THE TAX-EXEMPT FUND OF CALIFORNIA
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
[Photo collage: Outline of state superimposed over photos of hibiscus flower,
redwood trees, ocean]
[The American Funds Group(R)]
THE TAX-EXEMPT FUND OF CALIFORNIA(R) SEEKS A HIGH LEVEL OF CURRENT INCOME FREE
FROM FEDERAL AND CALIFORNIA INCOME TAXES, PRIMARILY THROUGH INVESTMENTS IN
CALIFORNIA MUNICIPAL BONDS. ADDITIONALLY, THE FUND SEEKS TO PRESERVE CAPITAL.
Fund results in this report were computed without a sales charge, unless
otherwise indicated. Here are the total returns and average annual compound
returns with all distributions reinvested for periods ended March 31, 1997 (the
most recent calendar quarter), assuming payment of the 4.75% maximum sales
charge at the beginning of the stated periods.
<TABLE>
<CAPTION>
Total Average Annual
Return Compound Return
<S> <C> <C>
10 Years +77.74% +5.92%
Five Years +34.82% +6.16%
One Year +00.69% -
</TABLE>
Sales charges are lower for accounts of $25,000 or more. The fund's 30-day
yield as of March 31, 1997, calculated in accordance with the Securities and
Exchange Commission formula, was 4.49%. The fund's distribution rate at maximum
offering price as of that date was 5.05%. The SEC yield reflects income the
fund expects to earn based on its current portfolio of securities, while the
distribution rate is based solely on the fund's past dividends. Accordingly,
the fund's SEC yield and distribution rate may differ.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN WILL
VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON. Income may be subject to
federal alternative minimum taxes. Certain other income, as well as capital
gain distributions, may be taxable.
FELLOW SHAREHOLDERS:
The Tax-Exempt Fund of California recently passed a significant milestone. The
fund marked its 10th anniversary in October. We are pleased that the fund's
first 10 years were a rewarding time for shareholders. Investors who reinvested
their dividends saw the value of their holdings increase during the fund's
lifetime by 102.5%, or 7.1% annually, through February 28. Over the same
period, the average California tax-free municipal bond fund rose 100.2%,
according to Lipper Analytical Services.
During the half-year ended February 28, shareholders earned a 4.5% total
return, assuming they reinvested their dividends, as most shareholders do. The
unmanaged Lehman Brothers Municipal Bond Index, which measures the national
investment-grade tax-exempt market, posted a 5.1% total return for the six
months. The average California tax-exempt fund, as tracked by Lipper, had a
total return of 4.8%.
The fund paid monthly dividends totaling 41.5 cents a share and a taxable
capital gain distribution of 8.5 cents (which included a short-term capital
gain of 1.3 cents) in November. Those who took their dividends in cash had an
income return of 2.7% (5.4% annualized) largely free of both state and federal
taxes. This annualized income return is the equivalent of a taxable return of
9.9% for shareholders in the top 45.2% combined state and federal tax bracket.
During the period your fund took a somewhat cautious approach by holding bonds
with shorter maturities. When interest rates rise or fall, bonds with longer
maturities typically fluctuate more than shorter term bonds. Thus, when the
market rallied strongly in November, your fund did not gain as much as many of
its counterparts.
The bond market's advance at the end of 1996 was in contrast to the first few
months of the year when government statistics indicated the economy was growing
rapidly. The reports prompted a selloff of bonds amid fears that the Federal
Reserve Board would soon raise short-term interest rates. By September,
however, it became apparent that inflation remained in check. Confidence in the
outlook for interest rates returned and investors once again pushed bond prices
up.
(Since the end of the semi-annual period, however, the Fed raised the federal
funds rate - the rate banks charge each other on overnight loans - 0.25%. It is
uncertain whether this was a one-time event or further hikes will follow.)
California municipal bonds benefited from the rally in 1996, and also drew
strength from the improving state economy. Employment figures are considered an
important economic barometer and in 1996 the state added 379,000 jobs.
While the improving statewide economy is a cause for optimism, several
unanswered questions hang over the state's municipal bond market. Chief among
the concerns is the impact of a statewide initiative approved in last
November's election. Proposition 218 requires voter approval on almost all
taxes and charges. The proposition could require dramatic changes in the way
communities manage their budgets and assess fees for services such as water and
sewer lines. How big an impact these new restrictions will have is uncertain.
