under the Advisory Agreement and noted that the scope of services
provided had expanded over time as a result of regulatory and other
developments. The directors noted that, for example, the Adviser is responsible
for maintaining and monitoring its own and, to varying degrees, the Fund's
compliance programs, and these compliance programs have recently been refined
and enhanced in light of new regulatory requirements. The directors considered
the quality of the investment research capabilities of the Adviser and the
other resources it has dedicated to performing services for the Fund. The
quality of administrative and other services, including the Adviser's role in
coordinating the activities of the Fund's other service providers, also were
considered. The directors also considered the Adviser's response to recent
regulatory compliance issues affecting many of the investment companies in the
AllianceBernstein Fund complex. The directors concluded that, overall, they
were satisfied with the nature, extent and quality of services provided to the
Fund under the Advisory Agreement.
Costs of Services Provided and Profitability to the Adviser
The directors reviewed a schedule of the revenues, expenses and related notes
indicating the profitability of the Fund to the Adviser for calendar year 2003
and for the period from January 28, 2002 (inception) to December 31, 2002. The
directors reviewed the assumptions and methods of allocation used by the
Adviser in preparing fund-specific profitability data, and noted the Adviser's
representation to them that it believed that the methods of allocation used in
preparing the profitability information were reasonable and appropriate and
that the Adviser had previously discussed with the directors that there is no
generally accepted allocation methodology for information of this type.
The directors recognized that it is difficult to make comparisons of
profitability from fund advisory contracts because comparative information is
not generally publicly available and is affected by numerous factors, including
the structure of the particular adviser, the types of funds it manages, its
business mix, numerous
28 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
assumptions regarding allocations and the adviser's capital structure and cost
of capital. In considering profitability information, the directors considered
the effect of fall-out benefits on the Adviser's expenses. The directors
focused on the profitability of the Adviser's relationship with the Fund before
taxes. The directors recognized that the Adviser should generally be entitled
to earn a reasonable level of profits for the services it provides to the Fund
and, based on their review, concluded that they were satisfied that the
Adviser's level of profitability from its relationship with the Fund was not
excessive.
Fall-Out Benefits
The directors considered that the Adviser benefits from soft dollar
arrangements whereby it receives brokerage and research services from many of
the brokers and dealers that execute purchases and sales of securities on
behalf of its clients, including the Fund. While the Fund does not normally
engage in brokerage transactions, the Adviser may benefit from soft dollar
arrangements when the Fund purchases securities in fixed price underwritings.
They noted that the Adviser makes presentations to the directors regarding its
trading practices and brokerage allocation policies, including its policies
with respect to soft dollar arrangements, from time to time and had made a
special presentation to the directors in 2004 on this subject. The directors
noted that the Adviser has represented to them that all of its soft dollar
arrangements are consistent with applicable legal requirements including the
achievement of best execution. At the special presentation, the directors
received and reviewed information concerning the Adviser's soft dollar
arrangements, which included a description of the Adviser's policies and
procedures with respect to allocating portfolio transactions for brokerage and
research services, data on the dollar amount of commissions allocated for
third-party research and brokerage services and for proprietary research and
brokerage services, and a list of firms providing third-party research and
brokerage to the Adviser.
The directors also noted that a subsidiary of the Adviser provides certain
shareholder services to the Fund and receives compensation from the Fund for
such services.
The directors recognized that the Adviser's profitability would be somewhat
lower if it did not receive research for soft dollars or if the Adviser's
subsidiary did not receive the other benefits described above. The directors
believe that the Adviser derives reputational and other benefits from its
association with the Fund.
Investment Results
In addition to the information reviewed by the directors in connection with the
meeting, the directors receive detailed comparative performance information for
the Fund at each regular Board meeting during the year. At the meeting, the di-
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 29
rectors reviewed information showing performance of the Fund compared to other
funds in the Lipper California Municipal Debt Average for periods ending
December 31, 2004 and compared to the Lehman Brothers Municipal Bond Index. The
directors noted that the Fund had performed somewhat above the Lipper median in
the 1-month period and significantly above the Lipper medians in the 3-month,
1-year and since-inception periods (January 2002 inception). Based on their
review, the directors concluded that the Fund's relative investment performance
over time had been satisfactory.
Advisory Fees and Other Expenses
The directors considered the advisory fee rate paid by the Fund to the Adviser
and information prepared by Lipper concerning fee rates paid by other funds in
the same Lipper category as the Fund. The directors recognized that it is
difficult to make comparisons of advisory fees because there are variations in
the services that are included in the fees paid by other funds.
