U.S. Government Securities Fund
Annual Report for the year ended August 31, 1995
[The American Funds Group (R)]
U.S. GOVERNMENT SECURITIES FUND (SM) seeks high current income, consistent with
prudent risk and preservation of capital, by investing primarily in obligations
backed by the full faith and credit of the United States government.
[Side Bar]
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of September 30, 1995,
calculated in accordance with the Securities and Exchange Commission formula,
was 5.36%.
The fund's distribution rate as of that date was 6.89%. The SEC yield reflects
income earned by the fund, while the distribution rate reflects dividends
actually paid by the fund.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN WILL
VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON.
Here are returns over various periods and a chart showing the growth of an
investment over the fund's lifetime, both with all distributions reinvested and
assuming payment of the 4.75% maximum sales charge at the beginning of the
stated periods. Sales charges are lower for accounts of $25,000 or more.
Average Annual Compound Returns
Periods Ended Periods Ended
8/31/95 9/30/95
Lifetime
(since 10/17/85) +7.83% +7.87%
Five Years +7.30% +7.34%
One Year +3.42% +5.67%
[End Side Bar]
Fellow Shareholders:
U.S. Government Securities Fund rebounded considerably in fiscal 1995, one year
after having its first fiscal year with a negative annual total return.
For the 12 months ended August 31, an investment in the fund gained 8.6% if you
reinvested your monthly dividends totaling $1.015 a share. If you took those
dividends in cash, your income return was 7.7% and the value of your holdings
rose 0.5%.
The fund's total return for the fiscal year was slightly above its own average
annual compound returns of 8.3% for the past five years and 8.4% for its
10-year lifetime. It also far outpaced the inflation rate, as measured by the
Consumer Price Index, which rose 2.6% over the fiscal year.
At the same time, the fund's conservative posture -- particularly at the start
of this reporting period -- limited its results relative to the bond market as
a whole. The fund trailed the unmanaged Lehman Brothers
Government/Mortgage-Backed Securities Index, which climbed 10.9% for the year
with dividends reinvested.
As you may remember, the bond market experienced one of the worst periods in
history during fiscal 1994. In response, we shortened the average maturity of
the fund's portfolio to curb further price declines. By August 31 a year ago,
the average maturity of our holdings was 6.9 years, down from 9.1 in February
'94. Primarily because of this cautious approach, the fund weathered the
difficult year fairly well.
We continued our vigilant stance well into fiscal 1995 but were surprised by
the bond market's rather abrupt recovery beginning last November. The
congressional elections encouraged investors to believe that the federal budget
deficit might ultimately be reduced. Reports of a weakening economy, the
prospects of lower interest rates and a slowdown in consumer spending also
bolstered the long, steady rise in bond prices throughout the spring. We began
to increase the average maturity of our holdings accordingly, raising it from
5.8 years on February 28 to 7.0 years at fiscal year-end. For the rest of the
summer, interest rates fluctuated, at first rising a bit higher but ending the
fiscal year near the 1995 lows.
The back-and-forth trend of recent months demonstrates today's somewhat
uncertain outlook: Will the economy grow slowly or take off? The answer will
have considerable influence on interest rates and the bond market.
For example, if the economy were to expand at a rate of 3.5%, the bond market
likely would be concerned about the potential for higher inflation,
[Pull Quote]
"The fund has proven to be a rewarding long-term investment through a variety
of economic and market conditions."
[End Pull Quote]
the Federal Reserve Board would probably not lower short-term interest rates
anytime soon, and rates in general would be likely to rise. If the economy were
to grow at 2.5%, inflation should remain under control, the Fed might act to
ease short-term credit and the bond market would benefit. Should the economy
grow at 1.5%, the bond market could surge once again as talk about the
likelihood of a recession could induce the Fed to cut interest rates before the
new year.
As always, we will carefully monitor the rate of inflation, the policies of the
Federal Reserve, consumer spending patterns and other developments both here
and abroad that could affect the bond market.
Since its inception on October 17, 1985 -- almost exactly 10 years ago -- U.S.
Government Securities Fund has provided income-oriented, safety-conscious
shareholders with investment stability and a solid return. Its portfolio of
U.S. Treasury securities, government agency paper and government-guaranteed
obligations is subject to interest rate risk and price fluctuations -- but it
remains insulated from the credit risk inherent in corporate bonds.
As you will see in the pages that follow, for shareholders with patience and
perseverance -- particularly those who have invested in the fund since it began
operations a decade ago -- the fund has proven to be a rewarding long-term
investment through a variety of economic and market conditions.
