- --------------------------------------------------------------------------------
Endowments
Prospectus
AUGUST 1, 1998
<PAGE>
ENDOWMENTS
One Market
Steuart Tower, Suite 1800
P.O. Box 7650
San Francisco, CA 94120
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TABLE OF CONTENTS
Expenses 4 Investment Results 15
.................................. ..................................
Financial Highlights 5 Dividends, Distributions and Taxes 18
.................................. ..................................
Investment Policies and Risks 6 Organization and Management of
.................................. Endowments 19
Securities and Investment ..................................
Techniques 8 Shareholder Services 21
..................................
Multiple Portfolio Counselor
System 13
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Endowments (the "Trust") is an open-end management investment company with two
diversified series, Growth and Income Portfolio and Bond Portfolio
(collectively, the "funds"). In a transaction approved by shareholders and
completed on July 31, 1998, Growth and Income Portfolio acquired all of the
assets and liabilities of Endowments, Inc. Bond Portfolio entered into a
similar transaction with Bond Portfolio for Endowments, Inc. on the same date.
As a result, certain financial and other information appearing in this
prospectus reflects the operations of these predecessor entities.
GROWTH AND INCOME PORTFOLIO The primary investment objective of Growth and
Income Portfolio is long-term growth of principal, with income and preservation
of capital as secondary objectives. The fund strives to accomplish these
objectives by normally investing primarily in common stocks or securities
convertible into common stock. Major investment emphasis will be given to
stocks of companies which appear to have favorable prospects for long-term
growth of capital and income.
BOND PORTFOLIO The investment objective of Bond Portfolio is to seek as high a
level of current income as is consistent with the preservation of capital. Any
capital appreciation is incidental to the fund's objective of current income.
The fund strives to accomplish this objective by investing primarily in
quality-oriented fixed-income securities, as described further in this
prospectus.
<PAGE>
Shareholders of the Trust must be: (i) any entity exempt from taxation under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended ("501(c)(3)
organizations"); (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. The Trust may change this
policy at any time without the approval of the Trust's shareholders. An
investment in the funds involves a certain amount of risk and may not be
suitable for all investors. See "Investment Policies and Risks."
This prospectus presents information you should know before investing in the
fund(s). You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND(S). THE LIKELIHOOD OF LOSS IS
GREATER IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE
FUND(S) IS NOT A DEPOSIT OR OBLIGATION OF, OR INSURED OR GUARANTEED BY, ANY
ENTITY OR PERSON INCLUDING THE U.S. GOVERNMENT AND THE FEDERAL DEPOSIT
INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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ENDOWMENTS / PROSPECTUS 3
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<PAGE>
EXPENSES
The effect of the expenses described below is reflected in the funds' share
prices and investment returns.
Shareholders pay no shareholder transaction expenses when buying or selling
shares of either fund. Operating expenses are paid by the funds.
SHAREHOLDER TRANSACTION EXPENSES
The funds have no sales charges on purchases or reinvested dividends, deferred
sales charges, redemption fees or exchange fees.
FUND OPERATING EXPENSES (as of July 31, 1997)
(as a percentage of average net assets after fee waiver)
<TABLE>
<CAPTION>
BOND PORTFOLIO
FOR
ENDOWMENTS, INC. ENDOWMENTS, INC.
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fees 0.50% 0.40%
................................................................................
12b-1 expenses none none
................................................................................
Other expenses 0.24% 0.35%
................................................................................
Total fund operating expenses 0.74% 0.75%/1/
</TABLE>
/1/ Capital Research and Management Company has been voluntarily waiving fees
to the extent necessary to ensure that each fund's expenses do not exceed
0.75% of average net assets per annum. Without such a waiver, fees for Bond
Portfolio for Endowments, Inc. (as a percentage of average net assets)
would have been 0.85%.
EXAMPLES
Assuming a hypothetical annual return of 5% and shareholder transaction and
operating expenses as described above, for every $1,000 you invested, you would
pay the following total expenses over the following periods:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and Income Portfolio $8 $24 $41 $92
................................................................................
Bond Portfolio $8 $24 $42 $93
</TABLE>
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY.
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4 ENDOWMENTS / PROSPECTUS
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<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the six months ended January 31, 1998 and the
seven years ended July 31, 1997 has been audited by Deloitte & Touche llp,
independent auditors, and for the three years ended July 31, 1990 by KPMG Peat
Marwick, independent auditors. These tables should be read together with the
financial statements which are included in the statement of additional
information, annual report and semi-annual report of each respective portfolio.
ENDOWMENTS, INC.
SELECTED PER-SHARE DATA*
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEARS ENDED JULY 31
....... ...................
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1/31/98 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year $22.66 $18.61 $18.06 $17.18 $18.43 $18.26 $17.89 $16.91 $18.22 $16.71 $19.70
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .28 .56 .58 .63 .65 .66 .78 .78 .89 .98 .82
........................................................................................................................
Net realized and
unrealized gain (loss)
on investments .83 6.04 1.73 2.21 (.16) 1.05 1.74 1.60 (.16) 2.52 (1.16)
........................................................................................................................
Total income from
investment operations 1.11 6.60 2.31 2.84 .49 1.71 2.52 2.38 .73 3.50 (.34)
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.26) (.55) (.61) (.61) (.66) (.69) (.73) (.87) (1.01) (.89) (.85)
........................................................................................................................
Distributions from net
realized gains (7.38) (2.00) (1.15) (1.35) (1.08) (.85) (1.42) (.53) (1.03) (1.10) (1.80)
........................................................................................................................
Total distributions (7.64) (2.55) (1.76) (1.96) (1.74) (1.54) (2.15) (1.40) (2.04) (1.99) (2.65)
........................................................................................................................
Net asset value,
end of year $16.13 $22.66 $18.61 $18.06 $17.18 $18.43 $18.26 $17.89 $16.91 $18.22 $16.71
- -------------------------------------------------------------------------------------------------------------------------
Total return 5.43%/2/ 38.40% 13.22% 18.57% 2.77% 10.05% 15.74% 15.03% 4.13% 23.22% (2.31)%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions) $45 $48 $59 $57 $53 $72 $58 $46 $39 $43 $36
........................................................................................................................
Ratio of expenses to
average net assets .38%/2/,/3/ .74% .82% .73% .73% .64% .70% .69% .68% .69% .63%
........................................................................................................................
Ratio of net income
to average net assets 1.34%/2/ 2.73% 3.12% 3.70% 3.78% 3.72% 4.37% 4.63% 5.08% 5.76% 4.86%
........................................................................................................................
Average commission paid
per share/1/ 4.94c 5.00c 5.87c 5.94c 6.27c 7.03c 7.14c 7.17c 7.83c 7.43c 7.20c
........................................................................................................................
Portfolio turnover
rate 21.38%/2/ 50.69% 38.73% 24.04% 25.58% 29.70% 20.35% 34.43% 20.75% 19.70% 33.48%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All per share data reflects the 100-for-1 stock split for Endowments, Inc.
effected on February 16, 1988.
/1/ Brokerage commissions paid on portfolio transactions increases the cost of
securities purchased or reduce the proceeds of securities sold and are not
separately reflected in the fund's statement of operations. Shares traded
on a principal basis (without commission), such as fixed-income
transactions, are excluded. Generally, non-U.S. commissions are lower than
U.S. commissions when expressed as cents per share but higher when
expressed as a percentage of transactions because of the lower per-share
prices of many non-U.S. securities.
/2/ Based on operations for the period shown and, accordingly, not representive
of a full year's operations.
/3/ Had Capital Research and Management Company not waived management services
fees, the fund's expense ratio would have been 0.42% for the six months
ended January 31, 1998.
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ENDOWMENTS / PROSPECTUS 5
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<PAGE>
BOND PORTFOLIO FOR ENDOWMENTS, INC.
SELECTED PER-SHARE DATA*
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEARS ENDED JULY 31
..... ...................
1/31/98 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $17.17 $16.63 $16.82 $16.86 $19.66 $19.44 $17.76 $17.50 $17.83 $17.10 $17.62
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .59 1.21 1.22 1.26 1.32 1.49 1.47 1.49 1.61 1.60 1.51
...............................................................................................................................
Net realized and
unrealized gain (loss)
on investments .03 .52 (.19) .01 (1.51) .64 1.70 .28 (.46) .61 (.09)
...............................................................................................................................
Total income from
investment operations .62 1.73 1.03 1.27 (.19) 2.13 3.17 1.77 1.15 2.21 1.42
- -------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.64) (1.19) (1.22) (1.24) (1.35) (1.48) (1.49) (1.51) (1.48) (1.48) (1.40)
...............................................................................................................................
Distributions from net
realized gains -- -- -- (.07) (1.26) (.43) -- -- -- -- (.54)
...............................................................................................................................
Total distributions (.64) (1.19) (1.22) (1.31) (2.61) (1.91) (1.49) (1.51) (1.48) (1.48) (1.94)
...............................................................................................................................
Net asset value,
end of year $17.15 $17.17 $16.63 $16.82 $16.86 $19.66 $19.44 $17.76 $17.50 $17.83 $17.10
- -------------------------------------------------------------------------------------------------------------------------------
Total return 3.72%/2/ 10.83% 6.25% 7.97% (1.44)% 11.74% 18.69% 10.78% 6.86% 13.68% 8.62%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in millions) $30 $33 $41 $44 $46 $67 $65 $46 $39 $40 $33
...............................................................................................................................
Ratio of expenses to
average net assets .38%/1/,/2/ .75%/1/ .75%/1/ .76% .77% .65% .68% .68% .69% .70% .64%
...............................................................................................................................
Ratio of net income
to average net assets 3.41%/2/ 7.04% 7.17% 7.52% 6.99% 7.69% 8.04% 8.76% 9.25% 9.28% 8.69%
...............................................................................................................................
Portfolio turnover
rate 19.89%/2/ 22.18% 54.43% 69.22% 82.12% 35.97% 63.30% 54.86% 42.90% 64.21% 128.52%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All per share data reflects the 50-for-1 stock split for Bond Portfolio for
Endowments, Inc. effected on February 16, 1988.
/1/ Had Capital Research and Management Company not waived management services
fees, the fund's ratios would have been 0.51%, 0.85% and 0.80% for the six
months ended January 31, 1998 and the fiscal years ended 1997 and 1996,
respectively.
/2/ Based on operations for the period shown and, accordingly, not
representative of a full year's operations.
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INVESTMENT POLICIES AND RISKS
Growth and Income Portfolio's primary investment objective is long-term growth
of principal, with income and preservation of capital as secondary objectives.
The fund will normally invest primarily in common stocks or securities
convertible into common stock, including those issued by real estate investment
trusts. Emphasis will be given to stocks of companies which have favorable
prospects for long-term growth of both capital and income. The fund may also
purchase preferred stocks and straight corporate debt securities that are rated
in
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6 ENDOWMENTS / PROSPECTUS
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<PAGE>
the top three quality categories by Moody's Investors Service, Inc. or
Standard & Poor's, or unrated but determined to be of equivalent quality by
Capital Research and Management Company, the funds' investment adviser. In
addition, cash and cash equivalents and U.S. Government securities may also be
held. The fund may from time to time invest up to 10% of its assets in common
stocks and other securities of issuers domiciled outside the U.S. The fund will
normally diversify its investments among different industries although the
degree of diversification will vary from time to time in accordance with the
judgment of management.
Bond Portfolio's investment objective is to seek as high a level of current
income as is consistent with the preservation of capital.
The fund invests primarily in fixed-income securities, including bonds and
debentures. These securities will be investment grade, which are rated in the
top four quality categories (those rated Baa or above by Moody's or BBB or
above by S&P) or unrated but determined to be of equivalent quality by Capital
Research and Management Company, the fund's investment adviser. Securities
rated Baa or BBB are considered investment grade but may have speculative
characteristics.
Normally, at least 65% of the fund's assets will be invested in bonds. (For
this purpose, bonds are considered to be any debt securities having initial
maturities in excess of one year.) The fund may also invest up to 10% of its
assets in obligations of corporations or government entities outside the U.S.
and Canada. All Canadian and other non-U.S. securities purchased by the fund
will be liquid, U.S. dollar-denominated and meet the quality standards set
forth above. In addition, the fund may invest in notes and bonds issued by
governments, their agencies or instrumentalities, or corporations in which the
principal value and/or interest payments vary with the rate of inflation.
The fixed-income securities in which the fund invests may have stock conversion
or purchase rights; however, such securities will generally not exceed 20% of
the fund's assets. The fund will not acquire common stocks except through the
exercise of conversion or stock purchase rights and will retain such common
stocks only when it is consistent with the fund's objective of current income.
In addition, the fund may hold cash or cash equivalents.
* * *
As the majority of the funds' shareholders are non-profit institutions,
investments will be made consonant with the standards generally considered
prudent by fiduciaries and trustees of such institutions.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 7
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<PAGE>
MORE INFORMATION ON THE FUNDS' INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS
ARE CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION.
Investment limitations are considered at the time securities are purchased.
These limits are based on the funds' net assets unless otherwise indicated. The
funds' fundamental investment restrictions (described in the statement of
additional information) and their investment objectives may not be changed
without shareholder approval.
THE FUNDS MAY NOT ACHIEVE THEIR INVESTMENT OBJECTIVES DUE TO MARKET CONDITIONS
AND OTHER FACTORS. IN ADDITION, THE FUNDS MAY EXPERIENCE DIFFICULTY LIQUIDATING
CERTAIN PORTFOLIO SECURITIES DURING SIGNIFICANT MARKET DECLINES OR PERIODS OF
HEAVY REDEMPTIONS.
- --------------------------------------------------------------------------------
SECURITIES AND INVESTMENT TECHNIQUES
PERTAINS TO GROWTH AND INCOME PORTFOLIO AND BOND PORTFOLIO:<
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.
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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8 ENDOWMENTS / PROSPECTUS
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<PAGE>
OTHER SECURITIES
The funds may also invest in securities that have a combination of equity and
debt characteristics such as non-convertible preferred stocks and convertible
securities. These securities may at times resemble equity more than debt and
vice versa. Non-convertible preferred stocks are similar to debt in that they
have a stated dividend rate akin to the coupon of a bond or note even though
they are often classified as equity securities. The prices and yields of non-
convertible preferred stocks generally move with changes in interest rates and
the issuer's credit quality, similar to the factors affecting debt securities.
Bonds, preferred stocks, and other securities may sometimes be converted into
shares of common stock or other securities at a stated exchange ratio. These
securities prior to conversion pay a fixed rate of interest or a dividend.
Because convertible securities have both debt and equity characteristics their
value varies in response to many factors, including the value of the underlying
equity, general market and economic conditions, convertible market valuations,
as well as changes in interest rates, credit spreads, and the credit quality of
the issuer.
U.S. GOVERNMENT SECURITIES
The funds may invest in securities guaranteed by the U.S. Government including
(1) direct obligations of the U.S. Treasury (such as Treasury bills, notes and
bonds) and (2) federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury.
Certain securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the
Treasury. However, they generally involve federal sponsorship in one way or
another: some are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations of the
issuer; and others are supported only by the credit of the issuing government
agency or instrumentality.
RESTRICTED AND ILLIQUID SECURITIES
The funds may purchase securities subject to restrictions on resale. All such
securities whose principal trading market is in the U.S. will be considered
illiquid unless they have been specifically determined to be liquid under
procedures which have been adopted by the funds' board of trustees, taking into
account factors such as the frequency and volume of trading, the commitment of
dealers to make markets and the availability of qualified investors, all of
which can change from time to time. The funds may incur certain additional
costs in disposing of illiquid securities.
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ENDOWMENTS / PROSPECTUS 9
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<PAGE>
INVESTING IN VARIOUS COUNTRIES
Investing outside the U.S. involves special risks caused by, among other
things, fluctuating currency values; different accounting, auditing, and
financial reporting regulations and practices in some countries; changing local
and regional economic, political, and social conditions; expropriation or
confiscatory taxation; greater market volatility; differing securities market
structures; and various administrative difficulties such as delays in clearing
and settling portfolio transactions or in receiving payment of dividends.
However, in the opinion of Capital Research and Management Company, investing
outside the U.S. also can reduce certain portfolio risks due to greater
diversification opportunities.
Additional costs could be incurred in connection with the funds' investment
activities outside the U.S. The Growth and Income Portfolio can purchase and
sell currencies to facilitate transactions in securities denominated in
currencies other than the U.S. dollar. Brokerage commissions may be higher
outside the U.S., and the Growth and Income Portfolio may bear certain expenses
in connection with its currency transactions. Furthermore, increased custodian
costs for either fund may be associated with the maintenance of assets in
certain jurisdictions.
PERTAINS TO GROWTH AND INCOME PORTFOLIO:
EQUITY SECURITIES
The fund will ordinarily invest in equity securities, which represent an
ownership position in a company. The prices of equity securities fluctuate
based on changes in the financial condition of their issuers and on market and
economic conditions. The fund's results will be related to the overall market
for these securities.
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10 ENDOWMENTS / PROSPECTUS
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<PAGE>
PERTAINS TO BOND PORTFOLIO:
PASS-THROUGH SECURITIES
The fund may invest in various debt obligations backed by a pool of mortgages
or other assets including loans on single family residences, home equity loans,
mortgages on commercial buildings, credit card receivables, and leases on
airplanes or other equipment. Principal and interest payments made on the
underlying asset pools backing these obligations are typically passed through
to investors. Mortgage-backed securities permit borrowers to prepay their
underlying mortgages. Prepayments can alter the effective maturity of these
instruments. Pass-through securities may have either fixed or adjustable
coupons. These securities include those discussed below.
"Mortgage-backed securities" are issued both by U.S. Government agencies,
including the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and by private entities. The payment of interest and
principal on securities issued by U.S. Government agencies is guaranteed by the
full faith and credit of the U.S. Government (in the case of GNMA securities)
or the issuer (in the case of FNMA and FHLMC securities). However, the
guarantees do not apply to the market prices and yields of these securities,
which vary with changes in interest rates.
Mortgage-backed securities issued by private entities are structured similarly
to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. These securities
and the underlying mortgages are not guaranteed by government agencies. In
addition, these securities generally are structured with one or more types of
credit enhancement. Mortgage-backed securities generally permit borrowers to
prepay their underlying mortgages. Prepayments by borrowers on underlying
obligations can alter the effective maturity of these instruments.
