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[LOGO OF THE AMERICAN FUNDS GROUP(R)]
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The Tax-Exempt Fund of California(SM)
Prospectus
NOVEMBER 1, 1997
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THE TAX-EXEMPT FUND OF CALIFORNIA
333 South Hope Street
Los Angeles, CA 90071
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Expenses 3 Investment Results 10
................................ .............................................
Financial Highlights 4 Dividends, Distributions and Taxes 11
................................ .............................................
Investment Policies and Fund Organization and Management 13
Risks 5
................................ .............................................
Securities and Investment Shareholder Services 16
Techniques 5
................................
Multiple Portfolio
Counselor System 9
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</TABLE>
The fund's investment objective is to provide investors with a high level of
current income exempt from federal and California income taxes. Consistent with
this primary objective is the additional objective of preservation of capital.
It seeks to achieve its objectives by investing primarily in investment grade
tax-exempt securities issued by the State of California, its political
subdivisions, municipalities and public authorities.
This prospectus presents information you should know before investing in the
fund. You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE LIKELIHOOD OF LOSS IS GREATER
IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE FUND IS NOT
A DEPOSIT OR OBLIGATION OF, OR INSURED OR GUARANTEED BY, ANY ENTITY OR PERSON
INCLUDING THE U.S. GOVERNMENT AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
20-010-1197
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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EXPENSES
The effect of the expenses described below is reflected in the fund's share
price and return.
You may pay certain shareholder transaction expenses when you buy or sell
shares of the fund. Fund operating expenses are paid out of the fund's assets
and are factored into its share price.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases
(as a percentage of offering price) 4.75%
................................................................................
SALES CHARGES ARE REDUCED OR ELIMINATED FOR LARGER PURCHASES. There is no sales
charge on reinvested dividends, and no deferred sales charge or redemption or
exchange fees. A contingent deferred sales charge of 1% applies on certain
redemptions made within 12 months following purchases without a sales charge.
FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
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<S> <C>
Management fees 0.41%
................................................................................
12b-1 expenses 0.23%/1/
................................................................................
Other expenses 0.08%
................................................................................
Total fund operating expenses 0.72%
</TABLE>
/1/ 12b-1 expenses may not exceed 0.25% of the fund's average net assets
annually.
EXAMPLES
Assuming a hypothetical annual return of 5% and shareholder transaction and
operating expenses as described above, for every $1,000 you invested, you would
pay the following total expenses over the following periods:
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<TABLE>
<S> <C>
One year $ 55
................................................................................
Three years $ 69
................................................................................
Five years $ 86
................................................................................
Ten years $133
</TABLE>
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY. YOUR EXPENSES WILL BE LESS IF YOU QUALIFY TO PURCHASE
SHARES AT A REDUCED OR NO SALES CHARGE.
3
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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FINANCIAL HIGHLIGHTS
The following information has been audited by Deloitte & Touche llp,
independent auditors. This table should be read together with the financial
statements which are included in the statement of additional information and
annual report.
SELECTED PER-SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
....................
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.78 $15.74 $15.40 $16.30 $15.21 $14.59 $13.87 $14.16 $13.63 $13.72
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INCOME FROM
INVESTMENT
OPERATIONS:
Net investment income .83 .84 .86 .84 .84 .85 .85 .84 .86 .82
........................................................................................................
Net realized and
unrealized gain (loss)
on investments .53 .04 .34 (.84) 1.09 .62 .72 (.29) .53 (.09)
........................................................................................................
Total income from
investment operations 1.36 .88 1.20 .00 1.93 1.47 1.57 .55 1.39 .73
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.83) (.84) (.86) (.84) (.84) (.85) (.85) (.84) (.86) (.82)
........................................................................................................
Distributions from net
realized gains (.09) -- -- (.06) -- -- -- -- -- --
........................................................................................................
Total distributions (.92) (.84) (.86) (.90) (.84) (.85) (.85) (.84) (.86) (.82)
........................................................................................................
Net asset value, end
of period $16.22 $15.78 $15.74 $15.40 $16.30 $15.21 $14.59 $13.87 $14.16 $13.63
........................................................................................................
Total return /1/ 8.80% 5.65% 8.16% 0.13% 13.08% 10.36% 11.56% 3.96% 10.41% 5.51%
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RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in millions) $289 $ 253 $ 233 $ 226 $ 223 $ 148 $ 111 $ 86 $ 68 $ 42
........................................................................................................
Ratio of expenses to
average net assets .72% .73% .73% .71% .71% .74% .85% .93% 1.00% .93%
........................................................................................................
Ratio of net income to
average net assets 5.15% 5.25% 5.65% 5.28% 5.36% 5.66% 5.89% 5.92% 6.06% 6.02%
........................................................................................................
Portfolio turnover rate 15.68% 27.60% 41.36% 15.08% 16.82% 20.28% 33.72% 20.19% 44.56% 80.15%
</TABLE>
/1/ Excludes maximum sales charge of 4.75%.
4
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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INVESTMENT POLICIES AND RISKS
The investment objective of the fund is to provide a high level of current
income exempt from federal and California income taxes. Consistent with this
primary objective is the additional objective of preserving the fund's capital.
Under normal market conditions, the fund will invest at least 80% of its assets
in, or derive at least 80% of its income from, securities that are exempt from
both federal and California income taxes. The assets of the fund will be
invested primarily in securities rated at the time of purchase within the four
highest categories for bonds and the two highest categories for notes and
commercial paper by either Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or in securities that are unrated but
determined to be of comparable quality.
Up to 20% of the fund's assets may be invested in tax-exempt bonds rated Ba and
BB or below (or in comparable unrated tax-exempt bonds). The fund may invest up
to 20% of assets in certain tax-exempt securities believed to pay interest
constituting an item of tax preference subject to federal alternative minimum
taxes; therefore, while the fund's distributions are not subject to regular
federal income tax, a portion may be included in determining a shareholder's
federal alternative minimum tax. Limits on the fund's investment policies are
determined at the time of purchase and are based on the fund's net assets
unless otherwise stated. The fund's fundamental investment restrictions
(described in the statement of additional information) and objectives may not
be changed without shareholder approval. MORE INFORMATION ON THE FUND'S
INVESTMENT POLICIES IS CONTAINED IN ITS STATEMENT OF ADDITIONAL INFORMATION.
THE FUND MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVES DUE TO MARKET CONDITIONS AND
OTHER FACTORS. IN ADDITION, THE FUND MAY EXPERIENCE DIFFICULTY LIQUIDATING
CERTAIN PORTFOLIO SECURITIES DURING SIGNIFICANT MARKET DECLINES OR PERIODS OF
HEAVY REDEMPTIONS.
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SECURITIES AND INVESTMENT TECHNIQUES
DEBT SECURITIES
Bonds and other debt securities are used by issuers to borrow money. Issuers
pay investors interest and generally must repay the amount borrowed at
maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. The prices of
debt securities fluctuate depending on such factors as interest rates, credit
quality and maturity. In general, their prices decline when interest rates rise
and vice versa.
5
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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The fund may invest up to 20% of its assets in debt securities rated Ba and BB
or below by Moody's or S&P or in unrated securities that are determined to be
of equivalent quality by Capital Research and Management Company, the fund's
investment adviser. These securities are commonly known as "high-yield, high-
risk" or "junk" bonds. High-yield, high-risk bonds are described by the rating
agencies as speculative and involve greater risk of default or price changes
due to changes in the issuer's creditworthiness than higher rated bonds, or
they may already be in default. The market prices of these securities may
fluctuate more than higher quality securities and may decline significantly in
periods of general economic difficulty. It may be more difficult to dispose of,
or to determine the value of, high-yield, high-risk bonds. The fund may invest
in bonds rated as low as Ca or CC which are described by the rating agencies as
"speculative in a high degree; often in default or [having] other marked
shortcomings." See the statement of additional information for a complete
description of the ratings.
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
MUNICIPAL BONDS
Municipal bonds are debt obligations generally issued to obtain funds for
various public purposes, including the construction of public facilities. The
interest on these obligations is generally not included in gross income for
federal income tax purposes.
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. Limited obligation or revenue bonds are secured by 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. 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.
There are, in addition, a variety of hybrid and special types of municipal
obligations, such as zero coupon and pre-refunded bonds, as well as numerous
differences in the security of municipal bonds, both within and between the two
primary classifications described above.
6
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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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.
PORTFOLIO COMPOSITION
The average monthly composition of the fund's portfolio as a percentage of its
average net assets based on the higher of Moody's or S&P ratings for the fiscal
year ended August 31, 1997 was as follows:
<TABLE>
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<S> <C>
Aaa/AAA 39.63%
................................................................................
Aa/AA 11.71%
................................................................................
A/A 18.04%
................................................................................
Baa/BBB 13.73%
................................................................................
Non-rated 10.94%
</TABLE>
Some or all of these non-rated securities were determined to be equivalent to
securities rated by Moody's or S&P as follows:
<TABLE>
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<S> <C>
Baa/BBB 4.14%
................................................................................
Ba/BB 5.17%
................................................................................
B/B 1.63%
</TABLE>
Money market instruments and cash made up an average of 5.95% of the fund's
portfolio.
MUNICIPAL LEASE OBLIGATIONS
The fund may invest in municipal lease revenue obligations, some of which may
be considered illiquid. The fund may purchase, without limitation, municipal
lease revenue obligations that are determined to be liquid by Capital Research
and Management Company. In determining whether these securities are liquid,
Capital Research and Management Company will consider among other things, the
credit quality and support, including strengths and weaknesses of the issuers
and lessees, the terms of the lease, the frequency and volume of trading and
the number of dealers trading the securities.
FORWARD COMMITMENTS
The fund may enter into commitments to purchase or sell securities at a future
date. When the fund agrees to purchase such securities, it assumes the risk of
any decline in value of the securities beginning on the date of the agreement.
7
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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When the fund agrees to sell such securities, it does not participate in
further gains or losses with respect to the securities. If the other party to
such a transaction fails to deliver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or could experience a loss.
VARIABLE AND FLOATING RATE OBLIGATIONS
The fund may invest in variable and floating rate obligations which have
interest rates that are adjusted at designated intervals or whenever interest
rates change. The rate adjustment feature tends to limit the extent to which
the market value of the obligation will fluctuate.
MATURITY
There are no restrictions on the maturity composition of the portfolio,
although it is anticipated that the fund normally will be invested
substantially in securities with maturities in excess of three years.
SPECIAL CONSIDERATIONS
Because the fund will invest primarily in securities issued by the State of
California, its political subdivisions, municipalities and public authorities,
the fund is more susceptible to factors adversely affecting issuers of
California securities than would be a comparable municipal bond mutual fund
which has not concentrated in issuers in a single state.
The fund may not invest 25% or more of its assets in securities the interest on
which is paid from revenues of similar type projects. The fund may, however,
invest more than an aggregate of 25% of its assets in industrial development
bonds.
8
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund assets. Under this system the
portfolio of a fund is divided into segments which are managed by individual
counselors. Counselors decide how their respective segments will be invested
(within the limits provided by a fund's objective(s) and policies and by
Capital Research and Management Company's investment committee). In addition,
Capital Research and Management Company's research professionals may make
investment decisions with respect to a portion of a fund's portfolio. The
primary individual portfolio counselors for the fund are listed below.
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
.........................
YEARS OF EXPERIENCE WITH CAPITAL
AS PORTFOLIO COUNSELOR RESEARCH AND
PORTFOLIO COUNSELORS FOR THE TAX-EXEMPT MANAGEMENT
FOR THE TAX-EXEMPT FUND OF CALIFORNIA COMPANY OR
FUND OF CALIFORNIA PRIMARY TITLE(S) (APPROXIMATE) ITS AFFILIATES TOTAL YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEIL L. Senior Vice 11 years (since 19 years 19 years
LANGBERG President the fund began
of the fund. operations)
Vice
President--
Investment
Management
Group, Capital
Research and
Management
Company
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MARK R. Vice 3 years 3 years 12 years
MACDONALD President--
Investment
Management
Group, Capital
Research and
Management
Company
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DAVID A. Vice President, 4 years 6 years 9 years
HOAG Capital
Research
Company*
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</TABLE>
The fund began operations on October 28, 1986
* A wholly owned subsidiary of Capital Research and Management Company
9
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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INVESTMENT RESULTS
The fund may compare investment results on a taxable and tax equivalent basis
to various indices or other mutual funds. Fund results may be calculated on a
total return, yield, and/or distribution rate basis. Results calculated without
a sales charge will be higher.
[X] TOTAL RETURN is the change in value of an investment in the fund over a
given period, assuming reinvestment of any dividends and capital gain
distributions.
[X] YIELD is computed by dividing the net investment income per share earned by
the fund over a given period of time by the maximum offering price per share
on the last day of the period, according to a formula mandated by the
Securities and Exchange Commission. A yield calculated using this formula
may be different than the income actually paid to shareholders.
[X] DISTRIBUTION RATE reflects dividends that were paid by the fund. The
distribution rate is calculated by annualizing the current month's dividend
and dividing by the average price for the month.
INVESTMENT RESULTS
(FOR PERIODS ENDED SEPTEMBER 30, 1997)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND THE FUND AT
TOTAL AT NET MAXIMUM
RETURNS: ASSET VALUE/1/ SALES CHARGE1,2 LEHMAN3 LIPPER/4/
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<S> <C> <C> <C> <C>
One year 8.54% 3.42% 9.02% 8.84%
................................................................................
Five years 7.31% 6.26% 7.17% 6.79%
................................................................................
Ten years 8.41% 7.88% 8.77% 8.35%
................................................................................
Lifetime/5/ 7.18% 6.70% 7.88% 7.09%
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</TABLE>
Yield1,2: 4.24%
Distribution Rate2: 4.84%
/1/ These fund results were calculated according to a standard formula that is
required for all stock and bond funds.