Cordially,
Paul G. Haaga, Jr. Abner D. Goldstine
Chairman of the Board President
October 10, 1995
[Side Bar]
The Funds's Investment Portfolio
August 31, 1995
U.S. Treasuries 60%
GNMAs and Other Mortgage- Backed Securities 29%
Other Federal Obligations 5%
Cash Equivalents 4%
Development Authorities 2%
[End Side Bar]
Long Term
The 10-year history of U.S. Government Securities Fund has offered some
valuable lessons to shareholders: Don't be fazed by day-to-day price
fluctuations. Try not to be distracted by short-lived market trends. Most
important, keep your eyes fixed on the long-term horizon.
This steadfast approach has met with considerable success. Just ask several of
the 2,342 individual shareholders and retirement plan sponsors who invested in
the fund within one year of its launch on October 17, 1985 -- and remain with
the fund to date, including:
- -- Litho Industries, Inc. of Raleigh, North Carolina -- where 22% of the
printing company's 401(k) plan participants made contributions to the fund
this year.
- -- Joaquin and Maria Villalba, who retired to Salinas, California, after
running a grocery store in nearby Castroville for 23 years.
- -- Dr. Jim Rhodes and his wife, Jo Ann, of Cleveland, Texas, who are back in
the veterinary business after a brief career diversion.
[Side Bar]
INVESTING FOR THE LONG TERM IN U.S. GOVERNMENT SECURITIES FUND
Since its inception a decade ago, the fund has been providing long-term
shareholders with a steady stream of income, a modest level of risk and a
solid financial base.
[End Side Bar]
In many of the years following their initial investment, these long-term
shareholders enjoyed attractive investment results amid rising bond prices and
falling interest rates. They also weathered the bond market storm of 1994, when
fears about higher inflation led to rising rates and the wider recognition that
even bonds guaranteed by the U.S. government can decline in value.
Yet by keeping their investments intact over time -- and adding to them
regardless of the bond market's daily moves -- these shareholders have
benefited from a relatively stable income stream. As such, they have looked to
their fund as a reliable resource to help them meet their current needs or, as
part of a broad financial program, produce a return for tomorrow that can help
them keep up with inflation.
INVESTORS FROM THE START
Back in 1985, Litho Industries was faced with the increased demands of growth.
The company needed to purchase larger printing presses and expand its
facilities. It also needed to retain a stable work force. "One of the ways you
do that is by making Litho Industries a good place to work, by providing
employees with competitive benefits," says Herb Wakeford, chief financial
officer, as he tours the massive printing, binding and shipping areas of his
company's newest plant. "So in 1985 we started offering a 401(k) plan featuring
U.S. Government Securities Fund and other American Funds."
Maria and Joaquin Villalba had a dilemma of a different type a decade ago. "For
23 years, we were working in our grocery store in Castroville -- every day,
every day, every day," explains Joaquin, "from eight in the morning to 10 at
night." The Villalbas sold food, gloves, jeans, money orders and practically
everything else to the field workers in California's agricultural San Joaquin
Valley. "We were working too hard," adds Maria, who frequently supplemented her
in-store hours with employment at a cannery in Watsonville, several miles away.
Recognizing the need to relax, the Villalbas sold their grocery and retired at
a relatively young age. On their broker's advice, they put a portion of their
proceeds into U.S. Government Securities Fund. For almost 10 years now, they
have been receiving monthly distributions from the fund and using the steady
income to offset their living and travel expenses.
Jim and Jo Ann Rhodes, on the other hand, have experienced very little down
time since the start of the past decade. They became shareholders
[Photo Caption]
Litho Ind.
Delivering quality printing services requires a stable employee base. Herb
Wakeford, chief financial officer of Litho Industries in Raleigh, North
Carolina (pictured on the opposite page), believes one way to achieve that is
by providing employees with competitive benefits like a 401(k) program that
includes U.S. Government Securities Fund among its investment options. "I may
feel like I need the money now," says Mamie McGhee, a plan participant and fund
shareholder, "but I'm going to need it a whole lot more later on." Pictured on
the right are a few of Mamie's coworkers and fellow shareholders: in the front
row, Faye Nelms and Chester Taybron, with Mamie McGhee in the middle; in the
back row (left to right): Matthew Stewart, Charles Horton and Arnold Shertz,
Litho Industries' owner, president and CEO.
