[The American Funds Group(R)]
The Tax-Exempt Fund of California
Digging for Gems in the Golden State
[Four Photos overlapping outline of California: Photo 1 - California Poppy; 2
- - Golden Gate Bridge; 3 - Surfer; 4 - Field]
Annual Report for the year ended August 31, 1998
The Tax-Exempt Fund of California(SM)
SEEKS A HIGH LEVEL OF CURRENT INCOME FREE FROM FEDERAL AND CALIFORNIA INCOME
TAXES, WITH THE ADDITIONAL OBJECTIVE OF PRESERVATION OF CAPITAL.
The Tax-Exempt Fund of California is one of the 28 mutual funds in The American
Funds Group (R), managed by Capital Research and Management Company. Since
1931, Capital has invested with a long-term focus based on thorough research
and attention to risk.
Fund results in this report were computed without a sales charge unless
otherwise indicated. Here are the average annual compound returns over various
periods with all distributions reinvested, assuming payment of the 4.75%
maximum sales charge at the beginning of the stated periods. Sales charges are
lower for accounts of $25,000 or more.
<TABLE>
<CAPTION>
Average Annual Compound Returns
for periods ended 8/31/98 9/30/98
(fiscal year-end) (latest calendar quarter)
<S> <C> <C>
Ten Years +7.42% +7.35%
Five Years +5.07 +5.10
One Year +2.85 +2.89
</TABLE>
The fund's 30-day yield as of September 30, 1998, calculated in accordance with
the Securities and Exchange Commission formula, was 3.89%. The fund's
distribution rate as of that date was 4.45%. 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.
$24,591/1/
Lehman Brothers
Municipal Bond Index
$22,754/2/
The fund at net asset value
(not including sales charge)
$22,642/3/
Lipper California
Municipal Debt Funds Average
$21,672/4/
The fund at maximum
offering price
[begin mountain chart]
<TABLE>
<CAPTION>
Year The fund at The fund at Lehman Lipper
maximum net asset Brothers California
offering value (not Municipal Municipal
price including Bond Index Debt Funds
sales /1/ Average /3/
charge)
<S> <C> <C> <C> <C>
10/28/86 9,525 10,000 10,000 10,000
1987 /#/ 9,562 10,039 10,260 10,010
1988 10,089 10,593 10,966 10,634
1989 11,140 11,696 12,170 11,813
1990 11,581 12,159 12,951 12,399
1991 12,919 13,564 14,478 13,787
1992 14,258 14,970 16,095 15,222
1993 16,123 16,928 18,059 17,128
1994 16,144 16,950 18,084 16,899
1995 17,461 18,333 19,687 18,107
1996 18,447 19,368 20,718 19,122
1997 20,070 21,072 22,634 20,847
1998 21,672 /4/ 22,754 /2/ 24,591 22,642
</TABLE>
[end mountain chart]
Year ended August 31
/1/ With interest compounded. The index is a national index not limited to
California bonds. It is unmanaged and does not reflect sales charges,
commissions or expenses.
/2/ Includes reinvested dividends of $9,883 and reinvested capital gain
distributions of $278.
/3/ With all distributions reinvested. The average does not reflect sales
charges.
/4/ Includes reinvested dividends of $9,412 and reinvested capital gain
distributions of $265. The net amount invested was $9,525.
/#/ For the period October 28, 1986 through August 31, 1987.
Past results are not predictive of future results.
<TABLE>
<CAPTION>
Investment Highlights
through August 31, 1998
<S> <C>
12-month total return +8.0%*
(income plus capital changes, with distributions reinvested)
Tax-free distribution rate for August 4.5%
(income return only, reflecting maximum sales charge)
Taxable equivalent distribution rate 8.2%
(for August, assuming a 45.2% maximum combined
state and federal tax rate)
SEC 30-day yield as of August 31 4.0%
(reflecting maximum sales charge)
*Does not include the 4.75% sales charge.
For current yield information, please call toll-free: 800/421-0180.
</TABLE>
FELLOW SHAREHOLDERS:
We are pleased to report that The Tax-Exempt Fund of California delivered a
solid total return for the fiscal year ended August 31, 1998, while continuing
to provide generous income free of federal and state income taxes. The value of
your holdings rose 8.0% if, like most shareholders, you reinvested your
dividends totaling 80 cents a share and your per-share capital gain of 8.4
cents. This was above your fund's lifetime average annual return of 7.2%.
However, The Tax-Exempt Fund of California's 8.0% return lagged other funds in
its investment universe over the past 12 months. The Lipper California
Municipal Debt Funds Average posted an 8.5% increase. The Tax-Exempt Fund of
California also trailed the 8.6% increase of the unmanaged Lehman Brothers
Municipal Bond Index, which measures the national investment-grade municipal
market and includes no expenses.
Shareholders who took dividends in cash had an income return of 4.9%, free of
both state and federal taxes, and saw the value of their investments increase
2.9%. Taxpayers in the maximum 45.2% combined federal and state tax bracket
would have had to earn an 8.9% yield in taxable investment income to match
their income return from the fund.
In December the fund expects to pay a taxable capital gain distribution of
about 24 cents a share. Capital gain distributions are unusual for the fund but
do happen from time to time. This year the amount is higher than typical
because interest rates are now lower than at any other time in the lifetime of
the fund. Thus, virtually any bond sold resulted in a gain.
THE YEAR IN REVIEW
Although bond prices were rising as the fiscal year began, we decided to guard
against a possible reversal of the trend and concentrated on bonds with shorter
maturities. The shorter a bond's maturity, the less its price normally
fluctuates. This strategy served us well when interest rates were climbing, but
as rates fell dramatically, funds that concentrated on bonds with longer
maturities did somewhat better.