Changes at the national level could also have an impact on California's
municipal finances. If the federal government shifts responsibility for many
programs to the states and their localities, as proposed, the financial burdens
on California and its cities and counties could increase. Most of your fund's
holdings, however, are in bonds for specific projects which generate revenues
independent of the political process.
It may be several years before the effect of changes in federal policies and
California's laws are understood. We will continue to closely monitor the
situations in Sacramento and Washington, D.C., as well as the economic outlook
for the state and nation.
We look forward to reporting to you again in six months when we will review
your fund's first 10 years in greater detail.
Cordially,
/s/Paul G. Haaga, Jr.
PAUL G. HAAGA, JR.
Chairman of the Board
/s/Abner D. Goldstine
ABNER D. GOLDSTINE
President
April 18, 1997
<TABLE>
<CAPTION>
Investment Highlights
through 2/28/97
<S> <C>
6-month total return +4.5%
(income plus capital changes,
with dividends reinvested)
12-month total return +5.2%
(income plus capital changes,
with dividends reinvested)
Tax-free distribution rate for February 5.0%
(income return only, reflecting
maximum sales charge)
Taxable equivalent distribution rate 9.1%
(for February, assuming a 45.2%
combined state and federal tax rate)
SEC 30-day yield as of February 28 4.5%
(reflecting maximum sales charge)
</TABLE>
FOR CURRENT YIELD INFORMATION, PLEASE CALL TOLL-FREE:
800/421-0180.
WHY DOUBLE TAX-FREE INVESTING IS WORTHWHILE
To use this table, find your estimated taxable income to determine your
combined federal and California tax rate. Then look at the right-hand column to
see what you would have had to earn from a taxable investment to equal the
fund's 5.0% tax-exempt distribution rate in February.
Because of tax increases in recent years, many high-income investors are
finding that their returns on taxable fixed-income issues have to be even
higher to match those currently offered by tax-exempt municipals. For instance,
a couple with a taxable income of $150,000 faces a combined federal and
California tax rate of 37.4%. In this bracket, the fund's current 5.0%
distribution rate would be equivalent to a return on a taxable fixed-income
investment of 8.0%. Investors in the highest bracket (45.2%) would need a
taxable distribution rate of 9.1% to equal the fund's tax-exempt distribution
rate.
<TABLE>
<CAPTION>
Federal Income Tax Rates The fund's 5.0%
tax-exempt dis-
Your Taxable Income Combined tribution rate in
Federal & February /2/ is equiv-
California alent to a taxable
Single Joint Tax Rate /1/ distribution rate of:
<S> <C> <C> <C>
$18,357 - 24,650 $36,714 - 41,200 20.1% 6.3%
24,651 - 25,484 41,201 - 50,968 32.3 7.4
25,485 - 32,207 50,969 - 64,414 33.8 7.6
32,208 - 59,750 64,415 - 99,600 34.7 7.7
59,751 - 124,650 99,601 - 151,750 37.4 8.0
124,651 - 271,050 151,751 - 271,050 42.0 8.6
Over 271,050 Over 271,050 45.2 9.1
</TABLE>
/1/ Based on 1997 federal and 1996 California marginal tax rates. The rates do
not include an adjustment for the loss of personal exemptions and the
phase-out of itemized deductions that are applicable to certain taxable income
levels.
/2/ The fund's distribution rate in the table is based on offering price and
therefore reflects the effects of the maximum sales charge on the initial
investment. It is not a projection of future results.