[End Photo Caption]
in the fund in the midst of building a booming veterinary practice that served
the medical needs of pets and livestock in Cleveland, Texas, a rural community
about 50 miles northeast of Houston. However, the stress of the clinic's
success -- particularly the untold number of house calls made in the middle of
the night ("Two a.m. is a mare's favorite time to give birth," jokes Jim) --
eventually blunted the Rhodes' ambitions.
They sold their clinic and Jim spent a few years working for the government as
a livestock inspector. That second career, however, did not offer Jim the
professional joy he experienced as a small-town vet. So the couple recently
decided to start again from scratch, with a smaller, more manageable practice
and a commitment to keeping regular hours. In the meantime, they have been
periodically contributing to their U.S. Government Securities Fund account and
reinvesting their monthly dividends. Eventually, they hope to find an
opportunity to apply their retirement savings to more recreational endeavors.
A LONG-TERM PERSPECTIVE
Keeping a long-term perspective through changing market conditions takes
patience, perseverance and a reasonable understanding of how bonds work.
Bond prices generally change every day. That is because as interest rates
change, the prices of existing bonds, including those issued by the U.S.
government or its agencies, adjust to reflect the new level of prevailing
rates. Bond prices move inversely to interest rates, much like an old-fashioned
seesaw. If interest rates go down, bond buyers are willing to pay more for
existing bonds. Conversely, if rates go up, existing bonds are less attractive
and their prices must fall to match current market yields.
Shareholders who remain in the fund for extended periods, however, learn that
the trade-off for price fluctuations is a relatively stable income stream from
the
[Photo Caption]
Maria
Maria and Joaquin Villalba are enjoying a comfortable retirement in Salinas,
California, with frequent visits by their granddaughters, Victoria (seated) and
Corrie. After 23 years of working long hours in their grocery store, they sold
the business, invested a portion of the proceeds in U.S. Government Securities
Fund, and currently live off the income. They spend a good part of each year in
Madrid, Spain, where their passion for paella is easily satisfied. The recipe?
"Chorizo, camarones, pollo y arroz -- spicy sausage, shrimp, chicken and rice,"
Maria says proudly, "and I use the best olive oil -- from Spain, of course."
[End Photo Caption]
monthly interest paid by the bonds. Of course, this income flow is not fixed;
it changes over time as the bonds in the fund's portfolio are sold and replaced
by new ones with different interest payments.
Price declines -- while they reduce the value of your account -- can also
provide a partially offsetting benefit. This is because shareholders who
reinvest their income dividends are able to obtain additional shares at lower
share prices. And, as Jo Ann Rhodes knows, the interest you earn on interest
over
the years is often the most important part of your total return. "Our broker
said the fund's price would fluctuate and not to worry about it," says Jo Ann.
"If it dropped down really low, we would just be buying more shares with the
dividends we were reinvesting and eventually we could have more shares than
before."
The fund also offers diversification of investment risk over time to
shareholders whose other investments are equity-based. While the prices of both
stocks and bonds fell together in 1994 -- and have sometimes moved up in tandem
- -- there are many years when stocks and bonds move in opposite directions.
[Side Bar]
Who owns U.S. Government Securities Fund?
INDIVIDUALS
Women 5,109
Men 2,076
Joint accounts 5,717
Personal tax-deferred
retirement accounts (including
IRAs and Keoghs) 23,688
Trustees, guardians and custodians 3,997
Total Individuals
(representing assets of $821 million) 40,587
INSTITUIIONS
Pension, profit-sharing and other
employee benefit accounts
(including 401(k) plans) 8,961
Business organizations 318
Educational, religious and charitable
organizations 213
TOTAL INSTITUTIONS
(representing assets of $305 million) 9,492
BROKERAGE ACCOUNTS
(representing assets of $211 million for
both individuals and institutions) 14,241
TOTAL ACCOUNTS 64,320
Source: American Funds Service Company, as of 8/31/95
[End Side Bar]
A SOLID FINANCIAL BASE
What Herb Wakeford of Litho Industries stresses to employees before they decide
to place their 401(k) contributions in U.S. Government Securities Fund or any
of the other American Funds available in their plan is building a solid
financial base. Herb talks about inflation and the precariousness of the Social
Security system in his presentation, and then makes the point that "if you want
to retire early or live well after you retire, you've got to start putting your
money away now." He adds: "Ideally, employees should choose their funds and
stay with them for several years. Otherwise, they will be trying to outguess
the market and will never react fast enough."
