SEC. File Nos. 33-6180
811-4694
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement
Under
the Securities Act of 1933
Post-Effective Amendment No. 14
and
Registration Statement
Under
The Investment Company Act of 1940
Amendment No. 16
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
(Exact Name of Registrant as specified in charter)
333 South Hope Street
Los Angeles, California 90071
(Address of principal executive offices)
Registrant's telephone number, including area code:
(213) 486-9200
JULIE F. WILLIAMS
333 South Hope Street
Los Angeles, California 90071
(name and address of agent for service)
Copies to:
Robert E. Carlson, Esq.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 S. Flower Street, 23rd Floor
Los Angeles, CA 90071-2371
(Counsel for the Registrant)
The Registrant has filed a declaration pursuant to rule 24f-2
registering an indefinite number of shares under the Securities Act of 1933.
On October 15, 1996, it filed its 24f-2 notice for fiscal 1996.
Approximate date of proposed public offering:
It is proposed that this filing become effective on January 1, 1997,
pursuant to paragraph (b) of rule 485.
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
The Tax-Exempt Fund of California
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER OF
PART "A" OF FORM N-1A CAPTIONS IN PROSPECTUS (PART "A")
<S> <C> <C>
1. COVER PAGE COVER PAGE
2. SYNOPSIS EXPENSES
3. CONDENSED FINANCIAL INFORMATION FINANCIAL HIGHLIGHTS; INVESTMENT RESULTS
4. GENERAL DESCRIPTION OF REGISTRANT FUND ORGANIZATION AND MANAGEMENT; INVESTMENT POLICIES AND
RISKS; SECURITIES AND INVESTMENT TECHNIQUES
5. MANAGEMENT OF THE FUND FINANCIAL HIGHLIGHTS; FUND ORGANIZATION AND MANAGEMENT
6. CAPITAL STOCK AND OTHER SECURITIES INVESTMENT POLICIES AND RISKS; FUND ORGANIZATION AND MANAGEMENT;
DIVIDENDS, DISTRIBUTIONS AND TAXES
7. PURCHASE OF SECURITIES BEING OFFERED PURCHASING SHARES; FUND ORGANIZATION AND MANAGEMENT; OTHER IMPORTANT
THINGS TO REMEMBER
8. REDEMPTION OR REPURCHASE SELLING SHARES
9. LEGAL PROCEEDINGS N/A
</TABLE>
<TABLE>
<CAPTION>
ITEM NUMBER OF CAPTIONS IN STATEMENT OF
PART "B" OF FORM N-1A ADDITIONAL INFORMATION (PART "B")
<S> <C> <C>
10. COVER PAGE COVER
11. TABLE OF CONTENTS TABLE OF CONTENTS
12. GENERAL INFORMATION AND HISTORY N/A
13. INVESTMENT OBJECTIVES AND POLICIES DESCRIPTION OF CERTAIN SECURITIES; FUNDAMENTAL POLICIES AND INVESTMENT
RESTRICTIONS
14. MANAGEMENT OF THE REGISTRANT TRUST OFFICERS AND TRUSTEES
15. CONTROL PERSONS AND PRINCIPAL HOLDERS TRUST OFFICERS AND TRUSTEES; FUND ORGANIZATION AND MANAGMENT (PART "A")
16. INVESTMENT ADVISORY AND OTHER SERVICES TRUST OFFICERS AND TRUSTEES; FUND ORGANIZATION AND MANAGEMENT (PART "A");
GENERAL INFORMATION; MANAGEMENT
17. BROKERAGE ALLOCATION AND OTHER PRACTICES EXECUTION OF PORTFOLIO TRANSACTIONS; FUND ORGANIZATION AND MANAGEMENT
(PART "A")
18. CAPITAL STOCK AND OTHER SECURITIES N/A
19. PURCHASE, REDEMPTION AND PRICING OF PURCHASE OF SHARES; REDEEMING SHARES; SHAREHOLDER
SECURITIES BEING OFFERED ACCOUNT SERVICES AND PRIVILEGES; PURCHASING SHARES (PART "A"); GENERAL
INFORMATION
20. TAX STATUS DIVIDENDS AND DISTRIBUTIONS; ADDITIONAL INFORMATION CONCERNING TAXES
21. UNDERWRITER MANAGEMENT; FUND ORGANIZATION AND MANAGEMENT (PART "A")
22. CALCULATION OF PERFORMANCE DATA INVESTMENT RESULTS
23. FINANCIAL STATEMENTS FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
ITEM IN PART "C"
<S> <C>
24. FINANCIAL STATEMENTS AND EXHIBITS
25. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT
26. NUMBER OF HOLDERS OF SECURITIES
27. INDEMNIFICATION
28. BUSINESS AND OTHER CONNECTIONS OF
INVESTMENT ADVISER
29. PRINCIPAL UNDERWRITERS
30. LOCATION OF ACCOUNTS AND RECORDS
31. MANAGEMENT SERVICES
32. UNDERTAKINGS
SIGNATURE PAGE
</TABLE>
<PAGE>
[LOGO OF THE AMERICAN FUNDS GROUP (R)]
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The Tax-Exempt Fund of California(SM)
Prospectus
JANUARY 1, 1997
<PAGE>
THE TAX-EXEMPT FUND OF CALIFORNIA
333 South Hope Street
Los Angeles, CA 90071
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Investment Policies and Risks 5
Securities and Investment Techniques 6
Multiple Portfolio Counselor System 8
Investment Results 9
Dividends, Distributions and Taxes 11
Fund Organization and Management 12
Shareholder Services 15
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The fund's investment objective is to provide investors with a high level of
current income exempt from federal and California income taxes. Consistent with
this primary objective is the additional objective of preservation of capital.
It seeks to achieve its objectives by investing primarily in investment grade
tax-exempt securities issued by the State of California, its political
subdivisions, municipalities and public authorities.
This prospectus presents information you should know before investing in the
fund. You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE LIKELIHOOD OF LOSS IS GREATER
IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE FUND IS NOT
A DEPOSIT OR OBLIGATION OF, OR INSURED OR GUARANTEED BY, ANY ENTITY OR PERSON
INCLUDING THE U.S. GOVERNMENT AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
20-010-0197
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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EXPENSES
The effect of the expenses described below is reflected in the fund's share
price or return.
You may pay certain shareholder transaction expenses when you buy or sell
shares of the fund. Annual fund operating expenses are paid out of the fund's
earned income.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases
(as a percentage of offering price) 4.75%
................................................................................
SALES CHARGES ARE REDUCED OR ELIMINATED FOR LARGER PURCHASES. There is no sales
charge on reinvested dividends, and no deferred sales charge or redemption or
exchange fees. A contingent deferred sales charge of 1% applies on certain
redemptions made within 12 months following purchases without a sales charge.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets for the fiscal period ended August 31,
1996)
- --------------------------------------------------------------------------------
Management fees 0.41%
12b-1 expenses 0.23%/1/
Other expenses 0.09%
Total fund operating expenses 0.73%
/1/ 12b-1 expenses may not exceed 0.25% of the fund's average net assets
annually. Due to these distribution expenses, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
EXAMPLES
Assuming a hypothetical annual return of 5% and shareholder transaction and
operating expenses as described above, for every $1,000 you invested, you would
pay the following total expenses over the following periods:
- --------------------------------------------------------------------------------
One year $ 55
Three years $ 70
Five years $ 86
Ten years $134
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY. YOUR EXPENSES WILL BE LESS IF YOU QUALIFY TO PURCHASE
SHARES AT A REDUCED OR NO SALES CHARGE.
3
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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FINANCIAL HIGHLIGHTS
The following information has been audited by Deloitte & Touche llp,
independent accountants. This table should be read together with the financial
statements which are included in the statement of additional information and
annual report.
SELECTED PER-SHARE DATA
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987/1/
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.74 $15.40 $16.30 $15.21 $14.59 $13.87 $14.16 $13.63 $13.72 $14.29
- ----------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment income .84 .86 .84 .84 .85 .85 .84 .86 .82 .65
Net realized and
unrealized gain (loss)
on investments .04 .34 (.84) 1.09 .62 .72 (.29) .53 (.09) (.57)
Total income from
investment operations .88 1.20 .00 1.93 1.47 1.57 .55 1.39 .73 .08
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.84) (.86) (.84) (.84) (.85) (.85) (.84) (.86) (.82) (.65)
Distributions from net
realized gains -- -- (.06) -- -- -- -- -- -- --
Total distributions (.84) (.86) (.90) (.84) (.85) (.85) (.84) (.86) (.82) (.65)
Net asset value, end
of period $15.78 $15.74 $15.40 $16.30 $15.21 $14.59 $13.87 $14.16 $13.63 $13.72
Total return /2/ 5.65% 8.16% 0.13% 13.08% 10.36% 11.56% 3.96% 10.41% 5.51% 0.39%/3/
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in millions) $ 253 $ 233 $ 226 $ 223 $ 148 $ 111 $ 86 $ 68 $ 42 $ 33
Ratio of expenses to
average net assets .73% .73% .71% .71% .74% .85% .93% 1.00% .93% .62%/3/
Ratio of net income to
average net assets 5.25% 5.65% 5.28% 5.36% 5.66% 5.89% 5.92% 6.06% 6.02% 4.80%/3/
Portfolio turnover rate 27.60% 41.36% 15.08% 16.82% 20.28% 33.72% 20.19% 44.56% 80.15% 0.00%/3/
</TABLE>
/1/ The period ended August 31, 1987 represents the initial period of
operations from October 28, 1986 to August 31, 1987.
/2/ Excludes maximum sales charge of 4.75%.
/3/ Based on operations for the period shown and, accordingly, not
representative of a full year's operations.
4
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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INVESTMENT POLICIES AND RISKS
The fund's investment objective is to provide shareholders with a high level of
current income exempt from federal and California income taxes. Consistent with
this primary objective is the additional objective of preserving the fund's
capital.
Under normal market conditions, the fund will invest at least 80% of its assets
in, or derive at least 80% of its income from, securities that are exempt from
both federal and California income taxes. The assets of the fund will be
invested primarily in securities rated at the time of purchase within the four
highest categories for bonds and the two highest categories for notes and
commercial paper by either Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or in securities that are unrated but
determined to be of comparable quality. Up to 20% of the fund's assets may be
invested in tax-exempt bonds rated Ba and BB or below (or in comparable unrated
tax-exempt bonds). The fund may invest up to 20% of assets in certain tax-
exempt securities believed to pay interest constituting an item of tax
preference subject to alternative minimum taxes; therefore, while the fund's
distributions are not subject to regular federal income tax, a portion may be
included in determining a shareholder's federal alternative minimum tax. MORE
INFORMATION ON THE FUND'S INVESTMENT POLICIES IS CONTAINED IN ITS STATEMENT OF
ADDITIONAL INFORMATION.
The fund's investment restrictions (which are described in the statement of
additional information as fundamental) and objectives may not be changed
without shareholder approval. All other investment practices may be changed by
the fund's board of trustees.
ACHIEVEMENT OF THE FUND'S INVESTMENT OBJECTIVES CANNOT, OF COURSE, BE ASSURED
DUE TO THE RISK OF CAPITAL LOSS FROM FLUCTUATING PRICES INHERENT IN ANY
INVESTMENT IN SECURITIES.
5
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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SECURITIES AND INVESTMENT TECHNIQUES
DEBT SECURITIES
Bonds and other debt securities are used by issuers to borrow money. Issuers
pay investors interest, and must repay the amount borrowed at maturity. Some
debt securities, such as zero coupon bonds, do not pay current interest, but
are purchased at a discount from their face values.
The prices of debt securities fluctuate depending on such factors as interest
rates, credit quality and maturity. In general, their prices decline when
interest rates rise and vice versa.
The fund may invest up to 20% of its total assets in debt securities rated Ba
and BB or below by Moody's or S&P or in unrated securities that are determined
to be of equivalent quality. These securities are commonly known as "high-
yield, high-risk" or "junk" bonds and are described by the rating agencies as
speculative. These securities are subject to greater risk of default and can
significantly decline in price, particularly in periods of general economic
difficulty. It may be more difficult to dispose of, or to determine the value
of, high-yield, high-risk bonds. The fund's high-yield, high-risk securities
may be rated as low as Ca or CC which are described by the rating agencies as
"speculative in a high degree; often in default or [having] other marked
shortcomings." See the statement of additional information for a complete
description of the ratings.
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
6
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
The average monthly composition of the fund's portfolio based on the higher of
Moody's or S&P ratings for the fiscal year ended August 31, 1996 was as
follows:
- --------------------------------------------------------------------------------
Aaa/AAA 41.83%
Aa/AA 12.90%
A/A 17.22%
Baa/BBB 14.51%
Non-rated 9.07%
Some or all of these non-rated securities were determined to be equivalent to
securities rated by Moody's or S&P as follows:
- --------------------------------------------------------------------------------
Baa/BBB 4.35%
Ba/BB 4.72%
Money market instruments and cash made up an average of 4.47% of the fund's
portfolio.
MUNICIPAL LEASE OBLIGATIONS
The fund may invest in municipal lease revenue obligations, some of which may
be considered illiquid. The fund may purchase, without limitation, municipal
lease revenue obligations that are determined to be liquid by Capital Research
and Management Company. In determining whether these securities are liquid,
Capital Research and Management Company will consider among other things, the
credit quality and support, including strengths and weaknesses of the issuers
and lessees, the terms of the lease, frequency and volume of trading and number
of dealers.
FORWARD COMMITMENTS
The fund may enter into commitments to purchase or sell securities for which
payment and delivery for the securities take place at a future date. When the
fund purchases such securities it assumes the risk of any decline in value of
the securities beginning on the date of the agreement or purchase. When the
fund sells such securities, it does not participate in further gains or losses
with respect to the securities. 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.
7
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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VARIABLE AND FLOATING RATE OBLIGATIONS
The fund may invest in variable and floating rate obligations which have
interest rates that are adjusted at designated intervals, or whenever there are
changes in the market rates of interest on which the interest rates are based.
The rate adjustment feature tends to limit the extent to which the market value
of the obligation will fluctuate.
MATURITY
There are no restrictions on the maturity composition of the portfolio,
although it is anticipated that the fund normally will be invested
substantially in securities with maturities in excess of three years.
