[THE AMERICAN FUNDS GROUP(R)]
U.S. GOVERNMENT SECURITIES FUND
Annual Report for the year ended August 31, 1997
Nearly half of your fund's holdings are concentrated in high-quality U.S.
Treasury obligations. Managing these "plain vanilla" government bonds is a
challenging, complex task, demanding thorough research and a broad base of
knowledge and expertise.
[illustrations: U.S. Government Treasury Building, scale, and various graphs]
U.S. GOVERNMENT SECURITIES FUND(SM) seeks high current income, consistent with
prudent investment risk and preservation of capital, by investing primarily in
obligations backed by the full faith and credit of the United States
government.
U.S. GOVERNMENT SECURITIES FUND is one of the 28 mutual funds in The American
Funds Group,(R) managed by Capital Research and Management Company. Since 1931,
Capital has invested with a long-term focus based on thorough research and
attention to risk.
RESULTS AT A GLANCE
(as of August 31, 1997, excluding payment of the 4.75% maximum sales charge)
TOTAL RETURNS
(at net asset value with all distributions reinvested)
ONE YEAR +9.1%
LIFETIME (since October 17, 1985) +149.2%
(8.0% annualized)
30-DAY DISTRIBUTION RATE 6.44%
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of September 30, 1997,
calculated in accordance with the Securities and Exchange Commission formula,
was 5.57%. The fund's distribution rate as of that date was 6.12%. The SEC
yield reflects income the fund expects to earn based on its current holdings,
while the distribution rate is based solely on the fund's past dividends.
Accordingly, the fund's SEC yield and distribution rate may differ.
Here are the fund's average annual compound returns over various periods, 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.
Periods Ended
8/31/97 9/30/97
$scal year-end latest calendar quarter
10 YEARS +7.52% +7.95%
5 YEARS +4.79% +4.74%
1 YEAR +3.88% +3.58%
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.
FELLOW SHAREHOLDERS:
In a year of moderate price fluctuation in the bond market, U.S.
Government Securities Fund continued to provide shareholders with a steady
stream of current income as well as an increase in share value.
For the 1997 fiscal year ended August 31, the fund paid monthly dividends
totaling 88 cents a share. That represents an income return of 7.1% for
shareholders who reinvested those dividends in additional shares, and 6.9% for
those who took their dividends in cash.
With yields at the end of the year below those at the start, the fund's
share price recorded a gain. (When interest rates decline, bond prices
typically rise, and vice versa.) Net asset value rose to $13.03 a share from
$12.78 a year earlier, contributing to a total return (dividends plus
appreciation) of 9.1% on a reinvested basis. That outpaced the 8.9% average
return of the 181 U.S. government funds tracked by Lipper Analytical Services.
The unmanaged Lehman Brothers Government/Mortgage-Backed Securities Index rose
9.8% with interest compounded.
This year's increase brings the fund's total return since it began
operations on October 17, 1985 to 149.2% with dividends reinvested - an average
annual compound return of 8.0%.
THE YEAR IN REVIEW
Bond prices advanced in fiscal 1997 but not without dips along the way.
Yields ebbed and flowed in a sea of economic data as investor perceptions of
potential inflationary pressures shifted between pessimism and optimism. In
March, unexpectedly strong economic growth led the Federal Reserve Board to
tighten monetary policy by raising a key short-term interest rate. Although
bond prices fell sharply on the move, they rebounded throughout the summer as
mounting evidence pointed to benign inflation for the foreseeable future.
FUND HIGHLIGHTS
In keeping with its emphasis on the highest quality bonds, U.S. Government
Securities Fund limits its investment universe to obligations issued or
guaranteed by the U.S. Treasury and federal agencies. Even within these
parameters, however, the fund is well-diversified, with bonds across a wide
spectrum of maturities and coupons.
Nearly 40% of net assets was held in mortgage-backed securities. These
instruments, which typically pay higher rates than Treasuries, helped enhance
both the fund's income return and total results.
The major challenge of managing mortgage-backed securities is trying to
anticipate when investors could benefit from, or be hurt by, early principal
payments of the underlying mortgages. Your fund's investment professionals
spend considerable time trying to predict when those prepayments might occur.
That research has led to sizable investments in older, "seasoned" mortgages,
which are less likely to be refinanced. We have recently purchased a number of
adjustable-rate mortgage securities and expect these loans - whose coupons
adjust with changes in interest rates - to be somewhat less volatile than their
fixed-rate counterparts.
The lion's share of the portfolio - about 45% of net assets - remains
invested in longer term U.S. Treasury securities. In January, the U.S. Treasury
issued its first inflation-indexed securities. We have made modest investments
in these instruments and are monitoring their progress carefully. An article
about the important role U.S. Treasury bonds play in helping meet the
objectives of the fund follows this letter.