<TABLE>
THE TAX-EXEMPT FUND OF CALIFORNIA
Investment Portfolio, February 28, 1997
Unaudited Principal Market
Amount Value
(000) (000)
<S> <C> <C>
Tax-Exempt Securities Maturing in More than
One Year - 93.61%
Various Purpose General Obligation Bonds, 7.00% 2005 $1,000 $1,152
Educational Facilities Authority, Revenue Bonds
(University of San Francisco), Series 1996, MBIA
Insured, 5.70% 2011 1190 1249
Health Facilities Financing Authority:
Hospital Revenue Bonds:
Downey Community Hospital, Series 1993, 5.75% 2015 6400 6262
Kaiser Permanente Medical Care Program, Semi-Annual
Tender Revenue Bonds, 1985 Tender Bonds, 5.55% 2025 2000 1908
Pacific Presbyterian Medical Center Insured Variable
Rate Demand, 1985 Series B,
6.75% 2015 (Prerefunded 2002) 4125 4579
St. Joseph Health System:
Series 1989 A, 6.90% 2014 (Prerefunded 1999) 1250 1353
Series 1991 A, 6.75% 2021 (Prerefunded 2001) 4000 4445
Hospital Revenue Refunding Bonds (Saint Francis
Memorial Hospital), Series 1993A, 5.75% 2005 1150 1188
Housing Finance Agency:
Home Mortgage Revenue Bonds:
1991 Series A, 7.35% 2011 550 583
1991 Series G, 6.95% 2011 1750 1834
1995 Series K, 5.55% 2021 2450 2478
Single Family Mortgage Purchase Bonds, Series B2,
AMBAC Insured, 5.70% 2007 3585 3635
Maritime Infrastructure Authority,
Airport Revenue Bonds (San Diego Unified Port
District Airport Project-Lindbergh Field) Series 1995,
5.00% 2020 2265 2048
Pollution Control Financing Authority:
Pollution Control Revenue Bonds (Pacific Gas and
Electric Co.):
1992 Series B, 6.35% 2009 2900 3019
1993 Series B, AMBAC Insured, 5.85% 2023 1000 1002
Resource Recovery Revenue Bonds, Waste Management Inc.
Guarantee Bond, Series A, 7.15% 2011 3500 3788
Solid Waste Revenue Bonds (Keller Canyon Landfill
Co. Project), BFI Corp. Guarantee, Series 1992:
5.80% 2016 1250 1229
6.875% 2027 5200 5611
Public Works Board, Lease Revenue Bonds:
California Community Colleges, (Various Community
College Projects), 1994 Series B, 6.75% 2005 1000 1122
Department of Corrections, State Prison:
Imperial County, 1991 Series A, 6.50% 2017 1000 1110
Lassen County (Susanville), 1993 Series D, 5.25% 2015 2000 1962
Refunding Revenue Bonds (1989 Multiple Purpose
Projects), Series C, AMBAC Insured:
5.00% 2014 3000 2833
5.00% 2023 1000 898
1991 Certificates of Participation (UCLA Central
Chiller/Cogeneration Facility), 7.00% 2015
(Prerefunded 1999) 1250 1364
Rural Home Mortgage Finance Authority, Single Family
Mortgage Revenue Bonds (Mortgage-Backed Securities
Program):
1995 Series B, 7.75% 2026 2860 3218
1996 Series A, 6.45% 2027 1500 1683
Statewide Communities Development Authority:
Certificates of Participation, J. Paul Getty Trust
5.00% 2015 1000 934
Hospital Revenue Certificates of Participation,
Cedars-Sinai Medical Center, Series 1992, 6.50% 2012 1900 2086
St. Joseph Health System Obligated Group,
Certificates of Participation, 5.50% 2014 3000 2917
Sisters of Charity of Leavenworth Health Services
Corp., Certificates of Participation, Series 1994,
5.00% 2023 2000 1780
Department of Water Resources, Central Valley Project,
Water System Revenue Bonds:
Series F, 7.25% 2010 500 526
Series O, MBIA Insured, 5.00% 2022 2000 1823
Series H, 6.90% 2025 (Prerefunded 2000) 2000 2196
County of Alameda, 1993 Refunding Certificates of
Participation (Santa Rita Jail Project), MBIA Insured,
5.375% 2009 1500 1530
Anaheim Public Financing Authority, Lease Revenue Bonds,
(Anaheim Public Improvements Project), Senior Lease
Revenue Bonds, 1997 Series A, FSA Insured 6.00% 2024 1500 1593
Association of Bay Area Governments Finance Authority
For Nonprofit Corporations, Certificates of Participation
(Stanford University Hospital), Series 1993, 5.50% 2013 2500 2440
Castaic Lake Water Agency Financing Corp., Refunding Revenue
Certificates of Participation (Water System
Improvement Projects), MBIA Insured, Series 1994A,
7.25% 2010 1400 1673
Central Valley Financing Authority, Cogeneration
Project Revenue Bonds (Carson Ice-Gen Project),
Series 1993:
6.10% 2013 3000 3040
6.20% 2020 5000 5059
Del Mar Race Track Authority, Revenue Refunding Bonds,
Series 1996, 6.00% 2001 1500 1539
East Bay Municpal Utility District (Alameda and Contra
Costa Counties), Water System Subordinated Revenue
Refunding Bonds, Series 1996, FGIC Insured, 5.00% 2026 1000 909
