The American Funds Income Series
U.S. GOVERNMENT SECURITIES FUND
Part B
Statement of Additional Information
November 1, 1998
as amended August 1, 1999
This document is not a prospectus but should be read in conjunction with the
current Prospectus dated November 1, 1998 of The American Funds Income Series
(the "Trust"). The Trust currently consists of one series, U.S. Government
Securities Fund (the "fund"). The Prospectus may be obtained from your
investment dealer or financial planner or by writing to the Trust at the
following address:
U.S. Government Securities Fund
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(800) 421-0180
Shareholders who purchase shares at net asset value through eligible
retirement plans should note that not all of the services or features described
below may be available to them, and they should contact their employer for
details.
Table of Contents
<TABLE>
<CAPTION>
Item Page No.
<S> <C>
Certain Investment Limitations 2
Description of Securities and Investment Techniques 2
Investment Restrictions 7
Fund Organization 8
Fund Officers and Trustees 9
Management 12
Dividends, Distributions and Federal Taxes 15
Purchase of Shares 17
Selling Shares 23
Shareholder Account Services and Privileges 25
Execution of Portfolio Transactions 27
General Information 27
Investment Results and Related Statistics 29
Appendix 33
Financial Statements Attached
</TABLE>
CERTAIN INVESTMENT LIMITATIONS
The following limitations and guidelines are considered at the time of
purchase, under normal market conditions, and are based on a percentage of the
fund's net assets unless otherwise noted. This summary is not intended to
reflect all of the fund's investment limitations.
U.S. GOVERNMENT SECURITIES
- - The fund will invest at least 65% of its assets in securities guaranteed by
the U.S. Government, its agencies or instrumentalities.
- - The fund may invest in U.S. Government securities not guaranteed by the full
faith and credit of the U.S. Government, cash and cash equivalents, short-term
debt, and other mortgage-related securities.
- - The fund will only purchase CMOs or mortgage-backed bonds which are fully
collateralized by securities issued by GNMA, FNMA or FHLMC and/or mortgages
insured by GNMA.
OTHER DEBT SECURITIES
- - The remainder of the fund's assets will be invested in securities rated
AAA/Aaa or unrated but determined to be of equivalent quality.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The descriptions below are intended to supplement the material in the
Prospectus under the "Risk/Return Summary" and "Investment Objective,
Strategies and Risks."
INVESTMENT POLICIES -- Except when the fund is in a temporary defensive
investment position, at least 65% of its total assets will be invested in
securities that are guaranteed by the U.S. Government, including such
securities held subject to repurchase agreements. Obligations not directly
backed by the full faith and credit of the U.S. Government such as privately
issued "zero-coupon bonds" representing interests in U.S. Treasury securities,
certificates of deposit, and privately issued mortgage-related securities will
not be considered securities guaranteed by the U.S. Government for purposes of
this 65% limitation.
Although the fund has no current intention of doing so during the next 12
months, the fund may also purchase obligations of non-U.S. corporations or
governmental entities, provided they are dollar-denominated and liquid.
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. Government
include (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury.
Certain securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the
Treasury. However, they generally involve federal sponsorship in one way or
another: some are backed by specific types of collateral; some are supported
by the discretionary authority of the Treasury to purchase certain obligations
of the issuer; and others are supported only by the credit of the issuing
government agency or instrumentality.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES -- Certificates issued by
the Government National Mortgage Association (GNMA) are mortgage-backed
securities representing part ownership of a pool of mortgage loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, and are either insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. A pool of these mortgages is
assembled and, after being approved by GNMA, is offered to investors through
securities dealers. The timely payment of interest and principal on each
mortgage is guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government.
Principal is paid back monthly by the borrower over the term of the loan.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current market rates, GNMA certificates
can be less effective than typical bonds of similar maturities at "locking in"
yields during periods of declining interest rates. GNMA certificates typically
appreciate or decline in market value during periods of declining or rising
interest rates, respectively. Due to the regular repayment of principal and
the prepayment feature, the effective maturities of mortgage pass-through
securities are shorter than stated maturities, will vary based on market
conditions and cannot be predicted in advance. The effective maturities of
newly-issued GNMA certificates backed by relatively new loans at or near the
prevailing interest rates are generally assumed to range between approximately
9 and 12 years.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS -- The Federal National Mortgage
Association (FNMA), a privately-owned corporate instrumentality of the U.S.
Government, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government.
The Federal Home Loan Mortgage Corporation (FHLMC), a corporate
instrumentality of the U.S. Government, issues participation certificates which
represent an interest in a pool of conventional mortgage loans. FHLMC
guarantees the timely payment of interest and the ultimate collection of
principal, and maintains reserves to protect holders against losses due to
default, but the certificates are not backed by the full faith and credit of
the U.S. Government.
FNMA and FHLMC securities are considered by the fund to be "U.S. Government
securities" for the purpose of the fund's fundamental investment restriction
stating that the fund may not purchase any security (other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government securities")) if, immediately after and as
a result of such investment, more than 5% of the value of the fund's total
assets would be invested in securities of the issuer.
As is the case with GNMA certificates, the actual maturity of and realized
yield on particular FNMA and FHLMC pass-through securities will vary based on
the prepayment experience of the underlying pool of mortgages.
OTHER MORTGAGE-RELATED SECURITIES -- The fund may invest in mortgage-related
securities issued by financial institutions such as commercial banks, savings
and loan associations, mortgage bankers and securities broker-dealers (or
separate trusts or affiliates of such institutions established to issue these
securities). These securities include mortgage pass-through certificates,
collateralized mortgage obligations (including real estate mortgage investment
conduits as authorized under the Internal Revenue Code of 1986) (CMOs) or
mortgage-backed bonds. Each class of bonds in a CMO series may have a
different effective maturity, bear a different coupon and have a different
priority in receiving payments. All principal payments, both regular principal
payments as well as any prepayment of principal, are passed through to the
holders of the various CMO classes dependent on the characteristics of each
class. In some cases, all payments are passed through first to the holders of
the class with the shortest stated maturity until it is completely retired.
Thereafter, principal payments are passed through to the next class of bonds in
the series, until all the classes have been paid off. In other cases, payments
are passed through to holders of whichever class first has the shortest
effective maturity at the time payments are made. As a result, an acceleration
in the rate of prepayments that may be associated with declining interest rates
shortens the expected life of each class. The impact of an acceleration in
prepayments affects the expected life of each class differently depending on
the unique characteristics of that class. In the case of some CMO series, each
class may receive a differing proportion of the monthly interest and principal
repayments on the underlying collateral. In these series the classes would be
more affected by an acceleration (or slowing) in the rate of prepayments than
CMOs which share principal and interest proportionally.
Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMOs). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds can provide that they are callable by the issuer prior to
maturity).
INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed bonds
issued by the U.S. government, its agencies or instrumentalities or other
related entities. The principal value of this type of bond is periodically
adjusted according to changes in the rate of inflation. The interest rate is
generally fixed at issuance; however, interest payments are based on an
inflation adjusted principal value. For example, in a period of falling
inflation, principal value will be adjusted downward, reducing the interest
payable.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The fund may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements, under
which it buys a security and obtains a simultaneous commitment from the seller
to repurchase the security at a specified time and price. Repurchase
agreements permit the fund to maintain liquidity and earn income over periods
of time as short as overnight. The seller must maintain with the fund's
custodian collateral equal to at least 100% of the repurchase price including
accrued interest as monitored daily by Capital Research and Management Company.
If the seller under the repurchase agreement defaults, the fund may incur a
loss if the value of the collateral securing the repurchase agreement has
declined and may incur disposition costs in connection with liquidating the
collateral. If bankruptcy proceedings are commenced with respect to the
seller, liquidation of the collateral by the fund may be delayed or limited.
FORWARD COMMITMENTS -- The fund may enter into commitments to purchase or sell
securities at a future date. When the fund agrees to purchase such securities
it, assumes the risk of any decline in the value of the security beginning on
the date of the agreement. When the fund agrees to sell such securities, it
does not participate in further gains or losses with respect to the securities
beginning on the date of the agreement. If the other party to such transaction
fails to deliver or pay for the securities, the fund could miss a favorable
price or yield opportunity, or could experience a loss.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly may increase. The fund will not use these
transactions for the purpose of leveraging and will segregate liquid assets
which will be marked to market daily in an amount sufficient to meet its
payment obligations in these transactions. Although these transactions will
not be entered into for leveraging purposes, to the extent the fund's aggregate
commitments under these transactions exceed its segregated assets, the fund
temporarily could be in a leveraged position (because it may have an amount
greater than its net assets subject to market risk). Should market values of
the fund's portfolio securities decline while the fund is in a leveraged
position, greater depreciation of its net assets would likely occur than were
it not in such a position. The fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
The fund also may enter into "roll" transactions, which are the sale of
mortgage-backed or other securities together with a commitment to purchase
similar, but not identical, securities at a later date. The fund intends to
treat roll transactions as two separate transactions: one involving the
purchase of a security and a separate transaction involving the sale of a
security. Since the fund does not intend to enter into roll transactions for
financing purposes, it may treat these transactions as not falling within the
definition of "borrowing" set forth in Section 2(a)(23) of the Investment
Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS -- The fund may enter into reverse repurchase
agreements. This type of agreement involves the sale of a security by the fund
and its commitment to repurchase the security at a specified time and price. A
reverse repurchase agreement is the sale of a security by a fund and its
agreement to repurchase the security at a specified time and price. The fund
will maintain in a segregated account with its custodian liquid assets such as
cash, U.S. Government securities or other appropriate high-grade debt
obligations in an amount sufficient to cover its obligations under reverse
repurchase agreements with broker-dealers (but no collateral is required on
reverse repurchase agreements with banks). Under the Investment Company Act of
1940 (the "1940 Act"), reverse repurchase agreements may be considered
borrowings by the fund; accordingly, the fund will limit its investments in
reverse repurchase agreements, together with any other borrowings, to no more
than one-third of its total assets. The use of reverse repurchase agreements
by the fund creates leverage which increases the fund's investment risk. As
the fund's aggregate commitments under these reverse repurchase agreements
increases, the opportunity for leverage similarly increases. If the income and
gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the costs of the agreements, the fund's earnings or net asset
value will increase faster than otherwise would be the case; conversely if the
income and gains fail to exceed the costs, earnings or net asset value would
decline faster than otherwise would be the case.
RESTRICTED SECURITIES AND LIQUIDITY -- The fund may purchase securities subject
to restrictions on resale. All such securities whose principal trading market
is in the U.S. will be considered illiquid unless they have been specifically
determined to be liquid under procedures adopted by the fund's board of
trustees, taking into account factors such as the frequency and volume of
trading, the commitment of dealers to make markets and the availability of
qualified investors, all of which can change from time to time. The fund may
incur certain additional costs in disposing of illiquid securities.
CASH AND CASH EQUIVALENTS -- The fund may maintain assets in cash or cash
equivalents. Cash equivalents include: (1) commercial paper (short-term notes
up to 9 months in maturity issued by corporations or governmental bodies); (2)
commercial bank obligations such as certificates of deposit (interest-bearing
time deposits); bankers' acceptances, (time drafts on a commercial bank where
the bank accepts an irrevocable obligation to pay at maturity); (3) savings
association obligations (certificates of deposit issued by mutual savings banks
or savings and loan associations); and (4) securities of the U.S. Government,
its agencies or instrumentalities that mature, or may be redeemed, in one year
or less;
PORTFOLIO TRADING -- The fund intends to engage in portfolio trading when
Capital Research and Management Company (the "Investment Adviser) believes that
the sale of a security owned by the fund and the purchase of another security
of better value can enhance principal and/or increase income. A security may
be sold to avoid any prospective decline in market value in light of what is
evaluated as an expected rise in prevailing yields, or a security may be
purchased in anticipation of a market rise (a decline in prevailing yields). A
security also may be sold and a comparable security purchased coincidentally in
order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities, or in connection with
a "roll" transaction as described in the Prospectus under " Securities and
Investment Techniques."
LOANS OF PORTFOLIO SECURITIES -- Although the fund has no current intention of
doing so during the next 12 months, the fund is authorized to lend portfolio
securities to selected securities dealers or to other institutional investors
whose financial condition is monitored by the Investment Adviser. The borrower
must maintain with the fund's custodian collateral consisting of cash, cash
equivalents or U.S. Government securities equal to at least 100% of the value
of the borrowed securities, plus any accrued interest. The Investment Adviser
will monitor the adequacy of the collateral on a daily basis. The fund may at
any time call a loan of its portfolio securities and obtain the return of the
loaned securities. The fund will receive any interest paid on the loaned
securities and a fee or a portion of the interest earned on the collateral.
The fund will limit its loans of portfolio securities to an aggregate of
one-third of the value of its total assets, measured at the time any such loan
is made.
MATURITY -- The maturity composition of the fund's portfolio will be adjusted
in response to market conditions and expectations. As described above, the
fund may invest in various mortgage pass-through securities and normally will
invest substantially in GNMA certificates (see "Government National Mortgage
Association Certificates" above). The fund may also invest in securities with
interest rates that are not fixed but fluctuate based upon changes in market
rates or designated indexes. Variable rate obligations have interest rates
that are adjusted at designated intervals, and interest rates on floating rate
obligations are adjusted whenever there are exchanges in the indexes or market
rates on which their interest rates are based. In some cases the fund has the
ability to demand payment from the dealer or issuer at par plus accrued
interest on short notice (seven days or less). The effective maturity of a
floating or variable rate obligation is deemed to be the longer of (i) the
notice period required before the fund is entitled to receive payment of the
obligation upon demand or (ii) the period remaining until the obligation's next
interest rate adjustment. If not sold or redeemed by the fund through the
demand feature, these obligations would mature on a specified date which may
range up to 30 years or more from the date of issuance.
PORTFOLIO TURNOVER -- Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads or brokerage commissions, and may result in the realization of
net capital gains, which are taxable when distributed to shareholders.
Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. The fund does not
anticipate its portfolio turnover to exceed 100% annually. The fund's
portfolio turnover rate would equal 100% if each security in the fund's
portfolio were replaced once per year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last five years.
INVESTMENT RESTRICTIONS
The fund has adopted certain investment restrictions which may not be changed
without a majority vote of the fund's outstanding shares. Such majority is
defined by the 1940 Act as the vote of the lesser of (i) 67% or more of the
outstanding voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities are present in person or by proxy, or
(ii) more than 50% of the outstanding voting securities. None of the following
investment restrictions involving a maximum percentage of assets will be
considered violated unless the excess occurs immediately after, and is caused
by, an acquisition [or encumbrance of securities or assets of, or borrowings]
by the fund. These restrictions provide that the fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
securities")) if, immediately after and as a result of such investment, more
than 5% of the value of the fund's total assets would be invested in securities
of the issuer;
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry,
except that this limitation shall not apply to U.S. Government securities;
3. Invest in companies for the purpose of exercising control or management;
4. Knowingly purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization;
5. Buy or sell real estate or commodities or commodity contracts in the
ordinary course of its business; however, the fund may purchase or sell readily
marketable debt securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein, including
real estate investment trusts;
6. Acquire securities subject to restrictions on disposition imposed by the
Securities Act of 1933, if, immediately after and as a result of such
acquisition, the value of such restricted securities and all other illiquid
securities held by the fund would exceed 10% of the value of the fund's total
assets;
7. Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically cause
it to be considered an underwriter as that term is defined under the Securities
Act of 1933;
8. Make loans, except that the fund may purchase readily marketable debt
securities and invest in repurchase agreements and make loans of portfolio
securities. The fund will not invest in repurchase agreements maturing in more
than seven days (unless subject to a demand feature) if any such investment,
together with any illiquid securities (including securities which are subject
to legal or contractual restrictions on resale) held by the fund, exceeds 10%
of the value of its total assets;
9. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short;
10. Purchase securities on margin, except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
11. Borrow money, except from banks for temporary or emergency purposes not in
excess of 5% of the value of the fund's total assets, except that the fund may
enter into reverse repurchase agreements, provided that the fund will limit its
aggregate borrowings to no more than one-third of its total assets;
12. Mortgage, pledge, or hypothecate any of its assets, provided that this
restriction shall not apply to the sale of securities pursuant to a reverse
repurchase agreement;
13. Purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Trust, its investment adviser, or distributor,
each owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
14. Invest in interests in oil, gas, or other mineral exploration or
development programs;
15. Invest more than 5% of its total assets in warrants which are unattached
to securities;
16. Write, purchase or sell puts, calls or combinations thereof.
Notwithstanding Investment Restriction #4, the fund may invest in securities
of other investment companies if deemed advisable by its officers in connection
with the administration of a deferred compensation plan adopted by the Trustees
pursuant to an exemptive order granted by the Securities and Exchange
Commission. For purposes of Investment Restriction #6, the fund will not
invest more than 15% of its net assets in illiquid securities.
FUND ORGANIZATION
The fund is an open-end, diversified management investment company. It was
organized as a Massachusetts business trust on May 8, 1985.
All fund operations are supervised by the fund's board of trustees. The board
meets periodically and performs duties required by applicable state and federal
laws. Members of the board who are not employed by Capital Research and
Management Company or its affiliates are paid certain fees for services
rendered to the fund as described in "Trustees and Trustee Compensation"
below. They may elect to defer all or a portion of these fees through a
deferred compensation plan in effect for the fund.
FUND OFFICERS AND TRUSTEES
Trustees and Trustee Compensation
<TABLE>
<CAPTION>
NAME, POSITION PRINCIPAL AGGREGATE TOTAL TOTAL NUMBER
ADDRESS WITH OCCUPATION(S) COMPENSATION COMPENSATION OF FUND
AND AGE REGISTRANT DURING PAST (INCLUDING (INCLUDING BOARDS ON
5 YEARS VOLUNTARILY VOLUNTARILY WHICH
DEFERRED DEFERRED TRUSTEE
COMPENSATION /1/) COMPENSATION SERVES /2/
FROM THE FUND /1/) FROM ALL
DURING FISCAL FUNDS MANAGED BY
YEAR ENDED AUGUST CAPITAL
31, 1998 RESEARCH AND
MANAGEMENT
COMPANY OR ITS
AFFILIATES /2/
FOR THE YEAR
ENDED AUGUST 31,
1998
<S> <C> <C> <C> <C> <C>
H. Frederick Private $4,211/3/ $171,100
ChristieAge: 65 Trustee Investor. 19
P.O. Box 144 Former President
Palos Verdes and Chief
Estates, CA 90274 Executive
Officer, The
Mission Group
(non-utility
holding company,
subsidiary of
Southern
California
Edison Company)
+ Don R. Conlan Trustee President none/4/ none/4/ 12
Age: 62 (retired), The
1630 Milan Avenue Capital Group
South Pasadena, CA Companies, Inc.
91030
Diane C. Creel Trustee CEO and $3,900/3/ $44,650
Age: 49 President, 12
100 W. Broadway The Earth
Suite 5000 Technology
Long Beach, CA 90802 Corporation
(international
consulting
engineering)
Martin Fenton, Jr. Trustee Chairman, Senior $4,625/3/ $121,084
Age: 63 Resource Group 15
4660 La Jolla (management of
Village Drive senior living
Suite 725 centers)
San Diego, CA 92122
Leonard R. Fuller Trustee President, $4,267/3/ $51,850
Age: 52 Fuller 12
4337 Marina City Consulting
Drive (financial
Suite 841 ETN management
Marina del Rey, CA consulting firm)
90292
+* Abner D. Senior Vice none/4/ none/4/
Goldstine President, President and 12
Age: 68 PEO and Trustee, Capital
Trustee Research and
Management
Company
+** Paul G. Haaga, Executive Vice none/4/ none/4/
Jr. Chairman President and 14
Age: 49 of Trustee, Capital
the Board Research and
Management
Company
Herbert Hoover III Trustee Private Investor $4,043 $65,084
Age: 70 13
1520 Circle Drive
San Marino, CA 91108
Richard G. Newman Trustee Chairman, $4,654/3/ $102,650
Age: 63 President and 13
3250 Wilshire CEO,
Boulevard AECOM Technology
Los Angeles, CA Corporation
90010-1599 (architectural
engineering)
</TABLE>
+ Trustees who are considered "interested persons of the fund as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), on the basis of
their affiliation with the fund's Investment Adviser, Capital Research and
Management Company.
* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
** Address is 333 South Hope Street, Los Angeles, CA 90071
/1/ Amounts may be deferred by eligible Trustees under a non-qualified deferred
compensation plan adopted by the fund in 1994. Deferred amounts accumulate at
an earnings rate determined by the total return of one or more funds in The
American Funds Group as designated by the Trustee.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 29 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management
Trust of America, Capital Income Builder, Inc., Capital World Growth and Income
Fund, Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., New World Fund, Inc., SMALLCAP World Fund, Inc., The
Tax-Exempt Bond Fund of America, Inc., The Tax-Exempt Fund of California, The
Tax-Exempt Fund of Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt
Money Fund of America, The U. S. Treasury Money Fund of America, U.S.
