[The American Funds Group(r)]
ANNUAL REPORT
FOR THE YEAR ENDED AUGUST 31
U.S. GOVERNMENT SECURITIES FUND
1999
[cover: illustration of people working]
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 29 mutual funds in The American
Funds Group,(r) the nation's third-largest mutual fund family. For more than
six decades, Capital Research and Management Company, the American Funds
adviser, has invested with a long-term focus based on thorough research and
attention to risk.
RESULTS AT A GLANCE (as of August 31, 1999, at net asset value)
Annualized total returns (with all distributions reinvested)
<TABLE>
<CAPTION>
<S> <C>
One year -0.01%
Five years +6.08%
Ten years +7.16%
Lifetime (since October 17, 1985) +7.52%
30-day distribution rate 5.69%
</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, 1999,
calculated in accordance with the Securities and Exchange Commission formula,
was 5.52%. The fund's distribution rate as of that date was 5.41%. 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.
FIGURES SHOWN ARE PAST RESULTS. SHARE PRICE AND RETURN WILL VARY, SO YOU MAY
LOSE MONEY. INVESTING FOR SHORT PERIODS MAKES LOSSES MORE LIKELY. INVESTMENTS
ARE NOT FDIC-INSURED, NOR ARE THEY DEPOSITS OF, OR GUARANTEED BY, A BANK OR ANY
OTHER ENTITY.
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 -
have updated all computer systems to process date-related information properly
following the turn of the century. Other preparations continue, including
external monitoring and contingency planning. 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.
[illustrations: Person in front of building. Tree branch.]
FELLOW SHAREHOLDERS:
In our report to you 12 months ago, we noted that turbulence in global markets
had generated unusually strong demand for government bonds. Since then, the
scenario has changed considerably: Many investors have returned to other
assets, and interest rates have risen somewhat. As a result, U.S. Treasury
securities have retreated sharply, washing away most of last year's exceptional
gains. Other sectors of the bond market also declined, but to a lesser degree.
Indeed, 1999 is shaping up to be one of the most difficult years for government
bonds in the recent past.
In this environment, the market price of many of the bonds held in U.S.
Government Securities Fund declined, pushing down the net asset value from
$13.39 per share last year to $12.63 at August 31, the 1999 fiscal close. For
shareholders who reinvested their monthly dividends, the fund's 5.9% income
return almost exactly offset the drop in share price, leaving the total return
at the end of the year essentially flat - down 0.01%.
U.S. Government Securities Fund held up better than most of its peers. The 180
U.S. government bond funds tracked by Lipper, Inc. posted an average 12-month
return of -1.5% with dividends reinvested. Meanwhile, nearly every such fund
lagged behind the unmanaged Lehman Brothers Government/Mortgage-Backed
Securities Index, which rose 0.8% for the year.
Despite the fund's modest 12-month return, we would emphasize that over longer,
more meaningful periods, U.S. Government Securities Fund has provided
shareholders with consistently attractive total returns. As the table on the
opposite page shows, since beginning operations on October 17, 1985, the fund
has gained an average of 7.5% a year, for a total return of 173.3%.
REVERSAL OF FORTUNE
The fund's fiscal year began in September 1998 in the midst of a global
financial crisis that buffeted stocks and most sectors of the bond market. At
the time, U.S. Treasury securities provided a harbor in these stormy seas, as
investors clamored for the relative safety of dollar-denominated government
bonds. By October, yields on 10-year Treasury bonds had fallen to 4.2% - their
lowest level in nearly 30 years. (Bond prices move in the opposite direction of
their yields.)
That trend began reversing itself in late autumn, when investors tiptoed back
into stocks and lower rated bonds. Matters worsened for all bonds in the new
year, when a string of strong economic data rekindled inflation fears. The
anticipation of preemptive measures by the Federal Reserve Board, confirmed by
quarter-point increases in short-term interest rates in June and August,
dampened bond prices considerably. Yields on 10-year Treasury bonds touched
6.2% in August - dragging bond prices down nearly 5% for the fund's fiscal
year.
A DIVERSIFIED PORTFOLIO
Given the broad nature of the bond market rout, there were few places to hide
during the fiscal year. Nonetheless, the investment professionals who manage
U.S. Government Securities Fund keep the portfolio well-diversified in an
effort to reduce the impact of declines on overall returns. Over the years, we
believe this strategy has helped the fund meet its objectives of high current
income and preservation of principal.
This strategy continued to hold shareholders in good stead in fiscal 1999: As
U.S. Treasuries fell, declines in the portfolio were tempered by investments in
mortgage-backed securities, which held up somewhat better. As of August 31,
mortgage-backed holdings accounted for about 40% of net assets, roughly what it
was 12 months ago. At the same time, we reduced our Treasury position slightly,
having found better values among federal agency debentures.
During the year, we also shortened the average effective maturity of the fund's
holdings to provide some cushion against an anticipated rise in interest rates.