Foothill/Eastern Transportation Corridor Agency, Toll
Road Revenue Bonds, Series 1995A, 6.00% 2016 2500 2514
City of Fremont, Multifamily Housing Revenue Refunding
Bonds (Durham Greens Project), Issue A of 1995,
5.40% 2026 3000 3018
City of Fresno Sewer System Revenue Bonds, Series 1993A
AMBAC Insured, 5.25% 2019 1000 960
Kern High School District (County of Kern), General
Obligation Refunding Bonds, Series 1996A,
MBIA Insured, 6.60% 2016 1000 1145
City of Long Beach:
Financing Authority Revenue Bonds,
Series 1992, AMBAC Insured, 6.00% 2017 750 801
Harbor Revenue Bonds, Series 1993, 5.125% 2018 1000 912
City of Los Angeles:
State Building Authority, Lease Revenue Bonds,
Department of General Services Lease,
Series 1988 A, 7.50% 2011 (Prerefunded 1998) 3500 3704
Convention and Exhibition Center Authority,
Certificates of Participation:
7.375% 2018 (Prerefunded 1999) 2500 2736
7.00% 2020 (Prerefunded 1999) 2000 2172
Harbor Department Revenue Bonds:
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1750 2203
Issue 1995, 6.625% 2025 4750 5058
Waste Water System Revenue Bonds:
Series 1996-A, 5.00% 2012 1000 969
Series 1990-B, 7.15% 2020 (Prerefunded 2000) 1000 1110
Department of Water and Power:
Electric Plant Revenue Bonds, Issue of 1990:
7.125% 2030 (Subject to Crossover Refunding 2000) 2500 2760
7.10% 2031 (Subject to Crossover Refunding 2001) 3000 3337
Water Works Refunding Revenue Bonds, Issue of 1989,
7.00% 2022 1000 1073
County of Los Angeles:
Capital Asset Leasing Corp., Certificates of Participation
(Marina del Rey), Series A:
6.25% 2003 4635 4872
6.50% 2008 6000 6250
Metropolitan Transportation Authority:
Proposition A Sales Tax Revenue Refunding Bonds,
Series 1993-A, FGIC Insured, 5.00% 2021 2000 1806
Proposition C Sales Tax Revenue Bonds, Second
Senior Bonds, Series 1995-A, AMBAC Insured,
5.00% 2025 1000 905
Transportation Commission, Sales Tax Revenue Bonds:
Series 1989, 7.00% 2019 2250 2411
Series 1991-A, 6.75% 2020 (Prerefunded 2001) 2500 2789
Marin Municipal Water District Water Revenue Bonds,
Series 1993, 5.65% 2023 1000 982
Northern California Public Power Agency, Geothermal Project
#3, Special Revenue Bonds, 1993 Refunding Series A,
5.60% 2006 3725 3873
City of Oakland, Special Refunding Revenue Bonds
(Pension Financing), 1988 Series A, FGIC Insured,
7.60% 2021 1000 1066
Port of Oakland, Revenue Bonds,
1992 Series E, MBIA Insured, 6.40% 2022 2670 2826
County of Orange:
Airport Revenue Refunding Bonds, Series 1993,
MBIA Insured, 5.25% 2007 1500 1509
Aliso Viejo Special Tax Bonds of
Community Facilities District No. 88-1, Series A of 1992:
7.25% 2008 (Prerefunded 2002) 1500 1735
7.35% 2018 (Prerefunded 2002) 4250 4937
Local Transportation Authority, First Senior Fixed-Rate Bonds:
AMBAC Insured, 6.00% 2007 1000 1083
MBIA Insured, 6.00% 2009 1500 1616
Recovery Certificates of Participation, 1996 Series A
MBIA Insured, 6.00% 2008 4500 4861
South Orange County, Public Financing Authority,
Special Tax Revenue Bonds, Series B (Junior Lien
Bonds):
6.55% 2002 1565 1628
6.65% 2003 1320 1375
6.85% 2005 2715 2835
7.00% 2006 1310 1371
City of Pasadena, Certificates of Participation (1990
Capital Improvements Project), 7.00% 2003
(Prerefunded 2000) 1000 1109
Redevelopment Agency of the City of Pittsburg, Los
Medanos Community Development Project, Tax Allocation
Refunding Bonds, AMBAC Insured, Series 1993A,
5.25% 2015 2195 2095
Pleasanton Joint Powers Financing Authority,
Reassessment Revenue Bonds, 1993 Series A:
5.40% 1999 980 1000
5.60% 2000 980 1008
5.70% 2001 3880 4001
6.15% 2012 1885 1943
Redding Joint Powers Financing Authority, Solid Waste
and Corporation Yard Revenue Bonds, 1993 Series A:
5.00% 2018 4000 3547
5.00% 2023 2000 1742
Sacramento City Financing Authority, 1991 Revenue
Bonds, 6.80% 2020 (Prerefunded 2001) 5500 6185
Sacramento Cogeneration Authority, Cogeneration
Project Revenue Bonds:
(Campbell Soup Project), 1995 Series:
6.00% 2003 1500 1566
6.50% 2005 1100 1182
(Proctor & Gamble Project), 1995 Series:
7.00% 2005 1700 1879
6.375% 2010 3500 3659
6.50% 2014 1000 1043
6.50% 2021 4000 4141
County of Sacramento, Single Family Mortgage Revenue
Bonds (GNMA Mortgage-Backed Securities Program),
Issue A of 1987, 9.00% 2019 1500 1979