Events at home and abroad bolstered much of the U.S. bond market and pushed
interest rates down. Economic growth continued to be strong while unemployment
declined and inflation remained in check. Additionally, a turbulent U.S. stock
market and financial tremors in Asia, Latin America and Russia triggered a
"flight to quality." Investors sought refuge in U.S. Treasury bonds, driving
their prices up. Municipal bonds couldn't keep pace but fared well nonetheless.
LOOKING FORWARD
Nationwide, the past few years have been remarkable. Historically, a strong
economy has been accompanied by rising inflation and higher interest rates. The
Federal Reserve cut interest rates on September 29 and again on October 15, and
the quality and liquidity of bonds are now bigger concerns than inflation. No
one can predict exactly where the economy will go or what trends await
investors. Whatever the economic environment, however, we believe diligent
research can continue to uncover good opportunities.
The turmoil in Asia has already been keenly felt in California's high-tech
manufacturing sector, dampening demand for some of the state's exports. Despite
Asia's recent economic problems, California has enjoyed an economic boom for
several years. This rosy trend has created some attractive investment
opportunities. Finding good values in the tax-exempt market requires solid
judgment not only about the state's economy and the movement of interest rates,
but also about the prospects of the individual projects. In the following pages
you'll read about two holdings that highlight the diversity of the fund and
illustrate the depth of our research.
We look forward to reporting to you again in six months.
Cordially,
/s/ Paul G. Haaga, Jr.
Paul G. Haaga, Jr.
Chairman of the Board
/s/ Abner D. Goldstine
Abner D. Goldstine
President
October 19, 1998
[Begin Sidebar]
Whatever the economic environment, we believe diligent research can continue to
uncover attractive opportunities in the tax-exempt market.
[End Sidebar]
DIGGING FOR GEMS IN THE GOLDEN STATE
[Begin Photo Caption]
Gas-powered cogeneration plants produce inexpensive electricity and can sell
one of the byproducts, low-pressure steam, to industrial corporations.
[End Photo Caption]
[Begin Sidebar]
Finding good value in the growing California municipal bond market can be a
challenge even for the most careful investor.
[End Sidebar]
The world of municipal bonds keeps getting bigger. More than $1.3 trillion in
bonds is currently outstanding in the U.S. tax-exempt market. In California,
60% more tax-exempt debt was issued in the first eight months of calendar 1998
than in the same period last year. On top of that, the world of tax-exempt
investments offers everything from highly rated and insured bonds to high-yield
bonds with more risk of default but the potential for greater rewards.
Sifting through this myriad of options can be a challenge even for the most
careful investor. How do you build a sound, well-balanced portfolio that can
reap the potential benefits but avoid the possible pitfalls of this manifold
market through good times and bad? We believe the answer is careful research.
Every issue in which the fund invests was thoroughly researched before it was
added to our portfolio.
The Tax-Exempt Fund of California has a wide range of investments from new to
old. We constantly build and rebuild your fund's portfolio. Some bonds are
sold, new ones added. Some bonds run their course to maturity, others leave the
portfolio early. Bonds can be upgraded or downgraded by rating agencies. As you
read on we will take you to Sacramento to tell you about an older holding that
was once considered risky and has blossomed to bring rewards, and to San
Francisco, where your dollars recently helped build a new kind of retirement
community.
MAKING LIGHT OF STEAM
Turning Things Around
The Sacramento Municipal Utility District is using steam to make electricity
and shareholders in The Tax-Exempt Fund of California are enjoying the results.
In the early 1990s, crippled by a recession, a historic drought that cut its
water supply as well as the costly loss of an aging nuclear plant, the utility
seemed headed for financial collapse and a takeover by Pacific Gas and
Electric. Along came a new general manager, who went to work slashing operating
costs and launching a major public relations campaign. A few years later, the
utility was financially strong while customers' bills were lower - lower, in
fact, than in any other major California city. That's the beginning of this
success story.
[Begin Photo Caption]
San Francisco Towers is an attractive new alternative for seniors who want to
stay in the city after they retire.
[End Photo Caption]
Tried and True Technology
Part of the plan was to issue bonds for the construction of small, gas-powered
cogeneration plants to provide inexpensive electricity. A byproduct of the
process is low-pressure steam, which can be sold to local industries. In 1995,
the utility decided to build a plant that would provide Procter & Gamble with
steam the industrial giant needs in its operations.
Because the bonds were backed only by future revenues, the main risk was that
the plant would never be operational. The rating agencies assigned the lowest
investment-grade rating to these bonds, which offered attractive yields to
compensate investors for the risk they were taking. David Hoag, an analyst for
Capital Research and Management Company, the fund's adviser, visited the site
and met with its management. He also called a Capital Research equity analyst
specializing in utilities and learned not only that cogeneration plants provide
a low-cost way to make electricity, but that the gas turbine engines used in
the plant are reliable and widely used. "These engines have been tested
hundreds and thousands of hours," explains Hoag. A look at the utility's
financial statements, which by this time were strong, also instilled
confidence.
"Advance Refunding"
With interest rates today much lower than in 1995, the issuer decided to save
money by "advance refunding" some of the bonds. When issuers advance refund,
they issue new bonds at the lower, current interest rate and use the proceeds
to buy Treasury obligations. The Treasuries are put into a trust to repay the
old debt. Because repayment of the old bonds is now backed by Treasury bonds,
the safest on the market, they currently have a rating of AAA, the highest
possible. Bondholders can benefit because the price of the bonds goes up
dramatically after such a significant upgrade.