SPECIAL CONSIDERATIONS
Because the fund will invest primarily in securities issued by the State of
California, its political subdivisions, municipalities and public authorities,
the fund is more susceptible to factors adversely affecting issuers of
California securities than would be a comparable municipal bond mutual fund
which has not concentrated in issuers in a single state.
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. The fund may, however,
invest more than an aggregate of 25% of its total assets in industrial
development bonds.
- --------------------------------------------------------------------------------
MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund assets. Under this system the
portfolio of the fund is divided into segments which are managed by individual
counselors. Counselors decide how their respective segments will be invested
(within the limits provided by the fund's objectives and policies and by
Capital Research and Management Company's investment committee). In addition,
Capital Research and Management Company's research professionals make
investment decisions with respect to a portion of the fund's portfolio. The
primary individual portfolio counselors for the fund are listed on the
following page.
8
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
--------------------------
YEARS OF EXPERIENCE WITH CAPITAL
AS PORTFOLIO COUNSELOR RESEARCH AND
PORTFOLIO COUNSELORS FOR THE TAX-EXEMPT MANAGEMENT
FOR THE TAX-EXEMPT FUND OF CALIFORNIA COMPANY OR
FUND OF CALIFORNIA PRIMARY TITLE(S) (APPROXIMATE) ITS AFFILIATES TOTAL YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DAVID A. Vice President, 3 years 5 years 9 years
HOAG Capital
Research
Company*
- ----------------------------------------------------------------------------------------
NEIL L. Senior Vice Since the fund 18 years 18 years
LANGBERG President began
of the fund. operations**
Vice
President--
Investment
Management
Group, Capital
Research and
Management
Company
- ----------------------------------------------------------------------------------------
MARK R. Vice President 2 years 2 years 11 years
MACDONALD of the fund.
Vice
President--
Investment
Management
Group, Capital
Research and
Management
Company
- ----------------------------------------------------------------------------------------
</TABLE>
* A wholly owned subsidiary of Capital Research and Management Company
** The fund began operations on October 28, 1986
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
The fund may from time to time compare investment results to various indices or
other mutual funds. Fund results may be calculated on a total return, yield,
and/or distribution rate basis. Results calculated without a sales charge will
be higher.
- - TOTAL RETURN is the change in value of an investment in the fund over a
given period, assuming reinvestment of any dividends and capital gain
distributions.
- - YIELD is computed by dividing the net investment income per share earned by
the fund over a given period of time by the maximum offering price per share
on the last day of the period, according to a formula mandated by the
Securities and Exchange Commission. A yield calculated using this formula
may be different than the income actually paid to shareholders.
9
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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- - DISTRIBUTION RATE reflects dividends that were paid by the fund. The
distribution rate is calculated by annualizing the current month's dividend
and dividing by the average price for the month. The SEC yield reflects
income the fund expects to earn based on its current portfolio of
securities, while the distribution rate is based solely on the fund's past
dividends. Accordingly, the fund's SEC yield and distribution rate may
differ.
INVESTMENT RESULTS
(FOR PERIODS ENDED SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND THE FUND AT
TOTAL AT NET MAXIMUM LEHMAN
RETURNS: ASSET VALUE SALES CHARGE1 INDEX/2/
- -----------------------------------------------
<S> <C> <C> <C>
One year 6.59% 1.51% 6.04%
...............................................
Five year 7.43% 6.39% 7.45%
...............................................
Lifetime/3/ 7.04% 6.52% 7.77%
- -----------------------------------------------
</TABLE>
Yield1: 4.94%
Distribution Rate: 5.12%
/1/ These fund results were calculated according to a standard that is required
for all stock and bond funds. The maximum sales charge has been deducted.
/2/ Lehman Brothers Municipal Bond Index represents the long-term investment
grade municipal bond market. This index is unmanaged and does not reflect
sales charges, commissions or expenses.
/3/ The fund began investment operations October 28, 1986.
- --------------------------------------------------------------------------------
Here are the fund's annual total return calculated without a sales charge. This
information is being supplied on a calendar year basis.
1987 -2.51
1988 8.46
1989 9.97
1990 5.6
1991 10.1
1992 8.25
1993 12.87
1994 -5.88
1995 17.59
Past results are not an indication of future results.
10
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The fund declares dividends from its net investment income daily and
distributes the accrued dividends to shareholders each month. Dividends begin
accruing one day after payment for shares is received by the fund or American
Funds Service Company. Capital gains, if any, are usually distributed in
November or December. When a capital gain is distributed, the net asset value
per share is reduced by the amount of the payment.
TAXES
In any fiscal year in which the fund qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital gains, the fund itself is relieved of federal income tax. The fund
is permitted to pass through to its shareholders tax-exempt income subject to
certain requirements. However, the fund may invest in obligations which pay
interest that is subject to state and local taxes when distributed by the fund.
Dividends derived from taxable interest income, distributions of capital gains
and dividends on gains from the disposition of certain market discount bonds
will not be exempt from federal, state or local income tax.
Capital gains are taxable whether they are reinvested or received in cash--
unless you are exempt from taxation or entitled to tax deferral. Early each
year, you will be notified as to the amount and tax status of all income
distributions paid during the prior year. You are required by the Internal
Revenue Code to report to the federal government all fund exempt-interest
dividends (and all other tax-exempt interest).
It is anticipated that federal exempt-interest dividends paid by the fund and
derived from interest on bonds exempt from California income taxation under the
Constitution or statutes of California ("California municipal securities") will
also be exempt from California corporate and personal income tax (although not
from California franchise tax). To the extent the fund's dividends are derived
from interest on debt obligations other than California municipal securities,
such dividends will be subject to California state income tax even though the
dividends may be exempt from federal income tax.
Any fund dividends derived from taxable interest income and any distributions
of capital gains will not be exempt from federal or California income tax. With
respect to states other than California, distributions of net investment income
11
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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may be taxable to investors under state or local law as dividend income even
though all or a portion of such distributions may be derived from interest on
otherwise tax-exempt obligations which, if realized directly, would be exempt
from such income taxes. For example, a state may require that a fund hold a
specified percentage of its bonds in order for the fund to pass through
interest paid on these bonds to its shareholders on a state tax-exempt basis,
whereas if the bonds were held directly by shareholders the interest would be
exempt from state tax.
YOU MUST PROVIDE THE FUND WITH A CERTIFIED CORRECT TAXPAYER IDENTIFICATION
NUMBER (GENERALLY YOUR SOCIAL SECURITY NUMBER) AND CERTIFY THAT YOU ARE NOT
SUBJECT TO BACKUP WITHHOLDING. IF YOU FAIL TO DO SO THE IRS CAN REQUIRE THE
FUND TO WITHHOLD 31% OF YOUR TAXABLE DISTRIBUTIONS AND REDEMPTIONS. Federal law
also requires the fund to withhold 30% or the applicable tax treaty rate from
certain dividends paid to nonresident alien, non-U.S. partnership and non-U.S.
corporation shareholder accounts.
This is a brief summary of some of the tax laws that affect your investment in
the fund. Please see the statement of additional information and your tax
adviser for further information.
- --------------------------------------------------------------------------------
FUND ORGANIZATION AND MANAGEMENT
FUND ORGANIZATION AND VOTING RIGHTS
The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust in 1986. All fund operations are supervised
by the fund's board of trustees who meet periodically and perform duties
required by applicable state and federal laws. Members of the board who are not
employed by Capital Research and Management Company or its affiliates are paid
certain fees for services rendered to the fund as described in the statement of
additional information. They may elect to defer all or a portion of these fees
through a deferred compensation plan in effect for the fund. The fund does not
hold annual meetings of shareholders. However, significant corporate matters
which require shareholder approval, such as certain elections of board members
or a change in a fundamental investment policy, will be presented to
shareholders at a meeting called for such purpose. Shareholders have one vote
per share owned. At the request of the holders of at least 10% of the shares,
the fund will hold a meeting at which any member of the board could be removed
by a majority vote.
12
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, is the investment adviser to the fund
and other funds, including those in The American Funds Group. Capital Research
and Management Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los Angeles, CA
90071. Capital Research and Management Company manages the investment portfolio
and business affairs of the fund. The management fee paid by the fund to
Capital Research and Management Company is composed of a management fee, which
may not exceed 0.30% of the fund's average net assets annually and declines at
certain asset levels, plus 3% of the fund's annual gross income. The total
management fee paid by the fund as a percentage of average net assets for the
previous fiscal year is listed above under "Expenses."
Capital Research and Management Company and its affiliated companies have
adopted a personal investing policy that is consistent with the recommendations
contained in the report dated May 9, 1994 issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has also been
incorporated into the fund's "code of ethics."
PLAN OF DISTRIBUTION
The fund has a Plan of Distribution or "12b-1 Plan" under which it may finance
activities primarily intended to sell shares, provided the categories of
expenses are approved in advance by the board and the expenses paid under the
plan were incurred within the preceding 12 months and accrued while the plan is
in effect. The 12b-1 fee paid by the fund as a percentage of average net assets
for the last fiscal year is listed above under "Expenses."
PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by Capital
Research and Management Company, which strives to obtain the best available
prices, taking into account the costs and quality of executions. Fixed-income
securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the underwriter, generally referred to as a
concession or discount. On occasion, securities may be purchased directly from
an issuer, in which case no commissions or discounts are paid. In the over-the-
counter
13
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
market, purchases and sales are transacted directly with principal market-
makers except in those circumstances where it appears better prices and
executions are available elsewhere.
Subject to the above policy, when two or more brokers are in a position to
offer comparable prices and executions, preference may be given to brokers who
have sold shares of the fund or have provided investment research, statistical,
and other related services for the benefit of the fund and/or other funds
served by Capital Research and Management Company.
PRINCIPAL UNDERWRITER AND TRANSFER AGENT
American Funds Distributors, Inc. and American Funds Service Company serve as
the principal underwriter and transfer agent for the fund, respectively. They
are headquartered at 333 South Hope Street, Los Angeles, CA 90071 and 135 South
State College Boulevard, Brea, CA 92821, respectively.
AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
[MAP]
WESTERN SERVICE CENTER
American Funds
Service Company
P.O. Box 2205
Brea, California
92822-2205
Fax: 714/671-7080
WESTERN CENTRAL SERVICE CENTER
American Funds
Service Company
P.O. Box 659522
San Antonio, Texas
78265-6007
Fax: 210/530-4050
EASTERN CENTRAL SERVICE CENTER
American Funds
Service Company
P.O. Box 6007
Indianapolis, Indiana
46206-6007
Fax: 317/735-6620
EASTERN SERVICE CENTER
American Funds
Service Company
P.O. Box 2280
Norfolk, Virginia
23501-2280
Fax: 804/670-4773
14
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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SHAREHOLDER SERVICES
The fund offers you a valuable array of services you can use to alter your
investment program as your needs and circumstances change. These services,
which are summarized below, are available only in states where they may be
legally offered and may be terminated or modified at any time upon 60 days'
written notice. A COMPLETE DESCRIPTION OF SHAREHOLDER SERVICES AND ACCOUNT
POLICIES IS CONTAINED IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION. In
addition, an easy-to-read guide to owning a fund in The American Funds Group
titled "Welcome to the Family" is sent to new shareholders and is available by
writing or calling American Funds Service Company.
- --------------------------------------------------------------------------------
PURCHASING SHARES
HOW TO PURCHASE SHARES
Generally, you may open an account by contacting any investment dealer
authorized to sell the fund's shares. You may add to your account through your
dealer or directly through American Funds Service Company by mail, wire, or
bank debit. You may also establish or add to your account by exchanging shares
from any of your other accounts in The American Funds Group. The fund and
American Funds Distributors reserve the right to reject any purchase order.
Various purchase options are available as described below subject to certain
investment minimums and limitations described in the statement of additional
information and "Welcome to the Family."
- - Automatic Investment Plan
You may invest monthly or quarterly through automatic withdrawals from your
bank account.
- - Automatic Reinvestment
You may reinvest your dividends and capital gain distributions into the
fund (with no sales charge). This will be done automatically unless you
elect to have the dividends and/or capital gain distributions paid to you
in cash.
- - Cross-Reinvestment
You may invest your dividend and capital gain distributions into any other
fund in The American Funds Group.
15
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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- - Exchange Privilege
You may exchange your shares into other funds in The American Funds Group
generally with no sales charge. Exchanges of shares from the money market
funds that were initially purchased with no sales charge will generally be
subject to the appropriate sales charge. You may also elect to
automatically exchange shares among any of the funds in The American Funds
Group. Exchange requests may be made in writing, by telephone including
American FundsLine (R) (see below) or by fax. EXCHANGES HAVE THE SAME TAX
CONSEQUENCES AS ORDINARY SALES AND PURCHASES.
- - Retirement Plans
Tax-exempt funds should not serve as retirement plan investments.
SHARE PRICE
The fund's share price, also called net asset value, is determined as of the
close of trading (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange is open. The fund calculates its net asset value per share,
generally using market prices, by dividing the total value of its assets after
subtracting liabilities by the number of its shares outstanding. Shares are
purchased at the offering price next determined after your investment is
received and accepted by American Funds Service Company. The offering price is
the net asset value plus a sales charge, if applicable.
SHARE CERTIFICATES
Shares are credited to your account and certificates are not issued unless you
request them by writing to American Funds Service Company.
INVESTMENT MINIMUMS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To establish an account $1,000
To add to an account $ 50
</TABLE>
16
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
SALES CHARGES
A sales charge may apply, as described below, when purchasing shares. Sales
charges may be reduced for larger purchases as indicated below.
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
-------------------
DEALER
NET CONCESSION AS
OFFERING AMOUNT % OF OFFERING
INVESTMENT PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.75% 4.99% 4.00%
................................................................................
$25,000 but less than $50,000 4.50% 4.71% 3.75%
................................................................................
$50,000 but less than $100,000 4.00% 4.17% 3.25%
................................................................................
$100,000 but less than $250,000 3.50% 3.63% 2.75%
................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
................................................................................
$500,000 but less than $1 million 2.00% 2.04% 1.60%
................................................................................