The directors noted that in connection with the settlement of the market timing
matter with the New York Attorney General, the Adviser agreed to material
reductions (averaging 20%) in the fee schedules of most of the open-end funds
sponsored by the Adviser (other than money market funds). As a result of that
settlement, the Adviser's fees (i) for managing open-end high income funds are
..50% of the first $2.5 billion of average daily net assets, .45% for average
daily net assets over that level to $5 billion, and .40% for average daily net
assets over $5 billion; and (ii) for managing open-end low risk income funds
are .45% of the first $2.5 billion of average daily net assets, .40% for
average daily net assets over that level to $5 billion, and .35% for average
daily net assets over $5 billion.
At their December 14-16, 2004 meetings, the directors requested a reduction in
the advisory fees of the Fund to the fee levels charged to comparable open-end
funds managed by the Adviser and deferred renewal of the Fund's Advisory
Agreement pending receipt and consideration of proposals by the Adviser. At the
February 7-10, 2005 meeting, the directors considered the Adviser's position
that no fee adjustments were warranted.
The directors also considered the total expense ratio of the Fund in comparison
to the fees and expenses of funds within the relevant Lipper category. The
expense ratio of the Fund was based on the Fund's latest fiscal year expense
ratio. The expense ratio of the Fund reflected fee waivers and/or expense
reimbursements. The directors recognized that the expense ratio information for
the Fund potentially reflected on the Adviser's provision of services, as the
Adviser is responsible for coordinating services provided to the Fund by
others. The directors noted that the expense ratios of some funds in the Fund's
Lipper category also were lowered by waivers or reimbursements by those funds'
investment advisers, which in some cases were voluntary and perhaps temporary.
30 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
The information reviewed by the directors showed that the Fund's at current
size contractual effective fee rate of 65 basis points was slightly above the
Lipper average and the same as the Lipper median. The directors also noted that
the Fund's expense ratio was somewhat higher than the Lipper median. The
directors further noted that the Fund's expense ratio was affected by its
relatively small size (approximately $210 million) and were satisfied that the
Fund's expense ratio was acceptable in light of the Fund's relatively small
size.
Economies of Scale
The directors considered that the Fund is a closed-end Fund and that it was not
expected to have meaningful asset growth as a result. In such circumstances,
the directors did not view the potential for realization of economies of scale
as the Fund's assets grow to be a material factor in their deliberations. The
directors also noted that if the Fund's net assets were to increase materially
as a result of, e.g., an acquisition or rights offering, they would review
whether potential economies of scale would be realized.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 31
ALLIANCEBERNSTEIN FAMILY OF FUNDS
Wealth Strategies Funds
- -------------------------------------------------------------------------------
Balanced Wealth Strategy
Wealth Appreciation Strategy
Wealth Preservation Strategy
Tax-Managed Balanced Wealth Strategy
Tax-Managed Wealth Appreciation Strategy
Tax-Managed Wealth Preservation Strategy
Blended Style Funds
- -------------------------------------------------------------------------------
U.S. Large Cap Portfolio
International Portfolio
Tax-Managed International Portfolio
Growth Funds
- -------------------------------------------------------------------------------
Domestic
Growth Fund
Mid-Cap Growth Fund
Large Cap Growth Fund*
Small Cap Growth Portfolio
Global & International
Global Health Care Fund*
Global Research Growth Fund
Global Technology Fund*
Greater China '97 Fund
International Growth Fund*
International Research Growth Fund*
Value Funds
- -------------------------------------------------------------------------------
Domestic
Balanced Shares
Focused Growth & Income Fund*
Growth & Income Fund
Real Estate Investment Fund
Small/Mid-Cap Value Fund*
Utility Income Fund
Value Fund
Global & International
Global Value Fund
International Value Fund
Taxable Bond Funds
- -------------------------------------------------------------------------------
Americas Government Income Trust
Corporate Bond Portfolio
Emerging Market Debt Fund
Global Strategic Income Trust
High Yield Fund
Multi-Market Strategy Trust
Quality Bond Portfolio
Short Duration Portfolio
U.S. Government Portfolio
Municipal Bond Funds
- -------------------------------------------------------------------------------
National
Insured National
Arizona
California
Insured California
Florida
Massachusetts
Michigan
Minnesota
New Jersey
New York
Ohio
Pennsylvania
Virginia
Intermediate Municipal Bond Funds
- -------------------------------------------------------------------------------
Intermediate California
Intermediate Diversified
Intermediate New York
Closed-End Funds
- -------------------------------------------------------------------------------
All-Market Advantage Fund
ACM Income Fund
ACM Government Opportunity Fund
ACM Managed Dollar Income Fund
ACM Managed Income Fund
ACM Municipal Securities Income Fund
California Municipal Income Fund
National Municipal Income Fund
New York Municipal Income Fund
The Spain Fund
World Dollar Government Fund
World Dollar Government Fund II
We also offer Exchange Reserves,** which serves as the money market fund
exchange vehicle for the AllianceBernstein mutual funds.
