THE TAX-EXEMPT FUND OF CALIFORNIA
ANNUAL REPORT for the year ended August 31, 1995
[The American Funds Group(R)]
[Photo caption]
ABOUT OUR COVER: California's stunning natural beauty remains a symbol of the
opportunities people have long sought in the Golden State.
[End Photo caption]
THE TAX-EXEMPT FUND OF CALIFORNIA(SM) seeks a high level of current income free
from federal and California income taxes primarily through investments in
California municipal bonds. The fund is managed consistent with the additional
objective of preservation of capital.
The fund invests in tax-exempt securities issued by the state of
California, its political subdivisions, municipalities and public authorities
to provide funding for projects such as highway improvements, water and power,
pollution control, hospital expansion and airport modernization.
With the elimination of most tax deductions and shelters in recent years,
investing in municipal securities provides one of the few remaining ways to
earn tax-free income. The fund gives California residents an opportunity to
earn double tax-free income through a diversified portfolio managed by proven
professionals.
[Side Bar]
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of September 30, 1995,
calculated in accordance with the Securities and Exchange Commission formula,
was 4.75%. The fund's distribution rate as of that date was 5.13%. The SEC
yield reflects income earned by the fund, while the distribution rate reflects
dividends actually paid by the fund.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN
WILL VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON.
Here are the average annual compound returns over various periods with all
distributions reinvested and assuming payment of the 4.75% maximum sales charge
at the beginning of the stated periods. Sales charges are lower for accounts of
$25,000 or more.
<TABLE>
<CAPTION>
ENDED ENDED
8/31/95 9/30/95
<S> <C> <C>
Lifetime (since 10/28/86) +6.51% +6.51%
Five Years/1/ +7.5 +7.60
One Year +3.01 +4.99
</TABLE>
[End Side Bar]
FELLOW SHAREHOLDERS:
Fiscal 1995 was a good year for The Tax-Exempt Fund of California. Aided by a
rebound in the broader bond market and by investors' recovering faith in the
California market, the fund generated a healthy return over the course of the
year while outpacing the vast majority of its peers.
During the 12 months ended August 31, 1995, the fund had a total return of
8.2%. This ranked the fund 8th of 91 California municipal bond funds tracked by
Lipper Analytical Services.* The unmanaged Lehman Brothers Municipal Bond
Index, which measures the national investment-grade tax-exempt market, posted a
total return of 8.9% for the fiscal year, while the average California
tax-exempt bond fund generated a 7.1% total return, according to Lipper.
The Tax-Exempt Fund of California paid dividends totaling 86.5 cents per
share during the year. This amounted to a double tax-free income return of
5.77%, exempt from both state and federal taxes, for shareholders who
reinvested their dividends and 5.62% for those who took their dividends in
cash.
These results are particularly gratifying because the fiscal year began
during one of the worst periods in the bond market's history. Interest rates
had been rising as the Federal Reserve Board steadily raised short-term
interest rates. Bond prices, which had been falling for eight months, continued
their decline during the first three months of the fiscal year as investors,
fearing even higher interest rates, continued to sell their holdings.
During the last quarter of 1994, investors began to believe that the Fed's
actions had slowed the economy enough to rule out further rate hikes. In
addition, the Republican victory in November's congressional elections gave
some investors hope that the nation's political leaders would cut the federal
budget deficit.
Against that background, sentiment in the market shifted dramatically,
interest rates finally started to decline and bond prices rallied. Initially,
however, California's municipal bonds did not participate fully in the rally.
Just as the upturn in prices began, Orange County declared bankruptcy, raising
concerns about the creditworthiness of all California municipal bonds. The
Tax-Exempt Fund of California owned no bonds issued by the county itself but
did hold some bonds sold by agencies in Orange County. None of the bonds
defaulted and most have regained the ground they lost in the days immediately
following the bankruptcy declaration, when any bond with even a vague
association with the county was tarnished.
By April, concern about the financial condition of most of California's
municipalities had largely dissipated. Demand for the state's bonds increased
and prices in the municipal bond market rose. Your fund took advantage of this
opportunity to add bonds at attractive prices, including some issued by
agencies in Orange County.
The fund also benefited from changes in the structure of its portfolio.
During the later stages of the market's retreat your fund's portfolio
counselors, believing interest rates would stop rising, shifted to bonds with
longer maturities after having bought bonds with shorter maturities earlier in
the year. Bonds with longer maturities typically react more to changes in
interest rates than bonds with shorter maturities and, thus, may be more
volatile. When the California market rallied last spring, the earlier shift to
longer maturities contributed to the fund's solid results.
*For the most recent 12-month period ended September 30, The Tax-Exempt Fund of
California was ranked 24th of 92 California municipal bond funds tracked by
Lipper; for the five years ended September 30, it ranked 10th of 46. Lipper
rankings do not reflect the effects of sales charges.
