<PAGE>
[LOGO OF THE AMERICAN FUNDS GROUP(R)]
- --------------------------------------------------------------------------------
U.S. Government
Securities FundSM
Prospectus
NOVEMBER 1, 1997
<PAGE>
U.S. GOVERNMENT SECURITIES FUND
333 South Hope Street
Los Angeles, CA 90071
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expenses 3 Investment Results 9
................................ .............................................
Financial Highlights 4 Dividends, Distributions and Taxes 10
................................ .............................................
Investment Policies and Fund Organization and Management 11
Risks 5
................................ .............................................
Securities and Investment Shareholder Services 14
Techniques 6
................................
Multiple Portfolio
Counselor System 8
- --------------------------------------------------------------------------------
</TABLE>
The fund's investment objective is to provide investors with a high level of
current income consistent with prudent investment risk and preservation of
capital. It seeks to achieve this objective by investing primarily in
securities that are guaranteed by the "full faith and credit" pledge of the
United States Government. Although the fund invests primarily in securities on
which the U.S. Government guarantees the payment of interest and principal, the
value of the fund's shares and its current yield will fluctuate and are not
guaranteed by the U.S. Government.
This prospectus presents information you should know before investing in the
fund. You should keep it on file for future reference.
YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE LIKELIHOOD OF LOSS IS GREATER
IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR INVESTMENT IN THE FUND 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.
22-010-1197
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
EXPENSES
The effect of the expenses described below is reflected in the fund's share
price and return.
You may pay certain shareholder transaction expenses when you buy or sell
shares of the fund. Fund operating expenses are paid out of the fund's assets
and are factored into its share price.
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases
(as a percentage of offering price) 4.75%
................................................................................
SALES CHARGES ARE REDUCED OR ELIMINATED FOR LARGER PURCHASES. There is no sales
charge on reinvested dividends, and no deferred sales charge or redemption or
exchange fees. A contingent deferred sales charge of 1% applies on certain
redemptions made within 12 months following purchases without a sales charge.
FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Management fees .41%
................................................................................
12b-1 expenses .26%/1/
................................................................................
Other expenses .13%
................................................................................
Total fund operating expenses .80%
</TABLE>
/1/ 12b-1 expenses may not exceed 0.30% of the fund's average net assets
annually.
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>
<S> <C>
One year $ 55
................................................................................
Three years $ 72
................................................................................
Five years $ 90
................................................................................
Ten years $142
</TABLE>
THESE EXAMPLES ARE NOT MEANT TO REPRESENT YOUR ACTUAL INVESTMENT RESULTS OR
EXPENSES, WHICH MAY VARY. YOUR EXPENSES WILL BE LESS IF YOU QUALIFY TO PURCHASE
SHARES AT A REDUCED OR NO SALES CHARGE.
3
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information has been audited by Deloitte & Touche llp,
independent auditors. This table should be read together with the financial
statements which are included in the statement of additional information and
annual report.
SELECTED PER-SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
....................
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $12.78 $13.24 $13.18 $14.73 $14.13 $13.57 $13.25 $13.48 $13.54 $13.75
- ----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .88 .93 1.01 1.03 1.07 1.18 1.22 1.31 1.30 1.35
..........................................................................................................
Net realized and
unrealized gain (loss)
on investments .25 (.49) .06 (1.56) .61 .53 .37 (.26) (.04) (.24)
..........................................................................................................
Total income (loss) from
investment
operations 1.13 .44 1.07 (.53) 1.68 1.71 1.59 1.05 1.26 1.11
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.88) (.90) (1.01) (1.02) (1.08) (1.15) (1.27) (1.28) (1.32) (1.32)
..........................................................................................................
Net asset value,
end of year $13.03 $12.78 $13.24 $13.18 $14.73 $14.13 $13.57 $13.25 $13.48 $13.54
..........................................................................................................
Total return /1/ 9.08% 3.40% 8.60% (3.72%) 12.44% 13.05% 12.34% 8.11% 9.82% 8.40%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in millions) $1,106 $1,216 $1,337 $1,373 $1,581 $1,328 $1,018 $ 619 $ 497 $ 410
..........................................................................................................
Ratio of expenses
to average net assets .80% .81% .79% .78% .83% .88% .95% .87% .97% 1.00%
..........................................................................................................
Ratio of net income
to average net assets 6.74% 7.04% 7.79% 7.35% 7.54% 8.63% 9.07% 9.73% 9.68% 9.80%
..........................................................................................................
Portfolio
turnover rate 28.16% 40.01% 46.77% 71.58% 35.24% 44.81% 53.40% 50.00% 101.30% 89.30%
</TABLE>
/1/ Excludes maximum sales charge of 4.75%.
4
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
INVESTMENT POLICIES AND RISKS
The investment objective of the fund is to provide a high level of current
income consistent with prudent investment risk and preservation of capital. It
seeks to achieve this objective by investing primarily in securities that are
guaranteed by the "full faith and credit" pledge of the United States
Government.
Although the fund invests primarily in securities on which the U.S. Government
guarantees the payment of interest and principal, the value of the fund's
shares and its current yield will fluctuate and are not guaranteed by the U.S.
Government. The market value of fixed-income securities is generally affected
by changes in the level of interest rates. An increase in interest rates will
tend to reduce their market value, and a decline in interest rates will tend to
increase their value.
The fund may also invest in securities that are issued by U.S. Government
agencies or instrumentalities but are not backed by the full faith and credit
of the U.S. Government. The fund may invest in notes and bonds issued by the
U.S. Government, its agencies or instrumentalities or other related entities in
which the principal value and interest payments vary with the rate of
inflation.
The fund also may maintain assets in cash or cash equivalents, in short-term
debt securities of private issuers (including certificates of deposit, bankers'
acceptances and commercial paper rated Prime-1 by Moody's Investors Service,
Inc. or A-1 by Standard and Poor's Corporation), and may enter into repurchase
agreements.
Except when the fund is in a temporary defensive investment position, at least
65% of its assets will be invested in securities that are guaranteed by the
U.S. Government.
The fund is not required to maintain any particular effective average portfolio
maturity, and its average maturity will vary with current and anticipated
market conditions. Limits on the fund's investment policies are determined at
the time of purchase and are based on the fund's net assets unless otherwise
stated. The fund's fundamental investment restrictions (which are described in
the statement of additional information) and objective may not be changed
without shareholder approval. MORE INFORMATION ON THE FUND'S INVESTMENT
POLICIES IS CONTAINED IN ITS STATEMENT OF ADDITIONAL INFORMATION.
THE FUND MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVE DUE TO MARKET CONDITIONS AND
OTHER FACTORS. IN ADDITION, THE FUND MAY EXPERIENCE DIFFICULTY LIQUIDATING
CERTAIN PORTFOLIO SECURITIES DURING SIGNIFICANT MARKET DECLINES OR PERIODS OF
HEAVY REDEMPTIONS.
5
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
Securities guaranteed by the U.S. Government include: (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.
PASS-THROUGH SECURITIES
The fund may invest in various debt obligations backed by pools of mortgages.
Principal and interest payments made on the underlying asset pools backing
these obligations are typically passed through to investors. Pass-through
securities may have either fixed or adjustable coupons. These securities
include those discussed below.
"Mortgage-backed securities" may be issued 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). 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 permit borrowers to prepay their underlying
mortgages. Prepayments can alter the effective maturity of these instruments.
"Collateralized mortgage obligations" (CMOs) are also backed by pools of
mortgages or mortgage loans, which are divided into two or more separate bond
issues. 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 so that when interest rates change the impact of changing prepayment
rates on these securities' effective maturities is magnified. The fund will
only purchase
6
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
CMOs or mortgage-backed bonds which are fully collateralized by securities
issued by GNMA, FNMA or FHLMC and/or mortgages insured by GNMA.
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 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 GNMA certificates 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.
7
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
MULTIPLE PORTFOLIO COUNSELOR SYSTEM
The basic investment philosophy of Capital Research and Management Company is
to seek fundamental values at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund assets. Under this system the
portfolio of a fund 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 the fund are listed below.
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
.........................
YEARS OF EXPERIENCE WITH CAPITAL
AS PORTFOLIO COUNSELOR RESEARCH AND
PORTFOLIO COUNSELORS FOR U.S. GOVERNMENT MANAGEMENT
FOR U.S. GOVERNMENT SECURITIES FUND COMPANY OR
SECURITIES FUND PRIMARY TITLE(S) (APPROXIMATE) ITS AFFILIATES TOTAL YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ABNER D. President and 12 years (since 30 years 45 years
GOLDSTINE Trustee of the the fund began
fund. Senior operations)
Vice President
and Director,
Capital
Research and
Management
Company
- -----------------------------------------------------------------------------------------
JOHN H. Vice President 11 years 14 years 15 years
SMET of the fund.
Vice President,
Capital
Research and
Management
Company
- -----------------------------------------------------------------------------------------
THOMAS H. Vice Less than 1 8 years 11 years
HOGH President-- year
Investment
Management
Group, Capital
Research and
Management
Company
- -----------------------------------------------------------------------------------------
JOHN W. Vice 7 years 9 years 9 years
RESSNER President--
Investment
Management
Group, Capital
Research and
Management
Company
- -----------------------------------------------------------------------------------------
</TABLE>
The fund began operations on October 17, 1985.
8
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
The fund 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. Results calculated without a sales charge will be
higher.
[X] TOTAL RETURN is the change in value of an investment in the 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
the 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 the fund. The
distribution rate is calculated by annualizing the current month's dividend
and dividing by the average price for the month.
INVESTMENT RESULTS
(FOR PERIODS ENDED SEPTEMBER 30, 1997)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL THE FUND
TOTAL AT NET THE FUND AT MAXIMUM
RETURNS: ASSET VALUE/1/ SALES CHARGE/1/,/2/ LEHMAN/3/ CPI/4/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year 8.71% 3.58% 9.48% 2.15%
................................................................................
Five years 5.76% 4.74% 6.73% 2.67%
................................................................................
Ten years 8.48% 7.95% 9.31% 3.43%
................................................................................
Lifetime/5/ 8.05% 7.61% 9.22% 3.35%
- --------------------------------------------------------------------------------
</TABLE>
Yield/1/,/2/: 5.57%
Distribution Rate/2/:
6.12%
/1/ These fund results were calculated according to a standard formula that is
required for all stock and bond funds.
/2/ The maximum sales charge has been deducted.