"Collateralized mortgage obligations" (CMOs) are also backed by a pool of
mortgages, mortgage-backed securities or mortgage loans, which are divided into
two or more separate bond issues. CMOs issued by U.S. Government agencies are
backed by agency mortgages, while privately issued CMOs may be backed by either
government agency mortgages or private mortgages. Payments of principal and
interest are passed through to each bond at varying schedules resulting in
bonds with different coupons, effective maturities, and sensitivities to
interest rates. In fact, some CMOs may be structured in a way that when
interest rates change the impact of changing prepayment rates on these
securities' effective maturities is magnified.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 11
- --------------------------------------------------------------------------------
<PAGE>
"Commercial mortgage-backed securities" are backed by mortgages of commercial
property, such as hotels, office buildings, retail stores, hospitals, and other
commercial buildings. These securities may have a lower prepayment risk than
other mortgage-related securities because commercial mortgage loans generally
prohibit or impose penalties on prepayments of principal. In addition,
commercial mortgage-related securities often are structured with some form of
credit enhancement to protect against potential losses on the underlying
mortgage loans. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans, including the effects of local and other economic
conditions on real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
"Asset-backed securities" are backed by other assets such as credit card,
automobile or consumer loan receivables, retail installment loans, or
participations in pools of leases. Credit support for these securities may be
based on the underlying assets and/or provided through credit enhancements by a
third party. The values of these securities are sensitive to changes in the
credit quality of the underlying collateral, the credit strength of the credit
enhancement, changes in interest rates, and at times the financial condition of
the issuer. Some asset-backed securities also may receive prepayments which can
change the bonds' effective maturities.
FORWARD COMMITMENTS
The fund may enter into commitments to purchase or sell securities at a future
date. When the fund agrees to purchase such securities, it assumes the risk of
any decline in value of the securities beginning on the date of the agreement.
When the fund agrees to sell such securities, it does not participate in
further gains or losses with respect to the securities. If the other party to
such a transaction fails to deliver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or could experience a loss. In
addition, the fund may also enter into reverse repurchase agreements, which are
the sale of a security by the fund and its agreement to repurchase the security
at a specified time and price at a later date.
The fund may also enter into "roll" transactions which are the sale of
mortgage-backed securities or other securities together with a commitment to
purchase similar, but not identical, securities at a later date. The fund
assumes the rights and risks of ownership, including the risk of price and
yield fluctuations as of the time of the agreement.
- --------------------------------------------------------------------------------
12 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
<
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. The seller must maintain with the
fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by Capital Research and
Management Company. The fund only enters into repurchase agreements involving
securities in which they could otherwise invest and with selected banks and
securities dealers whose financial condition is monitored by Capital Research
and Management Company. If the seller under a repurchase agreement defaults,
the fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur disposition costs in connection
with liquidating the collateral. If bankruptcy proceedings are commenced with
respect to the seller, liquidation of the collateral by the fund may be delayed
or limited.
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MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices. Capital Research and
Management Company utilizes a system of multiple portfolio counselors in
managing mutual fund assets. Under this system a fund's portfolio is divided
into segments which are managed by individual counselors. Counselors decide how
their respective segments will be invested (within the limits provided by a
fund's objective(s) and policies and by Capital Research and Management
Company's investment committee). In addition, Capital Research and Management
Company's research professionals may make investment decisions with respect to
a portion of a fund's portfolio. The primary individual portfolio counselors
for Growth and Income Portfolio and Bond Portfolio are listed on next page.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 13
- --------------------------------------------------------------------------------
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
================================================================================
YEARS OF EXPERIENCE
AS
INVESTMENT
PROFESSIONAL
(APPROXIMATE)
....................
YEARS OF EXPERIENCE WITH CAPITAL
PORTFOLIO AS PORTFOLIO COUNSELOR RESEARCH AND
COUNSELORS (AND RESEARCH PROFESSIONAL, MANAGEMENT
FOR GROWTH IF APPLICABLE) FOR COMPANY OR
AND INCOME PRIMARY GROWTH AND INCOME PORTFOLIO ITS TOTAL
PORTFOLIO TITLE(S) (APPROXIMATE) AFFILIATES YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROBERT G. Senior Vice 8 years (in 23 years 26 years
O'DONNELL President. addition to 18
Senior Vice years as a
President and research
Director, professional
Capital prior to
Research and becoming a
Management portfolio
Company counselor for
the fund).
- --------------------------------------------------------------------------------
CLAUDIA P. Vice President 2 years (in 21 years 23 years
HUNTINGTON (Growth and addition to 20
Income years as a
Portfolio). research
Senior Vice professional
President, prior to
Capital becoming a
Research and portfolio
Management counselor for
Company the fund).
================================================================================
</TABLE><
BOND PORTFOLIO
<TABLE>
<CAPTION>
================================================================================
YEARS OF EXPERIENCE AS
INVESTMENT
PROFESSIONAL
(APPROXIMATE)
.........................
YEARS OF
EXPERIENCE WITH CAPITAL
AS PORTFOLIO RESEARCH AND
PORTFOLIO COUNSELOR MANAGEMENT
COUNSELORS FOR BOND COMPANY OR
FOR PRIMARY PORTFOLIO ITS TOTAL
BOND PORTFOLIO TITLE(S) (APPROXIMATE) AFFILIATES YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABNER D. Senior Vice 23 years 31 years 46 years
GOLDSTINE President.
Senior Vice
President and
Director,
Capital
Research and
Management
Company
- -------------------------------------------------------------------------------
JOHN H. Vice President 10 years 15 years 16 years
SMET (Bond
Portfolio).
Vice
President,
Capital
Research and
Management
Company
================================================================================
</TABLE>
Capital Research and Management Company has managed the funds' assets since
July 26, 1975.
- --------------------------------------------------------------------------------
14 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
INVESTMENT RESULTS
The funds may compare investment results to various indices or other mutual
funds. Fund results may be calculated on a total return, yield and/or
distribution rate basis.
X TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gain
distributions.
X YIELD is computed by dividing the net investment income per share earned by a
fund over a given period of time by the maximum offering price per share on
the last day of the period, according to a formula mandated by the Securities
and Exchange Commission. A yield calculated using this formula may be
different than the income actually paid to shareholders.
X DISTRIBUTION RATE reflects dividends that were paid by a fund. The
distribution rate is calculated by dividing the dividends paid over the last
12 months by the sum of the month-end price and the capital gain
distributions paid over the last 12 months.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 15
- --------------------------------------------------------------------------------
<PAGE>
ENDOWMENTS, INC.
INVESTMENT RESULTS
(FOR PERIODS ENDED JUNE 30, 1998)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND
TOTAL AT NET
RETURNS: ASSET VALUE/1/ S&P 500/2/
- --------------------------------------------------------------------------------
<S> <C> <C>
One year 19.75% 30.09%
................................................................................
Five years 16.80% 23.03%
................................................................................
Ten years 14.90% 18.52%
................................................................................
Lifetime/3/ 15.23% 16.03%
</TABLE>
- --------------------------------------------------------------------------------
Yield/1/: 2.64%
Distribution Rate: 1.97%<
BOND PORTFOLIO FOR ENDOWMENTS, INC.
INVESTMENT RESULTS
(FOR PERIODS ENDED JUNE 30, 1998)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND LEHMAN
TOTAL AT NET AGGREGATE
RETURNS: ASSET VALUE/1/ BOND INDEX/4/
- --------------------------------------------------------------------------------
<S> <C> <C>
One year 8.99% 10.54%
................................................................................
Five years 6.13% 6.88%
................................................................................
Ten years 9.05% 9.07%
................................................................................
Lifetime/3/ 9.73% 9.77%/5/
</TABLE>
- --------------------------------------------------------------------------------
Yield/1/: 5.63%
Distribution Rate: 7.17%
/1/ These fund results were calculated according to a standard formula that is
required for all stock and bond funds.
/2/ The Standard & Poor's 500 Composite Index represents stocks. This index is
unmanaged and does not reflect sales charges, commissions or expenses.
/3/ For the period beginning July 26, 1975 (when Capital Research and
Management Company became the investment adviser of the funds' assets).
/4/ Lehman Brothers Aggregate Bond Index represents investment grade debt. This
index is unmanaged and does not reflect sales charges, commissions or
expenses.
/5/ Lehman/Brothers Aggregate Bond Index did not exist until December 31, 1975.
For the period between July 31, 1975 and December 31, 1975, Lehman Brothers
Government/Corporate Bond Index results were used. The Lehman Brothers
indices are based on July 31, 1975 index value.
- --------------------------------------------------------------------------------
16 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
Here are the fund's annual total returns. This information is being supplied on
a calendar year basis for comparative purposes.
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
ENDOWMENTS, INC.
<TABLE>
88 89 90 91 92 93 94 95 96 97
- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13.37 25.4 0.42 22.57 9.56 9.56 1.54 28.31 17.43 28.81
- -----------------------------------------------------------------------------
</TABLE> <
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
BOND PORTFOLIO FOR ENDOWMENTS, INC.
<TABLE>
88 89 90 91 92 93 94 95 96 97
- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.18 12.56 6.04 20.32 9.4 12.23 -4.31 15.99 3.98 8.72
- ----------------------------------------------------------------------------
</TABLE> <
Past results are not an indication of future results and may reflect a fee
waiver.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 17
- --------------------------------------------------------------------------------
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The funds usually pay dividends, which may fluctuate, in March, June, September
and December. Capital gains, if any, are usually distributed in December. When
a dividend or capital gain is distributed, the net asset value per share is
reduced by the amount of the payment.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from American Funds Service Company with regard to
uncashed distribution checks, the shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares.
FEDERAL TAXES
In any fiscal year in which the Trust qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital gains, the Trust itself (and hence the funds) is relieved of
federal income tax.
Generally, all dividends and capital gains are taxable whether they are
reinvested or received in cash -- unless you are exempt from taxation or
entitled to tax deferral. Early each year, you will be notified as to the
amount and federal tax status of all income distributions paid during the prior
year. Such distributions may also be subject to state or local taxes.
This is a brief summary of some of the tax laws that affect your investment in
the funds. Please see the statement of additional information and your tax
adviser for further information.
- --------------------------------------------------------------------------------
18 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
ORGANIZATION AND MANAGEMENT OF ENDOWMENTS
TRUST ORGANIZATION AND VOTING RIGHTS
Endowments, Inc., the predecessor to the Growth and Income Portfolio, was
organized as a Delaware corporation in 1969; Bond Portfolio for Endowments,
Inc., the predecessor to the Bond Portfolio, was organized as a Delaware
corporation in 1970. Each fund is now a separate series of a Delaware business
trust which is a registered, open-end, diversified management investment
company. The Trust was organized on May 14, 1998. All fund operations are
supervised by the Trust's board of trustees who meet periodically and perform
duties required by applicable state and federal laws. The funds do not hold
annual meetings of shareholders. However, significant matters that 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 of either fund, that fund
will hold a meeting at which any member of the board could be removed by a
majority vote.
<
As of June 30, 1998, the following shareholders owned 5% or more of the funds'
outstanding shares:
Endowments, Inc. -- California Institute of the Arts (24700 McBean Parkway,
Valencia, CA 91355) (398,897 shares, 14.55%); Citizens' Scholarship Foundation
of America (1505 Riverview Road, P.O. Box 297, St. Peter, MN 56082)
(212,369 shares, 7.74%); DeKalb County Community Foundation (2225 Gateway
Drive, Sycamore, IL 60178) (150,307 shares, 5.48%); Foundation for Reproductive
Research and Education (333 E. Superior Street, Prentice 490, Chicago, IL
60611) (158,100 shares, 5.77%); and Loyola Marymount University (7900 Loyola
Boulevard, Los Angeles, CA 90045) (156,660 shares, 5.71%).
Bond Portfolio for Endowments, Inc. -- California Institute for the Arts
(24700 McBean Parkway, Valencia, CA 91355) (514,168 shares, 30.17%); Citizens'
Scholarship of America (1505 Riverview Road, P.O. Box 297, St. Peter, MN 56082)
(151,872 shares, 8.91%); Foundation for Reproductive Research and Education
(333 E. Superior Street, Prentice 490, Chicago, IL 60611) (91,828 shares,
5.39%); and Hudson Institute, 5395 Emerson Way, (P.O. Box 26919, Indianapolis,
IN 46226) (142,565 shares, 8.37%). As California Institute of the Arts owns in
excess of 25% of the voting shares of the fund, it is, pursuant to the
Investment Company Act of 1940, presumed to be a controlling person of the
fund.
Shareholder inquiries may be made in writing to Endowments, One Market, Steuart
Tower, Suite 1800, P.O. Box 7650, San Francisco, CA 94120 or by calling
415/393-7105.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 19
- --------------------------------------------------------------------------------
<PAGE>
THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, has managed the funds' assets since
July 25, 1975 and is the investment adviser to other funds, including those in
The American Funds Group. Capital Research and Management Company, a wholly
owned subsidiary of The Capital Group Companies, Inc., is headquartered at 333
South Hope Street, Los Angeles, CA 90071. Capital Research and Management
Company manages the investment portfolio and business affairs of the funds. The
management fee paid by the funds to Capital Research and Management Company may
not exceed 0.50% of each fund's average net assets annually and declines at
certain asset levels. The total management fees paid by each fund, as a
percentage of average net assets, for the previous fiscal year are discussed
earlier under "Expenses."
Capital Research and Management Company and its affiliated companies have
adopted a personal investing policy that is consistent with the recommendations
contained in the May 9, 1994 report issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has also been
incorporated into the funds' code of ethics.
PORTFOLIO TRANSACTIONS
Orders for the funds' portfolio securities transactions are placed by Capital
Research and Management Company, which strives to obtain the best available
prices, taking into account the costs and quality of executions. Fixed-income
securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price which includes an
amount of compensation to the dealer, generally referred to as a concession or
discount. On occasion, securities may be purchased directly from an issuer, in
which case no commissions or discounts are paid. In the over-the-counter
market, purchases and sales are transacted directly with principal market-
makers except in those circumstances where it appears better prices and
executions are available elsewhere.
Subject to the above policy, when two or more brokers (either directly or
through their correspondent clearing agents) are in a position to offer
comparable prices and executions, preference may be given to brokers who have
provided investment research, statistical, and other related services for the
benefit of the funds and/or other funds served by Capital Research and
Management Company.
TRANSFER AGENT
American Funds Service Company serves as the transfer agent for the funds and
performs shareholder service functions. An agent of American Funds Service
Company who performs transfer agent services for the funds is located at
One Market, Steuart Tower, Suite 1800, San Francisco, CA 94105.
- --------------------------------------------------------------------------------
20 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
SHAREHOLDER SERVICES
The funds offer you a valuable array of services you can use to alter your
investment program as your needs and circumstances change. These services,
which are summarized below, are available only in states where they may be
legally offered and may be terminated or modified at any time upon 60 days'
written notice.
- --------------------------------------------------------------------------------
PURCHASING SHARES
Shares of the funds may be purchased directly from the funds only by (i) any
entity exempt from taxation under Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended ("501(c)(3) organizations"); (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. The minimum initial purchase is $50,000 for either fund; there is
no minimum on subsequent investments. The minimum initial investment may be
reduced by the board of trustees for investments which meet certain standards.
Any shareholder which no longer fulfills the characteristics described above
must transfer its shares to an eligible entity or, at the shareholder's option,
sell its shares at net asset value.
The purchase of shares may be paid in cash or in a like value of acceptable
securities, said securities to be valued in accordance with the valuation
procedures described in the statement of additional information under "Purchase
of Shares -- Price of Shares." Acceptable securities shall be those securities
deemed acceptable by Capital Research and Management Company; that is, those
securities which management deems to be consistent with the investment
objectives and policies of the funds.
Various services are available as described below:
X Automatic Reinvestment
Dividends and capital gain distributions are reinvested in additional shares
at no sales charge unless you indicate otherwise. You also may elect to have
dividends and/or capital gain distributions paid in cash.
X Right of Accumulation
You may take into account the current value of your existing holdings in the
Growth and Income Portfolio and the Bond Portfolio, as well as your holdings
in The American Funds Group, to determine your sales charge on investments
in accounts eligible to be aggregated, or when making a gift to an
individual or charity.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 21
- --------------------------------------------------------------------------------
<PAGE>
X Exchange Feature
As a shareholder of the Growth and Income Portfolio or the Bond Portfolio,
you may exchange all or part of your shares at net asset value for shares of
the other, and for shares of The Cash Management Trust of America or The
U.S. Treasury Money Fund of America, whose shares may be similarly exchanged
for shares of the Growth and Income Portfolio and/or the Bond Portfolio. The
Cash Management Trust of America and The U.S. Treasury Money Fund of America
are money market funds whose shares are sold at net asset value. This
feature is available only if the fund for which you are exchanging is
qualified in the state where you reside.
This exchange may or may not have potential tax consequences for the
shareholder. Shareholders should consult their tax or financial advisers
before exchanging their shares under this option.
X Automatic Withdrawals
Shareholders may authorize automatic withdrawals from their accounts. All
shares owned or purchased by a shareholder will be credited to the
shareholder's withdrawal account, and a sufficient number of shares will be
sold from the account to meet the requested withdrawal payments. All income
dividends and other distributions, if any, must be reinvested in fund shares
at net asset value and credited to the withdrawal account. Liquidation of
shares in excess of investment income will reduce and may deplete a
shareholder's invested capital. Withdrawal payments, therefore, should not
be considered as a yield or income on the investment.
X Account Statements
A shareholder account is opened in accordance with your registration
instructions. Transactions in the account, such as additional investments
and dividend reinvestments, will be reflected on regular confirmation
statements from American Funds Service Company.
SHARE PRICE
Each fund's share price, also called net asset value, is determined as of 4:00
p.m. New York time which is the normal close of trading on the New York Stock
Exchange, every day the Exchange is open. Each fund calculates its net asset
value per share, generally using market prices, by dividing the total value of
its assets after subtracting liabilities by the number of its shares
outstanding. Shares are purchased at the net asset value next determined after
your investment is received and accepted.
- --------------------------------------------------------------------------------
22 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
<PAGE>
SELLING SHARES
Shares are credited to your account and shares of the funds are redeemable
through the funds at net asset value. Shareholders may sell (redeem) their
shares, by tendering a request in proper form, at the offices of the funds,
P.O. Box 7650, One Market, Steuart Tower (Suite 1800), San Francisco,
California 94120. Proper tender of shares requires a written request for
redemption. Requests to sell must be signed and the authorized signature(s) of
the shareholder guaranteed by an "eligible guarantor" which includes a bank or
savings and loan association that is federally insured or a member firm of the
National Association of Securities Dealers, Inc. Notarization by a notary
public is not an acceptable signature guarantee.