Matthew Stewart, a Litho Industries employee and U.S. Government Securities
Fund shareholder, agrees with the idea of keeping a long-term outlook. "Right
now, my 401(k) program is basically the only thing I have going towards my
retirement," says Matthew. "I'm young and I'm working to build a good base from
which to start. U.S. Government Securities Fund provides my family and me with
a good comfort level."
For the Villalbas, the Rhodes and the employees of Litho Industries, investing
for the long term in U.S. Government Securities Fund has enabled them to focus
on more immediate pleasures: their families, careers and retirement.
[Photo Caption]
Dr. Jim
Having left a successful veterinary practice to work briefly for the
government, Dr. Jim Rhodes, and his wife, Jo Ann, of Cleveland, Texas, are
thrilled to be back in the business they both love. While they are building
their second veterinary practice, they are reinvesting the dividends in their
10-year-old U.S. Government Securities Fund account and looking toward
retirement. It's doubtful, though, that Jim will ever fully retire, says Jo
Ann. "He's going to have to go into the clinic at least several days a week. He
just loves being with people and animals, and if he doesn't have that contact,
he's miserable."
[End Photo Caption]
THE AMERICAN FUNDS INCOME SERIES
U.S. GOVERNMENT SECURITIES FUND
INVESTMENT PORTFOLIO AUGUST 31, 1995
<TABLE>
<CAPTION>
Principal Market Percent
Amount Value of Net
(000) (000) Assets
<S> <C> <C> <C>
FEDERAL AGENCY OBLIGATIONS -
MORTGAGE PASS-THROUGHS /1/ - 24.36%
Federal Home Loan Mortgage Corp.:
8.25% 2007 $961 $985 .07%
8.50% 2020-2021 10,995 11,349 .85
8.75% 2008 884 916 .07
9.00% 2010-2021 4,856 5,074 .38
10.50% 2006-2016 1,321 1,436 .11
10.75% 2009-2010 454 496 .04
11.00% 2011-2016 965 1,057 .08
11.50% 2011-2015 626 690 .05
11.75% 2011-2015 721 792 .06
12.00% 2000-2016 7,441 8,240 .62
12.25% 2011-2015 758 839 .06
12.50% 2009-2019 9,075 10,073 .75
13.00% 2010-2014 1,284 1,432 .11
13.50% 2010-2015 383 429 .03
13.75% 2014 52 58 .00
14.00% 2011-2014 246 276 .02
14.50% 2010-2011 41 46 .00
14.75% 2010 79 89 .01
15.00% 2011 76 85 .01
15.50% 2011 87 97 .01
16.00% 2012 61 68 .01
16.25% 2011 128 144 .01
Federal National Mortgage Assn.:
8.00% 2005-2023 6,120 6,246 .47
8.50% 2007-2023 14,587 15,082 1.13
9.00% 2011-2025 6,187 6,453 .48
9.50% 2011 970 1,017 .08
10.00% 2021 923 1,005 .08
11.00% 1999-2015 2,508 2,782 .21
12.00% 2000-2019 2,814 3,115 .23
12.25% 2013-2014 382 424 .03
12.50% 2001-2015 1,644 1,829 .14
12.75% 2012 106 117 .01
13.25% 2011-2014 1,115 1,241 .09
14.00% 2013 115 130 .01
14.50% 2014 15 17 .00
15.00% 2013 19 22 .00
15.50% 2012 48 55 .00
16.00% 2012 28 32 .00
Government National Mortgage Assn.:
5.50% 2023-2024 /2/ 32,538 32,218 2.41
6.00% 2024 /2/ 4,718 4,739 .35
6.125% 2020 /2/ 1,975 2,000 .15
7.00% 2008-2024 33,432 33,011 2.47
7.50% 2022-2025 35,754 35,991 2.69
8.00% 2023 1,591 1,630 .12
8.50% 2020-2025 52,798 54,857 4.10
9.00% 2011-2022 17,138 17,970 1.34
9.50% 2016-2025 12,177 12,894 .96
9.75% 1999-2012 3,347 3,473 .26
10.00% 2016-2019 3,853 4,192 .31
10.25% 2012 353 369 .03
10.50% 2015-2019 4,654 5,133 .38
11.00% 2009-2020 7,972 8,878 .66
11.25% 2001-2016 4,273 4,527 .34
11.50% 2000-2014 1,879 2,108 .16
11.75% 2000-2015 559 595 .04
12.00% 1999-2019 4,475 4,965 .37
12.25% 2013-2015 593 661 .05
12.50% 2010-2015 3,199 3,608 .27
12.75% 2013-2015 714 785 .06
13.00% 2011-2015 2,661 2,980 .22
13.25% 2013-2015 448 490 .04
13.50% 2010-2015 1,508 1,693 .13
14.00% 2011-2014 374 415 .03
14.50% 2012-2014 439 495 .04
15.00% 2011-2013 768 873 .07
16.00% 2011-2012 44 51 .00
--------- ---------
325,839 24.36
--------- ---------
FEDERAL AGENCY OBLIGATIONS - OTHER - 3.88%
