THE AMERICAN FUNDS TAX-EXEMPT SERIES II
THE TAX-EXEMPT FUND OF CALIFORNIA
PART B
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
as amended August 1, 1999
This document is not a prospectus but should be read in conjunction with the
current Prospectus dated November 1, 1998 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>
Certain Investment Limitations and Guidelines 2
Description of Certain Securities and Investment Techniques 2
Investment Restrictions 14
Fund Organization 16
Fund Officers and Trustees 17
Management 20
Dividends and Distributions 23
Additional Information Concerning Taxes 23
Purchase of Shares 28
Selling Shares 34
Shareholder Account Services and Privileges 35
Execution of Portfolio Transactions 37
General Information 38
Investment Results and Related Statistics 40
Description of Ratings for Debt Securities 43
Financial Statements attached
</TABLE>
CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES
The following limitations and guidelines are considered at the time of
purchase, under normal market conditions, and are based on a percentage of the
fund's net assets unless otherwise noted. This summary is not intended to
reflect all of the fund's investment limitations.
- - The fund will invest at least 80% of its assets in tax-exempt securities.
- - The fund may invest up to 20% of its assets in securities subject to
alternative minimum taxes.
- - The fund will invest at least 65% of its assets in debt securities rated
BBB/Baa or better or unrated but determined to be of equivalent quality.
- - The fund may invest up to 20% of its assets in debt securities rated BB/Ba or
below or unrated but determined to be of equivalent quality.
- - The fund will invest substantially in securities with maturities in excess of
three years.
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
THE DESCRIPTIONS BELOW ARE INTENDED TO SUPPLEMENT THE MATERIAL IN THE
PROSPECTUS UNDER the "Risk/Return Summary" and "Investment Objectives,
Strategies and Risks."
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.
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. The fund may invest in bonds rated as low as Ca
by Moody's or CC by S&P which are described by the rating agencies as
"speculative in a high degree; often in default or [having] other marked
shortcomings."
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. 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 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.
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.
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.
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.
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.
CONCENTRATION OF INVESTMENTS -- The fund may invest more than 25% of its assets
in municipal obligations of issuers located in the same state. This may make
the fund more susceptible to similar economic, political, or regulatory
occurrences such as changes in healthcare regulations, environmental
considerations related to construction, construction cost increases and labor
problems, failure of healthcare facilities to maintain adequate occupancy
levels, and inflation. Asa result, the potential for fluctuations in the fund's
share price may increase the more the fund invests in municipal obligations of
issuers in the same state.. The fund may invest more than 25% its assets in
industrial development bonds.
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 non-emergency 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 1997, in terms of job gains, exceeded that of the rest
of the United States. The State added nearly 430,000 non-farm jobs during
1997. In 1996, California surpassed its pre-recession employment peak of 12.7
million jobs. The unemployment rate, while still higher than the national
average, fell to 5.9% in early 1998, 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. The rate of employment
growth for the Los Angeles region indicates that its growth has almost caught
up with that in the San Francisco Bay region on a population share basis.
Personal income grew by over 7 percent or $55 billion in 1996 and by nearly 7%
again in 1997. 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 unsettled financial
situation occurring in certain Asian economies may adversely affect the State's
export-related industries, and therefore, the State's rate of economic growth.
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, 1996-97 and 1997-98
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 $461
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 1997-98.
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. In December 1997
Moody's raised its ratings on $325 billion of Orange County pension obligation
bonds to Baa3 from Ba. In February 1998 Fitch assigned outstanding Orange
County pension obligation bonds a BBB rating.
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
1998 the Los Angeles County Board of Supervisors approved an approximately
$13.6 billion 1998-99 budget, which was more than 5% larger than the 1997-98
budget, and which did not require cuts in services and jobs to balance. The
Board of Supervisors reserved the right to make further changes to reflect
revenue allocation decisions in the final State budget.
