THE AMERICAN FUNDS TAX-EXEMPT SERIES II
THE TAX-EXEMPT FUND OF CALIFORNIA
Part B
Statement of Additional Information
NOVEMBER 1, 1995
(AS AMENDED MARCH 1, 1996)
This document is not a prospectus but should be read in conjunction with
the current Prospectus dated November 1, 1995 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
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ITEM PAGE
NO.
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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 21
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES 23
EXECUTION OF PORTFOLIO TRANSACTIONS 24
GENERAL INFORMATION 24
INVESTMENT RESULTS 26
DESCRIPTION OF RATINGS FOR DEBT SECURITIES 28
FINANCIAL STATEMENTS ATTACHED
</TABLE>
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
INVESTMENT POLICIES -- Up to 20% of the fund's total assets may be invested in
tax-exempt securities that are rated below the four highest categories by
Standard & Poor's Corporation ("S&P") or by Moody's Investors Service, Inc.
("Moody's) (or equivalent securities that are not rated). These bonds are
commonly known as "junk bonds" or high-yield, high-risk bonds. See
"Description of Ratings for Debt Securities" below.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk bonds
can be sensitive to adverse economic changes and corporate/political
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers or issuers whose revenue is very
sensitive to economic conditions may experience financial stress that would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay
interest or principal or entered into bankruptcy proceedings, the fund may
incur losses or expenses in seeking recovery of amounts owed to it. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices and yields of high-yield, high-risk
bonds.
PAYMENT EXPECTATIONS - High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining
interest rate market, the fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high-yield, high-risk bond's value will decrease in a rising interest rate
market, as will the value of the fund's assets.
LIQUIDITY AND VALUATION - There may be little trading in the secondary market
for particular bonds, which may affect adversely the fund's ability to value
accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
Subsequent to its purchase by the fund, an issue of municipal bonds or
notes may cease to be rated or its rating may be reduced below the minimum
rating required for its purchase. Neither event requires the elimination of
such obligation from 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 generally debt obligations 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).
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS - The fund may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions whereby the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
The fund as purchaser assumes the risk of any decline in value of the security
beginning on the date of the agreement or purchase. As the fund's aggregate
commitments under these transactions increase, the opportunity for leverage
similarly may increase.
The fund will not use these transactions for leveraging purposes, and will
identify liquid assets such as cash, U.S. Government securities or other
appropriate high-grade debt obligations 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 holdings of cash and securities
that do not fluctuate in value (such as short-term money market instruments),
the fund temporarily will be in a leveraged position (in other words, it will
have an amount greater than its net assets subject to market risk). Should the
fund be in a leveraged position during a period of declining bond prices,
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 the fund buys a security and obtains a simultaneous
commitment from the seller to repurchase the security at a specified time and
price. Repurchase agreements permit the fund to maintain liquidity and earn
income over periods of time as short as overnight. The seller must maintain
with the fund's custodian collateral equal to at least 100% of the repurchase
price including accrued interest, as monitored daily by the Investment Adviser.
The fund will only enter into repurchase agreements involving securities in
which it could otherwise invest and with selected banks and securities dealers
whose financial condition is monitored by the Investment Adviser. If the
seller under the repurchase agreement defaults, the fund may incur a loss if
the value of the collateral securing the repurchase agreement has declined and
may incur disposition costs in connection with liquidating the collateral. If
bankruptcy proceedings are commenced with respect to the seller, realization
upon the collateral by the fund may be delayed or limited.
PORTFOLIO MANAGEMENT -- In seeking to achieve the fund's objectives, the
Investment Adviser causes the fund to purchase securities which it believes
represent the best values then currently available in the marketplace. Such
values are a function of yield, maturity, issue classification and quality
characteristics, coupled with expectations regarding the economy, movements in
the general level and term structure of interest rates, political developments,
and variations in the supply of funds available for investment in the
tax-exempt market relative to the demand for the funds placed upon it. These
latter factors change continuously and should be met with a dynamic, responsive
approach to the investment process. Some of the more important portfolio
management techniques that are utilized by the Investment Adviser are set forth
below.
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 eight 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.