For more complete information on any AllianceBernstein mutual fund, including
investment objectives and policies, sales charges, expenses, risks and other
matters of importance to prospective investors, visit our web site at
www.alliancebernstein.com or call us at (800) 227-4618 for a current
prospectus. You should read the prospectus carefully before you invest.
* Prior to December 15, 2004, these Funds were named as follows: Global Health
Care Fund was Health Care Fund; Large Cap Growth Fund was Premier Growth Fund;
Global Technology Fund was Technology Fund; and Focused Growth & Income Fund
was Disciplined Value Fund. Prior to February 1, 2005, Small/Mid-Cap Value Fund
was named Small Cap Value Fund. Prior to May 16, 2005, International Growth
Fund was named Worldwide Privatization Fund and International Research Growth
Fund was named International Premier Growth Fund. On June 24, 2005, All-Asia
Investment Fund merged into International Research GrowthFund. On July 8, 2005,
New Europe Fund will merge into International Research Growth Fund.
** An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
32 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
SUMMARY OF GENERAL INFORMATION
Shareholder Information
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transaction section of The Wall Street Journal under the
abbreviation "AllianceCal." The Fund's NYSEtrading symbol is "AKP." Weekly
comparative net asset value (NAV) and market price information about the Fund
is published each Monday in The Wall Street Journal, each Sunday in The New
York Times and each Saturday in Barron's and other newspapers in a table called
"Closed-End Bond Funds."
Dividend Reinvestment Plan
A Dividend Reinvestment Plan provides automatic reinvestment of dividends and
capital gains in additional Fund shares.
For questions concerning shareholder
account information, or if you would like a brochure describing the Dividend
Reinvestment Plan, please call Equiserve Trust Company at (800) 219-4218.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 33
NOTES
34 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
NOTES
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND o 35
NOTES
36 o ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
Privacy Notice
Alliance, the AllianceBernstein Family of Funds and AllianceBernstein
Investment Research and Management, Inc. (collectively, "Alliance" or "we")
understand the importance of maintaining the confidentiality of our customers'
nonpublic personal information. In order to provide financial products and
services to our customers efficiently and accurately, we may collect nonpublic
personal information about our customers from the following sources: (1)
information we receive from account documentation, including applications or
other forms (which may include information such as a customer's name, address,
social security number, assets and income) and (2) information about our
customers' transactions with us, our affiliates and others (including
information such as a customer's account balances and account activity).
It is our policy not to disclose nonpublic personal information about our
customers (or former customers) except to our affiliates, or to others as
permitted or required by law. From time to time, Alliance may disclose
nonpublic personal information that we collect about our customers (or former
customers), as described above, to non-affiliated third party providers,
including those that perform processing or servicing functions and those that
provide marketing services for us or on our behalf pursuant to a joint
marketing agreement that requires the third party provider to adhere to
Alliance's privacy policy. We have policies and procedures to safeguard
nonpublic personal information about our customers (or former customers) which
include: (1) restricting access to such nonpublic personal information and (2)
maintaining physical, electronic and procedural safeguards that comply with
federal standards to safeguard such nonpublic personal information.
ALLIANCE CALIFORNIA MUNICIPAL INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
CAMSR0405
ITEM 2. CODE OF ETHICS.
Not applicable when filing a semi-annual report to shareholders.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable when filing a semi-annual report to shareholders.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable when filing a semi-annual report to shareholders.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable when filing a semi-annual report to shareholders.
ITEM 6. SCHEDULE OF INVESTMENTS.
Please see Schedule of Investments contained in the Report to Shareholders
included under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable when filing a semi-annual report to shareholders.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
There have been no purchases of equity securities by the Fund or by affiliated
parties for the reporting period.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the Fund's Board of Directors since the Fund last
provided disclosure in response to this item.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-2(c) under the Investment Company Act of 1940, as
amended) are effective at the reasonable assurance level based on their
evaluation of these controls and procedures as of a date within 90 days of the
filing date of this document.
(b) There were no significant changes in the registrant's internal controls
over financial reporting during the second fiscal quarter of the period that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 11. EXHIBITS.
The following exhibits are attached to this Form N-CSR:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
11 (b) (1) Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
11 (b) (2) Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
11 (c) Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
<page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant): Alliance California Municipal Income Fund, Inc.
By: /s/ Marc O. Mayer
-------------
Marc O. Mayer
President
Date: June 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Marc O. Mayer
-------------
Marc O. Mayer
President
Date: June 29, 2005
By: /s/ Mark D. Gersten
---------------
Mark D. Gersten
Treasurer and Chief Financial Officer
Date: June 29, 2005