/2/ The maximum sales charge has been deducted.
/3/ Lehman Brothers Municipal Bond Index represents the long-term investment
grade municipal bond market. This index is unmanaged and does not reflect
sales charges, commissions or expenses.
/4/ Lipper California Municipal Debt Funds Average is comprised of funds that
limit their assets to those securities that are exempt from taxation in
California.
/5/ The fund began investment operations on October 28, 1986.
10
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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Here are the fund's annual total returns calculated without a sales charge.
This information is being supplied on a calendar year basis.
[BAR CHART]
1987 -2.51
1988 8.46
1989 9.97
1990 5.6
1991 10.1
1992 8.25
1993 12.87
1994 -5.08
1995 17.59
1996 4.27
[END BAR CHART]
Past results are not an indication of future results.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The fund declares dividends from its net investment income daily and
distributes the accrued dividends to shareholders each month. Dividends begin
accruing one day after payment for shares is received by the fund or American
Funds Service Company. Capital gains, if any, are usually distributed in
November or December. When a capital gain is distributed, the net asset value
per share is reduced by the amount of the payment.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from American Funds Service Company with regard to
uncashed distribution checks, the shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares.
11
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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TAXES
In any fiscal year in which the fund qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital
gains, the fund itself is relieved of federal income tax. The fund is permitted
to pass through to its shareholders tax-exempt income subject to certain
requirements. However, the fund may invest in obligations which pay interest
that is subject to state and local taxes when distributed by the fund.
Dividends derived from taxable interest income, distributions of capital gains
and dividends on gains from the disposition of certain market discount bonds
will not be exempt from federal, state or local income tax.
Capital gains are taxable whether they are reinvested or received in cash--
unless you are exempt from taxation or entitled to tax deferral. Early each
year, you will be notified as to the amount and tax status of all income
distributions paid during the prior year. You are required by the Internal
Revenue Code to report to the federal government all fund exempt-interest
dividends (and all other tax-exempt interest).
It is anticipated that federal exempt-interest dividends paid by the fund and
derived from interest on bonds exempt from California income taxation under the
Constitution or statutes of California ("California municipal securities") will
also be exempt from California corporate and personal income tax (although not
from California franchise tax). To the extent the fund's dividends are derived
from interest on debt obligations other than California municipal securities,
such dividends will be subject to California state income tax even though the
dividends may be exempt from federal income tax.
Any fund dividends derived from taxable interest income and any distributions
of capital gains will not be exempt from federal or California income tax. With
respect to states other than California, distributions of net investment income
may be taxable to investors under state or local law as dividend income even
though all or a portion of such distributions may be derived from interest on
otherwise tax-exempt obligations which, if realized directly, would be exempt
from such income taxes. For example, a state may require that a fund hold a
specified percentage of its bonds in order for the fund to pass through
interest paid on these bonds to its shareholders on a state tax-exempt basis,
whereas if the bonds were held directly by shareholders the interest would be
exempt from state tax.
YOU MUST PROVIDE THE FUND WITH A CERTIFIED CORRECT TAXPAYER IDENTIFICATION
NUMBER (GENERALLY YOUR SOCIAL SECURITY NUMBER) AND CERTIFY THAT YOU ARE NOT
SUBJECT TO BACKUP WITHHOLDING. IF YOU FAIL TO DO SO THE IRS CAN REQUIRE THE
FUND TO WITHHOLD 31% OF YOUR TAXABLE DISTRIBUTIONS AND REDEMPTIONS. Federal
12
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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law also requires the fund to withhold 30% or the applicable tax treaty rate
from certain dividends paid to nonresident alien, non-U.S. partnership and non-
U.S. corporation shareholder accounts.
This is a brief summary of some of the tax laws that affect your investment in
the fund. Please see the statement of additional information and your tax
adviser for further information.
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FUND ORGANIZATION AND MANAGEMENT
FUND ORGANIZATION AND VOTING RIGHTS
The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust in 1986. All fund operations are supervised
by the fund's board of trustees who meet periodically and perform duties
required by applicable state and federal laws. Members of the board who are not
employed by Capital Research and Management Company or its affiliates are paid
certain fees for services rendered to the fund as described in the statement of
additional information. They may elect to defer all or a portion of these fees
through a deferred compensation plan in effect for the fund. The fund does not
hold annual meetings of shareholders. However, significant matters which
require shareholder approval, such as certain elections of board members or a
change in a fundamental investment policy, will be presented to shareholders at
a meeting called for such purpose. Shareholders have one vote per share owned.
At the request of the holders of at least 10% of the shares, the fund will hold
a meeting at which any member of the board could be removed by a majority vote.
THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, is the investment adviser to the fund
and other funds, including those in The American Funds Group. Capital Research
and Management Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los Angeles, CA
90071. Capital Research and Management Company manages the investment portfolio
and business affairs of the fund. The management fee paid by the fund to
Capital Research and Management Company is composed of a management fee, which
may not exceed 0.30% of the fund's average net assets annually and declines at
certain asset levels, plus 3% of the fund's annual gross income. The total
management fee paid by the fund as a percentage of average net assets for the
previous fiscal year is discussed above under "Expenses."
13
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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Capital Research and Management Company and its affiliated companies have
adopted a personal investing policy that is consistent with the recommendations
contained in the report dated May 9, 1994 issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has also been
incorporated into the fund's code of ethics.
PLAN OF DISTRIBUTION
The fund has a Plan of Distribution or "12b-1 Plan" under which it may finance
activities primarily intended to sell shares, provided the categories of
expenses are approved in advance by the board. The 12b-1 fee paid by the fund
as a percentage of average net assets for the previous fiscal year is discussed
above under "Expenses."
PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by Capital
Research and Management Company, which strives to obtain the best available
prices, taking into account the costs and quality of executions. Fixed-income
securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the dealer, generally referred to as a concession or
discount. On occasion, securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid. In the over-the-counter
market, purchases and sales are transacted directly with principal market-
makers except in those circumstances where it appears better prices and
executions are available elsewhere.
Subject to the above policy, when two or more brokers (either directly or
through their correspondent clearing agents) are in a position to offer
comparable prices and executions, preference may be given to brokers who have
sold shares of the fund or have provided investment research, statistical, and
other related services for the benefit of the fund and/or other funds served by
Capital Research and Management Company.
14
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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PRINCIPAL UNDERWRITER AND TRANSFER AGENT
American Funds Distributors, Inc. and American Funds Service Company serve as
the principal underwriter and transfer agent for the fund, respectively. They
are headquartered at 333 South Hope Street, Los Angeles, CA 90071 and 135 South
State College Boulevard, Brea, CA 92821, respectively.
AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
CALL TOLL-FREE FROM ANYWHERE IN THE U.S.
(8 a.m. to 8 p.m. ET):
800/421-0180
WESTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2205
Brea, California 92822-2205
Fax: 714/671-7080
WESTERN CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 659522
San Antonio, Texas 78265-9522
Fax: 210/530-4050
EASTERN CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 6007
Indianapolis, Indiana 46206-6007
Fax: 317/735-6620
EASTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2280
Norfolk, Virginia 23501-2280
Fax: 804/670-4773
15
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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SHAREHOLDER SERVICES
The fund offers you a valuable array of services you can use to alter your
investment program as your needs and circumstances change. These services,
which are summarized below, are available only in states where they may be
legally offered and may be terminated or modified at any time upon 60 days'
written notice. A COMPLETE DESCRIPTION OF SHAREHOLDER SERVICES AND ACCOUNT
POLICIES IS CONTAINED IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION. In
addition, an easy-to-read guide to owning a fund in The American Funds Group
titled "Welcome to the Family" is sent to new shareholders and is available by
writing or calling American Funds Service Company.
THE SERVICES DESCRIBED MAY NOT BE AVAILABLE THROUGH SOME RETIREMENT PLANS OR
ACCOUNTS HELD BY INVESTMENT DEALERS. IF YOU ARE INVESTING IN SUCH A MANNER, YOU
SHOULD CONTACT YOUR PLAN ADMINISTRATOR/TRUSTEE OR DEALER ABOUT WHAT SERVICES
ARE AVAILABLE AND WITH QUESTIONS ABOUT YOUR ACCOUNT.
- --------------------------------------------------------------------------------
PURCHASING SHARES
HOW TO PURCHASE SHARES
Generally, you may open an account by contacting any investment dealer
authorized to sell the fund's shares. You may add to your account through your
dealer or directly through American Funds Service Company by mail, computer,
wire, or bank debit. You may also establish or add to your account by
exchanging shares from any of your other accounts in The American Funds Group.
The fund and American Funds Distributors reserve the right to reject any
purchase order for any reason. This includes exchange purchase orders that may
place an unfair burden on other shareholders due to their frequency.
Various purchase options are available as described below subject to certain
investment minimums and limitations described in the statement of additional
information and "Welcome to the Family."
[X] Automatic Investment Plan
You may invest monthly or quarterly through automatic withdrawals from your
bank account.
[X] Automatic Reinvestment
You may reinvest your dividends and capital gain distributions into the fund
(with no sales charge). This will be done automatically unless you elect to
have the dividends and/or capital gain distributions paid to you in cash.
16
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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[X] Cross-Reinvestment
You may invest your dividends and capital gain distributions into any other
fund in The American Funds Group.
[X] Exchange Privilege
You may exchange your shares into other funds in The American Funds Group
generally with no sales charge. Exchanges of shares from the money market
funds that were initially purchased with no sales charge will generally be
subject to the appropriate sales charge. You may also elect to automatically
exchange shares among any of the funds in The American Funds Group. Exchange
requests may be made in writing, by telephone, including American
FundsLine(R), by computer using American FundsLine OnLineSM (see below), or
by fax. EXCHANGES HAVE THE SAME TAX CONSEQUENCES AS ORDINARY SALES AND
PURCHASES.
[X] Retirement Plans
Tax-exempt funds should not serve as retirement plan investments.
SHARE PRICE
The fund's share price, also called net asset value, is determined as of the
close of trading (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange is open. The fund calculates its net asset value per share,
generally using market prices, by dividing the total value of its assets after
subtracting liabilities by the number of its shares outstanding. Shares are
purchased at the offering price next determined after your investment is
received and accepted by American Funds Service Company. The offering price is
the net asset value plus a sales charge, if applicable.
SHARE CERTIFICATES
Shares are credited to your account and certificates are not issued unless you
request them by writing to American Funds Service Company.
INVESTMENT MINIMUMS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To establish an account $1,000
To add to an account $ 50
</TABLE>
17
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
SALES CHARGES
A sales charge may apply, as described below, when purchasing shares. Sales
charges may be reduced for larger purchases as indicated below.
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
...................
DEALER
NET CONCESSION AS
OFFERING AMOUNT % OF OFFERING
INVESTMENT PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.75% 4.99% 4.00%
................................................................................
$25,000 but less than $50,000 4.50% 4.71% 3.75%
................................................................................
$50,000 but less than $100,000 4.00% 4.17% 3.25%
................................................................................
$100,000 but less than $250,000 3.50% 3.63% 2.75%
................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
................................................................................
$500,000 but less than $1 million 2.00% 2.04% 1.60%
................................................................................
$1 million or more and certain other
investments described below see below see below see below
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES
Investments of $1 million or more and investments made by employer-sponsored
defined contribution-type plans with 100 or more eligible employees are sold
with no initial sales charge. A 1% CONTINGENT DEFERRED SALES CHARGE MAY BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN ONE YEAR OF PURCHASE BY THESE
ACCOUNTS. Investments by retirement plans, foundations or endowments with $50
million or more in assets may be made with no sales charge and are not subject
to a contingent deferred sales charge. A dealer concession of up to 1% may be
paid by the fund from its Plan of Distribution and/or by American Funds
Distributors on all investments described above. Investments by certain
individuals and entities including employees and other associated persons of
dealers authorized to sell shares of the fund and Capital Research and
Management Company and its affiliated companies are not subject to a sales
charge.
ADDITIONAL DEALER COMPENSATION
In addition to the concessions listed, up to 0.25% of average net assets is
paid annually to qualified dealers for providing certain services pursuant to
the fund's Plan of Distribution. During the current fiscal year, American Funds
Distributors will also provide additional compensation to the top one hundred
dealers who have sold shares of funds in The American Funds Group based on the
pro rata share of a qualifying dealer's sales.
18
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
REDUCING YOUR SALES CHARGE
You and your immediate family may combine investments to reduce your costs. You
must let your investment dealer or American Funds Service Company know if you
qualify for a reduction in your sales charge using one or any combination of
the methods described below.
[X] Aggregation
Investments that may be aggregated include those made by you, your spouse
and your children under the age of 21, if all parties are purchasing shares
for their own account(s), including any business account solely "controlled
by", as well as any retirement plan or trust account solely for the benefit
of, these individuals. Investments made for multiple employee benefit plans
of a single employer or "affiliated" employers may be aggregated provided
they are not also aggregated with individual accounts. Finally, investments
made by a common trust fund or other diversified pooled account not
specifically formed for the purpose of accumulating fund shares may be
aggregated.
Purchases made for nominee or street name accounts will generally not be
aggregated with those made for other accounts unless qualified as described
above.
[X] Concurrent Purchases
You may combine concurrent purchases of two or more funds in The American
Funds Group, except direct purchases of the money market funds. Shares of
the money market funds purchased through an exchange, reinvestment or cross-
reinvestment from a fund having a sales charge do qualify.
[X] Right of Accumulation
You may take into account the current value of your existing holdings in The
American Funds Group to determine your sales charge. Direct purchases of the
money market funds are excluded.