FNSM Callable Principal STRIPS:
0%/8.25% 2022 /3/ 2,000 1,565 .12
0%/8.62% 2022 /3/ 4,500 3,731 .28
Federal Home Loan Bank Bonds 6.00% 1996 10,000 9,880 .74
Federal Home Loan Bank Notes 6.41% 2003 5,000 4,848 .36
Federal Home Loan Mortgage Notes 6.19% 2004 5,000 4,782 .36
Federal Home Loan Mortgage Notes 6.27% 2004 7,000 6,733 .50
Federal Home Loan Mortgage Notes 6.59% 2003 5,000 4,887 .37
Federal Home Loan Mortgage Notes 6.60% 2003 4,000 3,914 .29
Federal National Mortgage Assn. Notes 6.30%
1997 10,000 9,981 .75
Federal National Mortgage Assn. Notes 6.40%
2004 1,500 1,446 .11
--------- ---------
51,767 3.88
--------- ---------
U. S. GUARANTEED OBLIGATIONS - OTHER - 1.01%
Big Rivers Electrical Corp. 10.70% 2017 12,000 13,508 1.01
--------- ---------
COLLATERALIZED MORTGAGE OBLIGATIONS/1/ - 4.76%
Federal Home Loan Mortgage Corp.:
Series 1625, Class SC, 4.6077463% 2008 /4/ 6,233 3,338 .25
Series 1625, Class SG, 4.6076916% 2008 /4/ 2,178 1,310 .10
Series 1659, Class SA, 5.2116109% 2009 /4/ 2,500 1,571 .12
Series 1673, Class SA, 4.3658834% 2024 /4/ 2,000 737 .06
Series 1716, Class A, 6.50% 2009 10,586 10,215 .76
Series 83-A, Class 3, 11.875% 2013 301 322 .02
Series 83-B, Class 3, 12.50% 2013 2,577 2,809 .21
Federal National Mortgage Assn.:
Trust 35, Class 2, 12.00% 2018 851 949 .07
Trust 90-93, Class G, 5.50% 2020 3,600 3,302 .25
Trust 91-50, Class H, 7.75% 2006 4,000 4,111 .31
Trust 91-65, Class X, 6.50% 2019 26,030 24,240 1.81
Trust 91-146, Class Z, 8.00% 2006 6,109 6,281 .47
Trust G93-19, Class SJ, 0.8823505% 2023 /4/ 436 165 .01
Trust 93-43, Class SA, 8.917093% 2008 /4/ 620 480 .04
Trust 93-120, Class SB, 7.6456446% 2023 /4/ 4,000 2,276 .17
Trust 93-120, Class SN, 7.6098321% 2023 /4/ 3,233 1,527 .11
--------- ---------
63,633 4.76
--------- ---------
DEVELOPMENT AUTHORITIES - 1.91%
International Bank for Reconstruction and
Development:
14.90% May 1997 5,000 5,713 .43
12.25% December 2008 2,000 2,930 .22
8.875% June 2009 14,000 16,866 1.26
--------- ---------
25,509 1.91
--------- ---------
U. S. TREASURY OBLIGATIONS - 60.04%
11.50% November 1995 77,500 78,396 5.86
7.875% February 1996 40,000 40,388 3.02
9.375% April 1996 50,000 51,093 3.82
8.00% January 1997 53,000 54,540 4.09
9.00% May 1998 31,000 33,340 2.49
9.25% August 1998 13,500 14,681 1.10
7.00% April 1999 8,500 8,755 .65
9.125% May 1999 13,000 14,310 1.07
7.75% November 1999 11,000 11,676 .87
8.50% November 2000 12,000 13,260 .99
8.00% May 2001 5,500 5,990 .45
13.125% May 2001 39,000 52,016 3.89
13.375% August 2001 22,500 30,526 2.28
15.75% November 2001 5,500 8,179 .61
14.25% February 2002 39,000 55,532 4.15
11.625% November 2002 38,000 49,774 3.72
11.625% November 2004 8,500 11,579 .87
7.50% February 2005 30,000 32,428 2.42
10.75% August 2005 10,000 13,161 .98
10.375% November 2009 22,500 28,515 2.13
12.75% November 2010 10,000 14,617 1.09
13.875% May 2011 8,000 12,488 .93
10.375% November 2012 33,000 43,292 3.24
12.00% August 2013 12,000 17,569 1.31
12.50% August 2014 12,000 18,341 1.37
11.25% February 2015 3,500 5,217 .39
8.875% August 2017 67,500 83,573 6.25
--------- ---------
803,236 60.04
--------- ---------
Total Bonds and Notes (cost:$1,285,248,000) 1,283,492 95.96
--------- ---------
SHORT-TERM SECURITIES
Commercial Paper - 2.89%
Ford Motor Credit Co. 5.79% due 9/5/95 8,500 8,493 .64
Ford Motor Credit Co. 5.74% due 9/7/95 10,000 9,989 .75
General Electric Capital Corp. 5.82 due 9/1/95 20,100 20,097 1.50
--------- ---------
38,579 2.89
--------- ---------
TOTAL SHORT-TERM SECURITIES (COST:$38,579,000) 38,579 2.89
--------- ---------
TOTAL INVESTMENT SECURITIES (COST:$1,323,827,000) 1,322,071 98.85
Excess of cash and receivables over payable 15,385 1.15
--------- ---------
NET ASSETS 1,337,456 100.00%