/3/ Lehman Brothers Government/Mortgage-Backed Securities Index represents a
market-weighted index that includes Treasuries and agencies, as well as
FNMAs, FHLMCs, and GNMAs. This index is unmanaged and does not reflect sales
charges, commissions or expenses.
/4/ Consumer Price Index
/5/ The fund began investment operations on October 17, 1985.
9
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
Here are the fund's annual total returns calculated without a sales charge.
This information is being supplied on a calendar year basis.
[BAR CHART]
1987 0.97%
1988 6.92%
1989 11.71%
1990 9.8%
1991 14.16%
1992 7.59%
1993 10.45%
1994 -4.65%
1995 15.46%
1996 2.82%
[END BAR CHART]
Past results are not an indication of future results.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The fund declares dividends from its net investment income daily and
distributes the accrued dividends to shareholders each month. Dividends begin
accruing one day after payment for shares is received by the fund or American
Funds Service Company. All capital gains, if any, are distributed annually,
usually in December. When a capital gain is declared, 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.
10
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
FEDERAL TAXES
In any fiscal year in which the fund qualifies as a regulated investment
company and distributes to shareholders all of its net investment income and
net capital gains, the fund itself 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. The tax treatment of
redemptions from a retirement plan account may differ from redemptions from an
ordinary shareholder account.
YOU MUST PROVIDE THE FUND WITH A CERTIFIED CORRECT TAXPAYER IDENTIFICATION
NUMBER (GENERALLY YOUR SOCIAL SECURITY NUMBER) AND CERTIFY THAT YOU ARE NOT
SUBJECT TO BACKUP WITHHOLDING. IF YOU FAIL TO DO SO THE IRS CAN REQUIRE THE
FUND TO WITHHOLD 31% OF YOUR TAXABLE DISTRIBUTIONS AND REDEMPTIONS. Federal law
also requires the fund to withhold 30% or the applicable tax treaty rate from
dividends paid to certain nonresident alien, non-U.S. partnership and non-U.S.
corporation shareholder accounts.
This is a brief summary of some of the tax laws that affect your investment in
the fund. Please see the statement of additional information and your tax
adviser for further information.
- --------------------------------------------------------------------------------
FUND ORGANIZATION AND MANAGEMENT
FUND ORGANIZATION AND VOTING RIGHTS
The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust in 1985. All fund operations are supervised
by the fund's board of trustees who meet periodically and perform duties
required by applicable state and federal laws. Members of the board who are not
employed by Capital Research and Management Company or its affiliates are paid
certain fees for services rendered to the fund as described in the statement of
additional information. They may elect to defer all or a portion of these fees
through a deferred compensation plan in effect for the fund. The fund does not
hold annual meetings of shareholders. However, significant matters which
require shareholder approval, such as certain elections of board members or a
change in a fundamental investment policy, will be presented to shareholders at
a meeting called for such purpose. Shareholders have one vote per share owned.
At the request of the holders of at least 10% of the shares, the fund will hold
a meeting at which any member of the board could be removed by a majority vote.
11
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, is the investment adviser to the fund
and 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 fund. The management fee paid by the fund to
Capital Research and Management Company is composed of a management fee, which
may not exceed 0.30% of the fund's average net assets annually and declines at
certain asset levels, plus an amount which may not exceed 3% of the fund's
gross investment income for the preceding month and which also declines at
certain annual gross investment levels. The total management fee paid by the
fund, as a percentage of average net assets, for the previous fiscal year is
discussed above 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 fund's code of ethics.
PLAN OF DISTRIBUTION
The fund has a Plan of Distribution or "12b-1 Plan" under which it may finance
activities primarily intended to sell shares, provided the categories of
expenses are approved in advance by the board. The 12b-1 fee paid by the fund,
as a percentage of average net assets, for the previous fiscal year is
discussed above under "Expenses."
PORTFOLIO TRANSACTIONS
Orders for the fund's 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
12
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
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
sold shares of the fund or have provided investment research, statistical, and
other related services for the benefit of the fund and/or other funds served by
Capital Research and Management Company.
PRINCIPAL UNDERWRITER AND TRANSFER AGENT
American Funds Distributors, Inc. and American Funds Service Company serve as
the principal underwriter and transfer agent for the fund, respectively. They
are headquartered at 333 South Hope Street, Los Angeles, CA 90071 and 135 South
State College Boulevard, Brea, CA 92821, respectively.
AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
[MAP OF THE UNITED STATES APPEARS HERE]
WESTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2205
Brea, California
92822-2205
Fax: 714/671-7080
WESTERN CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 659522
San Antonio, Texas
78265-9522
Fax: 210/530-4050
EASTERN CENTRAL SERVICE CENTER
American Funds Service Company
P.O. Box 6007
Indianapolis, Indiana
46206-6007
Fax: 317/735-6620
EASTERN SERVICE CENTER
American Funds Service Company
P.O. Box 2280
Norfolk, Virginia
23501-2280
Fax: 804/67-4773 13
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
The fund offers 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. A COMPLETE DESCRIPTION OF SHAREHOLDER SERVICES AND ACCOUNT
POLICIES IS CONTAINED IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION. In
addition, an easy-to-read guide to owning a fund in The American Funds Group
titled "Welcome to the Family" is sent to new shareholders and is available by
writing or calling American Funds Service Company.
THE SERVICES DESCRIBED MAY NOT BE AVAILABLE THROUGH SOME RETIREMENT PLANS OR
ACCOUNTS HELD BY INVESTMENT DEALERS. IF YOU ARE INVESTING IN SUCH A MANNER, YOU
SHOULD CONTACT YOUR PLAN ADMINISTRATOR/TRUSTEE OR DEALER ABOUT WHAT SERVICES
ARE AVAILABLE AND WITH QUESTIONS ABOUT YOUR ACCOUNT.
- --------------------------------------------------------------------------------
PURCHASING SHARES
HOW TO PURCHASE SHARES
Generally, you may open an account by contacting any investment dealer
authorized to sell the fund's shares. You may add to your account through your
dealer or directly through American Funds Service Company by mail, computer,
wire, or bank debit. You may also establish or add to your account by
exchanging shares from any of your other accounts in The American Funds Group.
The fund and American Funds Distributors reserve the right to reject any
purchase order for any reason. This includes exchange purchase orders that may
place an unfair burden on other shareholders due to their frequency.
Various purchase options are available as described below subject to certain
investment minimums and limitations described in the statement of additional
information and "Welcome to the Family."
[X] Automatic Investment Plan
You may invest monthly or quarterly through automatic withdrawals from your
bank account.
[X] Automatic Reinvestment
You may reinvest your dividends and capital gain distributions into the fund
(with no sales charge). This will be done automatically unless you elect to
have the dividends and/or capital gain distributions paid to you in cash.
14
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
[X] Cross-Reinvestment
You may invest your dividends and capital gain distributions into any other
fund in The American Funds Group.
[X] Exchange Privilege
You may exchange your shares into other funds in The American Funds Group
generally with no sales charge. Exchanges of shares from the money market
funds that were initially purchased with no sales charge will generally be
subject to the appropriate sales charge. You may also elect to automatically
exchange shares among any of the funds in The American Funds Group. Exchange
requests may be made in writing, by telephone or including American
FundsLine(R), by computer using American FundsLine OnLineSM (see below), or
by fax. EXCHANGES HAVE THE SAME TAX CONSEQUENCES AS ORDINARY SALES AND
PURCHASES.
[X] Retirement Plans
You may invest in the fund through various retirement plans. For further
information contact your investment dealer or American Funds Distributors.
SHARE PRICE
The fund's share price, also called net asset value, is determined as of the
close of trading (normally 4:00 p.m., Eastern time) every day the New York
Stock Exchange is open. The 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 offering price next determined after your investment is
received and accepted by American Funds Service Company. The offering price is
the net asset value plus a sales charge, if applicable.
SHARE CERTIFICATES
Shares are credited to your account and certificates are not issued unless you
request them by writing to American Funds Service Company.
INVESTMENT MINIMUMS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To establish an account $1,000
For a retirement plan account $ 250
For a retirement plan account through payroll deduction $ 25
To add to an account $ 50
For a retirement plan account $ 25
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
SALES CHARGES
A sales charge may apply, as described below, when purchasing shares. Sales
charges may be reduced for larger purchases as indicated below.
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF
...................
DEALER
NET CONCESSION AS
OFFERING AMOUNT % OF OFFERING
INVESTMENT PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.75% 4.99% 4.00%
................................................................................
$25,000 but less than $50,000 4.50% 4.71% 3.75%
................................................................................
$50,000 but less than $100,000 4.00% 4.17% 3.25%
................................................................................
$100,000 but less than $250,000 3.50% 3.63% 2.75%
................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
................................................................................
$500,000 but less than $1 million 2.00% 2.04% 1.60%
................................................................................
$1 million or more and certain other
investments described below see below see below see below
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES
Investments of $1 million or more and investments made by employer-sponsored
defined contribution-type plans with 100 or more eligible employees are sold
with no initial sales charge. A 1% CONTINGENT DEFERRED SALES CHARGE MAY BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN ONE YEAR OF PURCHASE BY THESE
ACCOUNTS. Investments by retirement plans, foundations or endowments with $50
million or more in assets may be made with no sales charge and are not subject
to a contingent deferred sales charge. A dealer concession of up to 1% may be
paid by the fund from its Plan of Distribution and/or by American Funds
Distributors on all investments described above. Investments by certain
individuals and entities including employees and other associated persons of
dealers authorized to sell shares of the fund and Capital Research and
Management Company and its affiliated companies are not subject to a sales
charge.
ADDITIONAL DEALER COMPENSATION
In addition to the concessions listed, up to 0.25% of average net assets is
paid annually to qualified dealers for providing certain services pursuant to
the fund's Plan of Distribution. During the current fiscal year, American Funds
Distributors will also provide additional compensation to the top one hundred
dealers who have sold shares of funds in The American Funds Group based on the
pro rata share of a qualifying dealer's sales.
16
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
REDUCING YOUR SALES CHARGE
You and your immediate family may combine investments to reduce your costs. You
must let your investment dealer or American Funds Service Company know if you
qualify for a reduction in your sales charge using one or any combination of
the methods described below.
[X] Aggregation
Investments that may be aggregated include those made by you, your spouse
and your children under the age of 21, if all parties are purchasing shares
for their own account(s), including any business account solely "controlled
by", as well as any retirement plan or trust account solely for the benefit
of, these individuals. Investments made for multiple employee benefit plans
of a single employer or "affiliated" employers may be aggregated provided
they are not also aggregated with individual accounts. Finally, investments
made by a common trust fund or other diversified pooled account not
specifically formed for the purpose of accumulating fund shares may be
aggregated.