(The shorter a bond's maturity, the less its price tends to rise and fall in
response to interest rate changes.) At the fiscal close, the portfolio's
average effective maturity was 6.9 years, down from 7.1 years 12 months ago.
A LONG-TERM PERSPECTIVE
The U.S. economic expansion, now in its ninth year, continues to confound
expectations. Consumer demand is soaring, fueled by rising employment and a
robust stock market, yet inflation remains remarkably subdued. Still, there are
signs of higher prices in the pipeline - wage pressures have begun to
intensify, the cost of raw materials has risen and global economies are taking
their first steps toward recovery. These factors have put pressure on interest
rates, but it remains to be seen whether the worst is behind us.
The bonds held in U.S. Government Securities Fund carry virtually no risk of
default, but they are vulnerable to forces such as interest rate changes and
supply and demand - a fact that was amply demonstrated during the reporting
period. One of the benefits of a long-term perspective, however, is that it
allows us to take a measured view of events that may influence the underlying
worth of your fund's holdings. Our challenge is to constantly evaluate those
events and ultimately act on our convictions about what is most appropriate for
shareholders.
On the following pages, we invite you to meet several of your fellow
shareholders and learn how they make U.S. Government Securities Fund an
integral part of their long-term financial goals.
We look forward to reporting to you again in six months.
Cordially,
/s/Paul G. Haaga, Jr. /s/John H. Smet
Paul G. Haaga, Jr. John H. Smet
Chairman of the Board President
October 18, 1999
CHARTING A LONG-TERM INVESTMENT IN U.S. GOVERNMENT SECURITIES FUND
HOW $10,000 GREW FROM OCTOBER 17, 1985 THROUGH AUGUST 31, 1999
$31,651 Lehman Brothers
Government/Mortgage-Backed
Securities Index/1/
$26,256 Lipper General
U.S. Government Funds
Average/1/
$26,037 U.S. Government
Securities Fund/1,2/
$15,373 Consumer Price
Index (inflation)/3/
$10,000 original investment
[begin mountain chart]
<TABLE>
<CAPTION>
Year Lehman Brothers Lipper General US Government Consumer Price
Ended Government/ U.S. Government Securities Index (inflation)
Aug. 31 Mortgage-Backed Securities Fund Fund /1,2/ /3/
Securities Index/1/ /1,2/
<S> <C> <C> <C> <C>
10/17/85 $9,525 10,000 10,000 10,000
1986 10,779 11,526 11,890 10,092
1987 10,953 11,468 12,028 10,524
1988 11,873 12,262 13,014 10,948
1989 13,040 13,582 14,714 11,463
1990 14,097 14,360 15,814 12,107
1991 15,837 16,264 18,109 12,567
1992 17,904 18,286 20,488 12,962
1993 20,130 20,245 22,634 13,321
1994 19,380 19,554 22,324 13,707
1995 21,048 21,462 24,760 14,066
1996 21,763 22,015 25,791 14,471
1997 23,739 24,004 28,307 14,793
1998 31,390 26,577 26,041 15,032
1999 31,651 26,256 26,037 15,373
</TABLE>
[end chart]
Year ended August 31
/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 initial $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 gains taxes.
/3/ Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
The indexes are unmanaged and have no expenses. Neither the indexes nor the
Lipper average reflect sales charges or commissions. Calculated from 10/31/85.
Past results are not predictive of future results.
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>
<S> <C> <C>
Periods ended
8/31/99 9/30/99
fiscal year-end latest calendar quarter
10 years +6.64% +6.70%
5 years +5.05% +5.53%
1 year -4.78% -5.83%
</TABLE>
[illustration: People gardening]
A STURDY BALLAST:
MAKING U.S. GOVERNMENT SECURITIES FUND A PART OF A LONG-TERM INVESTMENT PLAN
Safety-conscious investors turn to U.S. Government Securities Fund for the high
quality of its holdings, but the fund fills a broad range of needs for its
diverse family of shareholders.
As its name suggests, your fund invests primarily in bonds that are directly or
indirectly backed by the "full faith and credit" of the U.S. government - among
the world's safest investments in terms of credit risk. Although fund shares
are not themselves guaranteed, the sterling pedigree of the issuer provides an
important comfort level for many shareholders. Indeed, for new investors,
government bonds are often a way to "dip their toes" into financial waters
before plunging into a broader universe of investing.
But there's more to U.S. Government Securities Fund than its good name. In
addition to credit quality, the fund has provided shareholders with a steady
stream of income and added stability to an overall investment plan. On the
following pages, we invite you to meet a few of your fellow shareholders and
learn how the fund has been a sturdy foundation for their long-term financial
goals.
[Begin Sidebar]
[illustration: Doctor]
WHO OWNS YOUR FUND WITH YOU? A RETIRED DOCTOR IN GEORGIA
Dr. Dorothy Lowery practiced anesthesiology in Texas for nearly 25 years. Like
many Texans, she bought oil stocks when the industry was booming, only to see
the value of her investment plummet when it went bust in the 1980s. That lesson
in market volatility led her to a financial adviser, who helped her build a
retirement portfolio using U.S. Government Securities Fund for its high quality
holdings and focus on preservation of capital, as well as an American Funds
stock fund for its growth potential. Now that Dorothy is retired - she has a
home on St. Simon's Island, off the Georgia coast - she has increased her
investment in the fund for added steadiness.
