PROSPECTUS SUPPLEMENT
January 10, 2000
for the following funds with prospectuses dated February 1, 1999 - December 1,
1999
<TABLE>
<CAPTION>
<S> <C>
AMCAP Fund, Inc. Limited Term Tax-Exempt Bond
American Balanced Fund, Inc. Fund of America
American High-Income Municipal The New Economy Fund
Bond Fund, Inc. New Perspective Fund, Inc.
American High-Income Trust SMALLCAP World Fund, Inc.
The Bond Fund of America, Inc. The Tax-Exempt Bond Fund of
Capital World Bond Fund, Inc. America, Inc.
Capital World Growth and The Tax-Exempt Fund of
Income Fund, Inc. California
The Cash Management Trust of The Tax-Exempt Fund of
America Maryland
EuroPacific Growth Fund The Tax-Exempt Fund of
Fundamental Investors, Inc. Virginia
The Growth Fund of America, The Tax-Exempt Money Fund
Inc. of America
The Income Fund of America, U.S. Government Securities
Inc. Fund
Intermediate Bond Fund of The U.S. Treasury Money Fund
America of America
The Investment Company of Washington Mutual Investors
America Fund, Inc.
</TABLE>
The initial investment minimum for all funds in The American Funds Group(r),
except the money market funds and the state tax-exempt funds, is now $250. The
initial investment minimum for the money market funds (The Cash Management
Trust of America, The Tax-Exempt Money Fund of America and The U.S. Treasury
Money Fund of America) and the state tax-exempt funds (The Tax-Exempt Fund of
California, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of
Virginia) is $1,000.
In addition, effective January 10, 2000, the sales charges applied to purchases
of the equity and fixed-income funds in The American Funds Group are as
follows:
<TABLE>
<CAPTION>
EQUITY FUNDS FIXED-INCOME FUNDS
Sales Charge Dealer Sales Charge Dealer
as % of Concession as % of Concession
as a % of as a % of
Offering Offering
Price Price
AMOUNT OF SALE Offering Net Offering Net
Price Amount Price Amount
Invested Invested
<S> <C> <C> <C> <C> <C> <C>
Less than $25,000 5.75% 6.10% 5.00%
$25,000 but less than 5.00 5.26 4.25 3.75% 3.90% 3.00%
$50,000
$50,000 but less than 4.50 4.71 3.75
$100,000
$100,000 but less than 3.50 3.63 2.75 3.50 3.63 2.75
$250,000
$250,000 but less than 2.50 2.56 2.00 2.50 2.56 2.00
$500,000
$500,000 but less than 2.00 2.04 1.60 2.00 2.04 1.60
$750,000
$750,000 but less than 1.50 1.52 1.20 1.50 1.52 1.20
$1 million
$1 million and above none none see none none see
prospectus prospectus
</TABLE>
<PAGE>
THE AMERICAN FUNDS TAX-EXEMPT SERIES II
THE TAX-EXEMPT FUND OF CALIFORNIA
Part B
Statement of Additional Information
November 1, 1999
(as amended January 10, 2000)
This document is not a prospectus but should be read in conjunction with the
current prospectus of The Tax-Exempt Fund of California (the "fund" or "TEFCA")
dated November 1, 1999. The prospectus may be obtained from your investment
dealer or financial planner or by writing to the fund at the following address:
The American Funds Tax-Exempt Series II
The Tax-Exempt Fund of California
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
Fundamental Policies and Investment Restrictions. . . . . . . . . . 12
Fund Organization and Voting Rights . . . . . . . . . . . . . . . . 13
Fund Trustees and Officers. . . . . . . . . . . . . . . . . . . . . 15
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Dividends, Distributions and Taxes. . . . . . . . . . . . . . . . . 21
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 27
Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Shareholder Account Services and Privileges . . . . . . . . . . . . 35
Execution of Portfolio Transactions . . . . . . . . . . . . . . . . 38
General Information . . . . . . . . . . . . . . . . . . . . . . . . 38
Investment Results and Related Statistics . . . . . . . . . . . . . 40
Financial Statements
</TABLE>
The Tax-Exempt Fund of California -- Page 1
<PAGE>
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, or derive at least 80%
of its income from, securities that are exempt from both federal and
California income taxes. 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 by Standard & Poor's Corporation (S&P) or Baa by Moody's Investors
Services, Inc. (Moody's) 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 by
S&P and Ba by Moody's 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 fund may experience difficulty liquidating certain portfolio securities
during significant market declines or periods of heavy redemptions. The
descriptions below are intended to supplement the material in the prospectus
under "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.
High-yield, high-risk bonds rated Ba or below by Standard & Poor's Corporation
and BB or below by Moody's Investors Services, Inc. (or unrated but considered
to be of equivalent quality) are described by the rating agencies as speculative
and involve greater risk of default or price changes due to changes in the
issuer's creditworthiness than higher rated bonds, or they may already be in
default. The market prices of these securities may fluctuate more than higher
quality securities and may decline significantly in periods of general economic
difficulty. It may be more difficult to dispose of, or to determine the value
of, high-yield, high-risk bonds. Certain risk factors relating to "high-yield,
high-risk bonds" are discussed below.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk
bonds can be sensitive to adverse economic changes and political and
corporate developments and may be less sensitive to interest rate changes.
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. 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, like other bonds, may
contain redemption or call provisions. If an issuer exercises these
provisions in a declining interest rate market, the fund would have to
replace the security with a lower yielding
The Tax-Exempt Fund of California -- Page 2
<PAGE>
security, resulting in a decreased return for investors. 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.
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.
The Investment Adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments, but there can be no assurance that it will be successful in doing
so.
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, their
exclusion from gross income for federal income tax purposes and, where
applicable, 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
bonds 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 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 Tax-Exempt Fund of California -- Page 3
<PAGE>
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. 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.
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 a 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.
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 (the "State") 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
The Tax-Exempt Fund of California -- Page 4
<PAGE>
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. During the severe recession California
experienced from 1991 to 1993, the state legislature eliminated significant
components of its aid to local governments. The State has since increased aid
to local governments and reduced certain mandates for local services. Whether
legislation will be enacted in the future to either increase or reduce the
redistribution of state revenues to local governments, or to make them less
dependent on state budget decisions, cannot be predicted. 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.
The Tax-Exempt Fund of California -- Page 5
<PAGE>
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 (the Health
Facility Construction Loan Insurance Fund or "HFCLIF") or from unappropriated
State funds. In the event of a default, any debenture payable from 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
The Tax-Exempt Fund of California -- Page 6
<PAGE>
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 anti-deficiency 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 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 unemployment rate, while still higher
than the national average, fell to an average of 5.9% in 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. The unsettled financial situation
occurring in
The Tax-Exempt Fund of California -- Page 7
<PAGE>
certain Asian economies and its spillover effects elsewhere may continue to
adversely affect the State's export-related industries, and therefore, the
State's rate of economic growth.
The recession severely affected State revenues while the State's health and
welfare costs were increasing. Consequently, the State had a lengthy period of
budget imbalance; the State's accumulated budget deficit approached $2.8 billion
at its peak at June 30, 1993. The large budget deficits depleted the State's
available cash resources and it had to use a series of external borrowings to
meet its cash needs. With the end of the recession, the State's financial
condition improved in the 1995-96 through 1998-99 fiscal years, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint. The accumulated budget
deficit from the recession years was eliminated. No deficit borrowing has
occurred at the end of the last four fiscal years and the State's cash flow
borrowing was limited to $1.7 billion in 1998-99. The State issued $1.0 billion
of revenue anticipation notes for the 1999-2000 fiscal year.
Some local governments in California have experienced notable financial
difficulties. 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. In September
1999, Moody's assigned the County an issuer (implied general obligation) rating
of Aa3 and, among other things, upgraded the ratings on the County's pension
obligation bonds to A1.
Los Angeles County, the nation's largest county, has also experienced financial
difficulty. Between 1992 and 1995, the County's long term bonds were downgraded
three times. This occurred 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. The County's improving financial condition has
been reflected in improved general obligation bond ratings. In June 1999, the
Los Angeles County Board of Supervisors approved a budget of approximately $15
billion for 1999-2000, up from the $13.6 billion approved for the previous
fiscal year. The County's financial condition will continue to be affected by
the large number of County residents who are dependent on government services
and by a structural deficit in its health department.
On June 29, 1999, the Governor of California signed the 1999-2000 Budget Act.
The Budget Act estimated General Fund revenues and transfers of $63.0 billion,
and contained expenditures totaling $63.7 billion. The Budget Act also
contained expenditures of $16.1 billion from special funds and $1.5 billion from
bond funds. The Administration estimated a budget reserve balance at June 30,
2000, of approximately $880 million. Not included in this amount was an
additional $300 million which (after the Governor's vetoes) was "set aside" to
provide funds for employee salary increases (to be negotiated in bargaining with
employee unions), and for litigation reserves. The Budget Act anticipates
normal cash flow borrowing during the fiscal year. Continued State economic
expansion and large revenue increases enabled the Governor and State legislature
to provide increases in spending programs in the 1999-2000 budget. These
included large increases in education and health and human services funding.
The Tax-Exempt Fund of California -- Page 8
<PAGE>
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 October 1, 1999, the State had over $19.6 billion aggregate amount of its
general obligation bonds outstanding. General obligation bond authorizations in
an aggregate amount of approximately $12.8 billion remained unissued as of
October 1, 1999. The State also builds and acquires capital facilities through
the use of lease purchase borrowing. As of October 1, 1999, the State had
approximately $6.6 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities had
approximately $26 billion aggregate principal amount of revenue bonds and notes
outstanding as of June 30, 1999. 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. In October 1998, Moody's raised its rating from
At to Aa3 citing the State's continuing economic recovery and a number of
actions taken to improve the State's credit condition, including the rebuilding
of cash and budget reserves. In August 1999, Standard & Poor's raised its rating
from A+ to AA- citing the State's strong economic performance and its return to
structural fiscal balance.