As our experience with the cogeneration bonds shows, research can uncover
excellent opportunities among lower investment-grade, higher-yielding issues.
SENIOR LIVING IN SAN FRANCISCO
A New Lifestyle
Retirement isn't what it used to be. Just look at the new wave of retirement
housing. Shuffleboard courts are forsaken for computer labs and fitness
centers. Home offices replace recreation rooms. With 50,000 boomers a day
turning 50 and emptying their nests, a new market is evolving for people who
demand a completely different lifestyle from that of their parents.
[Begin Sidebar]
<TABLE>
<CAPTION>
The fund's 4.5%
tax-exempt
distribution rate
Combined in August/2/
Your Taxable Income Federal & is equivalent
California to a taxable
Single Joint Tax Rate/1/ distribution rate of:
<S> <C> <C> <C>
$18,761 - 25,350 $37,522 - 42,350 20.1% 5.6%
25,351 - 26,045 42,351 - 52,090 32.3 6.7
26,046 - 32,916 52,091 - 65,832 33.8 6.8
32,917 - 61,400 65,833 - 102,300 34.7 6.9
61,401 - 128,100 102,301 - 155,950 37.4 7.2
128,101 - 278,450 155,951 - 278,450 42.0 7.8
Over 278,450 Over 278,450 45.2 8.2
</TABLE>
/1/ Based on 1998 federal and 1997 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.
WHY DOUBLE TAX-FREE INVESTING CAN BE 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 4.5% tax-exempt distribution rate in August.
Because of tax increases in recent years, many high-income investors are
finding that their returns on taxable fixed-income issues have to be even
higher to match those currently offered by tax-exempt municipals. For instance,
a couple with a taxable income of $152,000 faces a combined federal and
California tax rate of 37.4%. In this bracket, the fund's current 4.5%
distribution rate would be equivalent to a return on a taxable fixed-income
investment of 7.2%.
[End Sidebar]
The new San Francisco Towers, developed by nonprofit Episcopal Homes
Foundation, is one of a growing number of life-care communities that provide a
rising scale of assistance for those 65 and over, from independent living to
nursing care.
San Francisco Towers is a welcome addition for those who don't want to leave
the city just because they're getting older. When Vera and Walter Obermeyer
started to think about moving into a retirement home, they were afraid they
would have to move to another area. "We wanted to stay in San Francisco because
two of our children live here," Vera explains. They were happy to find that
they could.
A Solid Record
The main risk was that enough people wouldn't move in to San Francisco Towers.
Brenda Ellerin, a Capital Research analyst specializing in not-for-profit
health care, knew Episcopal Homes Foundation had a dominant market position in
Northern California. It owns life-care facilities in Pacific Grove on the
Monterey Peninsula, as well as in Santa Rosa and Oakland, all of which Ellerin
found well-managed and successful. Additionally, when Ellerin recommended the
bonds the Towers were already reserved to 80% capacity.
Bay Area Boom
Ellerin also checked the real estate market in San Francisco. Because people
usually sell their homes before moving to a life-care center like San Francisco
Towers, a soft market could mean vacancies. Statewide, home prices were up
about 11% from a year earlier; San Francisco experienced one of the highest
increases. Higher home prices could mean fewer buyers, but with mortgage
interest rates hovering around 20-year lows, this wasn't a problem. In fact,
the California Economic Review concludes that though home prices are very high
in San Francisco, homes are more affordable now than when prices were at
similar levels in 1989 because interest rates are so much lower.
San Francisco Towers is a newer holding in your portfolio, and things look good
so far. Today, more than 80% of the apartments are occupied. With Ellerin's
experience in health care facilities, shareholders in The Tax-Exempt Fund of
California can be sure she will continue to diligently monitor developments.
The holdings you've read about in these pages reflect the many facets of your
fund's portfolio. As you see, diligent research can uncover attractive
investment opportunities in different areas of the California tax-exempt
market.
