THE AMERICAN FUNDS TAX-EXEMPT SERIES I
THE TAX-EXEMPT FUND OF MARYLAND
THE TAX-EXEMPT FUND OF VIRGINIA
PART B
STATEMENT OF ADDITIONAL INFORMATION
November 15, 1998
(As amended August 1, 1999)
This document is not a prospectus but should be read in conjunction with the
current Prospectus dated November 15, 1998 of The American Funds Tax-Exempt
Series I (the "Trust"). The Trust currently consists of two series, The
Tax-Exempt Fund of Maryland (the "Maryland Fund" or "fund") and The Tax-Exempt
Fund of Virginia (the "Virginia Fund" or "fund"). Except where the context
indicates otherwise, all references herein to the "fund" apply to each of the
two funds. The Prospectus may be obtained from your securities dealer or
financial planner or by writing to the Trust at the following address:
THE AMERICAN FUNDS TAX-EXEMPT SERIES I
Attention: Secretary
1101 Vermont Avenue, N.W.
Washington, D.C. 20005
(202) 842-5665
TABLE OF CONTENTS
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ITEM PAGE NO.
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Description of Certain Securities and Investment Techniques B-1
Investment Restrictions B-5
Trust Officers and Trustees, including Trustee Compensation B-7
Management B-10
Dividends and Distributions B-12
Additional Information Concerning Taxes B-12
Purchase of Shares B-14
Shareholder Account Services and Privileges B-21
Execution of Portfolio Transactions B-22
General Information B-23
Investment Results B-25
Description of Ratings for Debt Securities B-27
Financial Statements Attached
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DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The descriptions below are intended to supplement the material in the
prospectus under "Investment Policies and Risks."
INVESTMENT POLICIES - Up to 20% of the fund's total assets may be invested in
tax-exempt securities that are rated below the four highest categories by
Standard & Poor's Corporation ("S&P") or by Moody's Investors Service, Inc.
("Moody's") (or equivalent securities that are not rated). These bonds are
commonly known as "junk bonds" or high-yield, high-risk bonds. See
"Description of Ratings for Debt Securities" below.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk bonds
can be very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers or issuers whose revenue is very sensitive to economic
conditions may experience financial stress that would adversely affect their
ability to service their principal and interest payment obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of
a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceedings, the fund may incur losses or expenses in seeking
recovery of amounts owed to it. In addition, periods of economic uncertainty
and changes can be expected to result in increased volatility of market prices
and yields of high-yield, high-risk bonds.
PAYMENT EXPECTATIONS - High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining
interest rate market, the fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high-yield, high-risk bond's value will decrease in a rising interest market,
as will the value of the fund's assets.
LIQUIDITY AND VALUATION - There may be little trading in the secondary market
for particular bonds, which may affect adversely the fund's ability to value
accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
Subsequent to its purchase by the fund, an issue of municipal bonds or notes
may cease to be rated or its rating may be reduced below the minimum rating
required for its purchase. Neither event requires the elimination of such
obligation from a fund's portfolio, but the Investment Adviser will consider
such an event in its determination of whether a fund should continue to hold
such obligation in its portfolio. If, however, as a result of downgrades or
otherwise, the fund holds more than 20% of its net assets in high-yield,
high-risk bonds, the fund will dispose of the excess as expeditiously as
possible.
MUNICIPAL BONDS - Municipal bonds are generally debt obligations issued to
obtain funds for various public purposes, including the construction of public
facilities. Opinions relating to the validity of municipal bonds and to the
exclusion from gross income for federal income tax purposes and, where
applicable, the exemption from state and local income tax are rendered by bond
counsel to the respective issuing authorities at the time of issuance.
The two principal classifications of municipal bonds are general obligation and
limited obligation (revenue) bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and credit including, if available, its
taxing power for the payment of principal and interest. Issuers of general
obligation bonds include states, counties, cities, towns and various regional
or special districts. The proceeds of these obligations are used to fund a
wide range of public facilities such as the construction or improvement of
schools, highways and roads, water and sewer systems and facilities for a
variety of other public purposes. Lease revenue bonds or certificates of
participation in leases are payable from annual lease rental payments from a
state or locality and may be considered a general obligation of the entity
making annual rental payments to the extent such rental payments are
appropriated annually.
Typically, the only security for a limited obligation or revenue bond is the
net revenue derived from a particular facility or class of facilities financed
thereby or, in some cases, from the proceeds of a special tax or other special
revenues. Revenue bonds have been issued to fund a wide variety of
revenue-producing public capital projects including: electric, gas, water and
sewer systems; highways, bridges and tunnels; port and airport facilities;
colleges and universities; hospitals; and convention, recreational and housing
facilities. Although the security behind these bonds varies widely, many
provide additional security in the form of a debt service reserve fund which
may also be used to make principal and interest payments on the issuer's
obligations. In addition, some revenue obligations (as well as general
obligations) are insured by a bond insurance company or backed by a letter of
credit issued by a banking institution.
Revenue bonds also include, for example, pollution control, health care and
housing bonds, which, although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured
by the revenues of the authority derived from payments by the private entity
which owns or operates the facility financed with the proceeds of the bonds.
Obligations of housing finance authorities have a wide range of security
features including reserve funds and insured or subsidized mortgages, as well
as the net revenues from housing or other public projects. Most of these bonds
do not generally constitute the pledge of the credit of the issuer of such
bonds. The credit quality of such revenue bonds is usually directly related to
the credit standing of the user of the facility being financed or of an
institution which provides a guarantee, letter of credit or other credit
enhancement for the bond issue.
TEMPORARY INVESTMENTS - The fund may invest in short-term municipal obligations
with a maturity of one year or less during periods of temporary defensive
strategy or when such investments are considered advisable for liquidity.
Generally, the income from all such securities is exempt from federal income
tax. See "Additional Information Concerning Taxes" below. Further, a portion
of the fund's assets, which normally will be less than 20% of assets, may be
held in cash or invested in high quality taxable short-term securities with a
maturity of one year or less. Such temporary investments may include: (1)
obligations of the U.S. Treasury; (2) obligations of agencies and
instrumentalities of the U.S. Government; (3) money market instruments, such as
certificates of deposit issued by domestic banks, corporate commercial paper,
and bankers' acceptances; and (4) repurchase agreements (which are described
below).
MUNICIPAL INFLATION-INDEXED BONDS - The fund may invest in inflation-indexed
bonds issued by municipalities. Interest payments are made to bondholders
semi-annually and are made up of two components; a fixed "real coupon" or
spread, and a variable coupon linked to an inflation index. Accordingly,
payments will increase or decrease each period as a result of changes in the
inflation index. In a period of deflation payments may decrease to zero, but
in any event will not be less than zero.
ZERO COUPON BONDS - Municipalities may issue zero coupon securities which are
debt obligations that do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the security begins to pay
interest. They are issued and traded at a discount from their face amount or
par value, which discount varies depending on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security, and the
perceived credit quality of the issuer.
PRE-REFUNDED BONDS - From time to time, a municipality may refund a bond that
it has already issued prior to the original bond's call date by issuing a
second bond, the proceeds of which are used to purchase securities. The
securities are placed in an escrow account pursuant to an agreement between the
municipality and an independent escrow agent. The principal and interest
payments on the securities are then used to pay off the original bondholders.
For the purpose of diversification, pre-refunded bonds will be treated as
governmental issues.
FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When the fund purchases such securities, it
assumes the risk of any decline in value of the security beginning on the date
of the agreement. When the fund agrees to sell such securities, it does not
participate in further gains or losses with respect to the securities beginning
on the date of the agreement. If the other party to such a transaction fails
to deliver or pay for the securities, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly increases. The fund will not use these
transactions for the purpose of leveraging and will segregate liquid assets
which will be marked to market daily in amounts sufficient to meet its payment
obligations in these transactions. Although these transactions will not be
entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets, the fund
temporarily would be in a leveraged position (because it will have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets will likely occur than were it
not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
REPURCHASE AGREEMENTS - Although the fund has no current intention to do so
during the next 12 months, it may enter on a temporary basis into repurchase
agreements, under which the fund buys a security and obtains a simultaneous
commitment from the seller to repurchase the security at a specified time and
price. Repurchase agreements permit the fund to maintain liquidity and earn
income over periods of time as short as overnight. The seller must maintain
with the fund's custodian bank collateral equal to at least 100% of the
repurchase price including accrued interest, as monitored daily by the
Investment Adviser. The fund will only enter into repurchase agreements
involving securities in which it could otherwise invest and with selected banks
and securities dealers whose financial condition is monitored by the Investment
Adviser. If the seller under the repurchase agreement defaults, the fund may
incur a loss if the value of the collateral securing the repurchase agreement
has declined and may incur disposition costs in connection with liquidating the
collateral. If bankruptcy proceedings are commenced with respect to the
seller, realization upon the collateral by a fund may be delayed or limited.
ADJUSTMENT OF MATURITIES - The Investment Adviser seeks to anticipate movements
in interest rates and adjusts the maturity distribution of the portfolio
accordingly. Longer term securities ordinarily yield more than shorter term
securities but are subject to greater and more rapid price fluctuation.
Keeping in mind the fund's objective of producing a high level of current
income, the Investment Adviser will increase the fund's exposure to this price
volatility only when it appears likely to increase current income without undue
risk to capital.
ISSUE CLASSIFICATION - Securities with the same general quality rating and
maturity characteristics, but which vary according to the purpose for which
they were issued, often tend to trade at different yields. These yield
differentials tend to fluctuate in response to political and economic
developments, as well as temporary imbalances in normal supply/demand
relationships. The Investment Adviser monitors these fluctuations closely, and
will attempt to adjust portfolio concentrations in various issue
classifications according to the value disparities brought about by these yield
relationship fluctuations.
QUALITY - Securities issued for similar purposes and with the same general
maturity characteristics, but which vary according to the creditworthiness of
their respective issuers, tend to trade at different yields. These yield
differentials also tend to fluctuate in response to political, economic and
supply/demand factors. The Investment Adviser will attempt to take advantage
of these fluctuations by adjusting the concentration of portfolio securities in
any given quality category according to the value disparities produced by these
yield relationship fluctuations.
The Investment Adviser believes that, in general, the market for municipal
bonds is less liquid than that for taxable fixed-income securities.
Accordingly, the ability of the fund to make purchases and sales of securities
in the foregoing manner may, at any particular time and with respect to any
particular securities, be limited or non-existent.
PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads or brokerage commissions, and may result in the realization of
net capital gains, which are taxable when distributed to shareholders.
Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. The fund does not
anticipate its portfolio turnover to exceed 100% annually. The fund's
portfolio turnover rate would equal 100% if each security in the fund's
portfolio was replaced once every year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last five years.
RISK OF NON-COMPLIANCE WITH CERTAIN FEDERAL REQUIREMENTS - The Internal Revenue
Code of 1986, as amended, imposes limitations on the use and investment of the
proceeds of state and local governmental bonds and of other funds of the
issuers of such bonds. These limitations must be satisfied on a continuing
basis to maintain the exclusion from gross income of interest on such bonds.
The provisions of the Code generally apply to bonds issued after August 15,
1986. Bond counsel qualify their opinions as to the federal tax status of new
issues of bonds by making such opinions contingent on the issuer's future
compliance with these limitations. Any failure on the part of an issuer to
comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued. These restrictions in the Code
also may affect the availability of certain municipal securities.
INVESTMENT RESTRICTIONS
The fund has adopted certain investment restrictions which may not be changed
without a majority vote of its outstanding shares. Such majority is defined by
the Investment Company Act of 1940, (the "1940 Act"), as the vote of the lesser
of (i) 67% or more of the outstanding voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities are
present in person or by proxy, or (ii) more than 50% of the outstanding voting
securities. Investment limitations expressed in the following restrictions are
considered at the time securities are purchased and are based on the fund's net
assets unless otherwise indicated. These restrictions provide that the fund
may not:
1. Invest more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of any class of securities of any one
issuer (for this purpose all indebtedness of an issuer shall be deemed a single
class), provided that this limitation shall apply only to 75% of the value of
the fund's total assets and, provided further, that the limitation shall not
apply to obligations of the U.S. Government or its agencies or
instrumentalities;
2. Enter into any repurchase agreement maturing in more than seven days
(unless subject to a demand feature of seven days or less) if any such
investment, together with any illiquid securities held by the fund, exceeds 10%
of the value of its total assets;
3. Buy or sell real estate in the ordinary course of its business; however,
the fund may invest in securities secured by real estate or interests therein;
4. Acquire securities subject to legal or contractual restrictions on
disposition;
5. Make loans to others, except for the purchase of debt securities or
entering into repurchase agreements;
6. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short;
7. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases or sales;
8. Borrow money, except from banks for temporary or emergency purposes, not in
excess of 5% of the value of the fund's total assets, excluding the amount
borrowed. This borrowing provision is intended to facilitate the orderly sale
of portfolio securities to accommodate unusually heavy redemption requests, if
they should occur; it is not intended for investment purposes;
9. Mortgage, pledge, or hypothecate its assets, except in an amount up to 10%
of the value of its total assets, but only to secure borrowings for temporary
or emergency purposes;
10. Underwrite any issue of securities, except to the extent that the purchase
of municipal bonds directly from the issuer in accordance with the fund's
investment objective, policies and restrictions, and later resale may be deemed
to be an underwriting;
11. Invest in companies for the purpose of exercising control or management;
12. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization;
13. Buy or sell commodities or commodity contracts or oil, gas or other
mineral exploration or development programs;
14. Write, purchase or sell puts, calls, straddles, spreads or any combination
thereof;
15. Purchase or retain the securities of any issuer, if, to the knowledge
of the fund, those individual officers and Trustees of the Trust, its
Investment Adviser, or principal underwriter, each owning beneficially more
than $ of 1% of the securities of such issuer, together own more than 5% of the
securities of such issuer;
16. Invest more than 5% of the value of the fund's total assets in securities
of any issuer with a record of less than three years continuous operation,
including predecessors, except those issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, or municipal bonds rated at
least "A" by either Moody's Investors Service, Inc. or Standard & Poor's
Corporation; or
17. Invest more than 25% of its assets in securities of any industry although,
for purposes of this limitation, the issuers of municipal securities and U. S.