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
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 WITH PRINCIPAL OCCUPATION(S) AGGREGATE TOTAL COMPENSATION .3 TOTAL NUMBER
REGISTRANT DURING PAST 5 YEARS COMPENSATION FROM ALL FUNDS OF FUND BOARDS
(POSITIONS WITHIN THE (INCLUDING MANAGED BY CAPITAL ON WHICH
ORGANIZATIONS LISTED MAY VOLUNTARILY DEFERRED RESEARCH AND TRUSTEE SERVES/2/
HAVE CHANGED DURING THIS COMPENSATION/1/) FROM MANAGEMENT
PERIOD) THE COMPANY DURING COMPANY/2/
FISCAL YEAR ENDED
AUGUST 31, 1995
<S> <C> <C> <C> <C> <C>
++ H. Frederick Christie Trustee Private Investor. The Mission Group $2,309/3/ $136,600 18
P.O. Box 144 (non-utility holding Company,
Palos Verdes Estates, CA 90274 subsidiary of Southern California
Age: 62 Edison Company), former President
and Chief Executive Officer
Diane C. Creel Trustee Chairwoman, CEO and President, $2,256 $30,675 12
100 W. Broadway The Earth Technology Corporation
Suite 5000
Long Beach, CA 90802
Age: 46
Martin Fenton, Jr. Trustee Chairman, Senior Resource Group $2,722/3/ $102,700 16
4350 Executive Drive (management of senior living
Suite 101 centers)
San Diego, CA 92121-2116
Age: 60
Leonard R. Fuller Trustee President, Fuller & Company, Inc. $2,111 $31,575 12
4337 Marina City Drive (financial management consulting
Suite 841 ETN firm)
Marina del Rey, CA 90292
Age: 48
+* Abner D. Goldstine President, Capital Research and Management none/4/ none/4/ 12
Age: 65 PEO and Company, Senior Vice President
Trustee and Director
+** Paul G. Haaga, Jr. Chairman of Capital Research and Management none/4/ none/4/ 14
Age: 46 the Board Company, Senior Vice President
and Director
Herbert Hoover III Trustee Private Investor $2,127 $60,050 14
200 S. Los Robles Avenue
Suite 520
Pasadena, CA 91101-2431
Age: 67
Richard G. Newman Trustee Chairman, President and CEO, $2,741/3/ $39,050 12
3250 Wilshire Boulevard AECOM Technology Corporation
Los Angeles, CA 90010-1599 (architectural engineering)
Age: 60
Peter Valli Trustee Chairman and CEO, BW/IP $2,450/3/ $37,050 12
200 Oceangate Boulevard International Inc. (industrial
Suite 900 manufacturing)
Long Beach, CA 90802
Age: 68
</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 ($724), Martin Fenton, Jr. ($5,807),
Richard G. Newman ($6,373) and Peter C. Valli ($5,610).
/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. Cremin, VICE PRESIDENT AND TREASURER. 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
* Kimberly S. Verdick, ASSISTANT SECRETARY. Capital Research and Management
Company, Assistant Vice President - Fund Business Management Group
** Nymia M. Cucueco, ASSISTANT TREASURER. Capital Research and Management
Company,
Vice President - Fund Business Management Group
** Anthony W. Hynes, Jr., ASSISTANT TREASURER. Capital Research and Management
Company, 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 92621.
*** 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
$1,200 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 October 1, 1995, 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.
As of October 1, 1995, the following shareholder owned 5% or more of the
fund's outstanding shares: Don Valentine - 5.62%.
MANAGEMENT
INVESTMENT ADVISER - The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad, with a staff of professionals, many
of whom have years of investment experience. 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.
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 serve 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, 1996, unless sooner terminated, and may be
renewed from year to year thereafter, provided that any such renewal has been
specifically approved at least annually as to a fund by (i) the Board of
Trustees, or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the fund, and (ii) the vote of a majority of
Trustees who are not parties to the 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).
