[THE AMERICAN FUNDS GROUP(R)]
U.S. GOVERNMENT SECURITIES FUND
[cover: illustration of how funds from bank result in real estate sales]
ANNUAL REPORT
for the year ended August 31 1998
U.S. GOVERNMENT SECURITIES FUND(SM)seeks high current income, consistent with
prudent investment risk and preservation of capital, by investing primarily in
obligations backed by the full faith and credit of the United States
government.
U.S. GOVERNMENT SECURITIES FUND is one of the 28 mutual funds in The American
Funds Group,(r) managed by Capital Research and Management Company. Since 1931,
Capital has invested with a long-term focus based on thorough research and
attention to risk.
RESULTS AT A GLANCE
(as of August 31, 1998, at net asset value)
ANNUALIZED TOTAL RETURNS (WITH ALL DISTRIBUTIONS REINVESTED)
ONE YEAR +9.7%
LIFETIME (since October 17, 1985) +8.1%
30-DAY DISTRIBUTION RATE 6.33%
Here are the fund's average annual compound returns over various periods, with
all distributions reinvested and assuming payment of the 4.75% maximum sales
charge at the beginning of the stated periods. Sales charges are lower for
accounts of $25,000 or more.
<TABLE>
<CAPTION>
PERIODS ENDED
8/31/98 9/30/98
fiscal year-end latest calendar quarter-end
<S> <C> <C>
10 YEARS +7.64% +7.72%
5 YEARS +4.27% +4.64%
1 YEAR +4.49% +5.57%
</TABLE>
Fund results in this report were computed without a sales charge unless
otherwise indicated. The fund's 30-day yield as of September 30, 1998,
calculated in accordance with the Securities and Exchange Commission formula,
was 4.71%. The fund's distribution rate as of that date was 5.94%. The SEC
yield reflects income the fund expects to earn based on its current portfolio
of securities, while the distribution rate is based solely on the fund's past
dividends. Accordingly, the fund's SEC yield and distribution rate may differ.
THE FIGURES IN THIS REPORT REFLECT PAST RESULTS. SHARE PRICE AND RETURN WILL
VARY, SO YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE SHORTER THE TIME
PERIOD OF YOUR INVESTMENT, THE GREATER THE POSSIBILITY OF LOSS. FUND SHARES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR INSURED OR GUARANTEED BY, THE U.S.
GOVERNMENT, ANY FINANCIAL INSTITUTION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER AGENCY, ENTITY OR PERSON.
ON THE COVER: Over the years, high-quality mortgage-backed securities have made
an important contribution to the fund's results.
FELLOW SHAREHOLDERS:
In contrast to weakness in stock markets, U.S. Treasury Securities moved higher
during fiscal 1998. In this hospitable environment, we are pleased to report
that U.S. Government Securities Fund once again produced a generous stream of
current income as well as a measure of capital appreciation.
For the 12 months ended August 31, the fund paid monthly dividends totaling
86.5 cents a share. That represents an income return of 6.8% for shareholders
who reinvested those dividends in additional shares, and 6.7% for those who
took dividends in cash.
Interest rates were lower at the end of the year than at the start, helping the
fund's share price record a gain. (Bond prices rise when interest rates fall,
and vice versa.) The fund's net asset value rose to $13.39 a share from $13.03
a year earlier, contributing to a total return (dividends plus appreciation) of
9.7% for shareholders who reinvested their dividends.
The fund's 9.7% return was ahead of the 8.4% average return posted by the 52
GNMA mortgage-backed securities funds tracked by Lipper Analytical Services,
but lagged the 10.7% average return of the 187 U.S. government funds for the
year. The unmanaged Lehman Brothers Government/Mortgage-Backed Securities Index
rose 10.9% with interest compounded.
This year's increase brings the fund's total return since it began operations
on October 17, 1985 to 173.3% - an average annual compound return of 8.1%.
THE APPEAL OF GOVERNMENT BONDS
A number of factors helped boost bond prices during the period. The U.S.
economy continued to expand, but growth slowed considerably in the second
quarter of 1998. Inflationary pressures remained in check, in part because
Asia's financial crisis helped take some steam out of a possibly overheating
economy. That reduced the likelihood that the Federal Reserve Board would raise
short-term interest rates. (In fact, the Fed lowered rates twice, on September
29 and October 15.) With sharp declines in stock markets both here and abroad,
many investors found high-quality U.S. bonds extremely appealing.
U.S. Treasury bonds, which serve as the primary benchmark for U.S. interest
rates and a gauge of the overall health of the economy, were the greatest
beneficiaries of the bond market's advance. The budget surplus has slowed the
pace of bond issuance by the federal government. At the same time, renewed
demand for U.S. Treasuries coincided neatly with the shrinking supply of new
issues, driving up prices of existing securities. Yields on 30-year Treasury
bonds, which began the period close to 7%, ended just above 5%. With slightly
more than half of net assets in Treasuries, your fund was well-positioned to
benefit from these gains.