Government obligations are not considered to be part of any industry.
Notwithstanding Investment Restriction #12, the fund may invest in securities
of other investment companies if deemed advisable by its officers in connection
with the administration of a deferred compensation plan adopted by the Trustees
pursuant to an exemptive order granted by the Securities and Exchange
Commission.
For the purpose of the fund's investment restrictions, the identification of
the "issuer" of municipal bonds which are not general obligation bonds is made
by the Investment Adviser on the basis of the characteristics of the obligation
as described, the most significant of which is the ultimate source of funds for
the payment of principal of and interest on such bonds.
For purposes of investment restriction number 13, the term "oil, gas or other
mineral exploration or development programs" includes oil, gas or other mineral
exploration or development leases.
Another policy of the fund which is not deemed a fundamental policy, and thus
may be changed by the Board of Trustees without shareholder approval, is that
the fund may not invest 25% or more of its assets in securities the interest on
which is paid from revenues of similar type projects (such as hospitals and
health facilities; turnpikes and toll roads; ports and airports; or colleges
and universities). The fund may, however, invest more than an aggregate of 25%
of its total assets in industrial development bonds.
TRUST OFFICERS AND TRUSTEES
(WITH THEIR PRINCIPAL OCCUPATIONS DURING THE PAST FIVE YEARS)#
TRUSTEE COMPENSATION
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NAME, ADDRESS AND AGE POSITION WITH PRINCIPAL OCCUPATION(S) AGGREGATE COMPENSATION TOTAL COMPENSATION TOTAL
NUMBER
REGISTRANT DURING PAST 5 YEARS# (INCLUDING VOLUNTARILY DEFERRED FROM ALL FUNDS OF
AFFILIATED
COMPENSATION/1/) FROM FUNDS AFFILIATED WITH THE FUND
BOARDS
DURING FISCAL YEAR ENDED AMERICAN FUNDS ON WHICH
7/31/98 GROUP FOR THE YEAR TRUSTEE
ENDED 7/31/98 SERVES
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Cyrus A. Ansary Trustee Investment Services $3,250 $54,050 3
1725 K Street, N.W., Suite 410 International Co.,
Washington, D.C. 20006 President
Age: 64
Stephen Hartwell*{ Chairman Emeritus Washington Management none/3/ none/3/ 3
Age: 83 and Trustee Corporation, Chairman of
the Board
James H. Lemon, Jr.*{ Chairman of the The Johnston-Lemon none/3/ none/3/ 3
Age: 62 Trust Group, Incorporated,
Chairman of the Board
and
Chief Executive Officer
Harry J. Lister*{ President and Trustee Washington Management none/3/ none/3/ 3
Age: 62 Corporation, President
and
Director
Jean Head Sisco Trustee Sisco Associates, $3,250 $41,750 3
2517 Massachusetts Avenue, N.W. Partner
Washington, D.C. 20008
Age: 73
T. Eugene Smith Trustee T. Eugene Smith, Inc., $3,450 $54,350 3
666 Tintagel Lane President
McLean, VA 22101
Age: 68
Stephen G. Yeonas Trustee Stephen G. Yeonas $3,450/2/ $42,250 3
1355 Beverly Road, Suite 102 Company,
McLean, VA 22101 Chief Executive Officer
Age: 73
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OTHER OFFICERS
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HOWARD L. KITZMILLER{ LOIS A. ERHARD{ MICHAEL W. STOCKTON{ J. LANIER FRANK{
Senior Vice President, Secretary Vice President Assistant Vice President, Assistant Assistant VicePresident
and Treasurer Washington Management Corporation, Secretary and Assistant Treasurer Washington Management
Corporation,
Washington Management Corporation, Vice President (Age: 46) Washington Management Assistant Vice President (Age: 37)
Director, Senior Vice President, Secretary and Corporation, Assistant
Assistant Treasurer (Age: 68) Vice President, Assistant Secretary
and Assistant Treasurer (Age: 31)
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# Positions within the organizations listed may have changed during this
period.
* Trustees who are considered "interested persons" as defined in the 1940 Act,
on the basis of their affiliation with the fund's Business Manager, Washington
Management Corporation.
{ Address is 1101 Vermont Avenue, N.W., Washington, D.C. 20005.
/1/Amounts may be deferred by eligible trustees under a non-qualified deferred
compensation plan adopted by the fund in 1993. Deferred amounts accumulate at
an earnings rate determined by the total return of one or more funds in The
American Funds Group as designated by the Trustee.
/2/Since the plan's adoption, the total amount of deferred compensation accrued
by the funds (plus earnings thereon) through 9/30/98, the latest calendar
quarter, for participants is as follows: Trustee Stephen G. Yeonas ($26,662).
Amounts deferred and accumulated earnings thereon are not funded and are
general unsecured liabilities of the funds until paid to the Trustee.
/3/Stephen Hartwell, James H. Lemon, Jr. and Harry J. Lister are affiliated
with the Business Manager and, accordingly, receive no compensation from the
funds.
All of the officers listed are officers of the Business Manager. All of the
Trustees and officers are also officers and/or directors of one or more of the
other funds for which Washington Management Corporation serves as Business
Manager. No Trustee compensation is paid by the funds to any officer or
Trustee who is a director, officer or employee of the Business Manager, the
Investment Adviser or affiliated companies. Each fund pays an annual retainer
fee of $750, an attendance fee of $200 per meeting and $100 per Committee
meeting to unaffiliated Trustees. The Trustees may elect, on a voluntary
basis, to defer all or a portion of those fees through a deferred compensation
plan in effect for the funds. Each fund also reimburses certain
meeting-related expenses of the Trustees.
The Business Manager has established a charitable foundation, the Washington
Management Corporation Foundation, which makes contributions to charities
organized under Section 501 (c)(3) of the Internal Revenue Code. Trustees and
officers of the fund, as well as all employees of the Business Manager and its
afffiliates, may particpate in a gift matching program sponsored by the
Foundation.
As of November 2, 1998, the officers and Trustees and their families as a
group, owned beneficially or of record 1.67% and 1.62%, respectively, of the
outstanding shares of the Maryland and Virginia funds.
MANAGEMENT
BUSINESS MANAGER - Since its inception, the Trust has operated under a
Business Management Agreement with Washington Management Corporation (the
"Business Manager"), 1101 Vermont Avenue, N.W., Washington, D.C. 20005.
The Business Manager provides all services required to carry on the fund's
general administrative and corporate affairs. These services include all
executive personnel, clerical staff, office space and equipment, arrangements
for and supervision of all shareholder services, Federal and state regulatory
compliance and responsibility for accounting and record keeping facilities. The
Business Manager provides similar services to other mutual funds.
The Business Manager receives a fee at the annual rate of 0.135% of the first
$60 million of the fund's net assets plus 0.09% of the fund's net assets in
excess of $60 million plus 1.35% of gross investment income. For the fiscal
years ended July 31, 1998, 1997, and 1996 the Business Manager's fees were
$181,000, $165,000 and $160,000 for the Maryland Fund and $201,000, $184,000
and $183,000 for the Virginia Fund, respectively. For the fiscal year ended
July 31, 1998, the Business Manager's fees for the Maryland Fund amounted to
0.195% of average net assets and for the Virginia Fund amounted to 0.190% of
average net assets.
INVESTMENT ADVISER - The Investment Adviser, Capital Research and Management
Company, founded in 1931, maintains research facilities in the U.S. and abroad
(Los Angeles, San Francisco, New York, Washington, D.C., London, Geneva,
Singapore, Hong Kong and Tokyo), with a staff of professionals, many of whom
have a number of years of investment experience. The Investment Adviser is
located at 333 South Hope Street, Los Angeles, CA 90071, and at 135 South State
College Boulevard, Brea, CA 92821. The Investment Adviser's research
professionals travel several million miles a year, making more than 5,000
research visits in more than 50 countries around the world. The Investment
Adviser believes that it is able to attract and retain quality personnel.
The Investment Adviser is responsible for more than $175 billion of stocks,
bonds and money market instruments and serves over eight million investors of
all types. These investors include privately owned businesses and large
corporations as well as schools, colleges, foundations and other non-profit and
tax-exempt organizations.
The Investment Adviser receives a fee at the annual rate of 0.165% of the first
$60 million of the fund's net assets plus 0.12% of the fund's net assets in
excess of $60 million plus 1.65% of gross investment income. For the fiscal
years ended July 31, 1998, 1997, and 1996 the Investment Adviser's fees were
$224,000, $203,000 and $197,000, for the Maryland Fund and $250,000, $229,000
and $227,000 for the Virginia Fund, respectively. For the fiscal year ended
July 31, 1998, the Investment Adviser's fees for the Maryland Fund amounted to
0.241% of average net assets and for the Virginia Fund amounted to 0.236% of
average net assets.
BUSINESS MANAGEMENT AGREEMENT AND INVESTMENT ADVISORY AGREEMENT - The Business
Management Agreement and Investment Advisory Agreement, unless sooner
terminated, will continue in effect until July 31, 1999 and may be renewed from
year to year thereafter, provided that any such renewal has been specifically
approved at least annually as to the fund by (i) the Board of Trustees, or by
the vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the fund, and (ii) the vote of a majority of Trustees who are not
parties to the Agreements or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The Agreements also provide that either party has the right
to terminate them, without penalty, upon sixty (60) days' written notice to the
other party and that the Agreements automatically terminate in the event of
their assignment (as defined in the 1940 Act).
The fund pays all expenses not specifically assumed by the Business Manager or
the Investment Adviser, including, but not limited to, registration and filing
fees with federal and state agencies; blue sky expenses; expenses of
shareholders' meetings; the expense of reports to existing shareholders;
expenses of printing proxies and prospectuses; insurance premiums; legal and
auditing fees; dividend disbursement expenses; the expense of the issuance,
transfer and redemption of its shares; custodian fees; printing and preparation
of registration statements; taxes; the fund's distribution expenses pursuant to
the Plan of Distribution; compensation, fees and expenses paid to Trustees who
are not "interested persons" of the Trust; association dues; and costs of
stationery, forms and certificates prepared exclusively for the fund.
PRINCIPAL UNDERWRITER - American Funds Distributors, Inc. is the Trust's
principal underwriter of the fund's shares. The Trust has adopted a Plan of
Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act (see
"Principal Underwriter" in the Prospectus). The Principal Underwriter receives
amounts payable pursuant to the Plan (see below) and commissions consisting of
that portion of the sales charge remaining after the discounts which it allows
to investment dealers. For the fiscal years ended July 31, 1998, 1997, and
1996 the commissions on Maryland Fund shares totaled $250,000, $170,000 and
$246,000 of which the Principal Underwriter retained $48,000, $32,000 and
$47,000, respectively, while the commissions on the Virginia Fund shares
totaled $300,000, $265,000 and $300,000 of which the Principal Underwriter
retained $58,000, $52,000 and $58,000, respectively.
Johnston, Lemon & Co. Incorporated ("Johnston, Lemon"), a wholly-owned
subsidiary of the business manager's parent company, The Johnston Lemon Group,
Inc. ("JLG"), received commission amounts of $44,000, $27,000 and $43,000, and
$41,000, $35,000 and $31,000, respectively, for the fiscal years ended July 31,
1998, 1997 and 1996, on its retail sales of the Maryland and Virginia Funds and
the Distribution Plan of the funds, but received no net brokerage commissions
resulting from purchases and sales of securities for the investment account of
the funds.
As required by rule 12b-1 and the 1940 Act, the Plan (together with the
Principal Underwriting Agreement) has been approved by the full Board of
Trustees and separately by a majority of the Trustees who are not "interested
persons" of the fund and who have no direct or indirect financial interest in
the operation of the Plan or the Principal Underwriting Agreement, and the Plan
has been approved by the vote of a majority of the outstanding voting
securities of the Trust. The officers and Trustees who are "interested
persons" of the Trust may be considered to have a direct or indirect financial
interest in the operation of the Plan due to present or past affiliations with
the Business Manager. Potential benefits of the Plan to the fund are improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Trustees who
are not "interested persons" of the Trust shall be committed to the discretion
of the Trustees who are not interested persons during the existence of the
Plan. The Plan may not be amended to increase materially the amount to be
spent for distribution without shareholder approval. The Board of Trustees
reviews quarterly a written report of amounts expended under the Plan or any
related agreement and the purposes for which such expenditures were made and
approves annually any continuance of the Plan.
Under the Plan the fund may expend up to 0.25% of its average net assets
annually to finance any activity which is primarily intended to result in the
sale of fund shares, provided the Board of Trustees has approved the category
of expenses for which payment is being made. These primarily include service
fees for qualified dealers and dealer commissions and wholesaler compensation
on sales of shares exceeding $1 million including purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees or a community foundation.