The Tax-Exempt Fund of California -- Page 9
<PAGE>
Year 2000
- ---------
In October 1997 the Governor issued an executive order stating that Year 2000
solutions would be a state government priority. Although the State reports that
it is making substantial progress overall toward the goal of Year 2000
compliance, the task is very complex and will likely encounter unexpected
difficulties. The State has not predicted whether all mission critical system
will be ready and tested by late 1999 or what impact failure of any particular
IT system(s) or of outside interfaces with State IT systems might have. The
State has indicated that all mission critical systems will have a contingency
business plan in place to mitigate potential system failures.
The State Treasurer's Office has reported that its systems for bond payments are
fully Y2K compliant. The State Controller's Office has reported that it has
completed the necessary Y2K remediation projects for the State fiscal and
accounting system. Both offices report they are actively working with outside
entities with which they interface to ensure they are also compliant. 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.
FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When the fund agrees to purchase such securities it
assumes the risk of any decline in value of the 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 a transaction fails to
deliver or pay for the securities, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly increases. The fund will not use these
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. As the fund's aggregate commitments under these transactions
increase the opportunity for leverage similarly may increase. 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.
VARIABLE AND FLOATING RATE OBLIGATIONS - The interest rates payable on certain
securities in which the fund may invest may not be fixed but may fluctuate based
upon changes in market rates. Variable and floating rate obligations bear coupon
rates that are adjusted at designated intervals, based on the then current
market rates of interest on which the coupon rates are based. Variable and
floating rate obligations permit the fund to "lock in" the current interest rate
for only the period until the next scheduled rate adjustment, but the rate
adjustment feature tends to limit the extent to which the market value of the
obligation will fluctuate.
The Tax-Exempt Fund of California -- Page 10
<PAGE>
TEMPORARY INVESTMENTS - The fund may invest in short-term municipal obligations
of up to one year in maturity during periods of temporary defensive strategy
resulting from abnormal market conditions, or when such investments are
considered advisable for liquidity. Generally, the income from all such
securities is exempt from federal income tax. Further, a portion of the fund's
assets, which will normally be less than 20%, may be held in cash or invested in
high-quality taxable short-term securities of up to one year in maturity. Such
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.
ADJUSTMENT OF MATURITIES - The Investment Adviser seeks to anticipate movements
in interest rates and adjusts the maturity distribution of the portfolio
accordingly. Keeping in mind the fund's objective, 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. Correspondingly,
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
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.
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).
The fund may also engage in the following investment practices, although it has
no current intention to do so over the next twelve months:
REPURCHASE AGREEMENTS - The fund may enter 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 the Investment Adviser. 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, realization upon the collateral by the
fund may be delayed or limited.
* * * * * *
PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the length
of time particular investments may have been held. Short-term trading profits
are not the fund's objective
The Tax-Exempt Fund of California -- Page 11
<PAGE>
and changes in its investments are generally accomplished gradually, though
short-term transactions may occasionally be made. High portfolio turnover (100%
or more) 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's portfolio turnover rate would equal 100% if each security in the
fund's portfolio were replaced once per year. See "Financial Highlights" in the
prospectus for the fund's annual portfolio turnover for each of the last five
fiscal periods.
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. As the similarity in issuers increases, the potential for
fluctuations in the fund's share price may increase. The fund may invest more
than 25% of its assets in industrial development bonds.
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES - The fund has adopted the following fundamental policies
and investment restrictions which may not be changed without approval by holders
of a majority of its outstanding shares. Such majority is defined in the
Investment Company Act of 1940 ("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.
All percentage limitations are considered at the time securities are purchased
and are based on the fund's net assets unless otherwise indicated. 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 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. 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;
3. Make loans to others, except for the purchase of debt securities or
entering into repurchase agreements;
4. 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;
5. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases or sales;
6. 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 pro-
The Tax-Exempt Fund of California -- Page 12
<PAGE>
vision 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;
7. 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;
8. Invest in companies for the purpose of exercising control or management;
9. Buy or sell commodities or commodity contracts or oil, gas or other mineral
exploration or development programs;
10. Write, purchase or sell puts, calls, straddles, spreads or any combination
thereof;
11. 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 #9, the term "oil, gas or other mineral
exploration or development programs" includes oil, gas or other mineral
exploration or development leases.
NON-FUNDAMENTAL POLICIES -- The following non-fundamental policies may be
changed without shareholder approval:
The fund may not:
(a) 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.
(b) invest more than 15% of its value of its net assets in illiquid
securities.
(c) invest in securities of other investment companies, except as
permitted by the Investment Company Act of 1940, as amended.
FUND ORGANIZATION AND VOTING RIGHTS
The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust on May 30, 1986.
All fund operations are supervised by the fund's board of trustees which 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.
The Tax-Exempt Fund of California -- Page 13
<PAGE>
They may elect to defer all or a portion of these fees through a deferred
compensation plan in effect for the fund.
The fund does not hold annual meetings of shareholders. However, significant
matters which require shareholder approval, such as certain elections of board
members or a change in a fundamental investment policy, will be presented to
shareholders at a meeting called for such purpose. Shareholders have one vote
per share owned. At the request of the holders of at least 10% of the shares,
the fund will hold a meeting at which any member of the board could be removed
by a majority vote.
The Tax-Exempt Fund of California -- Page 14
<PAGE>
FUND TRUSTEES AND OFFICERS
Trustees and Trustee Compensation
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
(INCLUDING VOLUNTARILY
DEFERRED
COMPENSATION/1/)
FROM THE FUND
POSITION DURING FISCAL YEAR
WITH PRINCIPAL OCCUPATION(S) DURING ENDED
NAME, ADDRESS AND AGE REGISTRANT PAST 5 YEARS AUGUST 31, 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard G. Capen, Jr. Trustee Corporate Director and author; former $ 1,250
6077 San Elijo, Box 2494 United States Ambassador to Spain;
Rancho Santa Fe, CA 92067 former Vice Chairman of the Board,
Age: 63 Knight-Ridder, Inc., former Chairman
and Publisher, The Miami Herald
- ---------------------------------------------------------------------------------------------------------------
H. Frederick Christie Trustee Private Investor. Former President and $ 2,500
P.O. Box 144 Chief Executive Officer, The Mission
Palos Verdes Estates, CA Group (non-utility holding company,
90274 subsidiary of Southern California
Age: 65 Edison Company
- ---------------------------------------------------------------------------------------------------------------
+Don R. Conlan Trustee President (Retired), The Capital Group none/3/
1630 Milan Avenue Companies, Inc.
South Pasadena, CA 91030
Age: 62
- ---------------------------------------------------------------------------------------------------------------
Diane C. Creel Trustee CEO and President, The Earth Technology $2,500/4/
100 W. Broadway Corporation (international consulting
Suite 5000 engineering)
Long Beach, CA 90802
Age: 49
- ---------------------------------------------------------------------------------------------------------------
Martin Fenton Trustee Chairman, Senior Resource Group $3,300/4/
4660 La Jolla Village (management of senior living centers)
Drive
Suite 725
San Diego, CA 92122
Age: 63
- ---------------------------------------------------------------------------------------------------------------
Leonard R. Fuller Trustee President, Fuller Consulting (financial $2,500/4/
4337 Marina City Drive management consulting firm)
Suite 841 ETN
Marina del Rey, CA 90292
Age: 53
- ---------------------------------------------------------------------------------------------------------------
+*Abner D. Goldstine President, Senior Vice President and Trustee, none/3/
Age: 69 PEO and Capital Research and Management Company
Trustee
- ---------------------------------------------------------------------------------------------------------------
+**Paul G. Haaga, Jr. Chairman Executive Vice President and Director, none/3/
Age: 50 of Capital Research and Management Company
the Board
- ---------------------------------------------------------------------------------------------------------------
Richard G. Newman Trustee Chairman, President and CEO, AECOM $ 2,900
3250 Wilshire Boulevard Technology Corporation (architectural
Los Angeles, CA 90010-1599 engineering)
Age: 64
- ---------------------------------------------------------------------------------------------------------------
Frank M .Sanchez Trustee President, The Sanchez Family none/3/
5234 Via San Delarro, #1 Corporation dba McDonald's Restaurants
Los Angeles, CA 90022 (McDonald's licensee)
Age: 55
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL COMPENSATION
(INCLUDING VOLUNTARILY
DEFERRED
COMPENSATION/1/) FROM TOTAL NUMBER
ALL FUNDS MANAGED BY OF FUND
CAPITAL RESEARCH AND BOARDS
MANAGEMENT COMPANY ON WHICH
OR ITS AFFILIATES/2/ FOR THE TRUSTEE
NAME, ADDRESS AND AGE YEAR ENDED AUGUST 31, 1999 SERVES/2/
- --------------------------------------------------------------------------
<S> <C> <C>
Richard G. Capen, Jr. $ 43,700 8
6077 San Elijo, Box 2494
Rancho Santa Fe, CA 92067
Age: 63
- --------------------------------------------------------------------------
H. Frederick Christie $206,600 19
P.O. Box 144
Palos Verdes Estates, CA
90274
Age: 65
- --------------------------------------------------------------------------
+Don R. Conlan none/3/ 12
1630 Milan Avenue
South Pasadena, CA 91030
Age: 62
- --------------------------------------------------------------------------
Diane C. Creel $ 48,000 12
100 W. Broadway
Suite 5000
Long Beach, CA 90802
Age: 49
- --------------------------------------------------------------------------
Martin Fenton $131,600 15
4660 La Jolla Village
Drive
Suite 725
San Diego, CA 92122
Age: 63
- --------------------------------------------------------------------------
Leonard R. Fuller $ 51,600 13
4337 Marina City Drive
Suite 841 ETN
Marina del Rey, CA 90292
Age: 53
- --------------------------------------------------------------------------
+*Abner D. Goldstine none/3/ 12
Age: 69
- --------------------------------------------------------------------------
+**Paul G. Haaga, Jr. none/3/ 14
Age: 50
- --------------------------------------------------------------------------
Richard G. Newman $107,100 13
3250 Wilshire Boulevard
Los Angeles, CA 90010-1599
Age: 64
- --------------------------------------------------------------------------
Frank M .Sanchez none/3/ 6
5234 Via San Delarro, #1
Los Angeles, CA 90022
Age: 55
- --------------------------------------------------------------------------
</TABLE>
The Tax-Exempt Fund of California -- Page 15
<PAGE>
The Tax-Exempt Fund of California -- Page 16
<PAGE>
+ "Interested persons" within the meaning of the 1940 Act on the basis of their
affiliation with the fund's Investment Adviser, Capital Research and
Management Company or the parent company of the Investment Adviser, The
Capital Group Companies, Inc.