[X] Statement of Intention
You may enter into a non-binding commitment to invest a certain amount
(which at your request, may include purchases made during the previous
90 days) in non-money market fund shares over a 13-month period. A portion
of your account may be held in escrow to cover additional sales charges
which may be due if your total investments over the statement period are
insufficient to qualify for the applicable sales charge reduction.
19
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
SELLING SHARES
HOW TO SELL SHARES
You may sell (redeem) shares in your account by contacting your investment
dealer or American Funds Service Company. You may also use American
FundsLine(R) or American FundsLine OnLineSM (see below). In addition, you may
sell shares in amounts of $50 or more automatically. If you sell shares through
your investment dealer you may be charged for this service. Shares held for you
in your dealer's street name must be sold through the dealer.
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. Sale requests may be
made in writing, by telephone, including American FundsLine(R), by computer
using American FundsLine OnLineSM, or by fax. Sales by telephone, computer or
fax are limited to $50,000 in accounts registered to individual(s) (including
non-retirement trust accounts). In addition, checks must be made payable to the
registered shareholder(s) and mailed to an address of record that has been used
with the account for at least 10 days.
Proceeds will not be mailed until sufficient time has passed to provide
reasonable assurance that checks or drafts (including certified or cashier's
checks) for shares purchased have cleared (which may take up to 15 calendar
days from the purchase date). Except for delays relating to clearance of checks
for share purchases or in extraordinary circumstances (and as permissible under
the Investment Company Act of 1940), sale proceeds will be paid on or before
the seventh day following receipt and acceptance of an order. Interest will not
accrue or be paid on amounts that represent uncashed distribution or redemption
checks.
The fund may, with 60 days' written notice, close your account if due to a sale
of shares the account has a value of less than the minimum required initial
investment.
Generally, written requests to sell shares must be signed by you and must
include any shares you wish to sell that are in certificate form. Your
signature must be guaranteed by a member firm of a domestic stock exchange or
the National Association of Securities Dealers, Inc., that is an eligible
guarantor institution, bank, savings association or credit union. A signature
guarantee is not currently required for any sale of $50,000 or less provided
the check is made payable to the registered shareholder(s) and is mailed to the
address of record on the account, and provided the address has been used with
the account for at least 10 days. Additional documentation may be required for
sale of shares held in corporate, partnership or fiduciary accounts.
20
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge (any contingent deferred sales charge paid
will be credited to your account) in any fund in The American Funds Group
within 90 days after the date of the redemption or distribution. Redemption
proceeds of shares representing direct purchases in the money market funds are
excluded. Reinvestment will be at the next calculated net asset value after
receipt and acceptance by American Funds Service Company.
- --------------------------------------------------------------------------------
OTHER IMPORTANT THINGS TO REMEMBER
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINESM
You may check your share balance, the price of your shares, or your most recent
account transactions, sell shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) or American
FundsLine OnLineSM. To use these services, call 800/325-3590 from a
TouchTone(TM) telephone or access The American Funds Web site on the Internet
at www.americanfunds.com.
TELEPHONE AND COMPUTER PURCHASES, SALES AND EXCHANGES
Unless you opt out of the telephone or computer (including American
FundsLine(R) or American FundsLine OnLineSM) or fax purchase, sale and/or
exchange options (see below), you agree to hold the fund, American Funds
Service Company, any of its affiliates or mutual funds managed by such
affiliates, and each of their respective directors, trustees, officers,
employees and agents harmless from any losses, expenses, costs or liabilities
(including attorney fees) which may be incurred in connection with the exercise
of these privileges provided American Funds Service Company employs reasonable
procedures to confirm that the instructions received from any person with
appropriate account information are genuine. If reasonable procedures are not
employed, the fund may be liable for losses due to unauthorized or fraudulent
instructions.
Generally, all shareholders are automatically eligible to use these options.
However, you may elect to opt out of these options by writing American Funds
Service Company. (You may also reinstate them at any time by writing to
American Funds Service Company.)
ACCOUNT STATEMENTS
You will receive regular confirmation statements reflecting transactions in
your account. Dividend and capital gain reinvestments and purchases through
automatic investment plans and certain retirement plans will be confirmed at
least quarterly.
21
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
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NOTES
22
<PAGE>
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THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
23
<PAGE>
THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS
<TABLE>
<CAPTION>
FOR SHAREHOLDER SERVICES FOR DEALER SERVICES
<C> <S>
American Funds American Funds
Service Company Distributors
800/421-0180 ext. 1 800/421-9900 ext. 11
FOR 24-HOUR INFORMATION
American American Funds
FundsLine(R) Internet Web site
800/325-3590 http://www.americanfunds.com
</TABLE>
Telephone conversations may be recorded or monitored for
verification, recordkeeping and quality assurance purposes.
------------------------------------------------------------
MULTIPLE TRANSLATIONS
This prospectus may be translated into other languages. In
the event of any inconsistency or ambiguity as to the
meaning of any word or phrase contained in a translation,
the English text shall prevail.
------------------------------------------------------------
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance
information, portfolio holdings, a statement from portfolio
management and the independent accountants' report (in the
annual report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more detailed information on all aspects of the
fund, including the fund's financial statements.
A current SAI has been filed with the Securities and
Exchange Commission ("SEC"). It is incorporated by
reference into this prospectus and is available along with
other related materials on the SEC's Internet Web site at
http://www.sec.gov.
CODE OF ETHICS
Includes a description of the fund's personal investing
policy.
To request a free copy of any of the documents above:
Call American Funds or Write to the Secretary
Service Company of the fund
800/421-0180 ext. 1 333 South Hope Street
Los Angeles, CA 90071
This prospectus has been printed on recycled paper.
[LOGO RECYCLED PAPER]
24
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
THE TAX-EXEMPT FUND OF CALIFORNIA
PART B
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1997
This document is not a prospectus but should be read in conjunction with the
current Prospectus dated November 1, 1997 of The American Funds Tax-Exempt
Series II (the "Trust"). The Trust currently consists of one series, The
Tax-Exempt Fund of California (the "fund"). The Prospectus may be obtained
from your investment dealer or financial planner or by writing to the Trust at
the following address:
The American Funds Tax-Exempt Series II
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
Table of Contents
<TABLE>
<CAPTION>
Item Page No.
<S> <C>
Description of Certain Securities and Investment Techniques 1
Investment Restrictions 8
Trust Officers and Trustees 11
Management 14
Dividends and Distributions 17
Additional Information Concerning Taxes 17
Purchase of Shares 22
Redeeming Shares 29
Shareholder Account Services and Privileges 30
Execution of Portfolio Transactions 32
General Information 33
Investment Results 35
Description of Ratings for Debt Securities 38
Financial Statements attached
</TABLE>
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
THE DESCRIPTIONS BELOW ARE INTENDED TO SUPPLEMENT THE MATERIAL IN THE
PROSPECTUS UNDER "INVESTMENT POLICIES AND RISKS."
INVESTMENT POLICIES -- Up to 20% of the fund's total assets may be invested in
tax-exempt securities that are rated Ba and BB or by Standard & Poor's
Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's) (or
equivalent securities that are not rated). These bonds are commonly known as
"high-yield, high-risk" bonds or "junk" bonds. See "Description of Ratings for
Debt Securities" below.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES -- High-yield, high-risk
bonds can be sensitive to adverse economic changes and political and corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress that
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaults on its obligations to pay interest
or principal or enters into bankruptcy proceedings, the fund may incur losses
or expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices and yields of high-yield, high-risk bonds.
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 debt obligations generally issued to
obtain funds for various public purposes, including the construction of public
facilities. Opinions relating to the validity of municipal bonds and to the
exclusion from gross income for federal income tax purposes and, where
applicable, the exemption from state and local income tax are rendered by bond
counsel to the respective issuing authorities at the time of issuance.
The two principal classifications of municipal bonds are general obligation
and limited obligation, 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.
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% of assets, may be
held in cash or invested in high quality taxable short-term securities of up to
one year in maturity. Such temporary investments may include: (1) obligations
of the U.S. Treasury; (2) obligations of agencies and instrumentalities of the
U.S. Government; (3) money market instruments, such as certificates of deposit
issued by domestic banks, corporate commercial paper, and bankers' acceptances;
and (4) repurchase agreements (which are described below).
MUNICIPAL INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed
bonds issued by municipalities. Interest payments are made to bondholders
semi-annually and are made up of two components: a fixed "real coupon" or
spread, and a variable coupon linked to an inflation index. Accordingly,
payments will increase or decrease each period as a result of changes in the
inflation index. In the period of deflation payments may decrease to zero, but
in any event will not be less than zero.
ZERO COUPON BONDS -- Municipalities may issue zero coupon securities which are
debt obligations that do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest. They are issued and traded at a discount from their face
amount or par value, which discount varies depending on the time remaining
until cash payments begin, prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer.
PRE-REFUNDED BONDS -- From time to time, a municipality may refund a bond that
it has already issued prior to the original bond's call date by issuing a
second bond, the proceeds of which are used to purchase securities. The
securities are placed in an escrow account pursuant to an agreement between the
municipality and an independent escrow agent. The principal and interest
payments on the securities are then used to pay off the original bondholders.
For the purposes of diversification, pre-refunded bonds will be treated as
governmental issues.
FORWARD COMMITMENTS -- The fund may enter into commitments to purchase or sell
securities at a future date. When a fund agrees to purchase such securities,
it assumes the risk of any decline in value of the security beginning on the
date of the agreement. When the fund agrees to sell such securities, it does
not participate in further gains or losses with respect to the securities
beginning on the date of the agreement. If the other party to such
transaction fails to deliver or pay for the securities, the fund could miss a
favorable price or yield opportunity, or could experience a loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly increases. The fund will not use their
transactions for the purpose of leveraging and will segregate liquid assets
which will be marked to market daily in an amount sufficient to meet its
payment obligations in these transactions. Although these transactions will
not be entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets the fund
temporarily could be in a leveraged position (because it may have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
REPURCHASE AGREEMENTS -- Although the fund has no current intention to do so
during the next 12 months, it may enter on a temporary basis into repurchase
agreements, under which it buys a security and obtains a simultaneous
commitment from the seller to repurchase the security at a specified time and
price. Repurchase agreements permit the fund to maintain liquidity and earn
income over periods of time as short as overnight. The seller must maintain
with the fund's custodian collateral equal to at least 100% of the repurchase
price including accrued interest, as monitored daily by Capital Research and
Management Company. The fund will only enter into repurchase agreements
involving securities in which it could otherwise invest and with selected banks
and securities dealers whose financial condition is monitored by the Investment
Adviser. If the seller under the repurchase agreement defaults, the fund may
incur a loss if the value of the collateral securing the repurchase agreement
has declined and may incur disposition costs in connection with liquidating the
collateral. If bankruptcy proceedings are commenced with respect to the
seller, liquidation of the collateral by the fund may be delayed or limited.
ADJUSTMENT OF MATURITIES -- The Investment Adviser seeks to anticipate
movements in interest rates and adjusts the maturity distribution of the
portfolio accordingly. Longer term securities ordinarily yield more than
shorter term securities but are subject to greater and more rapid price
fluctuation. Keeping in mind the fund's objective of producing a high level of
current income, the Investment Adviser will increase the fund's exposure to
this price volatility only when it appears likely to increase current income
without undue risk to capital.
ISSUE CLASSIFICATION -- Securities with the same general quality rating and
maturity characteristics, but which vary according to the purpose for which
they were issued, often tend to trade at different yields. These yield
differentials tend to fluctuate in response to political and economic
developments, as well as temporary imbalances in normal supply/demand
relationships. The Investment Adviser monitors these fluctuations closely, and
will attempt to adjust portfolio concentrations in various issue
classifications according to the value disparities brought about by these yield
relationship fluctuations.
QUALITY -- Securities issued for similar purposes and with the same general
maturity characteristics, but which vary according to the creditworthiness of
their respective issuers, tend to trade at different yields. These yield
differentials also tend to fluctuate in response to political, economic and
supply/demand factors. The Investment Adviser will attempt to take advantage
of these fluctuations by adjusting the concentration of portfolio securities in
any given quality category according to the value disparities produced by these
yield relationship fluctuations.
The Investment Adviser believes that, in general, the market for municipal
bonds is less liquid than that for taxable fixed-income securities.
Accordingly, the ability of the fund to make purchases and sales of securities
in the foregoing manner may, at any particular time and with respect to any
particular securities, be limited (or non-existent).
PORTFOLIO TURNOVER -- Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads or brokerage commissions, and may result in the realization of
net capital gains, which are taxable when distributed to shareholders.
Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. The fund does not
anticipate its portfolio turnover will exceed 100% annually. The fund's
portfolio turnover rate would exceed 100% if each security in the fund's
portfolio was replaced once every year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last 10 years.
RISK FACTORS RELATING TO CALIFORNIA DEBT OBLIGATIONS -- The following describes
certain risks relating to debt obligations of California issuers. This
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information drawn from official statements
relating to securities offerings of the State of California and various local
agencies in California, available as of the date of this Prospectus. While the
Investment Adviser has not independently verified such information, it has no
reason to believe that such information is not correct in all material
respects. In addition to this current information, future California
constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could have an
adverse effect on the debt obligations of California issuers. The initiative
process is used quite often in California, resulting in numerous initiative
items on the ballot for most state and local elections, any of which could
affect the ability of public entities to pay their obligations.
The Internal Revenue Code of 1986 imposes limitations on the use and
investment of the proceeds of state and local governmental bonds and of other
funds of the issuers of such bonds. These limitations must be satisfied on a
continuing basis to maintain the exclusion from gross income of interest on
such bonds. The provisions of the Code generally apply to bonds issued after
August 15, 1986. Bond counsel qualify their opinions as to the federal tax
status of new issues of bonds by making such opinions contingent on the
issuer's future compliance with these limitations. Any failure on the part of
an issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued. These restrictions in
the Code also may affect the availability of certain municipal securities.