Commissions on sales of shares exceeding $1 million (inluding purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code, including any
"401(k)" plan with 100 or more eligible employees) in excess of the Plan
limitation not reimbursed during the most recent fiscal quarter are recoverable
for five quarters, provided that such commissions do not exceed the annual
expense limit. After five quarteres, commissions are not recoverable. During
the Trust's fiscal year ended July 31, 1998, distribution expenses under the
Plan paid or payable to the Principal Underwriter were $231,000 for the
Maryland Fund and $264,000 for the Virginia Fund, all of which was used as
compensation to dealers and wholesalers. As of July 31, 1998, accrued and
unpaid distribution expenses were $36,000 and $43,000, respectively.
All officers of the fund and three of its Directors, who are "interested
persons" of the fund, are officers or directors of Washington Management
Corporation, a wholly-owned subsidiary of JLG. Johnston, Lemon participates
in receiving dealer service fee payments from the Plan. Some of the fund's
officers and three Directors who are "interested persons" of the fund are also
registered representatives with Johnston, Lemon and, as such, to the extent
they have sold shares of the fund, receive a portion of the service fee
payments in the same manner as all other Johnston, Lemon registered
representatives.
DIVIDENDS AND DISTRIBUTIONS
DIVIDENDS AND DISTRIBUTIONS - For the purpose of calculating dividends, daily
net investment income of the fund consists of: (a) all interest income accrued
on the fund's investments including any discount or premium ratably amortized
to the date of maturity or determined in such other manner as may be deemed
appropriate; minus (b) all liabilities accrued, including interest, taxes and
other expense items, amounts determined and declared as dividends or
distributions and reserves for contingent or undetermined liabilities, all
determined in accordance with generally accepted accounting principles.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from American Funds Service Company with regard to
uncashed distribution checks, the shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional tax considerations
generally affecting the fund and its shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the fund or its
shareholders, and the discussion here and in such fund's Prospectus is not
intended as a substitute for careful tax planning. Investors are urged to
consult their tax advisers with specific reference to their own tax situations.
GENERAL - The fund is not intended to constitute a balanced investment program
and is not designed for investors seeking capital appreciation or maximum
tax-exempt income irrespective of fluctuations in principal. Shares of the
fund generally would not be suitable for tax-exempt institutions or
tax-deferred retirement plans (E.G., plans qualified under Section 401 of the
Internal Revenue Code, Keogh-type plans and individual retirement accounts).
Such retirement plans would not gain any additional benefit from the tax-exempt
nature of the fund's dividends because such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the fund
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by industrial development bonds or "related persons"
thereof. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses a part of such facilities in
their trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
The fund intends to meet all the requirements and to elect the tax status of a
"regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As such, the fund will
not be subject to federal income taxes to the extent it distributes its net
investment income and net realized capital gains, if any, to shareholders. The
fund must distribute 90% of the aggregate interest excludable from gross income
and 90% of the investment company taxable income earned by it during the
taxable year.
The percentage of total dividends paid by the fund with respect to any taxable
year which qualify for exclusion from gross income ("exempt-interest
dividends") for Federal tax purposes will be the same for all shareholders
receiving dividends during such year. In order for the fund to pay
exempt-interest dividends during any taxable year, at the close of each fiscal
quarter at least 50% of the aggregate value of the Trust's and fund's assets
must consist of tax-exempt obligations. Not later than 60 days after the close
of its taxable year, the fund will notify each shareholder of the portion of
the dividends paid by the Fund to the shareholder with respect to such taxable
year which constitutes exempt-interest dividends. The aggregate amount of
dividends so designated cannot, however, exceed the excess of the amount of
interest excludable from gross income from tax under Section 103 of the Code
received by the Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or carry Fund
shares is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share is held for six months or less, any loss on the sale or exchange
of such share will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund does not expect to realize substantial long-term capital gains,
any net realized long-term capital gains will be distributed annually. The
fund will have no tax liability with respect to such gains, and the
distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held the fund's shares. Such
distributions will be designated as a capital gains dividend in a written
notice mailed by the fund to shareholders not later than 60 days after the
close of the fund's taxable year. The fund may also make a distribution of net
realized long-term capital gains near the end of the calendar year to comply
with certain requirements of the Code. Gain recognized on the disposition of a
debt obligation (including tax-exempt obligations purchased after April 30,
1993) purchased by the fund at a market discount (generally at a price less
than the principal amount) will be treated as ordinary income to the extent of
the portion of the market discount which accrued during the period of time the
fund held the debt obligation. Similarly, while the fund does not expect to
earn any taxable income, any taxable income earned by the fund will be
distributed and will be taxable to shareholders as ordinary income (whether
distributed in cash or additional shares).
If for any taxable year the fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions
would be taxable to shareholders to the extent of earnings and profits, and may
be eligible for the dividends received deduction for corporations.
Under the Code, if, within 90 days after fund shares are purchased, such shares
are redeemed and either reinstated in the same fund or exchanged for shares of
any other fund in The American Funds Group and the otherwise applicable sales
charge is waived, then the amount of the sales charge previously incurred in
purchasing fund shares shall not be taken into account for purposes of
determining the amount of any gain or loss on the redemption, but will be
treated as having been incurred in the purchase of the fund shares acquired in
the reinstatement or exchange.
The tax status of a gain realized on a redemption will not be affected by
exercise of the reinstatement privilege, but a loss may be nullified if you
reinvest in the same fund within 30 days.
As of the date of this statement of additional information, the maximum federal
individual stated tax rate applicable to ordinary income is 39.6% (effective
tax rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate applicable to net
capital gains on securities held more than one year is 20%; and the maximum
corporate tax rate applicable to ordinary income and net capital gain is 35%.
Naturally, the amount of tax payable by a shareholder with respect to either
distributions from the fund or disposition of fund shares will be affected by a
combination of tax rules covering E.G., deductions, credits, deferrals,
exemptions, sources of income and other matters.
FEDERAL TAXES - Under the Code, a nondeductible excise tax of 4% is imposed on
the excess of a regulated investment company's "required distribution" for the
calendar year ending within the regulated investment company's taxable year
over the "distributed amount" for such calendar year. The term "required
distribution" means the sum of (i) 98 percent of ordinary income (generally net
investment income) for the calendar year, (ii) 98 percent of capital gain net
income (both long-term and short-term) for the one-year period ending on
October 31 (as though the one-year period ending on October 31 were the
regulated investment company's taxable year), and (iii) the sum of any untaxed,
undistributed net investment income and net capital gains of the regulated
investment company for prior periods. The term "distributed amount" generally
means the sum of (i) amounts actually distributed by each fund from its current
year's ordinary income and capital gain net income and (ii) any amount on which
such fund pays income tax for the year. Each fund intends to meet these
distribution requirements to avoid the excise tax liability.
Individuals and corporations may be subject to alternative minimum tax. The
Code treats interest on private activity bonds, as defined therein, as an item
of tax preference for alternative minimum tax purposes. Also, shareholders
will not be permitted to deduct any of their share of fund expenses in
computing alternative minimum taxable income. Further, under the Code federal
exempt-interest dividends are includable in adjusted current earnings in
calculating corporate alternative minimum taxable income.
Fund shareholders are required by the Code to report to the federal government
all exempt-interest dividends and all other tax-exempt interest received.
PURCHASE OF SHARES
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METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
See "Investment Minimums and Fund Numbers" for initial investment minimums. $50 minimum (except where a lower
minimum is noted under "Investment Minimums and Fund Numbers").
By contacting Visit any investment dealer who is registered in the state where the purchase is made and who has a sales agreement
with American Funds Distributors. Mail directly to your investment
your dealer's address printed on your
investment account statement.
dealer
By mail Make your check payable to the fund and mail to the address indicated on the account application. Please indicate
an investment dealer on the account application. Fill out the account additions form at the bottom of a recent account statement,
make your check payable to the fund, write your account number on your check, and mail the check and form in the envelope provided
with your account statement.
By telephone Please contact your investment dealer to open account, then follow the procedures for additional investments.
Complete the "Investments by Phone" section on the account application or American FundsLink Authorization Form. Once you establish
the privilege, you, your financial advisor or any person with your account information can call American FundsLineR and make
investments by telephone (subject to conditions noted in "Telephone and Computer
Purchases, Redemptions and Exchanges" below).
By computer Please contact your investment dealer to open account, then follow the procedures for additional investments.
Complete the American FundsLink Authorization Form. Once you establish the privilege, you, your financial advisor or any person
with your account information may access American FundsLine OnLineR on the Internet and make investments by computer (subject to
conditions noted in "Telephone and Computer Purchases, Redemptions and Exchanges"
below).
By wire Call 800/421-0180 to obtain your account number(s), if necessary. Please indicate an investment dealer on the
account. Instruct your bank to wire funds to: Your bank should wire your additional investments in the same manner as described
under "Initial Investment."
Wells Fargo Bank
155 Fifth Street
Sixth Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER.
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INVESTMENT MINIMUMS AND FUND NUMBERS - Here are the minimum initial investments
required by the funds in The American Funds Group along with fund numbers for
use with our automated phone line, American FundsLine (see description below):
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FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP FundR 02
$1,000
American Balanced FundR 11
500
American Mutual FundR 03
250
Capital Income BuilderR 12
1,000
Capital World Growth and Income Fund$ 33
1,000
EuroPacific Growth FundR 16
250
Fundamental Investors$ 10
250
The Growth Fund of AmericaR 05
1,000
The Income Fund of AmericaR 06
1,000
The Investment Company of AmericaR 04
250
The New Economy FundR 14
1,000
New Perspective FundR 07
250
New World Fund $ 1,000** 36
SMALLCAP World FundR 35
1,000
Washington Mutual Investors Fund$ 01
250
BOND FUNDS
American High-Income Municipal Bond FundR 40
1,000
American High-Income Trust$ 21
1,000
The Bond Fund of America$ 08
1,000
Capital World Bond FundR 31
1,000
Intermediate Bond Fund of America$ 23
1,000
Limited Term Tax-Exempt Bond Fund of America$ 43
1,000
The Tax-Exempt Bond Fund of AmericaR 19
1,000
The Tax-Exempt Fund of CaliforniaR* 20
1,000
The Tax-Exempt Fund of MarylandR* 24
1,000
The Tax-Exempt Fund of VirginiaR* 25
1,000
U.S. Government Securities Fund$ 22
1,000
MONEY MARKET FUNDS
The Cash Management Trust of AmericaR 09
2,500
The Tax-Exempt Money Fund of America$ 39
2,500
The U.S. Treasury Money Fund of America$ 49
2,500
___________
*Available only in certain states.
** Effective September 15, 1999
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For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for individual retirement accounts
(IRAs). Minimums are reduced to $50 for purchases through "Automatic
Investment Plans" (except for the money market funds) or to $25 for purchases
by retirement plans through payroll deductions and may be reduced or waived for
shareholders of other funds in The American Funds Group. TAX-EXEMPT FUNDS
SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The minimum is $50 for
additional investments (except as noted above).
SALES CHARGES- The sales charges you pay when purchasing the stock, stock/bond,
and bond funds of The American Funds Group are set forth below. The money
market funds of The American Funds Group are offered at net asset value. (See
"Investment Minimums and Fund Numbers" for a listing of the funds.)
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AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND FUNDS
Less than $50,000........................................
6.10% 5.75% 5.00%
$50,000 but less than $100,000..................
4.71 4.50 3.75
BOND FUNDS
Less than $25,000.......................................
4.99 4.75 4.00
$25,000 but less than $50,000....................
4.71 4.50 3.75
$50,000 but less than $100,000..................
4.17 4.00 3.25
STOCK, STOCK/BOND, AND BOND FUNDS
$100,000 but less than $250,000...............
3.63 3.50 2.75
$250,000 but less than $500,000...............
2.56 2.50 2.00
$500,000 but less than $1,000,000............
2.04 2.00 1.60
$1,000,000 or more..................................... (see below)
none none DEALER COMMISSIONS- Commissions of up to 1% will be paid to
dealers who initiate and are responsible for
purchases of $1 million or more, for purchases by any
employer-sponsored 403(b) plan or purchases by any
defined contribution plan qualified under Section 401(a) of the
Internal Revenue Code including a "401(k)"
plan with 100 or more eligible employees, and for purchases made
at net asset value by certain retirement
plans of organizations with collective retirement plan assets of
$50 million or more: 1.00% on amounts of $1
million to $4 million, 0.50% on amounts over $4 million to $10
million and 0.25% on amounts over $10 million.
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OTHER COMPENSATION TO DEALERS - American Funds Distributors, at its expense
(from a designated percentage of its income) currently provides additional
compensation to dealers. These payments are limited to the top one hundred
dealers who have sold shares of the fund or other funds in The American Funds
Group. These payments will be based on a pro rata share of a qualifying
dealer's sales. American Funds Distributors will, on an annual basis, determine
the advisability of continuing these payments.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
PURCHASES NOT SUBJECT TO A SALES CHARGE - Investments of $1 million or more and
investments made by employer-sponsored defined contribution-type plans with 100
or more eligible employees are sold with no initial sales charge. A contingent
deferred sales charge may be imposed on certain redemptions by these accounts
made within one year of purchase. Investments by retirement plans, foundations
or endowments with $50 million or more in assets may be made with no initial
sales charge and are not subject to a contingent deferred sales charge. In
addition the stock, stock/bond and bond funds may sell shares at net asset
value with no contingent deferred sales charge to: (1) current or retired
directors, trustees, officers and advisory board members of the funds managed
or advised by Capital Research and Management Company, employees of Washington
Management Corporation, employees and partners of The Capital Group Companies,
Inc. and its affiliated companies, certain family members of the above persons,
and trusts or plans primarily for such persons; (2) current registered
representatives, retired registered representatives with respect to accounts
established while active, or full-time employees (and their spouses, parents,
and children) of dealers who have sales agreements with American Funds
Distributors (or who clear transactions through such dealers) and plans for
such persons or the dealers; (3) companies exchanging securities with the fund
through a merger, acquisition or exchange offer; (4) trustees or other
fiduciaries purchasing shares for certain retirement plans, foundations or
endowments with assets of $50 million or more; (5) insurance company separate
accounts; (6) accounts managed by subsidiaries of The Capital Group Companies,
Inc.; and (7) The Capital Group Companies, Inc., its affiliated companies and
Washington Management Corporation. Shares are offered at net asset value to
these persons and organizations due to anticipated economies in sales effort
and expense.