* 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 1993. 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 Trustees.
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 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.
4 Since the deferred compensation plan's adoption, the total amount of deferred
compensation accrued by the fund (plus earnings thereon) as of fiscal year
ended August 31, 1999 for participating Trustees is as follows: Richard G.
Capen, Jr. ($1,294), H. Frederick Christie ($4,855), Diane C. Creel ($1,677),
Martin Fenton ($12,522), Leonard R. Fuller ($3,496), Richard G. Newman
($25,536) and Frank M. Sanchez ($443). Amounts deferred and accumulated
earnings thereon are not funded and are general unsecured liabilities of the
fund until paid to the Trustees.
The Tax-Exempt Fund of California -- Page 17
<PAGE>
OFFICERS
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS AGE WITH REGISTRANT PAST 5 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Neil L. Langberg 46 Senior Vice Vice President - Investment
11100 Santa Monica President Management Group, Capital
Blvd. Research and Management Company
Los Angeles, CA 90025
- -------------------------------------------------------------------------------
Michael J. Downer 44 Vice President Senior Vice President - Fund
333 South Hope Street Business Management Group,
Los Angeles, CA 90071 Capital Research and Management
Company
- -------------------------------------------------------------------------------
David A. Hoag 33 Vice President Director and Vice President,
11100 Santa Monica Capital Research Company
Blvd.
Los Angeles, CA 90025
- -------------------------------------------------------------------------------
Julie F. Williams 51 Secretary Vice President - Fund Business
333 South Hope Street Management Group, Capital
Los Angeles, CA 90071 Research and Management Company
- -------------------------------------------------------------------------------
Anthony W. Hynes, Jr. 36 Treasurer Vice President - Fund Business
135 South State Management Group, Capital
College Blvd. Research and Management Company
Brea, CA 92821
- -------------------------------------------------------------------------------
Kimberly S. Verdick 35 Assistant Assistant Vice President - Fund
333 South Hope Street Secretary Business Management Group,
Los Angeles, CA 90071 Capital Research and Management
Company
- -------------------------------------------------------------------------------
Todd L. Miller 40 Assistant Assistant Vice President - Fund
135 South State Treasurer Business Management Group,
College Blvd. Capital Research and Management
Brea, CA 92821 Company
- -------------------------------------------------------------------------------
</TABLE>
All of the officers listed are officers, and/or directors/trustees of one of
more of the other funds for which Capital Research and Management Company serves
as Investment Adviser.
No compensation is paid by a fund to any officer or Trustee who is a director,
officer or employee of the Investment Adviser or affiliated companies. 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. No
pension or retirement benefits are accrued as part of fund expenses. The
Trustees may elect, on a voluntary basis, to defer all or a portion of their
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, 1999 the officers and Directors of the fund
and their families, as a group, owned beneficially or of record less than 1% of
the outstanding shares of the fund.
The Tax-Exempt Fund of California -- Page 18
<PAGE>
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, Hong Kong, Singapore and Tokyo), with a staff
of professionals, many of whom have a number of 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 managing more than $200 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 fund and the Investment Adviser will
continue in effect until May 31, 2000, 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 fund for its acts or omissions in the performance of its
obligations to the fund 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 it, 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, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, administrative, clerical and bookkeeping functions of
the fund, and provides suitable office space, necessary small office equipment
and utilities, general purpose accounting forms, supplies, and postage 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 the designing, printing and
mailing of reports, prospectuses, proxy statements, and notices to its
shareholders; taxes; expenses of the issuance and redemption of shares of the
fund (including stock certificates, registration and qualification fees and
expenses); expenses pursuant to the fund's Plan of Distribution (described
below); legal and auditing expenses; compensation, fees, and expenses paid to
directors 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.
The Tax-Exempt Fund of California -- Page 19
<PAGE>
The management fee is based upon the net assets of the fund and monthly gross
investment income. For the purpose of such computations under the Agreement,
gross investment income means gross income, computed without taking account of
gains or losses from sales of capital assets, but including original issue
discount as defined for federal income tax purposes. The Internal Revenue Code
in general defines original issue discount to mean the difference between the
issue price and the stated redemption price at maturity of certain debt
obligations. The holder of such indebtedness is in general required to treat as
ordinary income the proportionate part of the original issue discount
attributable to the period during which the holder held the indebtedness.
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.
The Agreement provides for a management fee reduction to the extent that the
fund's annual ordinary operating expenses exceed 1-1/2% of the first $30 million
of the net assets of the fund and 1% of the net assets in excess thereof.
Expenses which are not subject to this limitation are interest, taxes, and
extraordinary expenses. Expenditures, including costs incurred in connection
with the purchase or sale of portfolio securities, which are capitalized in
accordance with generally accepted accounting principles applicable to
investment companies, are accounted for as capital items and not as expenses.
For the fiscal years ended August 31, 1999, 1998, 1997, the Investment Adviser
received advisory fees of $1,459,000, $1,262,000, and $1,088,000, 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 fund 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, 1999 amounted to $205,000 after allowance of $794,000 to dealers.
During the fiscal years ended 1998 and 1997 the Principal Underwriter retained
$183,000 and $131,000, respectively after an allowance of $713,000 and $520,000
to dealers, respectively.
As required by rule 12b-1 and the 1940 Act, the Plan (together with the
Principal Underwriting Agreement) has been approved by the full 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 fund
may be considered to have a direct or indirect financial interest in the
operation of the Plan due to present or past affiliations with the Investment
Adviser and related companies. Potential benefits of the Plan to the fund
include 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
The Tax-Exempt Fund of California -- Page 20
<PAGE>
of assets and maintenance of a financially healthy management organization. The
selection and nomination of trustees who are not "interested persons" of the
fund are committed to the discretion of the trustees who are not "interested
persons" during the existence of the Plan. The Plan is 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 net assets annually to
finance any activity which is primarily intended to result in the sale of fund
shares, provided the fund's 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
fiscal year ended August 31, 1999, the fund paid or accrued $945,000 for
compensation to dealers under the Plan. As of August 31, 1999, accrued and
unpaid distribution expenses were $151,000.
The Glass-Steagall Act and other applicable laws, among other things, generally
prohibit commercial 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, DISTRIBUTIONS AND TAXES
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
The Tax-Exempt Fund of California -- Page 21
<PAGE>
declared as dividends or distributions and reserves for contingent or
undetermined liabilities, all determined in accordance with generally accepted
accounting principles.
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.
The Tax-Exempt Fund of California -- Page 22
<PAGE>
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 except as
indicated above. The fund will have no tax liability with respect to such
distributed 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 except as indicated above. 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. Any such income distributed
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.
The Tax-Exempt Fund of California -- Page 23
<PAGE>
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. Except as indicated 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
The Tax-Exempt Fund of California -- Page 24
<PAGE>
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
The Tax-Exempt Fund of California -- Page 25
<PAGE>
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.
The Tax-Exempt Fund of California -- Page 26
<PAGE>
PURCHASE OF SHARES
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
- -------------------------------------------------------------------------------
<S> <C> <C>
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 contacting Visit any investment Mail directly to your
your investment dealer dealer who is investment dealer's address
registered in the printed on your account
state where the statement.
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
"Shareholder Account Services
and Privileges - Telephone and
Computer Purchases, Redemptions
and Exchanges" below).
- -------------------------------------------------------------------------------
By computer Please contact your Complete the American FundsLink
investment dealer to Authorization Form. Once you
open account, then established the privilege, you,
follow the procedures your financial advisor or any
for additional person with your account
investments. information may access American
FundsLine OnLine(R) on the
Internet and make investments
by computer (subject to
conditions noted in
"Shareholder Account Services
and Privileges - Telephone and
Computer Purchases, Redemptions
and Exchanges" below).
- -------------------------------------------------------------------------------
By wire Call800/421-0180 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 FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY
PURCHASE ORDER.
- -------------------------------------------------------------------------------
</TABLE>
The Tax-Exempt Fund of California -- Page 27
<PAGE>
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>
MINIMUM
INITIAL FUND
FUND INVESTMENT NUMBER
---- ---------- ------
<S> <C> <C>
STOCK AND STOCK/BOND FUNDS
AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250 02
American Balanced Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 11
American Mutual Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 03
Capital Income Builder/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 12
Capital World Growth and Income Fund/SM/ . . . . . . . . . . . . . . . . 250 33
EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 16
Fundamental Investors/SM/ . . . . . . . . . . . . . . . . . . . . . . . 250 10
The Growth Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 05
The Income Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 06
The Investment Company of America/(R)/ . . . . . . . . . . . . . . . . . 250 04
The New Economy Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 14
New Perspective Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 07
New World Fund/SM/ . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 36
SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . 250 35
Washington Mutual Investors Fund/SM/ . . . . . . . . . . . . . . . . . . 250 01
BOND FUNDS
American High-Income Municipal Bond Fund/(R)/ . . . . . . . . . . . . . 250 40
American High-Income Trust/SM/ . . . . . . . . . . . . . . . . . . . . . 250 21
The Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . . . . . . 250 08
Capital World Bond Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 31
Intermediate Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . 250 23
Limited Term Tax-Exempt Bond Fund of America/SM/ . . . . . . . . . . . . 250 43
The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . . . . . . . . . . 250 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/ . . . . . . . . . . . . . . . . . . 250 22
MONEY MARKET FUNDS
The Cash Management Trust of America/(R)/ . . . . . . . . . . . . . . . 1,000 09
The Tax-Exempt Money Fund of America/SM/ . . . . . . . . . . . . . . . . 1,000 39
The U.S. Treasury Money Fund of America/SM/ . . . . . . . . . . . . . . 1,000 49
___________
*Available only in certain states.