Government Securities Fund and Washington Mutual Investors Fund, Inc. Capital
Research and Management Company also manages American Variable Insurance Series
and Anchor Pathway Fund which serve as the underlying investment vehicle for
certain variable insurance contracts; and Endowments, whose shareholders are
limited to (i) any entity exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended ("501(c)(3) organization"); (ii) any
trust, the present or future beneficiary of which is a 501(c)(3) organization,
and (iii) any other entity formed for the primary purpose of benefiting a
501(c)(3) organization. An affiliate of Capital Research and Management
Company, Capital International, Inc., manages Emerging Markets Growth Fund,
Inc.
/3/ Since the plan's adoption, the total amount of deferred compensation
accrued by the fund (plus earnings thereon) for participating Trustees is as
follows: H. Frederick Christie ($8,475), Diane C. Creel ($1,104), Martin
Fenton, Jr. ($10,861), Leonard R. Fuller ($5,591) and Richard G. Newman
($24,683). Amounts deferred and accumulated earnings thereon are not funded
and are general unsecured liabilities of the fund until paid to the Trustee.
/4/ Don R. Conlan, Abner D. Goldstine and Paul G. Haaga, Jr. are affiliated
with the Investment Adviser and, accordingly, receive no compensation from the
fund.
OFFICERS
(with their principal occupations during the past five years)#
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) PRINCIPAL
HELD WITH OCCUPATION(S) DURING
THE FUND PAST 5 YEARS
<S> <C> <C> <C>
John Smet 42 Executive Vice President,
11100 Santa Monica Vice Capital Research and
Blvd. President Management Company
Los Angeles, CA 90025
Michael J. Downer 43 Vice Senior Vice
333 South Hope Street President President - Fund
Los Angeles, CA 90071 Business Management
Group, Capital
Research and
Management Company
Julie F. Williams 50 Secretary Vice President -
333 South Hope Street Fund Business
Los Angeles, CA 90071 Management Group,
Capital Research and
Management Company
Anthony W. Hynes, Jr. 35 Treasurer Vice President -
135 South State Fund Business
College Blvd. Management Group,
Brea, CA 92821 Capital Research and
Management Company
Kimberly S. Verdick 33 Assistant Assistant Vice
333 South Hope Street Secretary President - Fund
Los Angeles, CA 90071 Business Management
Group, Capital
Research and
Management Company
Todd L. Miller 39 Assistant Assistant Vice
135 South State Treasurer President - Fund
College Blvd. Business Management
Brea, CA 92821 Group, Capital
Research and
Management Company
</TABLE>
# Positions within the organizations listed may have changed during this period
No compensation is paid by the fund to any officer or Trustee who is a trustee
or officer of the Investment Adviser. The fund pays annual fees of $2,500 to
Trustees who are not affiliated with the Investment Adviser, plus $200 for each
Board of Trustees meeting attended, plus $200 for each meeting attended as a
member of a committee of the Board of Trustees. The Trustees may elect, on a
voluntary basis, to defer all or a portion of these fees through a deferred
compensation plan in effect for the fund. The fund also reimburses certain
expenses of the Trustees who are not affiliated with the Investment Adviser.
As of October 1, 1998, the officers and Trustees and their families as a
group, owned beneficially or of record fewer than 1% of the outstanding shares
of the fund.
MANAGEMENT
INVESTMENT ADVISER -- The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington, D.C., London, Geneva, Singapore, Hong Kong and Tokyo), with a
staff of professionals, many of whom have a number of years of investment
experience. The Investment Adviser is located at 333 South Hope Street, Los
Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821.
The Investment Adviser's research professionals travel several million miles a
year, making more than 5,000 research visits in more than 50 countries around
the world. The Investment Adviser believes that it is able to attract and
retain quality personnel. The Investment Adviser is a wholly owned subsidiary
of The Capital Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $175 billion of stocks,
bonds and money market instruments and serves over eight million investors of
all types throughout the world. These investors include privately owned
businesses and large corporations as well as schools, colleges, foundations and
other non-profit and tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT -- The Investment Advisory and
Service Agreement (the "Agreement"), between the Trust and the Investment
Adviser will continue until May 31, 1999, unless sooner terminated, and may be
renewed from year to year thereafter, provided that any such renewal has been
specifically approved at least annually by (i) the Board of Trustees, or by the
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the fund, and (ii) the vote of a majority of Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party, cast in person, at a meeting called for the purpose of voting
on such approval. The Agreement provides that the Investment Adviser has no
liability to the Trust for its acts or omissions in the performance of its
obligations to the Trust not involving willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement. The
Agreement also provides that either party has the right to terminate the
Agreement without penalty, upon 60 days' written notice to the other party and
that the Agreement automatically terminates in the event of its assignment (as
defined in the 1940 Act).
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, administrative, clerical and bookkeeping functions of
the fund, provides suitable office space and utilities, necessary small office
equipment and general purpose accounting forms, supplies, and postage used at
the offices of the fund. The fund pays all expenses not assumed by the
Investment Adviser, including, but not limited to, custodian, stock transfer
and dividend disbursing fees and expenses; costs of designing, printing and
mailing of reports, prospectuses, proxy statements, and notices to its
shareholders; taxes; expenses of issuance and redemption of shares (including
stock certificates, registration and qualification fees and expenses); legal
and auditing expenses; compensation, fees, and expenses paid to trustees
unaffiliated with the Investment Adviser; association dues; and costs of
stationery and forms prepared exclusively for the fund; and costs of assembling
and storing shareholder account data.
The management fee is based upon the net assets of the fund and monthly gross
investment income. Gross investment income means gross income, computed
without taking account of gains or losses from sales of capital assets, but
including original issue discount as defined for federal income tax purposes.
The Internal Revenue Code in general defines original issue discount to mean
the difference between the issue price and the stated redemption price at
maturity of certain debt obligations. The holder of such indebtedness is in
general required to treat as ordinary income the proportionate part of the
original issue discount attributable to the period during which the holder held
the indebtedness. The management fee is based upon the annual rates of 0.30%
of the first $60 million of the fund's average net assets, plus 0.21% on
average net assets in excess of $60 million but not exceeding $1 billion, plus
0.18% on average net assets in excess of $1 billion but not exceeding $3
billion, plus 0.16% on average net assets in excess of $3 billion, plus 3% of
the first $40 million of annual gross income, plus 2.25% of annual gross
investment income in excess of $40 million but not exceeding $100 million, plus
2% of annual gross investment income in excess of $100 million. Assuming net
assets of $1.1 billion and gross investment income levels of 6%, 7%, 8%, 9% and
10%, management fees would be 0.37%, 0.40%, 0.42%, 0.44%, and 0.46%,
respectively.
During the fiscal years ended August 31, 1998, 1997, and 1996, the Investment
Adviser's total fees amounted to $4,450,000, $4,700,000, and $5,299,000,
respectively.
