THE TAX-EXEMPT FUND OF CALIFORNIA
ANNUAL REPORT for the year ended August 31, 1996
[The American Funds Group(R)]
[Photo collage: Outline of state of California superimposed over photos of
hibiscus flower, redwood trees, ocean]
ABOUT OUR COVER: California's diversity of natural beauty symbolizes the
breadth of opportunity that has long drawn people to the Golden State from
around the world.
THE TAX-EXEMPT FUND OF CALIFORNIA(SM) SEEKS A HIGH LEVEL OF CURRENT INCOME FREE
FROM FEDERAL AND CALIFORNIA INCOME TAXES, WITH THE ADDITIONAL OBJECTIVE OF
PRESERVATION OF CAPITAL.
THE FUND INVESTS IN TAX-EXEMPT SECURITIES ISSUED BY THE STATE OF
CALIFORNIA, ITS POLITICAL SUBDIVISIONS, MUNICIPALITIES AND PUBLIC AUTHORITIES
TO FUND PROJECTS SUCH AS HIGHWAY IMPROVEMENTS, WATER AND POWER, POLLUTION
CONTROL AND AIRPORT MODERNIZATION.
THE FUND GIVES CALIFORNIA RESIDENTS AN OPPORTUNITY TO EARN DOUBLE TAX-FREE
INCOME THROUGH A DIVERSIFIED PORTFOLIO OF MUNICIPAL BONDS MANAGED BY PROVEN
PROFESSIONALS.
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of September 30, 1996,
calculated in accordance with the Securities and Exchange Commission formula,
was 4.94%. The fund's distribution rate as of that date was 5.12%. The SEC
yield reflects income the fund expects to earn based on its current portfolio
of securities, while the distribution rate is based solely on the fund's past
dividends. Accordingly, the fund's SEC yield and distribution rate may differ.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN
WILL VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON. Income may be subject to
federal alternative minimum taxes. Also, distributions from gains on the sale
of certain bonds purchased at less than par value and capital gain
distributions, if any, are taxable.
Here are the average annual compound returns over various periods with all
distributions reinvested and assuming payment of the 4.75% maximum sales charge
at the beginning of the stated periods. Sales charges are lower for accounts of
$25,000 or more.
PERIODS ENDED PERIODS ENDED
8/31/96 9/30/96
Lifetime (since 10/28/86) +6.42% +6.52%
Five Years +6.34 +6.39
One Year +0.66 +1.51
[chart]
<TABLE>
<CAPTION>
The fund at The fund at Lehman Lipper
maximum net asset Brothers California
offering value Municipal Municipal
price/4/ (without any Bond Index Debt Average
sales /1/ /3/
charge)/2/
<S> <C> <C> <C> <C>
1987 /5/ 9562 10039 10260 10010
1988 10089 10593 10966 10644
1989 11140 11696 12170 11838
1990 11581 12159 12951 12439
1991 12919 13564 14478 13855
1992 14258 14970 16095 15310
1993 16123 16928 18059 17252
1994 16144 16950 18084 17030
1995 17461 18333 19687 18229
1996 18447 19368 20718 19264
</TABLE>
Year ended August 31
/1/With interest compounded. The index is a national index not limited to
California bonds. It is unmanaged and does not reflect sales charges,
commissions or expenses.
/2/Includes reinvested dividends of $7,775 and reinvested capital gain
distributions of $63.
/3/The average does not reflect sales charges.
/4/Includes reinvested dividends of $7,403 and reinvested capital gain
distributions of $60. The net amount invested was $9,525.
/5/For the period October 28, 1986 through August 31, 1987.
Past results are not predictive of future results.
[end chart]
FELLOW SHAREHOLDERS:
The Tax-Exempt Fund of California earned solid returns and produced a steady
stream of income during the fiscal year ended August 31.
The value of your holdings increased 5.6% if you reinvested your
dividends, as most shareholders do. Over the same period, the unmanaged Lehman
Brothers Municipal Bond Index, which measures the national investment-grade
municipal bond market, rose 5.2%.
Shareholders received dividends totaling 83.5 cents a share during the
year. Investors who took dividends in cash had an income return of 5.3%; the
value of their holdings increased 0.3%.
The fiscal year began with good fortune on two fronts. The state economy
continued to rebound. Bond prices rose and interest rates fell as the calendar
year ended. Believing that most investors had become too optimistic, your
fund's managers gradually shifted the portfolio to a more conservative stance.
This cautious approach is the hallmark of Capital Research and Management
Company (CRMC), the fund's investment adviser, and has often been rewarded in
down markets.