A DIVERSIFIED PORTFOLIO
As rates on U.S. Treasuries fell during the year, our investments in
mortgage-backed securities, representing 41% of net assets, continued to
enhance the fund's income return. Low interest rates and a robust economy led
to record issuance of new mortgage-backed securities last year, creating a
surplus in the market. While that dampened prices somewhat, it also offered
extraordinary buying opportunities, and we have been adding selectively to our
mortgage holdings. An explanation of how fundamental research helps us choose
mortgage-backed securities for the fund follows this letter.
With most of the appreciation in the bond market occurring on the longer end of
the yield curve, we lengthened the fund's average effective maturity to take
advantage of the rise in prices. (The longer a bond's maturity, the more
sensitive it tends to be to changes in interest rates.) On August 31, the
average effective maturity was 7.1 years, up from 6.5 years 12 months ago. We
also reduced our position in short-term instruments from 9% of net assets to
6%.
Different types of bonds often respond differently to similar economic or
market circumstances. While mortgage-backed securities are currently lagging
Treasury bonds, there have been many times when the opposite was true. As a
shareholder in U.S. Government Securities Fund, which invests primarily in a
combination of the two, you have the opportunity to participate in both sectors
of the market.
LOOKING AHEAD
With the U.S. economy slowing seemingly of its own accord and severe financial
contractions crippling most developing nations, the Federal Reserve recently
took steps to loosen credit markets. As long-term Treasury yields headed close
to those of short-term Treasuries, the Fed lowered short-term interest rates
twice after the close of the fiscal year. Meanwhile, anxiety in the world's
stock markets continues to make U.S. Treasury securities and other high-quality
bonds attractive.
The past year has demonstrated the value of making U.S. government securities
part of a diversified investment portfolio. In addition to availing
shareholders of the highest credit quality, in a low-interest-rate environment
such as this one they can add an important measure of stability when other
assets decline.
We look forward to reporting to you again in six months.
Cordially,
[/s/Paul G. Haaga, Jr. ] [/s/Abner D. Goldstine]
Paul G. Haaga, Jr. Abner D. Goldstine
Chairman of the Board President
October 16, 1998
[Begin sidebar]
CHARTING A $10,000 INVESTMENT IN U.S. GOVERNMENT SECURITIES FUND
(For the period October 17, 1985 to August 31, 1998 with dividends reinvested)
[begin mountain chart]
<TABLE>
<CAPTION>
Year Lehman Brothers US Government Consumer Price
Ended Government/ Securities Index (inflation)
Aug. 31 Mortgage-Backed Fund /1,2/ /3/
Securities
Index/1/
<S> <C> <C> <C>
10/17/85 $9,525 10,000 10,000
1986 10,779 11,890 10,092
1987 10,953 12,028 10,524
1988 11,873 13,014 10,948
1989 13,040 14,714 11,463
1990 14,097 15,814 12,107
1991 15,837 18,109 12,567
1992 17,904 20,488 12,962
1993 20,130 22,634 13,321
1994 19,380 22,324 13,707
1995 21,048 24,760 14,066
1996 21,763 25,791 14,471
1997 23,739 28,307 14,793
1998 31,390 26,041 15,032
</TABLE>
[end chart]
$31,390/1/
Lehman Brothers
Government/
Mortgage-Backed
Securities Index
$26,041/1,2/
U.S. Government
Securities Fund
$15,032/3/
Consumer Price Index
(Inflation)
$10,000
Original investment
/1/With dividends reinvested or interest compounded.
/2/This figure, unlike those shown elsewhere in this report, reflects payment
of the maximum sales charge of 4.75% on the $10,000 investment. Thus, the net
amount invested was $9,525. There is no sales charge on dividends or capital
gain distributions that are reinvested in additional shares. No adjustment has
been made for income or capital gain taxes.
/3/Computed from data supplied by the U.S. Department of Labor, Bureau of Labor
Statistics.
The indexes are unmanaged and do not reflect sales charges, commissions or
expenses.
Past results are not predictive of future results.
LOOKING HOMEWARD: UNCOVERING VALUE IN MORTGAGE-BACKED SECURITIES
[illustration: person looking through telescope at house: close-up and normal
distance views]
[begin sidebar]
A year ago in these pages, we talked about the role of U.S. Treasury securities
in the portfolio. This year, we invite you to read about the world of
mortgage-backed securities and how research helps us choose them for the
fund.[end sidebar]
If you look through the portfolio listing that begins on page 8, you will see
that U.S. Government Securities Fund holds a considerable number of
mortgage-backed securities. While these pools of home loans carry the highest
possible credit ratings, investing in them is a time-consuming effort, one
beyond the scope of most individual investors.