The funds do not have dealer agreements and do not accept redemption orders
from broker-dealers. The price you receive for the shares you sell is the net
asset value next determined after your order and all required documents are
received. (See "Purchasing Shares -- Share Price.") Because the funds' net
asset values fluctuate, reflecting the market value of the funds' portfolios,
the amount a shareholder receives for shares sold may be more or less than the
amount paid for them.
- --------------------------------------------------------------------------------
OTHER IMPORTANT THINGS TO REMEMBER
YEAR 2000
The date-related computer issue known as the "Year 2000 problem" could have an
adverse impact on the quality of services provided to the funds and its
shareholders. However, the funds understand that their key service providers --
including the investment adviser and its affiliates -- are taking steps to
address the issue. In addition, the Year 2000 problem may adversely affect the
companies in which the funds invest. For example, companies may incur
substantial costs to address the problem. They may also suffer losses caused by
corporate and governmental data processing errors. The funds and their
investment adviser will continue to monitor developments relating to this
issue.
- --------------------------------------------------------------------------------
ENDOWMENTS / PROSPECTUS 23
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL STATEMENT OF ADDITIONAL
REPORT TO SHAREHOLDERS INFORMATION (SAI)
Includes financial Contains more detailed
statements, detailed information on all aspects
performance information, of the funds, including the
portfolio holdings, a funds' financial statements.
statement from portfolio
management and the
independent auditor's
report.
A current SAI has been filed
CODE OF ETHICS with the Securities and
Exchange Commission ("SEC").
Includes a description of It is incorporated by
the funds' personal reference into this
investing policy. prospectus and is available
along with other related
materials on the SEC's
Internet Web site at
http://www.sec.gov.
To request a free copy of any of the documents above:
Write to the Secretary
of the funds
P.O. Box 7650
San Francisco, CA 94120
================================================================================
This prospectus has been printed on recycled paper. [RECLYCLE LOGO]
- --------------------------------------------------------------------------------
24 ENDOWMENTS / PROSPECTUS
- --------------------------------------------------------------------------------
ENDOWMENTS
Part B
Statement of Additional Information
August 1, 1998
Endowments (the "Trust") is an open-end management investment company,
commonly known as a mutual fund. The Trust offers two diversified investment
portfolios, Growth and Income Portfolio and Bond Portfolio (collectively, the
"funds").
This document is not a prospectus but should be read in conjunction with the
current Prospectus of Endowments dated August 1, 1998. The Prospectus may be
obtained by writing to the funds' at the following address:
ENDOWMENTS
ATTENTION: SECRETARY
ONE MARKET
STEUART TOWER, SUITE 1800
P.O. BOX 7650
SAN FRANCISCO, CALIFORNIA 94120
TELEPHONE: (415) 421-9360
Table of Contents
Item Page No.
ABOUT ENDOWMENTS 1
DESCRIPTION OF CERTAIN SECURITIES 2
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS 6
MANAGEMENT OF THE TRUST 7
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES 11
PURCHASE OF SHARES 15
EXECUTION OF PORTFOLIO TRANSACTIONS 16
REDEMPTION OF SHARES 17
GENERAL INFORMATION 17
INVESTMENT RESULTS 18
FINANCIAL STATEMENTS ATTACHED
ABOUT ENDOWMENTS
Endowments is a business trust organized under the laws of the state of
Delaware on May 14, 1998 with two separate series, Growth and Income Portfolio
and Bond Portfolio. Growth and Income Portfolio was formerly known as
Endowments, Inc. and was organized as a Delaware corporation. Bond Portfolio
was formerly known as Bond Portfolio for Endowments, Inc. and was organized as
a separate Delaware corporation. Endowments, Inc. and Bond Portfolio for
Endowments, Inc. were reorganized as separate series of Endowments on July 31,
1998 with all of the assets of each predecessor fund transferred to Growth and
Income Portfolio and Bond Portfolio, respectively. As a result, certain
financial information appearing in the prospectus and statement of additional
information reflects the operations of these predecessor entities.
DESCRIPTION OF CERTAIN SECURITIES
BOND PORTFOLIO
DEBT SECURITIES - The fund has no current intention (at least during the next
12 months) of investing in securities rated BB or below by Standard & Poor's
("S&P") and Ba or below by Moody's Investors Service, Inc. ("Moody's")
(commonly known as "junk" bonds) or unrated but determined to be of equivalent
quality by Capital Research and Management Company ("CRMC"). The fund is not
normally required to dispose of a security in the event that its rating is
reduced below BBB or Baa (or it is not rated and its quality becomes equivalent
to such a security). The fund, however, has no current intention of holding
more than 5% of its net assets in junk bonds. Junk bonds are described by the
rating agencies as speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness than higher rated
bonds, or they may already be in default. The market prices of these
securities may fluctuate more than higher quality securities and may decline
significantly. It may be more difficult to dispose of or to determine the
value of junk bonds.
MATURITY - There are no restrictions on the maturity composition of the
portfolio, although it is anticipated that the fund normally will be invested
substantially in securities with maturities in excess of three years. Under
normal market conditions, longer term securities yield more than shorter term
securities, but are subject to greater price fluctuations.
FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When a fund purchases such securities it assumes
the risk of any decline in value of the security beginning on the date of the
agreement. When a fund agrees to sell such securities, it does not participate
in further gains or losses with respect to such securities. If the other
party to such a transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity, or could experience a
loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly may increase. 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 will have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
The fund also may enter into "roll" transactions, which consist of the sale of
mortgage-backed securities or other securities together with a commitment to
purchase similar, but not identical, securities at a future date. The fund
intends to treat roll transactions as two separate transactions: one involving
the purchase of a security and a separate transaction involving the sale of a
security. Since the fund does not intend to enter into roll transactions for
financing purposes, it may treat these transactions as not falling within the
definition of "borrowing" set forth in Section 2(a)(23) of the Investment
Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS - This type of agreement involves the sale of a
security by the fund and its commitment to repurchase the security at a
specified time and price. The fund will identify liquid assets which will be
marked to market daily in an amount sufficient to cover its obligations under
reverse repurchase agreements with broker-dealers (but no collateral is
required on reverse repurchase agreements with banks). Under the Investment
Company Act of 1940, reverse repurchase agreements may be considered borrowings
by the fund. The use of reverse repurchase agreements by the fund creates
leverage which increases the fund's investment risk. As the fund's aggregate
commitments under these reverse repurchase agreements increases, the
opportunity for leverage similarly increases. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the costs of the agreements, the fund's earnings or net asset value will
increase faster than otherwise would be the case; conversely if the income and
gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case.
WARRANTS AND RIGHTS - The fund may only acquire warrants or rights that are
issued together with bonds or preferred stocks. Warrants generally entitle the
holder to buy a stated amount of common stock or additional bonds to be
exercised at a specified price. At the time the warrant is issued, the
exercise price is usually higher than the current market price. Warrants may be
issued with an expiration date or in perpetuity. The fund may also acquire
rights to purchase common stocks. Rights are similar to warrants except that
they normally entitle the holder to purchase common stock at a lower price than
the current market price.
INFLATION-INDEXED BONDS - The fund may invest in inflation-indexed bonds
issued by governments, their agencies or instrumentalities, or corporations.
The principal value of this type of bond is periodically adjusted according to
changes in the rate of inflation. The interest rate is generally fixed at
issuance; however, interest payments are based on an inflation adjusted
principal value. For example, in a period of falling inflation, principal
value will be adjusted downward, reducing the interest payable.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The fund may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
GROWTH AND INCOME PORTFOLIO
REPURCHASE AGREEMENTS - Although the fund has no current intention in doing
so, 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. The seller must maintain with the
fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by Capital Research and
Management Company. The fund only enters into repurchase agreements involving
securities in which they could otherwise invest and with selected banks and
securities dealers whose financial condition is monitored by Capital Research
and Management Company. If the seller under a repurchase agreement defaults,
the fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur disposition costs in connection
with liquidating the collateral. If bankruptcy proceedings are commenced with
respect to the seller, liquidation of the collateral by the fund may be delayed
or limited.
CURRENCY TRANSACTIONS - Although the fund has no current intention to do so,
the fund has the ability to enter into forward currency contracts to protect
against changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Forward currency
contracts entered into by the fund will involve the purchase or sale of a
currency against the U.S. dollar. The fund will segregate liquid assets which
will be marked to market daily to meet its forward contract commitments to the
extent required by the Securities and Exchange Commission.
Certain provisions of the Internal Revenue Code may affect the extent to which
the fund may enter into forward contracts. Such transactions may also affect,
for U.S. federal income tax purposes, the character and timing of income, gain
or loss recognized by the fund.
REAL ESTATE INVESTMENT TRUSTS - The fund may invest in securities issued by
real estate investment trusts (REITs), which are pooled investment vehicles
that invest primarily in real estate or real estate-related loans. REITs are
not taxed on income distributed to shareholders provided they meet requirements
imposed by the Internal Revenue Code. The return on REITs is dependent on such
factors as the skill of management and the real estate environment in general.
In addition, the risks associated with REIT debt and equity instruments, are
similar to the risks of investing in corporate-issued debt and common stocks,
respectively. Debt that is issued by REITs is typically rated by the credit
rating agencies as investment grade or above.
GROWTH AND INCOME PORTFOLIO AND BOND PORTFOLIO
BOND RATINGS - Growth and Income Portfolio may invest in debt securities which
are rated in the top three quality categories by any national rating service
(or determined to be equivalent by Capital Research and Management Company)
including bonds rated at least A by Standard & Poor's or Moody's Investors
Service, Inc. Bond Portfolio invests in bonds and debentures (including
straight debt securities), which are rated in the top four quality categories
by any national rating service (or determined to be equivalent by Capital
Research and Management Company). The top four rating categories for Standard
& Poor's and Moody's are described below:
Standard & Poor's:
"Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong."
"Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree."
"Debt rated 'A' has a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions than debt in higher categories."
"Debt rated $BBB' has an adequate capacity to pay interest and repay principal.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for debt in higher rated
categories."
Standard & Poor's applies indicators "+", no character and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Moody's Investors Service, Inc.:
"Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as 'gilt
edge.' Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues."
"Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, or fluctuation of protective elements may be
of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa securities."
"Bonds rated A are judged to be of upper medium grade obligations. These
bonds possess many favorable investment attributes. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future."
"Bonds rated Baa are judged to be medium grade obligations, I.E., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well."
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of that generic rating category.
CASH AND CASH EQUIVALENTS - Each fund may invest in cash or cash equivalents.
These securities include (1) commercial paper (short-term notes issued by
corporations or governmental bodies), (2) commercial bank obligations (E.G.,
certificates of deposit (interest bearing time deposits), and bankers'
acceptances (time drafts on a commercial bank where the bank accepts an
irrevocable obligation to pay at maturity)) , (3) savings association and
savings bank obligations (E.G., certificates of deposit issued by savings banks
or savings associations), (4) securities of the U.S. Government, its agencies
or instrumentalities that mature, at the time of purchase, or may be redeemed,
in one year or less, and (5) corporate bonds and notes that mature, at the time
of purchase, or that may be redeemed, in one year or less.
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 funds' objective and changes in their investments are
generally accomplished gradually, though short-term transactions may
occasionally be made. Management's appraisal of changing economic conditions
and trends may cause a change in emphasis within the portfolio, both among
individual securities and among various types of fixed-income securities in
order to achieve the objectives of the funds. High portfolio turnover (100% or
more) involves correspondingly greater transaction costs in the form of dealer
spreads or brokerage commissions. Fixed-income securities are generally traded
on a net basis and usually neither brokerage commissions nor transfer taxes are
involved. The funds do not anticipate that their portfolio turnovers will
exceed 100% annually. A fund's portfolio turnover rate would equal 100% if each
security in either fund's portfolio were replaced once per year.
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies and investment restrictions
for the funds which cannot be changed without shareholder approval. The funds'
investment objectives described in the Prospectus and the following fundamental
investment restrictions require shareholder approval to be changed. (Approval
requires the affirmative vote of 67% or more of the voting securities present
at a meeting of shareholders, provided more than 50% of such securities are
represented at the meeting, or the vote of more than 50% of the outstanding
voting securities, whichever is less.) Investment limitations expressed in the
following restrictions are considered at the time securities are purchased and
are based on the funds' net assets unless otherwise indicated. The following
are the funds' fundamental investment restrictions:
1. A fund may not invest in a security if, as a result of such investment,
more than 25% of its total assets would be invested in the securities of
issuers in any particular industry, except that the restriction does not apply
to securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto).
2. A fund may not make loans, but this limitation does not apply (i) to
purchases of debt securities, loan participations, or the entry into of
repurchase agreements, or (ii) to loans of portfolio securities if, as a
result, no more than 33 1/3% of a fund's total assets would be on loan to third
parties.
3. A fund may not purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (this shall not prevent the
funds from investing in securities or other instruments backed by real estate,
or the securities of companies engaged in the real estate business).
4. A fund may not purchase or sell commodities or commodities contracts.
This restriction shall not prohibit the funds, subject to restrictions
described in the funds' prospectus and statement of additional information,
from purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities-related or foreign currency-related hedging
instrument, including swap agreements and other derivative instruments, subject
to compliance with applicable provisions of the federal securities and
commodities laws.
5. A fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended.
6. A fund may not borrow money, except temporarily for extraordinary or
emergency purposes, in an amount not exceeding 5% of its total assets at the
time of such borrowing.
7. A fund may not, with respect to 75% of its total assets, invest more than
5% of the value of its total assets in the securities of any one issuer, or
acquire more than 10% of the voting securities of any one issuer. These
limitations do not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
8. A fund may not engage in the business of underwriting securities of other
issuers, except to the extent that a fund may be deemed an underwriter under
the Securities Act of 1933, as amended, in disposing of portfolio securities.
The following investment policies of the funds and all other policies
described in the funds' prospectus and this statement of additional information
are considered non-fundamental and may be changed at any time with the approval
of the Trust's board of trustees. The following nonfundamental policies apply
to both funds:
1. The funds may not invest in other companies for the purpose of exercising
control or management.
2. The funds may not purchase puts, calls or hedges.
3. The funds may not invest in securities of other investments companies,
except as permitted by the Investment Company Act of 1940, as amended.
The following non-fundamental policy applies to Growth and Income Portfolio
only:
1. The fund may not invest more than 10% of its total assets in securities
that are not readily marketable.
The following non-fundamental policy applies to Bond Portfolio only:
1. The fund may not invest more than 15% of its total assets in securities
that are not readily marketable.
Restricted securities are treated as not readily marketable by the funds,
with the exception of those securities that have been determined to be liquid
pursuant to procedures adopted by the Trust's board of trustees.
MANAGEMENT OF THE TRUST
The Trust is managed by its board of trustees. The Trustees and officers of
the Trust are listed below.
Trustees and Officers
(with their principal occupations for the past five years#)
TRUSTEES
ROBERT B. EGELSTON*, 333 South Hope Street, Los Angeles, CA 90071, Age: 67.
Chairman of the Board. Senior Partner, The Capital Group Partners L.P.; former
Chairman of the Board, The Capital Group Companies, Inc.
FRANK L. ELLSWORTH*, 333 South Hope Street, Los Angeles, CA 90071, Age: 55.
President and Trustee. Vice President, Capital Research and Management Company;
former President, Independent Colleges of Southern California.
STEVEN D. LAVINE, 24700 McBean Parkway, Valencia, CA 91355, Age: 51. Trustee.
President, California Institute of the Arts.
PATRICIA A. McBRIDE, 4933 Mangold Circle, Dallas, TX 75229, Age: 55. Trustee.
Chief Financial Officer, Kevin L. McBride, D.D.S., Inc.
GAIL L. NEALE, 154 Prospect Parkway, Burlington, VT 05401, Age: 63. Trustee.
President, The Lovejoy Consulting Group, Inc.
CHARLES R. REDMOND, Times Mirror Square, Los Angeles, CA 90053, Age: 71.
Trustee. Former Chairman, Pfaffinger Foundation and former President and Chief
Executive Officer, Times Mirror Foundation.
THOMAS E. TERRY*, 333 South Hope Street, Los Angeles, CA 90071, Age: 60.
Trustee. Consultant; former Vice President and Secretary, Capital Research and
Management Company (retired 1994).
ROBERT C. ZIEBARTH, P.O. Box 2156, Ketchum, ID 83340, Age: 61. Trustee.
Management Consultant, Ziebarth Company.
All of the officers listed are officers or employees of the investment adviser
or affiliated companies. The Trust does not pay any salaries or fees to its
trustees or officers. However, the Trust reimburses certain expenses of the
trustees who are not affiliated with the investment adviser.
OFFICERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING
WITH REGISTRANT PAST 5 YEARS#
<S> <C> <C> <C>
Robert G. O'Donnell 54 Senior Vice Senior Vice President and
P.O. Box 7650 President Director, Capital Research and
San Francisco, CA 94120 Management Company
Abner D. Goldstine 68 Senior Vice Senior Vice President and
11100 Santa Monica Blvd. President Director, Capital Research and
Los Angeles, CA 90025 Management Company
Claudia P. Huntington 46 Vice President Vice President, Capital
333 South Hope Street (Growth and Income Research and Management Company
Los Angeles, CA 90071 Portfolio)
John H. Smet 41 Vice President Vice President, Capital
11100 Santa Monica Blvd. (Bond Portfolio) Research and Management Company
Los Angeles, CA 90025
Patrick F. Quan 40 Secretary Vice President, Fund Business
P.O. Box 7650 Management Group, Capital
San Francisco, CA 94120 Research and Management Company
Lisa G. Hathaway 35 Assistant Vice Assistant Vice President, Fund
333 South Hope Street President Business Management Group,
Los Angeles, CA 90071 Capital Research and Management
Company
Mary C. Hall 40 Treasurer Senior Vice President, Fund
135 South State College Blvd. Business Management Group,
Brea, CA 92821 Capital Research and Management
Company
Robert P. Simmer 37 Assistant Treasurer Vice President, Fund Business
5300 Robin Hood Road Management Group, Capital
Norfolk, VA 23513 Research and Management Company
</TABLE>
_________________
# Positions within the organizations listed may have changed during this
period.
* An "interested person" of the funds within the meaning of the Investment
Company Act of 1940 the basis of his affiliation with Capital Research and
Management Company, the funds' investment adviser.
All of the officers listed are officers or employees of Capital Research and
Management Company or affiliated companies.