[End Sidebar]
RELATIVE STABILITY
Most investors look to stocks for their long-term growth potential, but their
prices can be turbulent at times. Bonds, which have tended to fluctuate less
dramatically than stocks, can help mitigate that volatility.
The majority of your fellow shareholders invest in stock funds as well,
although the proportion of stocks to bonds varies, depending on an individual's
risk tolerance and investment time horizon. For example, shareholders with
ample time to ride out stock declines often choose to keep their bond holdings
relatively small. That's the case with Kathy Resnik, a speech therapist in
Maryland. Since she plans to continue working for some time - she's currently
in her mid-40s - Kathy views her bond holdings as an anchor to a growth
portfolio consisting primarily of stocks. As she nears retirement, however, she
expects to reduce her stock exposure and increase her investment in the fund.
GENEROUS INCOME
Like most fixed-income investments, nearly all of the fund's return derives
from interest earned by the bonds in the portfolio, paid out as dividends to
shareholders. Over the years, those dividends have been more stable - and a
good deal higher - than income from such short-term instruments as certificates
of deposit. The fund has also provided better long-term protection against
inflation. Of course, CDs guarantee a return of principal at maturity and pay a
fixed rate of return, but that rate depends solely on prevailing short-term
interest rates, which can fluctuate.
Your fund offers another advantage: In most states, income earned on U.S.
Treasuries is exempt from state income taxes, which means you get to keep a
greater portion of your dividends.
U.S. Government Securities Fund strives to provide generous, steady dividends
through all interest-rate conditions. That steadiness attracted the attention
of the Minnesota School Boards, which operate the Association Insurance Trust,
a workers' compensation program. The trustees needed a quality investment that
paid consistently high income to help them cover the cost of claims. They
turned to U.S. Government Securities Fund about 10 years ago, as CD rates began
to slide. Over the years, generous dividends from the fund have helped the
trust meet expenses, and ultimately lowered premium costs for Minnesota's
school districts.
Like the vast majority of shareholders, the trust reinvests its monthly
dividends to purchase additional shares. Over time, the impact of compounding
can be considerable.
PROTECTING PRINCIPAL
Government bonds carry virtually no credit risk, but their market value will be
affected by factors such as changes in interest rates or supply and demand.
Therefore, while monthly dividends paid out by the fund are always positive and
relatively predictable, the fund's net asset value, which reflects the prices
of the bonds in the portfolio, can fluctuate.
[Begin Sidebar]
[illustration: Architect]
WHO OWNS YOUR FUND WITH YOU? A DESIGN FIRM IN COLORADO
Denver-based Thomas Ricca & Associates designs award-winning kitchens and food
service plans for large hotels, restaurants and universities. Among other
things, the company helps develop sensible menus. Likewise, the firm's 401(k)
offers its 40 employees a well-balanced "menu" of investment options. Their
options include U.S. Government Securities Fund, which can be a good choice for
rounding out a portfolio of stocks, or for safety-conscious investors looking
for income from high-quality bonds.
[End Sidebar]
Hand in hand with providing generous income, your fund also strives to preserve
the value of your investment. The emphasis on balancing the two components of
total return, income and capital value, means that the fund's investment
professionals won't take inappropriate risks simply to enhance current yield.
That focus has helped the fund deliver consistent total returns over its
14-year lifetime.
For shareholders, protecting principal becomes increasingly important as they
approach the time they'll need to make use of their investments - an imminent
retirement, for example, or a child nearing college age. Nonetheless, it can be
a consideration for investors at any stage. A financial adviser based in Texas,
for example, recommends the fund to his so-called "belt-and-suspender" clients,
investors who want the assurance of high-quality bonds and conservation of
capital.
The fund also appeals to an array of foundations, schools, churches and other
groups that need to maintain a fairly stable base of capital. One such
organization, the San Pedro Peninsula Hospital Foundation in California, allots
a minimum of 40% of its investments to bonds, largely to U.S. Government
Securities Fund. The fund's consistent returns have helped keep the endowment
intact.
THE RESEARCH ADVANTAGE
Regardless of their particular investment goals, the fund's shareholders have
something in common: They benefit from the professional management and research
expertise of Capital Research and Management Company, the investment adviser
for all of the American Funds.
[Begin Sidebar]
[illustration: Person in front of a school]
WHO OWNS YOUR FUND WITH YOU? A PRESCHOOL IN VIRGINIA
The Village Green Day School in Great Falls, Virginia, began life 20 years ago
in a small building in the center of town. Today, more than 480 preschoolers
prepare for elementary school on two campuses that feature computer-equipped
classrooms and some of the most innovative educational programs in the country.
The school's expansion was financed in part by an endowment that includes U.S.