$1 million or more and certain other
investments described below see below see below see below
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES
Investments of $1 million or more and investments made by employer-sponsored
defined contribution-type plans with 200 or more eligible employees are sold
with no initial sales charge. A 1% CONTINGENT DEFERRED SALES CHARGE MAY BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN ONE YEAR OF PURCHASE BY THESE
ACCOUNTS. A dealer concession of up to 1% may be paid by the fund from its Plan
of Distribution on these investments. Investments by retirement plans with $100
million or more in assets may be made with no sales charge and are not subject
to a contingent deferred sales charge. A dealer concession of up to 1% may be
paid by American Funds Distributors on these investments. Investments by
certain individuals and entities including employees and other associated
persons of dealers authorized to sell shares of the fund and Capital Research
and Management Company and its affiliated companies are not subject to a sales
charge.
17
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
ADDITIONAL DEALER COMPENSATION
In addition to the concessions listed, up to 0.25% of average net assets is
paid annually to qualified dealers for providing certain services pursuant to
the fund's Plan of Distribution. During 1997, American Funds Distributors will
also provide additional compensation to the top one hundred dealers who have
sold shares of funds in The American Funds Group based on the pro rata share of
a qualifying dealer's sales.
REDUCING YOUR SALES CHARGE
You and your immediate family may combine investments to reduce your costs. You
must let your investment dealer or American Funds Service Company know if you
qualify for a reduction in your sales charge using one or any combination of
the methods described below.
- - Aggregation
Investments that may be aggregated include those made by you, your spouse
and your children under the age of 21, if all parties are purchasing shares
for their own account(s), including any business account solely "controlled
by," as well as any retirement plan or trust account solely for the benefit
of, these individuals. Investments made for multiple employee benefit plans
of a single employer or "affiliated" employers may be aggregated provided
they are not also aggregated with individual accounts. Finally, investments
made by a common trust fund or other diversified pooled account not
specifically formed for the purpose of accumulating fund shares may be
aggregated.
Purchases made for nominee or street name accounts will generally not be
aggregated with those made for other accounts unless qualified as described
above.
- - Concurrent Purchases
You may combine concurrent purchases of two or more funds in The American
Funds Group, except direct purchases of the money market funds. Shares of
the 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 to determine your sales charge. Direct purchases
of the money market funds are excluded.
18
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
- - Statement of Intention
You may enter into a non-binding commitment to invest a certain amount in
non-money market fund shares over a 13-month period. A portion of your
account may be held in escrow to cover additional sales charges which may
be due if your total investments over the statement period are insufficient
to qualify for the applicable sales charge reduction.
- --------------------------------------------------------------------------------
SELLING SHARES
HOW TO SELL SHARES
You may sell (redeem) shares in your account by contacting your investment
dealer or American Funds Service Company. You may also use American
FundsLine(R) (see below). In addition, you may sell shares in amounts of $50 or
more automatically. If you sell shares through your investment dealer you may
be charged for this service. Shares held for you in your dealer's street name
must be sold through the dealer.
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. Sale requests may be
made in writing, by telephone, including American FundsLine(R) (see below), or
by fax. Sales by telephone or fax are limited to $10,000 in accounts registered
to individual(s) (including non-retirement trust accounts). In addition, checks
must be made payable to the registered shareholder(s) and mailed to an address
of record that has been used with the account for at least 15 days. Proceeds
will not be mailed until sufficient time has passed to provide reasonable
assurance that checks or drafts (including certified or cashier's checks) for
shares purchased have cleared (which may take up to 15 calendar days from the
purchase date). Except for delays relating to clearance of checks for share
purchases or in extraordinary circumstances (and as permissible under the
Investment Company Act of 1940), sale proceeds will be paid on or before the
seventh day following receipt and acceptance of an order. The fund may, with 60
days' written notice, close your account if due to a sale of shares the account
has a value of less than the minimum required initial investment.
Generally, written requests to sell shares must be signed by you and must
include any shares you wish to sell that are in certificate form. Your
signature must be guaranteed by a bank, savings 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. A
signature guarantee is not currently required for any sale of $50,000 or less
provided the check is made
19
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
payable to the registered shareholder(s) and is mailed to the address of record
on the account, and provided the address has been used with the account for at
least 15 days. Additional documentation may be required for sale of shares held
in corporate, partnership or fiduciary accounts.
You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge in any fund in The American Fund Group
within 90 days after the date of the redemption or distribution. Reinvestment
will be at the next calculated net asset value after receipt and acceptance by
American Funds Service Company.
- --------------------------------------------------------------------------------
OTHER IMPORTANT THINGS TO REMEMBER
AMERICAN FUNDSLINE(R)
You may check your share balance, the price of your shares, or your most recent
account transactions, sell shares (up to $10,000 per fund, per account each
day), or exchange shares around the clock with American FundsLine(R). To use
this service, call 800/325-3590 from a TouchTone(TM) telephone.
TELEPHONE PURCHASES, SALES AND EXCHANGES
Unless you opt out of the telephone (including American FundsLine(R)) or fax
purchase, sale and/or exchange options (see below), you agree to hold the fund,
American Funds Service Company, any of its affiliates or mutual funds managed
by such affiliates, 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 provided American Funds Service Company employs reasonable
procedures to confirm that the instructions received from any person with
appropriate account information are genuine. If reasonable procedures are not
employed, the fund may be liable for losses due to unauthorized or fraudulent
instructions.
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 to
American Funds Service Company.)
ACCOUNT STATEMENTS
You will receive regular confirmation statements reflecting transactions in
your account. Purchases through automatic investment plans and certain
retirement plans will be confirmed at least quarterly.
20
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
21
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
22
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
23
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
FOR SHAREHOLDER FOR DEALER FOR 24-HOUR
SERVICES SERVICES INFORMATION
American Funds American Funds American
Service Company Distributors FundsLine(R)
800/421-0180 ext. 1 800/421-9900 ext. 11 800/325-3590
Telephone conversations may be recorded or monitored for
verification, recordkeeping and quality assurance purposes.
--------------------------------------------------------------
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL STATEMENT OF ADDITIONAL
REPORT TO SHAREHOLDERS INFORMATION (SAI)
Includes financial Contains more detailed
statements, detailed information on all aspects of
performance information, the fund, including the
portfolio holdings, a fund's financial statements.
statement from portfolio
management and the auditor's
report.
CODE OF ETHICS A current SAI has been filed
with the Securities and
Includes a description of the Exchange Commission and is
fund's personal investing incorporated by reference (is
policy. legally part of the
prospectus).
To request a free copy of any of the documents above:
Call American Funds or Write to the Secretary of the
Service Company 800/421-0180 Fund 333 South Hope Street
ext. 1 Los Angeles, CA 90071
This prospectus has been printed on recycled paper.
[RECYCLE LOGO]
24
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
THE TAX-EXEMPT FUND OF CALIFORNIA
PART B
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
This document is not a prospectus but should be read in conjunction with
the current Prospectus dated January 1, 1997 of The American Funds Tax-Exempt
Series II (the "Trust"). The Trust currently consists of one series, The
Tax-Exempt Fund of California (the "fund"). The Prospectus may be obtained
from your investment dealer or financial planner or by writing to the Trust at
the following address:
The American Funds Tax-Exempt Series II
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
Table of Contents
<TABLE>
<CAPTION>
Item Page No.
<S> <C>
Description of Certain Securities and Investment Techniques 1
Investment Restrictions 8
Trust Officers and Trustees 11
Management 14
Dividends and Distributions 17
Additional Information Concerning Taxes 17
Purchase of Shares 22
Redeeming Shares 29
Shareholder Account Services and Privileges 30
Execution of Portfolio Transactions 32
General Information 32
Investment Results 34
Description of Ratings for Debt Securities 37
Financial Statements attached
</TABLE>
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 "high-yield, high-risk" bonds or "junk" 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 sensitive to adverse economic changes and political and corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers 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 defaults on its obligations to pay interest
or principal or enters 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 and the
fund's net asset value. From time to time legislation has been proposed that
would limit the use of high-yield, high-risk bonds in certain instances. The
impact that such legislation, if enacted, could have on the market for such
bonds cannot be predicted.
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 rate
market as will the value of the fund's assets. If the fund experiences
unexpected net redemptions, this may force it to sell high-yield, high-risk
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing the fund's rate of
return..
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 the fund's portfolio, but Capital Research and Management
Company (the "Investment Adviser") will consider such an event in its
determination of whether the 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 debt obligations generally issued to
obtain funds for various public purposes, including the construction of public
facilities. Municipal bonds may be used to refund outstanding obligations, to
obtain funds for general operating expenses or for public improvements or for
lending private institutions or corporations funds for the construction of
educational facilities, hospitals, housing, industrial facilities or for other
public purposes. The interest on these obligations is generally not included
in gross income for federal income tax purposes. See "Additional Information
Concerning Taxes" below. 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, or 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. Annual rental payments are payable 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.
There are, in addition, a variety of hybrid and special types of municipal
obligations as well as numerous differences in the security of municipal bonds,
both within and between the two primary classifications described above.
The amount of information about the financial condition of an issuer of
municipal bonds may not be as extensive as that which is made available by
corporations whose equity securities are publicly traded.
TEMPORARY INVESTMENTS -- The fund may invest in short-term municipal
obligations of up to one year in maturity 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 will normally be less than 20%, may be held in cash
or invested in high quality taxable short-term securities of up to one year in
maturity. 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 LEASE OBLIGATIONS -- The fund may invest in municipal lease revenue
obligations. The fund currently intends to purchase only municipal lease
revenue obligations that are determined to be liquid by Capital Research and
Management Company. In determining whether these securities are liquid,
Capital Research and Management Company will consider, among other things, the
credit quality and support, including strengths and weaknesses of the issuer
and lessee, the terms of the lease, frequency and volume of trading and number
of dealers.
FORWARD COMMITMENTS -- The fund may enter into commitments to purchase or
sell securities for which payment and delivery for the securities take place at
a future date. When a fund purchases such securities, it assumes the risk of
any decline in value of the security beginning on the date of the agreement or
purchase. When the fund sells such securities, it does not participate in
further gains or losses with respect to the security. 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 segregate
liquid assets which will be marked to market daily in an amount 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 could be in a leveraged position (because it may
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 would 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 of doing
so during the next 12 months, it may enter on a temporary basis into repurchase
agreements, under which it 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 collateral equal to at least 100% of the repurchase
price including accrued interest, as monitored daily by Capital Research and
Management Company. 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, liquidation of the collateral by the 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 exceed 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 10 years.
RISK FACTORS RELATING TO CALIFORNIA DEBT OBLIGATIONS -- The following describes
certain risks with respect to debt obligations of California issuers in which
the fund may invest. Such information constitutes only a brief summary, does
not purport to be a complete description, and is based on information drawn
from official statements relating to securities offerings of the State of
California and various local agencies in California, available as of the date
of this Prospectus. While the Investment Adviser has not independently
verified such information, it has no reason to believe that such information is
not correct in all material respects. In addition to this current information,
future California constitutional amendments, legislative measures, executive
orders, administrative regulations, court decisions and voter initiatives could
have an adverse effect on the debt obligations of California issuers. The
initiative process is used quite often in California, resulting in numerous
initiative items on the ballot for most state and local elections, any of which
could affect the ability of public entities to pay their obligations.
The Internal Revenue Code of 1986 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.
Certain debt obligations held by the fund may be obligations of issuers
which rely in whole or in substantial part on California state revenues for the
continuance of their operations and the payment of their obligations. Certain
state property and other state tax revenues and moneys from the state's general
fund are appropriated by the state legislature each fiscal year for
distribution to counties, cities and their various taxing entities, such as
school districts, to assist such local entities in providing essential
governmental functions, including those required by state law. Whether and to
what extent the California Legislature will continue to appropriate a portion
of the state's general fund to counties, cities and their various entities is
not entirely certain. To the extent local entities do not receive money from
the state to pay for their operations and services, their ability to pay debt
service on obligations held by the fund may be impaired.
Certain of the debt obligations may be obligations of issuers who rely in
whole or in part on ad valorem real or personal property taxes as a source of
revenue or may be leases subject to annual appropriation by the lessor.
Article XIIIA of the California Constitution limits the taxing powers of
California public agencies. Article XIIIA provides that the maximum ad valorem
tax on real property cannot exceed one percent of the full cash value of the
property, and effectively prohibits the levying of any other ad valorem
property tax, even with voter approval. Full cash value is defined as the
County Assessor's valuation of real property as shown on the 1975-76 tax bill
under "full cash value" or, thereafter, the appraisal value of real property
when purchased, newly constructed, or when a change in ownership has occurred
after the 1975 assessment. The full cash value is subject to annual adjustment
to reflect inflation at a rate not to exceed two percent or a reduction in the
consumer price index or comparable local data, or declining property value
caused by damage, destruction or other factors. Article XIIIB of the
California Constitution limits the amount of appropriations of state and of
local governments from "proceeds of taxes" to the amount of appropriations of
the entity for the prior year, adjusted for changes in the cost of living,
population and certain other adjustments. Both Article XIIIA and Article XIIIB
were adopted by the people of the State of California pursuant to the State's
initiative constitutional amendment process.
Certain debt obligations held by the fund may be obligations payable
solely from lease payments on real property leased to the state, cities,
counties or their various public entities, especially since the adoption of
Article XIIIA described above because such leases are structured so as not to
create a statutory "debt" of the leasing entity. However, to insure that a
debt is not technically created, California law requires that the lessor is not
required to make lease payments during any period that it is denied use and
occupancy of the property lease in proportion to such loss. Moreover, the
lessor does not agree to pay lease payments beyond the current fiscal year; it
only agrees to include lease payments in its annual budget for each fiscal
year. In case of a default under the lease, the only remedy available against
the lessor is that of reletting the property; no acceleration of lease payments
is permitted. Each of these factors presents a risk that the lease financing
obligations held by the fund would not be paid in a timely manner.
Proposition 62 was approved by the voters in 1986 and fully activated
in 1995 by a state Supreme Court ruling. Proposition 62 took away general law
cities' and counties' authority to impose other general purpose taxes without
voter approval.
On November 5, 1996, Proposition 218 was accepted by a majority of
California voters. Proposition 218 constrains local governments' ability to
impose "property-related" fees, assessments and taxes. This measure applies to
all cities, counties, special districts, redevelopment agencies and school
districts in California. This amendment basically extends to charter cities
the same voter approval requirements now imposed under Proposition 62 on
general law cities and counties.