--------- ---------
</TABLE>
/1/ 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.
/2/ Coupon rate changes periodically.
/3/ Represents zero coupon bond which will convert to a coupon-bearing security
at a later date.
/4/ Represents an inverse floater, which is a floating rate note whose interest
rate moves in the opposite direction of prevailing interest rates.
See Notes to Financial Statements
THE AMERICAN FUNDS INCOME SERIES
U.S. GOVERNMENT SECURITIES FUND
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
at August 31, 1995 (dollars in thousands)
- ---------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS:
Investment securities at market
(COST: $1,323,827) $1,322,071
Cash 8
Receivables for-
Sales of investments $ 552
Sales of fund's shares 2,510
Accrued interest 18,689 21,751
------------ ------------
1,343,830
LIABILITIES:
Payables for-
Purchases of investments 1,089
Repurchases of fund's shares 1,149
Dividends payable 3,038
Management services 466
Accrued expenses 632 6,374
------------ ------------
NET ASSETS AT AUGUST 31, 1995-
EQUIVALENT TO $13.24 PER SHARE ON
101,015,638 SHARES OF BENEFICIAL
INTEREST ISSUED AND OUTSTANDING;
UNLIMITED SHARES AUTHORIZED $1,337,456
=============
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995 (dollars in thousands)
------------ ------------
INVESTMENT INCOME:
Income:
Interest $ 113,599
Expenses:
Management services fee 5,575
Distribution expenses 3,425
Transfer agent fee 992
Reports to shareholders 102
Registration statement and prospectus 40
Postage, stationery and supplies 136
Trustees' fees 30
Auditing and legal fees 45
Custodian fee 56
Taxes other than federal income tax 27 10,428
------------ ------------
Net investment income 103,171
------------
REALIZED LOSS AND UNREALIZED
DEPRECIATION ON INVESTMENTS:
NET REALIZED LOSS (27,960)
Net change in unrealized
depreciation on investments:
Beginning of year (35,444)
End of year (1,756)
------------
Net change in unrealized depreciation
on investments 33,688
------------
NET REALIZED LOSS AND CHANGE IN
unrealized depreciation on investments 5,728
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $108,899
============
Statement of Changes in Net
Assets (dollars in thousands)
- ---------------------------------------- ------------- -------------
Year ended Year ended
8/31/95 8/31/94
OPERATIONS: ------------- -------------
Net investment income $ 103,171 $ 109,861
NET REALIZED LOSS ON INVESTMENTS (27,960) (8,805)
NET CHANGE IN UNREALIZED DEPRECIATION
on investments 33,688 (159,327)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
resulting from operations 108,899 (58,271)
------------- -------------
DIVIDENDS PAID TO SHAREHOLDERS (103,274) (109,394)
------------- -------------
Capital Share Transactions:
Proceeds from shares sold:
20,239,785 AND 25,313,467
shares, respectively 262,458 354,749
Proceeds from shares issued in
reinvestment of net investment income
dividends: 5,562,854 and 5,527,860
shares respectively 72,131 76,780
Cost of shares repurchased:
28,920,071 and 34,055,830
shares, respectively (375,402) (472,436)
------------- -------------
NET DECREASE IN NET ASSETS RESULTING
from capital share transactions (40,813) (40,907)
------------- -------------
TOTAL DECREASE IN NET ASSETS (35,188) (208,572)
NET ASSETS:
Beginning of year 1,372,644 1,581,216
------------- -------------
End of year (including undistributed
net investment income of $2,502 and
$2,605, RESPECTIVELY) $1,337,456 $1,372,644
============= =============
</TABLE>
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. The American Funds Income Series (the "trust") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company and has initially issued one series of shares, U.S.