STATEMENT OF INTENTION -- You may enter into a non-binding commitment to
purchase shares of a fund(s) over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. This includes purchases
made during the previous 90 days, but does not include appreciation of your
investment or reinvested distributions. The reduced sales charges and offering
prices set forth in the Prospectus apply to purchases of $50,000 or more made
within a 13-month period subject to the following statement of intention (the
"Statement"). The Statement is not a binding obligation to purchase the
indicated amount. When a shareholder elects to utilize a Statement in order to
qualify for a reduced sales charge, shares equal to 5% of the dollar amount
specified in the Statement will be held in escrow in the shareholder's account
out of the initial purchase (or subsequent purchases, if necessary) by American
Funds Service Company. All dividends and any capital gain distributions on
shares held in escrow will be credited to the shareholder's account in shares
(or paid in cash, if requested). If the intended investment is not completed
within the specified 13-month period, the purchaser will remit to the Principal
Underwriter the difference between the sales charge actually paid and the sales
charge which would have been paid if the total of such purchases had been made
at a single time. If the difference is not paid by the close of the period
within 45 days after written request by the Principal Underwriter or the
securities dealer, the appropriate number of shares held in escrow will be
redeemed to pay such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to the Principal Underwriter for the
balance still outstanding. The Statement may be revised upward at any time
during the 13-month period, and such a revision will be treated as a new
Statement, except that the 13-month period during which the purchase must be
made will remain unchanged and there will be no retroactive reduction of the
sales charges paid on prior purchases. Existing holdings eligible for rights
of accumulation (see the account application) and any individual investments in
American Legacy products (American Legacy, American Legacy II and American
Legacy III variable annuities, American Legacy Life, American Legacy Variable
Life, and American Legacy Estate Builder) may be credited toward satisfying the
Statement. During the Statement period, reinvested dividends and capital gain
distributions, investments in money market funds and investments made under a
right of reinstatement will not be credited toward satisfying the Statement.
When the trustees of certain retirement plans purchase shares by payroll
deduction, the sales charge for the investments made during the 13-month period
will be handled as follows: The regular monthly payroll deduction investment
will be multiplied by 13 and then multiplied by 1.5. The current value of
existing American Funds investments (other than money market fund investments),
and any rollovers or transfers reasonably anticipated to be invested in
non-money market American Funds during the 13-month period, and any individual
investments in American Legacy products are added to the figure determined
above. The sum is the Statement amount and applicable breakpoint level. On
the first investment and all other investments made pursuant to the Statement,
a sales charge will be assessed according to the sales charge breakpoint thus
determined. There will be no retroactive adjustments in sales charges on
investments previously made during the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION - Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above, or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
CONCURRENT PURCHASES -- You may combine purchases of two or more funds in The
American Funds Group, except direct purchases of the money market funds.
Shares of money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge do qualify.
RIGHT OF ACCUMULATION -- You may take into account the current value of your
existing holdings in The American Funds Group, as well as your holdings in
Endowments (shares of which may be owned only by tax-exempt organizations), to
determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity. When determining
your sales charge, you may also take into account the value of your individual
holdings, as of the end of the week prior to your investment, in various
American Legacy products (American Legacy, American Legacy II and American
Legacy III variable annuities, American Legacy Life, American Legacy Variable
Life, and American Legacy Estate Builder). Direct purchases of the money
market funds are excluded.
PRICE OF SHARES - Purchases of shares are made at the offering price next
determined after the purchase order is received by the fund or American Funds
Service Company; this offering price is effective for orders received prior to
the time of determination of the net asset value and, in the case of orders
placed with dealers, accepted by the Principal Underwriter prior to its close
of business. In case of orders sent directly to the fund or American Funds
Service Company, an investment dealer MUST be indicated. The dealer is
responsible for promptly transmitting purchase orders to the Principal
Underwriter. Orders received by the investment dealer, the Transfer Agent, or
the fund after the time of the determination of the net asset value will be
entered at the next calculated offering price. Prices which appear in the
newspaper are not always indicative of prices at which you will be purchasing
and redeeming shares of the fund, since such prices generally reflect the
previous day's closing price whereas purchases and redemptions are made at the
next calculated price.
The price you pay for shares, the public offering price, is based on the net
asset value per share which is calculated once daily at the close of regular
trading (currently 4:00 p.m., New York Time) each day the New York Stock
Exchange is open. For example, if the Exchange closes at 1:00 p.m. on one day
and at 4:00 p.m. on the next, the fund's share price would be determined as of
4:00 p.m. New York time on both days. The New York Stock Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas.
All portfolio securities of funds managed by Capital Research and Management
Company (other than money market funds) are valued, and the net asset value per
share is determined, as follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or less
to maturity are amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held on the 60th day, based on the value
determined on the 61st day. Forward currency contracts are valued at the mean
of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board; The fair value of all other assets is
added to the value of securities at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
Trust. The Trust will not knowingly sell fund shares (other than for the
reinvestment of dividends or capital gain distributions) directly or indirectly
or through a unit investment trust to any other investment company, person or
entity, where, after the sale, such investment company, person, or entity would
own beneficially directly, indirectly, or through a unit investment trust more
than 4.5% of the outstanding shares of the fund without the consent of a
majority of the Board of Trustees.
REDEEMING SHARES
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By writing to American Funds Send a letter of instruction specifying the name of the fund, the number of
Service Company (at the shares or dollar amount to be sold, your name and account number. You
appropriate address indicated should also enclose any share certificates you wish to redeem. For
under "Fund Organization and Management - Principal redemptions over $50,000 and for certain redemptions of $50,000 or less
Underwriter and Transfer Agent" (see below), your signature must be guaranteed by a bank, savings
in the prospectus) association, credit union, or member firm of a domestic stock exchange
or the National Association of Securities Dealers, Inc. that is an eligible
guarantor institution. You should verify with the institution that it is an
eligible guarantor prior to signing. Additional documentation may be
required for redemption of shares held in corporate, partnership or
fiduciary accounts. Notarization by a Notary Public is not an
acceptable signature guarantee.
By contacting your investment If you redeem shares through your investment dealer, you may be
dealer charged for this service. SHARES HELD FOR YOU IN YOUR INVESTMENT
DEALER'S STREET NAME MUST BE REDEEMED THROUGH THE DEALER.
You may have a redemption You may use this option, provided the account is registered in the name
check sent to you by using of an individual(s), a UGMA/UTMA custodian, or a non-retirement plan
American FundsLineR or trust. These redemptions may not exceed $50,000 per shareholder, each
American FundsLine OnLine/SM/ day account and the check must be made payable to the shareholder(s) of
or by telephoning, faxing, or record and be sent to the address of record provided the address has been
telegraphing American Funds used with the account for at least 10 days. See "Fund Organization and
Service Company (subject to the Management - Principal Underwriter and Transfer Agent" in the
conditions noted in this section prospectus and "Exchange Privilege" below for the appropriate telephone
and in "Telephone and Computer Purchases, Sales and Exchanges" or fax number.
in the prospectus)
In the case of the money Upon request (use the account application for the money market funds)
market funds, you may have you may establish telephone redemption privileges (which will enable you
redemptions wired to your to have a redemption sent to your bank account) and/or check writing
bank by telephoning American privileges. If you request check writing privileges, you will be provided
Funds Service Company ($1,000 with checks that you may use to draw against your account. These
or more) or by writing a check checks may be made payable to anyone you designate and must be signed
($250 or more) by the authorized number of registered shareholders exactly as indicated
on your checking account signature card.
</TABLE>
A SIGNATURE GUARANTEE IS NOT CURRENTLY REQUIRED FOR ANY REDEMPTION OF $50,000
OR LESS PROVIDED THE REDEMPTION CHECK IS MADE PAYABLE TO THE REGISTERED
SHAREHOLDER(S) AND IS MAILED TO THE ADDRESS OF RECORD, PROVIDED THE ADDRESS HAS
BEEN USED WITH THE ACCOUNT FOR AT LEAST 10 DAYS.
CONTINGENT DEFERRED SALES CHARGE - A contingent deferred sales charge of 1%
applies to certain redemptions from funds other than the money market funds
made within twelve months of purchase on investments of $1 million or more and
on any investment made with no initial sales charge by any employer-sponsored
403(b) plan or defined contribution plan qualified under Section 401(a) of the
Internal Revenue Code including a "401(k)" plan with 100 or more eligible
employees. The charge is 1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends and capital gain distributions) or the total
cost of such shares. Shares held for the longest period are assumed to be
redeemed first for purposes of calculating this charge. The charge is waived
for exchanges (except if shares acquired by exchange were then redeemed within
12 months of the initial purchase); for distributions from qualified retirement
plans and other employee benefit plans; for redemptions resulting from
participant-directed switches among investment options within a
participant-directed employer-sponsored retirement plan; for distributions from
403(b) plans or IRAs due to death, disability or attainment of age 59$; for
tax-free returns of excess contributions to IRAs; for redemptions through
certain automatic withdrawals not exceeding 10% of the amount that would
otherwise be subject to the charge; and for redemptions in connection with
loans made by qualified retirement plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN - The automatic investment plan enables you to make
regular investments monthly or quarterly in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. Bank accounts will be
charged on the day or a few days before investments are credited, depending on
the bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of the account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing to the
Transfer Agent.
AUTOMATIC REINVESTMENT - Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, American
Funds Service Company or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the paying fund) into any other fund in The American Funds Group
(the receiving fund) subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds to you. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE - You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to American Funds Service Company (see
"Redeeming Shares"), by contacting your investment dealer, by using American
FundsLine or American FundsLine OnLine(see "American FundsLine and American
FundsLine OnLine/"/ below), or by telephoning 800/421-0180 toll-free, faxing
(see "Principal Underwriter and Transfer Agent" in the prospectus for the
appropriate fax numbers) or telegraphing American Funds Service Company. (See
"Telephone and Computer Purchases, Redemptions and Exchanges" below.) Shares
held in corporate-type retirement plans for which Capital Guardian Trust
Company serves as trustee may not be exchanged by telephone, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES - You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS - Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS - Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments will be reflected on regular confirmation statements from American
Funds Service Company. Dividends and capital gain reinvestments and purchases
through automatic investment plans and certain retirement plans will be
confirmed at least quarterly.
AMERICAN FUNDSLINER AND AMERICAN FUNDSLINE ONLINER - You may check your share
balance, the price of your shares, or your most recent account transaction,
redeem shares (up to $50,000 per shareholder, each day), or exchange shares
around the clock with American FundsLine and American FundsLine OnLine. To use
this service, call 800/325-3590 from a TouchTonet telephone or access The
American Funds Website on the Internet at www.americanfunds.com. Redemptions
and exchanges through American FundsLine and American FundsLine OnLine are
subject to the conditions noted above and in "Telephone and Computer Purchases,
Redemptions and Exchanges" below. You will need your fund number (see the list
of funds in The American Funds Group under "Purchase of Shares--Investment
Minimums and Fund Numbers"), personal identification number (the last four
digits of your Social Security number or other tax identification number
associated with your account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES - By using the
telephone or computer (including American FundsLine and American FundsLine
OnLine), fax or telegraph purchases, redemption and/or exchange options, you
agree to hold the fund, American Funds Service Company, any of its affiliates
or mutual funds advised or managed by such affiliates, the fund's Business
Manager and each of their respective directors, trustees, officers, employees
and agents harmless from any losses, expenses, costs or liability (including
attorney fees) which may be incurred in connection with the exercise of these
privileges. Generally, all shareholders are automatically eligible to use these
options. However, you may elect to opt out of these options by writing American
Funds Service Company (you may also reinstate them at any time by writing
American Funds Service Company). If American Funds Service Company does not
employ reasonable procedures to confirm that the instructions received from any
person with appropriate account information are genuine, it and/or the fund may
be liable for losses due to unauthorized or fraudulent instructions. In the
event that shareholders are unable to reach the fund by telephone because of
technical difficulties, market conditions, or a natural disaster, redemption
and exchange requests may be made in writing only.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through its
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or not be a broker
who has provided investment research statistical, or other related services to
the Investment Adviser or has sold shares of the fund or other funds served by
the Investment Adviser. The fund does not consider that it has an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.
There are occasions on which portfolio transactions for the fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the fund, they are effected only when the
Investment Adviser believes that to do so is in the interest of the fund. When
such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner.
Substantially all portfolio transactions are effected on a principal basis and
ordinarily include a mark-up or mark-down, but no stated commission. Brokerage
commissions paid on portfolio transactions, including dealer concessions on
underwritings, for the fiscal year ended July 31, 1998 equaled $46,000 for the
Maryland Fund and $130,000 for the Virginia Fund, respectively.