Certain debt obligations held by the fund may be obligations which are
payable solely from the revenues of health care institutions. Certain
provisions under California law may adversely affect these revenues and,
consequently, payment on those debt obligations.
The federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
In the past, the Medi-Cal program has provided a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
eligible hospital. The State now selectively contracts by county with
California hospitals to provide reimbursement for nonemergency inpatient
services to Medi-Cal beneficiaries, generally on a flat per diem payment basis
regardless of cost. California law also permits private health plans and
insurers to contract selectively with hospitals for services to beneficiaries
on negotiated terms, generally at rates lower than standard charges. It is
expected that hospitals that do not contract with health plans and insurers
will experience some decrease in patient census.
Debt obligations payable solely from revenues of health care institutions
may also be insured by the state pursuant to an insurance program operated by
the Office of Statewide Health Planning and Development (the "Office"). Most
such debt obligations are secured by a mortgage of real property in favor of
the Office and the holders. If a default occurs on such insured debt
obligations, the Office may either continue to make debt service payments on
the obligations or foreclose on the mortgage and request the State Treasurer to
issue debentures payable from a reserve fund established under the insurance
program or from unappropriated state funds. At the request of the Office,
Arthur D. Little, Inc. prepared a study in September, 1986 to evaluate the
adequacy of the reserve fund established under the insurance program, and based
on certain formulations and assumptions found the reserve fund underfunded.
There has been no further such study to date. A similar ADL study in 1983 also
had found the reserve fund to be underfunded at that time. Moreover, moneys in
the reserve fund may be reappropriated by the California Legislature. In 1987,
the Legislature reappropriated $1.2 million of the reserve fund for other
purposes and reserves authority to do so in the future.
Certain debt obligations held by the fund may be obligations which are
secured in whole or in part by a mortgage or deed of trust on real property.
California has five principal statutory provisions which limit the remedies of
a creditor secured by a mortgage or deed of trust. Two limit the creditor's
right to obtain a deficiency judgment, one limitation being based on the method
of foreclosure and the other on the type of debt secured. Under the former, a
deficiency judgment is barred when the foreclosure is accomplished by means of
nonjudicial trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations. Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale. The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three
full monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. Therefore, the effective
minimum period for foreclosing on a mortgage could be in excess of seven months
after the initial default. Such time delays in collections could disrupt the
flow of revenues available to an issuer for the payment of debt service on the
outstanding obligations if such defaults occur with respect to a substantial
number of mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the private
right-of-sale proceedings violate the due process requirements of the federal
or state constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain debt obligations held by the fund may be obligations which finance
the acquisition of single-family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on
such mortgage loans may be imposed only with respect to voluntary prepayments
made during the first five years during the term of the mortgage loan, and
cannot in any event exceed six months' advance interest on the amount prepaid
in excess of 20% of the original principal amount of the mortgage loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES -- 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. 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 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 issued or guaranteed by 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 1/2 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.
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 #13, the term "oil, gas or other
mineral exploration or development programs" includes oil, gas or other mineral
exploration or development leases.
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.
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
Trustees and Trustee Compensation
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
REGISTRANT DURING PAST 5 (INCLUDING FROM ALL OF FUND
YEARS (POSITIONS VOLUNTARILY FUNDS BOARDS ON
WITHIN THE DEFERRED MANAGED BY WHICH
ORGANIZATIONS COMPENSATION/1/) CAPITAL TRUSTEE
LISTED MAY HAVE FROM THE RESEARCH AND SERVES/2/
CHANGED DURING COMPANY DURING MANAGEMENT
THIS PERIOD) FISCAL YEAR COMPANY/2/ FOR
ENDED THE YEAR
AUGUST 31, ENDED AUGUST
1996 31, 1996
<S> <C> <C> <C> <C> <C>
++H. Frederick Trustee Private Investor. $2,200/3/ $145,450 18
Christie The Mission Group
P.O. Box 144 (non-utility
Palos Verdes Estates, holding Company,
CA 90274 subsidiary of
Age: 63 Southern
California Edison
Company), former
President and
Chief Executive
Officer
Diane C. Creel Trustee CEO and President, The $2,400 $37,450 12
100 W. Broadway Earth Technology
Suite 5000 Corporation
Long Beach, CA 90802 (international
Age: 47 consulting
engineering)
Martin Fenton, Jr. Trustee Chairman, Senior $2,800/3/ $116,150 16
4350 Executive Drive Resource Group
Suite 101 (management of
San Diego, CA 92121-2116 senior living
Age: 61 centers)
Leonard R. Fuller Trustee President, Fuller $2,200 $40,450 12
4337 Marina City Drive & Company, Inc.
Suite 841 ETN (financial
Marina del Rey, CA management
90292 consulting firm)
Age: 50
+*Abner D. Goldstine President, Senior Vice none/4/ none/4/ 12
Age: 66 PEO and President and
Trustee Director, Capital
Research and
Management
Company
+**Paul G. Haaga, Jr. Chairman Executive Vice none/4/ none/4/ 14
Age: 47 of President and
the Board Director, Capital
Research and
Management
Company
Herbert Hoover III Trustee Private Investor $2,000 $63,950 14
1520 Circle Drive
San Marino, CA 91108
Age: 68
Richard G. Newman Trustee Chairman, $2,600/3/ $65,450 13
3250 Wilshire President and
Boulevard CEO, AECOM
Los Angeles, CA 90010-1599 Technology
Age: 61 Corporation
(architectural
engineering)
Peter Valli Trustee Chairman, BW/IP $2,200/3/ $38,050 12
45 Sea Isle Drive International
Long Beach, CA 90803 Inc. (industrial
Age: 69 manufacturing)
</TABLE>
+ Trustees who are considered "interested persons as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), on the basis of their
affiliation with the fund's Investment Adviser, Capital Research and Management
Company.
++ May be deemed an "interested person" of the fund due to membership on the
board of directors of the parent company of a registered broker-dealer.
* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
** Address is 333 South Hope Street, Los Angeles, CA 90071
/1/ Amounts may be deferred by eligible Trustees under a non-qualified deferred
compensation plan adopted by the Fund in 1994. 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/ Capital Research and Management Company manages The American Funds Group
consisting of 28 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management
Trust of America, Capital Income Builder, Inc., Capital World Growth and Income
Fund, Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, The U. S. Treasury Money Fund of America, U.S. Government Securities
Fund and Washington Mutual Investors Fund, Inc. Capital Research and
Management Company also manages American Variable Insurance Series and Anchor
Pathway Fund which serve as the underlying investment vehicle for certain
variable insurance contracts; and Bond Portfolio for Endowments, Inc. and
Endowments, Inc. whose shares may be owned only by tax-exempt organizations.
/3/ Since the plan's adoption, the total amount of deferred compensation
accrued by the fund (plus earnings thereon) for participating Trustees is as
follows: H. Frederick Christie ($3,180), Martin Fenton, Jr. ($6,570),
Richard G. Newman ($9,897) and Peter C. Valli ($8,409).
/4/ Paul G. Haaga, Jr. and Abner D. Goldstine are affiliated with the
Investment Adviser and, accordingly, receive no compensation from the Fund.
OFFICERS
(with their principal occupations during the past five years)#
*** Neil L. Langberg, SENIOR VICE PRESIDENT. Capital Research and Management
Company, Vice President, Investment Management Group
** Mary C. Hall, VICE PRESIDENT. Capital Research and Management Company,
Senior Vice President - Fund Business Management Group
* Michael J. Downer, VICE PRESIDENT. Capital Research and Management Company,
Senior Vice President - Fund Business Management Group
* Julie F. Williams, SECRETARY. Capital Research and Management Company,
Vice President - Fund Business Management Group
** Anthony W. Hynes, Jr., TREASURER. Capital Research and Management Company,
Vice President - Fund Business Management Group
* Kimberly S. Verdick, ASSISTANT SECRETARY. Capital Research and Management
Company, Assistant Vice President - Fund Business Management Group
** Todd D. Miller, ASSISTANT TREASURER. Capital Research and Management
Company, Assistant Vice President - Fund Business Management Group
# Positions within the organizations listed may have changed during this
period.
* Address is 333 South Hope Street, Los Angeles, CA 90071.
** Address is 135 South State College Boulevard, Brea, CA 92821.
*** Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
No compensation is paid by the fund to any officer or Trustee who is a
director or officer of the Investment Adviser. The fund pays annual fees of
$900 to Trustees who are not affiliated with the Investment Adviser, plus $200
for each Board of Trustees meeting attended, plus $200 for each meeting
attended as a member of a committee of the Board of Trustees. The Trustees may
elect, on a voluntary basis, to defer all or a portion of these fees through a
deferred compensation plan in effect for the fund. The fund also reimburses
certain expenses of the Trustees who are not affiliated with the Investment
Adviser. As of December 1, 1996, the officers and Trustees and their families
as a group, owned beneficially or of record fewer than 1% of the outstanding
shares of the fund.
MANAGEMENT
INVESTMENT ADVISER -- The Investment Adviser, 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 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 a wholly owned subsidiary of The Capital
Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $100 billion of
stocks, bonds and money market instruments and serves over five million
investors of all types throughout the world. These investors include privately
owned businesses and large corporations, as well as schools, colleges,
foundations and other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT -- The Investment Advisory and
Service Agreement (the "Agreement") between the Trust and the Investment
Adviser will continue in effect until May 31, 1997, unless sooner terminated,
and may be renewed from year to year thereafter, provided that any such renewal
has been specifically approved at least annually 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 Agreement 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 Agreement provides that the Investment Adviser
has no liability to the Trust for its acts or omissions in the performance of
its obligations to the Trust not involving willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement. The
Agreement also provides that either party has the right to terminate, without
penalty, upon 60 days' written notice to the other party and that the Agreement
automatically terminates in the event of its assignment (as defined in the 1940
Act).
The Investment Adviser receives a fee at an annual rate of 0.30% on
the first $60 million of average net assets, plus 0.21% on net assets over $60
million, plus 3% of gross investment income. Assuming net assets of $225
million and gross investment income levels of 4%, 5%, 6%, 7% and 8% management
fees would be 0.35%, 0.38%, 0.41%, 0.44% and 0.47%, respectively.
For the purpose of such computations under the Agreement, the fund's gross
investment income does not reflect any net realized gains or losses on the sale
of portfolio securities but does include original-issue discount as defined for
federal income tax purposes.
The Investment Adviser, in addition to providing investment advisory
services, furnishes the services and pays the compensation and travel expenses
of qualified persons to perform the executive and related administrative,
clerical and bookkeeping functions of the fund, and provides suitable office
space, necessary small office equipment and utilities, as well as general
purpose accounting forms, supplies, and postage to be used at the offices of
the fund. The fund pays all expenses not assumed by the Investment Adviser,
including, but not limited to, custodian, stock transfer and dividend
disbursing fees and expenses; costs of the designing, printing and mailing of
reports, prospectuses, proxy statements, and notices to its shareholders;
taxes; expenses of the issuance and redemption of shares (including stock
certificates, registration and qualification fees and expenses); legal and
auditing expenses; compensation, fees, and expenses paid to Trustees
unaffiliated with the Investment Adviser; association dues; and costs of
stationery and forms prepared exclusively for the fund.
The Investment Adviser has agreed to waive its fees by any amount
necessary to assure that fund expenses do not exceed applicable expense
limitations in any state in which the fund's shares are being offered for
sale.
During the fiscal years ended August 31, 1996, 1995 and 1994, the
Investment Adviser's total fees amounted to $1,018,000, $943,000 and $931,000,
respectively.
PRINCIPAL UNDERWRITER -- American Funds Distributors, Inc. (the "Principal
Underwriter") is the 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. 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.
Commissions retained by the Principal Underwriter on sales of fund shares
during the fiscal year ended August 31, 1996 amounted to $138,000 after
allowance of $527,000 to dealers. During the fiscal years ended August 31,
1995 and 1994 the Principal Underwriter retained $100,000 and $167,000,
respectively.
As required by rule 12b-1, the Plan (together with the Principal
Underwriting Agreement) has been approved by a majority of the entire 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 fund. The officers and Trustees who are "interested persons"
of the Trust due to present or past affiliations with the Investment Adviser
and related companies may be considered to have a direct or indirect financial
interest in the operation of the Plan. 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 is committed to the
discretion of the Trustees who are not "interested persons" during the
existence of the Plan. The Plan is reviewed quarterly and must be renewed
annually by the Board of Trustees.
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 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 200 or more eligible employees). Only expenses incurred
during the preceding 12 months and accrued while the Plan is in effect may be
paid by the fund. During the Trust's fiscal year ended August 31, 1996, the
fund paid or accrued $566,000 under the Plan as compensation to dealers. As of
August 31, 1996, accrued and unpaid distribution expenses were $103,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries or affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer adverse financial consequences as a result of any of
these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS AND DISTRIBUTIONS
The fund declares dividends from its net investment income daily and
distributes the accrued dividends to shareholders each month. The percentage
of the distribution that is tax-exempt may vary from distribution to
distribution. 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 original issue discount or market 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.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional federal, state and
local 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 the 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.
FEDERAL TAXES -- 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 benefit from
the tax-exempt nature of the fund's dividends because such dividends would be
ultimately taxable to 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 private activity 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 his
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 has elected the tax
status of a "regulated investment company" under the provisions of Subchapter M
of the Internal Revenue Code of 1986 (the "Code"). Under Subchapter M, if the
fund distributes within specified times at least 90% of the sum of its taxable
and tax-exempt net investment income, it will be taxed only on that portion, if
any, which it retains.
To qualify, the fund must (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, currencies, or other income
derived with respect to its business of investing in such stock, securities, or
currencies; (b) derive less than 30% of its gross income from the gains or sale
or other disposition of stock or securities held less than three months; and
(c) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of the fund's assets is represented by cash, cash
items, U.S. Government securities, securities of other regulated investment
companies, and other securities which must be limited, in respect of any one
issuer to an amount not greater than 5% of the fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities or the securities of other regulated investment
companies) or in two or more issuers which the fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses.