<PAGE>
<TABLE>
The Tax-Exempt Fund of California
Investment Portfolio, August 31, 1998
<S> <C> <C>
Principal Market
Amount Value
(000) (000)
Tax-Exempt Securities Maturing in More than One Year- 94.35%
Educational Fac. Auth., Rev. Bonds (University of San Francisco), Series 1996, $1,190 $1,334
MBIA Insured, 5.70% 2011
Health Fac. Fin. Auth:
Rev. Bonds:
Kaiser Permanente, 1998 Series A, FSA Insured, 5.25% 2011 1,000 1,065
UCSF-Stanford Health Care, 1998 Series A, AMBAC Insured, 5.00% 2009 1,000 1,056
Hospital Rev. Bonds:
Downey Community Hospital, Series 1993:
5.20% 2003 1,000 1,047
5.625% 2008 1,500 1,592
5.75% 2015 6,400 6,657
Pacific Presbyterian Medical Center, Insured Variable Rate Demand, 1985 Series B, 3,875 4,229
6.75% 2015 (Preref. 2002)
St. Joseph Health System Obligated Group, Cert. of Part., 5.50% 2014 3,000 3,102
Hospital Rev. Ref. Bonds (Saint Francis Memorial Hospital), Series 1993A, 5.75% 1,150 1,271
2005 (Preref. 2003)
Housing Finance Agcy:
Home Mortgage Rev. Bonds:
1991 Series A, 7.35% 2011 495 526
1997 Series H , MBIA Insured, 5.50% 2017 3,250 3,385
1995 Series K AMT, AMBAC Insured, 5.55% 2021 725 752
Single Family Mortgage Bonds, 1997 Series B-3 AMT, MBIA Insured, 5.10% 2012 1,825 1,852
Single Family Mortgage Rev Bonds:
1998 Series C-4, Class I:
4.90% 2004 2,695 2,756
5.10% 2007 1,000 1,024
5.15% 2008 4,650 4,750
1995 Issue B-2, AMBAC Insured AMT, 5.70% 2007 3,045 3,162
1997 Series C-1, Class III, MBIA Insured, 5.05% 2011 5,500 5,700
Maritime Infrastructure Auth., Airport Rev. Bonds (San Diego Unified Port Dist. 2,135 2,224
Airport Project-Lindbergh Field), Series 1995 AMT, AMBAC Insured 5.00% 2002
Pollution Control Fin. Auth:
Pollution Control Rev. Bonds (Pacific Gas and Electric Co.):
1992 Series B AMT, 6.35% 2009 4,400 4,773
1993 Series B AMT, AMBAC Insured, 5.85% 2023 1,000 1,058
Resource Recovery Rev. Bonds, Waste Management Inc. Guarantee Bond, Series A AMT, 1,500 1,622
7.15% 2011
Solid Waste Disposal Ref. Rev. Bonds:
(USA Waste Services, Inc. Project), Series 1998A AMT, 5.10% 2018 4,020 4,043
(CanFibre of Riverside Project), Series 1997A AMT, 9.00% 2019 4,000 4,184
(Keller Canyon Landfill Co. Project), BFI Corp. Guarantee, Series 1992 AMT, 6,200 6,795
6.875% 2027
Public Works Board, Lease Rev. Bonds:
California Community Colleges, 1994 Series B (Various Community College Projects), 1,000 1,137
6.75% 2005
Trustees of The California State University (Various University Projects):
1997 Series B, 5.25% 2010 1,500 1,598
1996 Series A, AMBAC Insured, 5.50% 2014 3,500 3,730
Dept. of Corrections, State Prison:
Imperial County, 1991 Series A, 6.50% 2017 1,000 1,205
Lassen County (Susanville), 1993 Series D, FSA Insured, 5.25% 2015 2,000 2,129
The Regents of the University of California:
(Various University Projects), 1993 Series B, MBIA Insured, 5.50% 2014 1,500 1,646
1991 Cert. of Part. (UCLA Central Chiller/Cogeneration Facility), 1,250 1,325
7.00% 2015 (Preref. 1999)
Public Works Board, Lease Rev. Ref. Bonds, 1998 Series A (Library and Courts 1,500 1,640
Annex Building Complex). 5.50% 2010
Rural Home Mortgage Finance Auth., Single Family Mortgage Rev. Bonds
(Mortgage-Backed Securities Program):
1995 Series B AMT, 7.75% 2026 2,845 3,344
1996 Series A AMT, 7.75% 2027 1,205 1,418
Statewide Communities Dev. Auth.:
Apartment Dev. Rev. Ref. Bonds ( Irvine Apartment Communities, LP):
Series 1998A-1 AMT, 5.05% 2008 2,000 2,030
Series 1998A-3, MBIA Insured, 5.10% 2010 5,000 5,086
Citrus Valley Health Partners, Inc., Cert. of Part., MBIA Insured:
5.50% 2011 1,000 1,084
5.625% 2012 1,000 1,094
Hospital Rev. Cert. of Part., Cedars-Sinai Medical Center, Series 1992, 3,650 4,210
6.50% 2012
Rev. Ref. Bonds (Sherman Oaks Project), Series 1998A, AMBAC Insured:
5.00% 2008 1,000 1,058
5.50% 2009 2,000 2,195
Sisters of Charity of Leavenworth Health Services Corp., Cert. of Part., 1,000 984
Series 1994, 5.00% 2023
Dept. of Water Resources, Central Valley Project, Water System Rev. Bonds:
Series O, MBIA Insured, 5.00% 2022 2,000 1,985
Series H, 6.90% 2025 (Preref. 2000) 2,000 2,143
Alameda Public Fin. Auth., 1997 Rev. Bonds (Marina Village Assessment Dist. Bond
Refinancing):
6.05% 2008 1,110 1,138
6.125% 2009 1,340 1,374
6.375% 2014 1,100 1,133
County of Alameda, 1993 Refunding Cert. of Part. (Santa Rita Jail Project), 1,500 1,625
MBIA Insured, 5.375% 2009
Anaheim Public Fin. Auth., Lease Rev. Bonds, (Anaheim Public Improvement Project), 1,500 1,752
Senior Lease Rev. Bonds, 1997 Series A, FSA Insured, 6.00% 2024
Association of Bay Area Governments, Finance Auth. for Nonprofit Corps.,
Cert. of Part.:
American Baptist Homes Foundation, Series 1998, 6.10% 2017 5,385 5,703
Episcopal Homes Foundation:
Series 1997A, 5.25% 2007 2,760 2,878
Series 1998, 5.00% 2009 4,600 4,741
Stanford University Hospital, Series 1993:
5.75% 2005 (Escrowed to Maturity) 1,500 1,644
5.50% 2013 (Preref. 2005) 1,240 1,378
Redevelopment Agcy. of the City of Burbank (Golden State Redevelopment Project),
Tax Allocation Bonds, 1993 Series A:
6.00% 2013 1,500 1,594
6.00% 2023 1,000 1,057