Johnston, Lemon & Co. Incorporated, which together with the Business Manager is
wholly owned by The Johnston-Lemon Group, Incorporated, may serve as broker for
the fund in effecting certain portfolio transactions, and may retain
commissions, in accordance with certain regulations of the Securities and
Exchange Commission.
GENERAL INFORMATION
CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds
from the sale of shares of the fund and of securities in the fund's portfolio,
are held by The Chase Manhattan Bank, Three Metrotech Center, Brooklyn, NY
11245, as Custodian.
TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the record of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee
of $31,000 and $34,000, for the Maryland Fund and the Virginia Fund,
respectively, for the fiscal year ended July 31, 1998.
INDEPENDENT ACCOUNTANTS - PricewaterhouseCoopers LLP, 400 South Hope Street,
Los Angeles, CA 90071, has served as the Trust's independent accountants since
its inception, providing audit services, preparation of tax returns and review
of certain documents to be filed with the Securities and Exchange Commission.
The Financial Statements included in this Statement of Additional Information
have been so included in reliance on the report of PricewaterhouseCoopers LLP
given on the authority of that firm as experts in auditing and accounting.
REPORTS TO SHAREHOLDERS - The Trust's fiscal year ends on July 31. Shareholders
are provided, at least semiannually, with reports showing the investment
portfolio and financial statements audited annually by the Trust's independent
accountants, PricewaterhouseCoopers LLP, whose selection is determined annually
by the Trustees. In an effort to reduce the volume of mail shareholders
receive from the fund when a household owns more than one account, the Transfer
Agent has taken steps to eliminate duplicate mailings of shareholder reports.
To receive additional copies of a report shareholders should contact the
Transfer Agent.
YEAR 2000 - The fund and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The fund understands that
these service providers are taking steps to address the "Year 2000 problem".
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the fund's investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the fund invests could experience settlement problems and
liquidity issues. Corporate and government data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings
of individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
PERSONAL INVESTING POLICY - Capital Research and Management Company and its
affiliated companies have adopted a personal investing policy consistent with
Investment Company Institute guidelines. This policy includes: a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; pre-clearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; disclosure of personal
holdings by certain investment personnel prior to recommendation for purchase
for the fund; blackout periods for personal investing for certain investment
personnel; ban on short-term trading profits for investment personnel;
limitations on service as a director of publicly traded companies; and
disclosure of personal securities transactions. You may obtain a summary of
the personal investing policy of the fund's investment adviser by contacting
the Secretary of the fund.
The financial statements including the investment portfolio and the report of
Independent Accountants contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE -- JULY 31, 1998
<TABLE>
<CAPTION>
THE TAX-EXEMPT FUND OF Maryland THE TAX-EXEMPT FUND OF VIRGINIA
<S> <C> <C>
Net asset value and redemption price per share $16.04 $16.36
(Net assets divided by shares outstanding)
Maximum Offering price per share (100/95.25 of $16.84 $17.18
net asset value per share, which takes into
account the fund's current maximum sales charge)
</TABLE>
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Under the laws of certain states,
including Massachusetts, where the Trust was organized, shareholders of a
Massachusetts business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the Trust. However, the
risk of a shareholder incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides that notice of the disclaimer may be given in any agreement,
obligation, or instrument which is entered into or executed by the Trust or
Trustees. The Declaration of Trust provides for indemnification out of Trust
property of any shareholder held personally liable for the obligations of the
Trust and also provides for the Trust to reimburse such shareholder for all
legal and other expenses reasonably incurred in connection with any such claim
or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
will provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
SHAREHOLDER VOTING RIGHTS - As permitted by Massachusetts law, there will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders. At that time, the Trustees then in
office will call a shareholders' meeting for the election of Trustees. The
Trustees must call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when requested to do so by the record
holders of 10% of the outstanding shares of the Trust. At such a meeting, a
Trustee may be removed after the holders of record of not less than a majority
of the outstanding shares of the Trust have declared that the Trustee be
removed either by declaration in writing or by votes cast in person or by
proxy. Except as set forth above, the Trustees will continue to hold office
and may appoint successor Trustees. The shares do not have cumulative voting
rights, which means that the holders of a majority of the shares of the Trust
voting for the election of Trustees can elect all the Trustees. No amendment
may be made to the Declaration of Trust without the affirmative vote of a
majority of the outstanding shares of the Trust except that amendments to
change the name of the Trust, to correct any ambiguous, defective or
inconsistent provision of, or to supply any omission to, the Declaration of
Trust, to establish new funds, or to reduce or eliminate the payment of taxes
by the Trust may be made by the Trustees without the vote or consent of
Shareholders. If not terminated by the vote or written consent of a majority
of the outstanding shares, the Trust will continue indefinitely.
The fund currently issues shares in two series and the Board of Trustees may
establish additional series of shares in the future. Each "series" of shares
represents interests in a separate portfolio and has its own investment
objective and policies. When more than one series of shares is outstanding,
shares of all series will vote together for a single set of Trustees, and on
other matters affecting the entire Trust, with each share entitled to a single
vote. On matters affecting only one series, only the shareholders of that
series shall be entitled to vote. On matters relating to more than one series
but affecting the series differently, separate votes by series are required.
INVESTMENT RESULTS
The Maryland Fund yield was 3.97% and the Virginia Fund yield was 3.76% based
on a 30-day (or one month) period ended July 31, 1998, computed by dividing the
net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((a-b/cd) + 1)/6/ -1]
Where:a =dividends and interest earned during the period.
b =expenses accrued for the period (net of reimbursements).
c =the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d =the maximum offering price per share on the last day of the period.
The fund may also calculate a tax equivalent yield based on a 30-day (or one
month) period ended no later than the date of the most recent balance sheet
included in the registration statement, computed by dividing that portion of
the yield (as computed by the formula stated above) which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield that is not tax-exempt. The Maryland Fund's tax-equivalent yield
based on the maximum combined effective federal/state/county tax rate of 44.1%
for the 30-day (or one month) period ended July 31, 1998 was 7.10%. For the
Virginia Fund investors with the maximum combined effective federal/state tax
rate of 43.1%, the tax-equivalent yield was 6.61% for the period ended July 31,
1998.
The Maryland Fund average annual total return for the one-year, five-year and
ten-year periods ending on July 31, 1998 was +0.86%, +5.02% and +6.95%,
respectively. The Virginia Fund average annual total return for the same time
periods was +0.07%, +4.73% and +6.89%, respectively. The average annual total
return ("T") is computed by equating the value at the end of the period ("ERV")
with a hypothetical initial investment of $1,000 ("P") over a period of years
("n") according to the following formula as required by the Securities and
Exchange Commission:
P(1+T)/n/ = ERV.
The following assumptions will be reflected in computations made in accordance
with the formula stated above: (1) deduction of the maximum sales load of
4.75% from the $1,000 initial investment; (2) reinvestment of dividends and
distributions at net asset value on the reinvestment date determined by the
Board; and (3) a complete redemption at the end of any period illustrated. The
fund will calculate total return for ten-year periods after such a period has
elapsed. In addition, the fund will provide lifetime average total return
figures.
The funds may also calculate distribution rates on a taxable and tax equivalent
basis. The distribution rates are computed by annualizing the current month's
dividend and dividing by the average net asset value or maximum
offering price for the month. The distribution rates may differ from the
yields.
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
....and taken all
distributions in shares,
If you had invested your investment would
$10,000 in the fund have been worth this
this many years ago... much at July 31, 1998
<TABLE>
<CAPTION>
Number of Years Periods Maryland Value** Virginia Value**
8/1-7/31
<S> <C> <C> <C>
1 1997-1998 $10,086 $10,007
2 1996-1998 $11,045 $10,917
3 1995-1998 11,706 11,514
4 1994-1998 12,590 12,388
5 1993-1998 12,774 12,600
6 1992-1998 13,720 13,523
7 1991-1998 15,469 15,247
8 1990-1998 16,621 16,476
9 1989-1998 17,504 17,435
10 1988-1998 19,571 19,465
11 1987-1998 20,971 20,688
12 8/14/86-1998 20,791 21,276
</TABLE>
ILLUSTRATION OF A $10,000 INVESTMENT IN THE TAX-EXEMPT FUND OF MARYLAND
WITH DIVIDENDS REINVESTED
(For the lifetime of the fund August 14, 1986 - July 31, 1998)
COST OF SHARES
VALUE OF SHARES**
<TABLE>
<CAPTION>
Fiscal Annual Dividends Total From From From Total
Year End Dividends (cumulative) Investment Initial Capital Dividends Value
July 31 Cost Investment Gains Reinvested
Reinvested
<S> <C> <C> <C> <C> <C> <C> <C>
1987* $ 493 $ 493 $ 10,493 $ 8,973 $0 $ 471 $ 9,444
1988 617 1,110 11,110 9,020 1 1,101 10,122
1989 653 1,763 11,763 9,480 1 1,832 11,313
1990 681 2,444 12,444 9,413 1 2,504 11,918
1991 736 3,180 13,180 9,527 1 3,276 12,804
1992 764 3,944 13,944 10,147 1 4,285 14,433
1993 765 4,709 14,709 10,353 1 5,154 15,508
1994 773 5,482 15,482 10,000 1 5,727 15,728
1995 860 6,342 16,342 10,193 1 6,726 16,920
1996 901 7,243 17,243 10,260 1 7,666 17,927
1997 945 8,188 18,188 10,680 1 8,953 19,634
1998 985 9,173 19,173 10,693 147 9,951 20,791
</TABLE>
The dollar amount of capital gain distributions during the fund's lifetime was
$145.
ILLUSTRATION OF A $10,000 INVESTMENT IN THE TAX-EXEMPT FUND OF VIRGINIA
WITH DIVIDENDS REINVESTED
(For the lifetime of the fund August 14, 1986 - July 31, 1998)
COST OF SHARES
VALUE OF SHARES**
<TABLE>
<CAPTION>
Fiscal Annual Dividends Total From From Capital From Total
Year End Dividends (cumulative) Investment Initial Gains Dividends Value
July 31 Cost Investment Reinvested Reinvestment
<S> <C> <C> <C> <C> <C> <C> <C>
1987* $ 545 $ 545 $ 10,545 $ 9,273 $0 $ 525 $ 9,798
1988 640 1,185 11,185 9,240 1 1,171 10,412
1989 671 1,856 11,856 9,700 1 1,919 11,620
1990 716 2,572 12,572 9,667 1 2,634 12,302
1991 760 3,332 13,332 9,833 1 3,454 13,288
1992 791 4,123 14,123 10,480 1 4,508 14,989
1993 800 4,923 14,923 10,673 1 5,407 16,081
1994 826 5,749 15,749 10,327 1 6,032 16,360
1995 892 6,641 16,641 10,527 1 7,069 17,597
1996 928 7,569 17,569 10,513 63 7,982 18,558
1997 955 8,524 18,524 10,913 65 9,269 20,247
1998 990 9,514 19,514 10,907 114 10,255 21,276
</TABLE>
The dollar amount of capital gain distributions during the fund's lifetime was
$112.
* From inception on August 14, 1986.
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
Note that past results are not an indication of future investment results. The
fund may include information on its investment results and/or comparisons of
its investment results to various unmanged indices or results of other mutual
funds or investment or savings vehicles in advertisements or in reports
furnished to present or perspective shareholders. The fund may also combine
its results with those of other funds in The American Funds Group for purposes
of illustrating investment strategies involving multiple funds.
The fund may also refer to results compiled by organizations such as CDA
Investment Services, Ibbotson Associates, Lipper Analytical Services,
Morningstar, Inc., Weisenberger Investment Company Services and the U.S.
Department of Commerce. Additionally, the fund may, from time to time, refer
to results published in various newspapers or periodicals, including "Barrons",
Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance
Magazine, Money, U.S. News and World Report and "The Wall Street Journal."
DESCRIPTION OF RATINGS FOR DEBT SECURITIES
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions as to the quality of the municipal bonds
which they undertake to rate. It should be emphasized, however, that ratings
are general and are not absolute standards of quality. Consequently, municipal
bonds with the same maturity, coupon and rating may have different yields,
while municipal bonds of the same maturity and coupon with different ratings
may have the same yield.
Moody's Investors Service, Inc. rates the long-term debt securities issued by
various entities from "Aaa" to "C." Moody's applies the numerical modifiers 1,
2, and 3 in each generic rating classification from Aa through B in its
corporate bond rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category. Ratings are described as follows:
BONDS --
"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."
"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 the Aaa
securities."
"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 sometime in the future."
"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."
"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."
"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."
"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."
"Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or having other marked
shortcomings."
"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."
NOTES --
"The MIG 1 designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing."
"The MIG 2 designation denotes high quality. Margins of protection are ample
although not as large as in the preceding group."
COMMERCIAL PAPER --
"Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while appropriate, maybe
more affected by external conditions. Ample alternate liquidity is
maintained."
Standard & Poor's Corporation rates the long-term securities debt of various
entities in categories ranging from "AAA" to "D" according to quality. The
ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Ratings are described as follows:
BONDS --
"Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong."
"Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree."
"Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories."
"Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
"BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
The highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions."
"The rating 'C1' is reserved for income bonds on which no interest is being
paid."
"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."
NOTES --
"The SP-1 rating denotes a very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
"The SP-2 rating denotes a satisfactory capacity to pay principal and
interest."
COMMERCIAL PAPER --
"The A-1 designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus
(+)designation.
The A-2 designation indicates a capacity for timely payment on issues so
designated is strong; however, the relative degree of safety is not as high as
for issues designated A-1."