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") 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 fund 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. If a shareholder receives a designated capital gain distribution
(treated by the shareholder as a long-term capital gain) with respect to any
fund share and such fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that fund share will
be treated as long-term capital loss to the extent of the designated capital
gain distribution. 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 its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the fund
held the debt obligation.
Similarly, while the fund does not expect to earn any significant
investment company taxable income, in the event that any taxable income is
earned by the fund it will be distributed. In general, the fund's investment
company taxable income will be its taxable income (for example, its short-term
capital gains) subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term capital
loss, if any, for such year. The fund would be taxed on any undistributed
investment company taxable income. Since any such income will be distributed,
it will be taxable to shareholders as ordinary income (whether distributed in
cash or additional shares).
If a shareholder exchanges or otherwise disposes of shares of the fund
within 90 days of having acquired such shares, and if, as a result of having
acquired those shares, the shareholder subsequently pays a reduced sales charge
for shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purposes of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other funds. Also, any loss realized on a redemption or exchange of
shares of a fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
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% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (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 the fund from its current year's ordinary income and capital
gain net income and (ii) any amount on which the fund pays income tax during
the periods described above. The fund intends to meet these distribution
requirements to avoid the excise tax liability.
If for any taxable year the fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
would 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
might be eligible for the dividends-received deduction for corporations. Under
normal circumstances, no part of the distributions to shareholders by the fund
is expected to qualify for the dividends-received deduction allowed to
corporate shareholders.
As of the date of this statement of additional information, the maximum
individual 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 is 28%; and the maximum corporate tax applicable to ordinary
income and net capital gains is 35%. However, to eliminate the benefit of
lower marginal corporate income tax rates, corporations which have taxable
income in excess of $100,000 for a taxable year will be required to pay an
additional amount of tax of up to $11,750 and corporations which have taxable
income in excess of $15,000,000 for a taxable year will be required to pay an
additional amount of tax of up to $100,000. Naturally, the amount of tax
payable by a taxpayer will be affected by a combination of tax law rules
covering, e.g., deductions, credits, deferrals, exemptions, sources of income
and other matters.
The interest on "private activity" bonds as defined under the Code is an
item of tax preference subject to the alternative minimum tax ("AMT") on
corporations and individuals. As of the date of this statement of additional
information, individuals are subject to an AMT at a maximum marginal rate of
28% and corporations at a rate of 20%. Shareholders will not be permitted to
deduct any of their share of fund expenses in computing alternative minimum
taxable income. With respect to corporate shareholders, all interest on
municipal bonds and other tax-exempt obligations, including exempt-interest
dividends paid by the fund, is included in adjusted book income and adjusted
current earnings in calculating federal alternative minimum taxable income, and
may also affect corporate federal "environmental tax" liability.
Fund shareholders are required by the Code to report to the federal
government all exempt-interest dividends and all other tax-exempt interest
received.
Under the Code, distributions of net investment income by the fund to
a nonresident alien individual, nonresident alien fiduciary of a trust or
estate, foreign corporation, or foreign partnership (a "foreign shareholder")
will be subject to U.S. withholding tax (at a rate of 30% or a lower treaty
rate, if applicable). Withholding will not apply if a dividend paid by the
fund is "effectively connected" with a U.S. trade or business, in which case
the reporting and withholding requirements applicable to U.S. citizens, U.S.
residents, or domestic corporations will apply.
CALIFORNIA TAXES -- The fund itself is not subject to tax in California if it
qualifies for exemption from federal tax under the Code as described above.
If, at the close of each quarter of its taxable year, at least 50% of the
value of the total assets of the fund consists of securities the interest on
which is exempt from taxation under the Constitution or statutes of California
("California Municipal Securities"), the fund will be qualified to pay
dividends exempt from California corporate or personal income tax to its
shareholders (hereinafter referred to as "California exempt-interest
dividends"). The fund intends to qualify under the above requirement so that
it can pay California exempt-interest dividends. If the fund fails to so
qualify, no part of the fund's dividends will be exempt from California
corporate or personal income tax.
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 that is exempt from California
corporate or personal income tax. The total amount of California
exempt-interest dividends paid by the fund to all of its shareholders with
respect to any taxable year cannot exceed the amount of interest received by
the fund during such year on California Municipal Securities less any expenses
or expenditures (including any expenditures attributable to the acquisition of
additional fund securities and dividends paid to the fund's corporate
shareholders) that are deemed to have been paid from such interest. Dividends
paid by the fund in excess of this limitation will be treated as ordinary
dividends subject to California corporate or personal income tax at ordinary
rates. For purposes of the limitation, expenses or other expenditures paid
during any year generally will be deemed to have been paid with funds
attributable to interest received by the fund from California Municipal
Securities for such year in the same ratio as such interest from California
Municipal Securities bears to the total gross income earned by the fund for the
year. The effect of this accounting convention is that amounts of interest
from California Municipal Securities received by the fund that would otherwise
be available for distribution as California exempt-interest dividends will be
reduced by the expenses and expenditures deemed to have been paid from such
amounts.
California has "conformity legislation" making federal alternative minimum
tax provisions generally applicable for California personal and corporate
income tax purposes; however, California does not include interest on private
activity bonds as an item of tax preference for personal and corporate income
tax purposes. Under these rules, dividends from the fund attributable to
interest on all tax-exempt obligations may be includable in adjusted book
income and adjusted current earnings for purposes of the alternative minimum
tax on corporations.
In cases where shareholders are "substantial users" or "related persons"
with respect to California Municipal Securities held by the fund, such
shareholders should consult their tax advisers to determine whether California
exempt-interest dividends paid by the fund with respect to such obligations
retain their California corporate or personal income tax exclusion. In this
connection, rules similar to those regarding the possible unavailability of
federal exempt-interest dividend treatment to "substantial users" are
applicable for California state tax purposes. See "Additional Information
Concerning Taxes--Federal Taxes" above.
Long-term and/or short-term capital gain distributions will not constitute
California exempt-interest dividends and will be taxed as ordinary dividends.
Moreover, interest on indebtedness incurred by a shareholder to purchase or
carry fund shares is not deductible for California corporate or personal income
tax purposes if the fund distributes California exempt-interest dividends
during the shareholder's taxable year.
The foregoing is only a summary of some of the important California
corporate or personal income tax considerations generally affecting the fund
and its shareholders. No attempt is made to present a detailed explanation of
the California income tax treatment of the fund or its shareholders, and this
discussion is not intended as a substitute for careful planning. Further, it
should be noted that the portion of any fund dividends constituting California
exempt-interest dividends is excludable from income for California income tax
purposes only. Any dividends paid to fund shareholders subject to California
state franchise tax will be taxed as ordinary dividends to such shareholders,
notwithstanding that all or a portion of such dividends is exempt from
California income tax. Accordingly, potential investors in the fund,
including, in particular, corporate investors which may be subject to
California franchise tax, should consult their own tax advisers with respect to
the application of such taxes to the receipt of fund dividends and as to their
particular California tax situation in general.
PURCHASE OF SHARES
<TABLE>
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<S> <C> <C>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
See "Investment $50 minimum (except where a
Minimums and Fund lower minimum is noted
Numbers" for initial under "Investment Minimums
investment minimums. and Fund Numbers").
BY Visit any investment Mail directly to your
CONTACTING dealer who is investment dealer's address
YOUR registered in the printed on your account
INVESTMENT state where the statement.
DEALER purchase is made and
who has a sales
agreement with
American Funds
Distributors.
BY MAIL Make your check Fill out the account
payable to the fund additions form at the
and mail to the bottom of a recent account
address indicated on statement, make your check
the account payable to the fund, write
application. Please your account number on your
indicate an check, and mail the check
investment dealer on and form in the envelope
the account provided with your account
application. statement.
BY Contact your Complete the "Investments
TELEPHONE investment dealer to by Phone" section on the
open account, then account application or
follow the American FundsLink
procedures for Authorization Form.
additional Once you establish the
investments. privilege, you, your
financial advisor or any
person with your account
information can call
American FundsLine(r) and
make investments by
telephone (subject to
conditions noted in
"Telephone Redemptions and
Exchanges" below).
BY WIRE Call 800/421-0180 to Your bank should wire your
obtain your account additional investments in
number(s), if the same manner as
necessary. Please described under "Initial
indicate an Investment."
investment dealer on
the account.
Instruct your bank
to wire funds to:
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 FUND AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO
REJECT ANY PURCHASE ORDER.
</TABLE>
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 closing price. The net asset value per share of money market
funds normally will remain constant at $1.00 based on the fund's current
practice of valuing their shares using the penny-rounding method in accordance
with rules of the Securities and Exchange Commission.
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
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. The
net asset value per share is determined as follows:
1. Municipal bonds and notes and any other securities with more than 60 days
remaining to maturity normally are valued at prices obtained from a national
municipal bond pricing service except that, where such prices are not available
or determined by the fund's officers not to represent market value, they are
valued at prices representing the mean between bid and asked quotations (on the
sale of similar issues) obtained from one or more broker/dealers dealing in
such municipal bonds and notes.
All securities with 60 days or less to maturity are amortized to maturity
based on their cost to the fund if acquired within 60 days of maturity or, if
already held by the fund on the 60th day, based on the value determined on the
61st day. The maturities of variable or floating rate instruments, or
instruments with the right to sell them at par to the issuer or dealer, are
deemed to be the time remaining until the next interest adjustment date or
until they can be redeemed at par.
Where market prices or market quotations are not readily available,
securities are valued at fair value as determined in good faith by the Board of
Trustees or a committee thereof. The fair value of all other assets is added
to the value of securities to arrive at the total assets;
2. There are deducted from the total assets, thus determined, all
liabilities, including accruals of taxes and other expense items; and
3. The value of the net assets so obtained is 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.
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(r) (see
description below):
<TABLE>
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FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(r) 02
$1,000
American Balanced Fund(r) 11
500
American Mutual Fund(r) 03
250
Capital Income Builder(r) 12
1,000
Capital World Growth and Income Fund(sm) 33
1,000
EuroPacific Growth Fund(r) 16
250
Fundamental Investors(sm) 10
250
The Growth Fund of America(r) 05
1,000
The Income Fund of America(r) 06
1,000
The Investment Company of America(r) 04
250
The New Economy Fund(r) 14
1,000
New Perspective Fund(r) 07
250
SMALLCAP World Fund(r) 35
1,000
Washington Mutual Investors Fund(sm) 01
250
BOND FUNDS
American High-Income Municipal Bond Fund(r) 40
1,000
American High-Income Trust(sm) 21
1,000
The Bond Fund of America(sm) 08
1,000
Capital World Bond Fund(r) 31
1,000
Intermediate Bond Fund of America(sm) 23
1,000
Limited Term Tax-Exempt Bond Fund of America(sm) 43
1,000
The Tax-Exempt Bond Fund of America(r) 19
1,000
The Tax-Exempt Fund of California(r)* 20
1,000
The Tax-Exempt Fund of Maryland(r)* 24
1,000
The Tax-Exempt Fund of Virginia(r)* 25
1,000
U.S. Government Securities Fund(sm) 22
1,000
MONEY MARKET FUNDS
The Cash Management Trust of America(r) 09
2,500
The Tax-Exempt Money Fund of America(sm) 39
2,500
The U.S. Treasury Money Fund of America(sm) 49
2,500
___________
*Available only in certain states.
</TABLE>
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).
STATEMENT OF INTENTION -- The reduced sales charges and offering prices set
forth in the Prospectus apply to purchases of $25,000 or more made within a
13-month period subject to the following statement of intention (the Statement)
terms. The Statement is not a binding obligation to purchase the indicated
amount. When a shareholder elects to utilize the 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 the Transfer Agent.
All dividends and capital gain distributions 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 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 prospectus and account
application) 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.
In the case of purchase orders by the trustees of certain retirement
plans 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 is 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.
DEALER COMMISSIONS -- 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.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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 200 or more eligible employees, and for purchases made at
net asset value by certain retirement plans of organizations with collective
retirement plan assets of $100 million or more: 1% on amounts of $1 million to
$2 million, 0.80% on amounts over $2 million to $3 million, 0.50% on amounts
over $3 million to $50 million, 0.25% on amounts over $50 million to $100
million, and 0.15% on amounts over $100 million. The level of dealer
commissions will be determined based on sales made over a 12-month period
commencing from the date of the first sale at net asset value.
American Funds Distributors, at its expense (from a designated
percentage of its income), will, during calendar year 1997, provide additional
compensation to dealers. Currently 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.
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 200 or more eligible employees or any other purchaser investing at least
$1 million in shares of the fund (or in combination with shares of other funds
in The American Funds Group other than the money market funds) may purchase
shares at net asset value; however, a contingent deferred sales charge of 1% is
imposed on certain redemptions made within twelve months of the purchase. (See
"Redeeming Shares--Contingent Deferred Sales Charge.")
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.
NET ASSET VALUE PURCHASES -- The stock, stock/bond and bond funds may sell
shares at net asset value to: (1) current or retired directors, trustees,
officers and advisory board members of the funds managed 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 of organizations with retirement plan assets of $100
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.
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 Investment Company Act of 1940, 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.
Redeeming Shares
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By writing to Send a letter of instruction specifying
American Funds the name of the fund, the number of shares
Service Company (at or dollar amount to be sold, your name and
the appropriate account number. You should also enclose
address indicated any share certificates you wish to redeem.
under "Fund For redemptions over $50,000 and for
Organization and certain redemptions of $50,000 or less
Management - (see below), your signature must be
Principal guaranteed by a bank, savings association,
Underwriter and credit union, or member firm of a domestic
Transfer Agent" in stock exchange or the National Association
the prospectus) 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 If you redeem shares through your
investment dealer investment dealer, you may be 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 You may use this option, provided the
redemption check account is registered in the name of an
sent to you by individual(s), a UGMA/UTMA custodian, or a
using American non-retirement plan trust. These
FundsLine(r) or by redemptions may not exceed $10,000 per day
telephoning, per fund account and the check must be
faxing, or made payable to the shareholder(s) of
telegraphing record and be sent to the address of
American Funds record provided the address has been used
Service Company with the account for at least 10 days.
(subject to the See "Transfer Agent" and "Exchange
conditions noted in Privilege" below for the appropriate
this section and in telephone or fax number.