All of the Trustees serve or have served on boards of tax-exempt 501(c)(3)
organizations and have had experience in dealing with the administrative and
financial needs of these institutions as indicated: Robert B. Egelston -
California Institute of the Arts, Claremont University Center, Los Angeles
Festival, The Los Angeles Philharmonic Association, The Music Center of Los
Angeles County, The Wharton School of Finance and Commerce, University of
Pennsylvania; Frank L. Ellsworth - Claremont University Center, English
Village, Seattle, Foundation for Independent Higher Education, Global Partners,
Canada, Graphic Arts Counsel--Los Angeles County Museum of Art, Independent
Colleges of Southern California, Inc., The Japanese-American National Museum,
Japanese Foundation of International Education, The Los Angeles Dance Center,
Pitzer College, Southwestern University School of Law; Steven D. Lavine -
American Council on the Arts, KCRW-FM National Public Radio, The Music Center
Operating Company, The Music Center of Los Angeles County; Patricia A. McBride
- - Commemara Conservancy Foundation, Dallas Museum of Art League, Dallas
Symphony Orchestra Association, Dallas Symphony Orchestra League, Dallas
Women's Foundation, Girl Scout Council, Inc., Eugene and Margaret McDermott Art
Fund, St. Mark's School of Texas, Southwest Museum of Science and Technology;
Gail L. Neale - The Flynn Theater, National Advisory Council, Hampshire
College, The JL Foundation, Origami Society of America, Shelburne Farms, The
Vera Institute of Justice; Thomas E. Terry - Academy of Arts and Sciences,
Citizens' Scholarship Foundation of America, Edgewood High School, Elvehjem
Museum of Art, Ketchum YMCA, Madison Community Foundation, Madison Opera, Inc.,
National Football Scholarship Foundation, Tin Chimneys Foundation, University
of Wisconsin; Charles R. Redmond - AMAN Folk Ensemble, Catholic Charities of
the Archdiocese of Los Angeles, Immaculate Heart High School, Loyola Marymount
University, Los Angeles Urban League, The Music Center of Los Angeles County, A
Noise Within, Pasadena Playhouse, Pfaffinger Foundation, Times Mirror
Foundation; Robert C. Ziebarth - Chicago Maternity Center, Choate School,
Foundation for Reproductive Research & Education, Latin School of Chicago,
National Association of Independent Schools, Naval Historical Foundation,
Northwestern Memorial Hospital.
INVESTMENT ADVISER - Capital Research and Management Company, the investment
adviser, founded in 1931, maintains research facilities in the United States
and abroad (Los Angeles, San Francisco, New York, Washington D.C., London,
Geneva, Singapore, Hong Kong and Tokyo), with a staff of professionals, many of
whom have a number of years of investment experience. Capital Research and
Management Company is located at 333 South Hope Street, Los Angeles, CA 90071,
and at 135 South State College Boulevard, Brea, CA 92821. Capital Research and
Management Company's research professionals travel several million miles a
year, making more than 5,000 research visits in more than 50 countries around
the world. Capital Research and Management Company believes that it is able to
attract and retain quality personnel.
An affiliate of Capital Research and Management Company 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.
Capital Research and Management Company is responsible for managing more than
$175 billion of stocks, bonds and money market instruments and serves over
eight million investors of all types. 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 Agreements (the "Agreements") between the Trust, on behalf of Growth
and Income Portfolio and Bond Portfolio, and Capital Research and Management
Company, dated July 31, 1998, may be renewed from year to year, provided that
any such renewal has been specifically approved at least annually by (i) the
board of trustees of the Trust, or by the vote of a majority (as defined in the
Investment Company Act of 1940) of the outstanding voting securities of the
Trust, and (ii) the vote of a majority of the Trustees who are not parties to
the Agreement or interested persons (as defined in said Act) of any such party,
cast in person, at a meeting called for the purpose of voting on such approval.
The Agreements also provide that either party has the right to terminate them
without penalty, upon 60 days' written notice to the other party, and that the
Agreements automatically terminates in the event of their assignment (as
defined in said Act). The Agreements are identical except for conforming
changes as the Investment Advisory and Service Agreements entered into by the
funds in 1975 before their reorganization as separate series of a Delaware
business trust.
Capital Research and Management Company, 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 funds, provides suitable office space, necessary
small office equipment and utilities, and provides general purpose accounting
forms, supplies, and postage used at the offices of the funds. The Trust pays
all expenses not specifically assumed by Capital Research and Management
Company, 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 shareholders; taxes;
expenses of the issuance and redemption of shares of the funds (including stock
certificates, registration and qualification fees and expenses); legal and
auditing expenses; expenses paid to Trustees unaffiliated with Capital Research
and Management Company; association dues; and costs of stationery and forms
prepared exclusively for the funds.
Capital Research and Management Company receives a management fee at the
annual rates of 1/2 of 1% of each fund's net assets up to $150,000,000 and 4/10
of 1% of such assets over $150,000,000.
The Agreements provide for an advisory fee reduction to the extent that a
fund's annual ordinary operating expenses exceed 0.75% of the average net
assets of the fund. 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.
During the years ended July 31, 1997, 1996 and 1995, Capital Research and
Management Company received from Endowments, Inc. advisory fees of $276,008,
$300,818, and $273,381, and from Bond Portfolio for Endowments, Inc. advisory
fees of $177,223, $214,202, and $223,573, respectively.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the funds and the purchase, ownership, and disposition of the funds'
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in
light of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended, the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of the funds' shares,
as well as the tax consequences arising under the laws of any state, foreign
country or other taxing jurisdiction.
The Trust (including each fund) intends each year to qualify and elect to be
treated as a "regulated investment company" under the provisions of Subchapter
M of the Internal Revenue Code. Under Subchapter M, if the Trust distributes
within specified times at least 90% of its investment company taxable income,
it will be taxed only on that portion of such investment company taxable income
that it retains.
To qualify as a "regulated investment company," a fund must (a) in each
taxable year, derive at least 90% of its gross income from dividends, interest,
certain 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 (but such other securities 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.
Under the Internal Revenue 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 net income
(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 for the year. The funds intend to distribute net
investment income and net capital gains so as to minimize or avoid the excise
tax liability.
The funds also intend to continue distributing to shareholders all of the
excess of net long-term capital gain over net short-term capital loss on sales
of securities. If the net asset value of shares of a fund should, by reason of
a distribution of realized capital gains, be reduced below a shareholder's
cost, such distribution would to that extent be a return of capital to that
shareholder even though taxable to the shareholder, and a sale of shares by a
shareholder at net asset value at that time would establish a capital loss for
federal tax purposes.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December and made payable
to shareholders of record in such a month are treated as paid and are thereby
taxable as of December 31, provided that the fund pays the dividend no later
than the end of January of the following year.
Any loss realized on a redemption or exchange of shares of a 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 funds may be required to pay withholding and other taxes imposed by
foreign countries which would reduce a fund's investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
The funds may invest in shares of foreign corporations that may be classified
under the Internal Revenue Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at
least one-half of its assets constitute investment-type assets, or 75% or more
of its gross income is investment-type income. If the funds receive a
so-called "excess distribution" with respect to PFIC stock, the funds itself
may be subject to a tax on a portion of the excess distribution, whether or not
the corresponding income is distributed by the funds to shareholders. In
general, under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the funds held the PFIC shares.
The funds will itself be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The funds may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund would be required to include in its gross income its
share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election would
involve marking to market the fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they
were realized and reported as ordinary income. Any mark-to-market losses and
any loss from an actual disposition of PFIC shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in
income in prior years.
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the funds to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the funds from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
If a fund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a DE MINIMIS amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the fund in each
taxable year in which the fund owns an interest in such debt security and
receives a principal payment on it. In particular, the fund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for
each period is equal to the lesser of (i) the amount of market discount
accruing during such period (plus any accrued market discount for prior periods
not previously taken into account) or (ii) the amount of the principal payment
with respect to such period. Generally, market discount accrues on a daily
basis for each day the debt security is held by the fund at a constant rate
over the time remaining to the debt security's maturity or, at the election of
the fund, at a constant yield to maturity which takes into account the
semi-annual compounding of interest. Gain realized on the disposition of a
market discount obligation must be recognized as ordinary interest income (not
capital gain) to the extent of the "accrued market discount."
Certain debt securities acquired by a fund may be treated as debt securities
that were originally issued at a discount. Very generally, original issue
discount is defined as the difference between the price at which a security was
issued and its stated redemption price at maturity. Although no cash income on
account of such discount is actually received by the fund, original issue
discount that accrues on a debt security in a given year generally is treated
for federal income tax purposes as interest and, therefore, such income would
be subject to the distribution requirements applicable to regulated investment
companies. Some debt securities may be purchased by a fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
Any regulated futures contracts and certain options (namely, nonequity options
and dealer equity options) in which a fund may invest may be "section 1256
contracts." Gains (or losses) on these contracts generally are considered to
be 60% long-term and 40% short-term capital gains or losses. Also, section
1256 contracts held by a fund at the end of each taxable year (and on certain
other dates prescribed in the Internal Revenue Code) are "marked to market"
with the result that unrealized gains or losses are treated as though they were
realized.
Transactions in options, futures and forward contracts undertaken by a fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the fund, and losses
realized by the fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that a fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition
of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by a fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Recently enacted rules may affect the timing and character of gain if a fund
engages in transactions that reduce or eliminate its risk of loss with respect
to appreciated financial positions. If a fund enters into certain transactions
in property while holding substantially identical property, the fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the fund's holding period in
the property. Loss from a constructive sale would be recognized when the
property was subsequently disposed of, and its character would depend on the
fund's holding period and the application of various loss deferral provisions
of the Internal Revenue Code.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a fund accrues income or other receivables or accrues expenses
or other liabilities denominated in a foreign currency and the time the fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of some
investments, including debt securities and certain forward contracts
denominated in a foreign currency, gains or losses attributable to fluctuations
in the value of the foreign currency between the acquisition and disposition of
the position also are treated as ordinary gain or loss. These gains and
losses, referred to under the Internal Revenue Code as "section 988" gains or
losses, increase or decrease the amount of the fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, a fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her fund shares.
The foregoing is limited to a summary of federal income taxation and should
not be viewed as a comprehensive discussion of all tax considerations relevant
to investors. Dividends and capital gain distributions may also be subject to
state, foreign or local taxes. Investors are urged to consult their tax
advisers with specific reference to their own tax situations.
PURCHASE OF SHARES
The purchase of shares may be paid in cash or in a like value of acceptable
securities. Such securities will (i) be acquired for investment and not for
resale; (ii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iii) have a value which is readily
ascertainable.
PRICE OF SHARES - The price you pay for shares is the net asset value per
share which is calculated once daily at 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 funds' share prices 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, Presidents' Day, Martin Luther King, Jr.'s Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day.
Such net asset value is effective for orders to purchase shares of the funds
received by the funds before the close of trading on the New York Stock
Exchange; orders received after the close of trading will be entered at the net
asset value as computed as of the close of trading of the New York Stock
Exchange on the next business day. Prices which appear in the newspaper are
not always indicative of prices at which you will be purchasing and redeeming
shares of the funds, since such prices generally reflect the previous day's
closing price whereas purchases and redemptions are made at the next calculated
price.
All portfolio securities of funds managed by Capital Research and Management
Company, other than the 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 Capital Research and Management Company 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 Capital Research and Management
Company deems it appropriate to do so, such securities will be valued at the
mean quoted bid and asked prices or at prices for securities of comparable
maturity, quality and type.
Securities with original maturities of one year or less having 60 days or less
to maturity are amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held on the 60th day, based on the value
determined on the 61st day. Forward currency contracts are valued at the mean
of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of 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. Purchases and sales
of securities and income and expenses are translated into U.S. dollars at the
prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities are
included with the net realized and unrealized gain or loss on investment
securities.
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.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the funds' portfolio securities transactions are placed by the
investment adviser. The investment adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research, statistical, or other related
services to the investment adviser or has sold shares of other funds served by
the investment adviser. The funds do not consider that they have 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 funds 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 funds, they are effected only when the
investment adviser believes that to do so is in the interest of the funds.
When such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner. The funds will not pay a mark-up for
research in principal transactions.
Brokerage commissions paid on portfolio transactions during the fiscal years
ended July 31, 1997, 1996 and 1995, amounted to $61,000, $52,000, and $38,000
for Endowments, Inc. There are no brokerage commissions paid on portfolio
transactions for Bond Portfolio for Endowments, Inc.
BOND PORTFOLIO FOR ENDOWMENTS, INC.
The fund is required to disclose information regarding investments in the
securities of broker-dealers (or parents of broker-dealers that derive more
than 15% of their revenue from broker-dealer activities) which have certain
relationships with the fund. During the fiscal year ended July 31, 1997,
Merrill Lynch, Pierce, Fenner & Smith, Inc. was among the top 10 dealers that
acted as principals in portfolio transactions. The fund held debt securities
issued by Merrill Lynch in the amount of $376,000 as July 31, 1997.
REDEMPTION OF SHARES
For redemption requests received after the close of trading on the New York
Stock Exchange, the redemption price will be the net asset value determined as
of the close of trading on the next business day of the New York Stock
Exchange. There is no charge to the shareholder for redemption. Payment in
cash or in kind is made as soon as reasonably practicable after tender in
proper form (as described above), and must, in any event, be made within seven
days thereafter. Either fund may, however, suspend the right of redemption
during any period when: (a) trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission or such
exchange is closed for other than weekends or holidays; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c) any
emergency as determined by the Securities and Exchange Commission exists,
making disposal of portfolio securities or valuation of net assets of the fund
not reasonably practicable.
Although they would not normally do so, the funds have the right to pay the
redemption price in whole or in part in portfolio securities as selected by the
board of trustees, taken at their value as used in determining net asset value
for purposes of computing the redemption price. A shareholder that redeems
fund shares, and is given by the fund a proportionate amount of the fund's
portfolio securities in lieu of cash, may incur brokerage commissions in the
event of a sale of the securities through a broker.
GENERAL INFORMATION
CUSTODIAN OF ASSETS - Securities and cash owned by the funds, including
proceeds from the sale of shares of the funds and of securities in the funds'
portfolios, are held by The Chase Manhattan Bank, One Chase Manhattan Plaza,
New York, NY 10081, as Custodian. Non-U.S. securities may be held by the
Custodian pursuant to sub-custodial arrangements in non-U.S. banks or foreign
branches of U.S. banks.
INDEPENDENT AUDITORS - Deloitte & Touche LLP, located at 1000 Wilshire
Boulevard, Los Angeles, CA 90017, serves as the Trust's independent auditors,
providing audit services, preparing tax returns and reviewing certain documents
of the Trust to be filed with the Securities and Exchange Commission. The
financial statements included in this statement of additional information from
the Annual and Semi-Annual Reports have been so included in reliance on the
reports of Deloitte & Touche LLP given on the authority of said firm as experts
in auditing and accounting.
COUNSEL - Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, CA 90071, has passed upon the legality of the shares offered hereby.
REPORTS TO SHAREHOLDERS - The Trust's fiscal year ends on July 31.
Shareholders are provided at least semi-annually with reports showing the
investment portfolio, financial statements and other information audited by the
funds' independent auditors, Deloitte & Touche LLP, whose selection is
determined annually by the board of trustees of the Trust.
The financial statements including the investment portfolios and the Reports
of Independent Auditors contained in the Annual Report as of July 31, 1997 and
Semi-Annual Report as of January 31, 1998 are included in this statement of
additional information.
YEAR 2000 - The funds 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 funds understand 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 funds' investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the funds invest 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 - Capital Research and Management Company and its
affiliated companies have adopted a personal investing policy consistent with
Investment Company Institute guidelines. This policy includes: a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; pre-clearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; blackout periods on
personal investing for certain investment personnel; ban on short-term trading
profits for investment personnel; limitations on service as a trustee of
publicly traded companies; and disclosure of personal securities transactions.
REMOVAL OF TRUSTEES BY SHAREHOLDERS - At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any Trustee or Trustees from office and may elect a successor
or successors to fill any resulting vacancies for the unexpired terms of
removed Trustees. The Trustees shall promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any Trustees when
requested in writing to do so by the record holders of not less than 10% of the
outstanding shares of the Trust.
INVESTMENT RESULTS
Endowments, Inc.'s yield was 2.51% and Bond Portfolio for Endowments, Inc.'s
yield was 5.96% based on a 30-day (or one month) period ended July 31, 1997,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[(a-b/cd+1)/6/-1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
(Endowments, Inc. and Bond Portfolio for Endowments, Inc. do not have a sales
charge.)
Endowments, Inc.'s average annual total return for the one-, five- and
ten-year periods ended on July 31, 1997 was +38.40%, +16.01% and +13.35%,
respectively. Bond Portfolio for Endowments, Inc.'s average annual total
return for the one-, five- and ten-year periods ended on July 31, 1997 was
+10.83%, +6.96% and +9.28%, respectively. The average annual total return (T)
is computed by equating the value at the end of the period (ERV) with a
hypothetical initial investment of $1,000 (P) over a period of years (n)
according to the following formula as required by the Securities and Exchange
Commission: P(1+T)/n/ = ERV.
The following assumptions will be reflected in computations made in accordance
with the formula stated above: (1) reinvestment of dividends and distributions
at net asset value on the reinvestment date determined by the board of
trustees; and (2) a complete redemption at the end of any period illustrated.
The funds 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 and the capital gains paid over the last 12 months. The distribution
rate may differ from the yield.
The funds may include information on their investment results and/or
comparisons of their investment results to various unmanaged indices (such as
The Dow Jones Average of 30 Industrial Stocks, The Standard & Poor's 500 Stock
Composite Index and the Lipper Growth & Income Fund Index for Endowments, Inc.
and the Lehman Aggregate Bond Index for Bond Portfolio for Endowments, Inc.) or
results of other mutual funds or investment or savings vehicles in
advertisements or in reports furnished to present or prospective shareholders.
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 funds may refer to results compiled by organizations such as CDA
Investment Services, Ibbotson Associates, Lipper Analytical Services, and
Morningstar, Inc. and by the U.S. Department of Commerce. Additionally, the
funds may, from time to time, refer to results published in various newspapers
and periodicals, including Barrons, Forbes, Fortune, Institutional Investor,
Kiplinger's Personal Finance Magazine, Money, U.S. News and World Report and
The Wall Street Journal.
The funds may, from time to time, compare their 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,
fuels, transportation, and other goods and services that people buy for
day-to-day living).