[Side Bar]
INVESTMENT HIGHLIGHTS
through 8/31/95
12-month total return +8.16%
(income plus capital changes, with dividends reinvested)
Tax-free distribution rate for August 5.35%
(income return only, reflecting maximum sales charge)
Taxable equivalent distribution rate 9.94%
(for August, assuming a 46.2% combined state and federal tax rate)
SEC 30-day yield as of August 31 4.73%
(reflecting maximum sales charge)
For current yield information, please call toll-free: 800/421-0180.
[End Side Bar]
The Tax-Exempt Fund of California has slowly increased the portion of its
portfolio in lower rated investment-grade bonds, which typically offer a higher
yield than higher grade bonds. During the 1995 fiscal year, the fund raised the
proportion of A and BBB bonds in the portfolio. Prices of these bonds rallied
strongly during the market upturn, helping the fund's results for the year.
Despite a slow improvement in California's economy, the state and most of
its municipalities still face the challenge of balancing the conflicting
demands of limiting government spending while not reducing services. An article
beginning on the following page discusses these issues in more detail, along
with your fund's investment approach.
In such an environment, we will continue to rely on thorough research,
diversification and a policy of investing for the long term. We look forward to
reporting to you again in six months.
Cordially,
PAUL G. HAAGA, JR. ABNER D. GOLDSTINE
Chairman of the Board President
October 9, 1995
[Side Bar]
WHY DOUBLE TAX-FREE INVESTING IS WORTHWHILE
<TABLE>
<CAPTION>
The fund's 5.35%
Federal Income Tax Rates Combined tax-exempt
Federal distribution
& rate
California in August/2/
Your Taxable Income Tax Rate/1/ is equivalent
to a
taxable
distribution
Single Joint rate of:
<S> <C> <C> <C>
$18,068-23,350 $36,136-39,000 20.1% 6.70%
23,351-25,083 39,001-50,166 32.3 7.90
25,084-31,700 50,167-63,400 33.8 8.08
31,701-56,550 63,401-94,250 34.7 8.19
56,551-109,936 94,251-143,600 37.4 8.55
109,937-117,950 37.9 8.62
143,601-219,872 42.0 9.22
117,951-219,872 219,873-256,500 42.4 9.29
219,873-256,500 43.0 9.39
256,501-439,744 45.6 9.83
Over 256,500 Over 439,744 46.2 9.94
</TABLE>
/1/ Based on 1995 federal and 1995 California marginal tax rates. The rates do
not include an adjustment for the loss of personal exemptions and the phase-
out of itemized deductions that are applicable to certain taxable income
levels.
/2/ The fund's distribution rate in the table is based on offering price and
therefore reflects the effects of the maximum sales charge on the initial
investment. It is not a projection of future results. Such results will
reflect interest rate levels, changes in the value of portfolio securities,
the effects of portfolio transactions, fund expenses and applicable sales
charges.
TO USE THIS TABLE, FIND YOUR ESTIMATED TAXABLE INCOME TO DETERMINE YOUR
COMBINED FEDERAL AND CALIFORNIA TAX RATE. THEN LOOK AT THE RIGHT-HAND COLUMN TO
SEE WHAT YOU WOULD HAVE HAD TO EARN FROM A TAXABLE INVESTMENT TO EQUAL THE
FUND'S 5.35% TAX-FREE DISTRIBUTION RATE IN AUGUST.
BECAUSE OF TAX INCREASES IN RECENT YEARS, MANY HIGH-INCOME INVESTORS ARE
FINDING THAT THEIR RETURNS ON TAXABLE FIXED-INCOME ISSUES HAVE TO BE EVEN
HIGHER TO MATCH THOSE CURRENTLY OFFERED BY TAX-EXEMPT MUNICIPALS. FOR INSTANCE,
A COUPLE WITH A TAXABLE INCOME OF $150,000 FACES A COMBINED FEDERAL AND
CALIFORNIA TAX RATE OF 42.0%. IN THIS BRACKET, THE FUND'S CURRENT 5.35%
DISTRIBUTION RATE WOULD BE EQUIVALENT TO A RETURN ON A TAXABLE FIXED-INCOME
INVESTMENT OF 9.22%.
[End Side Bar]
[Side Bar]
PORTFOLIO QUALITY RATING
Aaa/AAA 40%
Aa/AA 12%
A/A 18%
Baa/BBB 24%
Below investment-grade 6%
[End Side Bar]
THE GOLDEN STATE:
A MOSAIC OF PROBLEMS AND OPPORTUNITIES
The past few years have been difficult for California. It has faced natural
disasters, civil unrest and a slumping economy. Financial woes have hobbled the
state and hurt some of its richest and most populous counties. Last year,
Orange County - one of the wealthiest counties in the nation - declared
bankruptcy. Today, Los Angeles County faces very difficult choices as it tries
to balance its budget. The state government has its financial problems as well.