"Telephone
Purchases,
Redemptions and
Exchanges" below)
In the case of the Upon request (use the account application
money market funds, for the money market funds) you may
you may have establish telephone redemption privileges
redemptions wired (which will enable you to have a
to your bank by redemption sent to your bank account)
telephoning and/or check writing privileges. If you
American Funds request check writing privileges, you will
Service Company be provided with checks that you may use
($1,000 or more) or to draw against your account. These
by writing a check checks may be made payable to anyone you
($250 or more) designate and must be signed 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, AND PROVIDED THE ADDRESS
HAS BEEN USED WITH THE ACCOUNT FOR AT LEAST 15 DAYS.
CONTINGENT DEFERRED SALES CHARGE -- A contingent deferred sales charge of 1%
applies to certain redemptions 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 200 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 1/2; 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
shareholders to make regular monthly or quarterly investments in shares through
automatic charges to their 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 shareholders 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 your account, the plan may be terminated and the related investment
reversed. The shareholder may change the amount of the investment or
discontinue the plan at any time by writing 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.
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.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS -- A shareholder in one fund
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 the shareholder's 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 shall have the right, if the
shareholder fails 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 the shareholder. 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(r) (see "American FundsLine(r)" below), or by telephoning
800/421-0180 toll-free, faxing (see "Transfer Agent" below for the appropriate
fax numbers) or telegraphing American Funds Service Company. (See "Telephone
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.
ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from American Funds Service Company. Purchases through
automatic investment plans and certain retirement plans will be confirmed at
least quarterly.
AMERICAN FUNDSLINE(R) -- You may check your share balance, the price of your
shares, or your most recent account transaction, redeem shares (up to $10,000
per fund, per account each day), or exchange shares around the clock with
American FundsLine(r). To use this service, call 800/325-3590 from a TouchTonet
telephone. Redemptions and exchanges through American FundsLine(r) are subject
to the conditions noted above and in "Redeeming Shares--Telephone 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 REDEMPTIONS AND EXCHANGES -- By using the telephone (including
American FundsLine(r)), fax or telegraph redemption and/or exchange options,
you agree to hold the fund, American Funds Service Company, any of its
affiliates or mutual funds managed by such affiliates, 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 reinstate them at any time also 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, 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
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.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal years ended August 31, 1996 and
1995 amounted to $82,000 and $125,000, respectively.
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 One Chase Manhattan Plaza, New
York, NY 10081, as Custodian.
AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
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SERVICE AREA ADDRESS AREAS SERVED
WESTERN P.O. BOX 2205 AK, AZ, CA, HI, ID, MT, NV, OR, UT, WA
BREA, CA 92822-2205 AND OUTSIDE THE U.S.
FAX: 714/671-7080
WESTERN- P.O. BOX 659522 AR, CO, IA, KS, LA, MN, MO, ND, NE, NM,
CENTRAL SAN ANTONIO, TX 78265-9522 OK, SD, TX AND WY
FAX: 210/530-4050
EASTERN-CENTRAL P.O. BOX 6007 AL, IL, IN, KY, MI, MS, OH, TN AND WI
INDIANAPOLIS, IN 46206-6007
FAX: 317/735-6620
EASTERN P.O. BOX 2280 CT, DE, FL, GA, MA, MD, ME, NC, NH, NJ,
NORFOLK, VA 23501-2280 NY, PA, RI, SC, VA, VT, WV AND WASHINGTON, D.C.
FAX: 804/670-4773
ALL SHAREHOLDERS MAY CALL AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180 FOR SERVICE.
</TABLE>
TRANSFER AGENT -- American Funds Service Company (AFS), 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. It was paid a fee of
$72,000 for the fiscal year ended August 31, 1996.
INDEPENDENT ACCOUNTANTS -- Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
floor, Los Angeles, CA 90017, has served as the Trust's independent auditors
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 the independent
auditors given on the authority of said firm as experts in accounting and
auditing.
REPORTS TO SHAREHOLDERS -- The Trust's fiscal year ends on August 31.
Shareholders are provided, at least semiannually, with reports showing the
investment portfolio, financial statements and other information. The fund's
annual financial statements are audited by Deloitte & Touche LLP, whose
selection is determined annually by the Board of Trustees.
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 on 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.
The financial statements including the investment portfolio and the report
of independent auditors contained in the annual report are included in this
statement of additional information. The following information is not included
in the annual report:
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DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE -- AUGUST 31, 1996
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NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
(NET ASSETS DIVIDED BY SHARES OUTSTANDING) $15.78
OFFERING PRICE PER SHARE (100/95.25 OF PER SHARE
NET ASSET VALUE, WHICH TAKES INTO ACCOUNT THE $16.57
FUND'S CURRENT MAXIMUM SALES CHARGE)
</TABLE>
SHAREHOLDER AND TRUSTEE RESPONSIBILITY -- Under the laws of certain states,
including Massachusetts, where the Trust was organized, and California, where
the Trust's principal office is located, 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 each 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 -- All shares of the fund have equal voting rights
and may be voted in the elections of Trustees and on other matters submitted to
the vote of shareholders. 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. At such meeting, a trustee may be
removed after the holders of record of not less than two-thirds of the
outstanding shares 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 shall 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 voting for the election of
Trustees can elect all the Trustees. No amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the fund except that amendments may be made upon the sole
approval of the Trustees to conform the Declaration of Trust to the
requirements of applicable Federal laws or regulations or the requirements of
the regulated investment company provisions of the Code; however, the Trustees
shall not be held liable for failing to do so. If not terminated by the vote
or written consent of a majority of the outstanding shares, the Trust will
continue indefinitely.
The Trust currently issues shares in one series, but 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 fund's yield is 4.80% based on a 30-day (or one month) period
ended August 31, 1996 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 fund's tax-equivalent yield
based on the maximum combined effective federal/state tax rate of 46.2% for the
30-day (or one month) period ended August 31, 1996 was 8.92%.
The fund may also calculate a distribution rate on a taxable and tax
equivalent basis. The distribution rate is computed by annualizing the current
month's dividend and dividing by the average price for the month. The taxable
equivalent distribution rate will reflect the most current federal and state
tax rates available. The current distribution rate may differ from the current
yield.
The fund's total return over the past 12 months and average annual
total returns for the past five-year and lifetime periods ending on August 31,
1996 were 0.66%, 6.34% and 6.42%, 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. During its lifetime, the fund had a
total return of 84.5%.
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 five and ten-year periods after such
periods have elapsed. In addition, the fund may provide lifetime average total
return figures.
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
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... 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 August 31, 1996
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| |
Periods
Number of Years 9/1-8/31 Value
1 1995 - 1996 $10,066
2 1994 - 1996 10,883
3 1993 - 1996 10,900
4 1992 -1996 12,322
5 1991 - 1996 13,599
6 1990 - 1996 15,175
7 1989 - 1996 15,769
8 1988 - 1996 17,415
9 1987 - 1996 18,381
lifetime 1986*- 1996 18,447
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ILLUSTRATION OF A $10,000 INVESTMENT IN THE FUND WITH DIVIDENDS REINVESTED
(For the lifetime of the Fund October 28, 1986 through August 31, 1996)
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COST OF SHARES VALUE OF SHARES**
Fiscal Total From From From
Year End Annual Dividends Investment Initial Capital Gains Dividends Total
Aug. 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
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1987* $ 431 $ 431 $ 10,431 $ 9,147 $ 0 $ 415 $ 9,562
1988 582 1,013 11,013 9,087 0 1,002 10,089
1989 651 1,664 11,664 9,440 0 1,700 11,140
1990 682 2,346 12,346 9,247 0 2,334 11,581
1991 724 3,070 13,070 9,727 0 3,192 12,919
1992 771 3,841 13,841 10,140 0 4,118 14,258
1993 806 4,647 14,647 10,867 0 5,256 16,123
1994 875 5,522 15,522 10,267 57 5,820 16,144
1995 932 6,454 16,454 10,493 58 6,910 17,461
1996 949 7,403 17,403 10,520 58 7,869 18,447
</TABLE>
* From inception on October 28, 1986
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
EXPERIENCE OF INVESTMENT ADVISER -- Capital Research and Management Company
manages nine common stock funds that are at least 10 years old. In all of the
10-year periods since January 1, 1966 during which those funds were managed by
Capital Research and Management Company (121 in all), those funds have had
better total returns than the Standard and Poor's 500 Stock Composite Index in
94 of the 121 periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company, the fund's Investment Adviser.
The fund may also refer to results compiled by organizations such as
Lipper Analytical Services, Morningstar, Inc. and Wiesenberger Investment
Companies Services. 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, may
be 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>
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, August 31, 1996
Principal Market
Amount Value
(000) (000)
<S> <C> <C>
Tax-Exempt Securities Maturing in More than
One Year - 94.50%
Various Purpose General Obligation Bond, 7.00% 2005 $1,000 $1,137
Educational Facilities Authority, Revenue Bonds
(University of San Francisco), Series 1996, MBIA
Insured, 5.70% 2011 1190 1204
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 6400 6032
Kaiser Permanente Medical Care Program, Semi-Annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2000 1847
Pacific Presbyterian Medical Center Insured Variable
Rate Demand, 1985 Series B,
6.75% 2015 (Prerefunded 2002) 4125 4508
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1250 1356
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4000 4423
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1150 1146
Housing Finance Agency:
Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 581
1991 Series G, 6.95% 2011 1490 1545
1995 Series K, 5.55% 2021 2500 2501
1996 Series A, MBIA Insured
5.30% 2014 1000 985
Single Family Mortgage Purchase Bonds, Series B2,
AMBAC Insured, 5.70% 2007 3595 3606
Maritime Infrastructure Authority,
Airport Revenue Bonds (San Diego Unified Port
District Airport Project-Lindbergh Field) Series 1995,
5.00% 2020 2265 1976
Pollution Control Financing Authority:
Pollution Control Revenue Bonds (Pacific Gas and
Electric Company):
1992 Series B, 6.35% 2009 2900 2981
1993 Series B, 5.85% 2023 1000 966
Resource Recovery Revenue Bonds, Waste Management Inc.
Guarantee Bond, Series A, 7.15% 2011 3500 3774
Solid Waste Revenue Bonds (Keller Canyon Landfill
Company Project), BFI Corp. Guarantee, Series 1992,
6.875% 2027 5200 5474
Public Works Board, Lease Revenue Bonds:
California Community Colleges, Various Community
College Projects), 1994 Series B, 6.75% 2005 1000 1102
Department of Corrections, State Prison - Lassen County,
(Susanville), 1993 Series D, 5.25% 2015 2000 1891
The Regents of the University of California:
1993 Series A (Various University of California
Projects), 5.50% 2021 1000 917
1994 Series B (Various University of California
Projects), 5.75% 2002 1000 1041
Refunding Revenue Bonds (1989 Multiple Purpose
Projects), Series C, AMBAC Insured, 5.00% 2023 4000 3500
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1250 1369
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program):
1995 Series B, 7.75% 2026 2975 3315
1996 Series A, 6.45% 2027 1500 1651
Statewide Communities Development Authority:
Hospital Revenue Certificates of Participation,
Cedar-Sinai Medical Center, Series 1992, 6.50% 2012 1900 2066
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3000 2826
Sisters of Charity of Leavenworth Health Services
Corp., Certificates of Participation, Series 1994,
5.00% 2023 2000 1701
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 530
Series H, 6.90% 2025 (Prerefunded 2000) 2000 2192
Series O, MBIA Insured, 5.00% 2022 2000 1757
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured,
5.375% 2009 1500 1486
Castaic Lake Water Agency, Refunding Revenue
Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A,
7.25% 2010 1400 1637
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
1993 Series:
6.10% 2013 3000 2955
6.20% 2020 5000 4929
East Bay Municpal Utility District (Alameda and Contra
Costa Counties), Water System Subordinated Revenue
Refunding Bonds, Series 1996, FGIC Insured, 5.00% 2026 1000 883
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A:
6.00% 2016 1500 1454
6.00% 2034 1000 947
5.00% 2035 1000 809
City of Fremont, Multifamily Housing revenue Refunding
Bonds (Durham Greens Project), Issue A of 1995,
5.40% 2026 3000 3006
City of Fresno Sewer System Revenue Bonds, Series 1993A
5.25% 2019 1000 940
Kern High School District (County of Kern), General
Obligation Refunding Bonds, Series 1996A,
MBIA Insured, 6.60% 2016 1000 1118
City of Long Beach:
Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 776
Harbor Revenue Bonds, Series 1993, 5.125% 2018 1000 888
City of Los Angeles:
State Building Authority,Lease Revenue Bonds
(State of California Department
of General Services Lease), Series 1988 A,
7.50% 2011 (Prerefunded 1998) 3500 3742
Convention and Exhibition Center Authority,
Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2500 2746
7.00% 2020 (Prerefunded 1999) 2000 2176
Harbor Department Revenue Bonds:
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1750 2117
Issue 1995, 6.625% 2025 4750 4961
Waste Water System Revenue Bonds:
Series 1987, 8.125% 2017 (Prerefunded 1997) 1500 1601
Series 1990-B, 7.15% 2020 (Prerefunded 2000) 1000 1109
Department of Water and Power:
Electric Plant Revenue Bonds,Issue of 1990:
7.125% 2030 (Subject to Crossover Refunding 2000) 2500 2760
7.10% 2031 (Subject to Crossover Refunding 2001) 3000 3338
Water Works Refunding Revenue Bonds, Issue of 1989,
7.00% 2022 1000 1077
County of Los Angeles, Certificates of Participation
(Marina del Rey), Series A:
6.25% 2003 4635 4764
6.50% 2008 6000 6041
Los Angeles County:
Metropolitan Transportation Authority:
Proposition A Sales Tax Revenue Refunding Bonds,
Series 1993-A, MBIA Insured, 5.00% 2021 2000 1758
Proposition C Sales Tax Revenue Bonds, Second
Senior Bonds, Series 1995-A, AMBAC Insured,
5.00% 2025 1000 884
Transportation Commission, Sales Tax Revenue Bonds:
Series 1989, 7.00% 2019 2250 2418
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2500 2775
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1000 943
Northern California Public Power Agency,
Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 3725 3795
City of Oakland, Special Refunding Revenue Bonds
(Pension Financing), 1988 Series A, FGIC Insured,
7.60% 2021 1000 1075
Port of Oakland, Revenue Bonds:
1989 Series B, BIG Insured, 7.25% 2016 3125 3246
1992 Series E, MBIA Insured, 6.40% 2022 2670 2760
County of Orange:
Airport Revenue Refunding Bonds, Series 1993,
MBIA Insured, 5.25% 2007 1500 1470
Aliso Viejo, Special Tax Bonds of
Community Facilities District No. 88-1, Series A of 1992:
7.25% 2008 (Prerefunded 2002) 1500 1725
7.35% 2018 (Prerefunded 2002) 4250 4909
Recovery Certificates of Participation, 1996 Series A
MBIA Insured, 6.00% 2008 4500 4772
Orange County Local Transportation Authority, First
Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1000 1062
MBIA Insured, 6.00% 2009 1500 1569
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1565 1580
6.65% 2003 1320 1332
6.85% 2005 2715 2756
7.00% 2006 1310 1338