Government Securities Fund. Like many endowments, Village Green's maintains a
fairly conservative investment approach, emphasizing high quality and
preservation of principal.
[End Sidebar]
Even with its focus on government securities, the fund is well-diversified,
with holdings across a broad spectrum of maturities and interest rates. The
fund's investment professionals carefully monitor the balance of investments in
their efforts to add value for shareholders through all interest-rate
environments.
Managing a portfolio of "plain vanilla" bonds is a surprisingly complex
enterprise. The fund's analysts and portfolio counselors bring to their task a
broad base of expertise and a commitment to diligent research that goes beyond
the basic information available to most investors. That effort encompasses not
only quantitative analysis - the "number crunching" normally associated with
bond investing - but also a more qualitative knowledge of how global events
might influence different types of bonds and the value of your shares. That
understanding ultimately helps us make better investment decisions on your
behalf.
Research plays an important part in helping us deliver high current income and
protecting the value of your investment. In meeting those objectives, U.S.
Government Securities Fund, like a ship's ballast, has provided shareholders
with a sturdy base from which to sail toward their financial goals.
[Begin Sidebar]
YOUR FELLOW SHAREHOLDERS ALSO INCLUDE:
* A blood bank in Ohio
* A hospital foundation in California
* A construction firm in Colorado
* Labor unions, churches, colleges and libraries across the country.
[End Sidebar]
[illustration: Scientists doing research.]
WHAT MAKES THE AMERICAN FUNDS DIFFERENT?
[illustration: American flag]
As a shareholder in U.S. Government Securities Fund, you are also a member of
The American Funds Group, the nation's third-largest mutual fund family. You
won't find us advertised, yet thousands of financial advisers recommend the
American Funds for their clients' serious money - money set aside for
education, a home, retirement and other important dreams.
What the 29 funds in our group have in common is a commitment to your best
interests and the proven approach of our investment adviser, Capital Research
and Management Company. In business since 1931, Capital's calling cards
include:
A LONG-TERM, VALUE-ORIENTED APPROACH: Rather than follow short-term fads, we
rely on our own intensive research to find well-managed companies with
reasonably priced shares and solid, long-term potential. Despite our size, we
offer relatively few funds compared with many large fund families, allowing us
to maintain a careful focus on our objectives and enabling you to benefit from
economies of scale.
A GLOBAL PERSPECTIVE: We opened our first overseas office in 1962, well before
most mutual funds began investing internationally. Today, the American Funds
draw on one of the industry's most globally integrated research networks. We
spend substantial resources getting to know companies and industries around the
world.
A MULTIPLE PORTFOLIO COUNSELOR SYSTEM: More than 40 years ago, we developed a
unique strategy for managing investments that blends teamwork with individual
accountability. Every American Fund is divided among a number of portfolio
counselors, each of whom manages his or her portion independently, within each
fund's objectives; in most cases, research analysts manage a portion as well.
Over time, this method has contributed to consistency of results and continuity
of management.
Experienced investment professionals: Nearly 90% of the portfolio counselors
who serve the American Funds were in the investment business before the stock
market decline in October 1987. Long tenure and experience through a variety of
market conditions mean we aren't "practicing" with your money.
A COMMITMENT TO LOW OPERATING EXPENSES: You can't control market returns, but
you can control what you invest in and how much you pay to own it. American
Funds provide exceptional value for shareholders, with operating expenses that
are among the lowest in the mutual fund industry. Our portfolio turnover rate
is low as well, keeping transaction costs and tax consequences contained.
A PORTFOLIO FOR EVERY INVESTOR
[illustration: woman carrying flower]
Most financial advisers suggest that investors balance their portfolios by
investing across several types of investments. Which mix is right for you? That
depends on a number of things - including your risk tolerance, investment time
horizon and financial goals. The American Funds Group offers 29 funds with an
array of investment objectives to help you and your financial adviser build a
portfolio specifically tailored to your needs.