A budget was passed after a two-month delay. Credit rating agencies now give
California's state debt an A rating, several steps below the sterling AAA
rating it enjoyed in 1991.
The bad news, captured in newspaper headlines and on television, has
tarnished the Golden State's image as a land of perpetual sunshine and
boundless opportunity and optimism. But the bad news is only part of the story.
California is too diverse and vast to be captured in one headline or summed up
in a few minutes of TV news footage. Even the state's economic and budget
problems, while real, can be misleading. The California economy is growing
slowly again, and there are areas of the state in which the recession is a
memory. A number of California's high-tech industries are healthy and, we
believe, have a very bright future.
The negative publicity has created some good investment opportunities in
the municipal bond market. After the Orange County bankruptcy, investors became
overly cautious; their reluctance to buy California's municipal bonds forced
prices lower. When investors regained their faith in the state's bonds, the
market rallied strongly.
INVESTMENT AND JOBS ARE INCREASING
The state government's finances, while still fragile, have improved markedly
from the depths of the recession. California ended its fiscal year on June 30
with an $800 million operating surplus. Employment is growing at a rate of 2.3%
in 1995 and about 300,000 jobs have been added since the low point of the
recession in 1991.
Santa Clara County, in the heart of Silicon Valley, has recently added
6,000 jobs as the area's high-tech industries begin enjoying prosperity again.
One recent study noted that venture capitalists' investments in the state's
high-tech companies had nearly tripled from the first to the second quarter of
1995.
Amid these crosscurrents of growth and recession, wealth and bankruptcy,
The Tax-Exempt Fund of California continues to search for investments that
offer the opportunity for good returns with acceptable risk. To understand how
your fund navigates in this diverse economic environment, it is helpful to know
some of the fund's guiding principles, such as research and diversification.
[Photo Caption]
THE TAX-EXEMPT FUND OF CALIFORNIA FINANCES INFRASTRUCTURE PROJECTS, SUCH AS
ROADS AND BRIDGES WHICH HELP MAKE ECONOMIC EXPANSION POSSIBLE THROUGHOUT THE
STATE. HERE A NEW HIGHWAY IS UNDER CONSTRUCTION IN PLEASANTON, A FEW MILES
NORTH OF SAN JOSE.
[End Photo Caption]
THE BENEFITS OF DIVERSIFICATION
The Tax-Exempt Fund of California is not tied to the fortunes of one city,
county or region. It invests across the state. This geographical
diversification helps lower the risk that a regional economic downturn could
have a big impact on the fund's results.
Just as important is the type of investment the fund makes. The majority
of your fund's investments are in revenue-producing projects, such as
electricity-generating plants, hospitals or toll roads, rather than in general
obligation bonds (which are not tied to a specific project).
No investment exists in a vacuum. Understanding the economic and political
climate as well as prospects for each city and county, and the state as a
whole, is crucial to making investment decisions. In evaluating a proposed
investment, your fund's portfolio counselors and analysts always ask: "Does the
project make fundamental economic sense?" "Will there be customers for the
electricity a new plant will generate?" "Which hospitals will do well in the
new health care environment?" "Will the region grow fast enough to fill the
lanes of the proposed toll road?"
It's possible for a project to make fundamental economic sense in one
county or area of the state but not in another. That is why in-depth research
is so important.
Piecing together the California economic mosaic is challenging for
professional as well as private investors. It's helpful to recognize that many
of the problems facing municipalities across the state stem from common roots.
How local governments react to common problems varies widely, however.
A TALE OF TWO COUNTIES
The stories of two of the state's most populous counties - Los Angeles and
Orange - illustrate the shared problems facing California's local governments.
Beginning with Proposition 13 in 1978, the state's voters adopted a series
of initiatives severely restricting lawmakers' ability to raise taxes and
revenues. Spending demands, however, didn't diminish. The federal government,
for example, continued to demand that state and local governments support
certain programs. Taxpayers still wanted the police and fire departments to
protect them, their schools to run smoothly and potholes to be filled.
In the end, the traditional flexibility enjoyed by local governments - the
ability to cut spending or raise revenues to balance their budgets - was
impaired. At first, the state helped out by transferring billions of dollars to
the counties. Then came the recession of 1990 and the state government
developed its own financial problems.
Across the state, cities and counties reacted differently to the economic
problems. Orange County's problems with speculative, highly leveraged
investments are well documented. At one point, profits from a speculative
investment fund provided 35% of the county's locally generated income. Property
tax contributed only 25%.
SHORT-TERM FINANCING A PROBLEM
Orange County also encountered further problems because of the way it had
structured its debt payments. Most municipalities schedule their debt
repayments over a number of years. Typically, some payments are due in months
while others are years away. Orange County, however, relied heavily on
short-term financing and had more than $1 billion in short-term debts that had
to be paid. When the value of its speculative investments plunged, the county
couldn't pay and had to declare bankruptcy.