Purchases made for nominee or street name accounts will generally not be
aggregated with those made for other accounts unless qualified as described
above.
[X] Concurrent Purchases
You may combine concurrent purchases of two or more funds in The American
Funds Group, except direct purchases of the money market funds. Shares of
the money market funds purchased through an exchange, reinvestment or cross-
reinvestment from a fund having a sales charge do qualify.
[X] Right of Accumulation
You may take into account the current value of your existing holdings in The
American Funds Group to determine your sales charge. Direct purchases of the
money market funds are excluded.
[X] Statement of Intention
You may enter into a non-binding commitment to invest a certain amount
(which at your request, may include purchases made during the previous
90 days) in non-money market fund shares over a 13-month period. A portion
of your account may be held in escrow to cover additional sales charges
which may be due if your total investments over the statement period are
insufficient to qualify for the applicable sales charge reduction.
17
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
SELLING SHARES
HOW TO SELL SHARES
You may sell (redeem) shares in your account by contacting your investment
dealer or American Funds Service Company. You may also use American
FundsLine(R) or American FundsLine OnLineSM (see below). In addition, you may
sell shares in amounts of $50 or more automatically. If you sell shares through
your investment dealer you may be charged for this service. Shares held for you
in your dealer's street name must be sold through the dealer.
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. Sale requests may be
made in writing, by telephone, including American FundsLine(R), by computer
using American FundsLine OnLineSM, or by fax. Sales by telephone, computer or
fax are limited to $50,000 in accounts registered to individual(s) (including
non-retirement trust accounts). In addition, checks must be made payable to the
registered shareholder(s) and mailed to an address of record that has been used
with the account for at least 10 days.
Proceeds will not be mailed until sufficient time has passed to provide
reasonable assurance that checks or drafts (including certified or cashier's
checks) for shares purchased have cleared (which may take up to 15 calendar
days from the purchase date). Except for delays relating to clearance of checks
for share purchases or in extraordinary circumstances (and as permissible under
the Investment Company Act of 1940), sale proceeds will be paid on or before
the seventh day following receipt and acceptance of an order. Interest will not
accrue or be paid on amounts that represent uncashed distribution or redemption
checks.
The fund may, with 60 days' written notice, close your account if due to a sale
of shares the account has a value of less than the minimum required initial
investment.
Generally, written requests to sell shares must be signed by you and must
include any shares you wish to sell that are in certificate form. Your
signature must be guaranteed by a member firm of a domestic stock exchange or
the National Association of Securities Dealers, Inc. that is an eligible
guarantor institution, bank, savings association, or credit union. A signature
guarantee is not currently required for any sale of $50,000 or less provided
the check is made payable to the registered shareholder(s) and is mailed to the
address of record on the account, and provided the address has been used with
the account for at least 10 days. Additional documentation may be required for
sale of shares held in corporate, partnership or fiduciary accounts.
18
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge (any contingent deferred sales charge paid
will be credited to your account) in any fund in The American Funds Group
within 90 days after the date of the redemption or distribution. Redemption
proceeds of shares representing direct purchases in the money market funds are
excluded. Reinvestment will be at the next calculated net asset value after
receipt and acceptance by American Funds Service Company.
- --------------------------------------------------------------------------------
OTHER IMPORTANT THINGS TO REMEMBER
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(SM)
You may check your share balance, the price of your shares, or your most recent
account transactions, sell shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) or American
FundsLine OnLineSM. To use these services, call 800/325-3590 from a
TouchTone(TM) telephone or access The American Funds Web site on the Internet
at www.americanfunds.com.
TELEPHONE AND COMPUTER PURCHASES, SALES AND EXCHANGES
Unless you opt out of the telephone or computer (including American
FundsLine(R) or American FundsLine OnLineSM) or fax purchase, sale and/or
exchange options (see below), you agree to hold the fund, American Funds
Service Company, any of its affiliates or mutual funds managed by such
affiliates, and each of their respective directors, trustees, officers,
employees and agents harmless from any losses, expenses, costs or liabilities
(including attorney fees) which may be incurred in connection with the exercise
of these privileges provided American Funds Service Company employs reasonable
procedures to confirm that the instructions received from any person with
appropriate account information are genuine. If reasonable procedures are not
employed, the fund may be liable for losses due to unauthorized or fraudulent
instructions.
Generally, all shareholders are automatically eligible to use these options.
However, you may elect to opt out of these options by writing American Funds
Service Company. (You may also reinstate them at any time by writing to
American Funds Service Company.)
ACCOUNT STATEMENTS
You will receive regular confirmation statements reflecting transactions in
your account. Dividend and capital gain reinvestments and purchases through
automatic investment plans and certain retirement plans will be confirmed at
least quarterly.
19
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
20
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
21
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
22
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
- --------------------------------------------------------------------------------
NOTES
23
<PAGE>
U.S. GOVERNMENT SECURITIES FUND / PROSPECTUS
<TABLE>
<CAPTION>
FOR SHAREHOLDER SERVICES FOR DEALER SERVICES
<C> <S>
American Funds American Funds
Service Company Distributors
800/421-0180 ext. 1 800/421-9900 ext. 11
FOR 24-HOUR INFORMATION
American American Funds
FundsLine(R) Internet Web site
800/325-3590 http://www.americanfunds.com
</TABLE>
Telephone conversations may be recorded or monitored for
verification, recordkeeping and quality assurance purposes.
------------------------------------------------------------
MULTIPLE TRANSLATIONS
This prospectus may be translated into other languages. In
the event of any inconsistency or ambiguity as to the
meaning of any word or phrase contained in a translation,
the English text shall prevail.
------------------------------------------------------------
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Includes financial statements, detailed performance
information, portfolio holdings, a statement from portfolio
management and the independent accountants' report (in the
annual report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more detailed information on all aspects of the
fund, including the fund's financial statements.
A current SAI has been filed with the Securities and
Exchange Commission ("SEC"). It is incorporated by
reference into this prospectus and is available along with
other related materials on the SEC's Internet Web site at
http://www.sec.gov.
CODE OF ETHICS
Includes a description of the fund's personal investing
policy.
To request a free copy of any of the documents above:
Call American Funds or Write to the Secretary
Service Company of the fund
800/421-0180 ext. 1 333 South Hope Street
Los Angeles, CA 90071
This prospectus has been printed on recycled paper.
[LOGO OF RECYCLED PAPER]
24
The American Funds Income Series
U.S. GOVERNMENT SECURITIES FUND
Part B
Statement of Additional Information
November 1, 1997
This document is not a prospectus but should be read in conjunction with the
current Prospectus dated November 1, 1997 of The American Funds Income Series
(the "Trust"). The Trust currently consists of one series, U.S. Government
Securities Fund (the "fund"). The Prospectus may be obtained from your
investment dealer or financial planner or by writing to the Trust at the
following address:
U.S. Government Securities Fund
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(800) 421-0180
Shareholders who purchase shares at net asset value through eligible
retirement plans should note that not all of the services or features described
below may be available to them, and they should contact their employer for
details.
Table of Contents
<TABLE>
<CAPTION>
Item Page No.
<S> <C>
Description of Securities and Investment Techniques 1
Investment Restrictions 6
Fund Officers and Trustees 8
Management 11
Dividends, Distributions and Federal Taxes 13
Purchase of Shares 16
Redeeming Shares 22
Shareholder Account Services and Privileges 23
Execution of Portfolio Transactions 25
General Information 25
Investment Results 27
Appendix 30
Financial Statements Attached
</TABLE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The descriptions below are intended to supplement the material in the
Prospectus under "Investment Policies and Risks."
INVESTMENT POLICIES - Except when the fund is in a temporary defensive
investment position, at least 65% of its total assets will be invested in
securities that are guaranteed by the U.S. Government, including such
securities held subject to repurchase agreements. Obligations not directly
backed by the full faith and credit of the U.S. Government such as privately
issued "zero-coupon bonds" representing interests in U.S. Treasury securities,
certificates of deposit, and privately issued mortgage-related securities will
not be considered securities guaranteed by the U.S. Government for purposes of
this 65% limitation.
Although the fund has no current intention of doing so during the next 12
months, the fund may also purchase obligations of non-U.S. corporations or
governmental entities, provided they are dollar-denominated and liquid.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES - Certificates issued by
the Government National Mortgage Association (GNMA) are mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, and are either insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. A pool of these mortgages is
assembled and, after being approved by GNMA, is offered to investors through
securities dealers. The timely payment of interest and principal on each
mortgage is guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government.
Principal is paid back monthly by the borrower over the term of the loan.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current market rates, GNMA certificates
can be less effective than typical bonds of similar maturities at "locking in"
yields during periods of declining interest rates. GNMA certificates typically
appreciate or decline in market value during periods of declining or rising
interest rates, respectively. Due to the regular repayment of principal and
the prepayment feature, the effective maturities of mortgage pass-through
securities are shorter than stated maturities, will vary based on market
conditions and cannot be predicted in advance. The effective maturities of
newly-issued GNMA certificates backed by relatively new loans at or near the
prevailing interest rates are generally assumed to range between approximately
9 and 12 years.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS - The Federal National Mortgage
Association (FNMA), a privately-owned corporate instrumentality of the U.S.
Government, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government.
The Federal Home Loan Mortgage Corporation (FHLMC), a corporate
instrumentality of the U.S. Government, issues participation certificates which
represent an interest in a pool of conventional mortgage loans. FHLMC
guarantees the timely payment of interest and the ultimate collection of
principal, and maintains reserves to protect holders against losses due to
default, but the certificates are not backed by the full faith and credit of
the U.S. Government.
FNMA and FHLMC securities are considered by the fund to be "U.S. Government
securities" for the purpose of the fund's fundamental investment restriction
stating that the fund may not purchase any security (other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities")) if, immediately after and as
a result of such investment, more than 5% of the value of the fund's total
assets would be invested in securities of the issuer.
As is the case with GNMA certificates, the actual maturity of and realized
yield on particular FNMA and FHLMC pass-through securities will vary based on
the prepayment experience of the underlying pool of mortgages.