Subject to the expense limitation described below, the fund pays all
expenses not specifically assumed by the Investment Adviser, including, but not
limited to, registration and filing fees with federal and state agencies; blue
sky expenses; expenses of shareholders' meetings; the expense of reports to
existing shareholders; expenses of printing proxies and prospectuses; insurance
premiums; legal and auditing fees; dividend disbursement expenses; the expense
of the issuance transfer, and redemption of its shares; custodian fees;
printing and preparation of registration statements; taxes; the fund's
distribution expenses pursuant to the Plan of Distribution; compensation, fees
and expenses paid to Trustees unaffiliated with the Investment Adviser;
association dues; and costs of stationery, forms and certificates 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.
Only one state (California) continues to impose expense limitations on funds
registered for sale therein. The California provision currently limits annual
expenses to the sum of 2-1/2% of the first $30 million of average net assets,
2% of the next $70 million and 1-1/2% of the remaining average net assets.
Expenses pursuant to the fund's Plan of Distribution are excluded from this
limit. Other expenses which are not subject to this limit include interest,
taxes, brokerage commissions, transaction costs, and extraordinary items such
as litigation and any amounts excludable under the applicable regulation.
Expenditures, including costs incurred in connection with the purchase or sale
of portfolio securities, which are capitalized in accordance with generally
accepted accounting principles applicable to investment companies, are
accounted for as capital items and not as expenses.
During the fiscal years ended August 31, 1995, 1994, and 1993, the
Investment Adviser's total fees amounted to $943,000, $931,000, and $758,000,
respectively.
PRINCIPAL UNDERWRITER - American Funds Distributors, Inc. (the "Principal
Underwriter") is the Trust's principal underwriter. The Trust has adopted a
Plan of Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act
(see "Principal Underwriter" in the Prospectus). The Principal Underwriter
receives amounts payable pursuant to the Plan (see below) and commissions
consisting of that portion of the sales charge remaining after the discounts
which it allows to investment dealers. Commissions retained by the Principal
Underwriter on sales of fund shares during the fiscal year ended August 31,
1995 amounted to $100,000 after allowance of $400,000 to dealers. During the
fiscal years ended August 31, 1994 and 1993 the Principal Underwriter retained
$167,000 and 203,000, respectively.
As required by rule 12b-1, the Plan (together with the Principal
Underwriting Agreement) has been approved by the full Board of Trustees and
separately by a majority of the Trustees who are not "interested persons" of
the fund and who have no direct or indirect financial interest in the operation
of the Plan or the Principal Underwriting Agreement, and the Plan has been
approved by the vote of a majority of the outstanding voting securities of the
fund. The officers and Trustees who are "interested persons" of the Trust may
be considered to have a direct or indirect financial interest in the operation
of the Plan due to present or past affiliations with the investment adviser and
related companies. Potential benefits of the plan to the fund are improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Trustees who
are not "interested persons" of the Trust shall be committed to the discretion
of the Trustees who are not "interested persons" during the existence of the
Plan. The Plan 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, 1995, the fund paid or accrued
$409,000 under the Plan as compensation to dealers. As of August 31, 1995,
accrued and unpaid distribution expenses were $97,000.
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 with 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
DIVIDENDS AND DISTRIBUTIONS - For the purpose of calculating dividends, daily
net investment income of the fund consists of: (a) all interest income accrued
on the fund's investments including any discount or premium ratably amortized
to the date of maturity or determined in such other manner as may be deemed
appropriate; minus (b) all liabilities accrued, including interest, taxes and
other expense items, amounts determined and declared as dividends or
distributions and reserves for contingent or undetermined liabilities, all
determined in accordance with generally accepted accounting principles.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December and made payable
to shareholders of record in such a month are treated as paid and are thereby
taxable as of December 31, provided that the fund pays the dividend no later
than the end of January of the following year.
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 industrial development bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in 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 the
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 shall 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
will be subject to tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions
would be taxable to shareholders to the extent of earnings and profits, and may
be eligible for the dividends-received deduction for corporations. Under
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 during tax years beginning on or after January 1, 1987.
Under the Code, distributions of net investment income by the Funds 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
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. The dealer is responsible for promptly transmitting purchase
orders to the Principal Underwriter. Orders received by the investment dealer,
the Transfer Agent, or the fund after the time of the determination of the net
asset value will be entered at the next calculated offering price. Prices
which appear in the newspaper are not always indicative of prices at which you
will be purchasing and redeeming shares of the fund, since such prices
generally reflect the previous day's closing price whereas purchases and
redemptions are made at the next calculated price.