Fortunately, the fund's investment professionals have the expertise and
resources to make informed decisions on your behalf. They carefully scrutinize
every mortgage-backed security under consideration for the fund, evaluating
characteristics such as age, coupon rate and geographic concentration. They
study broad market trends to determine pricing and relative value. They stay
abreast of economic issues that could affect the housing market and the
direction of interest rates. It is a challenging task, but diligence can have
its rewards: Over the years, mortgage-backed securities have made an important
contribution to U.S. Government Securities Fund's overall return.
[Event sequence: 1]
[Begin sidebar]
Homeowners receive mortgages from financial institutions, such as banks and
savings and loan associations. In exchange for the loan, they agree to pay
interest and repay principal over a certain period of time.
[End sidebar]
[illustration: family buying home]
[Event sequence: 2]
[illustration: Certificates from bank being pooled with other certificates]
[Begin sidebar]
Instead of keeping the loan, the bank may
pool it with other home loans and sell it
to a federal agency, which guarantees it and
bundles it as a mortgage-backed security.
[End sidebar]
[Pull quote]
"People impose value on a security based on certain assumptions. It's our job
to be aware of gaps and discrepancies in those assumptions and make our
judgments accordingly."- Geoff Hawkins, research analyst
[End pull quote]
[Event sequence: 3]
[Illustration: Pooled certficates being deposited through bank]
[Begin sidebar]
Interest and principal payments then pass through the bank or other servicer to
investors in mortgage-backed securities, including shareholders in U.S.
Government Securities Fund.
[End sidebar]
WHAT ARE MORTGAGE-BACKED SECURITIES?
If you are among the two-thirds of all American adults who own their homes, you
have most likely had a mortgage. Your loan probably came from a financial
institution such as a bank or savings and loan association, and every month you
pay off a scheduled portion of the principal and interest until your debt is
cleared.
There's a good chance the institution that issued your mortgage sold it, along
with similar home loans, to a federal agency. The agency in turn guaranteed the
mortgages, and after pooling them, sold them to investors as a security. After
collecting monthly payments and deducting a service fee, the bank passes
interest and principal along to the investors who bought the security. The sale
of "pass-through certificates," as mortgage-backed securities are sometimes
known, provides banks with the liquidity they need to make additional loans. It
also helps keep credit relatively cheap and accessible to many home buyers.
Mortgage-backed securities are bundled and guaranteed primarily by three
agencies affiliated with the U.S. government, making them appropriate types of
investments for U.S. Government Securities Fund. Ginnie Mae, as the Government
National Mortgage Association is affectionately known, is by far the largest
agency; its mortgages carry a full government guarantee for the timely payment
of principal and interest. Fannie Mae and Freddie Mac - formerly known as the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.,
respectively - are privately held corporations, authorized by Congress to
borrow money from the Treasury, if necessary, to pay investors on time. All
loans guaranteed by these agencies must meet strict criteria to be included in
a mortgage pool.
In addition to top-grade quality, mortgage-backed securities have also
historically provided investors with relatively low volatility and returns well
ahead of inflation. The popularity of these instruments has created a vast
marketplace of ready buyers - mutual funds, commercial banks, insurance
companies and pension plans - totaling $1.5 trillion.
That market has also become increasingly diverse and sophisticated. Nearly
every type of mortgage has been securitized - from traditional fixed-rate loans
to adjustable-rate mortgages to hybrids of several kinds. Brokerage firms
sometimes pool a number of pass-throughs to create new securities, called
collateralized mortgage obligations (CMOs). These are then broken up into
different maturities and risk characteristics and sold separately to investors.
(These instruments might not be guaranteed by the U.S. government.) Making
sense of the sheer variety of securities - and pricing them correctly - demands
technical skill and experience.
"On the face of it, two securities may look the same," notes Geoff Hawkins, a
research analyst who specializes in mortgage-backed securities for the fund.
"What you often find after scratching the surface, though, is that they are in
fact structured quite differently. Those differences will affect not only their
market price, but also their appropriateness for the fund."
Given the size and complexity of the investment universe, few individuals have
the resources to tackle mortgage-backed securities alone. Minimum investments
are usually quite high, and mortgage payments may have to be reinvested every
month. U.S. Government Securities Fund offers shareholders a convenient way to
participate in this market. By diversifying among hundreds of the highest
quality pools, it has also provided investors with a way to manage risk and
smooth out returns over time.
PREPAYMENT RISK
Unlike conventional bonds, in which investors receive a lump-sum payment of
principal at maturity, mortgage-backed securities repay principal throughout
the life of the loan. Because most homeowners have the option of prepaying
their loans, the timing and rate of mortgage payments can vary widely and have
a signi$cant impact on returns. To compensate investors for this additional
risk of prepayment, mortgage-backed securities typically pay higher yields than
U.S. Treasury bonds with similar maturities.