</TABLE>
Minimums are reduced to $50 for purchases through "Automatic Investment Plans"
(except for the money market funds) or to $25
The Tax-Exempt Fund of California -- Page 28
<PAGE>
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>
<S> <C> <C> <C>
Amount of Purchase SALES CHARGE AS DEALER
at the Offering Price PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND FUNDS
Less than $25,000 6.10% 5.75% 5.00%
$25,000 but less than $50,000 5.26 5.00 4.25
$50,000 but less than $100,000 4.71 4.50 3.75
BOND FUNDS
Less than $100,000 3.90 3.75 3.00
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
$750,000
$750,000 but less than 1.52 1.50 1.20
$1,000,000
$1,000,000 or more none none (see below)
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES - Investment of $1 million or more are
sold with no initial sales charge. HOWEVER, A 1% CONTINGENT DEFERRED SALES
CHARGE MAY BE IMPOSED IF REDEMPTIONS ARE MADE WITHIN ONE YEAR OF PURCHASE.
Employer-sponsored defined contribution-type plans investing $1 million or more,
or with 100 or more eligible employees, may invest with no sales charge and are
not subject to a contingent deferred sales charge. Investments made by
retirement plans, endowments or foundations with $50 million or more in assets
may also be made with no sales charge and are not subject to a contingent
deferred sales charge. A dealer concession of up to 1% may be paid by the fund
under its Plan of Distribution on investments made with no initial sales charge.
In addition, the stock, stock/bond and bond funds may sell shares at net asset
value to:
The Tax-Exempt Fund of California -- Page 29
<PAGE>
(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 the
Principal Underwriter (or who clear transactions through such dealers) and plans
for such persons or the dealers;
(3) companies exchanging securities with the fund through a merger, acquisition
or exchange offer;
(4) trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with retirement plan assets of $50 million or more;
(5) insurance company separate accounts;
(6) accounts managed by subsidiaries of The Capital Group Companies, Inc.; and
(7) The Capital Group Companies, Inc., its affiliated companies and Washington
Management Corporation. Shares are offered at net asset value to these persons
and organizations due to anticipated economies in sales effort and expense.
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: 1.00% 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 - The Principal Underwriter, at its expense (from
a designated percentage of its income), currently provides additional
compensation to dealers. Currently these payments are limited to the top 100
dealers who have sold shares of the fund or other funds in The American Funds
Group. These payments will be based principally on a pro rata share of a
qualifying dealer's sales. The Principal Underwriter 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" (your spouse and
your children under age 21) may combine investments to reduce your costs. You
must let your investment dealer or American Funds Service Company (the "Transfer
Agent") know if you
The Tax-Exempt Fund of California -- Page 30
<PAGE>
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 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 $25,000 or more made within a 13-month period subject to the
following statement of intention (the "Statement"). The Statement is not a
binding obligation to purchase the indicated amount. When a shareholder
elects to utilize a 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 any capital gain distributions on shares held in escrow will
be credited to the shareholder's account in shares (or paid in cash, if
requested). If the intended investment is not completed within the
specified 13-month period, the purchaser will remit to the Principal
Underwriter the difference between the sales charge actually paid and the
sales charge which would have been paid if the total of such purchases had
been made at a single time. If the difference is not paid 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. Existing holdings eligible for rights
of accumulation (see the 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) and 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.
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 accounts and/or:
The Tax-Exempt Fund of California -- Page 31
<PAGE>
- employee benefit plan(s), such as an IRA, individual-type 403(b) plan,
or single-participant Keogh-type plan;
- business accounts solely controlled by these individuals (for example,
the individuals own the entire business);
- trust accounts established by the above individuals. However, if the
person(s) who established the trust is deceased, the trust account may
be aggregated with accounts of the person who is the primary
beneficiary of the trust.
Individual purchases by a trustee(s) or other fiduciary(ies) may also be
aggregated if the investments are:
- for a single trust estate or fiduciary account, including an employee
benefit plan other than those described above;
- 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
- 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.
RIGHTS 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 the Transfer
Agent; 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 the case of orders sent directly to the fund or the Transfer Agent, 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
The Tax-Exempt Fund of California -- Page 32
<PAGE>
time of the determination of the net asset value will be entered at the next
calculated offering price. Prices which appear in the newspaper are not always
indicative of prices at which you will be purchasing and redeeming shares of the
fund, since such prices generally reflect the previous day's closing price
whereas purchases and redemptions are made at the next calculated price.
The price you pay for shares, the offering price, is based on the net asset
value per share which is calculated once daily at the close of trading
(currently 4:00 p.m., New York time) each day the New York Stock Exchange is
open. 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, Presidents' 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 (other than money market funds) 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.
Short-term securities maturing within 60 days are valued at amortized cost which
approximates market value.
Assets or liabilities initially expressed in terms of non-U.S. 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 fund.
The Principal Underwriter will not knowingly sell shares of the fund directly or
indirectly to any person or entity, where, after the sale, such person or entity
would own beneficially directly or indirectly more than 4.5% of the outstanding
shares of the fund without the consent of a majority of the fund's Board of
Trustees.
The Tax-Exempt Fund of California -- Page 33
<PAGE>
SELLING SHARES
Shares are sold at the net asset value next determined after your request is
received in good order by the Transfer Agent. 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 other than the address of record, or an
address of record which has been changed within the last
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 is an eligible guarantor institution.
- 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).
The Tax-Exempt Fund of California -- Page 34
<PAGE>
- 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 1940 Act), 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 the Transfer Agent.
CONTINGENT DEFERRED SALES CHARGE - A contingent deferred sales charge of 1%
applies to certain redemptions from funds other than the money market funds made
within twelve months of purchase on investments of $1 million or more (other
than redemptions by employer-sponsored retirement plans). 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 403(b) plans or IRAs due to death, disability
or attainment of age 591/2; for tax-free returns of excess contributions to
IRAs; and for redemptions through certain automatic withdrawals not exceeding
10% of the amount that would otherwise be subject to the charge.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN - An automatic investment plan enables you to make
monthly or quarterly investments into the American Funds through automatic
debits from your bank account. To set up a plan you must fill out an account
application and specify the amount you would like to invest ($50 minimum) and
the date on which you would like your investments to occur. The plan will begin
within 30 days after your account application is received. Your bank account
will be debited on the day or a few days before your investment is made,
depending on the bank's capabilities. The Transfer Agent will then invest your
money into the fund you specified on or around the date you specified. If your
bank account cannot be debited due to insufficient funds, a stop-payment or the
closing of the 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 to 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
The Tax-Exempt Fund of California -- Page 35
<PAGE>
may elect to have dividends and/or capital gain distributions paid in cash by
informing the fund, the Transfer Agent or your investment dealer.
If you have elected to receive dividends and/or capital gain distributions in
cash, and the postal or other delivery service is unable to deliver checks to
your address of record, or you do not respond to mailings from American Funds
Service Company with regard to uncashed distribution checks, your distribution
option will automatically be converted to having all dividends and other
distributions reinvested in additional shares.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - You may cross-reinvest
dividends and capital gains ("distributions") into any other fund in The
American Funds Group at net asset value, subject to the following conditions:
(a) The aggregate value of your account(s) in the fund(s) paying distributions
equals or exceeds $5,000 (this is waived if the value of the account in the fund
receiving the distributions equals or exceeds that fund's minimum initial
investment requirement),
(b) If the value of the account of the fund receiving distributions is below
the minimum initial investment requirement, distributions must be automatically
reinvested,
(c) If you discontinue the cross-reinvestment of distributions, the value of
the account of the fund receiving distributions must equal or exceed the minimum
initial investment requirement. If you do not meet this requirement within 90
days of notification, the fund has the right to automatically redeem the
account.
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 the Transfer Agent (see "Redeeming
Shares"), by contacting your investment dealer, by using American FundsLine and
American FundsLine OnLine (see "American FundsLine and American FundsLine
OnLine" below), or by telephoning 800/421-0180 toll-free, faxing (see "Principal
Underwriter and Transfer Agent" in the prospectus for the appropriate fax
numbers) or telegraphing the Transfer Agent. (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, computer, 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 (a) meet the minimum initial investment requirement for the
receiving fund OR (b) the originating fund's balance must be at least $5,000 and
the receiving fund's minimum must be met within one year.
The Tax-Exempt Fund of California -- Page 36
<PAGE>
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 the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder 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 the Transfer Agent.
Dividend and capital gain reinvestments and purchases through automatic
investment plans and certain retirement plans will be confirmed at least
quarterly.
AMERICAN FUNDSLINE AND AMERICAN FUNDSLINE ONLINE - 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 and American FundsLine OnLine. To use
these services, call 800/325-3590 from a TouchTone(TM) telephone or access the
American Funds Web site on the Internet at www.americanfunds.com. Redemptions
and exchanges through American FundsLine and American FundsLine OnLine are
subject to the conditions noted above and in "Shareholder Account Services and
Privileges - 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) or computer (including American
FundsLine OnLine), fax or telegraph purchase, redemption and/or exchange
options, you agree to hold the fund, the Transfer Agent, 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 the Transfer Agent (you may also reinstate them
at any time by writing the Transfer Agent). If the Transfer Agent 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 the Transfer Agent.
REDEMPTION OF SHARES - The fund's declaration of trust permits the fund to
direct the Transfer Agent to redeem the shares of any shareholder for their then
current net asset value per share if at such time the shareholder owns of record
shares having an aggregate net asset value of less than the minimum initial
investment amount required of new shareholders as set forth in the
The Tax-Exempt Fund of California -- Page 37
<PAGE>
fund's current registration statement under the 1940 Act, and subject to such
further terms and conditions as the Board of Trustees of the fund may from time
to time adopt.