In the first half of the year, we shortened the fund's average maturity in
an effort to cushion it from possible interest rate increases. (The longer a
bond's maturity, the more its price tends to rise and fall in response to
interest rate fluctuations.) To that end, we increased our position in
short-term instruments to 8% of net assets, double what it was last August. At
the close of the year, the fund's average effective maturity was 6.5 years,
down from 7.8 years 12 months ago.
LOOKING FORWARD
Despite a business expansion that has put pressure on manufacturing
capacity and tightened labor markets, inflationary pressures appear to be in
check. Consumer prices have risen only slightly, while wholesale prices dropped
for seven consecutive months (from January to July), the longest streak of
producer-price deflation in 50 years. Explanations vary, but include rising
productivity, global competition and the flexibility to tap labor resources on
a worldwide basis. With the U.S. economy in a remarkable "sweet spot," the
favorable bond environment could continue.
Other factors are also at work. Many investors are looking to bonds as
U.S. stock prices continue to surge. The dollar's continued strength could
sustain demand for government issues among foreign investors. Finally, a lower
budget deficit could slow new bond issuance by the government, making existing
Treasuries more attractive.
At the same time, managing your fund in an economic environment without
precedent has presented us with many new challenges. Although we remain
cautiously optimistic, we know that the current economic boom will not last
indefinitely. With that in mind, we continue to make investment decisions we
believe will best serve your long-term interests.
We look forward to reporting to you in six months.
Cordially,
[/s/ Paul G. Haaga, Jr.] [/s/ Abner D. Goldstine]
Paul G. Haaga, Jr. Abner D. Goldstine
Chairman of the Board President
October 15, 1997
[begin chart]
CHARTING A $10,000 INVESTMENT IN U.S. GOVERNMENT SECURITIES FUND (FOR THE
PERIOD OCTOBER 17, 1985 TO AUGUST 31, 1997 WITH DIVIDENDS REINVESTED)
$28,307 /1/ Lehman Brothers Government/Mortgage-Backed Securities Index
Index since October 31, 1985.
$23,739 /1/ /2/ U.S. Government Securities Fund
The fund began operations on October 17, 1985.
$14,793 /3/ Consumer Price Index (inflation)
Index since October 31, 1985.
$10,000 original investment
<TABLE>
<CAPTION>
Year Lehman Brothers US Government Consumer Price
Ended Government/ Securities Index (inflation)
Aug. 31 Mortgage-Backed Fund Index since Oct.
Securities The fund began 31, 1985
Index since operations
Oct. 31, 1985 on Oct. 17, 1985
<S> <C> <C> <C>
10/17/85 $9,525 10,000 10,000
1986 10,779 11,890 10,092
1987 10,953 12,028 10,524
1988 11,873 13,014 10,948
1989 13,040 14,714 11,463
1990 14,097 15,814 12,107
1991 15,837 18,109 12,567
1992 17,904 20,488 12,962
1993 20,130 22,634 13,321
1994 19,380 22,324 13,707
1995 21,048 24,760 14,066
1996 21,763 25,791 14,471
1997 23,739 28,307 14,793
</TABLE>
/1/ With dividends reinvested or interest compounded.
/2/ This $gure, unlike those shown elsewhere in this report, reflects payment
of the maximum sales charge of 4.75% on the $10,000 investment. Thus, the net
amount invested was $9,525. There is no sales charge on dividends or capital
gain distributions that are reinvested in additional shares. No adjustment has
been made for income or capital gain taxes.
/3/ Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
The indexes are unmanaged and do not reflect sales charges, commissions or
expenses.
Past results are not predictive of future results.
[end chart]
A QUALITY ISSUE:
UNDERSTANDING U.S. TREASURY SECURITIES
[illustration: U.S. Government Treasury building]
True to its name, a considerable portion of U.S. Government Securities Fund is
concentrated in Treasury securities of various maturities. These issues, which
make up nearly half of the fund's net assets, form a critical, high-quality
anchor for the fund's investments.
U.S. Treasury securities are backed by the full faith and credit of the
U.S. government, making them the safest securities in the world in terms of
credit risk. Nonetheless, managing a portfolio of these "plain vanilla" bonds
is a complex task that requires a broad base of research and expertise. It
demands an understanding of financial and economic developments, knowledge of
fiscal and monetary policies and a perspective on stock and bond markets around
the world. The investment professionals who manage your fund are more than up
to the challenge.