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 billion 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 Governor's proposed budget for fiscal year 1998-1999 proposed total State
spending of $70.6 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.7% from the current year's budget. This
total included $55.4 billion in General Fund spending (a 4.5% increase from the
current year) and $15.2 billion in special funds pending (a 5.3% increase).
The Governor's proposed budget anticipated a $296 million reserve for economic
uncertainties. The new budget reflected agreements reached in the prior year
in the areas of welfare reform, education, state tax relief, and the financial
restructuring of the State's trial court system. The budget contained no tax
changes and relatively few minor programmatic changes.
The May 1998 Revision to the Governor's proposed budget increased the General
Fund revenue forecast by nearly $1.8 billion in 1997-98 and $2.5 billion in
1998-99. The May Revision provided for a balanced budget and a budget reserve
for economic uncertainties of $1.6 billion. In the May Revision the
administration proposed, among other things, a two-step reduction in the
State's vehicle license fee (VLF) which, when fully phased in, would reduce
State revenues by more than $3 billion annually. Since VLF is a primary source
of revenue for local governments, the May Revision proposed continuous
appropriation from the General Fund to replace that loss in revenues.
The VLF proposal met significant opposition in the Legislature and continuing
disagreement over the nature and extent of the proposed tax cut delayed final
adoption of the 1998-99 budget. Local government concern about the potential
impact of the VLF proposal on local government revenues underscores the extent
to which California country and other local government budgets are affected by
State budget decisions beyond their control.
In early August, 1998 the Governor and leaders of the State Legislature
reached agreement on a $76 billion State budget that included a $1.4 billion
tax cut. The main feature of the tax cut was a 25% reduction in the VLF, with
future reductions contingent upon higher than forecast State revenues. The
budget accord included significant additional funding for public school and
community colleges intended, among other things, to increase the length of the
California school year and extend the class size education initiatives already
under way. The budget accord also included a 7.9% increase in welfare
recipients monthly checks as well as a variety of smaller tax credits and cuts,
including an increase in the income tax credit for dependents, a modest
renters' credit and a number of tax credits and cuts aimed at specific
industries important to the California economy.
On August 21, 1998, the Governor signed the 1998-99 Budget Act providing for a
$75.4 billion State budget. The Governor invoked his line-item veto authority,
however, to cut $1.5 billion from the spending plan previously agreed upon with
State legislative leaders and provide for a $1.3 billion reserve. The extent
to which a number of such budget cuts are restored will be the subject, as in
previous years, of further negotiation between the Governor and the Legislature
prior to the end of the legislative session.
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 CURRENT 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 February 1, 1998, the State had over $18.4 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond
authorizations in an aggregate amount of approximately $6.9 billion remained
unissued as of February 1, 1998. The State also builds and acquires capital
facilities through the use of lease purchase borrowing. As of February 1,
1998, the State had approximately $6.4 billion of outstanding Lease-Purchase
Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $22.5 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+.
In October, 1997, Fitch raised its rating from A+ to AA- referring to
California's fundamental strengths, the extent of economic recovery and the
return of financial stability.
Year 2000
In October 1997 the Governor issued Executive Order W-163-97 stating that Year
2000 solutions would be a State priority and requiring each agency of the
State, no later than December 31, 1998, to address Year 2000 problems in their
essential systems and protect those systems from corruption by non-compliant
systems, in accordance with the Department of Information Technology's
California 2000 Program. There can be no assurance that steps being taken by
state or local government agencies with respect to the Year 2000 problem will
be sufficient to avoid any adverse impact upon the budgets or operations of
those agencies or upon the Fund.
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 #2, the fund will not invest more than
15% of its net assets in illiquid securities.
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.
FUND ORGANIZATION
The fund is an open-end, diversified management investment company. It was
organized as a Massachusetts business trust on May 30, 1986.
All fund operations are supervised by the fund's board of trustees. The board
meets periodically and performs 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 "Trustees and Trustee Compensation"
below. They may elect to defer all or a portion of these fees through a
deferred compensation plan in effect for the fund.