The bond market's rally did in fact end in early 1996 amid fears that the
U.S. economy might overheat. Interest rates turned up and continued to rise
through the rest of the fiscal year. Despite rising rates, The Tax-Exempt Fund
of California gained 0.6% in the second half of the fiscal year, as interest
earned more than offset the drop in market value.
California's economic recovery is continuing. Unemployment has fallen,
wages are rising and tax revenues have increased. In 1995, wages rose an
average of 6.4%, compared to a 2.5% increase in the Consumer Price Index, which
measures inflation. The state's tourism industry, which had been hurt by
earthquakes and urban unrest, has rebounded. The motion picture industry alone
added 5,400 jobs in 1995.
Although the economic news is good, California still faces a number of
long-term challenges. It is unclear, for example, how the overhaul of the
federal welfare system will affect the state budget. Orange County, which
declared bankruptcy in late 1994, has finished a complex recovery plan, but Los
Angeles County, the state's most populous, has a persistent structural deficit
and continues to rely on one-time financial sources to balance its budget. In
addition, the state's proposition-driven legislative process and lack of
government spending flexibility could again cause problems if the economy
cools.
We will continue to closely monitor interest rates and the changing
fortunes of California's economy. In the meantime, we will maintain the gradual
shift in the portfolio toward project financing, such as for hospital
construction or pollution control. These projects usually generate revenues
that are dedicated to interest payments and are not tied to the political
process. Choosing these bonds requires industry knowledge and in-depth
research. CRMC views research as the cornerstone of its efforts to find good
opportunities in California's municipal market.
The impact of this is apparent when the fund is compared to its peers. For
the five years ended August 31, which we consider the minimum period to judge
long-term results, The Tax-Exempt Fund of California ranked 12th of 47
California municipal debt funds, according to Lipper Analytical Services.* Over
the same time period, your fund's assets have grown steadily and now total more
than $250 million.
We believe our emphasis on fundamental research, combined with our
cautious approach, will continue to help us find those investments which offer
the best opportunity for solid returns.
In the following pages, we look at how these research efforts have borne
fruit by finding value in one California industry.
We look forward to reporting to you again in six months.
Cordially,
Paul G. Haaga, Jr.
Chairman of the Board
Abner D. Goldstine
President
October 11, 1996
INVESTMENT HIGHLIGHTS
through 8/31/96
12-month total return +5.6%
(income plus capital changes, with dividends reinvested)
Tax-free distribution rate for August 5.2%
(income return only, reflecting maximum sales charge)
Taxable equivalent distribution rate 9.7%
(for August, assuming a 46.2% maximum combined state and federal tax rate)
SEC 30-day yield as of August 31 4.8%
(reflecting maximum sales charge)
For current yield information, please call toll-free: 800/421-0180.
WHY DOUBLE TAX-FREE INVESTING CAN BE WORTHWHILE
<TABLE>
<CAPTION>
FEDERAL INCOME TAX RATES Combined The fund's 5.2%
Federal & tax-exempt
California distribution rate
Tax Rate /1/ in August /2/ is
equivalent to a
taxable distribu-
tion rate of:
Your Taxable Income
Single Joint
<S> <C> <C> <C>
$18,357 - 24,000 $36,714- 40,100 20.1% 6.5%
24,001 - 24,484 40,101 - 50,968 32.3 7.7
25,485 - 32,207 50,969 - 64,414 33.8 7.9
32,208 - 58,150 64,415 - 96,900 34.7 8.0
58,151 - 111,695 96,901 - 147,700 37.4 8.3
111,696 - 121,300 37.9 8.4
147,701 - 223,390 42.0 9.0
121,301 - 223,390 223,391 - 263,750 42.4 9.0
223,391 - 263,750 43.0 9.1
263,751 - 446,780 45.6 9.6
Over 263,750 Over 446,780 46.2 9.7
</TABLE>
/1/ Based on 1996 federal and California marginal tax rates. The rates do not
include an adjustment for the loss of personal exemptions and the phase-out of
itemized deductions that are applicable to certain taxable income levels.
/2/ The fund's distribution rate in the table is based on offering price and
therefore reflects the effects of the maximum sales charge on the initial
investment. It is not a projection of future results.
TO USE THIS TABLE, FIND YOUR ESTIMATED TAXABLE INCOME TO DETERMINE YOUR
COMBINED FEDERAL AND CALIFORNIA TAX RATE. THEN LOOK AT THE RIGHT-HAND COLUMN TO
SEE WHAT YOU WOULD HAVE HAD TO EARN FROM A TAXABLE INVESTMENT TO EQUAL THE
FUND'S 5.2% TAX-FREE DISTRIBUTION RATE IN AUGUST.