GROWTH FUNDS
Emphasis on long-term growth through stocks
AMCAP Fund(r)
EuroPacific Growth Fund(r)
The Growth Fund of America(r)
The New Economy Fund(r)
New Perspective Fund(r)
New World Fund(SM)
SMALLCAP World Fund(r)
GROWTH-AND-INCOME FUNDS
Emphasis on long-term growth and dividends through stocks
American Mutual Fund(r)
Capital World Growth and Income Fund(SM)
Fundamental Investors(SM)
The Investment Company of America(r)
Washington Mutual Investors Fund(SM)
EQUITY-INCOME FUNDS
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder(r)
The Income Fund of America(r)
BALANCED FUND
Emphasis on long-term growth and current income through stocks and bonds
American Balanced Fund(r)
INCOME FUNDS
Emphasis on current income through bonds
American High-Income Trust(SM)
The Bond Fund of America(SM)
Capital World Bond Fund(r)
Intermediate Bond Fund of America(r)
U.S. Government Securities Fund(SM)
TAX-EXEMPT INCOME FUNDS
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund(r)
Limited Term Tax-Exempt Bond Fund of America(SM)
The Tax-Exempt Bond Fund of America(r)
State-specific tax-exempt funds
The Tax-Exempt Fund of California(r)
The Tax-Exempt Fund of Maryland(r)
The Tax-Exempt Fund of Virginia(r)
MONEY MARKET FUNDS
Seeks stable monthly income through money market instruments
The Cash Management Trust of America(r)
The Tax-Exempt Money Fund of America(SM)
The U.S. Treasury Money Fund of America(SM)
FOR MORE COMPLETE INFORMATION ABOUT ANY OF THE FUNDS, INCLUDING CHARGES AND
EXPENSES, PLEASE OBTAIN A PROSPECTUS FROM YOUR INVESTMENT DEALER, DOWNLOAD ONE
FROM OUR WEB SITE AT WWW.AMERICANFUNDS.COM, OR PHONE THE FUND'S TRANSFER AGENT,
AMERICAN FUNDS SERVICE COMPANY, AT 800/421-0180. READ THE PROSPECTUS CAREFULLY
BEFORE YOU INVEST OR SEND MONEY. YOUR INVESTMENT DEALER CAN ALSO GIVE YOU A
COPY OF A PORTFOLIO FOR EVERY INVESTOR.
[begin pie chart]
The American Funds Income Series
U.S. Government Securities Fund
August 31, 1999
[S] [C]
Portfolio Composition
U.S. Treasuries 47%
Agency Mortgage-Backed Securit 40%
Agency Debentures 9%
Cash & Equivalents 4%
[end pie chart]
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 1999
<S> <C> <C> <C>
Principal Market Percent
Amount Value of Net
(000) (000) Assets
Federal Agency Obligations -
Mortgage Pass-Throughs (1) - 33.67%
Fannie Mae:
5.50% 2014 $4,834 $4,502
6.00% 2008-2013 12,304 11,657
6.27% 2005 6,922 6,742
6.35% 2005 16,402 16,026
6.50% 2028 5,889 5,574
7.00% 2009-2028 20,174 19,938
7.50% 2039 9,384 9,363
8.00% 2005-2023 2,225 2,261
8.282% 2002 (2) 3,441 3,472
8.50% 2007-2027 4,725 4,889
9.00% 2009-2023 1,271 1,330
9.50% 2011-2022 1,088 1,153
10.00% 2017-2021 601 650
11.00% 2010-2029 3,550 3,926
11.50% 2015 463 516
12.00% 2000-2029 3,899 4,387 8.47%
12.25% 2011-2013 365 408
12.50% 2001-2029 6,749 7,693
12.75% 2012 1 2
13.00% 2028 3,070 3,506
13.25% 2011-2014 508 583
13.50% 2015 1,434 1,651
14.00% 2013-2014 503 588
15.00% 2013 924 1,120
15.5% 2012 12 14
16.00% 2012 9 11
Freddie Mac:
6.00% 2014 5,735 5,462
6.50% 2014 9,976 9,693
7.00% 2008 660 657
8.00% 2012 1,715 1,759
8.25% 2007 407 415
8.50% 2009-2021 7,309 7,560
8.75% 2008 359 369
9.00% 2010-2021 2,427 2,523
10.50% 2006-2016 299 322
10.75% 2010 148 159
11.00% 2015-2016 404 441
11.50% 2015 165 180
11.75% 2014 244 269
12.00% 2000-2017 4,472 4,985
12.25% 2015 254 283
12.50% 2015-2019 4,057 4,549
13.00% 2014-2015 2,716 3,087
13.50% 2018 123 141 3.28
13.75% 2014 18 21
14.00% 2011-2014 119 138
14.5% 2010-2011 80 92
14.75% 2010 62 72
15.00% 2011 28 33
15.50% 2011 25 29
16.00% 2012 19 22
16.25% 2011 72 84
Government National Mortgage Assn.:
5.50% 2013 2,510 2,345
6.00% 2008-2030 96,805 90,642
6.50% 2013-2029 63,245 60,038
7.00% 2008-2029 58,907 57,251
7.50% 2009-2028 23,487 23,496
8.00% 2022-2027 15,182 15,389
8.50% 2020-2023 2,888 2,992
9.00% 2009-2022 9,601 10,117
9.50% 2009-2021 4,150 4,432
9.75% 2011-2012 1,132 1,216
10.00% 2016-2019 13,424 14,665
10.25% 2012 69 74
10.50% 2015-2019 1,158 1,277
11.00% 2013 144 159
11.25% 2001-2016 1,619 1,743
11.50% 2000-2014 61 67 21.92
11.75% 2000-2015 69 73
12.00% 2000-2016 1,140 1,264