OTHER MORTGAGE-RELATED SECURITIES - The fund may invest in mortgage-related
securities issued by financial institutions such as commercial banks, savings
and loan associations, mortgage bankers and securities broker-dealers (or
separate trusts or affiliates of such institutions established to issue these
securities). These securities include mortgage pass-through certificates,
collateralized mortgage obligations (including real estate mortgage investment
conduits as authorized under the Internal Revenue Code of 1986) (CMOs) or
mortgage-backed bonds. Each class of bonds in a CMO series may have a
different effective maturity, bear a different coupon and have a different
priority in receiving payments. All principal payments, both regular principal
payments as well as any prepayment of principal, are passed through to the
holders of the various CMO classes dependent on the characteristics of each
class. In some cases, all payments are passed through first to the holders of
the class with the shortest stated maturity until it is completely retired.
Thereafter, principal payments are passed through to the next class of bonds in
the series, until all the classes have been paid off. In other cases, payments
are passed through to holders of whichever class first has the shortest
effective maturity at the time payments are made. As a result, an acceleration
in the rate of prepayments that may be associated with declining interest rates
shortens the expected life of each class. The impact of an acceleration in
prepayments affects the expected life of each class differently depending on
the unique characteristics of that class. In the case of some CMO series, each
class may receive a differing proportion of the monthly interest and principal
repayments on the underlying collateral. In these series the classes would be
more affected by an acceleration (or slowing) in the rate of prepayments than
CMOs which share principal and interest proportionally.
Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMOs). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds can provide that they are callable by the issuer prior to
maturity).
INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed bonds
issued by the U.S. government, its agencies or instrumentalities or other
related entities. 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.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements, under
which it buys a security and obtains a simultaneous commitment from the seller
to repurchase the security at a specified time and price. Repurchase
agreements permit the fund to maintain liquidity and earn income over periods
of time as short as overnight. The seller must maintain with the fund's
custodian collateral equal to at least 100% of the repurchase price including
accrued interest as monitored daily by Capital Research and Management Company.
If the seller under the repurchase agreement defaults, the fund may incur a
loss if the value of the collateral securing the repurchase agreement has
declined and may incur disposition costs in connection with liquidating the
collateral. If bankruptcy proceedings are commenced with respect to the
seller, liquidation of the collateral by the fund may be delayed or limited.
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 the value of the security beginning on
the date of the agreement. When the fund agrees to sell such securities, it
does not participate in further gains or losses with respect to the securities
beginning on the date of the agreement. If the other party to such transaction
fails to deliver or pay for the securities, the fund could miss a favorable
price or yield opportunity, or could experience a loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly 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 may have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
The fund also may enter into "roll" transactions, which are the sale of GNMA
securities or other securities together with a commitment to purchase similar,
but not identical, securities at a later 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 - The fund may enter into 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. A
reverse repurchase agreement is the sale of a security by a fund and its
agreement to repurchase the security at a specified time and price. The fund
will maintain in a segregated account with its custodian liquid assets such as
cash, U.S. Government securities or other appropriate high-grade debt
obligations 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 (the "1940 Act"), reverse repurchase agreements may be considered
borrowings by the fund; accordingly, the fund will limit its investments in
reverse repurchase agreements, together with any other borrowings, to no more
than one-third of its total assets. 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.
CASH AND CASH EQUIVALENTS - The fund may maintain assets in cash or cash
equivalents. Cash equivalents include: (1) commercial paper (short-term notes
up to 9 months in maturity issued by corporations or governmental bodies); (2)
commercial bank obligations such as certificates of deposit (interest-bearing
time deposits); bankers' acceptances, (time drafts on a commercial bank where
the bank accepts an irrevocable obligation to pay at maturity); (3) savings
association obligations (certificates of deposit issued by mutual savings banks
or savings and loan associations); and (4) securities of the U.S. Government,
its agencies or instrumentalities that mature, or may be redeemed, in one year
or less;
PORTFOLIO TRADING - The fund intends to engage in portfolio trading when
Capital Research and Management Company (the "Investment Adviser) believes that
the sale of a security owned by the fund and the purchase of another security
of better value can enhance principal and/or increase income. A security may
be sold to avoid any prospective decline in market value in light of what is
evaluated as an expected rise in prevailing yields, or a security may be
purchased in anticipation of a market rise (a decline in prevailing yields). A
security also may be sold and a comparable security purchased coincidentally in
order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities, or in connection with
a "roll" transaction as described in the Prospectus under " Securities and
Investment Techniques."
LOANS OF PORTFOLIO SECURITIES - Although the fund has no current intention of
doing so during the next 12 months, the fund is authorized to lend portfolio
securities to selected securities dealers or to other institutional investors
whose financial condition is monitored by the Investment Adviser. The borrower
must maintain with the fund's custodian collateral consisting of cash, cash
equivalents or U.S. Government securities equal to at least 100% of the value
of the borrowed securities, plus any accrued interest. The Investment Adviser
will monitor the adequacy of the collateral on a daily basis. The fund may at
any time call a loan of its portfolio securities and obtain the return of the
loaned securities. The fund will receive any interest paid on the loaned
securities and a fee or a portion of the interest earned on the collateral.
The fund will limit its loans of portfolio securities to an aggregate of
one-third of the value of its total assets, measured at the time any such loan
is made.
MATURITY - The maturity composition of the fund's portfolio will be adjusted in
response to market conditions and expectations. As described above, the fund
may invest in various mortgage pass-through securities and normally will invest
substantially in GNMA certificates (see "Government National Mortgage
Association Certificates" above). The fund may also invest in securities with
interest rates that are not fixed but fluctuate based upon changes in market
rates or designated indexes. Variable rate obligations have interest rates
that are adjusted at designated intervals, and interest rates on floating rate
obligations are adjusted whenever there are exchanges in the indexes or market
rates on which their interest rates are based. In some cases the fund has the
ability to demand payment from the dealer or issuer at par plus accrued
interest on short notice (seven days or less). The effective maturity of a
floating or variable rate obligation is deemed to be the longer of (i) the
notice period required before the fund is entitled to receive payment of the
obligation upon demand or (ii) the period remaining until the obligation's next
interest rate adjustment. If not sold or redeemed by the fund through the
demand feature, these obligations would mature on a specified date which may
range up to 30 years or more from the date of issuance.
PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads or brokerage commissions, and may result in the realization of
net capital gains, which are taxable when distributed to shareholders.
Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. The fund does not
anticipate its portfolio turnover to exceed 100% annually. The fund's
portfolio turnover rate would equal 100% if each security in the fund's
portfolio were replaced once per year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last 10 years.
INVESTMENT RESTRICTIONS
The fund has adopted certain investment restrictions which may not be changed
without a majority vote of the fund's outstanding shares. Such majority is
defined by the 1940 Act as the vote of the lesser of (i) 67% or more of the
outstanding voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities are present in person or by proxy, or
(ii) more than 50% of the outstanding voting securities. None of the following
investment restrictions involving a maximum percentage of assets will be
considered violated unless the excess occurs immediately after, and is caused
by, an acquisition [or encumbrance of securities or assets of, or borrowings]
by the fund. These restrictions provide that the fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
securities")) if, immediately after and as a result of such investment, more
than 5% of the value of the fund's total assets would be invested in securities
of the issuer;
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry,
except that this limitation shall not apply to U.S. Government securities;
3. Invest in companies for the purpose of exercising control or management;
4. Knowingly purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
5. Buy or sell real estate or commodities or commodity contracts in the
ordinary course of its business; however, the fund may purchase or sell readily
marketable debt securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein, including
real estate investment trusts;
6. Acquire securities subject to restrictions on disposition imposed by the
Securities Act of 1933, if, immediately after and as a result of such
acquisition, the value of such restricted securities and all other illiquid
securities held by the fund would exceed 10% of the value of the fund's total
assets;
7. Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically cause
it to be considered an underwriter as that term is defined under the Securities
Act of 1933;
8. Make loans, except that the fund may purchase readily marketable debt
securities and invest in repurchase agreements and make loans of portfolio
securities. The fund will not invest in repurchase agreements maturing in more
than seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are subject
to legal or contractual restrictions on resale) held by the fund, exceeds 10%
of the value of its total assets;
9. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short;
10. Purchase securities on margin, except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
11. Borrow money, except from banks for temporary or emergency purposes not in
excess of 5% of the value of the fund's total assets, except that the fund may
enter into reverse repurchase agreements, provided that the fund will limit its
aggregate borrowings to no more than one-third of its total assets;
12. Mortgage, pledge, or hypothecate any of its assets, provided that this
restriction shall not apply to the sale of securities pursuant to a reverse
repurchase agreement;
13. Purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Trust, its investment adviser, or distributor,
each owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
14. Invest in interests in oil, gas, or other mineral exploration or
development programs;
15. Invest more than 5% of its total assets in warrants which are unattached
to securities;
16. Write, purchase or sell puts, calls or combinations thereof.
Notwithstanding Investment Restriction #4, the fund may invest in securities
of other investment companies if deemed advisable by its officers in connection
with the administration of a deferred compensation plan adopted by the Trustees
pursuant to an exemptive order granted by the Securities and Exchange
Commission.
FUND OFFICERS AND TRUSTEES
Trustees and Trustee Compensation
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION PRINCIPAL AGGREGATE TOTAL TOTAL NUMBER
AGE WITH OCCUPATION(S) COMPENSATION COMPENSATION OF FUND
REGISTRANT DURING (INCLUDING (INCLUDING BOARDS ON
PAST 5 YEARS VOLUNTARILY VOLUNTARILY WHICH
(POSITIONS DEFERRED DEFERRED TRUSTEE
WITHIN THE COMPENSATION/1/) COMPENSATION/1/) SERVES/2/
ORGANIZATIONS FROM FROM ALL FUNDS
LISTED MAY HAVE THE FUND DURING MANAGED BY
CHANGED DURING FISCAL YEAR CAPITAL RESEARCH
THIS PERIOD) ENDED AUGUST 31, AND
1997 MANAGEMENT
COMPANY/2/ FOR
THE YEAR ENDED
AUGUST 31, 1997
<S> <C> <C> <C> <C> <C>
H. Frederick Trustee Private $3,900 /3/ $163,500 18
Christie Age: 64 Investor.
P.O. Box 144 Former President
Palos Verdes and Chief
Estates, CA 90274 Executive
Officer The
Mission Group
(non-utility
holding company,
subsidiary of
Southern
California
Edison Company)
+Don R. Trustee President none/4/ none/4/ 12
ConlanAge: 61 (retired), The
1630 Milan Avenue Capital Group
South Pasadena, Companies, Inc.