Government Securities Fund (the "fund"). 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 the mean of such
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. The maturities of variable or floating rate
instruments are deemed to be the time remaining until the next interest rate
adjustment date. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith by the Valuation
Committee of the Board of Trustees.
As is customary in the mutual fund industry, securities transactions are
accounted for on the date the securities are purchased or sold. 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 are
declared on a daily basis after the determination of the fund's net asset value
and are paid to shareholders on a monthly basis.
Pursuant to the custodian agreement, the fund receives credit against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $56,000 includes $27,000 that was paid with 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 taxable income, including any net realized gain on
investments not offset by loss carryforwards, to its shareholders. Therefore,
no federal income tax provision is required.
As of August 31, 1995, net unrealized depreciation on investments for book and
federal income tax purposes aggregated $1,756,000, of which $20,998,000 related
to appreciated securities and $22,754,000 related to depreciated securities.
During the year ended August 31, 1995, the fund realized, on a tax basis, a net
capital loss of $27,960,000 on securities transactions. The fund has available
at August 31, 1995 a net capital loss carryforward totaling $55,673,000 which
may be used to offset capital gains realized during subsequent years through
2002 and thereby relieve the fund and its shareholders of any federal income
tax liability with respect to the capital gains that are so offset. It is the
intention of the fund not to make distributions from capital gains while there
is a capital loss carryforward. The cost of portfolio securities for book and
federal income tax purposes was $1,323,827,000 at August 31, 1995.
3. The fee of $5,575,0000 for management services was paid pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the trust are affiliated. The Investment
Advisory and Service Agreement provides for monthly fees, accrued daily, based
on an annual rate of 0.30% of the first $60 million of average net assets;
0.21% of such assets in excess of $60 million but not exceeding $1 billion;
0.18% of such assets in excess of $1 billion but not exceeding $3 billion; and
0.16% of such assets in excess of $3 billion; plus 3.00% on the first
$3,333,333 of the fund's monthly gross investment income; 2.25% of the next
$5,000,000 of such income; and 2.00% of such income in excess of $8,333,333.
Pursuant to a Plan of Distribution, the fund may expend up to 0.30% of its
average net assets annually for any activities primarily intended to result in
sales of fund shares, provided the categories of expenses for which
reimbursement is made are approved by the trust's Board of Trustees. Fund
expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended August 31, 1995,
distribution expenses under the Plan were $3,424,000. As of August 31, 1995,
accrued and unpaid distribution expenses were $684,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $992,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $662,000 (after allowances to
dealers) as its portion of the sales charges paid by purchasers of the fund's
shares. Such sales charges are not an expense of the fund and, hence, are not
reflected in the accompanying statement of operations.
Trustees who are unaffiliated with CRMC may elect to defer part or all of the
fees earned for services as members of the board. Amounts deferred are not
funded and are general unsecured liabilities of the fund. As of August 31,
1995, aggregate amounts deferred were $19,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain of the Trustees and officers of the
trust are or may be considered to be affiliated with CRMC, AFS and AFD. No
such persons received any remuneration directly from the fund.
4. As of August 31, 1995, accumulated undistributed net realized loss on
investments was $79,914,000 and paid-in capital was $1,416,624,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $583,215,000 and $613,355,000, respectively, during
the year ended August 31, 1995.