12.25% 2013-2015 169 188
12.75% 2014-2015 195 220
13.00% 2011-2015 1,112 1,276
13.25% 2013-2015 181 205
13.50% 2013 172 200
14.00% 2014 96 111
14.50% 2012-2014 247 292
16.00% 2011-2012 21 25
----------------------
445,064 33.67
----------------------
Federal Agency Obligations
Other - 9.01%
Federal Home Loan Bank Bonds:
5.625% 2001 10,000 9,927
5.50% 2003 10,000 9,691 3.43
6.00% 2004 10,000 9,648
5.80% 2008 17,325 16,042
Freddie Mac Notes:
5.125% 2003 17,000 16,190 1.22
5.75% 2008 11,000 10,201 .77
Tennessee Valley Authority:
Series G, 5.375% 2008 42,670 38,276
Series E, 6.25% 2017 10,000 9,108 3.59
----------------------
119,083 9.01
----------------------
Collateralized Mortgage
Obligations (1) - 5.03%
Fannie Mae:
Series 91-50, Class H, 7.75% 2006 1,628 1,648
Series 91-146, Class Z, 8.00% 2006 3,597 3,683
Series 1997-M5, Class C, ACES, 6.74% 2007 5,000 4,862
Series 1998-M6, Class A2, ACES, 6.32% 2008 17,500 16,505
Trust 35, Class 2, 12.00% 2018 254 279 3.90
Series 90-93, Class G, 5.50% 2020 1,505 1,430
Series 1992-119, Class Z, 8.00% 2022 4,134 4,168
Series 1994-4, Class ZA, 6.50% 2024 5,400 4,840
Series 1997-M6, Class ZA, 6.85% 2026 11,464 10,238
Series 1997-28, Class C, 7.00% 2027 4,000 3,846
Freddie Mac:
Series 1716, Class A, 6.50% 2009 10,586 10,259
Series 83-A, Class 3, 11.875% 2013 112 122
Series 83-B, Class 3, 12.50% 2013 892 978
Series 178, Class Z, 9.25% 2021 1,376 1,420 1.13
Series 1567, Class A, 5.527% 2023 (2) 1,133 1,104
Series 2030, Class F, 5.769% 2028 (2) 1,043 1,051
----------------------
66,433 5.03
----------------------
Collateralized Mortgage Obligations
(Privately Originated)(1),(3) - .98%
Collateralized Mortgage Obligation Trust,
Series 63, Class Z, 9.00% 2020 2,893 2,975 .23
PaineWebber CMO Pac,
Series O, Class 5, 9.50% 2019 2,566 2,685 .20
Ryland Acceptance Corp. Four,
Series 88, Class E, 7.95% 2019 7,216 7,266 .55
----------------------
12,926 .98
----------------------
Development Authorities - 0.21%
International Bank for Reconstruction and
Development 12.25% December 2008 2,000 2,735 .21
----------------------
U. S. Treasury Obligations - 46.91%
6.375% January 2000 8,000 8,026 .61
5.875% June 2000 13,200 13,237 1.00
13.125% May 2001 19,000 21,236 1.60
13.375% August 2001 8,000 9,099 .69
6.25% October 2001 1,000 1,009 .08
15.75% November 2001 5,500 6,613 .50
14.25% February 2002 15,000 17,850 1.35
5.875% September 2002 31,000 30,995 2.34
11.625% November 2002 48,000 55,748 4.22
5.75% April 2003 19,770 19,650 1.49
10.75% May 2003 10,250 11,847 .90
5.75% August 2003 3,170 3,148 .24
11.875% November 2003 6,000 7,260 .55
7.25% May 2004 39,750 41,750 3.16
7.875% November 2004 3,655 3,945 .30
11.625% November 2004 7,300 9,053 .68
7.50% February 2005 7,980 8,491 .64
0.00% May 2006 71,240 47,357 3.58
6.25% February 2007 31,000 31,102 2.35
6.625% May 2007 40,000 41,031 3.10
6.125 August 2007 16,530 16,476 1.25
10.375% November 2009 21,000 24,701 1.87
10.00% May 2010 4,000 4,691 .35
12.75% November 2010 10,000 13,236 1.00
13.875% May 2011 8,000 11,238 .85
10.375% November 2012 35,000 43,739 3.31
12.00% August 2013 11,000 15,139 1.14
9.875% November 2015 2,345 3,139 .24
8.875% August 2017 57,000 71,250 5.39
7.875% February 2021 16,250 18,847 1.43
7.125% February 2023 8,375 9,067 .69
----------------------
619,970 46.90
----------------------
Total Bonds and Notes (cost: $1,307,054,000) 1,266,211 95.80
----------------------
Short-Term Securities
Federal Agency Discount Notes - 3.15%
Federal Home Loan Bank due 9/1/99 14,780 14,778 1.12
Federal Home Loan Bank due 10/13/99 27,000 26,834 2.03
----------------------
Total Short-Term Securities (cost: $41,612,000) 41,612 3.15
----------------------
Total Investment Securities (cost: $1,348,666,000) 1,307,823 98.95
Excess of cash and receivables over payables 13,896 1.05
----------------------
Net Assets $1,321,719 100.00
====================
(1)Pass-through securities backed by a pool of
mortgages or other loans on which principal
payments are periodically made. Therefore, the
effective maturities are shorter than the stated
maturities.