Prepayments tend to occur for two reasons. The first is demographic - death,
divorce or relocation, for example - and is relatively easy to predict
statistically. The second, more unpredictable, reason is a change in interest
rates. Declining rates give homeowners an opportunity to refinance their loans
at lower rates. While that benefits homeowners, investors in mortgage-backed
securities not only miss out on future interest payments, but because they also
receive the principal still due on the loan they must frequently reinvest a
lump sum at a time when $xed-income investments are yielding less. In general,
mortgage-backed securities tend to do best when interest rates are stable or
rising slightly.
THE RESEARCH ADVANTAGE
The fund's investment professionals - a team of portfolio counselors, research
analysts and traders - spend considerable time trying to limit the impact of
prepayments on the portfolio and enhance overall return. That effort is
supported by intensive, ongoing research.
Although basic information is readily available, the fund's investment
professionals delve deeper, gathering substantially more data. They build
elaborate technical models to determine the underlying causes of prepayments
and make projections about cash $ow. They sift through thousands of pools,
trying to uncover characteristics that other investors may have overlooked (see
story below). "People impose value on a security based on certain assumptions,"
says Geoff. "It's our job to be aware of gaps and discrepancies in those
assumptions and make our judgments accordingly."
A crucial piece of information is the age of the mortgages in the pools. U.S.
Government Securities Fund holds a large number of older, or "seasoned,"
mortgages, which can have lower prepayment rates than newer mortgages. These
pools often pay higher coupons as well, although they may come with a
correspondingly higher price tag. "Seasoned loans tend to behave more
predictably," explains John Smet, one of the fund's three portfolio counselors,
"because in many cases, if homeowners were going to refinance, they would have
done so already. That increases my confidence that borrowers will hold their
loans to maturity, allowing investors to enjoy more income for longer."
Like all bonds, the prices of mortgage-backed securities fluctuate with changes
in interest rates. That's why, in addition to researching individual
securities, the fund's investment professionals must consider economic
variables - such as employment rates, inflation and regional housing statistics
- - that could affect their value in the marketplace. Investing in
adjustable-rate mortgages, which tend to be less sensitive to interest-rate
changes, is one way to help buttress the fund against market volatility.
Of course, U.S. Government Securities Fund holds more than mortgage-backed
securities; its investment universe also encompasses U.S. Treasuries,
short-term instruments and other agency obligations. Weighing the relative
value of different types of investments is an important step in the research
process. Changes in supply and demand, for example, can lead the fund's
portfolio counselors to adjust the investment mix by reducing or increasing the
number of mortgages in the portfolio. Currently, they account for about 41% of
net assets.
Mortgage-backed securities have played an important role in meeting the fund's
objectives. Over the years, they have paid generous income and added a measure
of balance and stability to the portfolio. Investing in these complex
instruments, however, requires skill, experience and extensive resources. We
think the effort is worth it.
[Begin sidebar]
A LOOK AT ONE HOLDING: FNMA #66620 Despite their generic nomenclature, every
mortgage pool has a story. It is the task of the fund's research analysts to
uncover that story. FNMA #66620 has been in U.S. Government Securities Fund
since 1989. Backed by a pool of fixed-rate 30-year mortgages, it pays an 11%
coupon and matures in 2010. Although Fannie Mae furnished general information
about the pool, additional work was needed before it could be added to the
portfolio. What the fund's investment professionals discovered was that
although the pool was securitized in 1988, most of the loans had been taken out
much earlier, around 1980. The pool's geographic breakdown also looked
promising: Most of the 40 loans were for single-residence homes in Florida,
which supported a thriving real estate market.
Michael Locke began following this holding when he joined the fund as a
mortgage analyst several years ago. "I like this particular pool for a number
of reasons," he says. "Although we originally paid a premium for the pool's
higher coupon, the income we receive has more than offset losses caused by any
prepayments that occur. What's more, because these loans are relatively old,
borrowers are less likely to refinance when interest rates drop. That makes the
security more stable than one with new mortgages."
[End sidebar]
[Begin sidebar]
THE LANGUAGE OF MORTGAGE-BACKED SECURITIES
ADJUSTABLE-RATE MORTGAGE: a loan on which the interest rate is periodically
reset.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS): pools of mortgages further divided
to create securities different from the original.
Coupon: the interest rate paid to investors during the life of a bond.
FANNIE MAES: mortgage pools backed by a federally chartered and privately owned
corporation, formerly known as the Federal National Mortgage Association.
FREDDIE MACS: mortgage pools backed by an agency of the U.S. government.
Formerly known as the Federal Home Loan Mortgage Corp.
GINNIE MAES: mortgage pools backed by the Government National Mortgage
Association, part of the U.S. Department of Housing and Urban Development.
Timely interest and principal payments are fully guaranteed by the government.