FUND OFFICERS AND TRUSTEES
Trustees and Trustee Compensation
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
AND AGE WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
REGISTRANT DURING PAST 5 (INCLUDING (INCLUDING OF FUND
YEARS VOLUNTARILY VOLUNTARILY BOARDS ON
(POSITIONS DEFERRED DEFERRED WHICH
WITHIN THE COMPENSATION/1/) COMPENSATION/1/) TRUSTEE
ORGANIZATIONS FROM THE FUND FROM ALL FUNDS SERVES/2/
LISTED MAY DURING MANAGED BY
HAVE CHANGED FISCAL YEAR ENDED CAPITAL
DURING THIS AUGUST 31, 1998 RESEARCH AND
PERIOD) MANAGEMENT
COMPANY OR ITS
AFFILIATES/2/ FOR
THE YEAR ENDED
AUGUST 31, 1998
<S> <C> <C> <C> <C> <C>
H. Frederick Trustee Private $2,611/3/ $171,100 19
Christie Investor.
Age: 65 Former
P.O. Box 144 President and
Palos Verdes Chief
Estates, CA Executive
90274 Officer, The
Mission Group
(non-utility
holding
Company,
subsidiary of
Southern
California
Edison
Company)
+Don R. Conlan Trustee President none/4/ none/4/ 12
Age: 62 (retired), The
1630 Milan Capital Group
Avenue Companies,
South Inc.
Pasadena, CA
91030
Diane C. Creel Trustee CEO and $2,300/3/ $44,650 12
Age: 49 President,
100 W. Broadway The Earth
Suite 5000 Technology
Long Beach, CA Corporation
90802 (international
consulting
engineering)
Martin Fenton, Trustee Chairman, $3,025/3/ $121,084 15
Jr. Senior
Age: 63 Resource Group
4660 La Jolla (management of
Village Drive senior living
Suite 725 centers)
San Diego, CA
92122
Leonard R. Trustee President, $2,666/3/ $51,850 12
Fuller Fuller
Age: 52 Consulting
4337 Marina (financial
City Drive management
Suite 841 ETN consulting
Marina del firm)
Rey, CA 90292
+*Abner D. President, Senior Vice none/4/ none/4/ 12
Goldstine PEO and President and
Age: 68 Trustee Trustee,
Capital
Research and
Management Company
+**Paul G. Chairman of Executive Vice none/4/ none/4/ 14
Haaga, Jr. the Board President and
Age: 49 Trustee,
Capital
Research and
Management
Company
Herbert Hoover Trustee Private $2,443 $65,084 13
III Investor
Age: 70
1520 Circle
Drive
San Marino, CA
91108
Richard G. Trustee Chairman, $3,054/3/ $102,650 13
Newman President and
Age: 63 CEO,
3250 Wilshire AECOM
Boulevard Technology
Los Angeles, Corporation
CA 90010-1599 (architectural
engineering)
</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 29 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., New World 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 Endowments, whose shareholders are
limited to (i) any entity exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended ("501(c)(3) organization"); (ii) any
trust, the present or future beneficiary of which is a 501(c)(3) organization,
and (iii) any other entity formed for the primary purpose of benefiting a
501(c)(3) organization. An affiliate of Capital Research and Management
Company, Capital International, Inc., manages Emerging Markets Growth Fund,
Inc.
/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 ($4,366), Diane C. Creel ($397), Martin Fenton,
Jr. ($8,952), Leonard R.Fuller ($2,012) and Richard G. Newman ($17,719).