BECAUSE OF TAX INCREASES IN RECENT YEARS, MANY HIGH-INCOME INVESTORS ARE
FINDING THAT THEIR RETURNS ON TAXABLE FIXED-INCOME ISSUES HAVE TO BE EVEN
HIGHER TO MATCH THOSE CURRENTLY OFFERED BY TAX-EXEMPT MUNICIPALS. FOR INSTANCE,
A COUPLE WITH A TAXABLE INCOME OF $150,000 FACES A COMBINED FEDERAL AND
CALIFORNIA TAX RATE OF 42.0%. IN THIS BRACKET, THE FUND'S CURRENT 5.2%
DISTRIBUTION RATE WOULD BE EQUIVALENT TO A RETURN ON A TAXABLE FIXED-INCOME
INVESTMENT OF 9.0%.
[chart]
PORTFOLIO QUALITY RATING
Aaa/AAA 46%
Aa/AA 13%
A/A 17%
Baa/BBB 19%
Below investment-grade 5%
[end chart]
*For the 12 months ended September 30, The Tax-Exempt Fund of California ranked
43rd of 95 California municipal bond funds tracked by Lipper; over five years,
it ranked 11th of 46. Lipper rankings do not reflect the effects of sales
charges.
CALIFORNIA'S HOUSING: A KEY INDUSTRY FOR THE FUTURE
California has earned a worldwide reputation as a hotbed of industrial
innovation and creativity. Many of the state's highest profile businesses, from
movies to semiconductors, are considered world leaders. But in discussions
about California's industries, one of the most important is often overlooked:
housing.
The Tax-Exempt Fund of California has invested in the state's housing
industry, buying bonds issued to help low-income families buy homes. These
tax-exempt housing bonds offer investors an attractive combination of good
ratings and solid yields. But they are complicated instruments and finding the
best opportunities among all the bonds in the market requires rigorous analysis
and a comprehensive knowledge of California's home-building industry.
CALIFORNIA STILL TRAILS
While not as glamorous as entertainment or as dramatic as designing
futuristic computers, there is no doubt that the housing industry plays a key
role in the state's economy. In a recent report, the non-partisan California
Legislative Analyst's Office termed housing "one of the most important sectors
in the California economy." Before the state's economic slump, home building
and related industries generated hundreds of thousands of jobs and contributed
about 4% to the gross state product. The National Association of Home Builders
(NAHB) estimates that the construction of 100,000 homes creates about 176,000
jobs.
Nationally, home building remains a strong industry. But in California,
which has trailed the rest of the country in the economic recovery, the
home-building industry has yet to recover to pre-recession levels. Some signs
that the industry is picking up are starting to emerge. In a June report, the
UCLA Business Forecast said that, after sliding for several years, real estate
prices had bottomed out. In the four months ended April 30, permits for
single-family homes were nearly 20% above the same period a year earlier. That
is "still depressed by any measure," the forecast said, but a sign that the
worst was over.
[Begin photo caption]
Home building is not as glamorous as many of California's industries, but it is
a key factor in the state's economic success. It ripples through the economy
beyond the construction jobs created. The State Housing Task Force says
homeownership "bolsters a community."[End photo caption]
[photo: Person measuring piece of wood]
California's population continues to grow, increasing demand for housing.
Rising wages and a stronger economy could bring homeownership within the reach
of more people. An expanding housing industry is good news for the Golden
State's economy. Home building ripples through the economy long after the slabs
have been poured and the last carpenters, roofers and electricians have left
the site. New homes create jobs for appliance and furniture salespeople, carpet
layers, cable installers and gardeners, among others.
The importance of the state's housing industry reaches beyond the number
of jobs created and its contribution to economic growth. Buying a home can be
the key to long-term financial security. Homeownership is the "nation's primary
wealth-building vehicle," says the NAHB.
[Begin pull quote]
Buying a home can be the key to long-term financial security. Homeownership is
the "nation's primary wealth-building vehicle."[End pull quote]
A KEY TO SUCCESS
It's just as important for the state. Building homes, especially homes within
the financial reach of a majority of the state's residents, will be a key part
of California's success, says the State Housing Task Force. The task force, set
up by the legislature in 1994 to study California's housing goals, says
homeownership "bolsters a community" by reflecting the values of
"self-reliance, independence and investment in one's future."
Communities which don't provide enough affordable housing "may be
crippling their own local economies," the task force warns. Business and
industry may be reluctant to relocate to California if their employees can't
afford housing. One company, the task force noted, reported that it cost
$82,000 to relocate an employee to Silicon Valley but only $55,000 to Dallas.