CA 91030
Diane C. Creel Trustee CEO and $3,900 $43,000 12
Age: 48 President,
100 W. Broadway The Earth
Suite 5000 Technology
Long Beach, CA Corporation
90802 (international
consulting
engineering)
Martin Fenton, Trustee Chairman, Senior $4,300 /3/ $132,600 16
Jr. Resource Group
Age: 62 (management of
4350 Executive senior living
Drive centers)
Suite 101
San Diego, CA
92121-2116
Leonard R. Fuller Trustee President, $3,900/3/ $46,200 12
Age: 51 Fuller &
4337 Marina City Company, Inc.
Drive (financial
Suite 841 ETN management
Marina del Rey, consulting firm)
CA 90292
+*Abner D. Senior Vice none/4/ none/4/ 12
Goldstine President, President and
Age: 67 PEO Director,
and Capital Research
Trustee and Management
Company
*Paul G. Haaga, Executive Vice none/4/ none/4/ 14
Jr. Chairman President and
Age: 48 of Director,
the Board Capital Research
and Management
Company
Herbert Hoover Trustee Private Investor $3,500 $68,000 14
III
Age: 69
1520 Circle Drive
San Marino, CA
91108
Richard G. Trustee Chairman, $4,300 /3/ $98,000 13
Newman President and
Age: 62 CEO,
3250 Wilshire AECOM Technology
Boulevard Corporation
Los Angeles, CA (architectural
90010-1599 engineering)
Peter C. Valli Trustee Retired. Former $4,300 /3/ $46,200 12
Age: 70 Chairman and
45 Sea Isle Drive CEO, BW/IP
Long Beach, CA International
90803 Inc. (industrial
manufacturing)
</TABLE>
+ Trustees who are considered "interested persons of the fund as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), on the basis of
their affiliation with the fund's Investment Adviser, Capital Research and
Management Company.
* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
** Address is 333 South Hope Street, Los Angeles, CA 90071
/1/ Amounts may be deferred by eligible Trustees under a non-qualified deferred
compensation plan adopted by the fund in 1994. Deferred amounts accumulate at
an earnings rate determined by the total return of one or more funds in The
American Funds Group as designated by the Trustee.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 28 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management
Trust of America, Capital Income Builder, Inc., Capital World Growth and Income
Fund, Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, The U. S. Treasury Money Fund of America, U.S. Government Securities
Fund and Washington Mutual Investors Fund, Inc. Capital Research and
Management Company also manages American Variable Insurance Series and Anchor
Pathway Fund which serve as the underlying investment vehicle for certain
variable insurance contracts; and Bond Portfolio for Endowments, Inc. and
Endowments, Inc. whose shares may be owned only by tax-exempt organizations.
/3/ Since the plan's adoption, the total amount of deferred compensation
accrued by the fund (plus earnings thereon) for participating Trustees is as
follows: H. Frederick Christie ($7,774), Martin Fenton, Jr. ($9,823), Leonard
R. Fuller ($3,003), Richard G. Newman ($20,779), and Peter C. Valli ($18,295).
Amounts deferred and accumulated earnings thereon are not funded and are
general unsecured liabilities of the fund until paid to the Trustee.
/4/ Don R. Conlan, Abner D. Goldstine and Paul G. Haaga, Jr. are affiliated
with the Investment Adviser and, accordingly, receive no compensation from the
fund.
OFFICERS
(with their principal occupations during the past five years)#
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) DURING
WITH THE FUND PAST 5 YEARS
<S> <C> <C> <C>
Michael J. Downer 43 Vice President Senior Vice President - Fund
333 South Hope Street Business Management Group,
Los Angeles, CA 90071 Capital Research and Management
Company
Mary C. Hall 39 Vice President Senior Vice President - Fund
135 South State College Blvd. Business Management Group,
Brea, CA 92821 Capital Research and Management
Company
John Smet 41 Vice President Vice President, Capital Research
11100 Santa Monica Blvd. and Management Company
Los Angeles, CA 90025
Julie F. Williams 49 Secretary Vice President - Fund Business
333 South Hope Street Management Group, Capital
Los Angeles, CA 90071 Research and Management Company
Anthony W. Hynes, Jr. 34 Treasurer Vice President - Fund Business
135 South State College Blvd. Management Group, Capital
Brea, CA 92821 Research and Management Company
Kimberly S. Verdick 32 Assistant Secretary Assistant Vice President - Fund
333 South Hope Street Business Management Group,
Los Angeles, CA 90071 Capital Research and Management
Company
Todd L. Miller 38 Assistant Treasurer Assistant Vice President - Fund
135 South State College Blvd. Business Management Group,
Brea, CA 92821 Capital Research and Management
Company
</TABLE>
# Positions within the organizations listed may have changed during this period
No compensation is paid by the fund to any officer or Trustee who is a
director or officer of the Investment Adviser. The fund pays annual fees of
$2,500 to Trustees who are not affiliated with the Investment Adviser, plus
$200 for each Board of Trustees meeting attended, plus $200 for each meeting
attended as a member of a committee of the Board of Trustees. The Trustees may
elect, on a voluntary basis, to defer all or a portion of these fees through a
deferred compensation plan in effect for the fund. The fund also reimburses
certain expenses of the Trustees who are not affiliated with the Investment
Adviser. As of October 1, 1997, the officers and Trustees and their families
as a group, owned beneficially or of record fewer than 1% of the outstanding
shares of the fund.
MANAGEMENT
INVESTMENT ADVISER - The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington, D.C., London, Geneva, Singapore, Hong Kong and Tokyo), with a
staff of professionals, many of whom have a number of years of investment
experience. The Investment Adviser is located at 333 South Hope Street, Los
Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821.
The Investment Adviser's research professionals travel several million miles a
year, making more than 5,000 research visits in more than 50 countries around
the world. The Investment Adviser believes that it is able to attract and
retain quality personnel. The Investment Adviser is a wholly owned subsidiary
of The Capital Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $100 billion of stocks,
bonds and money market instruments and serves over five million investors of
all types throughout the world. These investors include privately owned
businesses and large corporations as well as schools, colleges, foundations and
other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and Service
Agreement (the "Agreement"), between the Trust and the Investment Adviser will
continue until May 31, 1998, unless sooner terminated, and may be renewed from
year to year thereafter, provided that any such renewal has been specifically
approved at least annually by (i) the Board of Trustees, or by the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the fund, and (ii) the vote of a majority of Trustees who are not parties to
the Agreement or interested persons (as defined in the 1940 Act) of any such
party, cast in person, at a meeting called for the purpose of voting on such
approval. The Agreement provides that the Investment Adviser has no liability
to the Trust for its acts or omissions in the performance of its obligations to
the Trust not involving willful misconduct, bad faith, gross negligence or
reckless disregard of its obligations under the Agreement. The Agreement also
provides that either party has the right to terminate the Agreement without
penalty, upon 60 days' written notice to the other party and that the Agreement
automatically terminates in the event of its assignment (as defined in the 1940
Act).
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, administrative, clerical and bookkeeping functions of
the fund, provides suitable office space and utilities, necessary small office
equipment and general purpose accounting forms, supplies, and postage used at
the offices of the fund. The fund pays all expenses not assumed by the
Investment Adviser, including, but not limited to, custodian, stock transfer
and dividend disbursing fees and expenses; costs of designing, printing and
mailing of reports, prospectuses, proxy statements, and notices to its
shareholders; taxes; expenses of issuance and redemption of shares (including
stock certificates, registration and qualification fees and expenses); legal
and auditing expenses; compensation, fees, and expenses paid to directors
unaffiliated with the Investment Adviser; association dues; and costs of
stationery and forms prepared exclusively for the fund; and costs of assembling
and storing shareholder account data.
The management fee is based upon the net assets of the fund and monthly gross
investment income. Gross investment income means gross income, computed
without taking account of gains or losses from sales of capital assets, but
including original issue discount as defined for federal income tax purposes.
The Internal Revenue Code in general defines original issue discount to mean
the difference between the issue price and the stated redemption price at
maturity of certain debt obligations. The holder of such indebtedness is in
general required to treat as ordinary income the proportionate part of the
original issue discount attributable to the period during which the holder held
the indebtedness. The management fee is based upon the annual rates of 0.30%
of the first $60 million of the fund's average net assets, plus 0.21% on
average net assets in excess of $60 million but not exceeding $1 billion, plus
0.18% on average net assets in excess of $1 billion but not exceeding $3
billion, plus 0.16% on average net assets in excess of $3 billion, plus 3% of
the first $40 million of annual gross income, plus 2.25% of annual gross
investment income in excess of $40 million but not exceeding $100 million, plus
2% of annual gross investment income in excess of $100 million. Assuming net
assets of $1.1 billion and gross investment income levels of 6%, 7%, 8%, 9% and
10%, management fees would be 0.37%, 0.40%, 0.42%, 0.44%, and 0.46%,
respectively.
The fund pays all expenses not specifically assumed by the Investment Adviser,
including, but not limited to, registration and filing fees with federal and
state agencies, blue sky expenses, expenses of shareholders meetings, expenses
of reports to existing shareholders, expenses of printing proxies and
prospectuses, insurance premiums, legal and auditing fees, dividend
disbursement expenses, expenses of the issuance, transfer and redemption of its
shares, expenses pursuant to the fund's Plan of Distribution, custodian fees,
expenses of printing and preparation of registration statements, taxes and
compensation and expenses of Trustees who are not affiliated with the
Investment Adviser.
During the fiscal years ended August 31, 1997, 1996, and 1995, , the
Investment Adviser's total fees amounted to $4,700,000, $5,299,000, and
$5,575,000, respectively.
PRINCIPAL UNDERWRITER - American Funds Distributors, Inc. (the "Principal
Underwriter") is the principal underwriter of the fund's shares. The Principal
Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071, 135
South State College Boulevard, Brea, CA 92821, 8000 IH-10 West, San Antonio, TX
78230, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240, and 5300
Robin Hood Road, Norfolk, VA 23513. The fund has adopted a Plan of
Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act . The
Principal Underwriter receives amounts payable pursuant to the Plan (see below)
and commissions consisting of that portion of the sales charge remaining after
the discounts which it allows to investment dealers. Commissions retained by
the Principal Underwriter on sales of fund shares during the fiscal year ended
August 31, 1997 amounted to $382,000 after allowance of $1,565,000 to dealers.
During the fiscal years ended August 31, 1996 and 1995 the Principal
Underwriter retained $610,276 and $662,342, respectively.