Capistrano Unified School Dist., Cert. of Part., Series 1997, 5.20% 2018 2,710 2,740
Central Valley Fin. Auth., Cogeneration Project Rev. Bonds (Carson
Ice-Gen Project), Series 1993:
6.00% 2009 1,000 1,073
6.10% 2013 3,000 3,346
6.20% 2020 5,000 5,598
City of Chino Hills, Community Fac. District No. 9 (Rincon Village Area), 1,250 1,266
Special Tax Bonds, Series 1998, 6.45% 2023
City of Commerce, Community Dev. Commission, Redevelopment Project No. 1, 2,490 2,579
Subordinate Lien Tax Allocation Refunding Bonds, Series 1997 B, 5.50% 2008
Del Mar Race Track Auth., Rev. Ref. Bonds, Series 1996, 6.00% 2001 1,000 1,032
Delta Counties Home Mortgage Finance Auth., Single Family Mortgage Rev. Bonds 800 810
(Mortgage-Backed Securities Program), 1998 Series A AMT, MBIA Insured, 4.85% 2008
East Bay Regional Park District (Alameda and Contra Costa Counties), 1,000 1,047
1998 G.O. Refunding Bonds, 5.00% 2010
Foothill/Eastern Transportation Corridor Agency, Toll Road Rev. Bonds, 2,500 2,729
Series 1995A, 6.00% 2016
City of Fremont, Multifamily Housing Rev. Ref. Bonds, Issue A of 1995 3,000 3,172
(Durham Greens Project), 5.40% 2026
Imperial Irrigation Dist., 1998 Electric System Ref. Rev. Bonds, MBIA Insured, 1,000 1,033
5.00% 2012
City of Long Beach:
Fin. Auth. Rev. Bonds, Series 1992, AMBAC Insured, 6.00% 2017 750 862
Harbor Rev. Bonds, Series 1993 AMT, 5.125% 2018 1,000 996
City of Los Angeles:
Community Redevelopment Agcy., Central Business Dist. Redevelopment Project, 4,775 4,903
Tax Allocation Refunding Bonds, Series I, 5.00% 2001
Harbor Dept. Rev. Bonds:
Issue 1996 AMT, 5.50% 2007 3,675 3,998
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1,750 2,273
Issue 1995, Series B AMT, 6.625% 2025 1,000 1,093
Multifamily Housing Rev. Bonds (GNMA Collateralized - Ridgecroft Apartments 2,005 2,126
Project), Series 1997E AMT, 6.125% 2027
Dept. of Water and Power, Electric Plant Rev. Bonds, Issue of 1990:
7.125% 2030 (Subject to Crossover Refunding 2000) 1,000 1,073
7.10% 2031 (Subject to Crossover Refunding 2001) 3,000 3,279
County of Los Angeles:
Capital Asset Leasing Corp., Cert of Part. (Marina del Rey), Series A:
6.25% 2003 4,635 4,902
6.50% 2008 6,000 6,537
Public Works Fin. Auth., Regional Park and Open Space Dist., Dist. A, 3,000 3,245
Series 1997 A, 5.50% 2011
Transportation Commission, Sales Tax Rev. Bonds, Series 1991-A, 6.75% 2020 1,500 1,653
(Preref. 2001)
Marin Municipal Water Dist. Water Rev. Bonds, Series 1993, 5.65% 2023 1,000 1,039
Northern California Public Power Agcy., Geothermal Project #3, Special Rev. Bonds,
1993 Refunding Series A:
5.60% 2006 3,725 4,026
5.65% 2007 2,000 2,178
Oakland State Building Auth., Lease Rev. Bonds (Elihu M. Harris State Office 2,000 1,989
Building), 1998 Series A, AMBAC Insured, 5.00% 2023
County of Orange:
Aliso Viejo Special Tax Bonds of Community Fac. Dist. No. 88-1, Series A of 1992:
7.25% 2008 (Preref. 2002) 1,500 1,720
7.35% 2018 (Preref. 2002) 4,250 4,888
Limited Obligation Improvement Bonds, 1998 Series A, Irvine Coast Assessment Dist. 1,100 1,104
No. 88-1, 5.25% 2009
Local Transportation Auth., First Senior Fixed-Rate Bonds, MBIA Insured, 1,500 1,712
6.00% 2009
Recovery Cert. of Part., 1996 Series A, MBIA Insured, 6.00% 2008 1,500 1,718
City of Oxnard, Assessment Dist. No. 97-1-R (Pacific Commerce Center), Limited
Obligation Refunding Bonds:
5.50% 2004 1,480 1,528
5.60% 2005 2,895 2,989
5.70% 2006 1,200 1,239
City of Pasadena, Cert. of Part. (1990 Capital Improvements Project), 7.00% 2003 1,000 1,083
(Preref. 2000)
Redevelopment Agcy. of the City of Pittsburg, Los Medanos Community Dev. 2,195 2,252
Project, Tax Allocation Refunding Bonds, AMBAC Insured, Series 1993A, 5.25% 2015
Pleasanton Joint Powers Fin. Auth., Reassessment Rev. Bonds, 1993 Series A:
5.70% 2001 3,730 3,903
6.15% 2012 1,780 1,921
Community Fac. District No. 88-1 of the City of Poway (Parkway Business Centre),
Special Tax Refunding Bonds, Series 1998:
5.30% 2005 1,225 1,230
6.25% 2007 2,050 2,179
6.50% 2008 2,000 2,170
6.50% 2009 1,320 1,433
6.50% 2010 1,000 1,088
Redding Joint Powers Fin. Auth., Solid Waste and Corp. Yard Rev. Bonds, 1993 3,000 2,943
Series A, 5.00% 2018
Sacramento City Fin. Auth., 1991 Rev. Bonds, 6.80% 2020 (Preref. 2001) 5,500 6,119
Sacramento Cogeneration Auth., Cogeneration Project Rev. Bonds:
(Campbell Soup Project), 1995 Series:
6.00% 2003 1,500 1,623
6.50% 2005 1,100 1,237
(Procter & Gamble Project), 1995 Series:
7.00% 2005 1,700 1,965
6.375% 2010 3,500 3,956
6.50% 2014 1,000 1,162
6.50% 2021 4,000 4,650
Sacramento Municipal Utility Dist., Electric Rev. Bonds, 1997 Series K, 2,500 2,782
AMBAC Insured, 5.70% 2017
County of Sacramento:
Laguna Creek Ranch/Elliott Ranch Community Fac. Dist. No.1, Improvement Area No.2
Special Tax Refunding Bonds (Elliot Ranch):
6.00% 2012 880 923
6.10% 2013 665 701
6.30% 2021 500 527
Single Family Mortgage Rev. Bonds (GNMA Mortgage-Backed Securities Program), 1,500 2,258
Issue A of 1987 AMT, 9.00% 2019 (Escrowed to Maturity)
City of San Bernardino, SCH Health Care System Rev. Bonds, (Sisters of Charity of 1,000 1,107