BECOMING MORE AFFORDABLE
In the past few years, housing has become more affordable. During the
recession, house prices fell and lower interest rates reduced the cost of
mortgages. But California housing is still expensive. The median home price in
California is about 150% of the national average. The good news is that 150% is
far below the 225% reached in the late 1980s.
As a result, the goal of homeownership, while closer than in the 1980s, is
still a far-off dream for many Californians. The "gap between the home that a
median-income Californian can afford and the median home price" remains large,
the task force notes.
[Begin photo caption]
Permits for single-family homes still lag pre-recession levels, but building
activity has begun to pick up in California. The UCLA Business Forecast said
that, after sliding for many years, the California real estate market has
finally bottomed out. [End Photo caption]
[photo: Wood frame of building]
Three state agencies - the Housing Finance Agency, the Rural Home Mortgage
Finance Authority and the Southern California Home Financing Authority - are
helping make homes affordable to low-income residents.
Low-income buyers can often afford a home only if they can get a loan at
an artificially low interest rate. But banks hesitate to lend at below-market
rates. The three agencies raise money in the tax-free bond market at
below-market rates and pass the savings on to the borrowers.
At first glance, the bonds may appear safe and simple. The agencies pool
hundreds of mortgages and use them as security for the bonds, just as a bank
uses a house as security for an individual mortgage. These mortgage-backed
bonds usually receive a strong credit rating because diversification reduces
the risk of default. While one or two homeowners may not make their payments,
there is little risk that a significant number of homeowners in one pool will
default.
THE RISK OF PREPAYMENT
But these bonds are not simple. Investors face "prepayment risk," the risk that
the bonds will be paid off early. Investors earning solid returns on a low-risk
bond don't want it paid off ahead of schedule.
To analyze prepayment risk, the investment professionals at Capital
Research and Management Company, your fund's investment adviser, have to judge
interest rates. If interest rates fall, homeowners may refinance their homes
and pay off their mortgages early. They examine the bonds' track record for
clues to the likelihood homeowners will prepay.
The analysts also must consider the possibility that the state's economic
fortunes will improve, prompting homeowners to sell their property and "move
up" to bigger or more expensive homes. Interestingly, a strong economy and
falling interest rates, which are always considered good economic news, often
are negatives for investors in mortgage-backed bonds. Lower mortgage rates and
a booming economy increase prepayments.
A QUESTION OF STRUCTURE
Analysts must also study the structure of each bond issue. Typically, the
mortgage pools are divided into slices, with different bonds backed by
different slices. In some pools one series of bonds will carry all the
prepayment risk - close up while in others the risk may be spread among all the
bonds. Properly analyzing how a bond issue is structured can make a big
difference to the results of the investment.
The housing bonds in your fund's portfolio, accounting for about 6% of the
holdings at fiscal year-end, offer a chance to invest in the state's future by
investing in one of its most important industries. They also show that even
what appear to be safe and relatively easy-to-understand investments require
skill, industry knowledge and a thorough understanding of the bond market.
[Begin photo caption]
For every 100,000 homes built, 176,000 new jobs are created as skilled
carpenters, roofers, appliance salespeople, cable installers and gardeners ply
their trades. [End photo caption]
[photo: Construction worker on construction site]
<TABLE>
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, August 31, 1996
Principal Market
Amount Value
(000) (000)
<S> <C> <C>
Tax-Exempt Securities Maturing in More than
One Year - 94.50%
Various Purpose General Obligation Bond, 7.00% 2005 $1,000 $1,137
Educational Facilities Authority, Revenue Bonds
(University of San Francisco), Series 1996, MBIA
Insured, 5.70% 2011 1190 1204
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 6400 6032
Kaiser Permanente Medical Care Program, Semi-Annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2000 1847
Pacific Presbyterian Medical Center Insured Variable
Rate Demand, 1985 Series B,
6.75% 2015 (Prerefunded 2002) 4125 4508
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1250 1356
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4000 4423
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1150 1146
Housing Finance Agency:
Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 581
1991 Series G, 6.95% 2011 1490 1545
1995 Series K, 5.55% 2021 2500 2501
1996 Series A, MBIA Insured
5.30% 2014 1000 985
Single Family Mortgage Purchase Bonds, Series B2,
AMBAC Insured, 5.70% 2007 3595 3606
Maritime Infrastructure Authority,
Airport Revenue Bonds (San Diego Unified Port
District Airport Project-Lindbergh Field) Series 1995,
5.00% 2020 2265 1976
Pollution Control Financing Authority:
Pollution Control Revenue Bonds (Pacific Gas and
Electric Company):
1992 Series B, 6.35% 2009 2900 2981
1993 Series B, 5.85% 2023 1000 966
Resource Recovery Revenue Bonds, Waste Management Inc.