Certain debt obligations held by the fund may be obligations of issuers which
rely in whole or in substantial part on California state revenues for the
continuance of their operations and the payment of their obligations. Certain
state property and other state tax revenues and moneys from the state's general
fund are appropriated by the state legislature each fiscal year for
distribution to counties, cities and their various taxing entities, such as
school districts, to assist such local entities in providing essential
governmental functions, including those required by state law. Whether and to
what extent the California Legislature will continue to appropriate a portion
of the state's general fund to counties, cities and their various entities is
not entirely certain. To the extent local entities do not receive money from
the state to pay for their operations and services, their ability to pay debt
service on obligations held by the fund may be impaired.
Certain of the debt obligations may be obligations of issuers who rely in
whole or in part on ad valorem real or personal property taxes as a source of
revenue or may be leases subject to annual appropriation by the lessor.
Article XIIIA of the California Constitution limits the taxing powers of
California public agencies. Article XIIIA provides that the maximum ad valorem
tax on real property cannot exceed one percent of the full cash value of the
property, and effectively prohibits the levying of any other ad valorem
property tax, even with voter approval. Full cash value is defined as the
County Assessor's valuation of real property as shown on the 1975-76 tax bill
under "full cash value" or, thereafter, the appraisal value of real property
when purchased, newly constructed, or when a change in ownership has occurred
after the 1975 assessment. The full cash value is subject to annual adjustment
to reflect inflation at a rate not to exceed two percent or a reduction in the
consumer price index or comparable local data, or declining property value
caused by damage, destruction or other factors. Article XIIIB of the
California Constitution limits the amount of appropriations of state and of
local governments from "proceeds of taxes" to the amount of appropriations of
the entity for the prior year, adjusted for changes in the cost of living,
population and certain other adjustments. Both Article XIIIA and Article XIIIB
were adopted by the people of the State of California pursuant to the State's
initiative constitutional amendment process.
Certain debt obligations held by the fund may be obligations payable solely
from lease payments on real property leased to the state, cities, counties or
their various public entities, especially since the adoption of Article XIIIA
described above because such leases are structured so as not to create a
statutory "debt" of the leasing entity. However, to insure that a debt is not
technically created, California law requires that the lessor is not required to
make lease payments during any period that it is denied use and occupancy of
the property lease in proportion to such loss. Moreover, the lessor does not
agree to pay lease payments beyond the current fiscal year; it only agrees to
include lease payments in its annual budget for each fiscal year. In case of a
default under the lease, the only remedy available against the lessor is that
of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by the fund would not be paid in a timely manner.
Proposition 62 was approved by the voters in 1986 and fully activated in 1995
by a state Supreme Court ruling. Proposition 62 took away general law cities'
and counties' authority to impose other general purpose taxes without voter
approval.
On November 5, 1996, Proposition 218 was accepted by a majority of California
voters. Proposition 218 constrains local governments' ability to impose
"property-related" fees, assessments and taxes. This measure applies to all
cities, counties, special districts, redevelopment agencies and school
districts in California. This amendment basically extends to charter cities
the same voter approval requirements now imposed under Proposition 62 on
general law cities and counties.
Certain debt obligations held by the fund may be obligations which are payable
solely from the revenues of health care institutions. Certain provisions under
California law may adversely affect these revenues and, consequently, payment
on those debt obligations.
The federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program. In the
past, the Medi-Cal program has provided a cost-based system of reimbursement
for inpatient care furnished to Medi-Cal beneficiaries by any eligible
hospital. The State now selectively contracts by county with California
hospitals to provide reimbursement for nonemergency inpatient services to
Medi-Cal beneficiaries, generally on a flat per diem payment basis regardless
of cost. California law also permits private health plans and insurers to
contract selectively with hospitals for services to beneficiaries on negotiated
terms, generally at rates lower than standard charges. It is expected that
hospitals that do not contract with health plans and insurers will experience
some decrease in patient census.
Debt obligations payable solely from revenues of health care institutions may
also be insured by the state pursuant to an insurance program operated by the
Office of Statewide Health Planning and Development (the "Office"). Most such
debt obligations are secured by a mortgage of real property in favor of the
Office and the holders. If a default occurs on such insured debt obligations,
the Office may either continue to make debt service payments on the obligations
or foreclose on the mortgage and request the State Treasurer to issue
debentures payable from a reserve fund established under the insurance program
or from unappropriated state funds. At the request of the Office, William M.
Mercer, Incorporated ("Mercer") prepared a study dated August 1997 ("1997
Actuarial Study") to evaluate, among other matters, (1) the reserve sufficiency
of the Health Facility Construction Loan Insurance Fund ("HFCLIF") as of June
30, 1996 and (2) the risk to the State General Fund from the California Health
Facility Construction Loan Insurance Program. In the 1997 Actuarial Study,
Mercer concluded that the HFCLIF, on a cash flow basis, under normal and
expected conditions, should maintain a positive balance over the next 15 years
whether or not it insures new loans. Mercer ran a number of simulations,
however, varying the parameters of the normal and expected conditions and
incorporating the possibility of extraordinary events. Under all the scenarios
tested, the HFCLIF balance remained positive in the short term of three to five
years, but could become negative in the long term of 10 to 15 years depending
on the likelihood of extraordinary events and on whether new loans were
insured. The actual HFCLIF reserve as of June 30, 1996 was $140.5 million.
The 1997 Actuarial Study reports that under the California Division of
Insurance fully funded or accrual basis standard for financial guaranty
insurance companies, to which the HFCLIF is not subject, the required HFCLIF
balance would be $237.5 million. In the event of a default, any debenture
payable form the HFCLIF would become payable on a par with general obligations
bonds issued by the State.
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.
From 1990 to 1993, California (the "State") faced the worst economic, fiscal
and budget conditions since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among others, were severely
affected. Job losses were the worst of any post-war recession and have been
estimated to have exceeded 800,000. California's economy has been recovering
and growing steadily stronger since the start of 1994. The rate of economic
growth in California in 1996, in terms of job gains, exceeded that of the rest
of the United States. The State added nearly 350,000 jobs during 1996,
surpassing its pre-recession employment peak of 12.7 million jobs. Another
380,000 jobs are expected to be created in 1997. The unemployment rate, while
still higher than the national average, fell to the low 6 percent rage in
mid-1997, compared to over 10 percent during the recession. Many of the new
jobs were created in such industries as computer services, software design,
motion pictures and high technology manufacturing. Business services, export
trade and other manufacturing also experienced growth. All major economic
regions of the State grew, with particularly large gains in the Silicon Valley
region of Northern California. Personal income grew by over 7 percent or $55
billion in 1996. The residential construction sector of the State's economy
remained weak in 1996, with permits for new housing increasing modestly from
the previous year. In addition, the restructuring and consolidation occurring
in California's aerospace and financial services industries, while aimed at
making the companies involved more efficient and competitive in the longer
term, has produced some negative economic consequences in the shorter term,
including an uncertain job outlook for many workers.
The recession affected State tax revenues, which mirror economic conditions.
It has also caused increased expenditures for health and welfare programs. The
State has also been facing a structural imbalance in its budget with the
largest programs supported by the General Fund (K-12 schools and community
colleges, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. (The
General Fund, the State's main operating fund, consists of revenues which are
not required to be credited to any other fund.) As a result, the State
experienced recurring budget deficits. With the end of the recession, the
State's financial condition has improved in the 1995-96 and 1996-97 fiscal
years, with a combination of better than expected revenues, slowdown in growth
of social welfare programs, and continued spending restraint. As of June 30,
1997, the State's budget reserve had a positive cash balance of $281 million.
No deficit borrowing has occurred at the end of the last two fiscal years and
the State's cash flow borrowing was limited to $3 billion in 1996-97.
On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Pools"), filed for protection under Chapter 9
of the federal Bankruptcy Code. On June 12, 1996, Orange County emerged from
bankruptcy after the successful sale of $880 million in municipal bonds allowed
the County to pay off the last of its creditors. On January 7, 1997, Orange
County returned to the municipal bond market with a $136 million bond issue
maturing in 13 years at an insured yield of 7.23 percent.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August, 1995 the credit rating of the County's
long-term bonds was downgraded for the third time since 1992 as a result of,
among other things, severe operating deficits for the County's health care
system. In addition, the County was affected by an ongoing loss of revenue
caused by state property tax shift initiatives in 1993 through 1995. In June,
1997, the Los Angeles County Board of Supervisors approved an approximately $12
billion 1997-98 budget containing measures to eliminate a $157 million deficit.
The County's budgetary difficulties have continued and their effect, as well as
the effect of the improving California economy, on the 1997-1998 budget is
still uncertain.
1997-98 Fiscal Year Budget
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget
Act anticipates General Fund revenues and transfers of $52.5 billion (a 6.8
percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels). On a budgetary
basis, the budget reserve (SFEU) is projected to decrease from $408 million at
June 30, 1997 to $112 million at June 30, 1998. (The expenditure figure
assumes restoration of $200 million of vetoed funding.) The Budget Act also
includes Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billlion of expenditures from
various Bond Funds. Following enactment of the Budget Act, the State
implemented its annual cash flow borrowing program, issuing $3 billion of notes
which mature on June 30, 1998.
The following are major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contains a large increase in
funding for K-14 education, reflecting strong revenues which have exceeded
initial budgeted amounts. Part of the nearly $1.75 billion in increased
spending is allocated to prior fiscal years.
2. The Budget Act reflects a $1.235 billion pension case judgment payment, and
returns funding of the State's pension contribution to the quarterly basis
existing prior to the deferral actions invalidated by the courts. In May,
1997, the California Supreme Court in PERS V. WILSON made final a judgment
against the State requiring an immediate payment from the General Fund to the
Public Employees Retirement Fund ("PERF") to make up certain deferrals in
annual retirement fund contributions which had been legislated in earlier years
for budget savings, and which the courts found to be unconstitutional. On July
30, 1997, at the Governor's direction, the Controller transferred $1.235
billion from the General Fund to the PERF in satisfaction of the judgment,
representing the principal amount of the improperly deferred payments from
1995-96 and 1996-97. No provision exists for any additional payments relating
to this court case.
3. Continuing the third year of a four-year "compact" which the State
Administration has made with higher education units, funding from the General
Fund for the University of California and California State University has
increased by about 6 percent ($121 million and $107 million, respectively), and
there was no increase in student fees.
4. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels.
5. Health and welfare costs are contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs welfare reform program.
6. Unlike prior years, this Budget Act does not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, are included in the Budget Act to offset
incarceration costs for illegal immigrants.
7. The Budget Act contains no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.
Subsequent to the adoption and signature of the Budget Act, the Governor and
Legislature reached certain agreements related to State expenditures and taxes,
including support, on an annual basis, for a $931 million (by full
implementation in the 1999-2000 fiscal year) tax cut aimed primarily at middle
income families but also including businesses, $480 million to provide health
insurance for uninsured children, $450 million to pay for county courts, $300
million for pay raises for State employees, and $52 million for tuition cuts
for California public universities and community colleges. These agreements
mostly will affect budgets in future fiscal years and their impact on the
State's budget and the State's support for local governments is uncertain.
THE FOREGOING DISCUSSION OF THE 1997-98 FISCAL YEAR BUDGET IS BASED IN LARGE
PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT"
DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE INDICATED
THAT ITS DISCUSSION OF THE FISCAL YEAR BUDGET IS BASED ON ESTIMATES AND
PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE
AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE
AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE
ACHIEVED.
State Indebtedness
As of August 1, 1997, the State had over $17.82 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond
authorizations in an aggregate amount of aprpoximately $8.26 billion remained
unissued as of Augst 1, 1997. The State also builds and acquires capital
facilities through the use of lease purchase borrowing. As of August 1, 1997,
the State had approximately $6.17 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $19.09 billion aggregate principal amount of revenue bonds
and notes outstanding as of June 30, 1997. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such revenue
bonds. Such enterprises and projects include transportation projects, various
public works and exposition projects, educational facilities (including the
California State University and University of California systems), housing,
health facilities and pollution control facilities.
Litigation
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. In addition, the State is involved in
certain other legal proceedings that, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources.
Ratings
Because of the State's continuing budget problems, the State's General
Obligation bonds were downgraded in July 1994 to A1 from Aa by Moody's, to A
from A+ by Standard & Poor's, and to A from AA by Fitch. All three rating
agencies expressed uncertainty in the State's ability to balance the budget by
1996. However, in 1996, citing California's improving economy and budget
situation, both Fitch and Standard & Poor's raised their ratings from A to A+.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES -- The fund has adopted certain investment restrictions
which may not be changed without a majority vote of its outstanding shares.
Such majority is defined by the Investment Company Act of 1940 (the "1940 Act")
as the vote of the lesser of (i) 67% or more of the outstanding voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present in person or by proxy, or (ii) more
than 50% of the outstanding voting securities. None of the following investment
restrictions involving a maximum percentage of assets will be considered
violated unless the excess occurs immediately after, and is caused by, an
acquisition [or encumbrance of securities or assets of, or borrowings] by the
fund. 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, POSITION WITH PRINCIPAL OCCUPATION(S) AGGREGATE COMPENSATION TOTAL COMPENSATION TOTAL NUMBER OF
ADDRESS REGISTRANT DURING PAST 5 YEARS (INCLUDING VOLUNTARILY (INCLUDING VOLUNTARILY FUND BOARDS ON
AND AGE (POSITIONS WITHIN THE DEFERRED COMPENSATION/1/) DEFERRED WHICH TRUSTEE
ORGANIZATIONS LISTED MAY FROM THE FUND DURING COMPENSATION/1/) FROM SERVES/2/
HAVE CHANGED DURING THIS FISCAL YEAR ENDED ALL FUNDS MANAGED BY
PERIOD) AUGUST 31, 1997 CAPITAL RESEARCH AND
MANAGEMENT
COMPANY/2/ FOR THE YEAR
ENDED AUGUST 31, 1997
<S> <C> <C> <C> <C> <C>
H. Frederick Christie Trustee Private Investor. Former $2,300 /3/ $163,500 18
P.O. Box 144 President and Chief
Palos Verdes Estates, CA 90274 Executive Officer, The
Age: 64 Mission Group (non-utility
holding Company, subsidiary
of Southern California
Edison Company)
+Don R. Conlan Trustee President (retired), The none/4/ none/4/ 12
1630 Milan Avenue Capital Group Companies,
South Pasadena, CA 91030 Inc.