As required by rule 12b-1, the Plan (together with the Principal Underwriting
Agreement) has been approved by the full Board of Trustees and separately by a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan or
the Principal Underwriting Agreement, and the Plan has been approved by the
vote of a majority of the outstanding voting securities of the fund. The
officers and Trustees who are interested persons of the Trust due to present
affiliations with the Investment Adviser and related companies may be
considered to have a direct or indirect financial interest in the operation of
the Plan. Potential benefits of the Plan to the fund include improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Trustees who
are not interested persons of the Trust shall be committed to the discretion of
the Trustees who are not interested persons during the existence of the Plan.
Plan expenditures are reviewed quarterly and must be renewed annually by the
Board of Trustees.
Under the Plan the fund may expend up to 0.30% of its average net assets
annually to finance any activity which is primarily intended to result in the
sale of fund shares, provided the fund's Board of Trustees has approved the
category of expenses for which payment is being made. These include service
fees for qualified dealers and dealer commissions and wholesaler compensation
on sales of shares exceeding $1 million (including purchases by any
employer-sponsored 403(b) plan or purchases by any defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a "401(k)
plan with 100 or more eligible employees). Since these fees are paid out of
the fund's assets on an ongoing basis, over time these fees will increase the
cost of an investment and may cost the investor more than paying other types of
sales loads. During the fund's fiscal year ended August 31, 1997, the fund
paid $3,059,000 under the Plan as compensation to dealers. As of August 31,
1997 accrued and unpaid distribution expenses were $618,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries of affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer with adverse financial consequences as a result of
any of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The fund intends to meet all the requirements and has elected the tax status
of a "regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Under Subchapter M, if the fund
distributes within specified times at least 90% of its investment company
taxable income (net investment income and the excess of net short-term capital
gains over net long-term capital losses), it will be taxed only on the portion
of the investment company taxable income that it retains.
To qualify, the fund must (a) 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 which
must be limited, in respect of any one issuer, to an amount not greater than 5%
of the fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or in two or more issuers
which the fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(iii) the sum of any untaxed, undistributed net investment income and net
capital gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the fund from its current year's ordinary income and capital
gain income and (ii) any amount on which the fund pays income tax during the
periods described above. The fund intends to distribute net investment income
and net capital gains so as to minimize or avoid the excise tax liability.
The fund also intends to distribute 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 the fund should, by reason of a
distribution of realized capital gains, be reduced below a shareholder's cost,
such distribution would be, in effect, 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. In particular, investors should consider the tax implications of
purchasing shares just prior to a dividend or distribution record date. Those
investors purchasing shares just prior to such a date will then receive a
partial return of capital upon the dividend or distribution, which will
nevertheless be taxable to them as an ordinary or capital gains dividend.
Dividends and distributions 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.
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of
shares of the fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
As of the date of this statement of additional information, the maximum
individual stated tax rate applicable to ordinary income is 39.6% (effective
tax rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate applicable to net
capital gains on assets held more than 18 months is 20%, and on assets held
more than one year and not more than 18 months is 28%; and the maximum
corporate tax applicable to ordinary income and net capital gain is 35%.
However, to eliminate the benefit of lower marginal corporate income tax rates,
corporations which have taxable income in excess of $100,000 in a taxable year
will be required to pay an additional amount of up to $11,750, and corporations
which have taxable income in excess of $15,000,000 for a taxable year will be
required to pay an additional amount of income tax up to $100,000. Naturally,
the amount of tax payable by a taxpayer will be affected by a combination of
tax law rules covering, e.g., deductions, credits, deferrals, exemptions,
sources of income and other matters. Under the Code, an individual is entitled
to establish an IRA each year (prior to the tax return filing deadline for that
year) whereby earnings on investments are tax-deferred. In addition, in some
cases, the IRA contribution itself may be deductible.
The foregoing is limited to a summary discussion of federal taxation and
should not be viewed as a comprehensive discussion of all provisions of the
Code relevant to investors. Dividends and distributions may also be subject to
state or local taxes. Investors should consult their own tax advisers for
additional details as to their particular tax status.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
<S> <C> <C>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
See "Investment Minimums and Fund $50 minimum (except where a lower
Numbers" for initial minimum is noted under "Investment
investment minimums. Minimums and Fund Numbers").
By contacting Visit any investment dealer who is Mail directly to your investment
your registered in the state where the dealer's address printed on your
investment purchase is made and who has a account statement.
dealer sales agreement with American Funds
Distributors.
By mail Make your check payable to the fund Fill out the account additions form
and mail to the address indicated at the bottom of a recent account
on the account application. Please statement, make your check payable
indicate an investment dealer on to the fund, write your account
the account application. number on your check, and mail the
check and form in the envelope
provided with your account
statement.
By telephone Please contact your investment Complete the "Investments by Phone"
dealer to open account, then follow section on the account application
the procedures for additional or American FundsLink Authorization
investments. Form. Once you establish the
privilege, you, your financial
advisor or any person with your
account information can call
American FundsLine(r) and make
investments by telephone (subject
to conditions noted in "Telephone
and Computer Purchases, Redemptions
and Exchanges" below).
By computer Please contact your investment Complete the American FundsLink
dealer to open account, then follow Authorization Form. Once you
the procedures for additional establish the privilege, you, your
investments. financial advisor or any person with
your account information may access
American FundsLine(r) on the Internet
and make investments by computer
(subject to conditions noted in
"Telephone and Computer Purchases,
Redemptions and Exchanges" below).
By wire Call 800/421-0180 to obtain your Your bank should wire your
account number(s), if necessary. additional investments in the same
Please indicate an manner as described under "Initial
investment dealer on the account. Investment."
Instruct your bank to wire funds
to:
Wells Fargo Bank
155 Fifth Street
Sixth Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS - Here are the minimum initial investments
required by the funds in The American Funds Group along with fund numbers for
use with our automated phone line, American FundsLine(r) (see description
below):
<TABLE>
<CAPTION>
<S> <C> <C>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(r) 02
$1,000
American Balanced Fund(r) 11
500
American Mutual Fund(r) 03
250
Capital Income Builder(r) 12
1,000
Capital World Growth and Income Fund(sm) 33
1,000
EuroPacific Growth Fund(r) 16
250
Fundamental Investors(sm) 10
250
The Growth Fund of America(r) 05
1,000
The Income Fund of America(r) 06
1,000
The Investment Company of America(r) 04
250
The New Economy Fund(r) 14
1,000
New Perspective Fund(r) 07
250
SMALLCAP World Fund(r) 35
1,000
Washington Mutual Investors Fund(sm) 01
250
BOND FUNDS
American High-Income Municipal Bond Fund(r) 40
1,000
American High-Income Trust(sm) 21
1,000
The Bond Fund of America(sm) 08
1,000
Capital World Bond Fund(r) 31
1,000
Intermediate Bond Fund of America(r) 23
1,000
Limited Term Tax-Exempt Bond Fund of America(sm) 43
1,000
The Tax-Exempt Bond Fund of America(r) 19
1,000
The Tax-Exempt Fund of California(r)* 20
1,000
The Tax-Exempt Fund of Maryland(r)* 24
1,000
The Tax-Exempt Fund of Virginia(r)* 25
1,000
U.S. Government Securities Fund(sm) 22
1,000
MONEY MARKET FUNDS
The Cash Management Trust of America(r) 09
2,500
The Tax-Exempt Money Fund of America(sm) 39
2,500
The U.S. Treasury Money Fund of America(sm) 49
2,500
___________
*Available only in certain states.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for individual retirement accounts
(IRAs). Minimums are reduced to $50 for purchases through "Automatic
Investment Plans" (except for the money market funds) or to $25 for purchases
by retirement plans through payroll deductions and may be reduced or waived for
shareholders of other funds in The American Funds Group. TAX-EXEMPT FUNDS
SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The minimum is $50 for
additional investments (except as noted above).
DEALER COMMISSIONS - The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND FUNDS
Less than $50,000 6.10% 5.75%
5.00%
$50,000 but less than $100,000 4.71 4.50
3.75
BOND FUNDS
Less than $25,000 4.99 4.75
4.00
$25,000 but less than $50,000 4.71 4.50
3.75
$50,000 but less than $100,000 4.17 4.00
3.25
STOCK, STOCK/BOND, AND BOND FUNDS
$100,000 but less than $250,000 3.63 3.50
2.75
$250,000 but less than $500,000 2.56 2.50
2.00
$500,000 but less than $1,000,000 2.04 2.00
1.60
$1,000,000 or more none none (see below)
</TABLE>
Commissions of up to 1% will be paid to dealers who initiate
and are responsible for purchases of $1 million
or more, for purchases by any employer-sponsored 403(b) plan or
purchases by any defined contribution plan qualified under Section
401(a) of the Internal Revenue Code including a "401(k)" plan
with 100 or more eligible employees, and for purchases made at net
asset value by certain retirement plans of organizations with collective
retirement plan assets of $100 million or more: 1.00% on
amounts of $1 million to $2 million, 0.80% on amounts over $2 million to
$3 million, 0.50% on amounts over $3 million to $50 million, 0.25%
on amounts over $50 million to $100 million, and 0.15% on
amounts over $100 million. The level of dealer commissions will be
determined based on sales made over a 12-month period commencing
from the date of the first sale at net asset value.
American Funds Distributors, at its expense (from a designated percentage of
its income), will, during the current fiscal year, provide additional
compensation to dealers. Currently these payments are limited to the top one
hundred dealers who have sold shares of the fund or other funds in The American
Funds Group. These payments will be based on a pro rata share of a qualifying
dealer's sales. American Funds Distributors will, on an annual basis, determine
the advisability of continuing these payments.
Any employer-sponsored 403(b) plan or defined contribution plan qualified
under Section 401(a) of the Internal Revenue Code including a "401(k)" plan
with 100 or more eligible employees or any other purchaser investing at least
$1 million in shares of the fund (or in combination with shares of other funds
in The American Funds Group other than the money market funds) may purchase
shares at net asset value; however, a contingent deferred sales charge of 1% is
imposed on certain redemptions made within twelve months of the purchase. (See
"Redeeming Shares--Contingent Deferred Sales Charge.") Investments by
retirement plans, foundations or endowments with $50 million or more in assets
may be made with no sales charge and are not subject to a contingent deferred
sales charge.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
NET ASSET VALUE PURCHASES - The stock, stock/bond and bond funds may sell
shares at net asset value to: (1) current or retired directors, trustees,
officers and advisory board members of the funds managed by Capital Research
and Management Company, employees of Washington Management Corporation,
employees and partners of The Capital Group Companies, Inc. and its affiliated
companies, certain family members of the above persons, and trusts or plans
primarily for such persons; (2) current registered representatives, retired
registered representatives with respect to accounts established while active,
or full-time employees (and their spouses, parents, and children) of dealers
who have sales agreements with American Funds Distributors (or who clear
transactions through such dealers) and plans for such persons or the dealers;
(3) companies exchanging securities with the fund through a merger, acquisition
or exchange offer; (4) trustees or other fiduciaries purchasing shares for
certain retirement plans of organizations with retirement plan assets of $50
million or more; (5) insurance company separate accounts; (6) accounts managed
by subsidiaries of The Capital Group Companies, Inc.; and (7) The Capital Group
Companies, Inc., its affiliated companies and Washington Management
Corporation. Shares are offered at net asset value to these persons and
organizations due to anticipated economies in sales effort and expense.