The price you pay for shares, the public offering price, is based on the
net asset value per share which is calculated once daily at the close of
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, the liabilities,
including accruals of taxes and other expense items; and
3. The net assets so obtained are then divided by the total number of shares
outstanding and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
Trust. The Trust will not knowingly sell fund shares (other than for the
reinvestment of dividends or capital gain distributions) directly or indirectly
or through a unit investment trust to any other investment company, person or
entity, where, after the sale, such investment company, person, or entity would
own beneficially directly, indirectly, or through a unit investment trust more
than 4.5% of the outstanding shares of the fund without the consent of a
majority of the Board of Trustees.
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
are added to the figure determined above. The sum is the Statement amount and
applicable breakpoint level. On the first investment and all other investments
made pursuant to the Statement, a sales charge will be assessed according to
the sales charge breakpoint thus determined. There will be no retroactive
adjustments in sales charges on investments previously made during the 13-month
period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
DEALER COMMISSIONS - The following commissions will be paid, as described in
the prospectus, 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: 1.00% 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. See "The American Funds Shareholder Guide" in the fund's
Prospectus for more information.
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 10th day of the month (or on or about the
15th day of the month in the case of retirement plan accounts.) 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 showing the current transaction. 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 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).
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 underwriting, for the fiscal year ended August 31, 1995 amounted
to $125,000.
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, N.A., One Chase Manhattan Plaza, New
York, NY 10081, as Custodian.
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 annually by the Trust's independent
auditors, whose selection is determined annually by the 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:
<TABLE>
<CAPTION>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE -- AUGUST 31, 1995
<S> <C>
Net asset value and redemption price per share
(Net assets divided by shares outstanding) $15.74
Offering price per share (100/95.25 of per share
net asset value, which takes into account the $16.52
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 4.73% based on a 30-day (or one month) period ended
August 31, 1995, 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 46.24% for the 30-day
(or one month) period ended August 31, 1995 was 8.80%.
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, 1995
were 3.01%, 7.51% and 6.51%, 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 74.6%.
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
<TABLE>
<CAPTION>
... 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, 1995
<S> <C> <C>
| |
Periods
Number of Years 9/1-8/31 Value
1 1994 - 1995 $ 10,301
2 1993 - 1995 10,317
3 1992 - 1995 11,664
4 1991 - 1995 12,872
5 1990 - 1995 14,364
6 1989 - 1995 14,926
7 1988 - 1995 16,484
8 1987 - 1995 17,398
9 1986*- 1995 17,461
</TABLE>
ILLUSTRATION OF A $10,000 INVESTMENT IN THE FUND WITH DIVIDENDS REINVESTED
(For the lifetime of the Fund October 28, 1986 through August 31, 1995)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
</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 during which those funds were managed by Capital Research and
Management Company since 1964 (115 in all), those funds have had better total
returns than the Standard and Poor's 500 Stock Composite Index in 94 of the 115
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."