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 2730
County of San Bernardino, Certificates of
Participation, Series B (Capital Facilities
Project), 6.25% 2019 (Prerefunded 2001) 2000 2163
City of San Diego/MTDB Authority (San Diego Old Town
Light Rail Transit Extension), 1993 Lease Revenue
Bonds, 5.375% 2023 1500 1408
County of San Diego, The San Diego Regional Building
Authority, Certificates of Participation (1991 MTS
Tower Refunding Project), MBIA Insured, 6.363% 2019 1000 1052
City and County of San Francisco:
Airports Commission, San Francisco International Airport
Second Series Revenue Bonds, Issue 9, 5.25% 2020 1000 944
Port Commission Revenue Refunding Bonds,
Series 1994, 5.90% 2009 1500 1525
Redevelopment Agency:
Lease Revenue Bonds, Series 1992 (George R. Moscone
Convention Center), 5.50% 2018 3560 3353
Residential Facility Revenue Bonds (Coventry Park
Project), 1996 Series A, 8.50% 2026 5000 5030
County of San Joaquin, Certificates of Participation
(1993 General Hospital Project), 6.625% 2020 2235 2346
San Joaquin Hills Transportation Corridor Agency
(Orange County), Senior Lien Toll Road Revenue
Bonds, 6.75% 2032 1500 1584
Santa Ana Financing Authority, Police Administration
and Holding Facility Lease Revenue Bonds, MBIA
Insured, Series 1994A, 6.25% 2019 1000 1095
Santa Clara County Financing Authority, Lease Revenue
Bonds (VMC Facility Replacement Project), AMBAC
Insured, 1994 Series A, 7.75% 2009 2200 2726
Shafter Joint Powers Financing Authority Lease Revenue
Bonds, 1997 Series A (Community Correctional Facility
Acquisition Project):
5.50% 2006 1535 1548
5.95% 2011 1700 1714
South Tahoe Joint Powers Financing Authority, Refunding
Revenue Bonds (South Tahoe Redevelopment Project Area
No. 1), 1995 Series B, 6.25% 2020 3250 3281
Southern California Home Financing Authority, Single
Family Mortgage Revenue Bonds (GNMA and FNMA
Mortgage-Backed Securities Program), 1992 Series A,
6.75% 2022 1105 1143
The Regents of the University of California,
Various University of California Projects:
1994 Series B, 5.75% 2002 1000 1056
1993 Series A, 5.50% 2021 1000 950
---------
250527
---------
Tax-Exempt Securities Maturing in
One Year or Less - 5.82%
State of California, 1996-97 Revenue Anticipation Notes,
Series A, 4.50% 6/30/97 8450 8476
City of Los Angeles, Waste Water System Revenue Bonds,
Series 1987, 8.125% 2017 (Prerefunded 1997) 1500 1576
County of Los Angeles, 1996-97 Tax and Revenue
Anticipation Notes, Series A, 4.50% 6/30/97 3100 3110
City and County of San Francisco,
General Purpose Sewer Revenue Bonds,
Series 1988 A, AMBAC Insured,
7.25% 2015 (Prerefunded 1997) 2320 2406
---------
15568
---------
TOTAL TAX-EXEMPT SECURITIES (cost:$250,276,000) 266095
Excess of receivables over cash and payables 1531
---------
NET ASSETS $267,626
=========
See Notes to Financial Statements
</TABLE>
<TABLE>
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
at February 28, 1997 (dollars in thousands) (Unaudited)
<S> <C> <C>
Assets:
Tax-exempt securities (cost: $250,276) $266,095
Cash 19
Receivables for--
Sales of fund's shares $ 208
Accrued interest 3,898 4,106
----------- -----------
270,220
Liabilities:
Payables for--
Purchases of investments 1,732
Repurchases of fund's shares 69
Dividends payable 535
Management services 85
Accrued expenses 173 2,594
----------- -----------
Net Assets at February 28, 1997--
Equivalent to $15.99 per share on
16,736,459 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $267,626
=========
Statement of Operations
for the six months ended February 28, 1997
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $7,710
Expenses:
Management services fee $527
Distribution expenses 264
Transfer agent fee 35
Reports to shareholders 48
Registration statement and prospectus 10
Postage, stationery and supplies 19
Trustees' fees 8
Auditing and legal fees 30
Custodian fee 6
Taxes other than federal income tax 5
Other expenses 7 959
----------- -----------
Net investment income 6,751
-----------
Realized Gain and Change in Unrealized
Appreciation on Investments:
Net realized gain 624
Net unrealized appreciation:
Beginning of period 11,753
End of period 15,819
-----------
Net increase in unrealized appreciation 4,066
-----------
Net realized gain and increase in