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 quality of
executions. When, in the opinion of the Investment Adviser, two or more brokers
(either directly or through their correspondent clearing agents) are in a
position to obtain the best price and execution, preference may be given to
brokers who have sold shares of the fund or who have provided investment
research, statistical, or other related services to the Investment Adviser. The
fund does not consider that it has an obligation to obtain the lowest available
commission rate to the exclusion of price, service and qualitative
considerations.
There are occasions on which portfolio transactions for the fund may be executed
as part of concurrent authorizations to purchase or sell the same security for
other funds served by the Investment Adviser, or for trusts or other accounts
served by affiliated companies of the Investment Adviser. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to the fund, they are effected only when the Investment Adviser
believes that to do so is in the interest of the fund. When such concurrent
authorizations occur, the objective is to allocate the executions in an
equitable manner. The fund will not pay a mark-up for research in principal
transactions.
Dealer concessions paid on underwriting transactions for the fiscal years ended
August 31, 1999, 1998 and 1997, amounted to $318,000, $358,000 and $244,000,
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. If the fund holds non-U.S. securities, the Custodian may
hold these securities pursuant to sub-custodial arrangements in non-U.S.
banks or foreign branches of U.S. banks.
TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records 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. American Funds Service Company was paid a fee of
$81,000 for the fiscal year ended August 31, 1999.
INDEPENDENT ACCOUNTANTS - Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, serves as the fund's independent accountants
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 from the Annual
Report have been so included in reliance on the report Deloitte & Touche LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing. The selection of the fund's independent accountants is
reviewed and determined annually by the Board of Trustees.
The Tax-Exempt Fund of California -- Page 38
<PAGE>
REPORTS TO SHAREHOLDERS - The fund's fiscal year ends on August 31. Shareholders
are provided at least semiannually with reports showing the investment
portfolio, financial statements and other information. The fund's annual
financial statements are audited by the fund's independent accountants, Deloitte
& Touche LLP. 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 fund, Capital Research and Management Company
and its affiliated companies, including the fund's principal underwriter, have
adopted codes of ethics which allow for personal investments. The personal
investing policy is 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; blackout
periods on personal investing for certain investment personnel; ban on
short-term trading profits for investment personnel; limitations on service as a
director of publicly traded companies; and disclosure of personal securities
transactions.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Under the laws of certain states,
including Massachusetts where the fund was organized and California where the
fund'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 fund. However, the risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder liability
for acts, omissions, obligations or affairs of the fund and provides that notice
of the disclaimer may be given in each agreement, obligation, or instrument
which is entered into or executed by the fund or Trustees. The Declaration of
Trust provides for indemnification out of fund property of any shareholder held
personally liable for the obligations of the fund and also provides for the fund
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, officers, employees or agents of
the fund 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 Tax-Exempt Fund of California -- Page 39
<PAGE>
OTHER INFORMATION - The financial statements including the investment portfolio
and the report of Independent Accountants contained in the Annual Report are
included in this Statement of Additional Information. The following information
is not included in the Annual Report:
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE -- AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Net asset value and redemption price per share
(Net assets divided by shares outstanding) . . . . . . . . . $15.72
Maximum offering price per share
(100/95.25 of net asset value per share,
which takes into account the fund's current maximum
sales charge). . . . . . . . . . . . . . . . . . . . . . . . $16.50
</TABLE>
INVESTMENT RESULTS AND RELATED STATISTICS
The fund's yield is 4.34% based on a 30-day (or one month) period ended August
31, 1999, 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 average 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.
The fund's one year total return and average annual total return for the five-
and ten-year periods ended August 31, 1999 were -4.32%, 5.14% and 6.41%,
respectively. The fund's average annual total return at net asset value for the
one-, five- and ten-year periods ended on August 31, 1999 were 0.47%, 6.17% and
6.93, respectively.
In calculating average annual total return, the fund assumes: (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. In addition, the fund will provide lifetime
average total return figures.
The Tax-Exempt Fund of California -- Page 40
<PAGE>
The fund may also, at times, calculate total return based on net asset value per
share (rather than the offering price), in which case the figure would not
reflect the effect of any sales charges which would have been paid if shares
were purchased during the period reflected in the computation. Consequently,
total return calculated in this manner will be higher. These total returns may
be calculated over periods in addition to those described above. Total return
for the unmanaged indices will be calculated assuming reinvestment of dividends
and interest, but will not reflect any deductions for advisory fees, brokerage
costs or administrative expenses.
The fund may include information on its investment results and/or comparisons of
its investment results to various unmanaged indices (such as the Dow Jones
Average of 30 Industrial Stocks and the Standard and Poor's 500 Composite Stock
Index) 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, from time to time, 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 refer to results and surveys compiled by organizations such as CDA/
Wiesenberger, Ibbotson Associates, Lipper Analytical Services, Morningstar,
Inc., and by the U.S. Department of Commerce. Additionally, the fund may refer
to results published in various newspapers and periodicals, including Barron's,
Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance Magazine,
Money, U.S. News and World Report and The Wall Street Journal.
The fund may illustrate the benefits of tax-deferral by comparing taxable
investments to investments made through tax-deferred retirement plans.
The fund may compare its investment results with the Consumer Price Index, which
is a measure of the average change in prices over time in a fixed market basket
of goods and services (e.g. food, clothing, and fuels, transportation, and other
goods and services that people buy for day-to-day living).
The fund may also calculate a distribution rate on a taxable and tax equivalent
basis. The distribution rate is computed by dividing the dividends paid by the
fund over the last 12 months by the sum of the month-end net asset value or
maximum offering price and the capital gains paid over the last 12 months. The
distribution rate may differ from the yield.
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, 1999 was 7.92%.
The investment results for the fund set forth below were calculated as described
in the fund's prospectus. The fund's results will vary from time to time
depending upon market conditions, the composition of the fund's portfolio and
operating expenses of the fund, so that any investment results reported by the
fund should not be considered representative of what an investment in the fund
may earn in any future period. These factors and possible differences in
calculation methods should be considered when comparing the fund's investment
results with those
The Tax-Exempt Fund of California -- Page 41
<PAGE>
published for other mutual funds, other investment vehicles and unmanaged
indices. The fund's results also should be considered relative to the risks
associated with the fund's investment objective and policies.
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
. . . AND HAD TAKEN
ALL DIVIDENDS AND
CAPITAL GAIN
DISTRIBUTIONS
IN SHARES, YOUR
IF YOU HAD INVESTMENT WOULD
INVESTED $10,000 HAVE BEEN WORTH
IN THE FUND THIS MANY THIS MUCH AT
YEARS AGO . . . AUGUST 31, 1999
NUMBER PERIODS
OF YEARS 9/1 - 8/31 VALUE**
<S> <C> <C>
5
1998 - 1999 $ 9,568
6
1997 - 1999 10,333
7
1996 - 1999 11,240
8
1995 - 1999 11,881
9
1994 - 1999 12,845
10
1993 - 1999 12,865
11
1992 - 1999 14,544
12
1991 - 1999 16,051
13
1990 - 1999 17,911
14
1989 - 1999 18,612
15
1988 - 1999 20,555
16
1987 - 1999 21,695
Lifetime 1986* - 1999 21,774
</TABLE>
- ---------------------------------
* From October 28, 1986
The Tax-Exempt Fund of California -- Page 42
<PAGE>
ILLUSTRATION OF A $10,000 INVESTMENT IN TEFCA WITH DIVIDENDS REINVESTED
(FOR THE LIFETIME OF THE FUND OCTOBER 28, 1986 THROUGH AUGUST 31, 1999)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES**
-------------- -----------------
FISCAL TOTAL FROM FROM FROM
YEAR END ANNUAL DIVIDENDS INVESTMENT INITIAL CAPITAL-GAINS DIVIDENDS TOTAL
8/31 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
1999 999 10,411 20,411 10,480 543 10,751 21,774
</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 $563.