/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) PRINCIPAL OCCUPATION(S)
HELD WITH DURING PAST 5 YEARS
THE FUND
<S> <C> <C> <C>
Neil L. Langberg 45 Senior Vice Vice President -
11100 Santa Monica President Investment Management
Blvd. Group, Capital Research
Los Angeles, CA 90025 and Management Company
Michael J. Downer 43 Vice Senior Vice President -
333 South Hope Street President Fund Business Management
Los Angeles, CA 90071 Group, Capital Research
and Management Company
Julie F. Williams 50 Secretary Vice President - Fund
333 South Hope Street Business Management
Los Angeles, CA 90071 Group, Capital Research
and Management Company
Anthony W. Hynes, Jr. 35 Treasurer Vice President - Fund
135 South State Business Management
College Blvd. Group, Capital Research
Brea, CA 92821 and Management Company
Kimberly S. Verdick 33 Assistant Assistant Vice President
333 South Hope Street Secretary - Fund Business
Los Angeles, CA 90071 Management Group, Capital
Research and Management
Company
Todd L. Miller 39 Assistant Assistant Vice President
135 South State Treasurer - Fund Business
College Blvd. Management Group, Capital
Brea, CA 92821 Research and 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 trustee
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, 1998, 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 $175 billion of stocks,
bonds and money market instruments and serves over eight 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, 1999, 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 $290 million 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, 1998, 1997, and 1996, the Investment
Adviser's total fees amounted to $1,262,000, $1,088,000, and $1,018,000,
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, 3500 Wiseman Boulevard, San
Antonio, TX 78251, 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, 1998 amounted to $183,000 after allowance of $713,000 to dealers.
During the fiscal years ended August 31, 1997 and 1996, the Principal
Underwriter retained $131,000 and $138,000, 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, 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 or a community foundation).
Commissions 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 any
"401(k)" plan with 100 or more eligible employees) in excess of the Plan
limitation not reimbursed during the most recent fiscal quarter are recoverable
for five quarters, provided that such commissions do not exceed the annual
expense limit. After five quarters, commissions are not recoverable. During
the Trust's fiscal year ended August 31, 1998, the fund paid or accrued
$742,000 under the Plan as compensation to dealers. As of August 31, 1998,
accrued and unpaid distribution expenses were $140,000.
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 one year is 20% 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 $50 minimum (except where a
Minimums and Fund lower minimum is noted under
Numbers" for initial "Investment Minimums and Fund
investment minimums. Numbers").
BY Visit any investment Mail directly to your
CONTACTING dealer who is investment dealer's address
YOUR registered in the printed on your account
INVESTMENT state where the statement.
DEALER purchase is made and
who has a sales
agreement with
American Funds
Distributors.
BY MAIL Make your check Fill out the account additions
payable to the fund form at the bottom of a recent
and mail to the account statement, make your
address indicated on check payable to the fund,
the account write your account number on
application. Please your check, and mail the check
indicate an investment and form in the envelope
dealer on the account provided with your account
application. statement.
BY TELEPHONE Please contact your Complete the "Investments by
investment dealer to Phone" section on the account
open account, then application or American
follow the procedures FundsLink Authorization Form.
for additional 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 Complete the American
investment dealer to FundsLink Authorization Form.
open account, then Once you establish the
follow the procedures privilege, you, your financial
for additional advisor or any person with
investments. your account information may
access American FundsLine
OnLine(r) 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 Your bank should wire your
obtain your account additional investments in the
number(s), if same manner as described under
necessary. Please "Initial Investment."
indicate an 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>
<CAPTION>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
<S> <C> <C>
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
New World Fund (SM) 1,000+ 36
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.
+Effective September 15, 1999.
</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).
SALES CHARGES -- 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.)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C>
STOCK AND STOCK/BOND
FUNDS
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than 4.71 4.50 3.75
$100,000
BOND FUNDS
Less than $25,000 4.99 4.75 4.00
$25,000 but less than 4.71 4.50 3.75
$50,000
$50,000 but less than 4.17 4.00 3.25
$100,000
STOCK, STOCK/BOND, AND
BOND FUNDS
$100,000 but less than 3.63 3.50 2.75
$250,000
$250,000 but less than 2.56 2.50 2.00
$500,000
$500,000 but less than 2.04 2.00 1.60
$1,000,000
$1,000,000 or more none none (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 contingent
deferred sales charge may be imposed on certain redemptions by these accounts
made within one year of purchase. 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.
In addition, 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 $100 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.
DEALER COMMISSIONS -- 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 $50 million or more: 1% on amounts of $1 million to
$4 million, 0.50% on amounts over $4 million to $10 million, and 0.25% on
amounts over $10 million.