The fund pays all expenses not specifically assumed by the Investment Adviser,
including, but not limited to, registration and filing fees with federal and
state agencies, blue sky expenses, expenses of shareholders meetings, expenses
of reports to existing shareholders, expenses of printing proxies and
prospectuses, insurance premiums, legal and auditing fees, dividend
disbursement expenses, expenses of the issuance, transfer and redemption of its
shares, expenses pursuant to the fund's Plan of Distribution, custodian fees,
expenses of printing and preparation of registration statements, taxes and
compensation and expenses of Trustees who are not affiliated with the
Investment Adviser.
PRINCIPAL UNDERWRITER -- American Funds Distributors, Inc. (the "Principal
Underwriter") is the principal underwriter of the fund's shares. The Principal
Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071, 135
South State College Boulevard, Brea, CA 92821, 3500 Wiseman Boulevard, San
Antonio, TX 78251, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240,
and 5300 Robin Hood Road, Norfolk, VA 23513. The fund has adopted a Plan of
Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act . The
Principal Underwriter receives amounts payable pursuant to the Plan (see below)
and commissions consisting of that portion of the sales charge remaining after
the discounts which it allows to investment dealers. Commissions retained by
the Principal Underwriter on sales of fund shares during the fiscal year ended
August 31, 1998 amounted to $469,000 after allowance of $1,913,000 to dealers.
During the fiscal years ended August 31, 1997 and 1996 the Principal
Underwriter retained $382,000 and $610,276, respectively.
As required by rule 12b-1, the Plan (together with the Principal Underwriting
Agreement) has been approved by the full Board of Trustees and separately by a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the Plan or
the Principal Underwriting Agreement, and the Plan has been approved by the
vote of a majority of the outstanding voting securities of the fund. The
officers and Trustees who are interested persons of the Trust due to present
affiliations with the Investment Adviser and related companies may be
considered to have a direct or indirect financial interest in the operation of
the Plan. Potential benefits of the Plan to the fund include improved
shareholder services, savings to the fund in transfer agency costs, savings to
the fund in advisory fees and other expenses, benefits to the investment
process from growth or stability of assets and maintenance of a financially
healthy management organization. The selection and nomination of Trustees who
are not interested persons of the Trust shall be committed to the discretion of
the Trustees who are not interested persons during the existence of the Plan.
Plan expenditures are reviewed quarterly and must be renewed annually by the
Board of Trustees.
Under the Plan the fund may expend up to 0.30% of its average net assets
annually to finance any activity which is primarily intended to result in the
sale of fund shares, provided the fund's Board of Trustees has approved the
category of expenses for which payment is being made. These include service
fees for qualified dealers and dealer commissions and wholesaler compensation
on sales of shares exceeding $1 million (including purchases by any
employer-sponsored 403(b) plan, by any defined contribution plan qualified
under Section 401(a) of the Internal Revenue Code including a "401(k) plan with
100 or more eligible employees, or a community foundation).
Commissions on sales of shares exceeding $1 million (including purchases by
any employer-sponsored 403(b) plan or purchases by any defined contribution
plan qualified under Section 401(a) of the Internal Revenue Code, including any
"401(k)" plan with 100 or more eligible employees) in excess of the Plan
limitation not reimbursed during the most recent fiscal quarter are recoverable
for five quarters, provided that such commissions do not exceed the annual
expense limit. After five quarters, commissions are not recoverable. During
the fund's fiscal year ended August 31, 1998, the fund paid $3,224,000 under
the Plan as compensation to dealers. As of August 31, 1998 accrued and unpaid
distribution expenses were $620,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries of affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer with adverse financial consequences as a result of
any of these occurrences. In addition, state securities laws on this issue may
differ from the interpretations of federal law expressed herein and certain
banks and financial institutions may be required to be registered as dealers
pursuant to state law.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The fund intends to meet all the requirements and has elected the tax status
of a "regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Under Subchapter M, if
the fund distributes within specified times at least 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gains over net long-term capital losses), it will be taxed only on the
portion of the investment company taxable income that it retains.
To qualify, the fund must (a) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities, currencies, or
other income derived with respect to its business of investing in such stock,
securities, or currencies; and (b) diversify its holdings so that, at the end
of each fiscal quarter, (i) at least 50% of the market value of the fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities which
must be limited, in respect of any one issuer, to an amount not greater than 5%
of the fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or in two or more issuers
which the fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(iii) the sum of any untaxed, undistributed net investment income and net
capital gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the fund from its current year's ordinary income and capital
gain income and (ii) any amount on which the fund pays income tax during the
periods described above. The fund intends to distribute net investment income
and net capital gains so as to minimize or avoid the excise tax liability.
The fund also intends to distribute to shareholders all of the excess of net
long-term capital gain over net short-term capital loss on sales of securities.
If the net asset value of shares of the fund should, by reason of a
distribution of realized capital gains, be reduced below a shareholder's cost,
such distribution would be, in effect, a return of capital to that shareholder
even though taxable to the shareholder, and a sale of shares by a shareholder
at net asset value at that time would establish a capital loss for federal tax
purposes. In particular, investors should consider the tax implications of
purchasing shares just prior to a dividend or distribution record date. Those
investors purchasing shares just prior to such a date will then receive a
partial return of capital upon the dividend or distribution, which will
nevertheless be taxable to them as an ordinary or capital gains dividend.
Dividends and distributions generally are taxable to shareholders at the time
they are paid. However, dividends declared in October, November and December
and made payable to shareholders of record in such a month are treated as paid
and are thereby taxable as of December 31, provided that the fund pays the
dividend no later than the end of January of the following year.
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of
shares of the fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
As of the date of this statement of additional information, the maximum
individual stated tax rate applicable to ordinary income is 39.6% (effective
tax rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate generally
applicable to net capital gains on assets held more than one year is 20%, and
the maximum corporate tax applicable to ordinary income and net capital gain is
35%. However, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 in a
taxable year will be required to pay an additional amount of up to $11,750, and
corporations which have taxable income in excess of $15,000,000 for a taxable
year will be required to pay an additional amount of income tax up to $100,000.
Naturally, the amount of tax payable by a taxpayer will be affected by a
combination of tax law rules covering, e.g., deductions, credits, deferrals,
exemptions, sources of income and other matters. Under the Code, an individual
is entitled to establish an IRA each year (prior to the tax return filing
deadline for that year) whereby earnings on investments are tax-deferred. In
addition, in some cases, the IRA contribution itself may be deductible.
The foregoing is limited to a summary discussion of federal taxation and
should not be viewed as a comprehensive discussion of all provisions of the
Code relevant to investors. Dividends and distributions may also be subject to
state or local taxes. Investors should consult their own tax advisers for
additional details as to their particular tax status.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
<S> <C> <C>
See "Investment Minimums and Fund $50 minimum (except where a lower
Numbers" for initial minimum is noted under "Investment
investment minimums. Minimums and Fund Numbers").
By contacting Visit any investment dealer who Mail directly to your investment
your is registered in the state where dealer's address printed on your
investment the purchase is made and who has account statement.
dealer a sales agreement with American
Funds Distributors.