Los Angeles County's problems are different. Faced with the dilemma of
spending demands that outpaced revenue, the county used one-time revenue fixes
and borrowed long-term to meet immediate needs. That is much like mortgaging
your home to meet monthly bills, a strategy that will work for a while but not
forever. Today, Los Angeles County's political leaders finally are being forced
to make cutbacks that they had postponed.
[Pull Quote]
Piecing together the California economic mosaic is challenging for professional
as well as private investors.
[End Pull Quote]
SEEKING SOLUTIONS
Orange County is now working with both the state and local municipalities in an
effort to balance its budget and complete a financial plan. The county has
sought state permission to redirect state funds from legal entities within the
county, such as flood control districts, into the county coffers. Additionally,
the county is working to settle financial claims against it by municipalities
within its borders. County officials say the restructuring may not be finished
before spring.
Los Angeles County is also seeking solutions to its financial problems and
has recently received a pledge from the federal government to help keep most of
the county's medical facilities open. We believe there is little reason to
anticipate the county will be unable to make its bond payments. (Moody's rates
L.A. County's general obligation bonds A and Standard & Poor's gives them an
A-.)
OTHER AREAS HAVE REBOUNDED
With their worldwide fame, it's not surprising that the financial problems of
Los Angeles and Orange counties - home to Hollywood and Disneyland - have
grabbed the headlines. Often overlooked, though, is the financial strength of
other parts of the state. The San Joaquin Valley, with its heavy reliance on
agriculture, is doing well, particularly now that the drought has ended.
Agriculture supports 1.4 million direct and indirect jobs, or 10% of the
state's employment, according to estimates from the University of California.
In Santa Clara County, housing prices are climbing again. In the peninsula
south of San Francisco, office vacancies have fallen, and rents rose 7% from
the first to second quarter. In general, the northern part of the
state has rebounded well from the recession. Economists at the UCLA Business
Forecasting Project expect the state's overall economy to grow at a real rate
of 2.2% this year, and employment to increase an average of 2% a year for the
next two decades, with much of the growth coming in the north and central
regions.
NAVIGATING THE INVESTMENT WATERS
The UCLA economists are predicting a continued, if slow, recovery for the
state. However, the constraints on local governments - having to maintain
spending with little ability to raise revenues - remain a major problem. In
navigating these turbulent waters, The Tax-Exempt Fund of California will
continue to follow its two guiding principles: diversification and research.
With a huge, multifaceted economy, California remains fertile ground for
investors willing to diversify across the state and thoroughly research each
opportunity before making a commitment. Your fund's portfolio counselors will
strive to see that you benefit from these opportunities.
[Photo Caption]
SHAREHOLDERS IN THE TAX-EXEMPT FUND OF CALIFORNIA ARE
HELPING FINANCE PROJECTS AT THE PORT OF LOS ANGELES.
[End Photo Caption]
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, August 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
<S> <C> <C>
Tax-Exempt Securities Maturing in More than
One Year - 95.27%
Various Purpose General Obligation Bond, 7.00% 2005 $1,000 $1,144
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 8,400 7,927
Kaiser Permanente Medical Care Program, Semi-annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2,000 1,811
Pacific Presbyterian Medical Center Insured Variable
Rate Demand, 1985 Series B, 6.75% 2015 1,750 1,804
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1,250 1,387
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4,000 4,516
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1,150 1,128
Housing Finance Agency, Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 591
1991 Series G, 6.95% 2011 1,490 1,568
1995 Series G, 5.65% 2025 1,000 1,007
1995 Series K, 5.55% 2021 2,500 2,524
Pollution Control Financing Authority:
Pollution Control Revenue Bonds:
(Pacific Gas and Electric Company), 1993 Series B,
5.85% 2023 1,000 963
(Southern California Edison Company), 1992 Series B,
6.40% 2024 1,500 1,522
Solid Waste Revenue Bonds (Keller Canyon Landfill
Company Project), Series 1992, 6.875% 2027 5,200 5,424
Public Works Board, Lease Revenue Bonds:
(California Community Colleges, Various Community
College Projects), 1994 Series B, 6.75% 2005 1,000 1,095
The Regents of the University of California,
1993 Series A (Various University of California
Projects), 5.50% 2021 1,000 902
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program), 1995 Series B, 7.75% 2026/1/ 1,500 1,667
Statewide Communities Development Authority:
Hospital Revenue Certificates of Participation,
Cedar-Sinai Medical Center, Series 1992, 6.50% 2012 1,900 1,988
Sisters of Charity of Leavenworth Health Services