Age: 61
Diane C. Creel Trustee CEO and President, $2,300 $43,000 12
100 W. Broadway The Earth Technology
Suite 5000 Corporation (international
Long Beach, CA 90802 consulting engineering)
Age: 48
Martin Fenton, Jr. Trustee Chairman, Senior Resource $2,700 /3/ $132,600 16
4350 Executive Drive Group (management of
Suite 101 senior living centers)
San Diego, CA 92121-2116
Age: 62
Leonard R. Fuller Trustee President, Fuller & $2,300/3/ $46,200 12
4337 Marina City Drive Company, Inc.
Suite 841 ETN (financial management
Marina del Rey, CA 90292 consulting
Age: 51 firm)
+* Abner D. Goldstine President, Senior Vice President and none/4/ none/4/ 12
Age: 67 PEO and Director, Capital Research
Trustee and Management Company
+** Paul G. Haaga, Jr. Chairman of Executive Vice President none/4/ none/4/ 14
Age: 48 the Board and Director, Capital
Research and Management
Company
Herbert Hoover III Trustee Private Investor $1,900 $68,000 14
1520 Circle Drive
San Marino, CA 91108
Age: 69
Richard G. Newman Trustee Chairman, President and $2,700/3/ $98,000 13
3250 Wilshire Boulevard CEO,
Los Angeles, CA 90010-1599 AECOM Technology
Age: 62 Corporation
(architectural engineering)
Peter Valli Trustee Retired. Former Chairman $2,700/3/ $46,200 12
45 Sea Isle Drive and CEO, BW/IP
Long Beach, CA 90803 International Inc. (industrial
Age: 70 manufacturing)
</TABLE>
+ Trustees who are considered "interested persons" of the fund 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.
* 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 ($4,005), Martin Fenton, Jr. ($8,945), Leonard
R. Fuller ($1,081), Richard G. Newman ($15,213) and Peter C. Valli ($11,431).
/4/ Don R. Conlan, 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)#
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING
WITH THE FUND PAST 5 YEARS
<S> <C> <C> <C>
Neil L. Langberg 44 Senior Vice Vice President - Investment Management
11100 Santa Monica Blvd. President Group, Capital Research and Management
Los Angeles, CA 90025 Company
Michael J. Downer 43 Vice President Senior Vice President - Fund Business
333 South Hope Street Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Mary C. Hall 39 Vice President Senior Vice President - Fund Business
135 South State College Blvd. Management Group, Capital Research and
Brea, CA 92821 Management Company
Julie F. Williams 49 Secretary Vice President - Fund Business
333 South Hope Street Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Anthony W. Hynes, Jr. 34 Treasurer Vice President - Fund Business
135 South State College Blvd. Management Group, Capital Research and
Brea, CA 92821 Management Company
Kimberly S. Verdick 32 Assistant Assistant Vice President - Fund Business
333 South Hope Street Secretary Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Todd L. Miller 38 Assistant Assistant Vice President - Fund Business
135 South State College Blvd. Treasurer Management Group, Capital Research and
Brea, CA 92821 Management Company
</TABLE>
# Positions within the organizations listed may have changed during this period
No compensation is paid by the fund to any officer or Trustee who is a
director or officer of the Investment Adviser. The fund pays annual fees of
$900 to Trustees who are not affiliated with the Investment Adviser, plus $200
for each Board of Trustees meeting attended, plus $200 for each meeting
attended as a member of a committee of the Board of Trustees. The Trustees may
elect, on a voluntary basis, to defer all or a portion of these fees through a
deferred compensation plan in effect for the fund. The fund also reimburses
certain expenses of the Trustees who are not affiliated with the Investment
Adviser. As of October 1, 1997, the officers and Trustees and their families
as a group, owned beneficially or of record fewer than 1% of the outstanding
shares of the fund.
MANAGEMENT
INVESTMENT ADVISER -- The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington D.C., London, Geneva, Singapore, Hong Kong and Tokyo), with a
staff of professionals, many of whom have years of investment experience. The
Investment Adviser is located at 333 South Hope Street, Los Angeles, CA 90071,
and at 135 South State College Boulevard, Brea, CA 92821. The Investment
Adviser's research professionals travel several million miles a year, making
more than 5,000 research visits in more than 50 countries around the world.
The Investment Adviser believes that it is able to attract and retain quality
personnel. The Investment Adviser is a wholly owned subsidiary of The Capital
Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $100 billion of stocks,
bonds and money market instruments and serves over five million investors of
all types throughout the world. These investors include privately owned
businesses and large corporations, as well as schools, colleges, foundations
and other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT -- The Investment Advisory and
Service Agreement (the "Agreement") between the Trust and the Investment
Adviser will continue in effect until May 31, 1998, unless sooner terminated,
and may be renewed from year to year thereafter, provided that any such renewal
has been specifically approved at least annually by (i) the Board of Trustees,
or by the vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the fund, and (ii) the vote of a majority of Trustees who
are not parties to the Agreement or interested persons (as defined in the 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Agreement provides that the Investment Adviser
has no liability to the Trust for its acts or omissions in the performance of
its obligations to the Trust not involving willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement. The
Agreement also provides that either party has the right to terminate, without
penalty, upon 60 days' written notice to the other party and that the Agreement
automatically terminates in the event of its assignment (as defined in the 1940
Act).
The Investment Adviser receives a fee at an annual rate of 0.30% on the first
$60 million of average net assets, plus 0.21% on net assets over $60 million,
plus 3% of gross investment income. Assuming net assets of $290million and
gross investment income levels of 4%, 5%, 6%, 7% and 8% management fees would
be 0.35%, 0.38%, 0.41%, 0.44% and 0.47%, respectively. For the purpose of such
computations under the Agreement, the fund's gross investment income does not
reflect any net realized gains or losses on the sale of portfolio securities
but does include original-issue discount as defined for federal income tax
purposes.
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of
qualified persons to perform the executive and related administrative, clerical
and bookkeeping functions of the fund, and provides suitable office space,
necessary small office equipment and utilities, as well as general purpose
accounting forms, supplies, and postage to be used at the offices of the fund.
The fund pays all expenses not assumed by the Investment Adviser, including,
but not limited to, custodian, stock transfer and dividend disbursing fees and
expenses; costs of designing, printing and mailing reports, prospectuses,
proxy statements, and notices to its shareholders; taxes; expenses of issuance
and redemption of shares (including stock certificates, registration and
qualification fees and expenses); legal and auditing expenses; compensation,
fees, and expenses paid to Trustees unaffiliated with the Investment Adviser;
association dues; costs of stationery and forms prepared exclusively for the
fund; and costs of assembling and storing shareholder account data
During the fiscal years ended August 31, 1997, 1996, and 1995, the Investment
Adviser's total fees amounted to $1,088,000, $1,018,000, and $943,000,
respectively.
PRINCIPAL UNDERWRITER -- American Funds Distributors, Inc. (the "Principal
Underwriter") is the principal underwriter of the fund's shares. The Principal
Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071, 135
South State College Boulevard, Brea, CA 92821, 8000 IH-10 West, San Antonio, TX
78230, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240, and 5300
Robin Hood Road, Norfolk, VA 23513. The Trust has adopted a Plan of
Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act. The
Principal Underwriter receives amounts payable pursuant to the Plan (see below)
and commissions consisting of that portion of the sales charge remaining after
the discounts which it allows to investment dealers. Commissions retained by
the Principal Underwriter on sales of fund shares during the fiscal year ended
August 31, 1997 amounted to $131,000 after allowance of $520,000 to dealers.
During the fiscal years ended August 31, 1996 and 1995 the Principal
Underwriter retained $138,000 and $100,000, respectively.
As required by rule 12b-1, the Plan (together with the Principal Underwriting
Agreement) has been approved by a majority of the entire Board of Trustees and
separately by a majority of the Trustees who are not "interested persons" of
the fund and who have no direct or indirect financial interest in the operation
of the Plan or the Principal Underwriting Agreement, and the Plan has been
approved by the vote of a majority of the outstanding voting securities of the
fund. The officers and Trustees who are "interested persons" of the Trust due
to present or past affiliations with the Investment Adviser and related
companies may be considered to have a direct or indirect financial interest in
the operation of the Plan. Potential benefits of the plan to the fund are
improved shareholder services, savings to the fund in transfer agency costs,
savings to the fund in advisory fees and other expenses, benefits to the
investment process from growth or stability of assets and maintenance of a
financially healthy management organization. The selection and nomination of
Trustees who are not "interested persons" of the Trust is committed to the
discretion of the Trustees who are not "interested persons" during the
existence of the Plan. Plan expenditures are 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 100
or more eligible employees). Since these fees are paid out of the fund's
assets on an ongoing basis, over time these fees will increase the cost of an
investment and may cost the investor more than paying other types of sales
loads. During the Trust's fiscal year ended August 31, 1997, the fund paid or
accrued $614,000 under the Plan as compensation to dealers. As of August 31,
1997, accrued and unpaid distribution expenses were $123,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries or affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer adverse financial consequences as a result of any of
these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS AND DISTRIBUTIONS
The fund declares dividends from its net investment income daily and
distributes the accrued dividends to shareholders each month. The percentage
of the distribution that is tax-exempt may vary from distribution to
distribution. For the purpose of calculating dividends, daily net investment
income of the fund consists of: (a) all interest income accrued on the fund's
investments including any original issue discount or market premium ratably
amortized to the date of maturity or determined in such other manner as may be
deemed appropriate; minus (b) all liabilities accrued, including interest,
taxes and other expense items, amounts determined and declared as dividends or
distributions and reserves for contingent or undetermined liabilities, all
determined in accordance with generally accepted accounting principles.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is only a summary of certain additional federal, state and local
tax considerations generally affecting the fund and its shareholders. No
attempt is made to present a detailed explanation of the tax treatment of the
fund or its shareholders, and the discussion here and in the fund's Prospectus
is not intended as a substitute for careful tax planning. Investors are urged
to consult their tax advisers with specific reference to their own tax
situations.
FEDERAL TAXES -- The fund is not intended to constitute a balanced investment
program and is not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the fund generally would not be suitable for tax-exempt institutions or
tax-deferred retirement plans (E.G., plans qualified under Section 401 of the
Internal Revenue Code, Keogh-type plans and individual retirement accounts).
Such retirement plans would not gain any benefit from the tax-exempt nature of
the fund's dividends because such dividends would be ultimately taxable to
beneficiaries when distributed to them. In addition, the fund may not be an
appropriate investment for entities which are "substantial users" of facilities
financed by private activity bonds or "related persons" thereof. "Substantial
user" is defined under U.S. Treasury Regulations to include a non-exempt person
who regularly uses a part of such facilities in his trade or business and whose
gross revenues derived with respect to the facilities financed by the issuance
of bonds are more than 5% of the total revenues derived by all users of such
facilities, or who occupies more than 5% of the usable area of such facilities
or for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
Corporation and its shareholders.
The fund intends to meet all the requirements and has elected the tax status
of a "regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Under Subchapter M, if the fund
distributes within specified times at least 90% of the sum of its taxable and
tax-exempt net investment income, it will be taxed only on that portion, if
any, which it retains.
To qualify, the fund must (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, currencies, or other income
derived with respect to its business of investing in such stock, securities, or
currencies; and (b) 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 certain tax-exempt
obligations. Not later than 60 days after the close of its taxable year, the
fund will notify each shareholder in writing of the portion of the dividends
paid by the fund to the shareholder with respect to such taxable year which
constitutes exempt-interest dividends. The aggregate amount of dividends so
designated cannot, however, exceed the excess of the amount of interest
excludable from gross income from tax under Section 103 of the Code received by
the fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or carry fund
shares is not deductible for federal income tax purposes if the fund
distributes exempt-interest dividends during the shareholder's taxable year.
If a shareholder receives an exempt-interest dividend with respect to any share
and such share is held for six months or less, any loss on the sale or exchange
of such share will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the fund does not expect to realize substantial long-term capital gains,
any net realized long-term capital gains will be distributed annually. The
fund will have no tax liability with respect to such gains, and the
distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held fund shares. Such distributions
will be designated as a capital gains dividend in a written notice mailed by
the fund to shareholders not later than 60 days after the close of the fund's
taxable year. If a shareholder receives a designated capital gain distribution
(treated by the shareholder as a long-term capital gain) with respect to any
fund share and such fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that fund share will
be treated as long-term capital loss to the extent of the designated capital
gain distribution. The fund may also make a distribution of net realized
long-term capital gains near the end of the calendar year to comply with
certain requirements of the Code. Gain recognized on the disposition of a debt
obligation (including tax-exempt obligations purchased after April 30, 1993)
purchased by the fund at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the fund
held the debt obligation.
Similarly, while the fund does not expect to earn any significant investment
company taxable income, in the event that any taxable income is earned by the
fund it will be distributed. In general, the fund's investment company taxable
income will be its taxable income (for example, its short-term capital gains)
subject to certain adjustments and excluding the excess of any net long-term
capital gain for the taxable year over the net short-term capital loss, if any,
for such year. The fund would be taxed on any undistributed investment company
taxable income. Since any such income will be distributed, it will be taxable
to shareholders as ordinary income (whether distributed in cash or additional
shares).