By mail Make your check payable to the Fill out the account additions form at
fund and mail to the address the bottom of a recent account
indicated on the account statement, make your check payable to
application. Please indicate an the fund, write your account number on
investment dealer on the account your check, and mail the check and
application. form in the envelope provided with
your account statement.
By telephone Please contact your investment Complete the "Investments by Phone"
dealer to open account, then section on the account application or
follow the procedures for American FundsLink Authorization Form.
additional investments. Once you establish the privilege, you,
your financial advisor or any person
with your account information can call
American FundsLine(R) and make
investments by telephone (subject to
conditions noted in "Telephone and
Computer Purchases, Redemptions and
Exchanges" below).
By computer Please contact your investment Complete the American FundsLink
dealer to open account, then Authorization Form. Once you establish
follow the procedures for the privilege, you, your financial
additional investments. advisor or any person with your account
information may access American
FundsLine(R) on the Internet and make
investments by computer (subject to
conditions noted in "Telephone and
Computer Purchases, Redemptions and
Exchanges" below).
By wire Call 800/421-0180 to obtain your Your bank should wire your additional
account number(s), if necessary. investments in the same manner as
Please indicate an described under "Initial Investment."
investment dealer on the account.
Instruct your bank to wire funds
to:
Wells Fargo Bank
155 Fifth Street
Sixth Floor
San Francisco, CA 94106
(ABA #121000248)
For credit to the account of:
American Funds Service Company
a/c #4600-076178
(fund name)
(your fund acct. no.)
THE FUNDS AND AMERICAN FUNDS DISTRIBUTORS RESERVE THE RIGHT TO REJECT ANY PURCHASE
ORDER.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS - Here are the minimum initial investments
required by the funds in The American Funds Group along with fund numbers for
use with our automated phone line, American FundsLine(R) (see description
below):
<TABLE>
<CAPTION>
<S> <C> <C>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(R) $1,000 02
American Balanced Fund(R) 500 11
American Mutual Fund(R) 250 03
Capital Income Builder(R) 1,000 12
Capital World Growth and Income Fund(SM) 1,000 33
EuroPacific Growth Fund(R) 250 16
Fundamental Investors(SM) 250 10
The Growth Fund of America(R) 1,000 05
The Income Fund of America(R) 1,000 06
The Investment Company of America(R) 250 04
The New Economy Fund(R) 1,000 14
New Perspective Fund(R) 250 07
Mew World Fund, Inc. 1,000+ 36
SMALLCAP World Fund(R) 1,000 35
Washington Mutual Investors Fund(SM) 250 01
BOND FUNDS
American High-Income Municipal Bond Fund(R) 1,000 40
American High-Income Trust(SM) 1,000 21
The Bond Fund of America(SM) 1,000 08
Capital World Bond Fund(R) 1,000 31
Intermediate Bond Fund of America(R) 1,000 23
Limited Term Tax-Exempt Bond Fund of 1,000 43
America(SM)
The Tax-Exempt Bond Fund of America(R) 1,000 19
The Tax-Exempt Fund of California(R)* 1,000 20
The Tax-Exempt Fund of Maryland(R)* 1,000 24
The Tax-Exempt Fund of Virginia(R)* 1,000 25
U.S. Government Securities Fund(SM) 1,000 22
MONEY MARKET FUNDS
The Cash Management Trust of America(R) 2,500 09
The Tax-Exempt Money Fund of America(SM) 2,500 39
The U.S. Treasury Money Fund of America(SM) 2,500 49
___________
*Available only in certain states.
+Effective September 15, 1999.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for individual retirement accounts
(IRAs). Minimums are reduced to $50 for purchases through "Automatic
Investment Plans" (except for the money market funds) or to $25 for purchases
by retirement plans through payroll deductions and may be reduced or waived for
shareholders of other funds in The American Funds Group. TAX-EXEMPT FUNDS
SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The minimum is $50 for
additional investments (except as noted above).
SALES CHARGES -- The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND
FUNDS
Less than $50,000
6.10% 5.75% 5.00%
$50,000 but less than
$100,000 4.71 4.50 3.75
BOND FUNDS
Less than $25,000
4.99 4.75 4.00
$25,000 but less than
$50,000 4.71 4.50 3.75
$50,000 but less than
$100,000 4.17 4.00 3.25
STOCK, STOCK/BOND, AND
BOND FUNDS
$100,000 but less than
$250,000 3.63 3.50 2.75
$250,000 but less than
$500,000 2.56 2.50 2.00
$500,000 but less than
$1,000,000 2.04 2.00 1.60
$1,000,000 or more (see below)
none none
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES -- Investments of $1 million or more and
investments made by employer-sponsored defined contribution-type plans with 100
or more eligible employees are sold with no initial sales charge. A contingent
deferred sales charge may be imposed on certain redemptions by these accounts
made within one year of purchase. Investments by retirement plans, foundations
or endowments with $50 million or more in assets may be made with no sales
charge and are not subject to a contingent deferred sales charge.
In addition, the stock, stock/bond and bond funds may sell shares at net asset
value to:
(1) current or retired directors, trustees, officers and advisory board
members of the funds managed by Capital Research and Management Company,
employees of Washington Management Corporation, employees and partners of The
Capital Group Companies, Inc. and its affiliated companies, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) current registered representatives, retired registered representatives
with respect to accounts established while active, or full-time employees (and
their spouses, parents, and children) of dealers who have sales agreements with
American Funds Distributors (or who clear transactions through such dealers)
and plans for such persons or the dealers;
(3) companies exchanging securities with the fund through a merger,
acquisition or exchange offer;
(4) trustees or other fiduciaries purchasing shares for certain retirement
plans of organizations with retirement plan assets of $100 million or more;
(5) insurance company separate accounts;
(6) accounts managed by subsidiaries of The Capital Group Companies, Inc.; and
(7) The Capital Group Companies, Inc., its affiliated companies and Washington
Management Corporation. Shares are offered at net asset value to these persons
and organizations due to anticipated economies in sales effort and expense.
DEALER COMMISSIONS -- Commissions of up to 1% will be paid to dealers who
initiate and are responsible for purchases of $1 million or more, for purchases
by any employer-sponsored 403(b) plan or purchases by any defined contribution
plan qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees, and for purchases made at
net asset value by certain retirement plans of organizations with collective
retirement plan assets of $50 million or more: 1.00% on amounts of $1 million
to $4 million, 0.50% on amounts over $4 million to $10 million, and 0.25% on
amounts over $10 million.
OTHER COMPENSATION TO DEALERS -- American Funds Distributors, at its expense
(from a designated percentage of its income), currently provides additional
compensation to dealers. Currently these payments are limited to the top one
hundred dealers who have sold shares of the fund or other funds in The American
Funds Group. These payments will be based on a pro rata share of a qualifying
dealer's sales. American Funds Distributors will, on an annual basis, determine
the advisability of continuing these payments.