STATEMENT OF INTENTION - The reduced sales charges and public offering prices
set forth in the Prospectus apply to purchases of $50,000 or more made within a
13-month period subject to the following statement of intention (the
"Statement") terms: The Statement is not a binding obligation to purchase the
indicated amount. When a shareholder elects to utilize the Statement in order
to qualify for a reduced sales charge, shares equal to 5% of the dollar amount
specified in the Statement will be held in escrow in the shareholder's account
out of the initial purchase (or subsequent purchases, if necessary) by the
Transfer Agent. All dividends and any capital gain distributions on shares
held in escrow will be credited to the shareholder's account in shares (or paid
in cash, if requested). If the intended investment is not completed within the
specified 13-month period, the purchaser will remit to the Principal
Underwriter the difference between the sales charge actually paid and the sales
charge which would have been paid if the total purchases had been made at a
single time. If the difference is not paid within 45 days after written
request by the Principal Underwriter or the securities dealer, the appropriate
number of shares held in escrow will be redeemed to pay such difference. If
the proceeds from this redemption are inadequate, the purchaser will be liable
to the Principal Underwriter for the balance still outstanding. The Statement
may be revised upward at any time during the 13-month period, and such a
revision will be treated as a new Statement, except that the 13-month period
during which the purchase must be made will remain unchanged and there will be
no retroactive reduction of the sales charges paid on prior purchases.
Existing holdings eligible for rights of accumulation (see the prospectus and
account application) may be credited toward satisfying the Statement. During
the Statement period reinvested dividends and capital gain distributions,
investments in money market funds, and investments made under a right of
reinstatement will not be credited toward satisfying the Statement.
In the case of purchase orders by the directors of certain retirement plans by
payroll deduction, the sales charge for the investments made during the
13-month period will be handled as follows: the regular monthly payroll
deduction investment will be multiplied by 13 and then multiplied by 1.5. The
current value of existing American Funds investments (other than money market
fund investments) and any rollovers or transfers reasonably anticipated to be
invested in non-money market American Funds during the 13-month period are
added to the figure determined above. The sum is the Statement amount and
applicable breakpoint level. On the first investment and all other investments
made pursuant to the statement of intention, a sales charge will be assessed
according to the sales charge breakpoint thus determined. There will be no
retroactive adjustments in sales charges on investments previously made during
the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION - Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above, or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
PRICE OF SHARES - Purchases of shares are made at the offering price next
determined after the purchase order is received by the fund or American Funds
Service Company. This offering price is effective for orders received prior to
the time of determination of the net asset value and, in the case of orders
placed with dealers, accepted by the Principal Underwriter prior to its close
of business. In case of orders sent directly to the fund or American Funds
Service Company, an investment dealer MUST be indicated. The dealer is
responsible for promptly transmitting purchase orders to the Principal
Underwriter. Orders received by the investment dealer, the Transfer Agent, or
the fund after the time of the determination of the net asset value will be
entered at the next calculated offering price. Prices which appear in the
newspaper are not always indicative of prices at which you will be purchasing
and redeeming shares of the fund, since such prices generally reflect the
previous day's closing price whereas purchases and redemptions are made at the
next calculated closing price.
The price you pay for shares, the offering price, is based on the net asset
value per share which is calculated once daily at the close of trading
(currently 4:00 p.m., New York time) each day the New York Stock Exchange is
open. The New York Stock Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Martin Luther King, Jr.'s Birthday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day.
All portfolio securities of funds managed by Capital Research and Management
Company are valued, and the net asset value per share of the fund is
determined, as follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
Trust. The Trust will not knowingly sell shares of the fund (other than for
the reinvestment of dividends or capital gain distributions) directly,
indirectly or through a unit investment trust to any person or entity, where,
after the sale, such person, or entity would own beneficially directly,
indirectly, or through a unit investment trust more than 4.5% of the
outstanding shares of the fund without the consent of a majority of the Board
of Trustees.
REDEEMING SHARES
<TABLE>
<CAPTION>
<S> <C>
By writing to American Funds Service Send a letter of instruction specifying the name of
Company (at the appropriate address the fund, the number of shares or dollar amount to
indicated under "Principal be sold, your name and account number. You should
Underwriter and Transfer also enclose any share certificates you wish to
Agent" in the Prospectus) redeem. For redemptions over $50,000 and for
certain redemptions of $50,000 or less (see below),
your signature must be guaranteed by a bank, savings
association, credit union, or member firm of a
domestic stock exchange or the National Association
of Securities Dealers, Inc. that is an eligible
guarantor institution. You should verify with the
institution that it is an eligible guarantor prior
to signing. Additional documentation may be
required for redemption of shares held in corporate,
partnership or fiduciary accounts. Notarization by
a Notary Public is not an acceptable signature
guarantee.
By contacting your investment If you redeem shares through your investment dealer,
dealer you may be charged for this service. SHARES HELD
FOR YOU IN YOUR INVESTMENT DEALER'S STREET NAME MUST
BE REDEEMED THROUGH THE DEALER.
You may have a redemption check sent You may use this option, provided the account is
to you by using American FundsLine(r) registered in the name of an individual(s), a
or American FundsLine Online(sm) or by UGMA/UTMA custodian, or a non-retirement plan trust.
telephoning, faxing, or telegraphing These redemptions may not exceed 50,000 per
American Funds Service Company shareholder, per day, per fund account and the check
(subject to the conditions noted in must be made payable to the shareholder(s) of record
this section and in "Telephone and and be sent to the address of record provided the
Computer Purchases, Redemptions and address has been used with the account for at least 10
Exchanges" below) days. See "Fund Organization and Management -
Principal Underwriter and Transfer Agent" in the
prospectus and "Exchange Privilege" below for the
appropriate telephone or fax number.
In the case of the money Upon request (use the account application for the
market funds, you may have money market funds) you may establish telephone
redemptions wired to your redemption privileges (which will enable you to have
bank by telephoning American Funds a redemption sent to your bank account) and/or check
Service Company ($1,000 or more) or writing privileges. If you request check writing
by writing a check ($250 or more) privileges, you will be provided with checks that
you may use to draw against your account. These
checks may be made payable to anyone you designate
and must be signed by the authorized number of
registered shareholders exactly as indicated on your
checking account signature card.
</TABLE>
A SIGNATURE GUARANTEE IS NOT CURRENTLY REQUIRED FOR ANY REDEMPTION OF $50,000
OR LESS PROVIDED THE REDEMPTION CHECK IS MADE PAYABLE TO THE REGISTERED
SHAREHOLDER(S) AND IS MAILED TO THE ADDRESS OF RECORD, PROVIDED THE ADDRESS HAS
BEEN USED WITH THE ACCOUNT FOR AT LEAST 10 DAYS.
CONTINGENT DEFERRED SALES CHARGE - A contingent deferred sales charge of 1%
applies to certain redemptions made within twelve months of purchase on
investments of $1 million or more and on any investment made with no initial
sales charge by any employer-sponsored 403(b) plan or defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares. Shares held
for the longest period are assumed to be redeemed first for purposes of
calculating this charge. The charge is waived for exchanges (except if shares
acquired by exchange were then redeemed within 12 months of the initial
purchase); for distributions from qualified retirement plans and other employee
benefit plans; for redemptions resulting from participant-directed switches
among investment options within a participant-directed employer-sponsored
retirement plan; for distributions from 403(b) plans or IRAs due to death,
disability or attainment of age 591/2; for tax-free returns of excess
contributions to IRAs; for redemptions through certain automatic withdrawals
not exceeding 10% of the amount that would otherwise be subject to the charge;
and for redemptions in connection with loans made by qualified retirement
plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN - The automatic investment plan enables you to make
regular monthly or quarterly investments in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. . Bank accounts will be
charged on the day or a few days before investments are credited, depending on
the bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of the account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing the
Transfer Agent.
AUTOMATIC REINVESTMENT - Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, American
Funds Service Company or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS -You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the "paying fund") into any other fund in The American Funds Group
(the "receiving fund") subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds toyou. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE - You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to American Funds Service Company (see
"Redeeming Shares"), by contacting your investment dealer, by using American
FundsLine(r) or American FundsLine Online(sm)(see "American FundsLine(r)" and
American FundsLine Online(sm) below), or by telephoning 800/421-0180 toll-free,
faxing (see "Principal Underwriter and Transfer Agent" in the Prospectus for
the appropriate fax numbers) or telegraphing American Funds Service Company.
(See "Telephone and Computer Purchases, Redemptions and Exchanges" below.)
Shares held in corporate-type retirement plans for which Capital Guardian Trust
Company serves as trustee may not be exchanged by telephone, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES - You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS - Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS - Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments , will be reflected on regular confirmation statements from
American Funds Service Company. Dividend and capital gain reinvestments and
purchases through automatic investment plans and certain retirement plans will
be confirmed at least quarterly.
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(SM) - You may check your
share balance, the price of your shares, or your most recent account
transaction, redeem shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(r) and American
FundsLine OnLine(sm). To use this service, call 800/325-3590 from a
TouchTone(tm) telephone or access the American Funds Website on the Internet at
www.americanfunds.com. Redemptions and exchanges through American FundsLine(r)
and American FundsLine OnLine(sm) are subject to the conditions noted above and
in "Redeeming Shares--Telephone and Computer Purchases, Redemptions and
Exchanges" below. You will need your fund number (see the list of funds in The
American Funds Group under "Purchase of Shares--Investment Minimums and Fund
Numbers"), personal identification number (the last four digits of your Social
Security number or other tax identification number associated with your
account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES - By using the
telephone (including American FundsLine(r)) and American FundsLine OnLine(sm),
fax or telegraph redemption and/or exchange options, you agree to hold the
fund, American Funds Service Company, any of its affiliates or mutual funds
managed by such affiliates, and each of their respective directors, trustees,
officers, employees and agents harmless from any losses, expenses, costs or
liability (including attorney fees) which may be incurred in connection with
the exercise of these privileges. Generally, all shareholders are automatically
eligible to use these options. However, you may elect to opt out of these
options by writing American Funds Service Company (you may also reinstate them
at any time by writing American Funds Service Company). If American Funds
Service Company does not employ reasonable procedures to confirm that the
instructions received from any person with appropriate account information are
genuine, the fund may be liable for losses due to unauthorized or fraudulent
instructions. In the event that shareholders are unable to reach the fund by
telephone because of technical difficulties, market conditions, or a natural
disaster, redemption and exchange requests may be made in writing only.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the fund's 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 its
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not consider that it has
an obligation to obtain the lowest available commission rate to the exclusion
of price, service and qualitative considerations.