Corporation, Certificates of Participation,
Series 1994, 5.00% 2023 2,000 1,684
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3,000 2,800
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 544
Series H, 6.90% 2025 (Prerefunded 2000) 2,000 2,243
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured:
5.375% 2009 1,500 1,468
5.00% 2023 1,000 890
City of Berkeley, Health Facility Refunding Revenue
Bonds (Alta Bates Medical Center), 1992 Series A,
6.50% 2011 3,020 3,034
Castaic Lake Water Agency, Refunding Revenue
Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A:
7.25% 2007 500 587
7.25% 2010 1,400 1,655
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
1993 Series:
6.10% 2013 3,500 3,407
6.20% 2020 6,500 6,245
Culver City Redevelopment Financing Authority, 1993
Tax Allocation Refunding Revenue Bonds, AMBAC
Insured, 5.00% 2023 2,500 2,165
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A:
6.00% 2016 1,500 1,426
6.00% 2034 3,000 2,746
5.00% 2035 1,000 784
City of Long Beach, Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 774
Department of Airports of the City of Los Angeles,
1989 Series B, 7.40% 2010 1,000 1,074
Los Angeles Convention and Exhibition Center
Authority, Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2,500 2,821
7.00% 2020 (Prerefunded 1999) 2,000 2,230
Harbor Department of the City of Los Angeles, Revenue
Bonds:
Issue 1988, 7.60% 2018 1,750 1,978
Issue 1995, 6.625% 2025 4,750 4,952
City of Los Angeles, Waste Water System Revenue Bonds:
Series 1987, 8.125% 2017 (Prerefunded 1997) 1,500 1,661
Series 1990-B, 7.15% 2020 (Prerefunded 2000) 1,000 1,129
Department of Water and Power of the City of Los
Angeles:
Electric Plant Revenue Bonds, Issue of 1990,
7.125% 2030 2,500 2,800
Water Works Refunding Revenue Bonds:
Issue of 1989, 7.00% 2022 1,000 1,095
Issue of 1986, 7.375% 2022 1,000 1,067
County of Los Angeles, Certificates of Participation
(Marina del Rey), Series A:
6.25% 2003 4,635 4,567
6.50% 2008 6,000 6,012
Los Angeles County Metropolitan Transportation
Authority, Proposition C Sales Tax Revenue Bonds,
Second Senior Bonds, Series 1995-A, AMBAC Insured,
5.90% 2008 1,030 1,074
County of Los Angeles, Pension Obligation
Certificates, Series A, 6.875% 2006 1,000 1,033
Los Angeles County Public Works Financing Authority,
Lease Revenue Bonds (Multiple Capital Facilities
Project IV), MBIA Insured, 5.00% 2008 2,410 2,322
Los Angeles State Building Authority:
Lease Revenue Bonds (State of California Department
of General Services Lease), Series 1988 A,
7.50% 2011 (Prerefunded 1998) 3,500 3,853
Lease Revenue Refunding Bonds (State of California
Department of General Services Lease), 1993
Series A, 5.50% 2007 2,000 1,968
Los Angeles County Transportation Commission, Sales
Tax Revenue Bonds:
Series 1989, 7.00% 2019 2,250 2,424
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2,500 2,837
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1,000 948
The Metropolitan Water District of Southern
California, Waterworks Refunding Revenue Bonds,
Issue of 1986:
6.75% 2022 610 630
6.75% 2022 (Prerefunded 1996) 390 406
Northern California Public Power Agency,
Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 4,725 4,759
City of Oakland, Special Refunding Revenue Bonds
(Pension Financing), 1988 Series A, FGIC Insured,
7.60% 2021 1,000 1,111
Port of Oakland, Revenue Bonds:
1989 Series B, BIG Insured, 7.25% 2016 3,125 3,339
1992 Series E, MBIA Insured, 6.40% 2022 4,670 4,783
County of Orange, Airport Revenue Refunding Bonds,
Series 1993, MBIA Insured:
5.25% 2007 1,500 1,442
5.25% 2008 500 474
5.50% 2013 1,000 922
County of Orange (Aliso Viejo), Special Tax Bonds of
Community Facilities District No. 88-1, Series A of
1992:
7.25% 2008 (Prerefunded 2002) 1,500 1,746
7.35% 2018 (Prerefunded 2002) 4,250 5,023
Orange County Local Transportation Authority, First
Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1,000 1,039
MBIA Insured, 6.00% 2009 1,500 1,535
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1,565 1,586
6.65% 2003 1,320 1,343
6.85% 2005 2,715 2,745
7.00% 2006 1,310 1,325
7.25% 2013 2,000 2,012
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1,000 1,133
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2,195 2,022
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.40% 1999 1,000 1,006
5.60% 2000 1,940 1,951
5.70% 2001 3,980 4,014
6.15% 2012 3,900 3,876
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4,000 3,298
5.00% 2023 2,000 1,612
Riverside County Transportation Commission, Sales Tax
Revenue Bonds (Limited Tax), 1991 Series A,
6.40% 1999 500 532
County of Sacramento, Single Family Mortgage Revenue
Bonds (GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1,500 2,053
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds (Proctor & Gamble Project),
1995 Series:
6.00% 2003 700 702
7.00% 2005 1,700 1,854
6.50% 2014 1,000 1,012
6.375% 2010 3,500 3,550
6.50% 2021 4,000 3,985
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5,500 6,283
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2,000 2,192
City of San Bernardino, SCH Health Care System Revenue
Bonds (Sisters of Charity of the Incarnate Word,
Houston, Texas), Series 1991 A, 7.00% 2021 2,435 2,622