PER-SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
Year Ended August 31
-------- -------- -------- --------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year...................... $13.18 $14.73 $14.13 $13.57 $13.25
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income....... 1.01 1.03 1.07 1.18 1.22
Net realized and unrealized
gain (loss) on investments. 0.06 (1.56) .61 .53 .37
Total income from -------- -------- -------- -------- --------
investment operations................ 1.07 (0.53) 1.68 1.71 1.59
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment
income...................... (1.01) (1.02) (1.08) (1.15) (1.27)
-------- -------- -------- -------- --------
Net Asset Value, End of Year.. $13.23 $13.18 $14.73 $14.13 $13.57
======== ======== ======== ======== ========
==
Total Return*................. 8.60% (3.72%) 12.44% 13.05% 12.34%
Ratios/Supplemental Data:
Net assets, end of year (in
millions)................... $1,337 $1,373 $1,581 $1,328 $1,018
Ratio of expenses to average
net assets.................. .79% .78% .83% .88% .95%
Ratio of net income to
average net assets.......... 7.79% 7.35% 7.54% 8.63% 9.07%
Portfolio turnover rate...... 46.77% 71.58% 35.24% 44.81% 53.40%
</TABLE>
* This was calculated without deducting a sales charge. The maximum sales
charge is 4.75% of the fund's offering price.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of The
American Funds Income Series - U.S. Government
Securities Fund:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of The American Funds Income Series - U.S.
Government Securities Fund as of August 31, 1995, 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 the 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 the 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 August 31, 1995 by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of The American Funds Income Series - U.S. Government Securities Fund
at August 31, 1995, and the results of its operations for the year then ended,
the changes in its net assets for each of the two years then ended, and the
per-share data and ratios for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
September 22, 1995
TAX INFORMATION (Unaudited)
We are required to advise you within 60 days of the fund's fiscal year-end
regarding the federal tax status of distributions.
Certain states may exempt from income taxation a portion of the dividends paid
from net invstment income if derived from direct U.S. Treasury obligations.
For purposes of computing this exclusion, 67% of the dividends paid by the fund
from net investment income was derived from interest on direct U.S. Treasury
obligations.
Dividends received by retirement plans such as IRAs, Keogh-type plans, and
403(b) plans need not be reported as taxable income. However, many retirement
trusts may need this information for their annual information reporting.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FISCAL YEAR AND NOT A CALENDAR
YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION
WHICH WILL BE MAILED IN JAUNARY 1996 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO
BE INCLUDED ON THEIR RESPECTIVE 1995 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
BOARD OF TRUSTEES
H. FREDERICK CHRISTIE
Palos Verdes Estates, California
Private investor; former President and
Chief Executive Officer, The Mission Group; former President,
Southern California Edison Company
DIANE C. CREEL
Long Beach, California
Chairwoman, Chief Executive Officer and
President, The Earth Technology Corporation
MARTIN FENTON, Jr.
San Diego, California
Chairman of the Board,
Senior Resource Group, Inc.
(senior living centers management)
LEONARD R. FULLER
Los Angeles, California
President, Fuller & Company, Inc.
(financial management consulting firm)
ABNER D. GOLDSTINE
Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR.
Los Angeles, California
Chairman of the Board of the fund
Senior Vice President and Director,
Capital Research and Management Company
HERBERT HOOVER III
Pasadena, California
Private investor
RICHARD G. NEWMAN
Los Angeles, California
Chairman of the Board, President and Chief Executive Officer,
AECOM Technology Corporation
(architectural engineering)
PETER C. VALLI
Long Beach, California
Chairman of the Board and Chief Executive Officer, BW/IP International, Inc.
(industrial manufacturing)
OTHER OFFICERS
MARY C. CREMIN
Brea, California
Vice President and Treasurer of the fund
Senior Vice President -- Fund Business Management Group,
Capital Research and Management Company
MICHAEL J. DOWNER
Los Angeles, California
Vice President of the fund
Senior Vice President -- Fund Business Management Group,
Capital Research and Management Company
JOHN H. SMET
Los Angeles, California
Vice President of the fund
Vice President,
Capital Research and Management Company
JULIE F. WILLIAMS
Los Angeles, California
Secretary of the fund
Vice President -- Fund Business Management Group,
Capital Research and Management Company
KIMBERLY S. VERDICK
Los Angeles, California
Assistant Secretary of the fund
Compliance Associate -- Fund Business Management Group,
Capital Research and Management Company
ANTHONY W. HYNES, JR.
Brea, California
Assistant Treasurer of the fund
Vice President -- Fund Business Management Group,
Capital Research and Management Company
OFFICES OF THE FUND AND OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92621-5804
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
P.O. Box 2205
Brea, California 92622-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Morrison & Foerster
345 California Street
San Francisco, California 94104-2675
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR SECURITIES DEALER OR FINANCIAL PLANNER, OR CALL THE FUND'S
TRANSFER AGENT, TOLL-FREE, AT 800/421-0180.
This report is for the information of shareholders of U.S. Government
Securities Fund, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after December 31, 1995, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Litho in USA AGD/AL/2702
Lit. No. GVT-011-1095
Printed on recycled paper
[The American Funds Group (R)]