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, August 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
<S> <C> <C>
Tax-Exempt Securities Maturing in More than
One Year - 95.27%
Various Purpose General Obligation Bond, 7.00% 2005 $1,000 $1,144
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 8,400 7,927
Kaiser Permanente Medical Care Program, Semi-annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2,000 1,811
Pacific Presbyterian Medical Center Insured Variable
Rate Demand, 1985 Series B, 6.75% 2015 1,750 1,804
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1,250 1,387
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4,000 4,516
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1,150 1,128
Housing Finance Agency, Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 591
1991 Series G, 6.95% 2011 1,490 1,568
1995 Series G, 5.65% 2025 1,000 1,007
1995 Series K, 5.55% 2021 2,500 2,524
Pollution Control Financing Authority:
Pollution Control Revenue Bonds:
(Pacific Gas and Electric Company), 1993 Series B,
5.85% 2023 1,000 963
(Southern California Edison Company), 1992 Series B,
6.40% 2024 1,500 1,522
Solid Waste Revenue Bonds (Keller Canyon Landfill
Company Project), Series 1992, 6.875% 2027 5,200 5,424
Public Works Board, Lease Revenue Bonds:
(California Community Colleges, Various Community
College Projects), 1994 Series B, 6.75% 2005 1,000 1,095
The Regents of the University of California,
1993 Series A (Various University of California
Projects), 5.50% 2021 1,000 902
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program), 1995 Series B, 7.75% 2026/1/ 1,500 1,667
Statewide Communities Development Authority:
Hospital Revenue Certificates of Participation,
Cedar-Sinai Medical Center, Series 1992, 6.50% 2012 1,900 1,988
Sisters of Charity of Leavenworth Health Services
Corporation, Certificates of Participation,
Series 1994, 5.00% 2023 2,000 1,684
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3,000 2,800
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 544
Series H, 6.90% 2025 (Prerefunded 2000) 2,000 2,243
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured:
5.375% 2009 1,500 1,468
5.00% 2023 1,000 890
City of Berkeley, Health Facility Refunding Revenue
Bonds (Alta Bates Medical Center), 1992 Series A,
6.50% 2011 3,020 3,034
Castaic Lake Water Agency, Refunding Revenue
Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A:
7.25% 2007 500 587
7.25% 2010 1,400 1,655
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
1993 Series:
6.10% 2013 3,500 3,407
6.20% 2020 6,500 6,245
Culver City Redevelopment Financing Authority, 1993
Tax Allocation Refunding Revenue Bonds, AMBAC
Insured, 5.00% 2023 2,500 2,165
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A:
6.00% 2016 1,500 1,426
6.00% 2034 3,000 2,746
5.00% 2035 1,000 784
City of Long Beach, Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 774
Department of Airports of the City of Los Angeles,
1989 Series B, 7.40% 2010 1,000 1,074
Los Angeles Convention and Exhibition Center
Authority, Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2,500 2,821
7.00% 2020 (Prerefunded 1999) 2,000 2,230
Harbor Department of the City of Los Angeles, Revenue
Bonds:
Issue 1988, 7.60% 2018 1,750 1,978
Issue 1995, 6.625% 2025 4,750 4,952
City of Los Angeles, Waste Water System Revenue Bonds:
Series 1987, 8.125% 2017 (Prerefunded 1997) 1,500 1,661
Series 1990-B, 7.15% 2020 (Prerefunded 2000) 1,000 1,129
Department of Water and Power of the City of Los
Angeles:
Electric Plant Revenue Bonds, Issue of 1990,
7.125% 2030 2,500 2,800
Water Works Refunding Revenue Bonds:
Issue of 1989, 7.00% 2022 1,000 1,095
Issue of 1986, 7.375% 2022 1,000 1,067
County of Los Angeles, Certificates of Participation
(Marina del Rey), Series A:
6.25% 2003 4,635 4,567
6.50% 2008 6,000 6,012
Los Angeles County Metropolitan Transportation
Authority, Proposition C Sales Tax Revenue Bonds,
Second Senior Bonds, Series 1995-A, AMBAC Insured,
5.90% 2008 1,030 1,074
County of Los Angeles, Pension Obligation
Certificates, Series A, 6.875% 2006 1,000 1,033
Los Angeles County Public Works Financing Authority,
Lease Revenue Bonds (Multiple Capital Facilities
Project IV), MBIA Insured, 5.00% 2008 2,410 2,322
Los Angeles State Building Authority:
Lease Revenue Bonds (State of California Department
of General Services Lease), Series 1988 A,
7.50% 2011 (Prerefunded 1998) 3,500 3,853
Lease Revenue Refunding Bonds (State of California
Department of General Services Lease), 1993
Series A, 5.50% 2007 2,000 1,968