Qualified dealers currently are paid a continuing service fee not to exceed
0.25% of average net assets (0.15% in the case of the money market funds)
annually in order to promote selling efforts and to compensate them for
providing certain services. These services include processing purchase and
redemption transactions, establishing shareholder accounts and providing
certain information and assistance with respect to the fund.
REDUCING YOUR SALES CHARGE -- You and your immediate family may combine
investments to reduce your costs. You must let your investment dealer or
American Funds Service Company know if you qualify for a reduction in your
sales charge using one or any combination of the methods described below.
STATEMENT OF INTENTION -- You may enter into a non-binding commitment to
purchase shares of a fund(s) over a 13-month period and receive the same sales
charge as if all shares had been purchased at once. This includes purchases
made during the previous 90 days, but does not include appreciation of your
investment or reinvested distributions. The reduced sales charges and public
offering prices set forth in the Prospectus apply to purchases of $50,000 or
more made within a 13-month period subject to the following statement of
intention (the "Statement") terms: The Statement is not a binding obligation
to purchase the indicated amount. When a shareholder elects to use the
Statement in order to qualify for a reduced sales charge, shares equal to 5% of
the dollar amount specified in the Statement will be held in escrow in the
shareholder's account out of the initial purchase (or subsequent purchases, if
necessary) by the Transfer Agent. All dividends and any capital gain
distributions on shares held in escrow will be credited to the shareholder's
account in shares (or paid in cash, if requested). If the intended investment
is not completed within the specified 13-month period, the purchaser will pay
to the Principal Underwriter the difference between the sales charge actually
paid and the sales charge which would have been paid if the total purchases had
been made at a single time. If the difference is not paid by the close of the
period, the appropriate number of shares held in escrow will be redeemed to pay
such difference. If the proceeds from this redemption are inadequate, the
purchaser will be liable to the Principal Underwriter for the balance still
outstanding. The Statement may be revised upward at any time during the
13-month period, and such a revision will be treated as a new Statement, except
that the 13-month period during which the purchase must be made will remain
unchanged and there will be no retroactive reduction of the sales charges paid
on prior purchases. Existing holdings eligible for rights of accumulation (see
the prospectus and account application) and any individual investments in
American Legacy products (American Legacy, American Legacy II and American
Legacy III variable annuities, American Legacy Life, American Legacy Variable
Life, and American Legacy Estate Builder) may be credited toward satisfying the
Statement. During the Statement period reinvested dividends and capital gain
distributions, investments in money market funds, and investments made under a
right of reinstatement will not be credited toward satisfying the
Statement.
When the trustees of certain retirement plans purchase shares by payroll
deduction, the sales charge for the investments made during the 13-month period
will be handled as follows: the regular monthly payroll deduction investment
will be multiplied by 13 and then multiplied by 1.5. The current value of
existing American Funds investments (other than money market fund investments),
any rollovers or transfers reasonably anticipated to be invested in non-money
market American Funds during the 13-month period, and any individual
investments in American Legacy products are added to the figure determined
above. The sum is the Statement amount and applicable breakpoint level. On the
first investment and all other investments made pursuant to the statement of
intention, a sales charge will be assessed according to the sales charge
breakpoint thus determined. There will be no retroactive adjustments in sales
charges on investments previously made during the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION -- Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above, or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
CONCURRENT PURCHASES -- You may combine purchases of two or more funds in The
American Funds Group, except direct purchases of the money market funds.
Shares of money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge do qualify.
RIGHT OF ACCUMULATION -- You may take into account the current value of your
existing holdings in The American Funds Group, as well as your holdings in
Endowments (shares of which may be owned only by tax-exempt organizations), to
determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity. When
determining your sales charge, you may also take into account the value of your
individual holdings, as of the end of the week prior to your investment, in
various American Legacy products (American Legacy, American Legacy II and
American Legacy III variable annuities, American Legacy Life, American Legacy
Variable Life, and American Legacy Estate Builder). Direct purchases of the
money market funds are excluded.
PRICE OF SHARES -- Shares are purchased at the offering price next determined
after the purchase order is received and accepted by the fund or American Funds
Service Company. This offering price is effective for orders received prior to
the time of determination of the net asset value and, in the case of orders
placed with dealers, accepted by the Principal Underwriter prior to its close
of business. In case of orders sent directly to the fund or American Funds
Service Company, an investment dealer MUST be indicated. The dealer is
responsible for promptly transmitting purchase orders to the Principal
Underwriter. Orders received by the investment dealer, the Transfer Agent, or
the fund after the time of the determination of the net asset value will be
entered at the next calculated offering price. Prices which appear in the
newspaper do not always indicate the prices at which you will be purchasing and
redeeming shares of the fund, since such prices generally reflect the previous
day's closing price whereas purchases and redemptions are made at the next
calculated closing price.
The price you pay for shares, the offering price, is based on the net asset
value per share which is calculated once daily at the normal close of trading
(currently 4:00 p.m., New York time) each day the New York Stock Exchange is
open. For example, if the Exchange closes at 1:00 p.m. on one day and at 4:00
p.m. on the next, the fund's share price would be determined as of 4:00 p.m.
New York time on both days. The New York Stock Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas Day.
All portfolio securities of funds managed by Capital Research and Management
Company are valued, and the net asset value per share of the fund is
determined, as follows:
1. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or
less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by the
Trust. The Trust will not knowingly sell shares of the fund (other than for
the reinvestment of dividends or capital gain distributions) directly,
indirectly or through a unit investment trust to any person or entity, where,
after the sale, such person, or entity would own beneficially directly,
indirectly, or through a unit investment trust more than 4.5% of the
outstanding shares of the fund without the consent of a majority of the Board
of Trustees.
SELLING SHARES
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. You may sell
(redeem) shares in your account in any of the following ways:
THROUGH YOUR DEALER (certain charges may apply)
- - Shares held for you in your dealer's street name must be sold through the
dealer.
WRITING TO AMERICAN FUNDS SERVICE COMPANY
- - Requests must be signed by the registered shareholder(s)
- - A signature guarantee is required if the redemption is:
-- Over $50,000;
-- Made payable to someone other than the registered shareholder(s); or
-- Sent to an address that has not been used with the account for at least 10
days.
Your signature may be guaranteed by a domestic stock exchange or the National
Association of Securities Dealers, Inc., bank, savings association or credit
union that are eligible guarantor institutions.
- - Additional documentation may be required for sales of shares held in
corporate, partnership or fiduciary accounts.
- - You must include any shares you wish to sell that are in certificate form.
TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
FUNDSLINE(R) OR AMERICAN FUNDSLINE ONLINE(SM)
- - Redemptions by telephone or fax (including American FundsLine(R) and American
FundsLine OnLine(SM)) are limited to $50,000 per shareholder each day.
- - Checks must be made payable to the registered shareholder(s).
- - Checks must be mailed to an address of record that has been used with the
account for at least 10 days.
MONEY MARKET FUNDS
- - You may have redemptions of $1,000 or more wired to your bank by writing
American Funds Service Company.
- - You may establish check writing privileges (use the money market funds
application).