The Tax-Exempt Fund of California -- Page 43
<TABLE>
The Tax-Exempt Fund of California
August 31, 1999
<S> <C>
Aaa/AAA 35.5%
Aa/AA 9.1%
A/A 14.3%
Baa/BBB 22.2%
Below investment grade 18.5%
</TABLE>
<TABLE>
The Tax-Exempt Fund of California
Investment Portfolio, August 31, 1999 Principal Market
Amount Value
Fixed Income Securities (000) (000)
- -------------------------------------------- -------- --------
<S> <C> <C>
Tax-Exempt Securities Maturing in More Than One Year - 93.02%
G.O. Ref. Bonds, 5.25% 2009 3,000 3,098
Educational Facs. Auth., Rev. Bonds (University of San Francisco),
Series 1996, MBIA Insured, 5.70% 2011 1,190 1,261
Health Facs. Fncg. Auth.:
Rev. Bonds:
Antelope Valley Healthcare Dist., Series 1997B, FSA Insured, 5.00% 2012 4,500 4,408
Catholic Healthcare West, 1998 Series A:
5.00% 2006 4,635 4,517
5.00% 2007 1,000 966
5.25% 2008 1,750 1,707
Kaiser Permanente, 1998 Series A, FSA Insured, 5.25% 2011 1,000 1,010
Little Co. of Mary Health Services, Series 1998, AMBAC Insured:
5.00% 2010 2,170 2,184
5.00% 2013 1,125 1,100
Hospital Rev. Bonds:
Downey Community Hospital, Series 1993:
5.20% 2003 1,000 1,016
5.625% 2008 3,000 3,042
5.75% 2015 6,400 6,357
Pacific Presbyterian Medical Center,
1985 Series B, INDLC Insured, 6.75% 2015 (Preref. 2002) 3,725 3,946
St. Joseph Health System Obligated Group, Cert. of Part.,
5.50% 2014 3,000 2,918
Hospital Rev. Ref. Bonds (Saint Francis Memorial Hospital),
Series 1993A, 5.75% 2005 (Preref. 2003) 1,150 1,238
Housing Fin. Agcy.:
Home Mortgage Rev. Bonds:
1991 Series A, 7.35% 2011 495 514
1995 Series H, MBIA Insured, 5.50% 2017 3,250 3,195
1995 Series K AMT, AMBAC Insured, 5.55% 2021 180 183
Single Family Mortgage Bonds:
1995 Issue B-2 AMT, AMBAC Insured, 5.70% 2007 2,520 2,540
1997 Series B-3 AMT, MBIA Insured, 5.10% 2012 1,790 1,732
Single Family Mortgage Rev. Bonds:
1997 Series C-1, Class III, MBIA Insured, 5.05% 2011 4,955 4,914
1998 Series C-4, Class I:
4.90% 2004 2,410 2,429
5.10% 2007 895 901
5.15% 2008 3,155 3,164
Pollution Control Fncg. Auth.:
Pollution Control Rev. Bonds (Pacific Gas and Electric Co.):
1992 Series B AMT, 6.35% 2009 4,400 4,707
1993 Series B AMT, AMBAC Insured, 5.85% 2023 1,000 1,009
Resource Recovery Rev. Bonds, Waste Management Inc. Guarantee
Bond, Series A AMT, 7.15% 2011 3,500 3,651
Solid Waste Disposal Rev. Bonds:
(CanFibre of Riverside Project), Series 1997A AMT,
9.00% 2019 4,000 4,162
(Keller Canyon Landfill Co. Project), BFI Corp. Guarantee,
Series 1992 AMT, 6.875% 2027 4,000 4,068
(USA Waste Services, Inc. Project), Series 1998A AMT,
5.10% 2018 (Put 2008) 2,000 1,893
Public Works Board:
Lease Rev. Bonds:
California Community Colleges, 1994 Series B
Various Community College Projects, 6.75% 2005 1,000 1,106
Trustees of The California State University
(Various University Projects)
1997 Series B, 5.25% 2010 1,500 1,526
1996 Series A, AMBAC Insured, 5.50% 2014 3,500 3,523
Dept. of Corrections, State Prison:
Imperial County, 1991 Series A, 6.50% 2017 1,000 1,117
Lassen County (Susanville), 1993 Series D, FSA Insured,
5.25% 2015 2,000 1,986
The Regents of the University of California
(Various University Projects), 1993 Series B, MBIA Insured,
5.50% 2014 1,500 1,536
Lease Rev. Ref. Bonds:
Dept. of Corrections, 1998 Series C
(State Prison-Monterey County), 5.25% 2007 3,000 3,112
1998 Series A (Library and Courts Annex Building Complex),
5.50% 2010 1,500 1,563
Rural Home Mortgage Fin., Auth., Single Family Mortgage Rev. Bonds
(Mortgage-Backed Securities Program):
1995 Series B AMT, 7.75% 2026 1,630 1,775
1996 Series A AMT, 7.75% 2027 960 1,066
Statewide Communities Dev. Auth.:
Apartment Dev. Rev. Ref. Bonds (Irvine Apartment Communities, LP):
Series 1998A-1 AMT, 5.05% 2025 (Put 2008) 5,300 5,126
Series 1998A-3, 5.10% 2025 (Put 2010) 5,000 4,800
Series 1998A-4, 5.25% 2025 (Put 2013) 3,000 2,886
Citrus Valley Health Partners, Inc., Cert. of Part., MBIA Insured:
5.50% 2011 1,000 1,021
5.625% 2012 1,000 1,025
Hospital Rev. Cert. of Part., Cedars-Sinai Medical Center, Series 1992,
6.50% 2012 3,650 3,980
The Internext Group, Cert. of Part., 5.375% 2017 4,000 3,726
Cert. of Part., St. Joseph Health System Obligated Group:
5.00% 2007 1,000 1,003
Rev. Ref. Bonds (Sherman Oaks Project), Series 1998A, AMBAC Insured:
5.00% 2008 1,000 1,014
5.50% 2009 2,000 2,091
Veterans G.O. Bonds, Series BG, 4.95% 2010 2,000 1,981
Dept. of Water Resources, Central Valley Project, Water System Rev. Bonds:
Series O, MBIA Insured, 5.00% 2022 2,000 1,839
Alameda Public Fncg. Auth., 1999 Rev Bonds (1997 Rev. Bond Refinancing):
5.10% 2009 1,030 992
County of Alameda, 1993 Ref. Cert. of Part. (Santa Rita Jail Project),
MBIA Insured, 5.375% 2009 1,500 1,563
Anaheim Public Fncg. Auth., Lease Rev. Bonds,
(Anaheim Public Improvement Project), Senior Lease Rev. Bonds, FSA Insured:
1997 Series A, 6.00% 2024 1,500 1,594
1997 Series C, Capital Appreciation Bonds, 0% 2018 3,900 1,337
City of Antioch, Public Fncg. Auth., 1998 Reassessment Rev. Bonds,
Subordinated Series B:
5.40% 2007 1,175 1,135
5.50% 2008 1,235 1,190
5.70% 2010 1,380 1,332
Association of Bay Area Governments:
Fin. Auth., Taxable Rev. Ref. Cert. of Part.
(American Baptist Homes of the West Facs. Project),
Series 1997B, 6.20% 2027 2,000 1,992
Fin. Auth. for Nonprofit Corps., Cert. of Part.:
Episcopal Homes Foundation, Series 1997A, 5.25% 2007 2,505 2,514
Stanford University Hospital, Series 1993:
5.75% 2005 (Escrowed to Maturity) 1,240 1,333
5.50% 2013 (Preref. 2005) 1,500 1,589
Fncg. Auth. for Nonprofit Corps., Ref. Rev. Cert. of Part.:
American Baptist Homes Foundation, Series 1998A, 6.10% 2017 5,985 5,972
Episcopal Homes Foundation, Series 1998, 5.00% 2009 4,600 4,511
Redev. Agcy. of the City of Burbank (Golden State Redev. Project),
Tax Allocation Bonds, 1993 Series A:
6.00% 2013 1,500 1,524
6.00% 2023 1,000 1,007
6.25% 2024 1,500 1,530
Capistrano Unified School Dist., Cert. of Part., Series 1997, 5.20% 2018 1,845 1,845
Central Valley Fncg. Auth., Cogeneration Project Rev. Bonds
(Carson Ice-Gen Project), Series 1993:
6.00% 2009 1,000 1,030
6.10% 2013 (Preref. 2003) 3,000 3,246
6.20% 2020 (Preref. 2003) 5,000 5,427
Central Valley School Districts Fncg. Auth., (School Dist. G.O. Bond
Ref. Program), 1998 Rev. Bonds, Series A, MBIA Insured, 6.25% 2011 1,000 1,104
City of Chino Hills, Community Facs. Dist. No. 9 (Rincon Village Area),
Special Tax Bonds, Series 1998, 6.45% 2023 1,135 1,137
City of Commerce, Community Dev. Commission, Redev. Project No. 1,
Subordinate Lien Tax Allocation Ref. Bonds, Series 1997 B, 5.50% 2008 2,490 2,467
County of Contra Costa Public Fncg. Auth., 1999 Tax Allocation Rev. Bonds
(Pleasant Hill BART, N. Richmond, Bay Point, Oakley & Rodeo Redev. Projs),
5.00% 2013 1,000 929
Del Mar Race Track Auth., Rev. Ref. Bonds, Series 1996, 6.00% 2001 710 721
City of Duarte, City of Hope National Medical Center, Cert. of Part.,
Series 1999A, 5.25% 2009 1,000 975
East Bay Regional Park Dist. (Alameda and Contra Costa Counties),
1998 G.O. Ref. Bonds, 5.00% 2010 1,000 1,009
County of El Dorado, Community Facs. Dist. No. 1992-1 (El Dorado
Hills Dev.), Series 1999 Special Tax Bonds, 6.125% 2016 1,000 999
Foothill/Eastern Transportation Corridor Agcy., Toll Road Rev. Bonds,
Series 1995A, 6.00% 2016 (Preref. 2010) 2,500 2,720
City of Fremont, Multifamily Housing Rev. Ref. Bonds, Issue A of 1995
(Durham Greens Project), 5.40% 2026 3,000 3,074
Imperial Irrigation Dist., 1998 Electric System Ref. Rev. Bonds, MBIA Insured:
5.00% 2012 1,000 986
5.00% 2018 2,000 1,861
City of Irvine:
Assessment Dist. No. 95-12 Limited Obligation Improvement 2,500 2,327
Bonds, Group Three, 5.50% 2021
Assessment Dist. No. 94-13 (Oak Creek), Limited Obligation Improvement Bonds:
Group Two, 5.875% 2017 1,000 970
Group One, 5.50% 2022 1,000 923
City of Long Beach:
Fncg. Auth. Rev. Bonds, Series 1992, AMBAC Insured, 6.00% 2017 750 801
Harbor Rev. Bonds, Series 1993 AMT, 5.125% 2018 1,000 922
City of Los Angeles:
Community Redev. Agcy., Central Business Dist. Redev. Project,
Tax Allocation Ref. Bonds, Series I, 5.00% 2001 2,000 2,021
Harbor Dept. Rev. Bonds:
Issue 1988, 7.60% 2018 (Escrowed to Maturity) 1,750 2,151
Issue 1995, Series B AMT, 6.625% 2025 1,000 1,065
Issue 1996 AMT, 5.50% 2007 3,675 3,841
Multifamily Housing Rev. Bonds (GNMA Collateralized -
Ridgecroft Apartments Project), Series 1997E AMT, 6.125% 2027 2,005 2,055
Municipal Improvement Corp., Special Tax Lease Rev. Bonds
(Police Emergency Command Control Communications System), Series 1999 D,
AMBAC Insured, 5.00% 2012 2,500 2,466
County of Los Angeles:
Capital Asset Leasing Corp., Cert. of Part. (Marina del Rey), Series A:
6.25% 2003 3,815 3,944
6.50% 2008 6,000 6,367
Public Works Fncg. Auth., Regional Park and Open Space Dist. A,
Series 1997 A, 5.50% 2011 3,000 3,107
Marin Municipal Water Dist. Water Rev. Bonds, Series 1993, 5.65% 2023 1,000 995
Northern California Power Agcy., Geothermal Project Number 3
Special Rev. Bonds, 1993 Ref. Series A:
5.60% 2006 1,860 1,939
5.60% 2006 (Escrowed to Maturity) 1,000 1,064
5.65% 2007 (Escrowed to Maturity) 1,025 1,095
County of Orange:
Aliso Viejo Special Tax Bonds of Community Facs. Dist.