Guarantee Bond, Series A, 7.15% 2011 3500 3774
Solid Waste Revenue Bonds (Keller Canyon Landfill
Company Project), BFI Corp. Guarantee, Series 1992,
6.875% 2027 5200 5474
Public Works Board, Lease Revenue Bonds:
California Community Colleges, Various Community
College Projects), 1994 Series B, 6.75% 2005 1000 1102
Department of Corrections, State Prison - Lassen County,
(Susanville), 1993 Series D, 5.25% 2015 2000 1891
The Regents of the University of California:
1993 Series A (Various University of California
Projects), 5.50% 2021 1000 917
1994 Series B (Various University of California
Projects), 5.75% 2002 1000 1041
Refunding Revenue Bonds (1989 Multiple Purpose
Projects), Series C, AMBAC Insured, 5.00% 2023 4000 3500
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1250 1369
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program):
1995 Series B, 7.75% 2026 2975 3315
1996 Series A, 6.45% 2027 1500 1651
Statewide Communities Development Authority:
Hospital Revenue Certificates of Participation,
Cedar-Sinai Medical Center, Series 1992, 6.50% 2012 1900 2066
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3000 2826
Sisters of Charity of Leavenworth Health Services
Corp., Certificates of Participation, Series 1994,
5.00% 2023 2000 1701
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 530
Series H, 6.90% 2025 (Prerefunded 2000) 2000 2192
Series O, MBIA Insured, 5.00% 2022 2000 1757
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured,
5.375% 2009 1500 1486
Castaic Lake Water Agency, Refunding Revenue
Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A,
7.25% 2010 1400 1637
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
1993 Series:
6.10% 2013 3000 2955
6.20% 2020 5000 4929
East Bay Municpal Utility District (Alameda and Contra
Costa Counties), Water System Subordinated Revenue
Refunding Bonds, Series 1996, FGIC Insured, 5.00% 2026 1000 883
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A:
6.00% 2016 1500 1454
6.00% 2034 1000 947
5.00% 2035 1000 809
City of Fremont, Multifamily Housing revenue Refunding
Bonds (Durham Greens Project), Issue A of 1995,
5.40% 2026 3000 3006
City of Fresno Sewer System Revenue Bonds, Series 1993A
5.25% 2019 1000 940
Kern High School District (County of Kern), General
Obligation Refunding Bonds, Series 1996A,
MBIA Insured, 6.60% 2016 1000 1118
City of Long Beach:
Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 776
Harbor Revenue Bonds, Series 1993, 5.125% 2018 1000 888
City of Los Angeles:
State Building Authority,Lease Revenue Bonds
(State of California Department
of General Services Lease), Series 1988 A,
7.50% 2011 (Prerefunded 1998) 3500 3742
Convention and Exhibition Center Authority,
Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2500 2746
7.00% 2020 (Prerefunded 1999) 2000 2176
Harbor Department Revenue Bonds:
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1750 2117
Issue 1995, 6.625% 2025 4750 4961
Waste Water System Revenue Bonds:
Series 1987, 8.125% 2017 (Prerefunded 1997) 1500 1601
Series 1990-B, 7.15% 2020 (Prerefunded 2000) 1000 1109
Department of Water and Power:
Electric Plant Revenue Bonds,Issue of 1990:
7.125% 2030 (Subject to Crossover Refunding 2000) 2500 2760
7.10% 2031 (Subject to Crossover Refunding 2001) 3000 3338
Water Works Refunding Revenue Bonds, Issue of 1989,
7.00% 2022 1000 1077
County of Los Angeles, Certificates of Participation
(Marina del Rey), Series A:
6.25% 2003 4635 4764
6.50% 2008 6000 6041
Los Angeles County:
Metropolitan Transportation Authority:
Proposition A Sales Tax Revenue Refunding Bonds,
Series 1993-A, MBIA Insured, 5.00% 2021 2000 1758
Proposition C Sales Tax Revenue Bonds, Second
Senior Bonds, Series 1995-A, AMBAC Insured,
5.00% 2025 1000 884
Transportation Commission, Sales Tax Revenue Bonds:
Series 1989, 7.00% 2019 2250 2418
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2500 2775
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1000 943
Northern California Public Power Agency,
Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 3725 3795
City of Oakland, Special Refunding Revenue Bonds
(Pension Financing), 1988 Series A, FGIC Insured,
7.60% 2021 1000 1075
Port of Oakland, Revenue Bonds:
1989 Series B, BIG Insured, 7.25% 2016 3125 3246
1992 Series E, MBIA Insured, 6.40% 2022 2670 2760
County of Orange:
Airport Revenue Refunding Bonds, Series 1993,
MBIA Insured, 5.25% 2007 1500 1470
Aliso Viejo, Special Tax Bonds of
Community Facilities District No. 88-1, Series A of 1992:
7.25% 2008 (Prerefunded 2002) 1500 1725
7.35% 2018 (Prerefunded 2002) 4250 4909
Recovery Certificates of Participation, 1996 Series A
MBIA Insured, 6.00% 2008 4500 4772
Orange County Local Transportation Authority, First
Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1000 1062
MBIA Insured, 6.00% 2009 1500 1569