In the next few pages, we invite you to become better acquainted with the
world of U.S. Treasury obligations and how we use these top-grade instruments
to help meet the objectives of U.S. Government Securities Fund.
THE MARKETPLACE FOR U.S. TREASURIES
[Sidebar]
Investors in U.S. Treasuries lend money to the government in exchange for an
agreed-upon rate of interest. The original loan, or "principal," is returned at
a specified "maturity" date.
[End sidebar]
The seeds of our national debt were planted in 1789, little more than a
decade after the United States became a nation. In July of that year, the newly
formed Department of the Treasury issued its first bond, borrowing $400,000 to
finance, among other things, the first official U.S. delegation to Europe.
[illustration: U.S. Government Treasury building with dollar bills moving in
and out of building, "IOU" sign on top of building]
Today, the United States is the world's largest single issuer of debt,
with $3.7 trillion in Treasury securities outstanding. The sheer volume of debt
and the large size of individual issues have helped make the market for
Treasury bonds the most active and liquid in the world.
What do these loans pay for? Although securities are generally not
earmarked for specific purposes, investors in Treasuries help the U.S.
government meet budget shortfalls, pay interest on existing debt and finance a
multitude of federal projects. In return, lenders receive steady income, the
comfort of a government guarantee on payment of both principal and income, and
exemption from most state and local income taxes.
These securities play another prominent role for investors. Interest rates
on Treasuries serve as the benchmark interest rate throughout the U.S. economy,
as well as in many international capital markets.
INVESTING IN TREASURY SECURITIES
Most U.S. Treasuries are first brought to market at regularly scheduled
auctions for issues of specific maturities. Participants in these auctions -
primarily large commercial banks and investment banking firms - submit bids,
which are expressed as yields (the lowest yield equals the highest price).
The U.S. Treasury offers a broad spectrum of securities across a variety
of maturities. Those with original maturities of a year or less are sold as
Treasury bills; those with original maturities between two and 10 years are
called Treasury notes; while those with original maturities greater than 10
years are known as Treasury bonds. Both notes and bonds pay interest every six
months, plus principal at maturity. (Treasury bills, on the other hand, pay a
one-time fixed amount at maturity.)
After the auctions, Treasuries are actively traded in a secondary market
by securities dealers who specialize in U.S. government obligations. This
secondary market is primarily where the investment professionals who manage
U.S. Government Securities Fund - portfolio counselors, research analysts and
traders - look for attractive Treasury opportunities for the fund.
Purchasing these securities requires intimate knowledge of the market.
U.S. Treasuries, even those of similar maturities, offer slightly different
yields and total return opportunities. Investors may choose between "on the
run" securities, which are the most recently issued securities in that general
maturity range, and "off the run" (or previously outstanding) issues, which
tend to be less actively traded but which may offer better value or a higher
yield. Certain broad characteristics, such as "call" provisions (which allow
the Treasury to redeem outstanding bonds before their specified maturities),
can create opportunities for adding value and improving results.
Your fund's investment professionals search throughout the vast Treasury
market to find the best values for shareholders. Factors such as yield and
potential liquidity (the ability to be bought and sold easily) are carefully
evaluated before any decisions are made.
[Sidebar]
WHO OWNS U.S. TREASURIES?
Investors include individuals seeking income to meet current expenses,
retirement plan participants who want to compound income for the future, and
buyers from other countries looking for dollar-denominated investments offering
higher yields.
[pie chart]
Investors based outside the U.S.: 33%
Individual households: 15%
Other: 11%
Public and private pension funds: 13%
Federal Reserve Bank: 11%
Banks and other financial institutions: 9%
Mutual funds: 8%
Figures as of June 30, 1997.
Source: Federal Reserve Board, flow of funds data.
[end chart]
[End sidebar]
THE EFFECT OF INTEREST RATES
The "price," or market value, of outstanding Treasury obligations
continuously changes with changes in the interest-rate environment. Since the
securities pay a fixed rate of interest, the value of a bond goes up if current
rates are moving lower, and declines if current rates are moving higher.
The maturity of a bond plays a critical part in evaluating the effects of
interest rate changes. Typically, the longer a bond's maturity - that is, the
longer it will continue to pay interest to investors - the greater the impact a
rise or decline in interest rates will have on the price it can fetch in the
market. Longer term issues normally pay somewhat higher yields to compensate
for that greater risk.
[illustration: scale]
[Sidebar] Many factors can affect the market value of Treasuries, including
interest rate changes, monetary policy and world politics. [End sidebar]
STUDYING THE YIELD CURVE
The yield curve shows the relationship at a given time among interest
rates on comparable instruments through all maturity ranges. Changes in the
shape of the curve give the fund's investment professionals "snapshots" of
investor convictions about the health of the economy, the future direction of
interest rates and the likelihood of inflation. Here are examples in recent
years of yield curves on Treasuries with maturities ranging from three months
to 30 years.