MATURITY: the date a mortgage is scheduled to be completely paid off or
principal returned on a bond.
PASS-THROUGH CERTIFICATES: another name for mortgage-backed securities.
PREPAYMENT: complete or partial repayment of a loan before maturity.
SEASONED MORTGAGES: older loans that have been outstanding for some time.
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 1998
<S> <C> <C> <C>
U.S. Treasuries 52%
Agency Mortgage-Backed Securities 41%
Agency Debentures 1%
Cash & Equivalents 6%
Principa Market Percent
Amount Value of Net
(000) (000) Assets
Federal Agency Obligations -
Mortgage Pass-Throughs (1) - 36.26%
Fannie Mae
6.00% 2013-2028 $40,017 $39,696
6.50% 2024-2028 34,721 34,777
6.74% 2007 5,000 5,275
6.85% 2026 10,707 11,062
7.00% 2009-2028 38,858 39,640
8.00% 2005-2023 7,399 7,861
8.282% 2002 (2) 4,334 4,515
8.50% 2007-2027 7,898 8,262
9.00% 2009-2023 1,761 1,874
9.50% 2011-2022 1,589 1,707
10.00% 2017-2021 892 977
11.00% 2010-2015 1,418 1,596
12.00% 2000-2019 4,064 4,700
12.25% 2013-2014 190 220 14.02%
12.50% 2001-2028 2,733 3,243
12.75% 2012 2 2
13.25% 2011-2014 614 732
13.50% 2015 1,870 2,249
14.00% 2013-2014 912 1,120
15.00% 2013 11 13
15.50% 2012 19 23
16.00% 2012 10 12
Freddie Mac
6.00% 2013 15,580 15,564
6.50% 2013 6,282 6,363
7.00% 2008 902 924
8.25% 2007 511 530
8.50% 2009-2021 11,041 11,561
8.75% 2008 468 491
9.00% 2010-2021 3,695 3,901
10.50% 2006-2016 494 546
10.75% 2010 190 209
11.00% 2015-2016 594 666
11.50% 2015 231 259
11.75% 2014 275 313
12.00% 2000-2017 6,227 7,176
12.25% 2015 354 408
12.50% 2015-2019 4,884 5,672 4.63
13.00% 2014 629 742
13.50% 2018 206 243
13.75% 2014 29 35
14.00% 2011-2014 96 115
14.50% 2010-2011 23 28
14.75% 2010 42 50
15.00% 2011 43 52
15.50% 2011 26 32
16.00% 2012 21 26
16.25% 2011 76 92
Government National Mortgage Assn.:
5.50% 2013 2,662 2,620
6.00% 2013-2028 41,461 41,335
6.50% 2023-2028 16,919 17,030
6.875% 2017-2024 (2) 19,830 20,141
7.00% 2008-2026 (2) 36,852 37,569
7.50% 2009-2028 17,776 18,321
8.00% 2022-2026 9,982 10,399
8.50% 2020-2023 4,630 4,916
9.00% 2011-2022 11,361 12,170
9.50% 2009-2021 6,443 6,978
9.75% 2011-2012 1,562 1,679
10.00% 2016-2019 20,516 22,605
10.25% 2012 110 120
10.50% 2015-2019 1,691 1,886
11.00% 2009-2020 3,198 3,622 17.61
11.25% 2001-2016 2,071 2,302
11.50% 2000-2014 922 1,049
11.75% 2000-2015 147 154
12.00% 1999-2019 2,230 2,551
12.25% 2013-2015 231 263
12.50% 2010-2015 1,605 1,872
12.75% 2014-2015 283 323
13.00% 2011-2015 1,450 1,708
13.25% 2013-2015 210 240
13.50% 2013 279 333
14.00% 2014 98 117
14.50% 2012-2014 270 327
15.00% 2011-2013 333 404
16.00% 2011-2012 35 43
----------------------
438,631 36.26
----------------------
Federal Agency Obligations - Other - 1.08%
FNSM Callable Principal STRIPS
0%/8.25% 2022 (3) 2,000 1,983 .16
Freddie Mac Note 5.75% 2008 11,000 11,124 .92
----------------------
13,107 1.08
----------------------
Collateralized Mortgage Obligations (1) - 3.28%
Fannie Mae:
Trust 91-50, Class H, 7.75% 2006 2,440 2,553
Trust 91-146, Class Z, 8.00% 2006 5,435 5,705
Trust 97-41, Class B, 7.25% 2014 5,000 5,011 1.32
Trust 35, Class 2, 12.00% 2018 388 429
Trust 90-93, Class G, 5.50% 2020 2,263 2,258
Freddie Mac:
Series 1716, Class A, 6.50% 2009 10,586 10,517