(2)Coupon rate may change periodically.
(3)Comprised of federal agency originated or
guaranteed loans.
See Notes to Financial Statements
</TABLE>
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Financial Statements (Unaudited)
<S> <C> <C>
- ---------------------------------------- -----------------------------
Statement of Assets and Liabilities
at August 31, 1999 (dollars in thousands)
- ---------------------------------------- -----------------------------
Assets:
Investment securities at market
(cost: $1,348,666) $1,307,823
Cash 66
Receivables for-
Sales of investments $ 312
Sales of fund's shares 3,238
Accrued interest 15,672
Other 4 19,226
-----------------------------
1,327,115
Liabilities:
Payables for-
Purchases of investments 370
Repurchases of fund's shares 1,789
Dividends payable 2,083
Management services 428
Accrued expenses 726 5,396
-----------------------------
Net Assets at August 31, 1999-
Equivalent to $12.63 per share on
104,642,524 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $1,321,719
============
Statement of Operations
for the year ended August 31, 1999 (dollars in thousands)
-----------------------------
Investment Income:
Income:
Interest $ 87,717
Expenses:
Management services fee $5,028
Distribution expenses 3,989
Transfer agent fee 1,001
Reports to shareholders 78
Registration statement and prospectus 152
Postage, stationery and supplies 199
Trustees' fees 25
Auditing and legal fees 45
Custodian fee 26
Taxes other than federal income tax 13
Other expenses 36 10,592
-----------------------------
Net investment income 77,125
------------
Realized Loss and Unrealized
Depreciation on Investments:
Net realized loss (1,614)
Net on investments unrealized depreciation:
Beginning of year 37,133
End of year (40,843)
--------------------
Net unrealized depreciation on investments (77,976)
------------
Net realized loss and unrealized
depreciation on investments (79,590)
------------
Net Decrease in Net Assets Resulting
from Operations $ (2,465)
============
Statement of Changes in Net
Assets (dollars in thousands)
- ---------------------------------------- -----------------------------
Year ended Year ended
August 31, August 31
1999 1998
Operations: -----------------------------
Net investment income $ 77,125 $ 70,243
Net realized loss on investments (1,614) (187)
Net change in unrealized (depreciation)
appreciation on investments (77,976) 34,508
-----------------------------
Net (decrease) increase in net assets
resulting from operations (2,465) 104,564
-----------------------------
Dividends Paid to Shareholders (77,414) (73,356)
-----------------------------
Capital Share Transactions:
Proceeds from shares sold:
59,582,486 and 28,937,114
shares, respectively 788,396 383,161
Proceeds from shares issued in
reinvestment of net investment income
dividends: 4,640,790 and 4,071,001
shares, respectively 61,070 53,739
Cost of shares repurchased:
49,917,467 and 27,545,162
shares, respectively (657,673) (363,863)
-----------------------------
Net increase in net assets resulting
from capital share transactions 191,793 73,037
-----------------------------
Total Increase in Net Assets 111,914 104,245
Net Assets:
Beginning of year 1,209,805 1,105,560
-----------------------------
End of year (including undistributed
net investment income of $1,176 and
$1,465, respectively) $1,321,719 $1,209,805
================ =============
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - 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.
SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been
prepared in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates. The following is a summary of the significant
accounting policies consistently followed by the fund in the preparation of its
financial statements:
SECURITY VALUATION - 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. The ability of the
issuers of the debt securities held by the fund to meet their obligations may
be affected by economic developments in a specific industry, state or region.
Short-term securities maturing within 60 days are valued at amortized cost,
which approximates market value.
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.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security
transactions are accounted for as of the trade date. Realized gains and losses
from securities transactions are determined based on specific identified cost.
In the event securities are purchased on a delayed delivery or "when-issued"
basis, the fund will instruct the custodian to segregate liquid assets
sufficient to meet its payment obligations in these transactions. Dividend
income is recognized on the ex-dividend date, and interest income is recognized
on an accrual basis. Market discounts, premiums and original issue discounts on
securities purchased are amortized daily over the expected life of the
security.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends to shareholders
are declared daily after the determination of the fund's net investment income
and are paid to shareholders monthly.
2. FEDERAL INCOME TAXATION
The fund complies with the requirements of the Internal Revenue Code
applicable to regulated investment companies and intends to distribute all of
its net taxable income and net capital gains for the fiscal year. As a
regulated investment company, the fund is not subject to income taxes if such
distributions are made. Required distributions are determined on a tax basis
and may differ from net investment income and net realized gains for financial
reporting purposes. In addition, the fiscal year in which amounts are
distributed may differ from the year in which the net investment income and net
realized gains are recorded by the fund.