OTHER COMPENSATION TO DEALERS -- American Funds Distributors, at its expense
(from a designated percentage of its income), currently provides 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.
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.
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.
STATEMENT OF INTENTION -- You may enter into a non-binding commitment to
purchase shares of a fund(s) over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. This includes purchases
made during the previous 90 days, but does not include appreciation of your
investment or reinvested distributions. 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 use 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 pay 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 by the close of the period, 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) and any individual investments in American Legacy products
(American Legacy, American Legacy II and American Legacy III variable
annuities, American Legacy Life, American Legacy Variable Life, and American
Legacy Estate Builder) 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.
When the trustees of certain retirement plans purchase shares 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)
any rollovers or transfers reasonably anticipated to be invested in non-money
market American Funds during the 13-month period, and any individual
investments in American Legacy products are added to the figure determined
above. The sum is the Statement amount and applicable breakpoint level. On
the first investment and all other investments made pursuant to the Statement,
a sales charge will be assessed according to the sales charge breakpoint thus
determined. There will be no retroactive adjustments in sales charges on
investments previously made during the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
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.
CONCURRENT PURCHASES -- You may combine purchases of two or more funds in The
American Funds Group, except direct purchases of the money market funds.
Shares of money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge do qualify.
RIGHT OF ACCUMULATION -- You may take into account the current value of your
existing holdings in The American Funds Group, as well as your holdings in
Endowments (shares of which may be owned only by tax-exempt organizations), to
determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity. When
determining your sales charge, you may also take into account the value of your
individual holdings, as of the end of the week prior to your investment, in
various American Legacy products (American Legacy, American Legacy II and
American Legacy III variable annuities, American Legacy Life, American Legacy
Variable Life, and American Legacy Estate Builder). Direct purchases of the
money market funds are excluded.
PRICE OF SHARES -- Shares are purchased at the offering price next determined
after the purchase order is received and accepted 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 do not always indicate the 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 normal close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. For example, if the Exchange closes at 1:00 p.m. on one day
and at 4:00 p.m. on the next, the fund's share price would be determined as of
4:00 p.m. New York time on both days. The New York Stock Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, 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.
SELLING SHARES
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. You may sell
(redeem) shares in your account in any of the following ways:
THROUGH YOUR DEALER (certain charges may apply)
- - Shares held for you in your dealer's street name must be sold through the
dealer.
WRITING TO AMERICAN FUNDS SERVICE COMPANY
- - Requests must be signed by the registered shareholder(s)
- - A signature guarantee is required if the redemption is:
- -- Over $50,000;
- -- Made payable to someone other than the registered shareholder(s); or
- -- Sent to an address that has not been used with the account for at least 10
days.
Your signature may be guaranteed by a domestic stock exchange or the National
Association of Securities Dealers, Inc., bank, savings association or credit
union that are eligible guarantor institutions.
- - Additional documentation may be required for sales of shares held in
corporate, partnership or fiduciary accounts.
- - You must include any shares you wish to sell that are in certificate form.
TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
FUNDSLINE(R) OR AMERICAN FUNDSLINE ONLINE(R)
- - Redemptions by telephone or fax (including American FundsLine(r) and American
FundsLine OnLine(R)) are limited to $50,000 per shareholder each day.
- - Checks must be made payable to the registered shareholder(s).
- - Checks must be mailed to an address of record that has been used with the
account for at least 10 days.
MONEY MARKET FUNDS
- - You may have redemptions of $1,000 or more wired to your bank by writing
American Funds Service Company.
- - You may establish check writing privileges (use the money market funds
application).
- -- If you request check writing privileges, you will be provided with 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 or
registered shareholders exactly as indicated on your checking account signature
card.
Redemption 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.
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. Proceeds will be reinvested at the next calculated net asset value
after your request is received and accepted by American Funds Service Company.
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(R)(see "American FundsLine(r) and
American FundsLine Online(R)" 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(R) -- 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(R). 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(R) 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(R)),
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.