The investment results for the funds set forth below were calculated as
described in the funds' prospectus. The percentage increases shown in the
table below or used in published reports of the funds are obtained by
subtracting the index results at the beginning of the period from the index
results at the end of the period and dividing the difference by the index
results at the beginning of the period.
Endowments, Inc. vs. Various Unmanaged Indices
<TABLE>
<CAPTION>
10-Year Endowments, Inc. DJIA/1/ S&P 500/2/ Lipper Growth
8/1 - 7/31 and Income/3/
<S> <C> <C> <C> <C>
1987 - 1997 +251% +336% +303% +252%
1986 - 1996 +204 +330 +269 +220
1985 - 1995 +238 +391 +306 +255
1984 - 1994 +271 +385 +327 +290
1983 - 1993 +260 +333 +294 +249
1982 - 1992 +411 +528 +478 +381
1981 - 1991 +325 +392 +343 +290
1980 - 1990 +326 +392 +344 +301
1979 - 1989 +379 +409 +416 +387
1978 - 1988 +328 +308 +326 +329
1977 - 1987 +384 +388 +417 +412
1976 - 1986 +329 +208 +271 +301
1975 - 1985 +335 +177 +250 +287
1975# - 1985 +333 +177 +248 +287
</TABLE>
Bond Portfolio for Endowments, Inc. vs. Various Unmanaged Indices
<TABLE>
<CAPTION>
Lehman Lipper Average of
10-Year Bond Portfolio for Brothers Corporate A-Rated
8/1 - 7/31 Endowments, Inc. Aggregate/4/ Debt Funds/5/
<S> <C> <C> <C>
1987 - 1997 +143% +139% +135%
1986 - 1996 +129 +126 +119
1985 - 1995 +161 +160 +148
1984 - 1994 +191 +193 +178
1983 - 1993 +219 +218 +201
1982 - 1992 +254 +251 +232
1981 - 1991 +253 +269 +233
1980 - 1990 +204 +217 +188
1979 - 1989 +195 +201 +184
1978 - 1988 +178 +178 +164
1977 - 1987 +157 +164 +151
1976 - 1986 +178 +181 +168
1975 - 1985 +157 N/A +158
1975# - 1985 +158 N/A N/A
</TABLE>
________________
# From July 26, 1975
/1/ The Dow Jones Average of 30 Industrial Stocks is comprised of 30 industrial
companies such as General Motors and General Electric.
/2/ The Standard & Poor's 500 Stock Composite Index is comprised of industrial,
transportation, public utilities, and financial stocks and represents a large
portion of the value of issues traded on the New York Stock Exchange. Selected
issues traded on the American Stock Exchange are also included.
/3/ The Lipper Growth & Income Fund Index is a non-weighted index of the 30
largest funds within the Lipper Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gain
distributions as of the ex-dividend dates.
/4/ The Lehman Brothers Aggregate Bond Index covers all sectors of the fixed
income market and is a combination of the Lehman Brothers Treasury Bond Index,
the Agency Bond Index, the Corporate Bond Index, the Yankee Bond Index and the
Mortgage Backed Securities Index. Its inception date is December 31, 1975.
/5/ The Lipper Average of Corporate A-Rated Debt Funds is an average of the
cumulative total reinvestment performance of funds that invest at least 65% of
assets in corporate debt issues rated "A" or better or government issues.
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
If you had . . . and had taken
invested $50,000 all dividends and
in Endowments, Inc. this many capital gain
years ago . . . distributions
in shares, your
investment would
have been worth
this much at
7/31/97
| |
<S> <C> <C>
Number Periods
of Years 8/1 - 7/31 Value
1 1996 - 1997
$69,199
2 1995 - 1997
78,344
3 1994 - 1997
92,894
4 1993 - 1997
95,467
5 1992 - 1997
105,060
6 1991 - 1997
121,600
7 1990 - 1997
139,878
8 1989 - 1997
145,650
9 1988 - 1997
179,471
10 1987 - 1997
175,330
11 1986 - 1997
210,593
12 1985 - 1997
264,439
13 1984 - 1997
344,935
14 1983 - 1997
343,762
15 1982 - 1997
536,330
16 1981 - 1997
516,604
17 1980 - 1997
595,306
18 1979 - 1997
697,857
19 1978 - 1997
769,045
20 1977 - 1997
847,981
21 1976 - 1997
902,945
22 1975#- 1997
1,146,270
</TABLE>
# From July 26, 1975
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
. . . and had taken
all dividends and
If you had capital gain
invested $50,000 distributions
in Bond Portfolio for Endowments, Inc. this many in shares, your
years ago . . . investment would
have been worth
this much at
7/31/97
| |
<S> <C> <C>
Number Periods
of Years 8/1 - 7/31 Value
1 1996 - 1997
$55,413
2 1995 - 1997
58,877
3 1994 - 1997
63,572
4 1993 - 1997
62,654
5 1992 - 1997
70,011
6 1991 - 1997
83,093
7 1990 - 1997
92,049
8 1989 - 1997
98,359
9 1988 - 1997
111,818
10 1987 - 1997
121,453
11 1986 - 1997
126,814
12 1985 - 1997
153,398
13 1984 - 1997
185,059
14 1983 - 1997
199,782
15 1982 - 1997
247,638
16 1981 - 1997
293,217
17 1980 - 1997
279,795
18 1979 - 1997
290,179
19 1978 - 1997
310,440
20 1977 - 1997
312,715
21 1976 - 1997
351,971
22 1975#- 1997
395,088
</TABLE>
# From July 26, 1975
Illustration of a $50,000 investment in Endowments, Inc. with
dividends reinvested and capital gain distributions taken in shares
(for the period July 26, 1975 through July 31, 1997)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Year Total From From
Ended Annual Dividends Investment From Initial Capital Gains Dividends Total
July 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1975# $ 0 $ 0 $50,000 $49,769 $ 0 $ 0 $49,770
1976 2,408 2,408 52,408 60,781 0 2,695 63,476
1977 2,454 4,862 54,862 62,331 0 5,259 67,590
1978 2,899 7,761 57,761 65,910 0 8,615 74,525
1979 3,511 11,272 61,272 69,263 0 12,868 82,131
1980 4,322 15,594 65,594 77,021 0 19,256 96,277
1981 6,326 21,920 71,920 79,847 4,739 26,356 110,942
1982 7,869 29,789 79,789 64,678 13,443 28,739 106,860
1983 6,722 36,511 86,511 96,477 20,052 50,197 166,726
1984 7,502 44,013 94,013 83,847 31,536 50,774 166,157
1985 9,036 53,049 103,049 95,601 53,303 67,832 216,736
1986 10,623 63,672 113,672 104,971 81,000 86,184 272,155
1987 12,851 76,523 126,523 104,222 123,158 99,505 326,885
1988 15,733 92,256 142,256 88,382 130,787 100,178 319,347
1989 17,918 110,174 160,174 96,368 167,745 129,388 393,501
1990 22,799 132,973 182,973 89,440 178,016 142,283 409,739
1991 21,836 154,809 204,809 94,623 202,831 173,872 471,326
1992 20,318 175,127 225,127 96,580 249,826 199,127 545,533
1993 21,415 196,542 246,542 97,479 279,694 223,176 600,349
1994 22,417 218,959 268,959 90,868 296,050 230,062 616,980
1995 22,961 241,920 291,920 95,522 369,066 266,973 731,561
1996 25,984 267,904 317,904 98,431 428,636 301,171 828,238
1997 25,982 293,886 343,886 119,852 629,560 396,858 1,146,270
</TABLE>
# From July 26, 1975
The dollar amount of capital gain distributions during the period was $473,360.
Illustration of a $50,000 investment in Bond Portfolio for Endowments, Inc.
with
dividends reinvested and capital gain distributions taken in shares
(for the period July 26, 1975 through July 31, 1997)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES
Year Total From From
Ended Annual Dividends Investment From Initial Capital Gains Dividends Total
July 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1975# $ 0 $ 0 $50,000 $50,065 $ 0 $ 0 $50,064
1976 3,466 3,466 53,466 52,455 0 3,668 56,123
1977 4,395 7,861 57,861 54,854 0 8,315 63,169
1978 4,798 12,659 62,659 51,161 0 12,472 63,633
1979 5,595 18,254 68,254 50,165 0 17,913 68,078
1980 7,331 25,585 75,585 46,568 0 24,036 70,604
1981 7,990 33,575 83,575 39,235 0 28,137 67,372
1982 9,678 43,253 93,253 40,739 0 39,032 79,771
1983 10,518 53,771 103,771 45,384 0 53,497 98,881
1984 11,193 64,964 114,964 43,796 0 62,950 106,746
1985 12,231 77,195 127,195 47,570 0 81,205 128,775
1986 13,557 90,752 140,752 52,296 0 103,480 155,776
1987 13,829 104,581 154,581 50,040 0 112,609 162,649
1988 13,553 118,134 168,134 48,557 5,210 122,900 176,667
1989 15,800 133,934 183,934 50,630 5,433 144,778 200,841
1990 17,213 151,147 201,147 49,693 5,332 159,584 214,609
1991 19,146 170,293 220,293 50,432 5,411 181,896 237,739
1992 20,570 190,863 240,863 55,202 5,923 221,039 282,164
1993 22,376 213,239 263,239 55,827 12,805 246,660 315,292
1994 22,971 236,210 286,210 47,876 29,925 232,942 310,743
1995 23,564 259,774 309,774 47,762 31,232 256,528 335,522
1996 25,003 284,777 334,777 47,223 30,879 278,391 356,493
1997 26,094 310,871 360,871 48,756 31,882 314,450 395,088
</TABLE>
# From July 26, 1975
The dollar amount of capital gain distributions during the period was $33,339.
EXPERIENCE OF INVESTMENT ADVISER - The Investment Adviser manages nine growth
and growth-income funds that are at least 10 years old. In the rolling 10-year
periods since January 1, 1968 (133 in all), those funds have had better total
returns than their comparable Lipper indexes in 124 of 133 periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company.
<TABLE>
ENDOWMENTS, INC.
INVESTMENT PORTFOLIO, JANUARY 31, 1998
<S> <C> <C> <C>
Percent
of Net
INDUSTRY DIVERSIFICATION Assets
- ----------------------------------------------- ----------
EQUITY SECURITIES
Utilities: Electric & Gas 9.73
Health & Personal Care 8.43
Energy Sources 7.86
Insurance 6.35
Business & Public Services 6.31
Banking 6.08
Forest Products & Paper 4.44
Chemicals 4.01
Broadcasting & Publishing 3.33
Beverages & Tobacco 3.00
Telecommunications 2.62
Merchandising 2.24
Financial Services 2.09
Real Estate 1.81
Automobiles 1.69
Electrical & Electronics 1.46
Metals: Nonferrous 1.20
Industrial Components 1.12
Transportation: Rail & Road .85
Machinery & Engineering .75
----------
75.37
Equity securities in initial period of acquisition .86
Short-Term Securities 22.93
Excess of cash and receivables over payables .84
----------
Net Assets 100.00
==========
Percent
of Net
TEN LARGEST HOLDINGS Assets
- ----------------------------------------------- ----------
Duke Energy 3.16
Atlantic Richfield 3.08
Glaxo Wellcome 3.01
Fulton Financial 2.76
Trenwick Group 2.34
Houston Industries 2.25
Cendant (formerly CUC International) 2.24
Ultramar Diamond Shamrock 2.24
Merck 2.10
Beneficial 2.09
----------
25.27
==========
Shares or Percent
EQUITY SECURITIES PrincipaMarket Of Net
Common and preferred stocks and convertible debAmount Value Assets
- -------------------------------------------------------------------- ----------
ENERGY
Energy Sources-7.86%
Amoco Corp. 5000 $ 406,875 .91
Atlantic Richfield Co. 18500 1375938 3.08
Kerr-McGee Corp. 5000 313125 .70
Texaco Inc. 8000 416500 .93
Ultramar Diamond Shamrock Corp. 30000 999375 2.24
Utilities: Electric & Gas-9.73%
Ameren Corp. 10000 366250 .82
DPL Inc. 37500 686719 1.54
Duke Energy Corp. 26000 1408875 3.16
GPU, Inc. 20000 786250 1.76
Southern Electric PLC (United Kingdom) 60000 523309 1.17
Williams Companies, Inc. 20000 570000 1.28
------------- ----------
7853216 17.59
------------- ----------
MATERIALS
Chemicals-4.01%
Dow Chemical Co. 4000 360000 .81
Praxair, Inc. 15000 621563 1.39
Witco Corp. 20000 810000 1.81
Forest Products & Paper-4.44%
Georgia-Pacific Corp., Georgia-Pacific Group 5000 275625
Georgia-Pacific Corp., Timber Group 5000 116250 .88
Louisiana-Pacific Corp. 30000 601875 1.35
Union Camp Corp. 12000 686250 1.54
Weyerhaeuser Co. 6000 298875 .67
Metals: Nonferrous-1.20%
Aluminum Co. of America 7000 534625 1.20
------------- ----------
4305063 9.65
------------- ----------
CAPITAL EQUIPMENT
Electrical & Electronics-1.46%
Nokia Corp., Class A (American Depositary
Receipts) (Finland) 4000 304000 .68
Telefonaktiebolaget LM Ericsson, Class B
(American Depositary Receipts) (Sweden) 9000 347625 .78
Industrial Components-1.12%
Genuine Parts Co. 15000 497813 1.12
Machinery & Engineering-0.75%
Caterpillar Inc. 7000 336000 .75
------------- ----------
1485438 3.33
------------- ----------
CONSUMER GOODS
Automobiles-1.69%
Chrysler Corp. 10000 348125 .78
Ford Motor Co. 8000 408000 .91
Beverages & Tobacco-3.00%
Anheuser-Busch Companies, Inc. 8000 359500 .81
Imperial Tobacco Ltd. 60000 438051 .98
Philip Morris Companies Inc. 13000 539500 1.21
Health & Personal Care-8.43%
Avon Products, Inc. 15000 900000 2.02
Glaxo Wellcome PLC (American Depositary
Receipts) (United Kingdom) 25000 1345313 3.01
Merck & Co., Inc. 8000 938000 2.10
Schering-Plough Corp. 8000 579000 1.30
------------- ----------
5855489 13.12
------------- ----------
SERVICES
Broadcasting & Publishing-3.33%
Gannett Co., Inc. 8000 484000 1.08
Houston Industries Inc., 7.00% Automatic Common
Exchange Securities 7/1/00 (1) 17000 1003000 2.25
Business & Public Services-6.31%
Avery Dennison Corp. 20000 897500 2.01
Browning-Ferris Industries, Inc. 10000 345625 .77
Cendant Corp. (formerly CUC International),
3.00% convertible debentures 2/15/02 (2) $800,000 1001000 2.24
Electronic Data Systems Corp. 10000 416250 .93
Waste Management, Inc. 6596 155006 .36
Merchandising-2.24%
American Stores Co. 15000 326250 .73
J.C. Penney Co., Inc. 10000 673750 1.51
Telecommunications-2.62%
Ameritech Corp. 20000 858750 1.92
AT&T Corp. 5000 313124 .70
Transportation: Rail & Road-0.85%
Norfolk Southern Corp. 12000 378750 .85
------------- ----------
6853005 15.35
------------- ----------
FINANCE
Banking-6.08%
Bank of Tokyo-Mitsubishi, Ltd. (American
Depositary Receipts) (Japan) 25000 367188 .82
First Financial Bancorp. 5500 269500 .60
Fulton Financial Corp. 40770 1233293 2.76
Huntington Bancshares Inc. 25190 850162 1.90
Financial Services-2.09%
Beneficial Corp. 12000 931500 2.09
Insurance-6.35%
Aetna Inc. 5000 367500 .82
General Re Corp. 2500 520313 1.17
Liberty Corp. 10000 454375 1.02
Royal & Sun Alliance Insurance Group PLC
(United Kingdom) 40000 447034 1.00
Trenwick Group Inc. 30000 1042500 2.34
Real Estate-1.81%
Security Capital Pacific Trust 34285 807838 1.81
------------- ----------
7291203 16.33
------------- ----------
MISCELLANEOUS
Other equity securities in initial period of
acquisition 384200 .86
------------- ----------
TOTAL EQUITY SECURITIES (cost: $27,059,735) 34027614 76.23
------------- ----------
Principal
Amount
SHORT-TERM SECURITIES (000)
Corporate Short-Term Notes-22.93%
A.I. Credit Corp. 5.44% due 2/17/98 $1,000 997431 2.23
Abbott Laboratories 5.42% due 2/13/98 1,000 998043 2.24
American Express Credit Corp. 5.47% due 2/20/ 1,000 996961 2.23
BellSouth Telecommunications, Inc. 5.72%
due 2/3/98 400 399809 .90
General Electric Capital Corp. 5.62% due 2/2/ 950 949703 2.13
H.J. Heinz Co. 5.54% due 2/4/98 1,100 1099323 2.46
Lucent Technologies Inc. 5.44% due 2/4/98 1,000 999396 2.24
Monsanto Co. 5.50% due 2/10/98 1,100 1098319 2.46
Procter & Gamble Co. 5.42% due 2/24/98 1,100 1096025 2.46
Sara Lee Corp. 5.48% due 2/10/98 1,000 998478 2.24
Xerox Corp. 5.44% due 2/13/98 600 598822 1.34
------------ ----------
10232310 22.93
------------ ----------
----------- ----------
TOTAL SHORT-TERM SECURITIES (cost: $10,232,310) 10232310 22.93
------------ ----------
TOTAL INVESTMENT SECURITIES (cost: $37,292,045) 44259924 99.16
Excess of cash and receivables over payables 374354 .84
------------- ----------
NET ASSETS $44,634,278 100.00
============= ==========
(1)Security is convertible into Time Warner shares.
(2)Purchased in a private placement transaction;
resale may be limited to qualified institutional
buyers; resale to the public may require
registration.
See Notes to Financial Statements
Equity securities added to the portfolio
since July 31, 1997
- --------------------------------------
Aetna
American Stores
Anheuser-Busch Companies
Avery Dennison
Chrysler
First Financial Bancorp.
Fulton Financial
Genuine Parts
Imperial Tobacco
Kerr-McGee
Merck
Norfolk Southern
Praxair
Weyerhaeuser
Equity securities eliminated from the portfolio
since July 31, 1997
- --------------------------------------
Alexander & Baldwin
American Home Products
Arthur J. Gallagher & Co.
Cognizant
CoreStates Financial
CSX
General Mills
H.F. Ahmanson & Co.