[line graph]
<TABLE>
<CAPTION>
Maturity Yield
8/29/97
<S> <C>
3 month 5.215
6 month 5.368
1 year 5.559
2 year 5.959
3 year 6.081
5 year 6.221
10 year 6.339
30 year 6.611
</TABLE>
[end line graph]
NORMAL CURVE (8/29/97)
This was the yield curve at the end of the fund's fiscal year. The relatively
steady upward curve at the short-term end, and the flatness as maturities
extend, reflect investor beliefs that, despite a robust U.S. economy, inflation
will not be a concern for the foreseeable future.
[line graph]
<TABLE>
<CAPTION>
<S> <C>
Maturity Yield
10/15/92
3 month 2.972
6 month 3.099
1 year 3.236
2 year 3.999
3 year 4.492
5 year 5.529
10 year 6.526
30 year 7.507
</TABLE>
[end line graph]
STEEP CURVE (10/15/92)
The Federal Reserve Board keeps short-term rates low to help stimulate a weak
economy. Sharply higher long-term rates reflect investor convictions that a
recovery could cause inflation to become a problem in the future.
[line graph]
<TABLE>
<CAPTION>
Maturity Yield
3/15/89
<S> <C>
3 month 8.990
6 month 9.216
1 year 9.484
2 year 9.585
3 year 9.545
5 year 9.421
10 year 9.303
30 year 9.116
</TABLE>
[end line graph]
INVERTED CURVE (3/15/89)
To cool a booming economy, the Fed raises rates sharply on short-term
instruments to a level above yields on longer instruments. The move helps send
the U.S. into a brief recession, leading investors to believe that, with little
threat of inflation, long-term rates will stay low for some time.
Source: Bloomberg
Professional management can help moderate interest rate risk. Your fund's
portfolio counselors study the yield curve (see above), which provides
important clues about potential price fluctuations. In addition to trying to
anticipate changes in its shape, they look for the part of the curve where
maturities can provide the most attractive combination of income and potential
total return for a given exposure to risk.
The fund's investment professionals also devote a great deal of effort to
studying those factors that could affect the outlook for interest rates. That
research includes analyzing economic data on a global basis, keeping a close
watch on monetary policy and monitoring legislative activity in Washington.
[illustration: various graphs]
BUILDING A TREASURY PORTFOLIO
As you can see in the listing on pages 10 and 11, U.S. Government
Securities Fund holds nearly two dozen U.S. Treasury obligations. Maturities
are in the medium- to long-term range - five to 30 years - and their coupons
pay from slightly over 3% for newly created inflation-indexed bonds to nearly
14% for 30-year bonds issued in the early 1980s. (The fund also holds a small
number of short-term Treasury bills.) This diverse portfolio was built one
security at a time by the fund's four experienced portfolio counselors, who
thoroughly considered each security's potential to add value (see example
below) before investing in it. Because the fund takes a conservative approach,
their investment decisions must strike a fine balance between seeking
attractive yield and protecting the value of your investment.
Of course, as the rest of the portfolio listings show, U.S. Treasuries
tell only one part of the U.S. Government Securities Fund story. Your fund also
holds other types of securities - mortgage-backed securities, short-term
instruments and other agency obligations. Together, these top-quality
investments have provided safety-conscious investors with a steady stream of
income and a solid foundation for their long-term financial goals.
[Sidebar}
A LOOK AT ONE OF THE FUND'S TREASURY HOLDINGS: 7.25% MAY 2004
This 10-year bond was first issued in May 1994 during a robust U.S.
economy. Bond prices were in a severe decline that reached its nadir in
November 1994, when yields on 10-year Treasury bonds climbed to 8.0%.
We made our first, small investment in this bond in early 1996, when
interest rates on 10-year Treasuries were slightly below 6%. Since then, we
have used a cautious strategy to add to our position when periods of higher
interest rates presented favorable buying opportunities. In addition to
providing generous current income, we believe this bond will prove to be an
attractive part of the fund's portfolio.
U.S. TREASURY OBLIGATIONS - 44.98%
7.25% - The interest rate paid on the principal amount.
May 2004 - The date the bond "matures" - that is, when it stops paying interest
and returns the principal amount.
Principal Amount (000) - $52,000 - The amount scheduled to be returned to the
lender (or investor) when the bond "matures." The principal amount often
differs from what the fund paid, particularly if the bond was purchased some
time after it was originally issued.