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purposes of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other funds. Also, any loss realized on a redemption or exchange of
shares of the fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(iii) the sum of any untaxed, undistributed net investment income and net
capital gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the fund from its current year's ordinary income and capital
gain net income and (ii) any amount on which the fund pays income tax during
the periods described above. The fund intends to meet these distribution
requirements to avoid the excise tax liability.
If for any taxable year the fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
would be subject to tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions
would be taxable to shareholders to the extent of earnings and profits, and
might be eligible for the dividends-received deduction for corporations. Under
normal circumstances, no part of the distributions to shareholders by the fund
is expected to qualify for the dividends-received deduction allowed to
corporate shareholders.
As of the date of this statement of additional information, the maximum
individual tax rate applicable to ordinary income is 39.6% (effective tax rates
may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate applicable to net
capital gains on assets held more than 18 months is 20%; and on assets held
more than one year and not more than 18 months 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.
In most cases, 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% (20% on capital gains with respect to assets held more than 18
months) and corporations at a rate of 20%. Shareholders will not be permitted
to deduct any of their share of fund expenses in computing alternative minimum
taxable income. With respect to corporate shareholders, all interest on
municipal bonds and other tax-exempt obligations, including exempt-interest
dividends paid by the fund, is included in adjusted book income and adjusted
current earnings in calculating federal alternative minimum taxable income, and
may also affect corporate federal "environmental tax" liability.
Fund shareholders are required by the Code to report to the federal government
all exempt-interest dividends and all other tax-exempt interest received.
Under the Code, distributions of net investment income by the fund to a
nonresident alien individual, nonresident alien fiduciary of a trust or estate,
foreign corporation, or foreign partnership (a "foreign shareholder") will be
subject to U.S. withholding tax (at a rate of 30% or a lower treaty rate, if
applicable). Withholding will not apply if a dividend paid by the fund is
"effectively connected" with a U.S. trade or business, in which case the
reporting and withholding requirements applicable to U.S. citizens, U.S.
residents, or domestic corporations will apply.
CALIFORNIA TAXES -- The fund itself is not subject to tax in California if it
qualifies for exemption from federal tax under the Code as described above, but
with the additional requirement that it derive less than 30% of its gross
income from the gains on sale or other disposition of stock or securities held
for less than three months..
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 (but not
California franchise 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 in writing 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 capital gain
distributions or ordinary dividends as appropriate. Under California law,
ordinary income and capital gains currently are taxed at the same rate.
Moreover, interest on indebtedness incurred by a shareholder to purchase or
carry fund shares is not deductible for California corporate or personal income
tax purposes if the fund distributes California exempt-interest dividends
during the shareholder's taxable year.
The foregoing is only a summary of some of the important California corporate
or personal income tax considerations generally affecting the fund and its
shareholders. No attempt is made to present a detailed explanation of the
California income tax treatment of the fund or its shareholders, and this
discussion is not intended as a substitute for careful planning. Further, it
should be noted that the portion of any fund dividends constituting California
exempt-interest dividends is excludable from income for California income tax
purposes only. Any dividends paid to fund shareholders subject to California
state franchise tax will be taxed as ordinary dividends to such shareholders,
notwithstanding that all or a portion of such dividends is exempt from
California income tax. Accordingly, potential investors in the fund,
including, in particular, corporate investors which may be subject to
California franchise tax, should consult their own tax advisers with respect to
the application of such taxes to the receipt of fund dividends and as to their
particular California tax situation in general.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
<S> <C> <C>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
See "Investment Minimums and $50 minimum (except where a lower minimum is
Fund Numbers" for initial investment noted under "Investment Minimums and Fund
minimums. Numbers").
BY CONTACTING Visit any investment dealer who is Mail directly to your investment
YOUR registered in the state where the dealer's address printed on your
INVESTMENT purchase is made and who has a account statement.
DEALER sales agreement with American
Funds Distributors.
BY MAIL Make your check payable to the Fill out the account additions form at the bottom of a
fund and mail to the address recent account statement, make your check payable
indicated on the account to the fund, write your account number on your
application. Please indicate an check, and mail the check and form in the envelope
investment dealer on the account provided with your account statement.
application.
BY TELEPHONE Please contact your investment Complete the "Investments by Phone" section on
dealer to open account, then follow the account application or American FundsLink
the procedures for additional Authorization Form. Once you establish the
investments. privilege, you, your financial advisor or any person
with your account information can call American
FundsLine(R) and make investments by telephone
(subject to conditions noted in "Telephone and
Computer Purchases, Redemptions and
Exchanges" below).
BY COMPUTER Please contact your investment Complete the American FundsLink Authorization
dealer to open account, then follow Form. Once you establish the privilege, you, your
the procedures for additional financial advisor or any person with your account
investments. information may access American FundsLine
OnLine(SM) on the Internet and make investments
by computer (subject to conditions noted in
"Telephone and Computer Purchases, Redemptions
and Exchanges" below).
BY WIRE Call 800/421-0180 to obtain your Your bank should wire your additional investments
account number(s), if necessary. in the same manner as described under "Initial
Please indicate an investment Investment."
dealer on the account. Instruct your
bank to wire funds to:
Wells Fargo Bank
155 Fifth Street
Sixth Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUND AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS -- Here are the minimum initial
investments required by the funds in The American Funds Group along with fund
numbers for use with our automated phone line, American FundsLine(R) (see
description below):
<TABLE>
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FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(R) $1,000 02
American Balanced Fund(R) 500 11
American Mutual Fund(R) 250 03
Capital Income Builder(R) 1,000 12
Capital World Growth and Income Fund(SM) 1,000 33
EuroPacific Growth Fund(R) 250 16
Fundamental Investors(SM) 250 10
The Growth Fund of America(R) 1,000 05
The Income Fund of America(R) 1,000 06
The Investment Company of America(R) 250 04
The New Economy Fund(R) 1,000 14
New Perspective Fund(R) 250 07
SMALLCAP World Fund(R) 1,000 35
Washington Mutual Investors Fund(SM) 250 01
BOND FUNDS
American High-Income Municipal Bond Fund(R) 1,000 40
American High-Income Trust(SM) 1,000 21
The Bond Fund of America(SM) 1,000 08
Capital World Bond Fund(R) 1,000 31
Intermediate Bond Fund of America(SM) 1,000 23
Limited Term Tax-Exempt Bond Fund of 1,000 43
America(SM)
The Tax-Exempt Bond Fund of America(R) 1,000 19
The Tax-Exempt Fund of California(R)* 1,000 20
The Tax-Exempt Fund of Maryland(R)* 1,000 24
The Tax-Exempt Fund of Virginia(R)* 1,000 25
U.S. Government Securities Fund(SM) 1,000 22
MONEY MARKET FUNDS
The Cash Management Trust of America(R) 2,500 09
The Tax-Exempt Money Fund of America(SM) 2,500 39
The U.S. Treasury Money Fund of America(SM) 2,500 49
___________
*Available only in certain states.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for individual retirement accounts
(IRAs). Minimums are reduced to $50 for purchases through "Automatic
Investment Plans" (except for the money market funds) or to $25 for purchases
by retirement plans through payroll deductions and may be reduced or waived for
shareholders of other funds in The American Funds Group. TAX-EXEMPT FUNDS
SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The minimum is $50 for
additional investments (except as noted above).
DEALER COMMISSIONS -- The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
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<S> <C> <C> <C>
AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND FUNDS
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than $100,000 4.71 4.50 3.75
BOND FUNDS
Less than $25,000 4.99 4.75 4.00
$25,000 but less than $50,000 4.71 4.50 3.75
$50,000 but less than $100,000 4.17 4.00 3.25
STOCK, STOCK/BOND, AND BOND FUNDS
$100,000 but less than $250,000 3.63 3.50 2.75
$250,000 but less than $500,000 2.56 2.50 2.00
$500,000 but less than $1,000,000 2.04 2.00 1.60
$1,000,000 or more none none (see below)
</TABLE>
Commissions of up to 1% will be paid, to dealers who initiate and are
responsible for purchases of $1 million or more, for purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees, and for purchases made at
net asset value by certain retirement plans of organizations with collective
retirement plan assets of $100 million or more: 1% on amounts of $1 million to
$2 million, 0.80% on amounts over $2 million to $3 million, 0.50% on amounts
over $3 million to $50 million, 0.25% on amounts over $50 million to $100
million, and 0.15% on amounts over $100 million. The level of dealer
commissions will be determined based on sales made over a 12-month period
commencing from the date of the first sale at net asset value.
American Funds Distributors, at its expense (from a designated percentage of
its income), will, during the current fiscal year, provide additional
compensation to dealers. Currently these payments are limited to the top one
hundred dealers who have sold shares of the fund or other funds in The American
Funds Group. These payments will be based on a pro rata share of a qualifying
dealer's sales. American Funds Distributors will, on an annual basis, determine
the advisability of continuing these payments.
Any employer-sponsored 403(b) plan or defined contribution plan qualified
under Section 401(a) of the Internal Revenue Code including a "401(k)" plan
with 100 or more eligible employees or any other purchaser investing at least
$1 million in shares of the fund (or in combination with shares of other funds
in The American Funds Group other than the money market funds) may purchase
shares at net asset value; however, a contingent deferred sales charge of 1% is
imposed on certain redemptions made within twelve months of the purchase. (See
"Redeeming Shares--Contingent Deferred Sales Charge.") Investments by
retirement plans, foundations or endowments with $50 million or more in assets
may be made with no sales charge and are not subject to a contingent deferred
sales charge.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
NET ASSET VALUE PURCHASES -- The stock, stock/bond and bond funds may sell
shares at net asset value to: (1) current or retired directors, trustees,
officers and advisory board members of the funds managed by Capital Research
and Management Company, employees of Washington Management Corporation,
employees and partners of The Capital Group Companies, Inc. and its affiliated
companies, certain family members of the above persons, and trusts or plans
primarily for such persons; (2) current registered representatives, retired
registered representatives with respect to accounts established while active,
or full-time employees (and their spouses, parents, and children) of dealers
who have sales agreements with American Funds Distributors (or who clear
transactions through such dealers) and plans for such persons or the dealers;
(3) companies exchanging securities with the fund through a merger, acquisition
or exchange offer; (4) trustees or other fiduciaries purchasing shares for
certain retirement plans of organizations with retirement plan assets of $50
million or more; (5) insurance company separate accounts; (6) accounts managed
by subsidiaries of The Capital Group Companies, Inc.; and (7) The Capital Group
Companies, Inc., its affiliated companies and Washington Management
Corporation. Shares are offered at net asset value to these persons and
organizations due to anticipated economies in sales effort and expense.
STATEMENT OF INTENTION -- The reduced sales charges and offering prices set
forth in the prospectus apply to purchases of $50,000 or more made within a
13-month period subject to the following statement of intention (the Statement)
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 on shares held in escrow will be
credited to the shareholder's account in shares (or paid in cash, if
requested). If the intended investment is not completed within the specified
13-month period, the purchaser will remit to the Principal Underwriter the
difference between the sales charge actually paid and the sales charge which
would have been paid if the total of such purchases had been made at a single
time. If the difference is not paid within 45 days after written request by
the Principal Underwriter or the securities dealer, the appropriate number of
shares held in escrow will be redeemed to pay such difference. If the proceeds
from this redemption are inadequate, the purchaser will be liable to the
Principal Underwriter for the balance still outstanding. The Statement may be
revised upward at any time during the 13-month period, and such a revision will
be treated as a new Statement, except that the 13-month period during which the
purchase must be made will remain unchanged and there will be no retroactive
reduction of the sales charges paid on prior purchases. Existing holdings
eligible for rights of accumulation (see the prospectus and account
application) may be credited toward satisfying the Statement. During the
Statement period reinvested dividends and capital gain distributions,
investments in money market funds, and investments made under a right of
reinstatement will not be credited toward satisfying the Statement.
In the case of purchase orders by the trustees of certain retirement plans by
payroll deduction, the sales charge for the investments made during the
13-month period will be handled as follows: The regular monthly payroll
deduction investment will be multiplied by 13 and then multiplied by 1.5. The
current value of existing American Funds investments (other than money market
fund investments) and any rollovers or transfers reasonably anticipated to be
invested in non-money market American Funds during the 13-month period is added
to the figure determined above. The sum is the Statement amount and applicable
breakpoint level. On the first investment and all other investments made
pursuant to the Statement, a sales charge will be assessed according to the
sales charge breakpoint thus determined. There will be no retroactive
adjustments in sales charges on investments previously made during the 13-month
period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION -- Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
PRICE OF SHARES -- Purchases of shares are made at the offering price next
determined after the purchase order is received by the fund or American Funds
Service Company; this offering price is effective for orders received prior to
the time of determination of the net asset value and, in the case of orders
placed with dealers, accepted by the Principal Underwriter prior to its close
of business. In case of orders sent directly to the fund or American Funds
Service Company, an investment dealer MUST be indicated. The dealer is
responsible for promptly transmitting purchase orders to the Principal
Underwriter. Orders received by the investment dealer, the Transfer Agent, or
the fund after the time of the determination of the net asset value will be
entered at the next calculated offering price. Prices which appear in the
newspaper are not always indicative of prices at which you will be purchasing
and redeeming shares of the fund, since such prices generally reflect the
previous day's closing price whereas purchases and redemptions are made at the
next calculated closing price. The net asset value per share of money market
funds normally will remain constant at $1.00 based on the fund's current
practice of valuing their shares using the penny-rounding method in accordance
with rules of the Securities and Exchange Commission.