No. 88-1, Series A of 1992:
7.25% 2008 (Preref. 2002) 1,500 1,661
7.35% 2018 (Preref. 2002) 2,000 2,220
Limited Obligation Improvement Bonds, Irvine Coast Assessment
Dist. No. 88-1, 1998 Series A, 5.25% 2009 1,100 1,073
Local Transportation Auth., First Senior Fixed-Rate Bonds,
MBIA Insured, 6.00% 2009 1,500 1,631
Recovery Cert. of Part., 1996 Series A, MBIA Insured, 6.00% 2008 1,500 1,636
South Orange County Public Fncg. Auth., Special Tax Rev. Bonds,
1999 Series A, FSA Insured, 5.375% 2011 1,600 1,648
City of Oxnard, Assessment Dist. No. 97-1-R (Pacific Commerce Center),
Limited Obligation Ref. Bonds:
5.50% 2004 1,465 1,479
5.60% 2005 2,870 2,900
5.70% 2006 1,190 1,204
Redev. Agcy. of the City of Pittsburg, Los Medanos Community Dev.
Project, Tax Allocation Ref. Bonds, Series 1993A, AMBAC Insured, 5.25% 2 2,195 2,147
Pleasanton Joint Powers Fncg. Auth., Reassessment Rev. Bonds,
1993 Series A:
5.70% 2001 3,680 3,775
6.15% 2012 1,750 1,819
City of Poway, Community Facs. Dist. No. 88-1 (Parkway Business Centre),
Special Tax Ref. Bonds, Series 1998:
5.30% 2005 1,225 1,204
6.25% 2007 2,050 2,117
6.50% 2008 2,000 2,092
6.50% 2009 1,320 1,380
6.50% 2010 1,715 1,792
Riverside County Public Fncg. Auth., Cert. of Part., Air Force Village
West, Inc., 5.40% 2009 1,875 1,822
City of Roseville, North Roseville Community Facs. Dist. No. 1,
Special Tax Bonds, Series 1998, 5.20% 2007 2,200 2,131
Sacramento Cogeneration Auth., Cogeneration Project Rev. Bonds
(Procter & Gamble Project), 1995 Series:
7.00% 2005 1,700 1,877
6.375% 2010 (Preref. 2005) 1,900 2,114
6.375% 2010 1,600 1,746
6.50% 2014 (Preref. 2005) 1,000 1,119
6.50% 2021 (Preref. 2005) 4,000 4,476
Sacramento Municipal Utility Dist., Electric Rev. Bonds, 1997 Series K,
AMBAC Insured, 5.70% 2017 2,500 2,578
Sacramento Power Auth., Cogeneration Project Rev. Bonds, 1995 Series:
6.00% 2003 1,500 1,567
6.50% 2005 1,100 1,190
County of Sacramento:
Laguna Creek Ranch/Elliott Ranch Community Facs. Dist. No. 1,
Improvement Area No. 2 Special Tax Ref. Bonds (Elliott Ranch):
6.00% 2012 880 886
6.10% 2013 665 671
6.30% 2021 500 503
Single Family Mortgage Rev. Bonds (GNMA Mortgage-Backed
Securities Program), Issue A of 1987 AMT,
9.00% 2019 (Escrowed to Maturity) 1,500 2,110
City of San Bernardino, SCH Health Care System Rev. Bonds,
(Sisters of Charity for the Incarnate Word, Houston, Texas)
Series 1991A, 7.00% 2021 (Preref. 2001) 1,000 1,072
County of San Bernardino Housing Auth:
Multifamily Housing Rev. Bonds (Fannie Mae Program - Villa 2,030 2,019
Serena Project), Series 1985, 4.95% 2007
Multifamily Housing Rev. Ref. Bonds (Equity Residential/
Redlands Lawn & Tennis Apartments), Issue 1999A,
5.20% 2029 (Put 2009) 1,000 984
City of San Diego/MTDB Auth. (San Diego Old Town Light Rail Transit
Extension), 1993 Lease Rev. Bonds, 5.375% 2023 1,500 1,440
County of San Diego:
Poway Unified School Dist., Community Facs. Dist. No. 1, Series 1998
Special Tax Bonds, MBIA Insured:
5.00% 2010 1,000 1,008
Reassessment Dist. No. 97-1 (4-S Ranch), Limited Obligation
Improvement Bonds:
5.90% 2007 1,435 1,464
5.90% 2008 1,000 1,017
San Diego Unified School Dist., 1999 G.O. Bonds, Election of 1998, Series A
Capital Appreciation Bonds, FGIC Insured, 0% 2017 3,000 1,104
City and County of San Francisco:
Port Commission Rev. Ref. Bonds, Series 1994, 5.90% 2009 1,500 1,573
Redev. Agcy., Residential Fac. Rev. Bonds (Coventry Park Project),
Series 1996A AMT, 8.50% 2026 5,000 5,566
County of San Joaquin, Cert. of Part. (1993 General Hospital Project),
6.625% 2020 2,235 2,467
San Joaquin Hills Transportation Corridor Agcy.:
Toll Road Rev. Bonds, 6.75% 2032 (Preref. 2003) 1,500 1,648
Toll Road Ref. Rev. Capital Appreciation Bonds, Series 1997A, 0% 2020 3,765 1,171
City of San Jose:
Redev. Agcy., Multifamily Housing Rev. Bonds (GNMA Collateralized
- The Miraido Village), Series 1997A AMT:
5.30% 2012 975 973
5.65% 2022 1,500 1,468
Multifamily Housing Rev. Bonds (The Garden Apartments Project), 3,000 2,890
1999 Series A AMT, 5.00% 2032 (Put 2012)
San Marcos Public Facs. Auth., Ref. Rev. Bonds, Series 1998, 5.50% 2010 4,295 4,161
Santa Ana Fncg. Auth., Police Administration and Holding Fac. Lease Rev. Bonds,
Series 1994A, MBIA Insured, 6.25% 2019 1,000 1,096
City of Santa Clara, Subordinated Electric Rev. Ref. Bonds, Series 1998 A,
AMBAC Insured, 5.25% 2012 2,885 2,914
Santa Clara County Fncg. Auth., Lease Rev. Bonds (VMC Fac. Replacement
Project), AMBAC Insured, 1994 Series A, 7.75% 2009 2,200 2,705
Shafter Joint Powers Fin. Auth., Lease Rev. Bonds, 1997 Series A,
(Community Correctional Fac. Acquisition Project):
5.50% 2006 1,535 1,580
5.95% 2011 1,700 1,772
Southern California Home Fncg. Auth., Single Family Mortgage Rev.
Bonds (GNMA and FNMA Mortgage-Backed Securities Program),
1992 Series A AMT, 6.75% 2022 930 959
South Tahoe Joint Powers Fin. Auth., Ref. Rev. Bonds, (South Tahoe
Redev. Project Area No. 1), 1995 Series B, 6.25% 2020 3,250 3,304
Stanislaus Waste-To-Energy Fin. Agcy., Solid Waste Fac. Ref. Rev.
Certificates (Ogden Martin Systems of Stanislaus, Inc. Project),
Series 1990, 7.625% 2010 1,080 1,109
City of Stockton:
Mello-Roos Rev. Bonds, Community Facs. Dist. No. 90-2B
(Brookside Estates), Series 1997A:
5.50% 2005 1,560 1,569
5.75% 2008 1,840 1,852
5.95% 2010 1,000 1,010
6.20% 2015 1,750 1,760
Public Fncg. Auth., Cert. of Part. (Wastewater System Project), 1998
Series A, MBIA Insured, 5.125% 2009 1,060 1,085
Community Facs. Dist. No. 88-12 of the City of Temecula (Ynez Corridor),
Special Tax Ref. Bonds, 1998 Series A:
5.20% 2007 850 828
5.25% 2008 745 724
Virgin Islands Public Fin. Auth., Rev. and Ref. Bonds
(Matching Fund Loan Notes):
Series 1998 A, 5.20% 2010 1,000 971
Series 1998 C, 5.50% 2008 1,000 1,011
Series 1998 D:
5.50% 2003 1,895 1,900
6.00% 2006 2,220 2,275
Washington Township Health Care Dist., Rev. Bonds, Series 1999:
5.00% 2010 1,210 1,165
5.00% 2013 1,100 1,022
5.00% 2018 2,750 2,489
City of West Sacramento, Limited Obligation Ref. Improvement Bonds,
Reassessment Dist. of 1998, 5.20% 2008 500 481
West Sacramento Fncg. Auth., Special Tax Rev. Bonds, Series F:
5.85% 2013 1,725 1,656
6.10% 2029 1,500 1,405
----------
352,565
----------
Tax-Exempt Securities Maturing in One Year or Less - 7.64%
Health Facs. Fncg. Auth.:
Variable Rate Hospital Rev Bonds(Adventist Health 1,300 1,300
System/West) 1998 Series A, MBIA Insured, 2.65% 2028(1)
Insured Variable Rate Demand Rev. Bonds (Catholic Healthcare
West), 1996 Series D, MBIA Insured:
2.75% 2018(1) 2,800 2,800
2.75% 2021(1) 4,700 4,700
Variable Rate Rev. Bonds (St. Joseph Health System), Series 1991B, 2.40% 3,500 3,500
St. Joseph Health, Variable Rate Hospital Rev. Bonds, 2.30% 7/1/2013(1) 2,400 2,400
Variable Rate Rev. Bonds (Sutter/CHS), Series 1996C, FSA Insured, 2.85% 400 400
County of Kern:
Board of Education, 1999-2000 Tax and Rev. Anticipation Notes, 4.00% 6/3 3,000 3,009
1999-2000 Tax and Rev. Anticipation Notes, 4.00% 6/30/00 1,300 1,305
County of Los Angeles, 1999-2000 Tax and Rev. Anticipation 1,000 1,004
Notes, Series A, 4.00% 6/30/00
Orange County Water Dist., Variable Rate Cert. of Part., 1990 Project B,
2.85% 2015(1) 3,100 3,100
Pollution Control Fncg. Auth., Solid Waste Disposal Rev. Bonds
(Shell Oil Co. Martinex Project), Series 1994A AMT,
2.65% 2024(1) 2,100 2,100
Public Works Board, Lease Rev. Bonds, The Regents of the University
of California, 1991 Cert. of Part. (UCLA Central Chiller/Cogeneration
Fac.), 7.00% 2015 (Preref. 1999) 1,250 1,282
County of Ventura, 1999 Tax and Rev. Anticipation Notes, 4.00% 7/06/2000 1,000 1,004
Dept. of Water Resources, Central Valley Project, Water System 1,000 1,039
Rev. Bonds, Series H, 6.90% 2025 (Preref. 2000)
----------
28,943
----------
TOTAL TAX-EXEMPT SECURITES (cost: $376,109,000) 381,508
Excess of payables over cash and receivables 2,505
----------
NET ASSETS $ 379,
======
(1) Coupon rate changes periodically.