7.25% 2013 2000 2042
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1000 1107
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2195 2032
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.40% 1999 995 1009
5.60% 2000 995 1011
5.70% 2001 3950 4019
6.15% 2012 1930 1933
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4000 3363
5.00% 2023 2000 1651
County of Sacramento, Single Family Mortgage Revenue
Bonds (GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1500 1997
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds:
1995 Series:
6.00% 2003 1500 1525
6.50% 2005 1100 1149
(Proctor & Gamble Project), 1995 Series:
7.00% 2005 1700 1821
6.50% 2014 1000 1008
6.375% 2010 3500 3520
6.50% 2021 4000 4006
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5500 6147
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2000 2149
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 2435 2719
County of San Diego, The San Diego Regional Building
Authority, Certificates of Participation (1991 MTS
Tower Refunding Project), MBIA Insured, 6.363% 2019 1000 1024
City of San Diego/MTDB Authority (San Diego Old Town
Light Rail Transit Extension), 1993 Lease Revenue
Bonds, 5.375% 2023 1500 1362
City and County of San Francisco:
General Purpose Sewer Revenue Bonds,
Series 1988 A, AMBAC Insured,
7.25% 2015 (Prerefunded 1997) 3320 3487
Port Commission Revenue Refunding Bonds,
Series 1994, 5.90% 2009 1500 1487
Redevelopment Agency, Lease Revenue Bonds, Series 1992,
(George R. Moscone Convention Center), 5.50% 2018 3560 3306
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 1000 1023
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds:
6.75% 2032 1500 1535
5.00% 2033 1000 817
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1000 1068
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2200 2686
South Tahoe Joint Powers Financing Authority, Refunding
Revenue Bonds (South Tahoe Redevelopment Project Area
No. 1), 1995 Series B, 6.25% 2020 3250 3188
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1105 1132
---------
238650
---------
Tax-Exempt Securities Maturing in
One Year or Less - 4.39%
State of California:
General Obligation Tax-Exempt Commercial Paper Notes,
3.30% 9/4/96 1000 1000
1996-97 Revenue Anticipation Notes,
Series A, 4.50% 6/30/97 700 704
County of Los Angeles, 1996-97 Tax and Revenue
Anticipation Notes, Series A, 4.50% 6/30/97 8300 8345
Department of Airports of the City of Los Angeles,
1989 Series B, 7.40% 2010 (Prerefunded 5/1/97) 1000 1043
---------
11092
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$237,989,000) 249742
Excess of receivables over cash and payables 2790
---------
NET ASSETS $252,532
=========
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
at August 31, 1996 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $237,989) $249,742
Cash 28
Receivables for--
Sales of fund's shares $ 96
Accrued interest 3,582 3,678
--------- ---------------
253,448
Liabilities:
Payables for--
Repurchases of fund's shares 144
Dividends payable 549
Management services 89
Accrued expenses 134 916
--------- ---------------
Net Assets at August 31, 1996--
Equivalent to $15.78 per share on
16,001,073 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $252,532
=========
Statement of Operations
for the year ended August 31, 1996
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $14,791
---------------
Expenses:
Management services fee $1,018
Distribution expenses 566
Transfer agent fee 72
Reports to shareholders 50
Registration statement and prospectu 9
Postage, stationery and supplies 21
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 11
Taxes (other than federal income tax 3 1,807
--------- ---------------
Net investment income 12,984
---------------
Realized Gain and Change in Unrealized
Appreciation on Investments:
Net realized gain 1,373
Net unrealized appreciation:
Beginning of year 12,697
End of year 11,753
---------------
Net change in unrealized appreciation (944)
---------------
Net realized gain and change in
unrealized appreciation on investments 429
---------------
Net Increase in Net Assets Resulting
from Operations $13,413
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31
1996 1995
--------- ---------
Operations:
Net investment income $ 12,984 $ 12,549
Net realized gain on investments 1,373 871
Net change in unrealized appreciation
on investments (944) 3,633
--------- ---------------
Net increase in net assets
resulting from operations 13,413 17,053
--------- ---------------
Dividends Paid to Shareholders (12,978) (12,552)
--------- ---------------
Capital Share Transactions:
Proceeds from shares sold:
3,016,709 and 2,513,117
shares, respectively 48,021 38,225
Proceeds from shares issued in reinvestment
of net investment income dividends:
439,139 and 498,341 shares, respecti 6,983 7,598
Cost of shares repurchased:
2,264,964 and 2,849,307 shares,
respectively (36,022) (42,819)
--------- ---------------
Net increase in net assets
resulting from capital share transa 18,982 3,004
--------- ---------------
Total Increase in Net Assets 19,417 7,505
Net Assets:
Beginning of year 233,115 225,610
--------- ---------------
End of year $252,532 $233,115
========= =========
See Notes to Financial Statements
</TABLE>
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 fund seeks a high level of
current income free from federal and California income taxes, with the
additional objective of preservation of capital. 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.
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. Securities for which market quotations
are not readily available are valued at fair value by the Board of Trustees or
a committee thereof. All securities with 60 days or less to maturity are valued
at amortized cost, which approximates market value.
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 fund 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 over the life of the respective
securities. 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.
Pursuant to the custodian agreement, the fund may receive credits against
its custodian fee for imputed interest on certain balances with the custodian
bank. The custodian fee of $11,000 includes $4,000 paid by these 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, 1996, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $11,753,000, of which $12,482,000
related to appreciated securities and $729,000 related to depreciated
securities.
During the year ended August 31, 1996, the fund realized, on a tax basis, a net
capital gain of $1,373,000 on securities transactions. The fund utilized the
remaining capital loss carryforward totaling $43,000 to offset, for tax
purposes, capital gains realized during the year up to such amount. There was
no difference between book and tax realized gains on securities transactions
for the year ended August 31, 1996. The cost of portfolio securities for book
and federal income tax purposes was $237,989,000 at August 31, 1996.
3. The fee of $1,018,000 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, 1996,
distribution expenses under the Plan were $566,000. As of August 31, 1996,
accrued and unpaid distribution expenses were $103,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $72,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $138,000 (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 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,
1996, aggregate amounts deferred and earnings thereon were $28,000.
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, 1996, accumulated undistributed net realized gain on
investments was $1,330,000 and paid-in capital was $239,446,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $79,141,000 and $60,142,000, respectively, during the
year ended August 31, 1996.
<TABLE>
Per-Share Data and Ratios
Year ended August 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $15.74 $15.40 $16.30 $15.21 $14.59
------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income .84 .86 .84 .84 .85
Net realized and
unrealized gain
(loss) on investments .04 .34 (.84) 1.09 .62
------- ------- ------- ------- -------
Total income from
investment operations .88 1.20 .00 1.93 1.47
------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income (.84) (.86) (.84) (.84) (.85)
Distributions from net
realized gains - - (.06) - -
------- ------- ------- ------- -------
Total distributions (.84) (.86) (.90) (.84) (.85)
------- ------- ------- ------- -------
Net Asset Value, End of Year $15.78 $15.74 $15.40 $16.30 $15.21
======= ======= ======= ======= =======
Total Return* 5.65% 8.16% 0.13% 13.08% 10.36%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $253 $233 $226 $223 $148
Ratio of expenses to average
net assets .73% .73% .71% .71% .74%
Ratio of net income to
average net assets 5.25% 5.65% 5.28% 5.36% 5.66%
Portfolio turnover rate 27.60% 41.36% 15.08% 16.82% 20.28%
*Calculated without deducting a sales charge. The maximum sales charge is
4.75% of the fund's offering price.
</TABLE>
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 of
The American Funds Tax Exempt Series II-- The Tax-Exempt Fund of California
(the "Fund"), including the schedule of portfolio investments, as of August 31,
1996, and 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 statements and 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 per-share data
and ratios are free of material misstatement. An audit includes 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, 1996 by correspondence with the custodian. 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, 1996, 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 27, 1996
Tax Information (unaudited)
All of the distributions paid by the fund during the fiscal year ended August
31, 1996 were exempt-interest distributions within the meaning of Section
852(b)(5)(A) of the Internal Revenue Code.
This information is given to meet certain requirements of the Internal Revenue
Code and should not be used by shareholders for preparing their income tax
returns. For tax return preparation purposes, please refer to the year-end
information you receive from the fund's transfer agent.
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.
PART C
THE TAX-EXEMPT FUND OF CALIFORNIA
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Included in Prospectus - Part A
Condensed Financial Information
Included in Statement of Additional Information - Part B
Investment Portfolio Notes to Financial Statements
Statement of Assets and Liabilities Selected Per-Share Data and Ratios
Statement of Operations Report of Independent Accountants
Statement of Changes in Net Assets
(B) EXHIBITS:
1. On file (see SEC file Nos. 811-4694 and 33-6180)
2. On file (see SEC file Nos. 811-4694 and 33-6180)
3. None.
4. On file (see SEC file Nos. 811-4694 and 33-6180)
5. On file (see SEC file Nos. 811-4694 and 33-6180)
6. On file (see SEC file Nos. 811-4694 and 33-6180)
7. None.
8. On file (see SEC file Nos. 811-4694 and 33-6180)
9. On file (see SEC file Nos. 811-4694 and 33-6180)
10. Not applicable to this filing.
11. Consent of independent auditors
12. None.
13. On file (see SEC file Nos. 811-4694 and 33-6180)
14. None.
15. On file (see SEC file Nos. 811-4694 and 33-6180)
16. On file (see SEC file Nos. 811-4694 and 33-6180)
17. Financial data schedule.
Item 25. Persons Controlled by or Under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of August 31, 1996.
<TABLE>
<CAPTION>
Number of
Title of Class Record-Holders
<S> <C>
Shares of Beneficial 4,199
Interest (no par value)
</TABLE>
Item 27. Indemnification.
Registrant is a joint-insured under Investment Advisor/Mutual Fund
Errors and Omissions Policies written by American International Surplus Lines
Insurance Company, Chubb Custom Insurance Company, and ICI Mutual Insurance
Company which insures its officers and trustees against certain
liabilities.
Article VI of the Trust's By-Laws states:
(a) The Trust shall indemnify any Trustee or officer of the Trust who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than action by or in the right of the Trust) by reason
of the fact that such person is or was such Trustee or officer or an employee
or agent of the Trust, or is or was serving at the request of the Trust as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Trust, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith or in a manner reasonably believed to be
opposed to the best interests of the Trust, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that such person's
conduct was unlawful.
(b) The Trust shall indemnify any Trustee or officer of the Trust who was or
is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Trust to procure
a judgment in its favor by reason of the fact that such person is or was such
Trustee or officer or an employee or agent of the Trust, or is or was serving
at the request of the Trust as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), actually and
ITEM 27. INDEMNIFICATION (CONT.)
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Trust, except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of such person's duty to the
Trust unless and only to the extent that the court in which such action or suit
was brought, or any other court having jurisdiction in the premises, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
(c) To the extent that a Trustee or officer of the Trust has been successful
on the merits in defense of any action, suit or proceeding referred to in
subparagraphs (a) or (b) above or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith, without the necessity for the determination as to the standard of
conduct as provided in subparagraph (d).
(d) Any indemnification under subparagraph (a) or (b) (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case upon
a determination that indemnification of the Trustee or officer is proper under
the standard of conduct set forth in subparagraph (a) or (b). Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of Trustees who were not parties to such action, suit or proceeding,
and are disinterested Trustees or (ii) if such a quorum of disinterested
Trustees so directs, by independent legal counsel in a written opinion.
(e) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition of such
action, suit or proceeding, as authorized in the particular case,upon receipt
of an undertaking and security by or on behalf of the Trustee or officer to
repay such amount unless it shall ultimately be determined that such person is
entitled to be indemnified by the Trust as authorized herein.
(f) Agents and employees of the Trust who are not Trustees or officers of the
Trust may be indemnified under the same standards and procedures set forth
above, in the discretion of the Board.
(g) Any indemnification pursuant to this Article shall not be deemed exclusive
of any other rights to which those indemnified may be entitled and shall
continue as to a person who has ceased to be Trustee or officer and shall inure
to the benefit of the heirs, executors and administrators of such person.
(h) Nothing in the Declaration of Trust or in these By-Laws shall be deemed to
protect any Trustee, officer, distributor, investment adviser or controlling
shareholder of the Trust against any liability to the Trust or to its
shareholders to which such person would otherwise
be subject by reason of willful malfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such person's
office.
(i) The Trust shall have power to purchase and maintain insurance on behalf of
any
ITEM 27. INDEMNIFICATION (CONT.)
person against any liability asserted against or incurred by such person,
whether or not the Trust would have the power to indemnify such
person against such liability under the provisions of this
Article. Nevertheless, insurance will not be purchased or maintained by the
Trust if the purchase or maintenance of such insurance would result in the
indemnification of any person in contravention of any rule or regulation of the
SEC. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition of such
action, suit or proceeding, as authorized in the particular case, upon receipt
of an undertaking by or on behalf of the Trustee or officer to repay such
amount unless it shall ultimately be deter mined that such person is entitled
to be indemnified by the Trust as authorized herein. Such determination must
be made by disinterested Trustees or independent legal counsel.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer of controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
None.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) American Funds Distributors, Inc. is also the Principal Underwriter of
shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds
Income Series, The American Funds Tax-Exempt Series I, American High-Income
Municipal Bond Fund, Inc., American High-Income Trust, American Mutual Fund,
Inc., The Bond Fund of America, Inc., Capital Income Builder, Inc., Capital
World Bond Fund, Inc., Capital World Growth and Income Fund, Inc., The Cash
Management Trust of America, EuroPacific Growth Fund, Fundamental Investors,
Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc.,
Intermediate Bond Fund of America, The Investment Company of America, Limited
Term Tax-Exempt Bond Fund of America, The New Economy Fund, New Perspective
Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of America, The
Tax-Exempt Money Fund of America, The U.S. Treasury Money Fund of America and
Washington Mutual Investors Fund, Inc.