unrealized appreciation on investments 4,690
-----------
Net Increase in Net Assets Resulting
from Operations $11,441
=========
See Notes to Financial Statements
Statement of Changes in Net Assets Six months
(dollars in thousands) ended Year ended
February 28, August 31,
1997* 1996
--------- ---------
Operations:
Net investment income $ 6,751 $ 12,984
Net realized gain on investments 624 1,373
Net change in unrealized appreciation
on investments 4,066 (944)
----------- -----------
Net increase in net assets
resulting from operations 11,441 13,413
----------- -----------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (6,742) (12,978)
Distributions from net realized gain
on investments (1,381) -
----------- -----------
Total dividends and distributions (8,123) (12,978)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold:
1,477,985 and 3,016,709
shares, respectively 23,625 48,021
Proceeds from shares issued in reinvestment
of net investment income dividends:
297,271 and 439,139 shares, respectively 4,766 6,983
Cost of shares repurchased:
1,039,870 and 2,264,964 shares,
respectively (16,615) (36,022)
----------- -----------
Net increase in net assets
resulting from capital share transactions 11,776 18,982
----------- -----------
Total Increase in Net Assets 15,094 19,417
Net Assets:
Beginning of period 252,532 233,115
----------- -----------
End of period $267,626 $252,532
========= =========
*Unaudited
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
(Unaudited)
1. The American Funds Tax-Exempt Series II (the "trust") is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company and has initially issued one series of shares, The
Tax-Exempt Fund of California (the "fund"). The fund seeks a high level of
current income free from federal and California income taxes, primarily through
investments in California municipal bonds. Additionally, the fund seeks to
preserve capital. The following paragraphs summarize the significant accounting
policies consistently followed by the fund in the preparation of its financial
statements:
Tax-exempt securities with original or remaining maturities in excess of 60
days are valued at prices obtained from a national municipal bond pricing
service. The pricing service takes into account various factors such as
quality, yield and maturity of tax-exempt securities comparable to those held
by the fund, as well as actual bid and asked prices on a particular day. Other
securities with original or remaining maturities in excess of 60 days,
including securities for which pricing service values are not available, are
valued at the mean of their quoted bid and asked prices. However, in
circumstances where the investment adviser deems it appropriate to do so,
securities will be valued at the mean of their representative quoted bid and
asked prices, or, if such prices are not available, at the mean of such prices
for securities of comparable maturity, quality and type. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees or a committee thereof. All
securities with 60 days or less to maturity are valued at amortized cost, which
approximates market value.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions. Realized gains and losses from
securities transactions are reported on an identified cost basis. Interest
income is reported on the accrual basis. Premiums and original issue discounts
on securities purchased are amortized over the life of the respective
securities. Amortization of market discounts on securities is recognized upon
disposition, subject to applicable tax requirements. Dividends to shareholders
are declared daily after determination of the fund's net investment income and
paid to shareholders monthly.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $6,000 includes $4,000 paid by these credits rather than
in cash.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of February 28, 1997, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $15,819,000, of which $16,020,000
related to appreciated securities and $201,000 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the six months ended February 28, 1997. The cost of
portfolio securities for book and federal income tax purposes was $250,276,000
at February 28, 1997.