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1565 1580
6.65% 2003 1320 1332
6.85% 2005 2715 2756
7.00% 2006 1310 1338
7.25% 2013 2000 2042
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1000 1107
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2195 2032
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.40% 1999 995 1009
5.60% 2000 995 1011
5.70% 2001 3950 4019
6.15% 2012 1930 1933
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4000 3363
5.00% 2023 2000 1651
County of Sacramento, Single Family Mortgage Revenue
Bonds (GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1500 1997
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds:
1995 Series:
6.00% 2003 1500 1525
6.50% 2005 1100 1149
(Proctor & Gamble Project), 1995 Series:
7.00% 2005 1700 1821
6.50% 2014 1000 1008
6.375% 2010 3500 3520
6.50% 2021 4000 4006
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5500 6147
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2000 2149
City of San Bernardino, SCH Health Care System Revenue
Bonds (Sisters of Charity of the Incarnate Word,
Houston, Texas), Series 1991 A, 7.00% 2021 2435 2719
County of San Diego, The San Diego Regional Building
Authority, Certificates of Participation (1991 MTS
Tower Refunding Project), MBIA Insured, 6.363% 2019 1000 1024
City of San Diego/MTDB Authority (San Diego Old Town
Light Rail Transit Extension), 1993 Lease Revenue
Bonds, 5.375% 2023 1500 1362
City and County of San Francisco:
General Purpose Sewer Revenue Bonds,
Series 1988 A, AMBAC Insured,
7.25% 2015 (Prerefunded 1997) 3320 3487
Port Commission Revenue Refunding Bonds,
Series 1994, 5.90% 2009 1500 1487
Redevelopment Agency, Lease Revenue Bonds, Series 1992,
(George R. Moscone Convention Center), 5.50% 2018 3560 3306
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 1000 1023
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds:
6.75% 2032 1500 1535
5.00% 2033 1000 817
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1000 1068
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2200 2686
South Tahoe Joint Powers Financing Authority, Refunding
Revenue Bonds (South Tahoe Redevelopment Project Area
No. 1), 1995 Series B, 6.25% 2020 3250 3188
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1105 1132
---------
238650
---------
Tax-Exempt Securities Maturing in
One Year or Less - 4.39%
State of California:
General Obligation Tax-Exempt Commercial Paper Notes,
3.30% 9/4/96 1000 1000
1996-97 Revenue Anticipation Notes,
Series A, 4.50% 6/30/97 700 704
County of Los Angeles, 1996-97 Tax and Revenue
Anticipation Notes, Series A, 4.50% 6/30/97 8300 8345
Department of Airports of the City of Los Angeles,
1989 Series B, 7.40% 2010 (Prerefunded 5/1/97) 1000 1043
---------
11092
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$237,989,000) 249742
Excess of receivables over cash and payables 2790
---------
NET ASSETS $252,532
=========
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
at August 31, 1996 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $237,989) $249,742
Cash 28
Receivables for--
Sales of fund's shares $ 96
Accrued interest 3,582 3,678
--------- ---------------
253,448
Liabilities:
Payables for--
Repurchases of fund's shares 144
Dividends payable 549
Management services 89
Accrued expenses 134 916
--------- ---------------
Net Assets at August 31, 1996--
Equivalent to $15.78 per share on
16,001,073 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $252,532
=========
Statement of Operations
for the year ended August 31, 1996
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $14,791
---------------
Expenses:
Management services fee $1,018
Distribution expenses 566
Transfer agent fee 72
Reports to shareholders 50
Registration statement and prospectu 9
Postage, stationery and supplies 21
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 11
Taxes (other than federal income tax 3 1,807
--------- ---------------
Net investment income 12,984
---------------
Realized Gain and Change in Unrealized
Appreciation on Investments:
Net realized gain 1,373
Net unrealized appreciation:
Beginning of year 12,697
End of year 11,753
---------------
Net change in unrealized appreciation (944)
---------------
Net realized gain and change in
unrealized appreciation on investments 429
---------------
Net Increase in Net Assets Resulting
from Operations $13,413
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31
1996 1995
--------- ---------
Operations:
Net investment income $ 12,984 $ 12,549
Net realized gain on investments 1,373 871
Net change in unrealized appreciation
on investments (944) 3,633
--------- ---------------
Net increase in net assets
resulting from operations 13,413 17,053
--------- ---------------
Dividends Paid to Shareholders (12,978) (12,552)
--------- ---------------