Los Angeles County Transportation Commission, Sales
Tax Revenue Bonds:
Series 1989, 7.00% 2019 2,250 2,424
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2,500 2,837
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1,000 948
The Metropolitan Water District of Southern
California, Waterworks Refunding Revenue Bonds,
Issue of 1986:
6.75% 2022 610 630
6.75% 2022 (Prerefunded 1996) 390 406
Northern California Public Power Agency,
Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 4,725 4,759
City of Oakland, Special Refunding Revenue Bonds
(Pension Financing), 1988 Series A, FGIC Insured,
7.60% 2021 1,000 1,111
Port of Oakland, Revenue Bonds:
1989 Series B, BIG Insured, 7.25% 2016 3,125 3,339
1992 Series E, MBIA Insured, 6.40% 2022 4,670 4,783
County of Orange, Airport Revenue Refunding Bonds,
Series 1993, MBIA Insured:
5.25% 2007 1,500 1,442
5.25% 2008 500 474
5.50% 2013 1,000 922
County of Orange (Aliso Viejo), Special Tax Bonds of
Community Facilities District No. 88-1, Series A of
1992:
7.25% 2008 (Prerefunded 2002) 1,500 1,746
7.35% 2018 (Prerefunded 2002) 4,250 5,023
Orange County Local Transportation Authority, First
Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1,000 1,039
MBIA Insured, 6.00% 2009 1,500 1,535
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1,565 1,586
6.65% 2003 1,320 1,343
6.85% 2005 2,715 2,745
7.00% 2006 1,310 1,325
7.25% 2013 2,000 2,012
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1,000 1,133
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2,195 2,022
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.40% 1999 1,000 1,006
5.60% 2000 1,940 1,951
5.70% 2001 3,980 4,014
6.15% 2012 3,900 3,876
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4,000 3,298
5.00% 2023 2,000 1,612
Riverside County Transportation Commission, Sales Tax
Revenue Bonds (Limited Tax), 1991 Series A,
6.40% 1999 500 532
County of Sacramento, Single Family Mortgage Revenue
Bonds (GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1,500 2,053
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds (Proctor & Gamble Project),
1995 Series:
6.00% 2003 700 702
7.00% 2005 1,700 1,854
6.50% 2014 1,000 1,012
6.375% 2010 3,500 3,550
6.50% 2021 4,000 3,985
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5,500 6,283
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2,000 2,192
City of San Bernardino, SCH Health Care System Revenue
Bonds (Sisters of Charity of the Incarnate Word,
Houston, Texas), Series 1991 A, 7.00% 2021 2,435 2,622
County of San Diego, The San Diego Regional Building
Authority, Certificates of Participation (1991 MTS
Tower Refunding Project), MBIA Insured, 6.223% 2019 1,000 1,015
City and County of San Francisco, General Purpose
Sewer Revenue Bonds, Series 1988 A, AMBAC Insured,
7.25% 2015 (Prerefunded 1997) 3,320 3,592
City and County of San Francisco Redevelopment Agency,
Lease Revenue Bonds, Series 1992 (George R. Moscone
Convention Center), 5.50% 2018 4,560 4,101
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 1,000 997
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds:
6.75% 2032 3,000 3,031
5.00% 2033 1,000 782
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1,000 1,055
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2,200 2,703
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1,120 1,147
Southern California Public Power Authority,
1986 Refunding Series B, Palo Verde Project, 7.125%
2015 (Prerefunded 1996) 1,500 1,573
The Regents of the University of California:
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1,250 1,400
Government of Guam, General Obligation Bonds, 1995
Series A, 4.90% 1997/2/ 1,500 1,509
---------
222,087
---------
Tax-Exempt Securities Maturing in
One Year or Less - 4.06%
Pollution Control Financing Authority, Variable Rate
Resource Recovery Revenue Bonds (Atlantic Richfield
Company Project), Series 1994A, 3.65% 12/1/24/3/ 500 500
County of Los Angeles, 1995-96 Tax and Revenue
Notes, Series A, 4.50% 7/1/96 5,200 5,222
State of California, 1994 Revenue Anticipation
Warrants, Series C, FGIC Insured 5.75% 4/25/96 3,700 3,745
---------
9,467
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$218,857,000) 231,554
Excess of cash and receivables over payables 1,561
---------
NET ASSETS $233,115
=========
</TABLE>
/1/Represents a when-issued security.
/2/Interest payments on bonds issued by the governments of U.S. territories,
including Guam, the U.S. Virgin Islands and Puerto Rico, are free of state and
federal taxes.
/3/Coupon rate changes periodically.