County of San Diego, The San Diego Regional Building
Authority, Certificates of Participation (1991 MTS
Tower Refunding Project), MBIA Insured, 6.223% 2019 1,000 1,015
City and County of San Francisco, General Purpose
Sewer Revenue Bonds, Series 1988 A, AMBAC Insured,
7.25% 2015 (Prerefunded 1997) 3,320 3,592
City and County of San Francisco Redevelopment Agency,
Lease Revenue Bonds, Series 1992 (George R. Moscone
Convention Center), 5.50% 2018 4,560 4,101
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 1,000 997
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds:
6.75% 2032 3,000 3,031
5.00% 2033 1,000 782
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1,000 1,055
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2,200 2,703
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1,120 1,147
Southern California Public Power Authority,
1986 Refunding Series B, Palo Verde Project, 7.125%
2015 (Prerefunded 1996) 1,500 1,573
The Regents of the University of California:
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1,250 1,400
Government of Guam, General Obligation Bonds, 1995
Series A, 4.90% 1997/2/ 1,500 1,509
---------
222,087
---------
Tax-Exempt Securities Maturing in
One Year or Less - 4.06%
Pollution Control Financing Authority, Variable Rate
Resource Recovery Revenue Bonds (Atlantic Richfield
Company Project), Series 1994A, 3.65% 12/1/24/3/ 500 500
County of Los Angeles, 1995-96 Tax and Revenue
Notes, Series A, 4.50% 7/1/96 5,200 5,222
State of California, 1994 Revenue Anticipation
Warrants, Series C, FGIC Insured 5.75% 4/25/96 3,700 3,745
---------
9,467
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$218,857,000) 231,554
Excess of cash and receivables over payables 1,561
---------
NET ASSETS $233,115
=========
</TABLE>
/1/Represents a when-issued security.
/2/Interest payments on bonds issued by the governments of U.S. territories,
including Guam, the U.S. Virgin Islands and Puerto Rico, are free of state and
federal taxes.
/3/Coupon rate changes periodically.
See Notes to Financial Statements
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1995 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $218,857) $231,554
Cash 621
Receivables for-
Sales of fund's shares $ 55
Accrued interest 3,380 3,435
--------- ---------
235,610
Liabilities:
Payables for-
Purchases of investments 1,653
Repurchases of fund's shares 109
Dividends payable 509
Management services 82
Accrued expense 142 2,495
--------- ---------
Net Assets at August 31, 1995-
Equivalent to $15.74 per share on
14,810,189 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $233,115
=========
Statement of Operations
for the year ended August 31, 1995
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $14,168
---------
Expenses:
Management services fee $943
Distribution expenses 409
Transfer agent fee 59
Reports to shareholders 62
Registration statement and prospectus 9
Postage, stationery and supplies 21
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 12
Taxes (other than federal income tax) 4
Other expenses 43 1,619
--------- ---------
Net investment income 12,549
---------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 871
Net unrealized appreciation:
Beginning of year 9,064
End of year 12,697
---------
Net change in unrealized appreciation 3,633
---------
Net realized gain and change in
unrealized appreciation on investments 4,504
---------
Net Increase in Net Assets Resulting
from Operations $17,053
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31,
1995 1994
--------- ---------
Operations:
Net investment income $ 12,549 $ 11,900
Net realized gain (loss) on investments 871 (875)
Net change in unrealized appreciation
on investments 3,633 (11,274)
--------- ---------
Net increase (decrease) in net assets
resulting from operations 17,053 (249)
--------- ---------
Dividends and Distributions Paid to
Shareholders:
Dividend from net investment income (12,552) (11,899)
Distributions from net realized gain
on investments - (851)
--------- ---------
Total dividends and distributions (12,552) (12,750)
--------- ---------
Capital Share Transactions:
Proceeds from shares sold:
2,513,117 and 3,510,938
shares, respectively 38,225 55,665
Proceeds from shares issued in reinvestment
of net investment income dividends and
distributions of net realized gain on
investments: 498,341 and 527,612 shares,
respectively 7,598 8,349
Cost of shares repurchased:
2,849,307 and 3,079,542 shares,
respectively (42,819) (48,523)
--------- ---------
Net increase in net assets
resulting from capital share transactions 3,004 15,491
--------- ---------
Total Increase in Net Assets 7,505 2,492
Net Assets:
Beginning of year 225,610 223,118
--------- ---------
End of year $233,115 $225,610
========= =========
</TABLE>
See Notes to Financial Statements
Notes to Financial Statements
1. The American Funds Tax-Exempt Series II (the "trust") is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company and has initially issued one series of shares,
The Tax-Exempt Fund of California (the "fund"). The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Tax-exempt securities with original or remaining maturities in excess of
60 days are valued at prices obtained from a national municipal bond pricing