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of Maryland
Investment Portfolio, July 31, 1998
Principal
Amount Market
(000) Value
---------------------------
Tax-Exempt Securities Maturing in More than One Year - 94.82%
College & University Revenue - 1.91%
Frederick County, College Revenue Bonds (Hood College Project),
1990 Series:
7.05% 2004 $ 410 $435,178
7.05% 2005 455 487414
University of Maryland System Auxiliary Facility and Tuition
Revenue Bonds, 1993 Refunding Series C, 5.00% 2010 1000 1018320
-------------
1,940,912
-------------
General Obligations (Local) - 1.35%
Anne Arundel County, Consolidated Water and Sewer, 1993
Refunding Series, 5.30% 2016 500 506625
Frederick County, Public Facilities Bonds 1990, 8.875% 2002 250 293780
Harford County Consolidated Public Improvement Bonds,
Series 1992, 5.80% 2010 530 569035
-------------
1,369,440
-------------
General Obligations (State) - 1.52%
Commonwealth of Puerto Rico, Public Improvement
Refunding Bonds, Series 1998, 5.00% 2007 1500 1545090
-------------
Hospital & Health Facilities Revenue - 11.06%
Maryland Health and Higher Educational Facilities Authority:
(Charity Obligated Group-Daughters of Charity National
Health System), Variable Rate Hospital Revenue Bonds,
Series 1997D, 4.60% 2026 1750 1770230
Good Samaritan Hospital Issue, Revenue Bonds, Series 1993,
5.70% 2009 1000 1101440
Howard County, General Hospital Issue, Series 1993:
5.50% 2013 2000 2100880
5.50% 2021 1000 1042120
Johns Hopkins Hospital Issue, Revenue Refunding Bonds,
Series 1993, 5.60% 2009 850 900609
Suburban Hospital Issue, Revenue Refunding Bonds,
Series 1993, 5.125% 2021 1500 1470210
Prince George's County (Dimensions Health Corporation Issue):
Hospital Revenue Bonds, Series 1992, 7.20% 2006 215 241841
Project and Refunding Revenue Bonds, Series 1994, 5.375% 2014 1600 1614288
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Hospital Revenue Bonds (Mennonite General Hospital Project),
1996 Series A, 6.375% 2006 910 978004
-------------
11,219,622
-------------
Housing Finance Authority Revenue - 13.75%
Maryland Community Development Administration, Department of
Housing and Community Development:
Residential Revenue Bonds, 1998 Series B, AMT:
5.00% 2008 1,610 1,643,182
5.00% 2009 1,680 1,704,226
Single-Family Program Bonds:
1994 First Series, 5.80% 2009 2000 2112440
1994 First Series, 5.70% 2017 2,630 2,715,764
1994 Fifth Series, AMT, 5.875% 2017 1135 1169958
1990 First Series, 7.60% 2017 495 515335
1988 Third Series, 8.00% 2018 1,000 1,037,750
Montgomery County, Housing Opportunities Commission,
Single Family Mortgage Revenue Bonds:
1998 Series B, 4.80% 2009 600 598,062
1997 Series A, 5.50% 2009 750 777,068
1998 Series B, 4.90% 2010 500 498,730
Prince George's County Housing Authority, GNMA/FNMA
Collateralized Single Family Mortgage Bonds,
Series 1994 A, AMT, 6.60% 2025 930 992961
Commonwealth of Puerto Rico Housing Finance Corporation,
Single Family Mortgage Revenue Bonds, 1st Portfolio:
1988 Series A, 7.80% 2021 10 10210
1988 Series B, 7.65% 2022 160 169665
-------------
13,945,351
-------------
Industrial Development Revenue - 2.14%
Mayor and City Council of Baltimore, Port Facilities Revenue
Bonds (Consolidation Coal Sales Company Project):
Series 1984 A, 6.50% 2011 500 546335
Series 1984 B, 6.50% 2011 500 546335
Puerto Rico Ports Authority, Special Facilities Revenue Bonds
(American Airlines, Inc. Project), 1996 Series A, 6.25% 2026 1000 1081150
-------------
2,173,820
-------------
Insured - 18.04%
City of Baltimore, Refunding Revenue Bonds, FGIC Insured,
1994, Series A:
6.00% 2015 1500 1697475
5.00% 2024 1220 1216438
Calvert County, Economic Development Refunding Revenue Bonds,
(Asbury-Solomons Island Facility), Series 1997, MBIA Insured:
5.00% 2009 1000 1027350
5.00% 2010 1000 1020470
5.00% 2017 1000 984000
5.00% 2027 1000 976970
Charles County, Consolidated Public Improvement Bonds of 1993,
Series A, FGIC Insured, 5.25% 2003 715 747154
City of Frederick, General Improvement Bonds, 1992 Refunding
Series, FGIC Insured, 6.125% 2008 890 969814
Maryland Health and Higher Educational Facilities Authority:
Johns Hopkins Medical Institutions Parking Facilities Issue,
Parking Revenue Bonds, Series 1996, AMBAC Insured, 5.50% 2011 1200 1270956
Helix Health Issue, Revenue Bonds, Series 1997, AMBAC Insured,
5.00% 2007 1250 1295913
Memorial Hospital of Easton, Series 1989 B,
MBIA Insured, 7.00% 2012 1,200 1,254,840
Mercy Medical Center Issue Project and Refunding Revenue
Bonds, Series 1996, FSA Insured, 6.50% 2013 2000 2359120
Prince George's County, Solid Waste Management System
Revenue Bonds, Series 1993, 6.50% 2007 2,000 2,227,700
Commonwealth of Puerto Rico:
Electric & Power Authority, MBIA Insured, 7.00% 2007 1000 1,183,930
Public Improvement Bonds of 1987, MBIA Insured, 6.75% 2006 65 66130
-------------
18,298,260
-------------
Lease Revenue (State) - 1.57%
Maryland Stadium Authority, Sports Facilities
Lease Revenue Bonds, Series 1989 D, 7.50% 2010 1500 1593330
-------------
Life Care Facilities Revenue - 7.66%
Maryland Health and Higher Educational Facilities Authority,
First Mortgage Refunding Revenue Bonds, Roland Park Place Issue,
Series 1989, 7.75% 2012 2000 2078600
Maryland Health and Higher Educational Facilities Authority,
First Mortgage Revenue Bonds, PUMH of Maryland, Inc. Issue
(Heron Point of Chestertown), Series 1998A:
5.75%, 2019 1500 1481790
5.75%, 2026 1640 1595294
Prince George's County, Refunding Revenue Bonds, Collington
Episcopal Life Care Community, Inc., Series 1994 A, 6.00% 2013 2500 2615275
-------------
7,770,959
-------------
Multi-Family Housing - 5.37%
Montgomery County, Maryland Housing Opportunities Commission,
Multi-Family Revenue Bonds:
1995 Series A, 6.10% 2015 2,025 2,149,173
1994 Series A-2, 7.50% 2024 2000 2135360
Prince George's County, Mortgage Revenue Bonds
(GNMA Collateralized-Langley Gardens Apartments Project),
Series 1997 A, 5.60% 2017 1130 1168013
-------------
5452546
-------------
Pre-Refunded/1/ - 13.67%
Baltimore County, Metropolitan District Bonds, 63rd Issue,
1992 Series, 6.10% 2006 (2002) 250 272510
Calvert County, Economic Development Revenue Bonds
(Asbury-Solomons Island Facility), Series 1995, 8.625% 2024 (2005) 2300 2870584
Frederick County, Public Facilities Bonds:
1991, Series B, 6.30% 2011 (2002) 1370 1503191
1986 Series, 7.40% 2012 (2001) 310 347281
Harford County, Consolidated Public Improvement Bonds,
Series 1992, 5.80% 2010 (2002) 970 1049152
Howard County, Metropolitan District Refunding Bonds,
1991 Series A, 6.625% 2021 (2001) 500 536465
Maryland State Health and Higher Educational Facilities
Authority:
Junior Lien Revenue Bonds, Francis Scott Key Medical Center
Issue, 1990 Series A, 7.00% 2025 (2000) 250 269223
Memorial Hospital of Cumberland Issue, Revenue Refunding
Bonds, Series 1992, 6.50% 2010 (2004) 750 838050
Suburban Hospital Issue Revenue Bonds, Series 1992,
6.50% 2017 (2002) 500 552195
University of Maryland Medical System Issue, Revenue Bonds,
Series 1991 A, FGIC Insured, 6.50% 2021 (2001) 1000 1069420
Prince George's County, Hospital Revenue Bonds (Dimensions
Health Corporation Issue), Series 1992, 7.20% 2006 (2002) 1,035 1167501
Commonwealth of Puerto Rico:
Housing Bank and Finance Agency, Single Family Mortgage Revenue
Bonds, Homeownership 5th Portfolio, 1986 Series, 7.50% 2015 (2000) 495 525274
Public Improvement Bonds of 1992, MBIA Insured, 6.50% 2009 (2002) 1,000 1,101,260
University of Maryland System Auxiliary Facility and Tuition
Revenue Bonds:
1989 Series B, 7.00% 2007 (1999) 600 634427
1992 Series A, 6.30% 2009 (2001) 1050 1126325
-------------
13,862,858
-------------
Resource Recovery - 6.98%
Maryland Energy Financing Administration, Limited Obligation Solid
Waste Disposal Revenue Bonds (Wheelabrator Water Technologies
Baltimore L.L.C. Projects), 1996 Series, AMT, 6.30% 2010 3500 3834215
Montgomery County, Northeast Maryland Waste Disposal Authority,
Solid Waste Revenue Bonds AMT:
6.00% 2006 1000 1084720
6.00% 2007 1000 1089580
Series 1993 A, 6.30% 2016 1000 1069650
-------------
7078165
-------------
Special Obligations - 4.46%
Montgomery County Revenue Authority, Golf Course System Revenue
Bonds, Series 1996 A, 6.00% 2014 2355 2502117
Virgin Islands Public Finance Authority, Revenue and Refunding Bonds:
(Virgin Islands Matching Fund Loan Notes), Series 1998 A:
5.20% 2009 1000 1017060
5.20% 2010 1000 1008550
-------------
4527727
-------------
Tax Assessment Bonds - 2.12%
Prince George's County, Special Obligation Bonds (Woodview Village
Infrastructure Improvements), Series 1997 A, 8.00% 2026 2000 2146439
-------------
Turnpikes & Toll Roads Revenue - 1.08%
Maryland Transportation Authority Facilities Project,
Transportation Facilities Projects Revenue Bonds,
Series 1992, 5.80% 2006 1000 1092350
-------------
Water & Sewer Revenue - 2.14%
Maryland Water Quality Financing Administration,
Revolving Loan Fund Revenue Bonds, Series 1991 B, 0.00% 2005 700 512512
Washington Suburban Sanitary District, Refunding Bonds of 1997,
5.75% 2017 1510 1662631
-------------
2175143
-------------
96192012
-------------
Tax-Exempt Securities Maturing in One Year or Less - 3.92%
General Obligation (Local) - 1.36%
The Maryland-National Capital Park and Planning Commission,
Prince George's County, Park Acquisition and Development
Variable Rate Bond Anticipation Notes, Series V-2, 3.70% 2002 /2/ 1380 1380000
Hospital Facilities - 2.56%
Maryland Health and Higher Educational Facilities Authority,
Variable Rate Demand Revenue Bonds (Catholic Health
Initiatives), Series 1997 B, 3.55% 2015/2/ 2600 2600000
-------------
3980000
-------------
TOTAL TAX-EXEMPT SECURITIES (cost: $94,284,000) 100,172,012
Excess of cash and receivables over payables 1,278,348
-------------
NET ASSETS $101,450,360
==============
/1/Parenthetical year represents date of pre-refunding.