Market Value (000) - The market value of the security - what it was worth at
the fund's fiscal year-end - $54,608
Percent of Net Assets - The percentage of the portfolio, based on market value,
made up by this particular issue - 4.94%
[End sidebar]
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 1997
<S> <C> <C> <C> <C>
[pie chart]
U.S. Treasuries 45%
GNMAs and Other Mortgage-Backed Securities 40%
Other Federal Obligations 5%
Development Authorities 1%
Cash & Equivalents 9%
[end pie chart]
Principal Market Percent
Amount Value of Net
(000) (000) Assets
Federal Agency Obligations -
Mortgage Pass-Throughs (1) - 33.41%
Federal Home Loan Mortgage Corp.:
8.25% 2007 $ 657 $ 677
8.50% 2009-2021 14,442 15,136
8.75% 2008 608 634
9.00% 2010-2021 5,634 5,985
10.50% 2006-2016 760 834
10.75% 2009-2010 256 281
11.00% 2011-2016 705 786
11.50% 2011-2015 331 373
11.75% 2011-2014 354 397
12.00% 2000-2016 4,601 5,211
12.25% 2011-2015 457 515
12.50% 2009-2019 6,355 7,413 3.63 %
13.00% 2010-2014 831 983
13.50% 2010-2015 239 285
13.75% 2014 34 40
14.00% 2011-2014 165 196
14.50% 2010-2011 26 32
14.75% 2010 53 64
15.00% 2011 51 61
15.50% 2011 37 45
16.00% 2012 39 47
16.25% 2011 79 95
Federal National Mortgage Assn.:
7.00% 2009-2011 27,658 27,764
8.00% 2005-2023 4,746 4,918
8.307% 2002 (2) 4,893 5,058
8.50% 2007-2027 10,322 10,823
9.00% 2009-2023 2,772 2,960
9.50% 2011-2022 2,163 2,328
10.00% 2017-2021 1,460 1,616
11.00% 1999-2015 1,767 1,983
12.00% 2000-2019 1,509 1,731
12.25% 2013-2014 250 288 5.59
12.50% 2001-2015 1,055 1,243
12.75% 2012 24 28
13.25% 2011-2014 736 871
14.00% 2013 98 118
15.00% 2013 13 16
15.50% 2012 37 45
16.00% 2012 16 20
Government National Mortgage Assn.:
5.00% 2026 (2) 10,205 10,193
6.50% 2023-2026 (2) 34,387 33,715
6.875% 2022-2023 (2) 5,790 5,933
7.00% 2008-2026 (2) 67,620 68,034
7.375% 2023-2024 (2) 1,517 1,562
7.50% 2009-2026 34,570 35,067
8.00% 2022-2023 8,335 8,680
8.50% 2020-2026 18,672 19,597
9.00% 2011-2022 15,702 16,856
9.50% 2009-2021 9,061 9,837
9.75% 1999-2012 2,061 2,207
10.00% 2016-2019 28,311 31,586
10.25% 2012 151 163
10.50% 2015-2019 2,502 2,823
11.00% 2009-2020 4,571 5,234 24.19
11.25% 2001-2016 2,520 2,767
11.50% 2000-2014 1,286 1,482
11.75% 2000-2015 239 252
12.00% 1999-2019 2,828 3,298
12.25% 2013-2015 312 358
12.50% 2010-2015 1,976 2,334
12.75% 2013-2015 462 528
13.00% 2011-2015 1,751 2,086
13.25% 2013-2015 279 320
13.50% 2010-2014 988 1,190
14.00% 2011-2014 234 282
14.50% 2012-2014 344 419
15.00% 2011-2013 470 575
16.00% 2011-2012 40 49
-------------- ---------
369,327 33.41
-------------- ---------
Federal Agency Obligations - Other - 3.95%
FNSM Callable Principal STRIPS:
0%/8.25% 2022 (3) 2,000 1,821 .16
Federal Home Loan Bank Notes 6.41% 2003 5,000 4,884 .44
Federal Home Loan Mortgage Notes:
6.19% 2004 13,915 13,421
6.27% 2004 7,000 6,803
6.59% 2003 5,000 4,926 3.35
6.60% 2003 2,000 1,973
7.01% 2005 10,000 9,866
-------------- ---------
43,694 3.95
-------------- ---------
U. S. Guaranteed Obligations - Other - 1.15%
Big Rivers Electrical Corp. 10.70% 2017 12,000 12,678 1.15
-------------- ---------
Collateralized Mortgage Obligations (1) - 5.09%
Federal Home Loan Mortgage Corp.:
Series 1716, Class A, 6.50% 2009 10,585 10,144