International Paper
McCormick & Co.
RPM
</TABLE>
<TABLE>
Endowments, Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at January 31, 1998
<S> <C> <C>
Assets:
Investment securities at market
(cost: $37,292,045) $44,259,924
Cash 64,068
Receivables for-
Sales of investments $639,354
Sales of fund's shares 25,500
Dividends and accrued interest 69,958 734,812
-----------------------
45,058,804
Liabilities:
Payables for -
Purchases of investments 384,995
Management services 16,220
Accrued expenses 23,311 424,526
-----------------------
Net Assets at January 31, 1998 -
Equivalent to $16.13 per share on
2,766,536 shares of $1 par value
capital stock outstanding (authorized
capital stock--6,000,000 shares) $44,634,278
=============
Statement of Operations
for the six months ended January 31, 1998
Investment Income:
Income:
Dividends $ 534,819
Interest 269,891 $804,710
------------
Expenses:
Management services fee 118,336
Custodian fee 1,098
Registration statement and prospectus 11,804
Postage, stationery and supplies 4,262
Reports to shareholders 15,471
Auditing fees 15,748
Legal fees 4,216
Taxes other than federal income tax 14,832
Other expenses 12,973
------------
Total expenses before reimbursement 198,740
Reimbursement of expenses 23,351 175,389
-----------------------
Net investment income 629,321
------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 5,341,100
Net change in unrealized
appreciation on investments:
Beginning of period 10,415,185
End of period 6,967,789
------------
Net change in unrealized appreciatio
investments (3,447,396)
------------
Net realized gain and unrealized
appreciation on investments 1,893,704
------------
Net Increase in Net Assets Resulting
from Operations $ 2,523,025
=============
See Notes to Financial Statements
Statement of Changes in Net Assets
Six months
ended Year ended
1/31/98 7/31/97
Operations:
Net investment income $ 629,32$ 1,504,30
Net realized gain on investments 5,341,100 14,485,532
Net unrealized appreciation (depreciation)
on investments (3,447,396) 1,781,952
-----------------------
Net increase in net assets resulting
from operations 2,523,025 17,771,788
------------------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (543,870) (1,543,830)
Distributions from net realized
gain on investments (15,332,648 (6,480,136)
------------------------
Total dividends and distributions (15,876,518 (8,023,966)
------------------------
Capital Share Transactions:
Proceeds from shares sold:
65,680 and 198,622
shares, respectively 1,222,299 3,944,263
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
961,526 and 396,508 shares,
respectively 15,336,073 7,514,541
Cost of shares repurchased:
366,739 and 1,675,374
shares, respectively (6,298,090) (32,784,034)
------------------------
Net increase (decrease) in net assets
resulting from capital share transac10,260,282 (21,325,230)
------------------------
Total Decrease in Net Assets (3,093,211) (11,577,408)
Net Assets:
Beginning of period 47,727,489 59,304,897
------------------------
End of period (including undistributed
net investment income: $203,465 and
$118,014, respectively) $44,634,278$ 47,727,489
========================
See Notes to Financial Statements
</TABLE>
ENDOWMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Endowments, Inc. (the "fund") is registered under the Investment Company
Act of 1940 as an open-end, diversified management investment company. The fund
seeks to provide long-term growth of principal, with income and preservation of
capital as secondary objectives, primarily through investments in common
stocks. The following paragraphs summarize the significant accounting policies
consistently followed by the fund in the preparation of its financial
statements:
Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the investment adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the investment adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type. Securities with
original maturities of one year or less having 60 days or less to maturity are
amortized to maturity based on their cost if acquired within 60 days of
maturity or, if already held on the 60th day, based on the value determined on
the 61st day.
ASSETS OR LIABILITIES INITIALLY EXPRESSED IN TERMS OF FOREIGN CURRENCIES
ARE TRANSLATED INTO U.S. DOLLARS AT THE PREVAILING MARKET RATES AT THE END OF
THE REPORTING PERIOD. PURCHASES AND SALES OF SECURITIES AND INCOME AND EXPENSES
ARE TRANSLATED INTO U.S. DOLLARS AT THE PREVAILING MARKET RATES ON THE DATES OF
SUCH TRANSACTIONS. THE EFFECTS OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON
INVESTMENT SECURITIES ARE INCLUDED WITH THE NET REALIZED AND UNREALIZED GAIN OR
LOSS ON INVESTMENT SECURITIES.
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 Directors.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Dividend and interest income is reported on the accrual basis. DISCOUNTS
ON SECURITIES PURCHASED ARE AMORTIZED. THE FUND DOES NOT AMORTIZE PREMIUMS ON
SECURITIES PURCHASED. Dividends and distributions paid to shareholders are
recorded on the ex-dividend date.
Shares of the fund may be owned only by organizations exempt from federal
income taxation under Section 501(c)(3) of the Internal Revenue Code. The fund
itself is exempt from federal taxation under Section 501(c)(2) of the Internal
Revenue Code.
2. The fund is tax-exempt; therefore, no federal income tax provision is
required. However, it is the fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net investment income, including any net
realized gain on investments, to its shareholders.
As of January 31, 1998, net unrealized appreciation on investments for
book and federal income tax purposes aggregated $6,967,879, of which $7,312,980
related to appreciated securities and $345,101 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the six months ended January 31, 1998. The cost of
portfolio securities for book and federal income tax purposes was $37,292,045
at January 31, 1998.
3. The fee of $118,336 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.50% of the first $150 million of average net assets and
0.40% of such assets in excess of $150 million. The Investment Advisory and
Service Agreement provides for a fee reduction to the extent the fund's annual
ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets of the fund and 1.00% of the average net assets in excess
thereof. Expenses which are not subject to this limitation are interest,
taxes, brokerage commissions, transaction costs, and extraordinary expenses.
As of January 31, 1998, no such fee reduction was required.
In addition, CRMC has voluntarily agreed to waive its management services
fees to the extent necessary to ensure that the fund's annual ordinary
operating expenses do not exceed 0.75% of average net assets. Fee reductions
were $23,351 for the six months ended January 31, 1998.
No fees were paid by the fund to its officers and Directors.
4. As of January 31, 1998, accumulated undistributed net realized gain on
investments was $2,788,426 and additional paid-in capital was $31,907,762.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $7,972,090 and $15,575,298, respectively, during the
six months ended January 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $1,098 was paid by these credits rather than in cash.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
ENDOWMENTS, INC. Six months
PER-SHARE DATA AND RATIOS ended
1/31/98 Year Ended July 31
----------- -------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------------------------------------------------
Net Asset Value, Beginning of Period $22.66 $18.61 $18.06 $17.18 $18.43 $18.26
----------- -------------------------------------------------
Income from Investment Operations:
Net investment income .28 .56 .58 .63 .65 .66
Net realized and unrealized
gain (loss) on investments .83 6.04 1.73 2.21 (.16) 1.05
----------- -------------------------------------------------
Total income from investment operations 1.11 6.60 2.31 2.84 .49 1.71
----------- -------------------------------------------------
Less Distributions:
Dividends from net investment income (.26) (.55) (.61) (.61) (.66) (.69)
Distributions from net realized gains (7.38) (2.00) (1.15) (1.35) (1.08) (.85)
----------- -------------------------------------------------
Total distributions (7.64) (2.55) (1.76) (1.96) (1.74) (1.54)
----------- -------------------------------------------------
Net Asset Value, End of Period $16.13 $22.66 $18.61 $18.06 $17.18 $18.43
=========== =================================================
Total Return 5.43% (1) 38.40% 13.22% 18.57% 2.77% 10.05%
Ratios/Supplemental Data:
Net assets, end of period (in millions) $45 $48 $59 $57 $53 $72
Ratio of expenses to average net assets .38%(1),(2 .74% .72% .73% .73% .64%
Ratio of net income to average net assets 1.34% (1) 2.73% 3.12% 3.70% 3.78% 3.72%
Average commissions paid per share(3) 4.94c 4.98c 5.87c 5.94c 6.27c 7.03c
Portfolio turnover rate 21.38% (1) 50.69% 38.73% 24.04% 25.58% 29.70%
(1) Based on operations for the period shown and,
accordingly, not representative of a full
year's operations.
(2) Had CRMC not waived management services fees,
the fund's expense ratio would have been 0.42%
for the six months ended January 31, 1998.
(3) Brokerage commissions paid on portfolio
transactions increase the cost of securities
purchased or reduce the proceeds of securities
sold and are not separately reflected in the
fund's statement of operations.
Shares traded on a principal basis (without
commissions), such as most over-the-counter
and fixed-income transactions, are excluded.
</TABLE>
Endowments, Inc.
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS held November 20, 1997
Shares outstanding on October 2, 1997 (record date) 2,075,099
Shares voting on November 20, 1997 1,667,900 (80.4%)
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Percent of Percent of
Votes Shares Votes Shares
Director For Voting For Withheld Withheld
<S> <C> <C> <C> <C>
Robert B. Egelston 1,667,900 100.0% 00.0%
Frank L. Ellsworth 1,667,900 100.0 00.0
Steven D. Lavine 1,667,900 100.0 00.0
Patricia A. McBride 1,664,277 99.8 3,6230.2
Charles R. Redmond 1,664,277 99.8 3,6230.2
Thomas E. Terry 1,667,900 100.0 00.0
Robert C. Ziebarth 1,667,900 100.0 00.0
</TABLE>
RATIFICATION OF AUDITORS
<TABLE>
<CAPTION>
Percent of
Percent of Shares Percent of
Votes Shares Votes Voting Shares
For Voting For Against Against Abstentions Abstaining
<S> <C> <C> <C> <C> <C> <C>
Deloitte & 1,667,900 100% 0 0% 0 0%
Touche LLP
</TABLE>
<TABLE>
<S> <C> <C> <C>
ENDOWMENTS, INC.
INVESTMENT PORTFOLIO, JULY 31, 1997
Percent
of Net
INDUSTRY DIVERSIFICATION Assets
- --------------------------------------------------- -----
EQUITY-TYPE SECURITIES
Utilities: Electric & Gas 8.40%
Energy Sources 8.12
Health & Personal Care 7.01
Insurance 6.92
Business & Public Services 6.50
Chemicals 6.07
Banking 6.02
Forest Products & Paper 4.61
Food & Household Products 4.42
Metals: Nonferrous 4.08
Broadcasting & Publishing 2.74
Telecommunications 2.62
Merchandising 2.45
Financial Services 1.82
Electrical & Electronics 1.57
Real Estate 1.44
Transportation: Rail & Road 1.29
Beverages & Tobacco 1.23
Machinery & Engineering 1.17
Automobiles .69
-----
79.17
Equity-type securities in initial period of acquisition 4.09
Short-Term Securities 16.18
Excess of cash and receivables over payables .56
-----
Net Assets 100.00%
=====
Percent
of Net
TEN LARGEST HOLDINGS Assets
- --------------------------------------------------- ---------
Aluminum Co. of America 4.08%
Atlantic Richfield 4.08
General Mills 3.33
Duke Energy 2.97
American Home Products 2.59
RPM 2.56
J.C. Penney 2.45
Trenwick 2.41
H.F. Ahmanson 2.23
Glaxo Wellcome 2.23
-----
28.93%
=====
Shares or Percent
EQUITY-TYPE SECURITIES Principal Market Of Net
Common and preferred stocks and convertible debentures Amount Value Assets
- --------------------------------------------------- --------- --------- ---------
ENERGY
Energy Sources-8.12%
Amoco Corp. 5000 $ 470,000 0.98%
Atlantic Richfield Co. 26000 1945125 4.08
Texaco Inc. 4000 464250 .97
Ultramar Diamond Shamrock Corp. 30000 997500 2.09
Utilities: Electric & Gas-8.40%
DPL Inc. 25000 615625 1.29
Duke Energy Corp. 28000 1419250 2.97
GPU, Inc. 20000 693750 1.45
Southern Electric PLC (United Kingdom) 60000 439982 .92
Union Electric Co. 10000 385000 .81
Williams Companies, Inc. 10000 457500 .96
--------- ---------
7887982 16.52
--------- ---------
MATERIALS
Chemicals-6.07%
Dow Chemical Co. 8000 760000 1.59
RPM, Inc. 60000 1222500 2.56
Witco Corp. 20000 912500 1.92
Forest Products & Paper-4.61%
Georgia-Pacific Corp. 5000 472188 .99
International Paper Co. 6000 336000 .70
Louisiana-Pacific Corp. 30000 688125 1.44
Union Camp Corp. 12000 702750 1.48
Metals: Nonferrous-4.08%
Aluminum Co. of America 22000 1947000 4.08
--------- ---------
7041063 14.76
--------- ---------
CAPITAL EQUIPMENT
Electrical & Electronics-1.57%
Nokia Corp., Class A (American Depositary
Receipts) (Finland) 4000 342500 .72
Telefonaktiebolaget LM Ericsson, Class B
(American Depositary Receipts) (Sweden) 9000 407250 .85
Machinery & Engineering-1.17%
Caterpillar Inc. 10000 560000 1.17
--------- ---------
1309750 2.74
--------- ---------
CONSUMER GOODS
Automobiles-0.69%
Ford Motor Co. 8000 327000 .69
Beverages & Tobacco-1.23%
Philip Morris Companies Inc. 13000 586625 1.23
Food & Household Products-4.42%
General Mills, Inc. 23000 1589875 3.33
McCormick & Co. 20000 520000 1.09
Health & Personal Care-7.01%
American Home Products Corp. 15000 1236563 2.59
Avon Products, Inc. 3900 282994 .59
Glaxo Wellcome PLC (American Depositary
Receipts) (United Kingdom) 25000 1062500 2.23
Schering-Plough Corp. 14000 763874 1.60
--------- ---------
6369431 13.35
--------- ---------
SERVICES
Broadcasting & Publishing-2.74%
Gannett Co., Inc. 4000 397250 .83
Houston Industries Inc., 7.00% Automatic Common
Exchange Securities 7/1/00 (1) (2) 17000 911625 1.91
Business & Public Services-6.50%
Alexander & Baldwin, Inc. 30000 810000 1.70
Browning-Ferris Industries, Inc. 13000 481000 1.01
Cognizant Corp. 8000 341000 .71
CUC International Inc., 3.00% convertible
debentures 2/15/02 (3) $800,000 824000 1.73
Electronic Data Systems Corp. 10000 432500 .91
Waste Management, Inc.(formerly WMX
Technologies, Inc.) 6596 211072 .44
Merchandising-2.45%
J.C. Penney Co., Inc. 20000 1170000 2.45
Telecommunications-2.62%
Ameritech Corp. 12000 809250 1.70
AT&T Corp. 12000 441750 .92
Transportation: Rail & Road-1.29%
CSX Corp. 10000 617500 1.29
--------- ---------
7446947 15.60
--------- ---------
FINANCE
Banking-6.02%
H.F. Ahmanson & Co. 20000 1063750 2.23
Bank of Tokyo-Mitsubishi, Ltd. (American
Depositary Receipts) (Japan) 25000 473438 .99
CoreStates Financial Corp. 10000 616875 1.29
Huntington Bancshares Inc. 25190 717915 1.51
Financial Services-1.82%
Beneficial Corp. 12000 870000 1.82
Insurance-6.92%
Arthur J. Gallagher & Co. 15000 543750 1.14
General Re Corp. 3000 626625 1.31
Liberty Corp. 10000 447500 .94
Royal & Sun Alliance Insurance Group PLC
(United Kingdom) 65000 535295 1.12
Trenwick Group Inc. 30000 1147500 2.41
Real Estate-1.44%
Security Capital Pacific Trust 30000 686249 1.44
--------- ---------
7728897 16.20
--------- ---------
MISCELLANEOUS
Other equity-type securities in initial period of acquisition 1953241 4.09
--------- ---------
TOTAL EQUITY-TYPE SECURITIES (cost: $29,322,142) 39737311 83.26
--------- ---------
Principal
Amount
SHORT-TERM SECURITIES (000)
Corporate Short-Term Notes-14.29%
Associates Corp. of North America 5.85%
due 8/1/97 $890 889855 1.86
Bell Atlantic Financial Services, Inc. 5.47%
due 8/11/97 1,000 998329 2.09
E.I. du Pont de Nemours and Co. 5.45% due 9/4/97 1,300 1293112 2.71
Lucent Technologies Inc. 5.47%-5.50%
due 8/4-9/11/97 1,000 997947 2.09
Pitney Bowes Credit Corp. 5.51% due 8/15/97 1,200 1197245 2.51
United Parcel Service of America, Inc.5.49%
due 9/23/97 700 694236 1.46
Weyerhaeuser Co. 5.53% due 8/7/97 750 749192 1.57
--------- ---------
6819916 14.29
--------- ---------
Federal Agency Discount Notes-1.89%
Federal National Mortgage Assn. 5.45% due 8/26/97 905 901,454 1.89
--------- ---------
TOTAL SHORT-TERM SECURITIES (cost: $7,721,354) 7721370 16.18
--------- ---------
TOTAL INVESTMENT SECURITIES (cost: $37,043,496) 47458681 99.44
Excess of cash and receivables over payables 268808 .56
--------- ---------
NET ASSETS $47,727,489 100.00%
========= =========
(1)Non-income-producing security.
(2) Security is convertible into Time Warner shares.
(3)Purchased in a private placement transaction;
resale to the public may require registration
or sale only to qualified institutional buyers.
See Notes to Financial Statements
Equity-type securities added to the portfolio
since January 31, 1997
- --------------------------------------
Avon Products
Bank of Tokyo-Mitsubishi
CSX
CUC International
Electronic Data Systems
Arthur J. Gallagher
Glaxo Wellcome
Houston Industries
Royal & Sun Alliance Insurance
Southern Electric
Texaco
Ultramar Diamond Shamrock
Williams Companies
Witco
Equity-type securities eliminated from the portfolio
since January 31, 1997
- --------------------------------------
ACNielsen
American Greetings
Anheuser-Busch
Central Fidelity Banks
Crompton & Knowles
Exxon
International Business Machines
Jefferson BankShares
Merck & Co.