Capital Share Transactions:
Proceeds from shares sold:
3,016,709 and 2,513,117
shares, respectively 48,021 38,225
Proceeds from shares issued in reinvestment
of net investment income dividends:
439,139 and 498,341 shares, respecti 6,983 7,598
Cost of shares repurchased:
2,264,964 and 2,849,307 shares,
respectively (36,022) (42,819)
--------- ---------------
Net increase in net assets
resulting from capital share transa 18,982 3,004
--------- ---------------
Total Increase in Net Assets 19,417 7,505
Net Assets:
Beginning of year 233,115 225,610
--------- ---------------
End of year $252,532 $233,115
========= =========
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
1. The American Funds Tax-Exempt Series II (the "trust") is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company and has initially issued one series of shares,
The Tax-Exempt Fund of California (the "fund"). The fund seeks a high level of
current income free from federal and California income taxes, with the
additional objective of preservation of capital. The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Tax-exempt securities with original or remaining maturities in excess of
60 days are valued at prices obtained from a national municipal bond pricing
service. The pricing service takes into account various factors such as
quality, yield and maturity of tax-exempt securities comparable to those held
by the fund, as well as actual bid and asked prices on a particular day.
Securities for which pricing service values are not available are valued at the
mean of their quoted bid and asked prices. However, in circumstances where the
investment adviser deems it appropriate to do so, securities will be valued at
the mean of their representative quoted bid and asked prices, or, if such
prices are not available, at the mean of such prices for securities of
comparable maturity, quality and type. Securities for which market quotations
are not readily available are valued at fair value by the Board of Trustees or
a committee thereof. All securities with 60 days or less to maturity are valued
at amortized cost, which approximates market value.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions. Realized gains and losses from
securities transactions are reported on an identified cost basis. Interest
income is reported on the accrual basis. Premiums and original issue discounts
on securities purchased are amortized over the life of the respective
securities. Amortization of market discounts on securities is recognized upon
disposition, subject to applicable tax requirements. Dividends to shareholders
are declared daily after determination of the fund's net investment income and
paid to shareholders monthly.
Pursuant to the custodian agreement, the fund may receive credits against
its custodian fee for imputed interest on certain balances with the custodian
bank. The custodian fee of $11,000 includes $4,000 paid by these credits rather
than in cash.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of August 31, 1996, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $11,753,000, of which $12,482,000
related to appreciated securities and $729,000 related to depreciated
securities. During the year ended August 31, 1996, the fund realized,
on a tax basis, a net capital gain of $1,373,000 on securities transactions.
The fund utilized the remaining capital loss carryforward totaling $43,000 to
offset, for tax purposes, capital gains realized during the year up to such
amount. There was no difference between book and tax realized gains on
securities transactions for the year ended August 31, 1996. The cost of
portfolio securities for book and federal income tax purposes was $237,989,000
at August 31, 1996.
3. The fee of $1,018,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million; and 3.00% of the fund's monthly
gross investment income.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended August 31, 1996,
distribution expenses under the Plan were $566,000. As of August 31, 1996,
accrued and unpaid distribution expenses were $103,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $72,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $138,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees who are unaffiliated with CRMC may elect to defer part or all of
the fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of August 31,
1996, aggregate amounts deferred and earnings thereon were $28,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the trust
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of August 31, 1996, accumulated undistributed net realized gain on
investments was $1,330,000 and paid-in capital was $239,446,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $79,141,000 and $60,142,000, respectively, during the
year ended August 31, 1996.