Series 83-A, Class 3, 11.875% 2013 190 204
Series 83-B, Class 3, 12.50% 2013 1,670 1,827
Series 76, Class F, 9.125% 2020 1,709 1,768 2.19
Series 178, Class Z, 9.25% 2021 2,941 3,136
Series 1567, Class A, 6.088% 2023 (2) 1,650 1,531
Series 1948, Class PJ, 6.65% 2027 6,000 5,588
Federal National Mortgage Assn.:
Trust 91-50, Class H, 7.75% 2006 2,788 2,864
Trust 91-146, Class Z, 8.00% 2006 7,165 7,324
Trust 97-41, Class B, 7.25% 2014 5,000 5,041
Trust 35, Class 2, 12.00% 2018 540 601 2.90
Trust 90-93, Class G, 5.50% 2020 3,421 3,210
Trust 92-119, Class Z, 8.00% 2022 3,524 3,706
Trust 97-M6, Class ZA, 6.85% 2026 10,000 9,307
-------------- ---------
56,251 5.09
-------------- ---------
Collateralized Mortgage Obligations
(Privately Originated)(1),(4) - 1.80%
Collateralized Mortgage Obligation Trust,
Series 63, Class Z, 9.00% 2020 3,828 4,131 .37
PaineWebber CMO Pac, Series O, Class 5, 9.50% 2019 5,000 5,395 .49
Ryland Acceptance Corp., Series 88, Class E,
7.95% 2019 10,233 10,421 .94
-------------- ---------
19,947 1.80
-------------- ---------
Development Authorities - 0.26%
International Bank for Reconstruction and
Development, 12.25% December 2008 2,000 2,868 .26
-------------- ---------
U. S. Treasury Obligations - 44.98%
6.875% July 1999 13,250 13,463 1.22
5.875% November 1999 16,000 15,952 1.44
8.50% November 2000 12,500 13,350 1.21
13.125% May 2001 19,000 23,287 2.11
13.375% August 2001 10,000 12,470 1.13
6.25% October 2001 2,000 2,003 .18
15.75% November 2001 5,500 7,404 .67
14.25% February 2002 15,000 19,620 1.77
3.625% July 2002 (2),(5) 40,000 40,075 3.62
11.625% November 2002 38,000 46,918 4.24
10.75% May 2003 10,250 12,410 1.12
11.875% November 2003 12,000 15,371 1.39
7.25% May 2004 52,000 54,608 4.94
7.50% February 2005 13,500 14,399 1.30
3.375% January 2007 (2),(5) 4,000 3,978 .36
10.375% November 2009 25,000 30,535 2.76
10.00% May 2010 4,000 4,842 .44
12.75% November 2010 10,000 13,936 1.26
13.875% May 2011 8,000 11,879 1.08
10.375% November 2012 35,000 44,794 4.05
12.00% August 2013 11,000 15,604 1.41
8.875% August 2017 63,500 78,661 7.12
6.375% August 2027 1,800 1,744 .16
-------------- ---------
497,303 44.98
-------------- ---------
Total Bonds and Notes (cost:$999,452,000) 1,002,068 90.64
-------------- ---------
Short-Term Securities
U.S. Treasury Securities - 8.41%
U.S. Treasury Bills due 9/18/97 20,900 20,846 1.88
U.S. Treasury Bills due 10/9/97 4,090 4,067 .37
U.S. Treasury Bills due 10/16/97 49,000 48,687 4.40
U.S. Treasury Bills due 11/6/97 19,610 19,431 1.76
-------------- ---------
93,031 8.41
-------------- ---------
-------------- ---------
Total Short-Term Securities (cost:$93,023,000) 93,031 8.41
-------------- ---------
Total Investment Securities (cost:$1,092,475,000) 1,095,099 99.05
Excess of cash and receivables over payables 10,461 .95
-------------- ---------
Net Assets 1,105,560 100.00 %
-------------- ---------
(1) 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.
(2) Coupon rate may change periodically.
(3) Zero-coupon bond which will
convert to a coupon-bearing security at a future
date.
(4) Comprised of federal agency originated or
guaranteed loans.
(5) Inflation-indexed bonds whose principal and
interest payments move with changes in a retail
price index.