<TABLE>
<CAPTION>
(1) (2) (3)
(b)
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C> <C>
David A. Abzug Regional Vice President None
5657 Lemona Avenue
Van Nuys, CA 91411
John A. Agar Regional Vice President None
1501 N. University Drive, Suite 227A
Little Rock, AR 72207
Robert B. Aprison Regional Vice President None
2983 Bryn Wood Drive
Madison, WI 53711
S Richard Armstrong Assistant Vice President None
L William W. Bagnard Vice President None
Steven L. Barnes Senior Vice President None
8000 Town Line Avenue South
Suite 204
Minneapolis, MN 55438
Michelle A. Bergeron Vice President None
4160 Gateswalk Drive
Smyrna, GA 30080
Joseph T. Blair Vice President None
27 Drumlin Road
West Simsbury, CT 06092
John A. Blanchard Regional Vice President None
6421 Aberdeen Road
Mission Hills, KS 66208
Ian B. Bodell Senior Vice President None
3100 West End Avenue, Suite 870
Nashville, TN 37215
Michael L. Brethower Vice President None
108 Hagen Court
Georgetown, TX 78628
C. Alan Brown Regional Vice President None
4619 McPherson Avenue
St. Louis, MO 63108
L Daniel C. Brown Senior Vice President None
H J. Peter Burns Vice President None
Brian C. Casey Regional Vice President None
9508 Cable Drive
Kensington, MD 20895
Victor C. Cassato Vice President None
609 W. Littleton Blvd., Suite 310
Littleton, CO 80120
Christopher J. Cassin Senior Vice President None
111 W. Chicago Avenue
Suite G3
Hinsdale, IL 60521
Denise M. Cassin Regional Vice President None
1301 Stoney Creek Drive
San Ramon, CA 94538
L Larry P. Clemmensen Director and Treasurer None
L Kevin G. Clifford Director, Senior Vice President None
Ruth M. Collier Vice President None
145 West 67th Street, #12K
New York, NY 10023
Thomas E. Cournoyer Vice President None
2333 Granada Boulevard
Coral Gables, FL 33134
Douglas A. Critchell Vice President None
4116 Woodbine Street
Chevy Chase, MD 20815
* Carl D. Cutting Vice President None
Dan Delianedis Regional Vice President None
8689 Braxton Drive
Eden Prairie, MN 55347
Michael A. Dilella Vice President None
P.O. Box 661
Ramsey, NJ 07446
G. Michael Dill Senior Vice President None
505 E. Main Street, Suite A
Jenks, OK 74037
Kirk D. Dodge Regional Vice President None
2617 Salisbury Road
Ann Arbor, MI 48103
Peter J. Doran Senior Vice President None
1205 Franklin Avenue
Garden City, NY 11530
L Michael J. Downer Secretary Vice President
Robert W. Durbin Vice President None
74 Sunny Lane
Tiffin, OH 44883
I Lloyd G. Edwards Vice President None
L Paul H. Fieberg Senior Vice President None
John Fodor Regional Vice President None
15 Latisquama Road
Southborough, MA 01772
L Mark P. Freeman, Jr. Director, President None
Clyde E. Gardner Senior Vice President None
Route 2, Box 3162
Osage Beach, MO 65065
B Evelyn K. Glassford Vice President None
Jeffrey J. Greiner Regional Vice President None
5898 Heather Glen Court
Dublin, OH 43017
L Paul G. Haaga, Jr. Director Chairman of the Board
David E. Harper Senior Vice President None
R.D. 1, Box 210, Rte. 519
Frenchtown, NJ 08825
Ronald R. Hulsey Regional Vice President None
6744 Avalon
Dallas, TX 75214
Robert S. Irish Regional Vice President None
1225 Vista Del Mar Drive
Delray Beach, FL 33483
L Robert L. Johansen Vice President and Controller None
Michael J. Johnston Chairman of the Board None
630 Fifth Avenue, 36th Floor
New York, NY 10111
Damien Jordan Senior Vice President None
V. John Kriss Senior Vice President None
P.O. Box 274
Surfside, CA 90743
Arthur J. Levine Vice President None
12558 Highlands Place
Fishers, IN 46038
B Karl A. Lewis Assistant Vice President None
T. Blake Liberty Regional Vice President None
12585-E East Tennessee Circle
Aurora, CO 80012
L Lorin E. Liesy Assistant Vice President None
L Susan G. Lindgren Vice President - None
Institutional Investment
Services Division
S Stella Lopez Vice President None
Stephen A. Malbasa Regional Vice President None
13405 Lake Shore Blvd.
Cleveland, OH 44110
Steven M. Markel Vice President None
5241 S. Race Street
Littleton, CO 80121
L John C. Massar Director, Senior Vice President None
L E. Lee McClennahan Senior Vice President None
Laurie B. McCurdy Regional Vice President None
3500 W. Camino de Urania
Tucson, AZ 85741
S John V. McLaughlin Senior Vice President None
Terry W. McNabb Vice President None
2002 Barrett Station Road
St. Louis, MO 63131
L R. William Melinat Vice President - Institutional None
Investment Services Division
David R. Murray Vice President None
25701 S.E. 32nd Place
Issaquah, WA 98029
Stephen S. Nelson Vice President None
7215 Trevor Court
Charlotte, NC 28226
William E. Noe Regional Vice President None
304 River Oaks Road
Brentwood, TN 37027
Peter A. Nyhus Regional Vice President None
3084 Wilds Ridge Court
Prior Lake, MN 55372
Eric P. Olson Regional Vice President None
62 Park Drive
Glenview, IL 60025
Fredric Phillips Vice President None
32 Ridge Avenue
Newton Centre, MA 02161
B Candance D. Pilgrim Assistant Vice President None
Carl S. Platou Regional Vice President None
4021 96th Avenue, S.E.
Mercer Island, WA 98040
L John O. Post, Jr. Vice President None
Steven J. Reitman Vice President None
212 The Lane
Hinsdale, IL 60521
Brian A. Roberts Regional Vice President None
12025 Delmahoy Drive
Charlotte, NC 28277
George S. Ross Vice President None
55 Madison Avenue
Morristown, NJ 07960
L Julie D. Roth Vice President None
L James F. Rothenberg Director None
Douglas F. Rowe Regional Vice President None
30309 Oak Tree Drive
Georgetown, TX 78628
Christopher S. Rowey Regional Vice President None
9417 Beverlywood Street
Los Angeles, CA 90034
Dean B. Rydquist Vice President None
1080 Bay Pointe Crossing
Alpharetta, GA 30202
Richard R. Samson Vice President None
4604 Glencoe Avenue, Suite 4
Marina del Rey, CA 90292
Joseph D. Scarpitti Regional Vice President None
31465 St. Andrews
Westlake, OH 44145
L Daniel B. Seivert Assistant Vice President None
L R. Michael Shanahan Director None
David W. Short Director, Senior Vice President None
1000 RIDC Plaza, Suite 212
Pittsburgh, PA 15238
L Victor S. Sidhu Vice President - Institutional None
Investment Services Division
William P. Simon, Jr. Vice President None
554 Canterbury Lane
Berwyn, PA 19312
L John C. Smith Assistant Vice President - None
Institutional Investment Services Division
L Mary E. Smith Assistant Vice President - None
Institutional Investment
Services Division
Rodney G. Smith Vice President None
2350 Lakeside Blvd., #850
Richardson, TX 75082
Nicholas D. Spadaccini Regional Vice President None
855 Markley Woods Way
Cincinnati, OH 45230
Daniel S. Spradling Senior Vice President None
#4 West Fourth Avenue, Suite 406
San Mateo, CA 94402
Thomas A. Stout Regional Vice President None
12913 Kendale Lane
Bowie, MD 20715
Craig R. Strauser Regional Vice President None
17040 Summer Place
Lake Oswego, OR 97035
Francis N. Strazzeri Regional Vice President None
31641 Saddletree Drive
Westlake Village, CA 91361
L Drew Taylor Assistant Vice President None
S James P. Toomey Assistant Vice President None
I Christopher E. Trede Assistant Vice President None
George F. Truesdail Vice President None
400 Abbotsford Court
Charlotte, NC 28270
Scott W. Ursin-Smith Regional Vice President None
606 Glenwood Avenue
Mill Valley, CA 94941
L David M. Ward Assistant Vice President - None
Institutional Investment
Services Division
Thomas E. Warren Regional Vice President None
4001 Crockers Lake Blvd., #1012
Sarasota, FL 34238
L J. Kelly Webb Senior Vice President None
Gregory J. Weimer Vice President None
125 Surrey Drive
Canonsburg, PA 15317
B Timothy W. Weiss Director None
SF N. Dexter Williams Vice President None
Timothy J. Wilson Regional Vice President None
113 Farmview Place
Venetia, PA 15367
B Laura Wimberly Assistant Vice President None
H Marshall D. Wingo Director, Senior Vice President None
L Robert L. Winston Director, Senior Vice President None
William R. Yost Regional Vice President None
9320 Overlook Trail
Eden Prairie, MN 55347
Janet M. Young Regional Vice President None
1616 Vermont
Houston, TX 77006
Scott D. Zambon Regional Vice President None
209 Robinson Drive
Tustin Ranch, CA 92782
</TABLE>
L Business Address, 333 South Hope Street, Los Angeles, CA 90071
SF Business Address, One Market Plaza, Steuart Towers, Suite 1800,
San Francisco, CA 94111
B Business Address, 135 South State College Boulevard, Brea, CA 92821
S Business Address, 8000 IH-10 West, Suite 1400, San Antonio, TX 78230
H Business Address, 5300 Robin Hood Road, Norfolk, VA 23513
I Business Address, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other records required by Rules 31a-1 and 31a-2 under
the Investment Company Act of 1940, as amended, are maintained and kept in the
offices of the Fund and its investment adviser, Capital Research and Management
Company, 333 South Hope Street, Los Angeles, CA 90071. Certain accounting
records are maintained and kept in the offices of the Fund's accounting
department, 135 South State College Blvd., Brea, CA 92821.
Records covering shareholder accounts are maintained and kept by the
transfer agent, American Funds Service Company, 135 South State College Blvd.,
Brea, CA 92621, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240, 8000
IH-10 West, Suite 1400, San Antonio, TX 78230 and 5300 Robin Hood Road,
Norfolk, VA 23514.
Records covering portfolio transactions are also maintained and kept by
the custodian, The Chase Manhattan Bank, One Chase Manhattan Plaza, New York,
NY 10081.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
(c) As reflected in the prospectus, the fund undertakes to provide each
person to whom a prospectus is delivered with a copy of the fund's latest
annual report to shareholders, upon request and without charge.
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, and State of California, on the
27th day of December, 1996.
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
By /s/ Paul G. Haaga, Jr.
(Paul G. Haaga, Jr., Chairman of the Board)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed below on December 27, 1996, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
(1) Principal Executive Officer:
/s/ Abner D. Goldstine President and Trustee
(Abner D. Goldstine)
(2) Principal Financial Officer and
Principal Accounting Officer:
/s/ Anthony W. Hynes, Jr. Treasurer
(Anthony W. Hynes, Jr.)
(3) Trustees:
H. Frederick Christie* Trustee
Diane C. Creel* Trustee
Martin Fenton, Jr.* Trustee
Leonard R. Fuller* Trustee
/s/ Abner D. Goldstine President and Trustee
(Abner D. Goldstine)
/s/ Paul G. Haaga, Jr. Chairman of the Board
(Paul G. Haaga, Jr.)
Herbert Hoover III* Trustee
Richard G. Newman* Trustee
Peter C. Valli* Trustee
</TABLE>
*By /s/ Julie F. Williams
Julie F. Williams, Attorney-in-Fact
Counsel represents that this amendment does not contain disclosures that
would make the amendment ineligible for effectiveness under the provisions of
Rule 485(b).
/s/ Michael J. Downer
Michael J. Downer
C-14
CONSENT OF INDEPENDENT AUDITORS
The American Funds Tax-Exempt Series II - The Tax Exempt Fund of California
We consent to (a) the use in this Post-Effective Amendment No. 14 to
Registration Statement No. 33-6180 on Form N-1A of our report dated September
27, 1996 appearing in the Financial Statements, which are included in Part B,
the Statement of Additional Information of such Registration Statement, (b) the
references to us under the heading "General Information" in such Statement of
Additional Information and (c) the reference to us under the heading "Financial
Highlights" in the Prospectus, which is a part of such Registration Statement.
Deloitte & Touche LLP
December 23, 1996
Los Angeles, California
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-1-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 237,989
<INVESTMENTS-AT-VALUE> 249,742
<RECEIVABLES> 3,678
<ASSETS-OTHER> 28
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 253,448
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 916
<TOTAL-LIABILITIES> 916
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,446
<SHARES-COMMON-STOCK> 16,001,073
<SHARES-COMMON-PRIOR> 14,810,189
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,330
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,753
<NET-ASSETS> 252,532
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,791
<OTHER-INCOME> 0
<EXPENSES-NET> 1,807
<NET-INVESTMENT-INCOME> 12,984
<REALIZED-GAINS-CURRENT> 1,373
<APPREC-INCREASE-CURRENT> (944)
<NET-CHANGE-FROM-OPS> 13,413
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 12,978
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,016,709
<NUMBER-OF-SHARES-REDEEMED> 2,264,964
<SHARES-REINVESTED> 439,139
<NET-CHANGE-IN-ASSETS> 19,417
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,018
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,807
<AVERAGE-NET-ASSETS> 247,251
<PER-SHARE-NAV-BEGIN> 15.74
<PER-SHARE-NII> .84
<PER-SHARE-GAIN-APPREC> .04
<PER-SHARE-DIVIDEND> .84
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.78
<EXPENSE-RATIO> .007
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