the Incarnate Word Houston,Texas) Series 1991A, 7.00% 2021 (Preref. 2001)
County of San Bernardino Housing Auth., Multifamily Housing Rev. Bonds 2,090 2,125
(Fannie Mae Program - Villa Serena Project), Series 1985, 4.95% 2007
City of San Diego/MTDB Auth. (San Diego Old Town Light Rail Transit Extension), 1,500 1,529
1993 Lease Rev. Bonds, 5.375% 2023
County of San Diego:
Cert. of Part. (Sharp Healthcare Obligated Group), MBIA Insured, 5.25% 2007 1,515 1,634
Poway Unified School Dist., Community Fac. Dist. No. 1, Series 1998
Special Tax Bonds, MBIA Insured:
5.00% 2009 2,000 2,118
5.00% 2010 1,000 1,052
Reassessment Dist. No. 97-1 (4-S Ranch), Limited Obligation Improvement Bonds:
5.90% 2007 1,435 1,483
5.90% 2008 1,000 1,033
City and County of San Francisco:
Port Commission Rev. Ref. Bonds, Series 1994, 5.90% 2009 1,500 1,605
Redevelopment Agcy., Residential Facility Rev. Bonds (Coventry Park Project), 5,000 5,641
Series 1996A AMT, 8.50% 2026
County of San Joaquin, Cert. of Part. (1993 General Hospital Project), 6.625% 2020 2,235 2,454
San Joaquin Hills Transportation Corridor Agcy. Senior Lien Toll Road Rev. Bonds, 1,500 1,703
6.75% 2032 (Preref. 2003)
Redevelopment Agcy. of the City of San Jose, Multifamily Housing Rev. Bonds
(GNMA Collateralized-The Miraido Village), Series 1997A AMT:
5.30% 2012 1,000 1,027
5.65% 2022 1,500 1,547
San Marcos Public Fac. Auth., Ref. Rev. Bonds, Series 1998, 5.50% 2010 4,295 4,301
Santa Ana Fin. Auth.:
Police Administration and Holding Facility Lease Rev. Bonds, MBIA Insured, Series 1,000 1,185
1994A, 6.25% 2019
Ref. Rev. Bonds, 1998 Series A (City of Santa Ana and South Harbor Boulevard/ 1,595 1,691
Fairview Street Redevelopment Projects), MBIA Insured, 5.00% 2008
City of Santa Clara, Subordinated Electric Rev. Ref. Bonds, Series 1998 A, AMBAC 2,885 3,075
Insured, 5.25% 2012
Santa Clara County Fin. Auth., Lease Rev. Bonds (VMC Facility Replacement Project), 2,200 2,853
AMBAC Insured, 1994 Series A, 7.75% 2009
Shafter Joint Powers Finance Auth., Lease Rev. Bonds, 1997 Series A,
(Community Correctional Facility Acquisition Project):
5.50% 2006 1,535 1,645
5.95% 2011 1,700 1,856
South Orange County, Public Fin. Auth., Special Tax Rev. Bonds, Series B
(Junior Lien Bonds):
6.55% 2002 1,565 1,596
6.85% 2005 2,715 2,769
South Tahoe Joint Powers Fin. Auth. Ref. Rev. Bonds, (South Tahoe 3,250 3,506
Redevelopment Project Area No. 1), 1995 Series B, 6.250% 2020
Southern California Home Fin. Auth., Single Family Mortgage Rev. Bonds 1,060 1,120
(GNMA and FNMA Mortgage-Backed Securities Program), 1992 Series A AMT, 6.75% 2022
Stanislaus Waste-To-Energy Finance Agcy., Solid Waste Facility Ref. Rev. 1,105 1,168
Cert. (Ogden Martin Systems of Stanislaus, Inc. Project), Series 1990, 7.625% 2010
City of Stockton:
Mello-Roos Rev. Bonds, Series 1997A, Community Fac. Dist., No. 90-2
(Brookside Estates):
5.50% 2005 1,560 1,611
5.75% 2008 1,840 1,920
5.95% 2010 1,000 1,049
Public Fin. Auth., Cert. of Part. (Wastewater System Project), 1998 Series A, 1,060 1,134
MBIA Insured, 5.125% 2009
Community Fac. District No. 88-12 of the City of Temecula (Ynez Corridor),
Special Tax Refunding Bonds, 1998 Series A:
5.20% 2007 850 854
5.25% 2008 745 749
Virgin Islands Public Finance Auth., Rev. Ref. Bonds (Virgin Islands Matching
Fund Loan Notes):
Series 1998 C Bonds, 5.50% 2008 1,000 1,069
Series 1998 A, 5.20% 2010 1,000 1,033
City of West Sacramento, Limited Obligation Refunding Improvement Bonds, 500 499
Reassessment Dist. of 1998, 5.20% 2008
------
337,358
------
Tax-Exempt Securities Maturing in One Year or Less - 4.28%
State Health Fac. Fin. Auth., Variable Rate Rev. Bonds:
St. Joseph Health System, Series 1991B, 3.15% 2009* 1,000 1,000
Sutter Health, Series 1990B, 3.15% 2020* 2,400 2,400
Los Angeles County Metropolitan Transportation Auth., Proposition C Sales Tax 9,800 9,896
Rev. Ref. Bonds, Second Senior Bonds, Series 1998-A, AMBAC Insured, 4.50% 6/30/99
County of Marin, 1998-99 Tax and Rev. Anticipation Notes, 4.50% 6/30/99 2,000 2,020
------
15,316
------
TOTAL TAX-EXEMPT SECURITIES (cost: $329,995,000) 352,674
Excess of cash and receivables over payables 4,880
------
NET ASSETS $357,554
=======
*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, 1998 (dollars in thousands)
Assets:
Tax-exempt securities (cost: $329,995) $352,674
Cash 135
Receivables for--
Sales of fund's shares $ 1,923
Accrued interest 4,772 6,695
--------------- ---------------
359,504
Liabilities:
Payables for--
Purchases of investments 0
Repurchases of fund's shares 998
Dividends payable 636
Management services 113
Accrued expenses 203 1,950
--------------- ---------------
Net Assets at August 31, 1998--
Equivalent to $16.60 per share on
21,545,341 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $357,554
=========
Statement of Operations
for the year ended August 31, 1998
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $17,825
Expenses:
Management services fee $1,262
Distribution expenses 742
Transfer agent fee 68
Reports to shareholders 64