SHARE CERTIFICATES -- Shares are credited to your account and certificates are
not issued unless you request them by writing to American Funds Service
Company.
REDEMPTION OF SHARES -- The fund's Declaration of Trust permits the fund to
direct the Transfer Agent to redeem your shares if, through redemptions or
otherwise, they have a value of less than the minimum initial investment amount
required of new shareholders (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). We will give you prior notice of at least 60 days
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
The Investment Adviser places orders for the fund's portfolio securities
transactions. 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 have an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.
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, 1998, 1997
and 1996 amounted to $358,000, $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
$68,000 for the fiscal year ended August 31, 1998.
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. It
provides shareholders 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. In an effort to reduce the
volume of mail shareholders receive from the fund when a household owns more
than one account, the Transfer Agent has taken steps to eliminate duplicate
mailings of shareholder reports. To receive additional copies of a report
shareholders should contact the Transfer Agent.
YEAR 2000 - The fund and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The fund understands that
these service providers are taking steps to address the "Year 2000 problem".
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the fund's investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the fund invests could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings of
individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
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 trustee 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, 1998
<S> <C>
Net asset value and redemption price per share $16.60
(Net assets divided by shares outstanding)
Offering price per share (100/95.25 of per $17.43
share net asset value, which takes into account
the 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 AND RELATED STATISTICS
The fund's yield was 4.04% based on a 30-day (or one month) period ended
August 31, 1998 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, 1998 was 7.37%.
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, 1998
were 2.85%, 5.07% and 7.42%, 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 116.72%. The fund's total return over the past 12 months and average annual
total return at net asset value over the past five- and ten-year periods ending
on August 31, 1998 was 7.98%, 6.09% and 7.95%, respectively.
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, 1998
| |
Periods
Number of Years 9/1-8/31 Value
<S> <C> <C>
1 1997 -1998 $10,285
2 1996 -1998 11,188
3 1995 - 1998 11,826
4 1994 - 1998 12,785
5 1993 - 1998 12,805
6 1992 - 1998 14,476
7 1991 - 1998 15,976
8 1990 - 1998 17,827
9 1989 - 1998 18,526
10 1988 - 1998 20,460
11 1987 - 1998 21,594
lifetime 1986*- 1998 21,672
</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, 1998)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES**
Fiscal Total From From From
Year End Annual Dividends Investment Initial Capital Dividends Total
Gains
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
1998 1,013 9,412 19,412 11,067 271 10,334 21,672
</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 $265.
Note that past results are not an indication of future investment results.
The fund may include information on its investment results and/or comparisons
of its investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles in advertisements or in reports
furnished to present or prospective shareholders. The fund may also combine
its results with those of other funds in The American Funds Group for purposes
of illustrating investment strategies involving multiple funds.
The fund may also refer to results and surveys compiled by organizations such
as CDA Investment Technologies, Ibbotson Associates, Lipper Analytical Services
("Lipper"), Morningstar, Inc., Wiesenberger Investment Companies Services and
the U.S. Department of Commerce. Additionally, the fund may 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."
<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 1 $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 Se 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, 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% 201 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 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 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 P 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 Cour 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 P 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. Bo 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 Insu 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 Projec 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 Apartment 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 Offi 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 Assessme 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 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, 1 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 Cha 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 Extens 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% 200 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 Projec 5,000 5,641
Series 1996A AMT, 8.50% 2026
County of San Joaquin, Cert. of Part. (1993 General Hospital Project), 6.6 2,235 2,454
San Joaquin Hills Transportation Corridor Agcy. Senior Lien Toll Road Rev. 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 1,000 1,185
1994A, 6.25% 2019
Ref. Rev. Bonds, 1998 Series A (City of Santa Ana and South Harbor Bouleva 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, 2,885 3,075
Insured, 5.25% 2012
Santa Clara County Fin. Auth., Lease Rev. Bonds (VMC Facility Replacement 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 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 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>
<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>
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.
<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>
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.