service. The pricing service takes into account various factors such as
quality, yield and maturity of tax-exempt securities comparable to those held
by the fund, as well as actual bid and asked prices on a particular day. Other
securities with original or remaining maturities in excess of 60 days,
including securities for which pricing service values are not available, are
valued at the mean of their quoted bid and asked prices. However, in
circumstances where the investment adviser deems it appropriate to do so,
securities will be valued at the mean of their representative quoted bid and
asked prices, or, if such prices are not available, at the mean of such prices
for securities of comparable maturity, quality and type. All securities with
60 days or less to maturity are valued at amortized cost which approximates
market value. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Valuation Committee
of the Board of Trustees.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. 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 over the life of
the respective securities. Dividends are declared on a daily basis after
determination of the fund's net investment income and paid to shareholders on a
monthly basis.
Pursuant to the custodian agreement, the fund may receive credit against
its custodian fee for imputed interest on certain balances with the custodian
bank. The custodian fee of $12,000 includes $3,000 that was paid by the
credits rather than in cash.
2. It is the fund'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 August 31, 1995, net unrealized appreciation on investments for
book and federal income tax purposes aggregated $12,697,000, of which
$13,408,000 related to appreciated securities and $711,000 related to
depreciated securities. During the year ended August 31, 1995, the fund
realized, on a tax basis, a net capital gain of $871,000 on securities
transactions. The fund has available at August 31, 1995, a net capital loss
carryforward totaling $43,000, which may be used to offset capital gains
realized during subsequent years through 2002 and thereby relieve the fund and
its shareholders of any federal income tax liability with respect to capital
gains that are so offset. It is the intention of the fund not to make
distributions from capital gains while there is a capital loss
carryforward. There was no difference between book and tax realized gains on
securities transactions for the year ended August 31, 1995. The cost of
portfolio securities for book and federal income tax purposes was $218,857,000
at August 31, 1995.
3. The fee of $943,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million; and 3.00% of the fund's monthly
gross investment income.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
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 fund's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended August 31, 1995,
distribution expenses under the Plan were $409,000. As of August 31, 1995,
accrued and unpaid distribution expenses were $97,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $59,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $100,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees of the fund who are unaffiliated with CRMC 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 fund. As
of August 31, 1995, aggregate amounts deferred were $16,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the trust
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of August 31, 1995, accumulated undistributed net realized loss on
investments was $43,000 and paid-in capital was $220,461,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $93,716,000 and $87,514,000, respectively, during the
year ended August 31, 1995.
Per-Share Data and Ratios
<TABLE>
<CAPTION>
Year ended August 31
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $15.40 $16.30 $15.21 $14.59 $13.87 $14.16
------- ------- ------- ------ ------- -------
-
Income from Investment
Operations:
Net investment income .86 .84 .84 .85 .85 .84
Net realized and
unrealized gain
(loss) on investments .34 (.84) 1.09 .62 .72 (.29)
------- ------- ------- ------ ------- -------
-
Total income from
investment operations 1.20 .00 1.93 1.47 1.57 .55
------- ------- ------- ------ ------- -------
-
Less Distributions:
Dividends from net
investment income (.86) (.84) (.84) (.85) (.85) (.84)
Distributions from net
realized gains - (.06) - - - -
------- ------- ------- ------ ------- -------
-
Total distributions (.86) (.90) (.84) (.85) (.85) (.84)
------- ------- ------- ------ ------- -------
-
Net Asset Value, End of Year $15.74 $15.40 $16.30 $15.21 $14.59 $13.87
======= ======= ======= ====== ======= =======
=
Total Return* 8.16% 0.13% 13.08% 10.36% 11.56% 3.96%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $233 $226 $223 $148 $111 $86
Ratio of expenses to average
net assets .73% .71% .71% .74% .85% .93%
Ratio of net income to
average net assets 5.65% 5.28% 5.36% 5.66% 5.89% 5.92%
Portfolio turnover rate 41.36% 15.08% 16.82% 33.72% 20.20%
20.28%
</TABLE>
*This was calculated without deducting a sales charge. The maximum sales
charge is 4.75% of the fund's offering price.