Registration statement and prospectus 14
Postage, stationery and supplies 26
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 1
Taxes other than federal income tax 5
Other expenses 32 2,271
--------------- ---------------
Net investment income 15,554
---------------
Realized Gain and Increase in Unrealized
Appreciation on Investments:
Net realized gain 5,345
Net unrealized appreciation:
Beginning of year 19,054
End of year 22,679
---------------
Net increase in unrealized appreciation 3,625
---------------
Net realized gain and increase in
unrealized appreciation on investments 8,970
---------------
Net Increase in Net Assets Resulting
from Operations $24,524
=========
See Notes to Financial Statements
Statement of Changes in Net Assets
(dollars in thousands)
Year ended August 31
1998 1997
--------- ---------
Operations:
Net investment income $ 15,554 $ 13,818
Net realized gain on investments 5,345 1,397
Net change in unrealized appreciation
on investments 3,625 7,301
------------------ ------------------
Net increase in net assets
resulting from operations 24,524 22,516
------------------ ------------------
Dividends and Distributions Paid to
Shareholders:
Dividends paid from net investment income (15,589) (13,821)
Distributions from net realized gain
on investments (1,580) (1,382)
------------------ ------------------
Total dividends and distributions (17,169) (15,203)
------------------ ------------------
Capital Share Transactions:
Proceeds from shares sold:
6,096,025 and 3,438,562
shares, respectively 99,998 55,139
Proceeds from shares issued in reinvestment of net
investment income dividends and distributions of
net realized gain on investments:
581,317 and 535,942 shares, respectively 9,526 8,594
Cost of shares repurchased:
2,957,515 and 2,150,063 shares,
respectively (48,491) (34,412)
------------------ -----------------
Net increase in net assets
resulting from capital share transactions 61,033 29,321
------------------ -----------------
Total Increase in Net Assets 68,388 36,634
Net Assets:
Beginning of year 289,166 252,532
------------------ ------------------
End of year $357,554 $289,166
=========== ===========
See Notes to Financial Statements
</TABLE>
<PAGE>
Notes to Financial Statements
1. The American Funds Tax-Exempt Series II (the "trust") is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company and has initially issued one series of shares, The
Tax-Exempt Fund of California (the "fund"). The fund seeks a high level of
current income free from federal and California income taxes, with the
additional objective of preservation of capital. The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Tax-exempt securities 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. Securities and
assets for which representative market quotations are not readily available are
valued at fair value as determined in good faith by a committee appointed by
the Board of Trustees.
As is customary in the mutual fund industry, securities transactions
are accounted for on the date the securities are purchased or sold. 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. Amortization of
market discounts on securities is recognized upon disposition, subject to
applicable tax requirements. Dividends to shareholders are declared daily after
the determination of the fund's net investment income and paid to shareholders
monthly.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of August 31, 1998, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $22,679,000, of which $22,771,000
related to appreciated securities and $92,000 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the year ended August 31, 1998. The cost of
portfolio securities for book and federal income tax purposes was $329,995,000
at August 31, 1998.
3. The fee of $1,262,000 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million; and 3.00% of the fund's monthly
gross investment income.
Pursuant to a Plan of Distribution, the fund may expend up to 0.25% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the fund's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended August 31, 1998,
distribution expenses under the Plan were $742,000. As of August 31, 1998,
accrued and unpaid distribution expenses were $140,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $68,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $183,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees who are unaffiliated with CRMC may elect to defer part or all of the
fees earned for services as members of the Board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of August 31,
1998, aggregate amounts deferred and earnings thereon were $33,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the trust
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of August 31, 1998, accumulated undistributed net realized gain on
investments was $5,073,000 and paid-in capital was $329,800,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $135,743,000 and $85,922,000, respectively, during
the year ended August 31, 1998.