Parker Hannifin
PepsiCo
PG&E
Tambrands
U.S. Bancorp
USLIFE
Volvo
Warner-Lambert
</TABLE>
<TABLE>
<S> <C> <C>
Endowments, Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at July 31, 1997
Assets:
Investment securities at market
(cost: $37,043,496) $47,458,681
Cash 54,940
Receivables for-
Sales of Investments $191,019
Dividends and accrued interest $68,014 259,033
------------ ------------
47,772,654
Liabilities:
Payables for -
Management services 21,838
Accrued expenses 23,327 45,165
------------ ------------
Net Assets at July 31, 1997 -
Equivalent to $22.66 per share on
2,106,069 shares of $1 par value
capital stock outstanding (authorized
capital stock--6,000,000 shares) $47,727,489
=============
Statement of Operations
for the year ended July 31, 1997
Investment Income:
Income:
Dividends $ 1,257,590
Interest 652,824 $1,910,414
------------
Expenses:
Management services fee 276,008
Custodian fee 2,768
Registration statement and prospectus 14,819
Reports to shareholders 10,753
Auditing fees 46,844
Legal fees 4,810
Taxes other than federal income tax 30,070
Other expenses 20,038 406,110
Net investment income 1,504,304
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 14,485,532
Net increase in unrealized
appreciation on investments:
Beginning of year 8,633,233
End of year 10,415,185
------------
Net unrealized appreciation on investments 1,781,952
Net realized gain and unrealized
appreciation on investments 16,267,484
Net Increase in Net Assets Resulting
from Operations $ 17,771,788
See Notes to Financial Statements
Statement of Changes in Net Assets
Year ended Year ended
7/31/97 7/31/96
Operations:
Net investment income $ 1,504,304 $ 1,871,962
Net realized gain on investments 14,485,532 6,351,802
Net unrealized appreciation (depreciation)
on investments 1,781,952 (726,814)
------------ ------------
Net increase in net assets resulting
from operations 17,771,788 7,496,950
------------- -------------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (1,543,830) (1,975,816)
Distributions from net realized
gain on investments (6,480,136) (3,710,692)
------------- -------------
Total dividends and distributions (8,023,966) (5,686,508)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
198,622 and 279,532
shares, respectively 3,944,263 5,201,405
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
396,508 and 283,073 shares,
respectively 7,514,541 5,156,184
Cost of shares repurchased:
1,675,374 and 518,349
shares, respectively (32,784,034) (9,598,279)
------------- -------------
Net increase (decrease) in net assets
resulting from capital share transactions (21,325,230) 759,310
------------- -------------
Total Increase (Decrease) in Net Assets (11,577,408) 2,569,752
Net Assets:
Beginning of year 59,304,897 56,735,145
------------- -------------
End of year (including undistributed
net investment income: $118,014 and
$157,540, respectively) $47,727,489 $ 59,304,897
============= =============
See Notes to Financial Statements
</TABLE>
ENDOWMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Endowments, Inc. (the "fund") is registered under the Investment Company Act
of 1940 as an open-end, diversified management investment company. The fund
seeks to provide long-term growth of principal with income and preservation of
capital as secondary objectives, primarily through investments in common
stocks. The following paragraphs summarize the significant accounting policies
consistently followed by the fund in the preparation of its financial
statements:
Equity-type securities traded on a national securities exchange (or reported
on the Nasdaq national market) and securities traded in the over-the-counter
market are stated at the last reported sales price on the day of valuation;
other securities, and securities for which no sale was reported on that date,
are stated at the last quoted bid price. Short-term securities with original or
remaining maturities in excess of 60 days are valued at the mean of their
quoted bid and asked prices. Short-term securities with 60 days or less to
maturity are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value by the Board of Directors or a committee thereof.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Dividend and interest income is reported on the accrual basis. Discounts
and premiums on securities purchased are amortized over the life of the
respective securities. Dividends and distributions paid to shareholders are
recorded on the ex-dividend date.
Shares of the fund may be owned only by organizations exempt from federal
income taxation under Section 501(c)(3) of the Internal Revenue Code. The fund
itself is exempt from federal taxation under Section 501(c)(2) of the Internal
Revenue Code.
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 $2,768 was paid by these credits rather than in cash.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of July 31, 1997, net unrealized appreciation on investments for book and
federal income tax purposes aggregated $10,415,185, of which $10,440,334
related to appreciated securities and $25,149 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the year ended July 31, 1997. The cost of portfolio
securities for book and federal income tax purposes was $37,043,496 at July 31,
1997.
3. The fee of $276,008 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.50% of the first $150 million of average net assets and
0.40% of such assets in excess of $150 million. The Investment Advisory and
Service Agreement provides for a fee reduction to the extent the fund's annual
ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets of the fund and 1.00% of the average net assets in excess
thereof. Expenses which are not subject to this limitation are interest,
taxes, and extraordinary expenses. For the year ended of July 31, 1997, no
such fee reduction was required.
In addition, CRMC has voluntarily agreed to waive its management services fees
to the extent necessary to ensure that the fund's annual expenses do not exceed
0.75% of average net assets. For the year ended July 31, 1997, no such fee
reduction was required.
No fees were paid by the fund to its officers and Directors.
4. As of July 31, 1997, accumulated undistributed net realized gain on
investments was $12,780,274 and additional paid-in capital was $22,307,947.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $21,861,248 and $44,658,716, respectively, during the
year ended July 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
ENDOWMENTS, INC.
PER-SHARE DATA AND RATIOS
Year ended July 31
-------- -------- -------- -------- --------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Net Asset Value, Beginning of Year 18.61 18.06 17.18 18.43 18.26
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income .56 .58 .63 .65 .66
Net realized and unrealized
gain (loss) on investments 6.04 1.73 2.21 (.16) 1.05
-------- -------- -------- -------- --------
Total income from investment operations 6.60 2.31 2.84 .49 1.71
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income (.55) (.61) (.61) (.66) (.69)
Distributions from net realized gains (2.00) (1.15) (1.35) (1.08) (.85)
-------- -------- -------- -------- --------
Total distributions (2.55) (1.76) (1.96) (1.74) (1.54)
-------- -------- -------- -------- --------
Net Asset Value, End of Year 22.66 18.61 18.06 17.18 18.43
======== ======== ======== ======== ========
Total Return 38.40% 13.22% 18.57% 2.77% 10.05%
Ratios/Supplemental Data:
Net assets, end of year (in millions) $48 $59 $57 $53 $72
Ratio of expenses to average net assets .74% .72% .73% .73% .64%
Ratio of net income to average net assets 2.73% 3.12% 3.70% 3.78% 3.72%
Average commissions paid per share(1) 5.00c 5.87c 5.94c 6.27c 7.03c
Portfolio turnover rate 50.69% 38.73% 24.04% 25.58% 29.70%
(1)Brokerage commissions paid on portfolio transactions
increase the cost of securities purchased or reduce the
proceeds of securities sold, and are not separately
reflected in the fund's statement of operations.
Shares traded on a principal basis (without commissions),
such as most over-the-counter and fixed-income
transactions, are excluded.
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Endowments, Inc.:
We have audited the accompanying statement of assets and liabilities of
Endowments, Inc. (the "fund"), including the schedule of portfolio investments,
as of July 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the per-share data and ratios for each of the five years
in the period then ended. These financial statements and per-share data and
ratios are the responsibility of the fund's management. Our responsibility is
to express an opinion on these financial statements and per-share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
per-share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at July 31, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, 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 Endowments, Inc. as of
July 31, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the per-share data and ratios for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 29, 1997
<TABLE>
BOND PORTFOLIO FOR ENDOWMENTS, INC.
INVESTMENT PORTFOLIO, JANUARY 31, 1998
<S> <C> <C> <C>
Principal Percent
Amount Market of Net
BONDS & NOTES (000) Value Assets
Industrials - 14.49%
Comcast Corp. 8.375% due 5/01/07 (1) $ 250 $ 278,940 .93%
Hutchison Whampoa Finance Ltd. 6.988% due 8/1/37 (1) 300 276990 .93
Hyundai Semiconductor America, Inc.
8.625% due 5/15/07 (1) 450 376875 1.26
Inco Ltd.:
9.875% due 6/15/19 300 321054 3.78
9.60% due 6/15/22 700 811454
News America Holdings Inc. 7.43% due 10/1/26 500 540805 1.81
Petrozuata Finance Inc., Series A, 7.63% due 4/1/09 (1) 250 257508 .86
Tele-Communications, Inc. 9.80% due 2/1/12 250 311335 1.04
Time Warner Inc.:
Pass-Through Asset Trust, Series 1997-1
6.10% due 12/30/01 (1),(2) 250 247768 3.46
0% convertible debentures due 6/22/13 1500 789375
Wharf International Finance Ltd., Series A,
7.625% due 3/13/07 (1) 500 403854 1.35
--------- ---------
4615958 15.42
--------- ---------
Electric Utilities - 3.53%
Big Rivers Electric Corp. 10.70% due 9/15/17 1000 1055890 3.53
--------- ---------
Leisure & Tourism - 1.71%
Royal Caribbean Cruises Ltd. 7.00% due 10/15/07 500 513300 1.71
--------- ---------
Telephone - 1.74%
U S West Capital Funding, Inc. 6.95% due 1/15/37 500 520325 1.74
--------- ---------
Transportation (2) - 8.59%
Airplanes Pass Through Trust, Class C, 8.15% due 3/15/1 1000 1052500 3.52
Jet Equipment Trust, Series 1994-A,
11.79% due 6/15/13 (1) 750 1011518 3.38
USAir, Inc., Series 1996-B, 7.50% due 4/15/08 475 507354 1.69
--------- ---------
2571372 8.59
--------- ---------
Financial - 4.71%
Barnett Capital I 8.06% due 12/1/26 500 535715 1.79
MBNA Capital A, MBNA Corp., Series A,
8.278% due 12/1/26 300 318114 1.06
Terra Nova (Bermuda) Holdings Ltd. 10.75% due 7/1/05 500 557220 1.86
--------- ---------
1411049 4.71
--------- ---------
Real Estate - 2.55%
Irvine Co. 7.46% due 3/15/06 (1),(3) 500 513050 1.71
SocGen Real Estate Co. LLC, Series A,
7.64% due 12/29/49 (1) 250 251115 .84
--------- ---------
764165 2.55
--------- ---------
Collateralized Mortgage/Asset-Backed
Obligations (2) - 4.85%
Asset Backed Securities Investment Trust, Series 1997-D,
6.79% due 8/17/03 250 250425 .84
Asset Securitization Corp., Series 1997-D5, Class A-1A,
6.50% due 2/14/43 486 494320 1.65
Merrill Lynch Mortgage Investors, Inc., Series 1995-A,
7.338% due 6/15/21 (4) 305 312685 1.04
Prudential Home Mortgage Securities Co., Inc.,
Series 1992-2033, Class A-12, 7.50% due 11/25/22 48 47454 .16
Structured Asset Securities Corp, Series 1996-CFL,
Class A2A, 7.75% due 2/25/28 342 345776 1.16
--------- ---------
1450660 4.85
--------- ---------
Governments (excluding U.S. Government) &
Governmental Authorities - 3.86%
Quebec (Province of) 13.25% due 9/15/14 1000 1154410 3.86
--------- ---------
Federal Agency Obligations - Mortgage
Pass-Throughs (2) - 12.13%
Fannie Mae (formerly Federal National Mortgage Assn.):
9.00% due 11/1/20 205 218724 2.24
6.191% due 3/1/33 (4) 449 451462
Freddie Mac (formerly Federal Home Loan Mortgage Corp.):
8.75% due 7/1/08 105 110502
12.50% due 12/1/12 48 56840 .97
9.00% due 3/1/20 114 122307
Government National Mortgage Assn.:
8.50% due 12/15/08 317 338172
10.00% due 12/15/19 350 391316
7.50% due 1/15/24 575 594382 8.92
7.00% due 2/20/24 (4) 665 679089
7.375% due 6/20/24 (4) 652 668278
--------- ---------
2960886 12.13
--------- ---------
U.S. Treasury Obligations - 34.18%
9.25% due 8/15/98 1000 1019999
7.25% due 5/15/04 1500 1640865
11.625% due 11/15/04 500 670545 34.18
10.375% due 11/15/12 2000 2690320
7.50% due 11/15/16 1000 1183590
8.875% due 8/15/17 2250 3027309
--------- ---------
10,232,628 34.18
--------- ---------
TOTAL BONDS & NOTES (cost: $27,328,759) 27250643 93.27
--------- ---------
Number
STOCKS of Shares
Preferred Stocks - 0.70%
Swire Pacific Ltd. 8.84% cumulative guaranteed perpetua 10000 208750 .70
capital (1) --------- ---------
TOTAL EQUITY-TYPE SECURITIES (COST $250,000) 208750 .70
Principal --------- ---------
Amount
SHORT-TERM SECURITIES (000)
Corporate Short-Term Notes - 4.31%
General Electric Capital Corp. 5.59% due 2/2/98 1290 1289597 4.31
--------- ---------
TOTAL SHORT-TERM SECURITIES (cost: $1,289,597) 1289597 4.31
--------- ---------
TOTAL INVESTMENT SECURITIES (cost: $28,868,356) 28748990 98.28
Excess of cash and receivables over payables 517023 1.72
--------- ---------
NET ASSETS $29,266,013 100.00%
======== =========
(1) Purchased in a private placement transaction; resale
may be limited to qualified institutional buyers;
resale to the public may require registration.
(2) Pass-through securities backed by a pool of
mortgages or other loans on which principal
payments are periodically made. Therefore, the
effective maturity is shorter than the stated maturity.
(3) Valued under procedures established
by the Board of Directors.
(4) Coupon rate changes periodically.
See Notes to Financial Statements
</TABLE>
<TABLE>
Bond Portfolio for Endowments, Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at January 31, 1998
<S> <C> <C>
Assets:
Investment securities at market
(cost: $28,868,356) $29,419,176
Cash 51,781
Receivables for-
Sales of investments $ 602
Accrued interest 515,061 515,663
--------- ---------
29,986,620
Liabilities:
Payables for-
Repurchases of Fund's shares 22,500
Management services 283
Accrued expenses 27,638 50,421
--------- ---------
Net Assets at January 31, 1998-
Equivalent to $17.15 per share on
1,745,671 shares of $1 par value
capital stock outstanding (authorized
capital stock - 5,000,000 shares) $29,936,199
===========
Statement of Operations
for the period ended January 31, 1998
Investment Income:
Interest income $ 1,211,224
Expenses:
Management services fee $ 81,421
Custodian fee 666
Registration statement and prospectus 12,824
Reports to shareholders 19,970
Auditing fees 17,998
Legal fees 4,216
Taxes other than federal income tax 14,408
Other expenses 13,004
---------
Total expenses before fee waiver 164,507
Fee waiver 44,890 119,617
--------- ---------
Net investment income 1,091,607
---------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized gain 147,681
Net change in unrealized appreciation
(depreciation) on investments:
Beginning of period 625,522
End of period 550,820
---------
Net unrealized appreciation on
investments (74,702)
---------
Net realized gain and unrealized
appreciation on investments 72,979
---------
Net Increase in Net Assets Resulting
from Operations $ 1,164,586
===========
Statement of Changes in Net Assets
Six months
ended Year ended
1/31/98 7/31/97
Operations: --------- ---------
Net investment income $ 1,091,607 $ 2,508,147
Net realized gain (loss) on investments 147,681 (216,967)
Net unrealized appreciation (depreciation) on
investments (74,702) 1,356,940
--------- ---------
Net increase in net assets resulting
from operations 1,164,586 3,648,120
--------- ---------
Dividends and Distributions Paid to
Shareholders:
Dividends from net investment income (1,197,029) (2,533,400)
--------- ---------
Capital Share Transactions:
Proceeds from shares sold:
62,046 and 187,635
shares, respectively 1,053,575 3,152,584
Proceeds from shares issued in
reinvestment of net investment income
dividends and distributions of net
realized gain on investments:
28,173 and 65,746 shares,
respectively 474,183 1,089,420
Cost of shares repurchased:
268,592 and 822,286
shares, respectively (4,591,811) (13,772,096)
--------- ---------
Net decrease in net assets resulting
from capital share transactions (3,064,053) (9,530,092)
--------- ---------
Total Decrease in Net Assets (3,096,496) (8,415,372)
Net Assets:
Beginning of period 33,032,695 41,448,067
--------- ---------
End of period (including undistributed
net investment income: $168,918 and
$274,339, respectively) $29,936,199 $33,032,695
===============================
See Notes to Financial Statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Bond Portfolio for Endowments, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks to provide as high a level of current income
as is consistent with preservation of capital. The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Fixed-income securities are valued at prices obtained from a pricing service,
when such prices are available; however, in circumstances where the investment
adviser deems it appropriate to do so, such securities will be valued at the
mean quoted bid and asked prices or at prices for securities of comparable
maturity, quality and type. Securities with original maturities of one year or
less having 60 days or less to maturity are amortized to maturity based on
their cost if acquired within 60 days of maturity or, if already held on the
60th day, based on the value determined on the 61st day. 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 Directors.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. In the event
the fund purchases securities on a delayed-delivery or "when-issued" basis, it
will segregate with its custodian liquid assets in an amount sufficient to meet
its payment obligations in these transactions. Realized gains and losses from
securities transactions are reported on an identified cost basis. Interest
income is reported on the accrual basis. Discounts on securities purchased are
amortized. The fund does not amortize premiums on securities purchased.
Distributions paid to shareholders are recorded on the ex-dividend date.
Shares of the fund may be owned only by organizations exempt from federal
income taxation under Section 501(c)(3) of the Internal Revenue Code. The fund
itself is exempt from taxation under Section 501(c)(2) of the Internal Revenue
Code.
2. The fund is tax-exempt; therefore, no federal income tax provision is
required. However, it is the fund's policy to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net investment income, including any net
realized gain on investments, to its shareholders.
As of January 31, 1998, net unrealized appreciation on investments, for book
and federal income tax purposes aggregated $550,820, of which $1,082,975
related to appreciated securities and $532,155 related to depreciated
securities. There was no difference between book and tax realized gains on
securities transactions for the six months ended January 31, 1998. The cost of
portfolio securities for book and federal income tax purposes was $28,868,356
at January 31, 1998.
3. The fee of $81,421 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.50% of the first $150 million of average net assets and
0.40% of such assets in excess of $150 million. The Investment Advisory and
Service Agreement provides for a fee reduction to the extent the fund's annual
ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets of the fund and 1.00% of the average net assets in excess
thereof. Expenses not subject to this limitation are interest, taxes and
extraordinary expenses. For the period ended January 31, 1998, no such fee
reduction was required.
In addition, CRMC has voluntarily agreed to waive its management services fees
to the extent necessary to ensure that the fund's expenses do not exceed 0.75%
of average net assets. For the period ended January 31, 1998, fee reductions
were $44,890.
No fees were paid by the fund to its officers and Directors.