/2/Coupon rate changes periodically.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of Maryland
Financial Statements
Statement of Assets and Liabilities
July 31, 1998
(dollars in thousands)
Assets:
Tax-exempt securities:
Maturing in more than one year
(cost: $90,304) $ 96,192
Maturing in one year or less
(cost: $3,980) $3,980
Cash 78
Receivables for --
Sales of Fund's shares 534
Interest 968 5,560
----------- -----------
101,752
-----------
Liabilities:
Payables for --
Repurchases of Fund's shares 77
Dividends 135
Adviser and management services 36
Other expenses 54 302
----------- -----------
Net Assets at July 31, 1998 -
Equivalent to $16.04 per share on 6,325,924 shares
of beneficial interest issued and outstanding (unlimited
shares authorized) $101,450
=
See Notes to Financial Statements
Statement of Operations
for the year ended July 31, 1998
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $5,230
Expenses:
Investment adviser fee $ 224
Business management fee 181
Distribution expenses 231
Transfer agent fee 31
Reports to shareholders 15
Registration statement and prospectus 6
Postage, stationery and supplies 8
Trustees' fees 7
Auditing and legal fees 24
Custodian fee 5
Other expenses 5 737
----------- -----------
Net investment income 4,493
-----------
Realized Gain and Unrealized Appreciation
on Investments:
Net realized gain 698
-----------
Net unrealized appreciation on investments:
Beginning of year 5,851
End of year 5,888
-----------
Change in unrealized appreciation on investments 37
-----------
Net realized gain and change in unrealized
appreciation on investments 735
-----------
Net Increase in Net Assets
Resulting from Operations $5,228
=
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year Ended July 31,
1998 1997
----------------------------
Operations:
Net investment income $ 4,493 $ 4,135
Net realized gain on investments 698 561
Net change in unrealized appreciation on investments 37 2,812
----------- -----------
Net increase in net assets resulting from operations 5,228 7,508
----------- -----------
Dividends and Distributions Paid to Shareholders:
Dividends paid from net investment income (4,491) (4,135)
Distribution paid from net realized gain on investments (642) -
----------- -----------
Total dividends and distributions (5,133) (4,135)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold: 1,252,351 and 717,812 shares, respectively 20,079 11,169
Proceeds from shares issued in reinvestment of net investment income
dividends and distributions of net realized gain on investments:
211,827 and 163,465 shares, respectively 3,386 2,544
Cost of shares repurchased: 548,078 and 671,863 shares, respectively (8,767) (10,456)
----------- -----------
Net increase in net assets resulting from capital
share transactions 14,698 3,257
----------- -----------
Total Increase in Net Assets 14,793 6,630
Net Assets:
Beginning of year 86,657 80,027
----------- -----------
End of year $101,450 $86,657
= =
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Per-share
Data and Ratios Year En ded Jul y 31
The Tax-Exempt -------- -------- -------- -------- --------
Fund of Maryland 1998 1997 1996 1995 1994
Net Asset Value,
Beginning of Year $16.02 $15.39 $15.29 $15.00 $15.53
---------- ---------- ---------- -------- --------
Income from Investment
Operations:
Net investment income .78 .79 .80 .80 .76
Net realized and
unrealized gain (loss)
on investments .14 .63 .10 .29 (.53)
---------- ---------- ---------- -------- --------
Total income from
investment operations .92 1.42 .90 1.09 .23
---------- ---------- ---------- -------- --------
Less Distributions:
Dividends from net
investment income (.78) (.79) (.80) (.80) (.76)
Distributions from net
realized gains (.12) - - - -
---------- ---------- ---------- -------- --------
Total distributions (.90) (.79) (.80) (.80) (.76)
---------- ---------- ---------- -------- --------
Net Asset Value,
End of Year $16.04 $16.02 $15.39 $15.29 $15.00
========== ========== ========== ======== ========
Total Return (1) 5.89 9.52% 5.95% 7.58% 1.42%
Ratios/Supplemental Data:
Net assets, end of
year (in millions) $101 $87 $80 $75 $75
Ratio of expenses to
average net assets .79% .82% .81% .78% .75%
Ratio of net income to
average net assets 4.84% 5.08% 5.14% 5.38% 4.90%
Portfolio turnover rate 10.30% 15.27% 16.01% 20.91% 10.01%
(1) Excludes maximum sales charge of 4.75%.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of Virginia
Investment Portfolio, July 31, 1998
Principal
Amount Market
(000) Value
- -
Tax-Exempt Securities Maturing in More than One Year - 96.15%
College & University Revenue - 2.50%
Virginia College Building Authority Educational Facilities Revenue
Bonds (Marymount University Project), Series 1992, 6.875% 2007 $1,650 $1,805,381
Virginia Polytechnic Institute and State University, University Services
System and General Revenue Pledge Bonds, Series C 1996, 5.35% 2009 1,000 1,058,160
-
2863541
-
General Obligations (Local) - 9.55%
Arlington County:
Public Improvement Bonds, Series 1996, 6.00% 2011 1000 1130850
Refunding Bonds, Series 1993, 6.00% 2012 1000 1128880
Chesapeake:
Public Improvement Bonds, Series 1992, 6.00% 2006 1600 1729664
Refunding Bonds, Series 1993, 5.40% 2008 1000 1071520
Leesburg Refunding Bonds, Series 1993, 5.60% 2008 1195 1270464
Lynchburg Public Improvement Refunding Bonds,
Series 1993, 5.25% 2009 1000 1037760
City of Virginia Beach, Virginia, General Obligation Public
Improvement and Refunding Bonds, Series 1998:
5.25% 2007 1385 1468017
5.25% 2010 2000 2106900
-
10944055
-
General Obligations (State) - .70%
Commonwealth of Virginia, Public Facilities Bonds,
1993 Series A, 5.40% 2005 750 800370
-
Hospital & Health Facilities Revenue - 14.55%
Industrial Development Authority of the town of Abingdon, Virginia,
Hospital Facility Revenue and Refunding Bonds (Johnston Memorial
Hospital), Series 1998
5.00% 2008 1015 1034437
5.00% 2009 1020 1031516
5.00% 2010 505 506101
Fairfax County Industrial Development Authority, Hospital
Revenue Refunding Bonds (INOVA Health Systems Hospital
Project), Series 1993 A:
5.00% 2007 750 776175
5.25% 2019 2500 2565925
5.00% 2023 500 495405
Industrial Development Authority of Halifax County, Virginia
Hospital Refunding Revenue Bonds (Halifax Regional Hospital, Inc.),
Series 1998:
4.65% 2007 600 594852
4.80% 2009 1000 990900
Industrial Development Authority of Henry County, Hospital Revenue
Bonds (Memorial Hospital of Martinsville and Henry County),
Series 1997, 6.00% 2017 2000 2138460
Industrial Development Authority of the City of Norfolk, Hospital
Revenue Bonds (Daughters of Charity National Health System-DePaul
Medical Center), Series 1992 A, 6.50% 2007 1000 1098520
Norfolk Industrial Development Authority, Hospital Revenue
Bonds (Sentara Hospitals-Norfolk Project),
Series A 1994, 5.00% 2020 1000 974370
Peninsula Ports Authority, Health System Revenue and Refunding Bonds
(Riverside Health System Project), Series 1992 A, 6.625% 2010 1300 1416779
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Hospital Revenue Bonds (Mennonite General Hospital Project),
1996 Series A, 6.375% 2006 1830 1966756
Virginia Beach, Virginia Development Authority (Sentara Bayside
Hospital), 6.60% 2009 1000 1089270
-
16679466
-
Housing Finance Authority Revenue - 4.63%
Commonwealth of Puerto Rico Housing Finance Corporation,
Single Family Mortgage Revenue Bonds, 1st Portfolio:
1988 Series A, 7.80% 2021 10 10210
1988 Series B, 7.65% 2022 190 201478
Virginia Housing Development Authority, Commonwealth
Mortgage Bonds:
1994 Series H, Sub-Series H-1, 6.10% 2003 500 528590
1995 Series A-AMT, Sub-Series A-1, 6.60% 2004 1000 1046130
1998 Series E, Sub-Series E-1, 4.50% 2005 /1/ 1190 1187025
1994 Series I-AMT, Sub-Series I-1, 6.40% 2005 800 860896
1994 Series H, Sub-Series H-2, 6.55% 2017 1000 1067980
1992 Series A, 7.10% 2022 380 399079
-
5301388
-
Industrial Development Revenue - 2.77%
Industrial Development Authority of the County of Henrico,
Solid Waste Disposal Revenue Bonds (Browning-Ferris Industries of
South Atlantic, Inc. Project):
Series 1996 A AMT, 5.30% 2011 1,000 1,051,090
Series 1996 A AMT, 5.45% 2014 1,000 1,039,720
Puerto Rico Ports Authority, Special Facilities Revenue Bonds
(American Airlines, Inc. Project), 1996 Series A, 6.25% 2026 1000 1081150
-
3171960
-
Insured - 21.26%
Chesapeake Certificates of Participation,
MBIA Insured, 1993 Series, 5.40% 2005 1000 1056130
Industrial Development Authority of Danville, Virginia,
Hospital Revenue Bonds (Danville Regional Medical Center),
Series 1998, AMBAC Insured:
5.25% 2012 1995 2067658
5.25% 2013 1000 1034910
Fairfax County Industrial Development Authority,
Hospital Revenue Refunding Bonds (INOVA Health System
Hospitals Project), Series 1993 A, FSA Insured, 5.25% 2019 1000 1024400
Fairfax County Redevelopment and Housing Authority, Multifamily
Housing Revenue Bonds (Grand View Apartments Project), Series
1998 A, FHA Insured, 5.05% 2010 1000 1003460
Industrial Development Authority of the County of Hanover,
Hospital Revenue Bonds (Memorial Regional Medical Center
Project at Hanover Medical Park), Series 1995, MBIA Insured:
6.50% 2010 1375 1608159
6.375% 2018 1000 1164240
Loudoun County:
Industrial Development Authority, Hospital Revenue Bonds,
FSA Insured, 6.00% 2005 1000 1093170
Sanitation Authority, Water and Sewer System Revenue Bonds,
FGIC Insured, Series 1992, 6.25% 2010 2000 2179960
Industrial Development Authority of the City of Norfolk, Health Care
Revenue Bonds (Bon Secours Health System), Series 1997, MBIA Insured:
5.00% 2006 1190 1224486
5.00% 2007 1250 1292688
Pamunkey Regional Jail Authority, Jail Facility Revenue Bonds,
Series 1996, MBIA Insured, 5.70% 2010 1000 1081379
Industrial Development Authority of the County of Prince William
(Virginia), Hospital Facility Refunding Revenue Bonds (Potomac
Hospital Corporation of Prince William), FSA Insured,
Series 1998, 5.00% 2008 1475 1521787
Southeastern Public Service Authority of Virginia, Senior Revenue
Refunding Bonds, Series 1998, AMBAC Insured, 5.00% 2015 4000 4031720
City of Virginia Beach Development Authority, Hospital Revenue
Bonds (Virginia Beach General Hospital Project),
Series 1993, AMBAC Insured, 6.00% 2011 1000 1125640
Washington, D.C. Metropolitan Area Airports Authority, Airport
System Revenue and Refunding Bonds, MBIA Insured AMT:
Series 1998 B, 5.25% 2010 1000 1040570
Series 1992 A, 6.625% 2019 750 819788
-
24370145
-
Lease Revenue (State) - .91%
Virginia Public Building Authority, Public Facilities Revenue
Refunding Bonds, Series 1998A, 5.00% 2004 1000 1039090
-
Life Care Facilities Revenue- 5.17%
Industrial Development Authority of the County of Henrico, Virginia,
Residential and Health Care Facility Mortgage Revenue Refunding Bonds
(Our Lady of Hope), Series 1997, 6.00% 2016 2730 2794292
Industrial Development Authority of the County of James City,
Virginia, Residential Care Facility First Mortgage Revenue Bonds
(Williamsburg Landing, Inc.), Series 1996A, 6.625% 2019 3000 3133110
-
5927402
-
Multi-Family Housing - 2.03%
Virginia Housing Development Authority, Multi-Family Housing Bonds:
1997 Series B-AMT, 5.80% 2010 1185 1268780
1996 Series B, 5.95% 2016 1000 1056760
-
2325540
-
Pre-Refunded (2) - 13.95%
Danville, Virginia Industrial Development Authority, Hospital
Revenue Bonds, Danville Regional Medical Center,
Series 1994, FGIC Insured, 6.00% 2007 (2004) 1000 1101420
Fairfax County:
Economic Development Authority, Parking Revenue
Bonds (Huntington Metrorail Station Project),
Series 1990 A, 6.75% 2015 (2000) 500 537675
Industrial Development Authority Hospital Revenue Bonds
(Fairfax Hospital System Project), INOVA Health Systems,
Series 1991 C, 6.801% 2023 (2001) 1000 1095110
Henry County Public Service Authority, Water and Sewer Revenue
Bonds, FGIC Insured, Series 1990, 7.20% 2019 (2000) 1250 1351600
Newport News General Obligation, Water Bonds,
Series A 1992, 6.125% 2009 (2002) 1170 1270175
Norfolk:
Capital Improvement and Refunding Bonds,
Series 1992 A, 6.00% 2011 (2001) 500 532565
Industrial Development Authority, Hospital Revenue Bonds:
(Children's Hospital of the King's Daughters Obligated
Group), Series 1991, AMBAC Insured, 7.00% 2011 (2001) 400 438908
(Sentara Hospitals-Norfolk Project), Series 1991, 7.00% 2020 (2000) 250 270923
Peninsula Ports Authority, Health Care Facilities Revenue and
Refunding Bonds (Mary Immaculate Project), 1994 Series, 6.875% 2010 (2004) 1900 2216844
Prince William County Service Authority, Water and Sewer
System Revenue Bonds, Series 1991, FGIC Insured, 6.50% 2021 (2001) 680 738942
Roanoke:
Industrial Development Authority, Hospital Revenue Bonds,
Carilion Health System (Roanoke Memorial Hospital Projects),
Series 1990, MBIA Insured, 7.25% 2017 (2000) 750 810225
Public Improvement and Refunding Bonds, Series 1992 B:
6.375% 2009 (2001) 250 271033
6.40% 2011 (2001) 500 544635
Water System Revenue Bonds,
Series 1991, FGIC Insured, 6.50% 2021 (2001) 750 815010
University of Virginia, Hospital Revenue Bonds,
1984 Series A, HIBI Insured, 9.875% 2001 (2000) 10 11400
Upper Occoquan Sewage Authority, Regional Sewerage System
Revenue Bonds, Series 1991, MBIA Insured, 6.00% 2021 (2001) 700 738647
Virginia Public Building Authority, State Building Revenue Bonds,
Series 1991 A, 6.50% 2011 (2001) 1750 1903353
Virginia Resources Authority:
Solid Waste Disposal System Revenue Bonds,
1990 Series A, 7.30% 2015 (2000) 1000 1072570
Water and Sewer System Revenue Bonds
Series 1990, 7.25% 2011 (2000) 250 271516
-
15992551
-
Resource Recovery - 1.82%
Fairfax County Economic Development Authority, Resource Recovery
Revenue Bonds, Series 1988 A AMT (Ogden Martin Systems of
Fairfax, Inc. Project), 7.55% 2003 500 522169
Roanoke Valley Resource Authority, Solid Waste System Revenue
Bonds, Series 1992, 5.75% 2012 1500 1561905
-
2084074
-
Special Obligations - 1.80%
Virgin Islands Public Finance Authority, Revenue and Refunding
Bonds (Virgin Islands Matching Fund Loan Notes):
Series 1998 C, 5.50% 2007 1000 1046820
Series 1998 A, 5.20% 2009 1000 1017060
-
2063880
-
State Appropriation - 1.44%
Big Stone Gap, Virginia Redevelopment and Housing Authority,
Commonwealth of Virginia Correctional Facility Lease Revenue Bonds
(Wallens Ridge Development Project), Series 1995, 5.25% 2010 1600 1654224
-
State Authority - 5.46%
Virginia Public School Authority, School Financing Bonds:
(1997 Resolution), Series 1998 B, 5.25% 2007 2000 2121400
(1987 Resolution), 1991 Refunding Series C, 6.25% 2007 1500 1621890
(1991 Resolution), Series 1994 A, 6.20% 2014 1500 1655760
Virginia Resources Authority:
Water and Sewer System Revenue Bonds
(Pooled Loan Program), 1986 Series A, 7.50% 2017 50 50451
Water System Refunding Revenue Bonds,
1992 Series A, 6.45% 2013 750 811237
-
6260738
-
Tax Assessment Bonds - 1.77%
Dulles Town Center, Community Development Authority (Loudoun
County, Virginia), Special Assessment Bonds (Dulles Town
Center Project), Series 1998, 6.25% 2026 2000 2024520
-
Turnpikes & Toll Roads Revenue - 1.76%
Pocahontas Parkway Association, Route 895 Connector, Toll
Road Revenue Bonds, Series 1998A, 5.25% 2009 2000 2022520
-
Water & Sewer Revenue - 4.08%
Chesterfield County Water and Sewer Revenue Refunding Bonds,
Series 1992, 6.375% 2009 1250 1371050
City of Richmond, Virginia, Public Utility Revenue and Refunding Bonds
Series 1998 A:
5.25% 2009 1500 1569390
5.25% 2011 1000 1033480
Rivanna Water and Sewer Authority, Regional Water and Sewer
System Refunding Revenue Bonds, Series 1991, 6.40% 2007 645 697729
-
4671649
-
110197113
-
Tax-Exempt Securities Maturing in One Year or Less - 3.67%
Industrial Development Revenue - 2.44%
Industrial Development Authority of King George County, Virginia,
Variable Rate Demand Exempt Facility Revenue Bonds (Birchwood Power
Partners, L.P. Project):
Series 1994 A, 3.85% 2024 /3/ 2200 2200000
Series 1994 B, 3.85% 2024 /3/ 600 600000
-
2800000
-
Pre-Refunded /2/ - 1.23%
Loudoun County Sanitation Authority, Water and Sewer System
Revenue Bonds, Series 1989, AMBAC Insured, 7.50% 2017 (1999) 375 388448
Suffolk, Series 1989, 7.00% 2005 (1998) 1000 1025400
-
1413848
-
4213848
-
TOTAL TAX-EXEMPT SECURITIES (cost: $108,556,000) 114410961
Excess of cash and receivables over payables 202598
-
NET ASSETS $114,613,559
=
/1/ Represents a when-issued security.