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 $1,000 was paid by these credits rather than in cash.
<PAGE>
<TABLE>
Per-Share Data and Ratios
<S> <C> <C> <C> <C> <C>
Year endedAugust 31
1998 1997 1996 1995 1994
Net Asset Value, Beginning
of Year $16.22 $15.78 $15.74 $15.40 $16.30
-------------------- ------- --------------
Income from Investment
Operations:
Net investment income .79 .83 .84 .86 .84
Net realized and
unrealized gain
(loss) on investments .47 .53 .04 .34 (.84)
-------------------- ------- --------------
Total income from
investment operations 1.26 1.36 .88 1.20 -
-------------------- ------- --------------
Less Distributions:
Dividends from net
investment income (.80) (.83) (.84) (.86) (.84)
Distributions from net
realized gains (.08) (.09) - - (.06)
-------------------- ------- --------------
Total distributions (.88) (.92) (.84) (.86) (.90)
-------------------- ------- --------------
Net Asset Value, End of Year $16.60 $16.22 $15.78 $15.74 $15.40
==================== ======= ==============
Total Return* 7.98% 8.80% 5.65% 8.16% 0.13%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $358 $289 $253 $233 $226
Ratio of expenses to average
net assets .71% .72% .73% .73% .71%
Ratio of net income to
average net assets 4.83% 5.15% 5.25% 5.65% 5.28%
Portfolio turnover rate 27.78% 15.68% 27.60% 41.36% 15.08%
*Excludes maximum sales charge of 4.75%.
</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 investment portfolio, as of August 31, 1998, 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, 1998 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, 1998, 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
Deloitte & Touche LLP
Los Angeles, California
September 30, 1998
Tax Information (unaudited)
During the fiscal year ended August 31, 1998, the fund paid 79.5 cents per
share of exempt-interest distributions within the meaning of Section
852(b)(5)(A) of the Internal Revenue Code, 0.2 cents per share of ordinary
income, and a long-term capital gain of 7.9 cents per share, of which 6.0 cents
were 28% rate gains.
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.
Printed on recycled paper
Litho in USA KBDA/L/3927
Lit. No. TEFCA-011-1098
45024/15024
[The American Funds Group(R)]
The Tax-Exempt Fund of California
Board of Trustees
H. Frederick Christie
Rolling Hills Estates, California
Private investor; former President and
Chief Executive Officer, The Mission Group;
former President, Southern California
Edison Company
Don R. Conlan
South Pasadena, California
President (retired), The Capital Group Companies, Inc.
Diane C. Creel
Long Beach, California
President and Chief Executive Officer,
The Earth Technology Corporation
(international consulting engineering)
Martin Fenton, Jr.
San Diego, California
Chairman of the Board, Senior Resource
Group, Inc. (senior living centers
management)
Leonard R. Fuller
Marina del Rey, California
President, Fuller Consulting
(management consultants)
Abner D. Goldstine
Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and
Management Company
Paul G. Haaga, Jr.
Los Angeles, California
Chairman of the Board of the fund
Executive Vice President and Director,
Capital Research and
Management Company
Herbert Hoover III
San Marino, California
Private investor
Richard G. Newman
Los Angeles, California
Chairman of the Board, President and
Chief Executive Officer,
AECOM Technology Corporation
(architectural engineering)
Peter C. Valli retired from the Board of
Trustees effective March 17, 1998. He
had been a Trustee of the fund since
1991. The Trustees thank him for his
many contributions to the fund.
Other Officers
Neil L. Langberg
Los Angeles, California
Senior Vice President of the fund
Vice President - Investment Management
Group, Capital Research and
Management Company
Michael J. Downer
Los Angeles, California
Vice President of the fund
Senior Vice President - Fund Business
Management Group, Capital Research and
Management Company
Julie F. Williams
Los Angeles, California
Secretary of the fund
Vice President - Fund Business
Management Group, Capital Research and
Management Company
Anthony W. Hynes, Jr.
Brea, California
Treasurer of the fund
Vice President - Fund Business
Management Group, Capital Research and
Management Company
Kimberly S. Verdick
Los Angeles, California
Assistant Secretary of the fund
Assistant Vice President - Fund Business
Management Group, Capital Research and
Management Company
Todd L. Miller
Brea, California
Assistant Treasurer of the fund
Assistant Vice President - Fund Business
Management Group, Capital Research and
Management Company
Offices of the fund and of the
investment adviser, Capital Research
and Management Company
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5823
Transfer agent for shareholder accounts
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
Custodian of assets
The Chase Manhattan Bank
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
Independent auditors
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
Principal underwriter
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT
OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER. 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
December 31, 1998, this report must be
accompanied by an American Funds Group
Statistical Update for the most recently
completed calendar quarter.
PREPARING FOR THE YEAR 2000 The fund's key service providers, Capital Research
and Management Company, the investment adviser, and American Funds Service
Company, the transfer agent, are updating their computer systems to process
date-related information properly following the turn of the century. Both are
on track to complete modifications of significant internal systems by the end
of 1998. Testing with business partners, vendors and other service providers is
already under way. We will continue to keep you up-to-date in our regular
publications. If you'd like more detailed information, call Shareholder
Services at 800/421-0180, ext. 21, or visit our Web site at
www.americanfunds.com.