See Notes to Financial Statements
Key to Abbreviations
Agcy. = Agency
Auth. = Authority
Cert. of Part. = Certificates of Participation
Dept. = Department
Dev. = Development
Dist. = District
Econ. = Economic
Fac. = Facility
Facs. = Facilities
Fin. = Finance
Fncg. = Financing
G.O. = General Obligation
Preref. = Prerefunded
Redev. = Redevelopment
Ref. = Refunding
Rev. = Revenue
</TABLE>
<TABLE>
The Tax-Exempt Fund of California
Financial Statements
Statement of Assets and Liabilities
at August 31, 1999 (dollars in thousands)
<S> <C> <C>
Assets:
Tax-exempt securities (cost: $376,109) $381,508
Cash 16
Receivables for--
Sales of fund's shares $ 366
Accrued interest 5,399
Other 4 5,769
--------------- ---------------
387,293
Liabilities:
Payables for--
Purchases of investments 1,550
Repurchases of fund's shares 5,688
Dividends payable 709
Management services 124
Other 219 8,290
--------------- ---------------
Net Assets at August 31, 1999--
Equivalent to $15.72 per share on
24,111,614 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $379,003
=========
Statement of Operations
for the year ended August 31, 1999
(dollars in thousands)
Investment Income:
Income:
Interest on tax-exempt securities $20,052
Expenses:
Management services fee $1,459
Distribution expenses 945
Transfer agent fee 81
Reports to shareholders 65
Registration statement and prospectus 19
Postage, stationery and supplies 15
Trustees' fees 18
Auditing and legal fees 39
Custodian fee 8
Taxes other than federal income tax 4
Other expenses 17 2,670
--------------- ---------------
Net investment income 17,382
---------------
Realized gain and change in unrealized
Appreciation on Investments
Net realized gain 1,312
Net unrealized appreciation:
Beginning of year 22,679
End of year 5,399
---------------
Net change in unrealized appreciation (17,280)
---------------
Net realized gain and change in unrealized
appreciation on investments (15,968)
---------------
Net Increase in Net Assets Resulting
from Operations $1,414
=========
Statement of Changes in Net Assets
(dollars in thousands) Year ended Year ended
August 31, August 31,
1999 1998
--------- ---------
Operations:
Net investment income $ 17,382 $ 15,554
Net realized gain on investments 1,312 5,345
Net unrealized (depreciation) appreciation
on investments (17,280) 3,625
--------------- ------------------
Net increase in net assets
resulting from operations 1,414 24,524
--------------- ------------------
Dividends and Distributions Paid to
Shareholders:
Dividends paid from net investment income (17,400) (15,589)
Distributions from net realized gain
on investments (5,084) (1,580)
--------------- ------------------
Total dividends and distributions (22,484) (17,169)
--------------- ------------------
Capital Share Transactions:
Proceeds from shares sold:
6,994,060 and 6,096,025
shares, respectively 114,227 99,998
Proceeds from shares issued in reinvestment of net
investment income dividends and distributions of
net realized gain on investments:
850,311 and 581,317 shares, respectively 13,877 9,526
Cost of shares repurchased:
5,278,098 and 2,957,515 shares,
respectively (85,585) (48,491)
--------------- ------------------
Net increase in net assets
resulting from capital share transactions 42,519 61,033
--------------- ------------------
Total Increase in Net Assets 21,449 68,388
Net Assets:
Beginning of year 357,554 289,166
--------------- ------------------
End of year (including undistributed $379,003 $357,554
net investment income: $38 and $1, respecti =========== ===========
See Notes to Financial Statements
</TABLE>
The Tax-Exempt Fund of California
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - 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 exempt from regular federal and California income taxes, with
the additional objective of preservation of capital.
SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been
prepared in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates. The following is a summary of the significant
accounting policies consistently followed by the fund in the preparation of its
financial statements:
SECURITY VALUATION - 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. The ability of the
issuers of the debt Securities held by the fund to meet their obligations may
be affected by economic developments in a specific industry, state or region.
Short-term securities maturing within 60 days are valued at amortized cost,
which approximates market value. 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.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities
transactions are accounted for as of the trade date. Realized gains and losses
from the securities transactions are determined based on specific identified
cost. In the event securities are purchased on a delayed delivery or
"when-issued" basis, the fund will instruct the custodian to segregate liquid
assets sufficient to meet its payment obligations in these transactions.
Interest income is recognized on an accrual basis. Premiums and original issue
discounts on securities are amortized daily over the expected life of the
security. Amortization of market discounts on securities is recognized upon
disposition.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends to shareholders
are declared daily after determination of the fund's net investment income and
are paid to shareholders monthly.
2. FEDERAL INCOME TAXATION
The fund complies with the requirements of the Internal Revenue Code
applicable to regulated investment companies and intends to distribute all of
its net taxable income and net capital gains for the fiscal year. As a
regulated investment company, the fund is not subject to income taxes if such
distributions are made. Required distributions are determined on a tax basis
and may differ from net investment income and net realized gains for financial
reporting purposes. In addition, the fiscal year in which amounts are
distributed may differ from the year in which the net investment income and net
realized gains are recorded by the fund.
As of August 31, 1999, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $5,399,000, of which $11,282,000
related to appreciated securities and $5,883,000 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the year ended August 31, 1999. During the year
ended August 31, 1999, the fund realized, on a tax basis, a net capital gain of
$1,312,000 on securities transactions. The cost of portfolio securities for
book and federal income tax purposes was $376,109,000 at August 31, 1999.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $1,459,000 for management services
was incurred pursuant to an agreement with Capital Research and Management
Company (CRMC) with which certain officers and Trustees of the fund 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.
DISTRIBUTION EXPENSES - 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, 1999, distribution expenses under the Plan were limited to $945,000.
Had no limitation been in effect, the fund would have paid $988,000 in
distribution expenses under the Plan. As of August 31, 1999, accrued and unpaid
distribution expenses were $151,000.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $205,000 (after allowance 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.
TRANSFER AGENT FEE - American Funds Service Company (AFS), the transfer
agent for the fund, was paid a fee of $81,000.
DEFERRED TRUSTEES' FEES - 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, 1999, aggregate amounts deferred and earnings
thereon were $50,000.
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 fund
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities, of $116,172,000 and $82,298,000, respectively, during
the year ended August 31, 1999.
As of August 31, 1999, accumulated undistributed net realized gain on
investments was $818,000 and additional paid-in capital was $372,748,000. The
fund reclassified $55,000 and $428,000 to undistributed net investment income
and additional paid-in capital, respectively, from undistributed net realized
gains for the year ended August 31, 1999 as a result of permanent differences
between book and tax.
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 $8,000 was paid by these credits rather than in cash.
<TABLE>
Per-Share Data and Ratios
Year endedAugust 31
-----
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $16.60 $16.22 $15.78 $15.74 $15.40
----- ----- ----- ----- -----
Income From Investment
Operations:
Net investment income .74 .79 .83 .84 .86
Net gains or losses on
securities (both realized
and unrealized) (.65) .47 .53 .04 .34
----- ----- ----- ----- -----
Total from
investment operations .09 1.26 1.36 .88 1.20
----- ----- ----- ----- -----
Less Distributions:
Dividends (from net
investment income) (.74) (.80) (.83) (.84) (.86)
Distributions (from
capital gains) (.23) (.08) (.09) - -
----- ----- ----- ----- -----
Total distributions (.97) (.88) (.92) (.84) (.86)
----- ----- ----- ----- -----
Net Asset Value, End of Year $15.72 $16.60 $16.22 $15.78 $15.74
===== ===== ===== ===== =====
Total Return* 0.47% 7.98% 8.80% 5.65% 8.16%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $379 $358 $289 $253 $233
Ratio of expenses to average
net assets .70% .71% .72% .73% .73%
Ratio of net income to
average net assets 4.55% 4.83% 5.15% 5.25% 5.65%
Portfolio turnover rate 22.68% 27.78% 15.68% 27.60% 41.36%
*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, 1999, 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, 1999 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, 1999, 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.
Deloitte & Touche, LLP
Los Angeles, California
September 30, 1999
Tax Information (unaudited)
During the fiscal year ended August 31, 1999, the fund paid 74.3 cents per
share of exempt-interest distributions within the meaning of Section
852(b)(5)(A) of the Internal Revenue Code, and a long-term capital gain of 22.6
cents per share.
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.