/2/ Parenthetical year represents date of pre-refunding.
/3/ Coupon rate changes periodically.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of Virginia
Financial Statements
Statement of Assets and Liabilities
July 31, 1998
(dollars in thousands)
Assets:
Tax-exempt securities:
Maturing in more than one year
(cost: $104,382) $110,197
Maturing in one year or less
(cost: $4,174) 4,214
Cash 63
Receivables for --
Sales of Funds' shares $ 260
Interest 1,584 1,844
----------- -----------
116,318
-----------
Liabilities:
Payables for --
Purchases of investments 1,187
Repurchases of Funds' shares 273
Dividends 143
Adviser and management services 40
Other expenses 61 1,704
----------- -----------
Net Assets at July 31, 1998 -
Equivalent to $16.36 per share on 7,004,811 shares
of beneficial interest issued and outstanding (unlimited
shares authorized) $114,614
=
See Notes to Financial Statements
Statement of Operations
for the year ended July 31, 1998 The
(dollars in thousands) Tax-Exempt
Fund of
Virginia
--------------
Investment Income:
Income:
Interest on tax-exempt securities $5,827
-----------
Expenses:
Investment adviser fee 250
Business management fee 201
Distribution fee 264
Transfer agent fee 34
Reports to shareholders 18
Registration statement and prospectus 5
Postage, stationery and supplies 9
Trustees' fees 7
Auditing and legal fees 24
Custodian fee 5
Other expenses 6 823
----------- -----------
Net investment income 5,004
-----------
Realized Gain and Unrealized Appreciation
on Investments:
Net realized gain 1,368
-----------
Net unrealized appreciation on investments:
Beginning of year 7,054
End of year 5,855
-----------
Change in unrealized appreciation on investments (1,199)
-----------
Net realized gain and change in unrealized
appreciation on investments 169
-----------
Net Increase in Net Assets
Resulting from Operations $5,173
=
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands) Year Ended July 31
1998 1997
---------- -----------
Operations:
Net investment income $ 5,004 $ 4,680
Net realized gain on investments 1,368 118
Net change in unrealized appreciation on investments (1,199) 3,502
----------- -----------
Net increase in net assets resulting from operations 5,173 8,300
----------- -----------
Dividends and Distributions Paid to Shareholders:
Dividend paid from net investment income (5,001) (4,680)
Distribution paid from net realized gain on investments (244) -
----------- -----------
Total dividends and distributions (5,245) (4,680)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold: 1,285,596 and 1,037,170 shares, respectively 21,057 16,514
Proceeds from shares issued in reinvestment of net investment income
dividends and distributions of net realized gain on investments:
188,801 and 168,347 shares, respectively 3,083 2,677
Cost of shares repurchased: 616,127 and 798,604 shares, respectively (10,063) (12,694)
----------- -----------
Net increase in net assets resulting from capital
share transactions 14,077 6,497
----------- -----------
Total Increase in Net Assets 14,005 10,117
Net Assets:
Beginning of year 100,609 90,492
----------- -----------
End of year $114,614 $100,609
= =
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Per-Share
Data and Ratios Year En ded Jul y 31
The Tax-Exempt -------- -------- -------- -------- --------
Fund of Virginia 1998 1997 1996 1995 1994
Net Asset Value,
Beginning of Year $16.37 $15.77 $15.79 $15.49 $16.01
------------------------------------------------
Income from Investment
Operations:
Net investment income .78 .80 .81 .83 .80
Net realized and
unrealized gain (loss)
on investments .03 .60 .03 .30 (.52)
------------------------------------------------
Total income from
investment operations .81 1.40 .84 1.13 .28
------------------------------------------------
Less Distributions:
Dividends from net
investment income (.78) (.80) (.81) (.83) (.80)
Distributions from
net realized gains (.04) - (.05) - -
-------------------- - - -
Total distributions (.82) (.80) (.86) (.83) (.80)
-------------------- - - -
Net Asset Value,
End of Year $16.36 $16.37 $15.77 $15.79 $15.49
================================================
Total Return (1) 5.08% 9.10% 5.46% 7.56% 1.74%
Ratios/Supplemental Data:
Net assets, end of
year (in millions) $115 $101 $90 $92 $93
Ratio of expenses to
average net assets .78% .81% .79% .79% .78%
Ratio of net income to
average net assets 4.73% 4.99% 5.11% 5.37% 5.04%
Portfolio turnover rate 24.66% 18.41% 27.34% 32.18% 2.36%
(1) Excludes maximum sales charge of 4.75%.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. The American Funds Tax-Exempt Series I (the "Trust") is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company and has initially issued two series of shares, The
Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia (the "Funds").
The Funds seek a high level of current income exempt from Federal and their
respective state income taxes. Additionally, each Fund seeks to preserve
capital. The following paragraphs summarize the significant accounting
policies consistently followed by the Trust in the preparation of its financial
statements:
Tax-exempt securities are valued at prices obtained from a pricing service,
when such prices are available; however, in circumstances where the investment
adviser deems it appropriate to do so, such securities will be valued at the
mean quoted bid and asked prices or at prices for securities of comparable
maturity, quality, and type. Securities with original maturities of one year or
less having 60 days or less to maturity are amortized to maturity based on
their cost if acquired within 60 days of maturity or, if already held on the
60/th/ day, based on the value determined on the 61/st/ day. Securities for
which representative market quotations are not readily available are valued at
fair value as determined in good faith under policies approved by the Trust's
Board.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the Trust purchases securities on a delayed delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions. Realized gains and losses from
securities transactions are reported on an identified cost basis. Interest
income is reported on the accrual basis. Premiums and original issue discounts
on securities purchased are amortized. Amortization of market discounts on
securities is recognized upon disposition, subject to applicable tax
requirements. Dividends to shareholders are declared daily after determination
of the fund's net investment income and paid to shareholders monthly.
Distributions paid to shareholders are recorded on the ex-dividend date.
2. It is the Trust's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision
is required.
As of July 31, 1998, net unrealized appreciation on investments for book and
federal income tax purposes for the Maryland Fund aggregated $5,888,000, of
which $5,959,000 related to appreciated securities and $71,000 related to
depreciated securities. For the Virginia Fund, net unrealized appreciation
aggregated $5,855,000, of which $5,908,000 related to appreciated securities
and $53,000 related to depreciated securities. There was no difference between
book and tax realized gains on securities transactions for the year ended July
31, 1998. The cost of portfolio securities for book and federal income tax
purposes was $94,284,000 and $108,556,000 for the Maryland and Virginia Funds,
respectively, at July 31, 1998.
3. Officers of the Trust received no remuneration from the Funds in such
capacities. Their remuneration was paid by Washington Management Corporation
(WMC), a wholly owned subsidiary of The Johnston-Lemon Group, Incorporated.
Fees of $181,000 and $201,000 were recognized by the Maryland and Virginia
Funds, respectively, and were paid or are payable to WMC for business
management services. The business management contract provides for monthly
fees, accrued daily, based on an annual rate of 0.135% of the first $60 million
of average net assets of each of the Funds; 0.09% of such assets in excess of
$60 million; plus 1.35% of the gross investment income (excluding any net
capital gains from transactions in portfolio securities). Johnston, Lemon &
Co. Incorporated, a wholly owned subsidiary of The Johnston-Lemon Group,
Incorporated, has informed the Funds that it has earned $44,000 and $41,000 on
its retail sales of shares and under the distribution plan of the Maryland and
Virginia Funds, respectively, but received no net brokerage commissions
resulting from purchases and sales of securities for the investment account of
the Funds. All the officers of the Trust and three of its trustees are
affiliated with WMC.
Fees of $224,000 and $250,000 were recognized by the Maryland and Virginia
Funds, respectively, and were paid or are payable to Capital Research and
Management Company (CRMC) as Investment Adviser pursuant to an investment
advisory contract with the Trust. The investment advisory contract provides
for monthly fees, accrued daily, based on an annual rate of 0.165% of the first
$60 million of average net assets of each of the Funds; 0.12% of such assets in
excess of $60 million; plus 1.65% of the gross investment income (excluding any
net capital gains from transactions in portfolio securities).
Pursuant to a Plan of Distribution, the Funds may expend up to 0.25% of
their average net assets annually for any activities primarily intended to
result in sales of Fund shares, provided the categories of expenses for which
reimbursement is made are approved by the Funds' Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts and reimbursements to American Funds
Distributors, Inc. (AFD), the principal underwriter of the Funds' shares, for
its activities and expenses related to the sale of Fund shares or servicing of
shareholder accounts. During the year ended July 31, 1998, distribution
expenses under the Plan were $231,000 and $264,000, including accrued and
unpaid expenses of $36,000 and $43,000, for the Maryland and Virginia Funds,
respectively. Had no limitation been in effect, the Funds would have paid
$256,000 and $311,000, respectively, in distribution expense under the Plan.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
Funds' shares, has informed the Funds that it has received $48,000 and $58,000
(after allowances to dealers) for the Maryland and Virginia Funds,
respectively, as its portion of the sales charges paid by purchasers of the
Funds' shares. Such sales charges are not an expense of the Funds and, hence,
are not reflected in the accompanying statement of operations.
American Funds Service Company (AFS), the transfer agent for the Maryland and
Virginia Funds, was paid fees of $31,000 and $34,000, respectively.
Trustees who are unaffiliated with WMC may elect to defer part or all of the
fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the Funds. As of July 31, 1998,
aggregate amounts deferred and earnings thereon were $14,000 each for the
Maryland and Virginia Funds.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC.
4. As of July 31, 1998:
The Tax-Exempt The Tax-Exempt
Fund of Fund of
Maryland Virginia
Accumulated
undistributed net
realized gain
on investments $ 617,000 $ 1,238,000
Paid-in capital 94,943,000 107,518,000
Purchases and sales of
investment securities,
excluding short-term
securities, during the
year ended July 31, 1998:
Purchases 21,023,000 36,387,000
Sales 9,291,000 25,433,000
Pursuant to the custodian agreement, the Funds receive credits against their
custodian fees for imputed interest on certain balances with the custodian
bank. The custodian fee of $5,000 for both the Maryland and Virginia Funds was
paid by these credits rather than in cash.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 15 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
August 28, 1998, relating to the financial statements and per-share data and
ratios of The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia
(constituting The American Funds Tax-Exempt Series I), which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the references to us under the headings
"Independent Accountants" and "Reports to Shareholders" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
November 9, 1998