See Notes to Financial Statements
</TABLE>
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Financial Statements
<S> <C> <C>
- ---------------------------------------- -------------------- ---------------
Statement of Assets and Liabilities
at August 31, 1997 (dollars in thousands)
- ---------------------------------------- -------------------- ---------------
Assets:
Investment securities at market
(cost: $1,092,475) $1,095,099
Cash 502
Receivables for-
Sales of investments $ 303
Sales of fund's shares 1,672
Accrued interest 12,567 14,542
-------------------- ---------------
1,110,143
Liabilities:
Payables for-
Purchases of investments 0
Repurchases of fund's shares 1,431
Dividends payable 2,043
Management services 376
Accrued expenses 733 4,583
-------------------- ---------------
Net Assets at August 31, 1997-
Equivalent to $13.03 per share on
84,873,762 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $1,105,560
=========
Statement of Operations
for the year ended August 31, 1997 (dollars in thousands)
-------------------- ---------------
Investment Income:
Income:
Interest $ 87,323
Expenses:
Management services fee $4,700
Distribution expenses 3,059
Transfer agent fee 874
Reports to shareholders 144
Registration statement and prospectus 80
Postage, stationery and supplies 236
Trustees' fees 24
Auditing and legal fees 41
Custodian fee 53
Taxes other than federal income tax 32
Other expenses 24 9,267
-------------------- ---------------
Net investment income 78,056
---------------
Realized Gain and Unrealized
Appreciation on Investments:
Net realized loss (6,208)
Net unrealized (depreciation) appreciation
on investments:
Beginning of year (26,927)
End of year 2,624
--------------------
Net unrealized appreciation
on investments 29,551
---------------
Net realized loss and
unrealized appreciation on investments 23,343
---------------
Net Increase in Net Assets Resulting
from Operations $101,399
=========
Statement of Changes in Net
Assets (dollars in thousands)
- ---------------------------------------- ----------------------------------------
Year ended August 31
1997 1996
Operations: -------------------- ---------------
Net investment income $ 78,056 $ 91,685
Net realized loss on investments (6,208) (21,590)
Net unrealized appreciation (depreciation)
on investments 29,551 (25,171)
-------------------- ---------------
Net increase in net assets
resulting from operations 101,399 44,924
-------------------- ---------------
Dividends Paid to Shareholders (78,533) (89,352)
-------------------- ---------------
Capital Share Transactions:
Proceeds from shares sold:
13,697,793 and 16,684,657
shares, respectively 177,817 220,093
Proceeds from shares issued in
reinvestment of net investment income
dividends: 4,328,162 and 4,829,407
shares respectively 56,223 63,705
Cost of shares repurchased:
28,335,433 and 27,346,462
shares, respectively (367,751) (360,421)
-------------------- ---------------
Net decrease in net assets resulting
from capital share transactions (133,711) (76,623)
-------------------- ---------------
Total Decrease in Net Assets (110,845) (121,051)
Net Assets:
Beginning of year 1,216,405 1,337,456
-------------------- ---------------
End of year (including undistributed
net investment income of $4,358 and
$4,835, respectively) $1,105,560 $1,216,405
============= =========
See Notes to Financial Statements
</TABLE>
U.S. GOVERNMENT SECURITIES FUND
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 fund seeks high current income,
consistent with prudent investment risk and preservation of capital, by
investing primarily in obligations backed by the full faith and credit of the
United States government. 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 more than
60 days remaining to maturity are valued at the mean of their representative
quoted bid and asked prices. Where pricing service or market quotations are
not readily available, securities will be valued at fair value by the Board of
Trustees or a committee thereof. Short-term securities with 60 days or less
remaining to maturity are valued at amortized cost, which approximates market
value.
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 and premiums on securities
purchased are amortized. Dividends to shareholders are declared daily after
the determination of the fund's net investment income and are paid to
shareholders monthly.
2. It is the fund's policy to continue to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required.
As of August 31, 1997, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $2,624,000, of which $19,106,000
related to appreciated securities and $16,482,000 related to depreciated
securities. During the year ended August 31, 1997, the fund realized, on a tax
basis, a net capital loss of $6,208,000 on securities transactions. The fund
had available at August 31, 1997 a net capital loss carryforward totaling
$103,311,000 which may be used to offset capital gains realized during
subsequent years through 2005 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 $1,092,475,000 at
August 31, 1997.
3. The fee of $4,700,000 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 such income
in excess of $3,333,333 but not exceeding $8,333,333; 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, 1997,
distribution expenses under the Plan were $3,059,000. As of August 31, 1997,
accrued and unpaid distribution expenses were $618,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $874,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $382,000 (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,
1997, aggregate amounts deferred and earnings thereon were $60,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both
wholly owned subsidiaries of CRMC. Certain Trustees and officers of the trust
are or may be considered to be affiliated with CRMC, AFS and AFD. No such
persons received any remuneration directly from the fund.
4. As of August 31, 1997, accumulated net realized loss on investments was
$107,712,000 and paid-in capital was $1,206,290,000.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $300,117,000 and $475,821,000, respectively, during
the year ended August 31, 1997.