Series 83-A, Class 3, 11.875% 2013 145 171
Series 83-B, Class 3, 12.50% 2013 1,256 1,422
Series 178, Class Z, 9.25% 2021 2,253 2,426 1.96
Series 1567, Class A, 6.088% 2023 (2) 1,445 1,395
Series 1948, Class PJ, 6.65% 2027 6,000 6,122
Series 2030, Class F, 6.141% 2028 1,694 1,703
----------------------
39,712 3.28
----------------------
Collateralized Mortgage Obligations
(Privately Originated)(1),(4) - 1.75%
Collateralized Mortgage Obligation Trust,
Series 63, Class Z, 9.00% 2020 4,187 4,443 .37
PaineWebber CMO Pac, Series O, Class 5, 9.50% 2019 3,889 4,258 .35
Ryland Acceptance Corp., Series 88, Class E,
7.95% 2019 9,754 10,205 .84
Structured Asset Securities Corp.,
Series 1998-RF1, 8.709% 2027(2),(5) 2,129 2,336 .19
----------------------
21,242 1.75
----------------------
Development Authorities - 0.25%
International Bank for Reconstruction and
Development 12.25% December 2008 2,000 2,990 .25
----------------------
U. S. Treasury Obligations - 51.83%
6.375% May 1999 18,000 18,146 1.50
9.125% May 1999 15,500 15,919 1.32
5.875% June 2000 10,500 10,667 .88
13.125% May 2001 19,000 22,856 1.89
13.375% August 2001 10,000 12,264 1.01
6.25% October 2001 1,000 1,035 .08
15.75% November 2001 5,500 7,229 .60
6.125% December 2001 1,000 1,033 .08
14.25% February 2002 15,000 19,334 1.60
5.875% September 2002 16,000 16,485 1.36
11.625% November 2002 38,000 47,393 3.92
10.75% May 2003 10,250 12,672 1.05
11.875% November 2003 12,000 15,705 1.30
7.25% May 2004 91,750 101,670 8.40
7.875% November 2004 1,825 2,095 .17
11.625% November 2004 4,500 6,050 .50
7.50% February 2005 11,500 13,024 1.08
6.50% May 2005 6,000 6,492 .53
3.375% January 2007 (2),(6) 6,944 6,727 .56
7.25% July 2007 7,750 8,340 .69
6.125% August 2007 6,750 7,228 .60
10.375% November 2009 21,000 26,690 2.21
10.00% May 2010 4,000 5,071 .42
12.75% November 2010 10,000 14,477 1.20
13.875% May 2011 8,000 12,349 1.02
10.375% November 2012 35,000 47,868 3.96
12.00% August 2013 11,000 16,662 1.38
9.875% November 2015 900 1,348 .11
8.875% August 2017 86,750 121,708 10.06
7.875% February 2021 8,500 11,127 .92
7.125% February 2023 10,500 12,849 1.06
3.625% April 2028 (2),(6) 4,535 4,441 .37
----------------------
626,954 51.83
----------------------
Total Bonds and Notes (cost: $1,105,504,000) 1,142,636 94.45
----------------------
Short-Term Securities
Federal Agency Discount Notes - 4.95%
Federal Home Loan Bank due 9/1/98 2,100 2,100 .17
Federal Home Loan Bank due 9/9/98 8,000 7,989 .66
Federal Home Loan Bank due 9/11/98 12,000 11,980 .99
Federal Home Loan Bank due 9/25/98 6,400 6,376 .53
Federal Home Loan Bank due 10/28/98 17,400 17,249 1.42
Federal Home Loan Bank due 11/27/98 14,452 14,262 1.18
----------------------
Total Short-Term Securities (cost: $59,955,000) 59,956 4.95
----------------------
Total Investment Securities (cost: $1,165,459,000) 1,202,592 99.40
Excess of cash and receivables over payables 7,213 .60
----------------------
Net Assets $1,209,805 100.00
======================
(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)Purchased in a private placement transaction; resale may be
limited to qualified institutional buyers; resale to the public may
require registration.