As of August 31, 1999, net unrealized depreciation on investments for book
and federal income tax purposes aggregated $40,843,000, of which $9,169,000
related to appreciated securities and $50,012,000 related to depreciated
securities. There was no difference between book and tax realized losses on
securities transactions for the year ended August 31, 1999. During the year
ended August 31, 1999, the fund realized, on a tax basis, a net capital loss of
$1,614,000 on securities transactions. The fund had available at August 31,
1999 a net capital loss carryforward totaling $68,463,000 which may be used to
offset capital gains realized during subsequent years through 2007 and thereby
relieve the fund and its shareholders of any federal income tax liability with
respect to the capital gains that are so offset. The fund will not make
distributions from capital gains while a capital loss carryforward remains. In
addition, the fund has deferred, for tax purposes, to fiscal year ending August
31, 2000, the recognition of capital losses totaling $4,005,000 which were
realized during the period November 1, 1998 through August 31, 1999. The cost
of portfolio securities for book and federal income tax purposes was
$1,348,666,000 at August 31, 1999.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $5,028,000 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
(asset-based fee); plus 3.00% on the first $3,333,333 of the fund's monthly
gross investment income; and 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
(income-based fee).
DISTRIBUTION EXPENSES - 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, 1999, distribution expenses under the Plan were limited to
$3,989,000. Had no limitation been in effect, the fund would have paid
$4,156,000 in distribution expenses under the Plan. As of August 31, 1999,
accrued and unpaid distribution expenses were $647,000.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $983,000 (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.
TRANSFER AGENT FEE - American Funds Service Company (AFS), the transfer
agent for the fund, was paid a fee of $1,001,000.
DEFERRED TRUSTEES' FEES - 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, 1999, aggregate deferred amounts and earnings
thereon since the deferred compensation plan's adoption (1993) net of any
payments to Trustees, were $75,000.
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. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities of $1,147,057,000 and $951,728,000, respectively, during
year ended August 31, 1999.
As of August 31, 1999, net realized loss on investments was $72,469,000
and paid-in capital was $1,433,855,000. The fund reclassified $19,043,000 from
undistributed net realized gains to paid-in capital for the year ended August
31, 1999 as a result of permanent differences between book and tax.
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 $26,000 includes $25,000 that was paid by these credits
rather than in cash.
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, 53% 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 2000 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO
BE INCLUDED ON THEIR RESPECTIVE 1999 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
<TABLE>
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA AND RATIOS
- --------------------------------- -------- -----------------------------
Year Ended August 31
-------- -----------------------------
1999 1998 1997 1996 1995
-------- -----------------------------
Net Asset Value, Beginning
of Year $13.39 $13.03 $12.78 $13.24 $13.18
-------- -----------------------------
Income from Investment
Operations:
Net investment income .77 .83 .88 .93 1.01
Net gains or lossess on securities
(both realized and unrealized) (.76) .40 .25 (.49) .06
-------- -----------------------------
Total from investment operations .01 1.23 1.13 .44 1.07
-------- -----------------------------
Less Distributions:
Dividends (from net investment
income) (.77) (.87) (.88) (.90) (1.01)
-------- -----------------------------
Net Asset Value, End of Year $12.63 $13.39 $13.03 $12.78 $13.24
======= =============================
Total Return* (.01)% 9.70% 9.08% 3.40% 8.60%
Ratios/Supplemental Data:
Net assets, end of year (in
millions) $1,322 $1,210 $1,106 $1,216 $1,337
Ratio of expenses to average
net assets .79% .79% .80% .81% .79%
Ratio of net income to
average net assets 5.80 6.24% 6.74% 7.04% 7.79%
Portfolio turnover rate 81.10 81.99% 28.16% 40.01% 46.77%
*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, 1999,
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, 1999, 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, 1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the per-share data and ratios for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
September 30, 1999
[The American Funds Group(r)]
U.S. GOVERNMENT SECURITIES FUND
BOARD OF TRUSTEES
AMBASSADOR RICHARD G. CAPEN, JR.,
Rancho Santa Fe, California
Corporate director and author;
former United States Ambassador to Spain;
former Vice Chairman of the Board,
Knight-Ridder, Inc.; former Chairman of
the Board and Publisher, The Miami Herald
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 consulting engineering)
MARTIN FENTON, San Diego, California
Managing Director, Senior Resource
Group, LLC (development and management
of senior living communities)
LEONARD R. FULLER, Marina del Rey, California
President, Fuller Consulting
(financial management consulting firm)
ABNER D. GOLDSTINE, Los Angeles, California
Vice Chairman of the Board 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
RICHARD G. NEWMAN, Los Angeles, California
Chairman of the Board, President and Chief
Executive Officer, AECOM Technology
Corporation (architectural engineering)
FRANK M. SANCHEZ, Los Angeles, California
Chairman of the Board and Chief Executive
Officer, The Sanchez Family Corporation
dba McDonald's Restaurants (McDonald's licensee)
HERBERT HOOVER III, a Trustee since 1986, has retired from the board. The
Trustees thank him for his many contributions to the fund.
OTHER OFFICERS
JOHN H. SMET, Los Angeles, California
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 90071-2472
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
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, 1999, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
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.
Printed on recycled paper
Litho in USA DD/CG/4368
Lit. No. GVT-011-1099