The price you pay for shares, the public offering price, is based on the net
asset value per share which is calculated once daily at the close of trading
(currently 4:00 p.m., New York time) each day the New York Stock Exchange is
open. The New York Stock Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Martin Luther King, Jr.'s Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
All portfolio securities of funds managed by Capital Research and Management
Company are valued, and the net asset value per share is determined, as
follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
Trust. The Trust will not knowingly sell fund shares (other than for the
reinvestment of dividends or capital gain distributions) directly or indirectly
or through a unit investment trust to any other investment company, person or
entity, where, after the sale, such investment company, person, or entity would
own beneficially directly, indirectly, or through a unit investment trust more
than 4.5% of the outstanding shares of the fund without the consent of a
majority of the Board of Trustees.
REDEEMING SHARES
<TABLE>
<CAPTION>
<S> <C>
By writing to American Funds Service Send a letter of instruction specifying the name of the fund,
Company (at the appropriate address the number of shares or dollar amount to be sold, your name
indicated under "Fund Organization and account number. You should also enclose any share
and Management - Principal certificates you wish to redeem. For redemptions over
Underwriter and Transfer Agent" in the $50,000 and for certain redemptions of $50,000 or less (see
prospectus) below), your signature must be guaranteed by a member firm
of a domestic stock exchange or the National Association of
Securities Dealers, Inc. that is an eligible guarantor
institution, bank, savings association, or credit union. You
should verify with the institution that it is an eligible guarantor
prior to signing. Additional documentation may be required
for redemption of shares held in corporate, partnership or
fiduciary accounts. Notarization by a Notary Public is not an
acceptable signature guarantee.
By contacting your investment dealer If you redeem shares through your investment dealer, you
may be charged for this service. SHARES HELD FOR YOU IN
YOUR INVESTMENT DEALER'S STREET NAME MUST BE REDEEMED
THROUGH THE DEALER.
You may have a redemption check You may use this option, provided the account is registered
sent to you by using American in the name of an individual(s), a UGMA/UTMA custodian, or
FundsLine (R) or American FundsLine a non-retirement plan trust. These redemptions may not
Online(SM) or by telephoning, faxing, exceed $50,000 per shareholder per day per fund account
or telegraphing American Funds and the check must be made payable to the shareholder(s) of
Service Company (subject to the record and be sent to the address of record provided the
conditions noted in this section and in address has been used with the account for at least 10 days.
"Telephone and Computer Purchases See "Fund Organization and Management - Principal
Redemptions and Exchanges" below) Underwriter and Transfer Agent" in the prospectus and
"Exchange Privilege" below for the appropriate telephone or
fax number.
In the case of the money market funds, Upon request (use the account application for the money
you may have redemptions wired to market funds) you may establish telephone redemption
your bank by telephoning American privileges (which will enable you to have a redemption sent to
Funds Service Company ($1,000 or your bank account) and/or check writing privileges. If you
more) or by writing a check ($250 or request check writing privileges, you will be provided with
more) checks that you may use to draw against your account.
These checks may be made payable to anyone you
designate and must be signed by the authorized number of
registered shareholders exactly as indicated on your
checking account signature card.
</TABLE>
A SIGNATURE GUARANTEE IS NOT CURRENTLY REQUIRED FOR ANY REDEMPTION OF $50,000
OR LESS PROVIDED THE REDEMPTION CHECK IS MADE PAYABLE TO THE REGISTERED
SHAREHOLDER(S) AND IS MAILED TO THE ADDRESS OF RECORD, AND PROVIDED THE ADDRESS
HAS BEEN USED WITH THE ACCOUNT FOR AT LEAST 10 DAYS.
CONTINGENT DEFERRED SALES CHARGE -- A contingent deferred sales charge of 1%
applies to certain redemptions made within twelve months of purchase on
investments of $1 million or more and on any investment made with no initial
sales charge by any employer-sponsored 403(b) plan or defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares. Shares held
for the longest period are assumed to be redeemed first for purposes of
calculating this charge. The charge is waived for exchanges (except if shares
acquired by exchange were then redeemed within 12 months of the initial
purchase); for distributions from qualified retirement plans and other employee
benefit plans; for redemptions resulting from participant-directed switches
among investment options within a participant-directed employer-sponsored
retirement plan; for distributions from 403(b) plans or IRAs due to death,
disability or attainment of age 59 1/2; for tax-free returns of excess
contributions to IRAs; for redemptions through certain automatic withdrawals
not exceeding 10% of the amount that would otherwise be subject to the charge;
and for redemptions in connection with loans made by qualified retirement
plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN -- The automatic investment plan enables you to make
regular monthly or quarterly investments in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. Bank accounts will be charged
on the day or a few days before investments are credited, depending on the
bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of your account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing the
Transfer Agent.
AUTOMATIC REINVESTMENT -- Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, American
Funds Service Company or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS -- You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the "paying fund") into any other fund in The American Funds Group
(the "receiving fund") subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds to you. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE -- You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to American Funds Service Company (see
"Redeeming Shares"), by contacting your investment dealer, by using American
FundsLine(R) or American FundsLine Online(SM)(see "American FundsLine(R) and
American FundsLine Online(SM)" below), or by telephoning 800/421-0180
toll-free, faxing (see "Transfer Agent" below for the appropriate fax numbers)
or telegraphing American Funds Service Company. (See "Telephone and Computer
Purchases, Redemptions and Exchanges" below.) Shares held in corporate-type
retirement plans for which Capital Guardian Trust Company serves as trustee may
not be exchanged by telephone, fax or telegraph. Exchange redemptions and
purchases are processed simultaneously at the share prices next determined
after the exchange order is received. (See "Purchase of Shares--Price of
Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS ORDINARY SALES
AND PURCHASES.
AUTOMATIC EXCHANGES -- You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS -- Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of your account. The Transfer Agent
arranges for the redemption by the fund of sufficient shares, deposited by you
with the Transfer Agent, to provide the withdrawal payment specified.
ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments , will be reflected on regular confirmation statements from
American Funds Service Company. Dividend and capital gain reinvestments and
purchases through automatic investment plans and certain retirement plans will
be confirmed at least quarterly.
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(SM) -- You may check your
share balance, the price of your shares, or your most recent account
transaction, redeem shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) and American
FundsLine Online(SM). To use this service, call 800/325-3590 from a
TouchTone(TM) telephone or access the American Funds Website on the Internet at
www.americanfunds.com. Redemptions and exchanges through American FundsLine(R)
and American FundsLine Online(SM) are subject to the conditions noted above and
in "Redeeming Shares--Telephone and Computer Purchases, Redemptions and
Exchanges" below. You will need your fund number (see the list of funds in The
American Funds Group under "Purchase of Shares--Investment Minimums and Fund
Numbers"), personal identification number (the last four digits of your Social
Security number or other tax identification number associated with your
account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES -- By using the
telephone (including American FundsLine(R) and American FundsLine Online(SM)),
fax or telegraph redemption and/or exchange options, you agree to hold the
fund, American Funds Service Company, any of its affiliates or mutual funds
managed by such affiliates, and each of their respective directors, trustees,
officers, employees and agents harmless from any losses, expenses, costs or
liability (including attorney fees) which may be incurred in connection with
the exercise of these privileges. Generally, all shareholders are
automatically eligible to use these options. However, you may elect to opt out
of these options by writing American Funds Service Company (you may reinstate
them at any time also by writing American Funds Service Company). If American
Funds Service Company does not employ reasonable procedures to confirm that the
instructions received from any person with appropriate account information are
genuine, the fund may be liable for losses due to unauthorized or fraudulent
instructions. In the event that shareholders are unable to reach the fund by
telephone because of technical difficulties, market conditions, or a natural
disaster, redemption and exchange requests may be made in writing only.
REDEMPTION OF SHARES -- The fund's Declaration of Trust permits the fund to
direct the Transfer Agent to redeem your shares if the shares owned by you
through redemptions, market decline or otherwise, have a value of less than the
minimum initial investment amount required of new shareholders of that series
or Class, (determined, for this purpose only as the greater of the
shareholder's cost or the current net asset value of the shares, including any
shares acquired through reinvestment of income dividends and capital gain
distributions). Prior notice of at least 60 days will be given to you before
the involuntary redemption provision is made effective with respect to your
account. You will have not less than 30 days from the date of such notice
within which to bring the account up to the minimum determined as set forth
above.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the fund's portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through its
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not consider that it has
an obligation to obtain the lowest available commission rate to the exclusion
of price, service and qualitative considerations.
There are occasions on which portfolio transactions for the fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the fund, they are effected only when the
Investment Adviser believes that to do so is in the interest of the fund. When
such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal years ended August 31, 1997 and
1996 amounted to $244,000 and $82,000, respectively.
GENERAL INFORMATION
CUSTODIAN OF ASSETS -- Securities and cash owned by the fund, including
proceeds from the sale of shares of the fund and of securities in the fund's
portfolio, are held by The Chase Manhattan Bank, One Chase Manhattan Plaza, New
York, NY 10081, as Custodian.
TRANSFER AGENT -- American Funds Service Company (AFS), a wholly owned
subsidiary of the Investment Adviser, maintains the record of each
shareholder's account, processes purchases and redemptions of the fund's
shares, acts as dividend and capital gain distribution disbursing agent, and
performs other related shareholder service functions. It was paid a fee of
$66,000 for the fiscal year ended August 31, 1997.
INDEPENDENT ACCOUNTANTS -- Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
floor, Los Angeles, CA 90017, has served as the Trust's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements included in this Statement of Additional
Information have been so included in reliance on the report of the independent
auditors given on the authority of said firm as experts in accounting and
auditing.
REPORTS TO SHAREHOLDERS -- The Trust's fiscal year ends on August 31.
Shareholders are provided, at least semiannually, with reports showing the
investment portfolio, financial statements and other information. The fund's
annual financial statements are audited by Deloitte & Touche LLP whose
selection is determined annually by the Board of Trustees.
PERSONAL INVESTING POLICY -- The Investment Adviser 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. You may obtain a summary of the personal investing policy by
contacting the Secretary of the fund.
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, 1997
<S> <C>
Net asset value and redemption price per share
(Net assets divided by shares outstanding) $16.22
Offering price per share (100/95.25 of per share
net asset value, which takes into account the $17.03
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 will continue to hold office and may appoint
successor Trustees. The shares do not have cumulative voting rights, which
means that the holders of a majority of the shares 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 will 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 was 4.17% based on a 30-day (or one month) period ended
August 31, 1997 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 45.2% for the 30-day
(or one month) period ended August 31, 1997 was 7.61%.
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 ten-year periods ending on August 31, 1997
were 3.61%, 6.04% and 7.18%, 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 100.7%.
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, 1997
<S> <C> <C>
| |
Periods
Number of Years 9/1-8/31 Value
1 1996-1997 $10,361
2 1995 - 1997 10,952
3 1994 - 1997 11,840
4 1993 - 1997 11,849
5 1992 - 1997 13,407
6 1991 - 1997 14,795
7 1990 - 1997 16,510
8 1989 - 1997 17,156
9 1988 - 1997 18,947
10 1987 - 1997 19,998
lifetime 1986*- 1997 20,070
</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, 1997)
<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
1996 949 7,403 17,403 10,520 58 7,869 18,447
1997 996 8,399 18,399 10,813 161 9,096 20,070
</TABLE>
* From inception on October 28, 1986
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
The dollar amount of capital gain distributions during the period was $160.
Note that past results are not an indication of future investment results.
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."
<PAGE>
<TABLE>
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, August 31, 1997
<S> <C> <C>
Principal Market
Amount Value
(000) (000)
Tax-Exempt Securities Maturing in More than
One Year - 94.79%
Educational Facilities Authority, Revenue Bonds
(University of San Francisco), Series 1996, MBIA
Insured, 5.70% 2011 $1,190 $1,282
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 6400 6443
Kaiser Permanente Medical Care Program, Semi-Annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2000 1978
Pacific Presbyterian Medical Center, Insured
Variable Rate Demand, 1985 Series B,
6.75% 2015 (Prerefunded 2002) 4000 4377
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1250 1337
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4000 4430
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1150 1210
Housing Finance Agency:
Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 582
1991 Series G, 6.95% 2011 780 818
1995 Series K, 5.55% 2021 905 923
1997 Series H, MBIA Insured, 5.50% 2017 3250 3261
Single Family Mortgage Purchase Bonds, Series B2,
AMBAC Insured, 5.70% 2007 3420 3493
Maritime Infrastructure Authority,
Airport Revenue Bonds (San Diego Unified Port
District Airport Project-Lindbergh Field), Series 1995,
AMBAC Insured, 5.00% 2020 2265 2106
Pollution Control Financing Authority:
Pollution Control Revenue Bonds (Pacific Gas and
Electric Co.):
1992 Series B, 6.35% 2009 4400 4708
1993 Series B, AMBAC Insured, 5.85% 2023 1000 1016
Resource Recovery Revenue Bonds, Waste Management Inc.