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 $53,000 includes $31,000 that was paid by these credits
rather than in cash.
<TABLE>
PER-SHARE DATA AND RATIOS
- --------------------------------- -------------------------------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended August 31
-------- -------- -------- -------- --------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Net Asset Value, Beginning
of Year $ 12. $ 13. $ 13. $ 14.7 $ 14.1
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income .88 .93 1.01 1.03 1.07
Net realized and unrealized
gain (loss) on investments. .25 (.49) .06 (1.56) .61
Total income (loss) from -------- -------- -------- -------- --------
investment operations (.53) 1
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment
income (.88) (.90) (1.01) (1.02) (1.08)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 13. $ 12. $ 13. $ 13.1 $ 14.7
====== ======== ======== ======== ========
Total Return* 9.08% 3.40% 8.60% (3.72%) 12.44%
Ratios/Supplemental Data:
Net assets, end of year (in
millions) $1,106 $1,216 $1,337 $1,373 $1,581
Ratio of expenses to average
net assets .80% .81% .79% .78% .83%
Ratio of net income to
average net assets 6.74% 7.04% 7.79% 7.35% 7.54%
Portfolio turnover rate 28.16% 40.01% 46.77% 71.58% 35.24%
*Calculated without deducting a
sales charge. The maximum sales charge is
4.75% of the fund's offering price.
</TABLE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of
The American Funds Income Series
U.S. Government Secutities Fund:
We have audited the accompanying statement of assets and liabilities of
The American Funds Income Series -- U.S. Government Securities Fund (the
"Fund", including the schedule of portfolio investments as of August 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 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, 1997, 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, 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.
/s/ Deloitte & Touche LLP
Los Angeles, California
September 25, 1997
Tax Information (Unaudited)
Certain states may exempt from income taxation a portion of the dividends paid
from net investment income if derived from direct U.S. Treasury obligations.
For purposes of computing this exclusion, 48% 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 report 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 January 1998 to determine the CALENDAR YEAR amounts to be
included on their respective 1997 tax returns. Shareholders should consult
their tax advisers.
BOARD OF TRUSTEES
H. FREDERICK CHRISTIE, Rolling Hills Estates, California
Private investor; former President and Chief Executive Of$cer,
The Mission Group; former President,
Southern California Edison Company
DON R. CONLAN, South Pasadena, California
President (retired),
The Capital Group Companies, Inc.
DIANE C. CREEL, Long Beach, California
Chief Executive Of$cer and President,
The Earth Technology Corporation
(international engineering consulting)
MARTIN FENTON, JR., San Diego, California
Chairman of the Board, Senior Resource Group, Inc.
(senior living centers management)
LEONARD R. FULLER, Marina del Rey, California
President, Fuller & Company, Inc.
($nancial management consulting)
ABNER D. GOLDSTINE, Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR., Los Angeles, California
Chairman of the Board of the fund
Executive Vice President and Director,
Capital Research and Management Company
HERBERT HOOVER III, San Marino, California
Private investor
RICHARD G. NEWMAN, Los Angeles, California
Chairman of the Board, President and Chief Executive Of$cer,
AECOM Technology Corporation (architectural engineering)
PETER C. VALLI, Long Beach, California
Retired; former Chairman of the Board, BW/IP International, Inc.
(industrial manufacturing)
OTHER OFFICERS
MICHAEL J. DOWNER, Los Angeles, California
Vice President of the fund
Senior Vice President - Fund Business Management Group,
Capital Research and Management Company
MARY C. HALL, Brea, California
Vice President of the fund
Senior Vice President - Fund Business Management Group,
Capital Research and Management Company
JOHN H. SMET, Los Angeles, California
Vice President of the fund
Vice President,
Capital Research and Management Company
JULIE F. WILLIAMS, Los Angeles, California
Secretary of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ANTHONY W. HYNES, Jr., Brea, California
Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
KIMBERLY S. VERDICK, Los Angeles, California
Assistant Secretary of the fund
Assistant Vice President - Fund Business Management Group,
Capital Research and Management Company
TODD L. MILLER, Brea, California
Assistant Treasurer of the fund
Assistant Vice President - Fund Business Management Group,
Capital Research and Management Company
OF$CES OF THE FUND AND OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5804
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071-2371
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR $NANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE
COMPANY, TOLL-FREE, AT 800/421-0180, OR VISIT WWW.AMERICANFUNDS.COM ON THE
WORLD WIDE WEB.
This report is for the information of shareholders of 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, 1997, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Printed on recycled paper
Litho in USA AGD/AL/3209
Lit. No. GVT-011-1097
[The American Funds Group(R)]