Independent Auditors' Report
To the Board of Trustees of the American Funds
Tax-Exempt Series II and Shareholders of
The Tax-Exempt Fund Of California:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of The American Funds Tax-Exempt Series II
- -- The Tax-Exempt Fund of California, as of August 31, 1995, the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the selected
per-share data and ratios for each of the five years in the period then ended.
These financial statements and the per-share data and ratios are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statement and selected per-share data and ratios
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and selected
per-share data and ratios are fee of material misstatement. An audit included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at August 31, 1995, by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. an audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The American Funds Tax-Exempt Series II -- The Tax-Exempt Fund of
California at August 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the per-share data and ratios for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 22, 1995
Tax Information (unaudited)
We are required to advise you within 60 days of the fund/s fiscal year-end
regarding the federal tax status of distributions received by shareholders
during the fiscal year.
Shareholders may exclude from federal taxable income any exempt-interest
dividends paid from net investment income. All of the dividends paid from net
investment income qualify as exempt-interest dividends.
SINCE THE ABOVE IS REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE CALENDAR
YEAR, SHAREHOLDERS SHOULD REFER TO THE YEAR-END INFORMATION WHICH WILL BE
MAILED IN JANUARY, 1996 TO DETERMINE THE CALENDAR YEAR STATUS OF THE FUND'S
DISTRIBUTIONS FOR PURPOSES OF THEIR 1995 TAX RETURNS. SHAREHOLDERS SHOULD
CONSULT THEIR TAX ADVISORS.
BOARD OF TRUSTEES
H. FREDERICK CHRISTIE
Palos Verdes Estates, California
Private investor; former President and
Chief Executive Officer, The Mission Group;
former President, Southern California
Edison Company
DIANE C. CREEL
Long Beach, California
Chairwoman, Chief Executive Officer and
President, The Earth Technology Corporation
MARTIN FENTON, JR.
San Diego, California
Chairman of the Board,
Senior Resource Group, Inc.
(senior living centers management)
LEONARD R. FULLER
Los Angeles, California
President, Fuller & Company, Inc.
(financial management consulting firm)
ABNER D. GOLDSTINE
Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR.
Los Angeles, California
Chairman of the Board of the fund
Senior Vice President and Director,
Capital Research and Management Company
HERBERT HOOVER III
Pasadena, California
Private investor
RICHARD G. NEWMAN
Los Angeles, California
Chairman of the Board, President and
Chief Executive Officer,
AECOM Technology Corporation
(architectural engineering)
PETER C. VALLI
Long Beach, California
Chairman of the Board and Chief Executive Officer, BW/IP International, Inc.
(industrial manufacturing)
OTHER OFFICERS
NEIL L. LANGBERG
Los Angeles, California
Senior Vice President of the fund
Vice President - Investment Management Group, Capital Research and Management
Company
MARY C. CREMIN
Brea, California
Vice President and Treasurer of the fund
Senior Vice President - Fund Business Management Group, Capital Research and
Management Company
MICHAEL J. DOWNER
Los Angeles, California
Vice President of the fund
Senior Vice President - Fund Business
Management Group, Capital Research and Management Company
JULIE F. WILLIAMS
Los Angeles, California
Secretary of the fund
Vice President - Fund Business Management Group, Capital Research and
Management Company
KIMBERLY S. VERDICK
Los Angeles, California
Assistant Secretary of the fund
Compliance Associate - Fund Business
Management Group, Capital Research and
Management Company
NYMIA M. CUCUECO
Brea, California
Assistant Treasurer of the fund
Vice President - Fund Business Management Group, Capital Research and
Management Company
ANTHONY W. HYNES, JR.
Brea, California
Assistant Treasurer of the fund
Vice President - Fund Business Management Group, Capital Research and
Management Company
OFFICES OF THE FUND AND OF THE INVESTMENT ADVISER, CAPITAL RESEARCH AND
MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92621-5804
TRANSFER AGENT FOR
SHAREHOLDER ACCOUNTS
American Funds Service Company
P.O. Box 2205
Brea, California 92622-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Morrison & Foerster
345 California Street
San Francisco, California 94104-2675
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
[Side Bar]
LEONARD WEIL retired from the Board effective December 31, 1994. He has been a
member of the Board of Trustees since 1987. The Trustees thank him for his many
contributions to the fund.
DIANE CREEL and LEONARD FULLER were elected Trustees effective September 22,
1994.
[End Side Bar]
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR SECURITIES DEALER OR FINANCIAL PLANNER, OR CALL THE FUND'S
TRANSFER AGENT, TOLL-FREE, AT 800/421-0180.
This report is for the information of shareholders of The Tax-Exempt Fund of
California, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after December 31, 1995, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Litho in USA MED/ALI/2760
Lit. No. TEFCA-011-1095
[The American Funds Group(R)]