Guarantee Bond, Series A, 7.15% 2011 4500 4896
Solid Waste Disposal Revenue Bonds (CanFibre
of Riverside Project), Series 1997A,
9.00% 2019 4000 4038
Solid Waste Revenue Bonds (Keller Canyon Landfill
Co. Project), BFI Corp. Guarantee, Series 1992:
5.80% 2016 1250 1271
6.875% 2027 5200 5730
Public Works Board, Lease Revenue Bonds:
California Community Colleges (Various Community
College Projects), 1994 Series B, 6.75% 2005 1000 1137
The Regents of the University of California,
Various University of California Projects:
1993 Series B, MBIA Insured, 5.50% 2014 1500 1561
1993 Series A, 5.50% 2021 1000 986
Department of Corrections, State Prison:
Imperial County, 1991 Series A, 6.50% 2017 1000 1139
Lassen County (Susanville), 1993 Series D:
5.25% 2015 2000 2010
5.375% 2018 1600 1558
Refunding Revenue Bonds (1989 Multiple Purpose
Projects), Series C, AMBAC Insured, 5.00% 2023 2000 1870
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1250 1349
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program):
1995 Series B, 7.75% 2026 2845 3231
1996 Series A, 7.75% 2027 1205 1373
Statewide Communities Development Authority:
Certificates of Participation, J. Paul Getty Trust,
5.00% 2015 1000 965
Hospital Revenue Certificates of Participation,
Cedars-Sinai Medical Center, Series 1992, 6.50% 2012 1900 2152
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3000 3009
Sisters of Charity of Leavenworth Health Services
Corp., Certificates of Participation, Series 1994,
5.00% 2023 2000 1857
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 520
Series O, MBIA Insured, 5.00% 2022 2000 1890
Series H, 6.90% 2025 (Prerefunded 2000) 2000 2173
Alameda Public Financing Authority, 1997 Revenue Bonds
(Marina Village Assessment District Bond Refinancing):
6.05% 2008 1110 1135
6.125% 2009 1340 1370
6.375% 2014 1100 1124
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured,
5.375% 2009 1500 1577
Anaheim Public Financing Authority, Lease Revenue Bonds
(Anaheim Public Improvements Project), Senior Lease
Revenue Bonds, 1997 Series A, FSA Insured, 6.00% 2024 1500 1643
Association of Bay Area Governments Finance Authority
For Nonprofit Corporations, Certificates of Participation
(Stanford University Hospital), Series 1993:
5.75% 2005 2240 2388
5.50% 2013 2500 2513
Redevelopment Agency of the City of Burbank
(Golden State Redevelopment Project), Tax
Allocation Bonds, 1993 Series A:
6.00% 2013 1500 1549
6.00% 2023 1000 1022
Castaic Lake Water Agency Financing Corp., Refunding
Revenue Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A,
7.25% 2010 1400 1715
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
Series 1993:
6.10% 2013 3000 3117
6.20% 2020 5000 5194
Del Mar Race Track Authority, Revenue Refunding Bonds,
Series 1996, 6.00% 2001 1750 1808
East Bay Municpal Utility District (Alameda and Contra
Costa Counties), Wastewater System Subordinated Revenue
Refunding Bonds, Series 1996, FGIC Insured, 5.00% 2026 2230 2091
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A, 6.00% 2016 2500 2597
City of Fremont, Multifamily Housing Revenue Refunding
Bonds (Durham Greens Project), Issue A of 1995,
5.40% 2026 3000 3120
City of Fresno, Sewer System Revenue Bonds, Series 1993A
AMBAC Insured, 5.25% 2019 1000 988
Kern High School District (County of Kern), General
Obligation Refunding Bonds, Series 1996A,
MBIA Insured, 6.60% 2016 1000 1155
City of Long Beach:
Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 821
Harbor Revenue Bonds, Series 1993, 5.125% 2018 1000 943
City of Los Angeles:
Convention and Exhibition Center Authority,
Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2500 2696
7.00% 2020 (Prerefunded 1999) 2000 2143
Harbor Department Revenue Bonds:
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1750 2190
Issue 1995, Series B, 6.625% 2025 4750 5118
Metropolitan Transportation Authority:
Proposition A Sales Tax Revenue Refunding Bonds,
Series 1993-A, FGIC Insured, 5.00% 2021 2000 1876
Proposition C Sales Tax Revenue Bonds, Second
Senior Bonds, Series 1995-A, AMBAC Insured,
5.00% 2025 1000 935
Multifamily Housing Revenue Bonds (GNMA Collateralized -
Ridgecroft Apartments Project), Series 1997E,
6.125% 2027 2005 2049
Transportation Commission, Sales Tax Revenue Bonds:
Series 1989, 7.00% 2019 2250 2401
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2500 2773
Waste Water System Revenue Bonds, Series 1990-B,
7.15% 2020 (Prerefunded 2000) 1000 1097
Department of Water and Power, Electric Plant Revenue Bonds,
Issue of 1990:
7.125% 2030 (Subject to Crossover Refunding 2000) 2500 2711
7.10% 2031 (Subject to Crossover Refunding 2001) 3000 3275
County of Los Angeles, Capital Asset Leasing Corp.,
Certificates of Participation (Marina del Rey), Series A:
6.25% 2003 4635 4952
6.50% 2008 6000 6368
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1000 1006
Northern California Public Power Agency, Geothermal Project
#3, Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 3725 3835
Port of Oakland, Revenue Bonds,
1992 Series E, MBIA Insured, 6.40% 2022 1670 1787
County of Orange:
Aliso Viejo Special Tax Bonds of Community
Facilities District No. 88-1, Series A of 1992:
7.25% 2008 (Prerefunded 2002) 1500 1726
7.35% 2018 (Prerefunded 2002) 4250 4908
Local Transportation Authority, First Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1000 1101
MBIA Insured, 6.00% 2009 1500 1657
Recovery Certificates of Participation, 1996 Series A,
MBIA Insured, 6.00% 2008 3000 3285
City of Oxnard, Assessment District No.97-1-R
(Pacific Commerce Center), Limited Obligation
Refunding Bonds:
5.50% 2004 1500 1524
5.60% 2005 2920 2971
5.70% 2006 1215 1241
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1565 1623
6.85% 2005 2715 2825
7.00% 2006 1310 1366
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1000 1098
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2195 2140
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.70% 2001 3855 3997
6.15% 2012 1870 1966
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4000 3701
5.00% 2023 2000 1826
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5500 6151
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds:
(Campbell Soup Project), 1995 Series:
6.00% 2003 1500 1595
6.50% 2005 1100 1198
(Proctor & Gamble Project), 1995 Series:
7.00% 2005 1700 1905
6.375% 2010 3500 3792
6.50% 2014 1000 1080
6.50% 2021 4000 4279
Sacramento Municipal Utility District,
Electric Revenue Bonds, 1997 Series K, AMBAC Insured,
5.70% 2017 2500 2639
County of Sacramento:
Laguna Creek Ranch/Elliott Ranch Community
Facilities District No.1, Improvement Area
No.2 Special Tax Refunding Bonds (Elliott Ranch):
6.00% 2012 440 433
6.30% 2021 500 500
Single Family Mortgage Revenue Bonds
(GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1500 2161
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 (Prerefunded 2001) 2435 2718
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2000 2152
City of San Diego/MTDB Authority (San Diego Old Town
Light Rail Transit Extension), 1993 Lease Revenue
Bonds, 5.375% 2023 1500 1464
County of San Diego, Reassessment District No. 97-1
(4-S Ranch), Limited Obligation Improvement Bonds:
5.90% 2007 1435 1427
5.90% 2008 1000 990
City and County of San Francisco:
Airports Commission, San Francisco International Airport
Second Series Revenue Bonds, Issue 9B, 5.25% 2020 1000 965
Port Commission Revenue Refunding Bonds,
Series 1994, 5.90% 2009 1500 1552
Redevelopment Agency:
Lease Revenue Bonds, Series 1992 (George R. Moscone
Convention Center), 5.50% 2018 2560 2516
Residential Facility Revenue Bonds (Coventry Park
Project), 1996 Series A, 8.50% 2026 5000 5184
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 2235 2406
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds, 6.75% 2032 1500 1615
Redevelopment Agency of the City of San Jose,
Multifamily Housing Revenue Bonds
(GNMA Collateralized - The Miraido Village), Series 1997A:
5.30% 2012 1000 995
5.65% 2022 1500 1490
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1000 1116
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2200 2794
Shafter Joint Powers Financing Authority Lease Revenue
Bonds, 1997 Series A (Community Correctional Facility
Acquisition Project):
5.50% 2006 1535 1585
5.95% 2011 1700 1768
South Tahoe Joint Powers Financing Authority, Refunding
Revenue Bonds (South Tahoe Redevelopment Project Area
No. 1), 1995 Series B, 6.25% 2020 3250 3363
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1105 1158
City of Stockton, Mello-Roos Revenue Bonds,
Series 1997A, Community Facilities District
No. 90-2 (Brookside Estates)(1):
5.50% 2005 1560 1562
5.75% 2008 1840 1843
5.95% 2010 1000 1001
---------
274113
---------
Tax-Exempt Securities Maturing in
One Year or Less - 5.64%
County of Contra Costa, 1997-1998 Tax and Revenue
Anticipation Notes, Series A, 4.50% 7/1/98 7400 7442
City of Los Angeles:
State Building Authority, Lease Revenue Bonds,
Department of General Services Lease,
Series 1988 A, 7.50% 2011 (Prerefunded 1998) 3500 3634
Waste Water System Revenue Bonds,
Series 1987, 8.125% 2017 (Prerefunded 1997) 1000 1027
County of Los Angeles, 1997-98 Tax and Revenue
Anticipation Notes, Series A, 4.50% 6/30/98 3500 3520
Pollution Control Financing Authority,
Pollution Control Refunding Revenue Bonds
(Shell Oil Co. Project), 1991 Series A,
3.35% 2010(2) 700 700
---------
16323
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$271,382,000) 290436
Excess of payables over cash and receivables 1270
---------
$289,166
NET ASSETS =========
(1)Represents a when-issued security.
(2)Coupon rate changes periodically.
See Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
The Tax-Exempt Fund of California
Financial Statements
<S> <C> <C>
Statement of Assets and Liabilities
at August 31, 1997 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $271,382) $290,436
Cash 20
Receivables for--
Sales of fund's shares $ 217
Accrued interest 3,837 4,054
--------------- -----------
294,510
Liabilities:
Payables for--
Purchases of investments 4,400
Repurchases of fund's shares 99
Dividends payable 584
Management services 98
Accrued expenses 163 5,344
--------------- -----------
Net Assets at August 31, 1997--
Equivalent to $16.22 per share on
17,825,514 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $289,166
=========
Statement of Operations
for the year ended August 31, 1997
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $15,762
Expenses:
Management services fee $1,088
Distribution expenses 614
Transfer agent fee 66
Reports to shareholders 50
Registration statement and prospectus 22
Postage, stationery and supplies 23
Trustees' fees 16
Auditing and legal fees 34
Custodian fee 13
Taxes other than federal income tax 4
Other expenses 14 1,944
--------------- -----------
Net investment income 13,818
-----------
Realized Gain and Increase in Unrealized
Appreciation on Investments:
Net realized gain 1,397
Net unrealized appreciation:
Beginning of year 11,753
End of year 19,054
---------------
Net increase in unrealized appreciation 7,301
-----------
Net realized gain and increase in
unrealized appreciation on investments 8,698
-----------
Net Increase in Net Assets Resulting
from Operations $22,516
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31
1997 1996
--------- ---------
Operations:
Net investment income $ 13,818 $ 12,984
Net realized gain on investments 1,397 1,373
Net change in unrealized appreciation
on investments 7,301 (944)
------------------ -----------
Net increase in net assets
resulting from operations 22,516 13,413
------------------ -----------
Dividends and Distributions Paid to
Shareholders:
Dividends paid from net investment income (13,821) (12,978)
Distributions from net realized gain
on investments (1,382) -
------------------ -----------
Total dividends and distributions (15,203) (12,978)
------------------ -----------
Capital Share Transactions:
Proceeds from shares sold:
3,438,562 and 3,016,709
shares, respectively 55,139 48,021
Proceeds from shares issued in reinvestment of net
investment income dividends and distributions of
net realized gain on investments:
535,942 and 439,139 shares, respectively 8,594 6,983
Cost of shares repurchased:
2,150,063 and 2,264,964 shares,
respectively (34,412) (36,022)
------------------ -----------
Net increase in net assets
resulting from capital share transactions 29,321 18,982
------------------ -----------
Total Increase in Net Assets 36,634 19,417
Net Assets:
Beginning of year 252,532 233,115
------------------ -----------
End of year $289,166 $252,532
=========== ===========
See Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
Per-Share Data and Ratios
<S> <C> <C> <C> <C> <C>
Year ended August 31
1997 1996 1995 1994 1993
Net Asset Value, Beginning
of Year $15.78 $15.74 $15.40 $16.30 $15.21
--------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income .83 .84 .86 .84 .84
Net realized and
unrealized gain
(loss) on investments .53 .04 .34 (.84) 1.09
--------- ------- ------- ------- -------
Total income from
investment operations 1.36 .88 1.20 .00 1.93
--------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income (.83) (.84) (.86) (.84) (.84)
Distributions from net
realized gains (.09) - - (.06) -
--------- ------- ------- ------- -------
Total distributions (.92) (.84) (.86) (.90) (.84)
--------- ------- ------- ------- -------
Net Asset Value, End of Year $16.22 $15.78 $15.74 $15.40 $16.30
========= ======= ======= ======= =======
Total Return* 8.80% 5.65% 8.16% 0.13% 13.08%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $289 $253 $233 $226 $223
Ratio of expenses to average
net assets .72% .73% .73% .71% .71%
Ratio of net income to
average net assets 5.15% 5.25% 5.65% 5.28% 5.36%
Portfolio turnover rate 15.68% 27.60% 41.36% 15.08% 16.82%
*Calculated without deducting a sales charge. The maximum
sales charge is 4.75% of the fund's offering price.
</TABLE>
<PAGE>
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,
1997, 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 per-share data and ratios for each of the five years in the
period then ended. These financial statements and 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 as of August 31, 1997 by correspondence with the custodian and brokers;
where replies were not received, we performed other 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 as of August 31, 1997, 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.
/s/Deloitte & Touche LLP
Los Angeles, California
September 25, 1997
Tax Information (unaudited)
During the fiscal year ended August 31, 1997, the fund paid 82.8 cents per
share of exempt-interest distributions within the meaning of Section
852(b)(5)(A) of the Internal Revenue Code and 8.5 cents per share of capital
gain distributions within the meaning of Section 852(b)(3)(C) 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 calendar
year-end information you receive from the fund's transfer agent.