There are occasions on which portfolio transactions for the fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the fund, they are effected only when the
Investment Adviser believes that to do so is in the interest of the fund. When
such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal year ended August 31, 1997
amounted to $73,000. No brokerage commissions were paid for the fiscal year
ended August 31, 1996. Brokerage commissions, including dealer concessions on
underwritings, for the fiscal year ended August 31, 1995, amounted to $15,000 .
GENERAL INFORMATION
CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds
from the sale of shares of the fund and of securities in the fund's portfolio,
are held by The Chase Manhattan Bank, One Chase Manhattan Plaza, New York, NY
10081, as Custodian.
TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee
of $874,000 for the fiscal year ended August 31, 1997.
INDEPENDENT AUDITORS - Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, has served as the fund's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements included in this Statement of Additional
Information have been so included in reliance on the report of the independent
auditors given on the authority of said firm as experts in accounting and
auditing.
REPORTS TO SHAREHOLDERS - The Trust's fiscal year ends on August 31.
Shareholders are provided at least semiannually with reports showing the
investment portfolio, financial statements and other information. The fund's
annual financial statements are audited annually by the Trust's independent
auditors, Deloitte & Touche LLP, whose selection is determined by the Trustees.
PERSONAL INVESTING POLICY - The Investment Adviser and its affiliated companies
have adopted a personal investing policy consistent with Investment Company
Institute guidelines. This policy includes: a ban on acquisitions of
securities pursuant to an initial public offering; restrictions on acquisitions
of private placement securities; pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with codes of ethics; blackout periods on personal investing for
certain investment personnel; ban on short-term trading profits for investment
personnel; limitations on service as a director of publicly traded companies;
and disclosure of personal securities transactions. You may obtain a summary
of the personal investing policy by contacting the Secretary of the fund.
The financial statements including the investment portfolio and the report of
Independent Auditors contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
<TABLE>
<CAPTION>
<S> <C>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE -- AUGUST 31, 1997
Net asset value and redemption price per share
(Net assets divided by shares outstanding) $ 13.03
Offering price per share (100/95.25 of per share
net asset value, which takes into account the
fund's current maximum sales charge) $ 13.68
</TABLE>
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Under the laws of certain states,
including Massachusetts, where the Trust was organized, and California, where
the Trust's principal office is located, shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. However, the risk of a shareholder
incurring any financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its
obligations. The Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
will provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
SHAREHOLDER VOTING RIGHTS - All shares of the fund have equal voting rights
and may be voted in the elections of Trustees and on other matters submitted to
the vote of shareholders. As permitted by Massachusetts law, there will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders. At that time, the Trustees then in
office will call a shareholders' meeting for the election of Trustees. The
Trustees must call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when requested to do so by the record
holders of 10% of the outstanding shares. At such a meeting, a Trustee may be
removed after the holders of record of not less than a majority of the
outstanding shares of the fund have declared that the Trustee be removed either
by declaration in writing or by votes cast in person or by proxy. Except as
set forth above, the Trustees will continue to hold office and may appoint
successor Trustees. The shares do not have cumulative voting rights, which
means that the holders of a majority of the shares voting for the election of
Trustees can elect all the Trustees. No amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the fund except that amendments may be made upon the sole
approval of the Trustees to conform the Declaration of Trust to the
requirements of applicable Federal laws or regulations or the requirements of
the regulated investment company provisions of the Code, however, the Trustees
will not be liable for failing to do so. If not terminated by the vote or
written consent of a majority of the outstanding shares, the Trust will
continue indefinitely.
The Trust currently issues shares in one series (the fund), but the Board of
Trustees may establish additional series of shares in the future. When more
than one series of shares is outstanding, shares of all series will vote
together for a single set of Trustees, and on other matters affecting the
entire Trust, with each share entitled to a single vote. On matters affecting
only one series, only the shareholders of that series shall be entitled to
vote. On matters relating to more than one series but affecting the series
differently, separate votes by series are required.
INVESTMENT RESULTS
The fund's yield is 5.46% based on the 30-day (or one month) period ended
August 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.
The fund may also calculate a distribution rate on a taxable and tax
equivalent basis. The distribution rate is computed by annualizing the current
month's dividend and dividing by average net asset value or maximum offering
price for the month. The distribution rate may differ from the yield.
In addition, investments in premium bonds may affect the fund's distribution
rate. A premium bond is bond which is purchased for more than its face value.
Because of this, the bond usually pays a higher than market rate interest, but
the value of the bond (which affects the net asset value of the fund) will be
lower than its purchase price as it nears maturity. The SEC yield takes into
account the long-term effects of premium bonds (I.E., for a premium bond, the
income must be regularly reduced (amortized) by an amount that provides for the
future decrease in value of the bond) whereas the distribution rate may not.
Therefore, the distribution rates of bond funds that invest in premium bonds
(and do not amortize) usually are higher than their SEC yields.
Income from "roll" transactions (the sale of GNMA certificates or other
securities together with a commitment, for which the Fund receives a fee, to
purchase similar securities at a future date) is recorded for accounting
purposes as interest income ratable over the term of each roll and is included
in net investment income for purposes of determining the fund's yield.
As of August 31, 1997, the fund's total return over the past 12 months and
annual total return for the five-year and ten-year periods was 3.88%, 4.79%
and 7.52%. 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) deduction of the maximum sales load of
4.75% from the $1,000 initial investment; (2) reinvestment of dividends and
distributions at net asset value on the reinvestment date determined by the
Board; and (3) a complete redemption at the end of any period illustrated. The
fund will calculate total return for five and ten-year periods after such
periods have elapsed. In addition, the fund may provide lifetime average total
return figures.
EXPERIENCE OF INVESTMENT ADVISER - Capital Research and Management Company
manages nine common stock funds that are at least 10 years old. In the rolling
10-year periods since January 1, 1967 (127 in all), those funds have had
better total returns that the Standard and Poor's 500 Composite Stock Index in
91 of the 127 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.
The fund may also refer to results compiled by organizations such as Lipper
Analytical Services, Morningstar, Inc. and Wiesenberger Investment Companies
Services. Additionally, the fund may, from time to time, refer to results
published in various newspapers or periodicals, including Barrons, Forbes,
Fortune, Institutional Investor, Kiplinger's Personal Finance Magazine, Money,
U.S. News and World Report and The Wall Street Journal.
THE BENEFITS OF SYSTEMATIC INVESTING
<TABLE>
<CAPTION>
<S> <C> <C>
Here's how much you would have if you invested $2,000 a year in the Fund:
2 Years 4 Years Lifetime
(9/1/95 - 8/31/97) (9/1/93 - 8/31/97) (10/17/85 - 8/31/97)
$4,226 $8,806 $37,653
</TABLE>
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
If you had invested ... and taken all
$10,000 in the Fund distributions in shares,
this many years ago... your investment would
| have been worth this
much at August 31, 1997
|
Periods
Number of Years 9/1-8/31 Value**
<S> <C> <C>
1 1996 - 1997 $10,388
2 1995 - 1997 10,743
3 1994 - 1997 11,665
4 1993 - 1997 11,236
5 1992 - 1997 12.633
6 1991 - 1997 14,274
7 1990 - 1997 16,040
8 1989 - 1997 17,343
9 1988 - 1997 19,038
10 1987 - 1997 20,638
11 1986 - 1997 20,980
Lifetime 1985* - 1997 23,739
</TABLE>
Illustration of a $10,000 investment in the Fund
with dividends reinvested
(For the lifetime of the Fund October 17, 1985 - August 31, 1997)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES**
From
Fiscal Total From Capital From
Year End Annual Dividends Investment Initial Gains Dividends Total
August 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1986* $825 $825 $10,825 $9,920 $26 $833 $10,779
1987 1,035 1,860 11,860 9,167 38 1,748 10,953
1988 1,099 2,959 12,959 9,027 37 2,809 11,873
1989 1,211 4,170 14,170 8,987 37 4,016 13,040
1990 1,289 5,459 15,459 8,833 37 5,227 14,097
1991 1,383 6,842 16,842 9,047 37 6,753 15,837
1992 1,382 8,224 18,224 9,420 39 8,445 17,904
1993 1,417 9,641 19,641 9,820 41 10,269 20,130
1994 1,440 11,081 21,081 8,787 36 10,557 19,380
1995 1,547 12,628 22,628 8,827 37 12,184 21,048
1996 1,493 14,121 24,121 8,520 35 13,208 21,763
1997 1,545 15,666 25,666 8,687 36 15,016 23,739
</TABLE>
The dollar amount of capital gain distributions during the period was $41.
* From inception on October 17, 1985.
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.: "Prime-1" is the highest commercial paper
rating and issuers rated in this category have the following characteristics:
"Issuers rated 'Prime-1' have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by
-- leading market positions in well-established industries
-- high rates of return on funds employed
-- conservative capitalization structures with moderate reliance on debt and
ample asset protections
-- broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- well-established access to a range of financial markets and assured
sources of alternate liquidity."
STANDARD & POOR'S CORPORATION'S: "A-1" is the highest commercial paper rating,
and issuers rated in this category have the following characteristics:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation."
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 1997
<S> <C> <C> <C> <C>
U.S. Treasuries 45%
GNMAs and Other Mortgage-Backed Securities 40%
Other Federal Obligations 5%
Development Authorities 1%
Cash & Equivalents 9%
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 $ 12.78 $ 13.35 $ 13.18 $ 14.73 $ 14.13
-------- -------- -------- -------- --------
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 1.13 0.44 1.07 (.53) 1.68
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment
income (.88) (.90) (1.01) (1.02) (1.08)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 13.03 $ 12.78 $ 13.24 $ 13.18 $ 14.73
====== ======== ======== ======== ========
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.