See Notes to Financial Statements
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
<S> <C> <C>
August 31, 1995 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $218,857) $231,554
Cash 621
Receivables for-
Sales of fund's shares $ 55
Accrued interest 3,380 3,435
--------- ---------
235,610
Liabilities:
Payables for-
Purchases of investments 1,653
Repurchases of fund's shares 109
Dividends payable 509
Management services 82
Accrued expense 142 2,495
--------- ---------
Net Assets at August 31, 1995-
Equivalent to $15.74 per share on
14,810,189 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $233,115
=========
Statement of Operations
for the year ended August 31, 1995
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $14,168
---------
Expenses:
Management services fee $943
Distribution expenses 409
Transfer agent fee 59
Reports to shareholders 62
Registration statement and prospectus 9
Postage, stationery and supplies 21
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 12
Taxes (other than federal income tax) 4
Other expenses 43 1,619
--------- ---------
Net investment income 12,549
---------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 871
Net unrealized appreciation:
Beginning of year 9,064
End of year 12,697
---------
Net change in unrealized appreciation 3,633
---------
Net realized gain and change in
unrealized appreciation on investments 4,504
---------
Net Increase in Net Assets Resulting
from Operations $17,053
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31,
1995 1994
--------- ---------
Operations:
Net investment income $ 12,549 $ 11,900
Net realized gain (loss) on investments 871 (875)
Net change in unrealized appreciation
on investments 3,633 (11,274)
--------- ---------
Net increase (decrease) in net assets
resulting from operations 17,053 (249)
--------- ---------
Dividends and Distributions Paid to
Shareholders:
Dividend from net investment income (12,552) (11,899)
Distributions from net realized gain
on investments - (851)
--------- ---------
Total dividends and distributions (12,552) (12,750)
--------- ---------
Capital Share Transactions:
Proceeds from shares sold:
2,513,117 and 3,510,938
shares, respectively 38,225 55,665
Proceeds from shares issued in reinvestment
of net investment income dividends and
distributions of net realized gain on
investments: 498,341 and 527,612 shares,
respectively 7,598 8,349
Cost of shares repurchased:
2,849,307 and 3,079,542 shares,
respectively (42,819) (48,523)
--------- ---------
Net increase in net assets
resulting from capital share transactions 3,004 15,491
--------- ---------
Total Increase in Net Assets 7,505 2,492
Net Assets:
Beginning of year 225,610 223,118
--------- ---------
End of year $233,115 $225,610
========= =========
</TABLE>
See Notes to Financial Statements
Notes to Financial Statements
1. The American Funds Tax-Exempt Series II (the "trust") is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company and has initially issued one series of shares,
The Tax-Exempt Fund of California (the "fund"). The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Tax-exempt securities with original or remaining maturities in excess of
60 days are valued at prices obtained from a national municipal bond pricing
service. The pricing service takes into account various factors such as
quality, yield and maturity of tax-exempt securities comparable to those held
by the fund, as well as actual bid and asked prices on a particular day. Other
securities with original or remaining maturities in excess of 60 days,
including securities for which pricing service values are not available, are
valued at the mean of their quoted bid and asked prices. However, in
circumstances where the investment adviser deems it appropriate to do so,
securities will be valued at the mean of their representative quoted bid and
asked prices, or, if such prices are not available, at the mean of such prices
for securities of comparable maturity, quality and type. All securities with
60 days or less to maturity are valued at amortized cost which approximates
market value. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Valuation Committee
of the Board of Trustees.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Interest income is reported on the accrual basis. Premiums and
original issue discounts on securities purchased are amortized over the life of
the respective securities. Dividends are declared on a daily basis after
determination of the fund's net investment income and paid to shareholders on a
monthly basis.
Pursuant to the custodian agreement, the fund may receive credit against
its custodian fee for imputed interest on certain balances with the custodian
bank. The custodian fee of $12,000 includes $3,000 that was paid by the
credits rather than in cash.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision
is required.
As of August 31, 1995, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $12,697,000, of which $13,408,000
related to appreciated securities and $711,000 related to depreciated
securities.