(6)Index-linked bond whose principal amount moves
with a government 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, 1998 (dollars in thousands)
- ---------------------------------------- -----------------------------
Assets:
Investment securities at market
(cost: $1,165,459) $1,202,592
Cash 221
Receivables for-
Sales of investments $ 1,336
Sales of fund's shares 23,793
Accrued interest 13,402 38,531
-----------------------------
1,241,344
Liabilities:
Payables for-
Purchases of investments 25,476
Repurchases of fund's shares 2,826
Dividends payable 2,175
Management services 379
Accrued expenses 683 31,539
-----------------------------
Net Assets at August 31, 1998-
Equivalent to $13.39 per share on
90,336,715 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $1,209,805
============
Statement of Operations
for the year ended August 31, 1998 (dollars in thousands)
-----------------------------
Investment Income:
Income:
Interest $ 79,128
Expenses:
Management services fee $4,450
Distribution expenses 3,224
Transfer agent fee 807
Reports to shareholders 90
Registration statement and prospectus 73
Postage, stationery and supplies 175
Trustees' fees 29
Auditing and legal fees 43
Custodian fee 2
Taxes other than federal income tax 19
--------------------
Total expenses before reimbursement 8,912
Reimbursement of expenses 27 8,885
-----------------------------
Net investment income 70,243
------------
Realized Loss and Unrealized
Appreciation on Investments:
Net realized loss (187)
Net unrealized appreciation
on investments:
Beginning of year 2,625
End of year 37,133
--------------------
Net unrealized appreciation
on investments 34,508
------------
Net realized loss and
unrealized appreciation on investments 34,321
------------
Net Increase in Net Assets Resulting
from Operations $104,564
============
Statement of Changes in Net
Assets (dollars in thousands)
- ---------------------------------------- -----------------------------
Year ended
August 31
1998 1997
Operations: -----------------------------
Net investment income $ 70,243 $ 78,056
Net realized loss on investments (187) (6,208)
Net unrealized appreciation
on investments 34,508 29,551
-----------------------------
Net increase in net assets
resulting from operations 104,564 101,399
-----------------------------
Dividends Paid to Shareholders (73,356) (78,533)
-----------------------------
Capital Share Transactions:
Proceeds from shares sold:
28,937,114 and 13,697,793
shares, respectively 383,161 177,817
Proceeds from shares issued in
reinvestment of net investment income
dividends: 4,071,001 and 4,328,162
shares respectively 53,739 56,223
Cost of shares repurchased:
27,545,162 and 28,335,433
shares, respectively (363,863) (367,751)
-----------------------------
Net increase (decrease) in net assets resulting
from capital share transactions 73,037 (133,711)
-----------------------------
Total Increase (Decrease) in Net Assets 104,245 (110,845)
Net Assets:
Beginning of year 1,105,560 1,216,405
-----------------------------
End of year (including undistributed
net investment income of $1,465 and
$4,358, respectively) $1,209,805 $1,105,560
================ =============
*Unaudited
See Notes to Financial Statements
</TABLE>
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:
Fixed-income securities are valued at prices obtained from a pricing
service, when such prices are available; however, in circumstances where the
investment adviser deems it appropriate to do so, such securities will be
valued at the mean quoted bid and asked prices or at prices for securities of
comparable maturity, quality and type. Securities with original maturities of
one year or less having 60 days or less to maturity are amortized to maturity
based on their cost if acquired within 60 days of maturity or, if already held
on the 60th day, based on the value determined on the 61st day. Securities and
assets for which representative market quotations are not readily available are
valued at fair value as determined in good faith by a committee appointed by
the Board of Trustees.
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, 1998, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $37,133,000, of which $49,205,000
related to appreciated securities and $12,072,000 related to depreciated
securities. During the year ended August 31, 1998, the fund realized, on a tax
basis, a net capital loss of $187,000 on securities transactions. During the
year ended August 31, 1998, a capital loss carryforward totaling $8,610,000
expired. The fund had available at August 31, 1998 a net capital loss
carryforward totaling $89,790,000 which may be used to offset capital gains
realized during subsequent years through 2006 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
$1,165,459,000 at August 31, 1998.
3. The fee of $4,450,000 for management services was incurred pursuant to an
agreement with Capital Research and Management Company (CRMC), with which
certain officers and Trustees of the 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 31,1998,
distribution expenses under the Plan were $3,224,000. As of August 31, 1998,
accrued and unpaid distribution expenses were $620,000.
American Funds Service Company (AFS), the transfer agent for the fund, was
paid a fee of $807,000. American Funds Distributors, Inc. (AFD), the principal
underwriter of the fund's shares, received $469,000 (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,
1998, aggregate amounts deferred and earnings thereon were $51,000.
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, 1998, accumulated net realized loss on investments was
$89,898,000 and paid-in capital was $1,261,105,000. The fund reclassified
$220,000 and $18,001,000 to undistributed net investment income and
undistributed net realized gains, respectively, from paid-in capital for the
year ended August 31, 1998.
The fund made purchases and sales of investment securities, excluding
short-term securities, of $834,786,000 and $911,543,000, respectively, during
the year ended August 31, 1998.
Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
The custodian fee of $2,000 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
---------------------------------------
1998 1997 1996 1995 1994
---------------------------------------
Net Asset Value, Beginning
of Year $13.03 $12.78 $13.24 $13.18 $14.73
---------------------------------------
Income from Investment
Operations:
Net investment income .83 .88 .93 1.01 1.03
Net realized and unrealized
gain (loss) on investments .40 .25 (.49) .06 (1.56)
Total income (loss) from ---------------------------------------
investment operations 1.23 .44 (.53)
---------------------------------------
Less Distributions:
Dividends from net investment
income (.87) (.88) (.90) (1.01) (1.02)
---------------------------------------
Net Asset Value, End of Year $13.39 $13.03 $12.78 $13.24 $13.18
=======================================
Total Return* 9.70% 9.08% 3.40% 8.60%(3.72%)
Ratios/Supplemental Data:
Net assets, end of year (in
millions) $1,210 $1,106 $1,216 $1,337 $1,373
Ratio of expenses to average
net assets .79% .80% .81% .79% .78%
Ratio of net income to
average net assets 6.24% 6.74% 7.04% 7.79% 7.35%
Portfolio turnover rate 81.99% 28.16% 40.01% 46.77% 71.58%
*Excludes maximum sales charge of 4.75%.
</TABLE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of
The American Funds Income Series
U.S. Government Securities Fund:
We have audited the accompanying statement of assets and liabilities of
The American Funds Income Series -- U.S. Government Securities Fund (the
"Fund"), including the schedule of portfolio investments as of August 31, 1998,
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, 1998, 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, 1998, 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
Deloitte & Touche LLP
Los Angeles, California
September 30, 1998
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, 52% of the dividends paid by the fund
from net investment income was derived from interest on direct U.S. Treasury
obligations.
Dividends received by retirement plans such as IRAs, Keogh-type plans, and
403(b) plans need not be reported as taxable income. However, many retirement
trusts may need this information for their annual information reporting.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FISCAL YEAR AND NOT A CALENDAR
YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION
WHICH WILL BE MAILED IN JANUARY 1999 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO
BE INCLUDED ON THEIR RESPECTIVE 1998 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
BOARD OF TRUSTEES
H. FREDERICK CHRISTIE, Rolling Hills Estates, California
Private investor; former President and Chief Executive Officer,
The Mission Group; former President,
Southern California Edison Company
DON R. CONLAN, South Pasadena, California
President (retired),
The Capital Group Companies, Inc.
DIANE C. CREEL, Long Beach, California
President and Chief Executive Officer,
The Earth Technology Corporation
(international engineering consulting)
MARTIN FENTON, JR., San Diego, California
Chairman of the Board, Senior Resource Group, Inc.
(senior living centers management)
LEONARD R. FULLER, Marina del Rey, California
President, Fuller Consulting
(management consultants)
ABNER D. GOLDSTINE, Los Angeles, California
President of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR., Los Angeles, California
Chairman of the Board of the fund
Executive Vice President and Director,
Capital Research and Management Company
HERBERT HOOVER III, San Marino, California
Private investor
RICHARD G. NEWMAN, Los Angeles, California
Chairman of the Board, President and Chief Executive Officer,
AECOM Technology Corporation (architectural engineering)
PETER C. VALLI retired from the Board of Trustees effective March 17, 1998. He
had been a Trustee of the fund since 1991. The Trustees thank him for his many
contributions to the fund.
OTHER OFFICERS
JOHN H. SMET, Los Angeles, California
Executive Vice President of the fund
Vice President,
Capital Research and Management Company
MICHAEL J. DOWNER, Los Angeles, California
Vice President of the fund
Senior Vice President - Fund Business Management Group,
Capital Research and Management Company
JULIE F. WILLIAMS, Los Angeles, California
Secretary of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
ANTHONY W. HYNES, JR., Brea, California
Treasurer of the fund
Vice President - Fund Business Management Group,
Capital Research and Management Company
KIMBERLY S. VERDICK, Los Angeles, California
Assistant Secretary of the fund
Assistant Vice President - Fund Business Management Group,
Capital Research and Management Company
TODD L. MILLER, Brea, California
Assistant Treasurer of the fund
Assistant Vice President - Fund Business Management Group,
Capital Research and Management Company
OFFICES OF THE FUND AND OF THE INVESTMENT ADVISER,
CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071-2371
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1000 Wilshire Boulevard
Los Angeles, California 90017-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, PLEASE
CONTACT YOUR FINANCIAL ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE
COMPANY, TOLL-FREE, AT 800/421-0180, OR VISIT WWW.AMERICANFUNDS.COM ON THE
WORLD WIDE WEB.
PREPARING FOR THE YEAR 2000. The fund's key service providers - Capital
Research and Management Company, the investment adviser, and American Funds
Service Company, the transfer agent - are updating their computer systems to
process date-related information properly following the turn of the century.
Both are on track to complete modifications of significant internal systems by
the end of 1998. Testing with business partners, vendors and other service
providers is already under way. We will continue to keep you up to date in our
regular publications. If you'd like more detailed information, call Shareholder
Services at 800/421-0180, ext. 21, or visit our Web site at
www.americanfunds.com.
This report is for the information of shareholders of U.S. Government
Securities Fund, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after December 31, 1998, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
Printed on recycled paper
Litho in USA AGD/FS/3920
Lit. No. GVT-011-1098
45017/15017