<TABLE>
Per-Share Data and Ratios
Year ended August 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $15.74 $15.40 $16.30 $15.21 $14.59
------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income .84 .86 .84 .84 .85
Net realized and
unrealized gain
(loss) on investments .04 .34 (.84) 1.09 .62
------- ------- ------- ------- -------
Total income from
investment operations .88 1.20 .00 1.93 1.47
------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income (.84) (.86) (.84) (.84) (.85)
Distributions from net
realized gains - - (.06) - -
------- ------- ------- ------- -------
Total distributions (.84) (.86) (.90) (.84) (.85)
------- ------- ------- ------- -------
Net Asset Value, End of Year $15.78 $15.74 $15.40 $16.30 $15.21
======= ======= ======= ======= =======
Total Return* 5.65% 8.16% 0.13% 13.08% 10.36%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $253 $233 $226 $223 $148
Ratio of expenses to average
net assets .73% .73% .71% .71% .74%
Ratio of net income to
average net assets 5.25% 5.65% 5.28% 5.36% 5.66%
Portfolio turnover rate 27.60% 41.36% 15.08% 16.82% 20.28%
*Calculated without deducting a sales
charge. The maximum sales charge is
4.75% of the fund's offering price.
</TABLE>
Independent Auditors' Report
To the Board of Trustees of the American Funds
Tax-Exempt Series II and Shareholders of
The Tax-Exempt Fund Of California:
We have audited the accompanying statement of assets and liabilities of
The American Funds Tax Exempt Series II-- The Tax-Exempt Fund of California
(the "Fund"), including the schedule of portfolio investments, as of August 31,
1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the selected per-share data and ratios for each of the five years in
the period then ended. These financial statements and the per-share data and
ratios are the responsibility of the fund's management. Our responsibility is
to express an opinion on these financial statements and per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per-share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The American Funds Tax-Exempt Series II -- The Tax-Exempt Fund of
California at August 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the per-share data and ratios for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
[signature: Deloitte & Touche LLP]
Los Angeles, California
September 27, 1996
TAX INFORMATION (UNAUDITED)
All of the distributions paid by the fund during the fiscal year ended August
31, 1996 were exempt-interest distributions within the meaning of Section
852(b)(5)(A) of the Internal Revenue Code.
This information is given to meet certain requirements of the Internal Revenue
Code and should not be used by shareholders for preparing their income tax
returns. For tax return preparation purposes, please refer to the year-end
information you receive from the fund's transfer agent.
THE TAX-EXEMPT FUND OF CALIFORNIA
BOARD OF TRUSTEES
H. FREDERICK CHRISTIE
Rolling Hills Estates, California
Private investor; former President and
Chief Executive Officer, The Mission Group;
former President, Southern California
Edison Company
DIANE C. CREEL
Long Beach, California
Chief Executive Officer and President,
The Earth Technology Corporation
(environmental engineering)
MARTIN FENTON, JR.
San Diego, California
Chairman of the Board,
Senior Resource Group, Inc.
(senior living centers management)
LEONARD R. FULLER
Marina del Rey, California
President, Fuller & Company, Inc.
(financial management consulting)
ABNER D. GOLDSTINE
Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR.
Los Angeles, California
Chairman of the Board of the fund
Senior Vice President and Director,
Capital Research and Management Company
HERBERT HOOVER III
San Marino, California
Private investor
RICHARD G. NEWMAN
Los Angeles, California
Chairman of the Board, President
and Chief Executive Officer,
AECOM Technology Corporation
(architectural engineering)
PETER C. VALLI
Long Beach, California
Chairman of the Board,
BW/IP International, Inc.
(industrial manufacturing)
OTHER OFFICERS
NEIL L. LANGBERG
Los Angeles, California
Senior Vice President of the fund
Vice President - Investment Management Group,
Capital Research and Management Company
MICHAEL J. DOWNER
Los Angeles, California
Vice President of the fund
Senior Vice President - Fund Business Management Group,
Capital Research and Management Company
MARY C. HALL
Brea, California
Vice President of the fund
Senior Vice President - Fund Business Management Group,
Capital Research and Management Company
JULIE F. WILLIAMS
Los Angeles, California
Secretary of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ANTHONY W. HYNES, JR.
Brea, California
Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
KIMBERLY S. VERDICK
Los Angeles, California
Assistant Secretary of the fund
Assistant Vice President - Fund Business Management Group,
Capital Research and Management Company
OFFICES OF THE FUND AND OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5804
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Morrison & Foerster LLP
345 California Street
San Francisco, California 94104-2675
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER OR CALL AMERICAN FUNDS SERVICE COMPANY,
TOLL-FREE, AT 800/421-0180.
This report is for the information of shareholders of The Tax-Exempt Fund of
California, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after December 31, 1996, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Litho in USA MED/ALI/3086
Lit. No. TEFCA-011-1096
Printed on recycled paper
[The American Funds Group(R)]