During the year ended August 31, 1995, the fund realized, on a tax basis, a net
capital gain of $871,000 on securities transactions. The fund has available at
August 31, 1995, a net capital loss carryforward totaling $43,000, which may be
used to offset capital gains realized during subsequent years through 2002 and
thereby relieve the fund and its shareholders of any federal income tax
liability with respect to capital gains that are so offset. It is the
intention of the fund not to make distributions from capital gains while there
is a capital loss carryforward. There was no difference between book
and tax realized gains on securities transactions for the year ended August 31,
1995. The cost of portfolio securities for book and federal income tax purposes
was $218,857,000 at August 31, 1995.
3. The fee of $943,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million; and 3.00% of the fund's monthly
gross investment income.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended August 31, 1995,
distribution expenses under the Plan were $409,000. As of August 31, 1995,
accrued and unpaid distribution expenses were $97,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $59,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $100,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees of the fund who are unaffiliated with CRMC may elect to defer
part or all of the fees earned for services as members of the Board. Amounts
deferred are not funded and are general unsecured liabilities of the fund. As
of August 31, 1995, aggregate amounts deferred were $16,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the trust
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of August 31, 1995, accumulated undistributed net realized loss on
investments was $43,000 and paid-in capital was $220,461,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $93,716,000 and $87,514,000, respectively, during the
year ended August 31, 1995.
Per-Share Data and Ratios
<TABLE>
<CAPTION>
Year ended August 31
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $15.40 $16.30 $15.21 $14.59 $13.87 $14.16
------- ------- ------- ------ ------- -------
-
Income from Investment
Operations:
Net investment income .86 .84 .84 .85 .85 .84
Net realized and
unrealized gain
(loss) on investments .34 (.84) 1.09 .62 .72 (.29)
------- ------- ------- ------ ------- -------
-
Total income from
investment operations 1.20 .00 1.93 1.47 1.57 .55
------- ------- ------- ------ ------- -------
-
Less Distributions:
Dividends from net
investment income (.86) (.84) (.84) (.85) (.85) (.84)
Distributions from net
realized gains - (.06) - - - -
------- ------- ------- ------ ------- -------
-
Total distributions (.86) (.90) (.84) (.85) (.85) (.84)
------- ------- ------- ------ ------- -------
-
Net Asset Value, End of Year $15.74 $15.40 $16.30 $15.21 $14.59 $13.87
======= ======= ======= ====== ======= =======
=
Total Return* 8.16% 0.13% 13.08% 10.36% 11.56% 3.96%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $233 $226 $223 $148 $111 $86
Ratio of expenses to average
net assets .73% .71% .71% .74% .85% .93%
Ratio of net income to
average net assets 5.65% 5.28% 5.36% 5.66% 5.89% 5.92%
Portfolio turnover rate 41.36% 15.08% 16.82% 33.72% 20.20%
20.28%
</TABLE>
*This was calculated without deducting a sales charge. The maximum sales
charge is 4.75% of the fund's offering price.
Independent Auditors' Report
To the Board of Trustees of the American Funds
Tax-Exempt Series II and Shareholders of
The Tax-Exempt Fund Of California:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of The American Funds Tax-Exempt Series II
- -- The Tax-Exempt Fund of California, as of August 31, 1995, the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the selected
per-share data and ratios for each of the five years in the period then ended.
These financial statements and the per-share data and ratios are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statement and selected per-share data and ratios
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and selected
per-share data and ratios are fee of material misstatement. An audit included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at August 31, 1995, by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. an audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The American Funds Tax-Exempt Series II -- The Tax-Exempt Fund of
California at August 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the per-share data and ratios for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 22, 1995
Tax Information (unaudited)
We are required to advise you within 60 days of the fund/s fiscal year-end
regarding the federal tax status of distributions received by shareholders
during the fiscal year.
Shareholders may exclude from federal taxable income any exempt-interest
dividends paid from net investment income. All of the dividends paid from net
investment income qualify as exempt-interest dividends.
SINCE THE ABOVE IS REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE CALENDAR
YEAR, SHAREHOLDERS SHOULD REFER TO THE YEAR-END INFORMATION WHICH WILL BE
MAILED IN JANUARY, 1996 TO DETERMINE THE CALENDAR YEAR STATUS OF THE FUND'S
DISTRIBUTIONS FOR PURPOSES OF THEIR 1995 TAX RETURNS. SHAREHOLDERS SHOULD
CONSULT THEIR TAX ADVISORS.