3. The fee of $527,000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million; and 3.00% of the fund's monthly
gross investment income.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the six months ended February 28,
1997, distribution expenses under the Plan were $264,000. As of February 28,
1997, accrued and unpaid distribution expenses were $113,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $35,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $257,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees who are unaffiliated with CRMC may elect to defer part or all of the
fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of February 28,
1997, aggregate amounts deferred and earnings thereon were $34,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both wholly
owned subsidiaries of CRMC. Certain Trustees and officers of the trust are or
may be considered to be affiliated with CRMC, AFS and AFD. No such persons
received any remuneration directly from the fund.
4. As of February 28, 1997, accumulated undistributed net realized gain on
investments was $573,000 and paid-in capital was $251,222,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $25,463,000 and $15,323,000, respectively, during the
six months ended February 28, 1997.
<TABLE>
Per-Share Data and Ratios
Six
Months
ended
February Year ended August 31
28, 1997 /1/ 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $15.78 $15.74 $15.40 $16.30 $15.21 $14.59
------- ------- ------- ------- ------- -------
Income from Investment
Operations:
Net investment income .42 .84 .86 .84 .84 .85
Net realized and
unrealized gain
(loss) on investments .30 .04 .34 (.84) 1.09 .62
------- ------- ------- ------- ------- -------
Total income from
investment operations .72 .88 1.20 .00 1.93 1.47
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from net
investment income (.42) (.84) (.86) (.84) (.84) (.85)
Distributions from net
realized gains (.09) - - (.06) - -
------- ------- ------- ------- ------- -------
Total distributions (.51) (.84) (.86) (.90) (.84) (.85)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $15.99 $15.78 $15.74 $15.40 $16.30 $15.21
======= ======= ======= ======= ======= =======
Total Return /2/ 4.53% /3/ 5.65% 8.16% 0.13% 13.08% 10.36%
Ratios/Supplemental Data:
Net assets, end of period
(in millions) $268 $253 $233 $226 $223 $148
Ratio of expenses to average
net assets .37% /3/ .73% .73% .71% .71% .74%
Ratio of net income to
average net assets 2.59% /3/ 5.25% 5.65% 5.28% 5.36% 5.66%
Portfolio turnover rate 6.21% /3/ 27.60% 41.36% 15.08% 16.82% 20.28%
/1/ Unaudited
/2/ Calculated without deducting a sales charge.
The maximum sales charge is
4.75% of the fund's offering price.
/3/ Based on operations for the period shown
and, accordingly, not representative
of a full year's operations.
</TABLE>
OFFICES OF THE FUND AND OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5804
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
(PLEASE WRITE TO THE ADDRESS NEAREST YOU.)
American Funds Service Company
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071-2371
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE
COMPANY, TOLL-FREE, AT 800/421-0180 OR VISIT WWW.AMERICANFUNDS.COM ON THE WORLD
WIDE WEB.
This report is for the information of shareholders of The Tax-Exempt Fund of
California, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after June 30, 1997, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Litho in USA MED/ALI/3388
Lit. No. TEFCA-013-0497
Printed on recycled paper
[The American Funds Group(R)]