4. As of January 31, 1998, accumulated net realized loss on investments was
$395,774 and additional paid-in capital was $27,866,564.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $5,706,067 and $6,521,814, respectively, during the
six months ended January 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $666 was paid by these credits rather than in cash.
<TABLE>
BOND PORTFOLIO FOR ENDOWMENTS, INC.
PER-SHARE DATA AND RATIOS
<S> <C> <C> <C> <C> <C> <C>
Six months Year ended July 31
ended -------------------- ---------- --------------------
1/31/98 1997 1996 1995 1994 1993
Net Asset Value, Beginning of Period 17.17 16.63 16.82 16.86 19.66 19.44
---------- -------------------- ---------- --------------------
Income from Investment Operations:
Net investment income .59 1.21 1.22 1.26 1.32 1.49
Net realized and unrealized
gain (loss) on investments .03 .52 (.19) .01 (1.51) .64
---------- -------------------- ---------- --------------------
Total income (loss) from investment
operations .62 1.73 1.03 1.27 (.19) 2.13
---------- -------------------- ---------- --------------------
Less Distributions:
Dividends from net investment income (.64) (1.19) (1.22) (1.24) (1.35) (1.48)
Distributions from net realized gains - - - (.07) (1.26) (.43)
---------- -------------------- ---------- --------------------
Total distributions (.64) (1.19) (1.22) (1.31) (2.61) (1.91)
---------- -------------------- ---------- --------------------
Net Asset Value, End of Period 17.15 17.17 16.63 16.82 16.86 19.66
========== ==================== ========== ====================
Total Return 3.72% /1/ 10.83% 6.25% 7.97% (1.44)% 11.74%
Ratios/Supplemental Data:
Net assets, end of period (in millions) $30 $33 $41 $44 $46 $67
Ratio of expenses to average net assets .37% /1//2/.75% /2/ .75% /2/ .76% .77% .65%
Ratio of net income to average net assets 3.41% /1/ 7.04% 7.17% 7.52% 6.99% 7.69%
Portfolio turnover rate 19.89% /1/ 22.18% 54.43% 69.22% 82.12% 35.97%
/1/ Based on operations for the period shown and, accordingly,
not representative of a full year's operations.
/2/ Had CRMC not waived management services fees, the fund's
expense ratio would have been 0.51%, 0.85% and 0.80% for
the six months ended January 31, 1998 and the fiscal years
ended 1997 and 1996, respectively.
</TABLE>
Bond Portfolio for Endowments, Inc.
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS held November 20, 1997
Shares outstanding on October 2, 1997 (record date) 1,977,834
Shares voting on November 20, 1997 1,608,735 (81.3%)
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Percent of Percent of
Votes Shares Votes Shares
Director For Voting For Withheld Withheld
<S> <C> <C> <C> <C>
Robert B. Egelston 1,608,735 100.0% 00.0%
Frank L. Ellsworth 1,608,735 100.0 00.0
Steven D. Lavine 1,579,171 98.2 29,5641.8
Patricia A. McBride 1,600,366 99.5 8,3690.5
Charles R. Redmond 1,600,366 99.5 8,3690.5
Thomas E. Terry 1,608,735 100.0 00.0
Robert C. Ziebarth 1,608,735 100.0 00.0
</TABLE>
RATIFICATION OF AUDITORS
<TABLE>
<CAPTION>
Percent Percent of
of Shares Shares Percent of
Votes Voting Votes Voting Shares
For For Against Against Abstentions Abstaining
<S> <C> <C> <C> <C> <C> <C>
Deloitte & 1,608,735 100% 0 0% 0 0%
Touche LLP
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Bond Portfolio for Endowments, Inc.:
We have audited the accompanying statement of assets and liabilities of Bond
Portfolio for Endowments, Inc. (the "fund"), including the investment
portfolio, as of January 31, 1998, and the related statement of operations for
the six-month period then ended, the statement of changes in net assets for the
six-month period then ended and for the year ended July 31, 1997, and the
per-share data and ratios for the six-month period ended January 31, 1998 and
for each of the five years in the period ended July 31, 1997. 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 at January
31, 1998, by correspondence with the custodian and brokers; where replies were
not received from brokers, 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 Bond Portfolio for Endowments, Inc. at January 31, 1998, the
results of its operations for the six-month period then ended, the changes in
its net assets the six-month period then ended and for the year ended July 31,
1997, and the per-share data and ratios for the six-month period ended January
31, 1998 and for each of the five years in the period ended July 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 20, 1998
<TABLE>
<S> <C> <C> <C>
BOND PORTFOLIO FOR ENDOWMENTS, INC.
INVESTMENT PORTFOLIO, JULY 31, 1997
Principal Percent
Amount Market of Net
BONDS & NOTES (000) Value Assets
Industrials - 14.20%
Comcast Corp. 8.375% due 5/01/07 (1) $ 250 $ 275,783 0.84%
Hutchison Whampoa Finance Ltd. 6.988% due 8/1/37 (1) 200 203040 .61
Hyundai Semiconductor America, Inc.
8.625% due 5/15/07 (1) 500 527000 1.60
Inco Ltd.:
9.875% due 6/15/19 300 325062 3.40
9.60% due 6/15/22 700 799365
Millennium America Inc. 7.00% due 11/15/06 250 251440 .76
News America Holdings Inc. 7.43% due 10/1/26 500 524520 1.59
Petrozuata Finance Inc., Series A, 7.63% due 4/1/09 (1) 250 260800 .79
Tele-Communications, Inc. 9.80% due 2/1/12 250 301268 .91
Time Warner Inc.:
Pass-Through Asset Trust, Series 1997-1 ,
6.10% due 12/30/01 (1)(2) 250 244183 2.92
0% convertible debentures due 6/22/13 1500 721875
Wharf International Finance Ltd., Series A,
7.625% due 3/13/07 (1) 250 257236 .78
--------- ------
4691572 14.20
--------- ------
Electric Utilities - 3.21%
Big Rivers Electric Corp. 10.70% due 9/15/17 1000 1059910 3.21
--------- ------
Telephone - 4.95%
U S West Capital Funding, Inc. 6.95% due 1/15/37 500 516085 4.95
U S West, Inc. 0% convertible
debentures due 6/25/11 3000 1117500
--------- ------
1,633,585 4.95
--------- ------
Transportation (2) - 9.26%
Airplanes Pass Through Trust, Class C, 8.15% due 3/15/19 1000 1058000 3.20
Jet Equipment Trust:
Series 1994-A, 11.79% due 6/15/13 (1) 750 991575 4.54
Series 1995-B, Class A, 7.63% due 2/15/15 (1) 480 506971
USAir, Inc., Series 1996-B, 7.50% due 4/15/08 481 501622 1.52
--------- ------
3058168 9.26
--------- ------
Financial - 5.67%
American Re Corp. 10.875% due 9/15/04 1000 1052060 3.18
Capital One Bank 8.125% due 3/1/00 250 260733 .79
Terra Nova (Bermuda) Holdings Ltd. 10.75% due 7/1/05 500 560900 1.70
--------- ------
1873693 5.67
--------- ------
Real Estate - 1.51%
Irvine Co. 7.46% due 3/15/06 (1)(3) 500 498100 1.51
--------- ------
Collateralized Mortgage/Asset-Backed
Obligations (2) - 2.95%
Merrill Lynch Mortgage Investors, Inc., Series 1995-A,
7.383% due 6/15/21 (4) 369 376367 1.14
Prudential Home Mortgage Securities Co., Inc.,
Series 1992-2033, Class A-12, 7.50% due 11/25/22 213 212705 .64
Structured Asset Securities Corp., Series 1996-CFL,
Class A2A, 7.75% due 2/25/28 381 386028 1.17
--------- ------
975100 2.95
--------- ------
Floating Rate Eurodollar Notes (Undated) (4) - 5.42%
Bank of Nova Scotia 5.75% 1000 896300 2.71
Canadian Imperial Bank of Commerce 5.688% 1000 893750 2.71
--------- ------
1790050 5.42
--------- ------
Governments (excluding U.S. Government) &
Governmental Authorities - 3.56%
Quebec (Province of) 13.25% due 9/15/14 1000 1177640 3.56
--------- ------
Federal Agency Obligations - Mortgage
Pass-Throughs (2) - 13.27%
Federal Home Loan Mortgage Corp.:
8.75% due 7/1/08 118 122705
12.50% due 12/1/12 52 60747 .95
9.00% due 3/1/20 124 133214
Federal National Mortgage Assn.:
9.00% due 11/1/20 240 255397 2.20
6.03% due 3/1/33 (4) 474 471134
Government National Mortgage Assn.:
8.50% due 12/15/08 347 367368
10.00% due 12/15/19 402 445302
7.50% due 1/15/24 584 597550 10.12
7.00% due 2/20/24 (4) 749 764818
7.375% due 6/20/24 (4) 749 769465
8.50% due 10/15/25 378 394775
--------- ------
4382475 13.27
--------- ------
U.S. Treasury Obligations - 22.48%
9.25% due 8/15/98 1000 1036091
7.25% due 5/15/04 500 535470
11.625% due 11/15/04 500 663595 22.48
10.375% due 11/15/12 2000 2627820
8.875% due 8/15/17 2000 2564380
--------- ------
7,427,356 22.48
--------- ------
TOTAL BONDS & NOTES (cost: $27,966,316) 28567649 86.48
--------- ------
Number
STOCKS of Shares
Preferred Stocks - 0.83%
Swire Pacific Ltd. 8.84% cumulative guaranteed perpetual 10000 274200 .83
capital (1) --------- ------
TOTAL STOCKS (COST $250,000) 274200 .83
--------- ------
SHORT-TERM SECURITIES
Corporate Short-Term Notes - 11.58%
Associates Corp. of North America 5.85% due 8/1/97 980 979841 2.97
Atlantic Richfield Co. 5.50% due 8/6/97 1150 1148946 3.48
Pfizer Inc 5.45% due 9/11/97 (1) 1200 1192370 3.61
Xerox Corp. 5.48% due 10/17/97 510 503933 1.52
--------- ------
TOTAL SHORT-TERM SECURITIES (cost: $3,825,101) 3825090 11.58
--------- ------
TOTAL INVESTMENT SECURITIES (cost: $32,041,417) 32666939 98.89
Excess of cash and receivables over payables 365756 1.11
--------- ------
NET ASSETS $33,032,695 100.00%
========= =======
(1) Purchased in a private placement transaction; resale
to the public may require registration or sale only to
qualified institutional buyers.
(2) Pass-through securities backed by a pool of
mortgages or other loans on which principal
payments are periodically made. Therefore, the
effective maturity of these securities is shorter than
the stated maturity.
(3) Valued under procedures established
by the Board of Directors.
(4) Coupon rate changes periodically.
See Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C> <C>
Bond Portfolio for Endowments, Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
at July 31, 1997
Assets:
Investment securities at market
(cost: $32,041,417) $32,666,939
Cash 50,708
Receivables for-
Sales of investments $ 1,697
Accrued interest 546,152 547,849
----------- -----------
33,265,496
Liabilities:
Payables for-
Purchases of investments 200,000
Management services 10,540
Accrued expenses 22,261 232,801
----------- -----------
Net Assets at July 31, 1997-
Equivalent to $17.17 per share on
1,924,044 shares of $1 par value
capital stock outstanding (authorized
capital stock - 5,000,000 shares) $33,032,695
===========
Statement of Operations
for the year ended July 31, 1997
Investment Income:
Interest income $ 2,775,511
Expenses:
Management services fee $ 177,223
Custodian fee 2,022
Registration statement and prospectus 15,568
Reports to shareholders 10,753
Auditing fees 46,844
Legal fees 4,810
Taxes other than federal income tax 25,071
Other expenses 20,124
-----------
Total expenses before fee waiver 302,415
Fee waiver 35,051 267,364
----------- -----------
Net investment income 2,508,147
-----------
Realized Loss and Unrealized
Appreciation on Investments:
Net realized loss (216,967)
Net change in unrealized appreciation
(depreciation) on investments:
Beginning of year (731,418)
End of year 625,522
-----------
Net unrealized appreciation on
investments 1,356,940
-----------
Net realized loss and unrealized
appreciation on investments 1,139,973
-----------
Net Increase in Net Assets Resulting
from Operations $ 3,648,120
===========
Statement of Changes in Net Assets
Year ended July 31
1997 1996
Operations:
Net investment income $ 2,508,147 $ 3,075,042
Net realized gain (loss) on investments (216,967) 123,217
Net unrealized appreciation (depreciation) on
investments 1,356,940 (526,188)
----------- -----------
Net increase in net assets resulting
from operations 3,648,120 2,672,071
----------- -----------
Dividends Paid to Shareholders:
Dividends from net investment income (2,533,400) (3,085,285)
----------- -----------
Capital Share Transactions:
Proceeds from shares sold:
187,635 and 168,909
shares, respectively 3,152,584 2,838,556
Proceeds from shares issued in
reinvestment of net investment income
dividends: 65,746 and 94,993 shares,
respectively 1,089,420 1,596,233
Cost of shares repurchased:
822,286 and 377,703
shares, respectively (13,772,096) (6,407,611)
----------- -----------
Net decrease in net assets resulting
from capital share transactions (9,530,092) (1,972,822)
----------- -----------
Total Decrease in Net Assets (8,415,372) (2,386,036)
Net Assets:
Beginning of year 41,448,067 43,834,103
----------- -----------
End of year (including undistributed
net investment income: $274,340 and
$299,593, respectively) $33,032,695 $41,448,067
=========== ===========
See Notes to Financial Statements
</TABLE>
Bond Portfolio for Endowments, Inc.
Notes to Financial Statements
1. Bond Portfolio for Endowments, Inc. (the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks to provide as high a level of current income
as is consistent with the preservation of capital. The following paragraphs
summarize the significant accounting policies consistently followed by the fund
in the preparation of its financial statements:
Bonds and notes are valued at prices obtained from a bond-pricing service
provided by a major dealer in bonds, 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 of their representative quoted bid
and asked prices or, if such prices are not available, at prices for securities
of comparable maturity, quality, and type. Short-term securities with original
or remaining maturities in excess of 60 days are valued at the mean of their
quoted bid and asked prices. Short-term securities with 60 days or less to
maturity are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued at
fair value by the Board of Directors or a committee thereof.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses from securities transactions are reported on an identified cost
basis. Interest income is reported on the accrual basis. Discounts on
securities purchased are amortized over the life of the respective securities.
The fund does not amortize premiums on securities purchased. Dividends and
distributions paid to shareholders are recorded on the ex-dividend date.
Shares of the fund may be owned only by organizations exempt from federal
income taxation under Section 501(c)(3) of the Internal Revenue Code. The fund
itself is exempt from federal taxation under Section 501(c)(2) of the Internal
Revenue Code.
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 $2,022 was paid by these credits rather than in cash.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of July 31, 1997, net unrealized appreciation on investments for book and
federal income tax purposes aggregated $625,522, of which $994,372 related to
appreciated securities and $368,850 related to depreciated securities. There
was no difference between book and tax realized gains on securities
transactions for the year ended July 31, 1997. The fund has available at July
31, 1997 a net capital loss carryforward totaling $543,455, which may be used
to offset capital gains realized during subsequent years through July 31, 2004.
It is the intention of the fund not to make distributions from capital gains
until the capital loss carryforward is utilized. The cost of portfolio
securities for book and federal income tax purposes was $32,041,417 at July 31,
1997.
3. The fee of $177,223 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Directors of the fund are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.50% of the first $150 million of average net assets and
0.40% of such assets in excess of $150 million. The Investment Advisory and
Service Agreement provides for a fee reduction to the extent the fund's annual
ordinary operating expenses exceed 1.50% of the first $30 million of the
average net assets of the fund and 1.00% of the average net assets in excess
thereof. Expenses which are not subject to this limitation are interest,
taxes, and extraordinary expenses. For the year ended July 31, 1997, no such
fee reduction was required.
In addition, CRMC has voluntarily agreed to waive its management services fees
to the extent necessary to ensure that the fund's expenses do not exceed 0.75%
of average net assets. For the year ended July 31, 1997, fee reductions were
$35,051.
No fees were paid by the fund to its officers and Directors.
4. As of July 31, 1997, accumulated net realized loss on investments was
$543,455 and additional paid-in capital was $30,752,244.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $6,975,429 and $18,694,604, respectively, during the
year ended July 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C>
BOND PORTFOLIO FOR ENDOWMENTS, INC.
PER-SHARE DATA AND RATIOS
Year ended July 31
---------- ---------- ------------------------------
1997 1996 1995 1994 1993
---------- ---------- ------------------------------
Net Asset Value, Beginning of Year 16.63 16.82 16.86 19.66 19.44
---------- ---------- ------------------------------
Income from Investment Operations
Net investment income 1.21 1.22 1.26 1.32 1.49
Net realized and unrealized
gain (loss) on investments .52 (.19) .01 (1.51) .64
---------- ---------- ------------------------------
Total income (loss) from investment operations 1.73 1.03 1.27 (.19) 2.13
---------- ---------- ------------------------------
Less Distributions:
Dividends from net investment income (1.19) (1.22) (1.24) (1.35) (1.48)
Distributions from net realized gains - - (.07) (1.26) (.43)
---------- ---------- ------------------------------
Total distributions (1.19) (1.22) (1.31) (2.61) (1.91)
---------- ---------- ------------------------------
Net Asset Value, End of Year 17.17 16.63 16.82 16.86 19.66
======= ======= ======= ======= =======
Total Return 10.83% 6.25% 7.97% (1.44)% 11.74%
Ratios/Supplemental Data:
Net assets, end of year (in millions) $33 $41 $44 $46 $67
Ratio of expenses to average net assets .75% /1/ .75% /1/ .76% .77% .65%
Ratio of net income to average net assets 7.04% 7.17% 7.52% 6.99% 7.69%
Portfolio turnover rate 22.18% 54.43% 69.22% 82.12% 35.97%
/1/ Had Capital Research and Management Company not waived fees,
the fund's ratios of expenses to average net assets would have
been 0.85% and 0.80%, respectively, for the periods shown.
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Bond Portfolio for Endowments, Inc.:
We have audited the accompanying statement of assets and liabilities of Bond
Portfolio for Endowments, Inc. (the "fund"), including the schedule of
portfolio investments, as of July 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the per-share data and
ratios for each of the five years in the period then ended. These financial
statements and per-share data and ratios are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and per-share data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per-share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, 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 Bond Portfolio for Endowments, Inc. as of July 31, 1997, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the per-share
data and ratios for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 29, 1997