-- If you request check writing privileges, you will be provided with checks
that you may use to draw against your account. These checks may be made
payable to anyone you designate and must be signed by the authorized number or
registered shareholders exactly as indicated on your checking account signature
card.
Redemption proceeds will not be mailed until sufficient time has passed to
provide reasonable assurance that checks or drafts (including certified or
cashier's checks) for shares purchased have cleared (which may take up to 15
calendar days from the purchase date). Except for delays relating to clearance
of checks for share purchases or in extraordinary circumstances (and as
permissible under the Investment Company Act of 1940), sale proceeds will be
paid on or before the seventh day following receipt and acceptance of an order.
Interest will not accrue or be paid on amounts that represent uncashed
distribution or redemption checks.
The fund may, with 60 days' written notice, close your account if due to a
sale of shares the account has a value of less than the minimum required
initial investment.
You may reinvest proceeds from a redemption or a dividend or capital gain
distribution without a sales charge (any contingent deferred sales charge paid
will be credited to your account) in any fund in The American Funds Group
within 90 days after the date of the redemption or distribution. Redemption
proceeds of shares representing direct purchases in the money market funds are
excluded. Proceeds will be reinvested at the next calculated net asset value
after your request is received and accepted by American Funds Service Company.
CONTINGENT DEFERRED SALES CHARGE -- A contingent deferred sales charge of 1%
applies to certain redemptions made within twelve months of purchase on
investments of $1 million or more and on any investment made with no initial
sales charge by any employer-sponsored 403(b) plan or defined contribution plan
qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares. Shares held
for the longest period are assumed to be redeemed first for purposes of
calculating this charge. The charge is waived for exchanges (except if shares
acquired by exchange were then redeemed within 12 months of the initial
purchase); for distributions from qualified retirement plans and other employee
benefit plans; for redemptions resulting from participant-directed switches
among investment options within a participant-directed employer-sponsored
retirement plan; for distributions from 403(b) plans or IRAs due to death,
disability or attainment of age 591/2; for tax-free returns of excess
contributions to IRAs; for redemptions through certain automatic withdrawals
not exceeding 10% of the amount that would otherwise be subject to the charge;
and for redemptions in connection with loans made by qualified retirement
plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN -- The automatic investment plan enables you to make
regular monthly or quarterly investments in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. Bank accounts will be charged
on the day or a few days before investments are credited, depending on the
bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of the account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing the
Transfer Agent.
AUTOMATIC REINVESTMENT -- Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, American
Funds Service Company or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS -- You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the "paying fund") into any other fund in The American Funds Group
(the "receiving fund") subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds to you. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE -- You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to American Funds Service Company (see
"Redeeming Shares"), by contacting your investment dealer, by using American
FundsLine(R) or American FundsLine Online(SM)(see "American FundsLine(R)" and
American FundsLine Online(SM) below), or by telephoning 800/421-0180 toll-free,
faxing (see "Principal Underwriter and Transfer Agent" in the Prospectus for
the appropriate fax numbers) or telegraphing American Funds Service Company.
(See "Telephone and Computer Purchases, Redemptions and Exchanges" below.)
Shares held in corporate-type retirement plans for which Capital Guardian Trust
Company serves as trustee may not be exchanged by telephone, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES -- You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS -- Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments , will be reflected on regular confirmation statements from
American Funds Service Company. Dividend and capital gain reinvestments and
purchases through automatic investment plans and certain retirement plans will
be confirmed at least quarterly.
AMERICAN FUNDSLINE(R) AND AMERICAN FUNDSLINE ONLINE(SM) -- You may check your
share balance, the price of your shares, or your most recent account
transaction, redeem shares (up to $50,000 per shareholder each day), or
exchange shares around the clock with American FundsLine(R) and American
FundsLine OnLine(SM). To use this service, call 800/325-3590 from a
TouchTone(TM) telephone or access the American Funds Website on the Internet at
www.americanfunds.com. Redemptions and exchanges through American FundsLine(R)
and American FundsLine OnLine(SM) are subject to the conditions noted above and
in "Redeeming Shares--Telephone and Computer Purchases, Redemptions and
Exchanges" below. You will need your fund number (see the list of funds in The
American Funds Group under "Purchase of Shares--Investment Minimums and Fund
Numbers"), personal identification number (the last four digits of your Social
Security number or other tax identification number associated with your
account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES -- By using the
telephone (including American FundsLine(R)) and American FundsLine OnLine(SM),
fax or telegraph redemption and/or exchange options, you agree to hold the
fund, American Funds Service Company, any of its affiliates or mutual funds
managed by such affiliates, and each of their respective directors, trustees,
officers, employees and agents harmless from any losses, expenses, costs or
liability (including attorney fees) which may be incurred in connection with
the exercise of these privileges. Generally, all shareholders are automatically
eligible to use these options. However, you may elect to opt out of these
options by writing American Funds Service Company (you may also reinstate them
at any time by writing American Funds Service Company). If American Funds
Service Company does not employ reasonable procedures to confirm that the
instructions received from any person with appropriate account information are
genuine, the fund may be liable for losses due to unauthorized or fraudulent
instructions. In the event that shareholders are unable to reach the fund by
telephone because of technical difficulties, market conditions, or a natural
disaster, redemption and exchange requests may be made in writing only.
SHARE CERTIFICATES -- Shares are credited to your account and certificates are
not issued unless you request them by writing to American Funds Service
Company.
REDEMPTION OF SHARES -- The fund's Declaration of Trust permits the fund to
direct the Transfer Agent to redeem your shares if, through redemptions or
otherwise, they have a value of less than the minimum initial investment amount
required of new shareholders (determined, for this purpose only, as the greater
of the shareholder's cost or the current net asset value of the shares,
including any shares acquired through reinvestment of income dividends and
capital gain distributions). We will give you prior notice of at least 60 days
before the involuntary redemption provision is made effective with respect to
your account. You will have not less than 30 days from the date of such notice
within which to bring the account up to the minimum determined as set forth
above.
EXECUTION OF PORTFOLIO TRANSACTIONS
The Investment Adviser places orders for the fund's portfolio securities
transactions. The Investment Adviser strives to obtain the best available
prices in its portfolio transactions taking into account the costs and
promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through its
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not have an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.
Portfolio transactions for the fund may be executed as part of concurrent
authorizations to purchase or sell the same security for other funds served by
the Investment Adviser, or for trusts or other accounts served by affiliated
companies of the Investment Adviser. Although such concurrent authorizations
potentially could be either advantageous or disadvantageous to the fund, they
are effected only when the Investment Adviser believes that to do so is in the
interest of the fund. When such concurrent authorizations occur, the objective
is to allocate the executions in an equitable manner.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal years ended August 31, 1998 and
1997 amounted to $8,000 and $73,000, respectively. No brokerage commissions
were paid for the fiscal year ended August 31, 1996.
GENERAL INFORMATION
CUSTODIAN OF ASSETS -- Securities and cash owned by the fund, including
proceeds from the sale of shares of the fund and of securities in the fund's
portfolio, are held by The Chase Manhattan Bank, One Chase Manhattan Plaza, New
York, NY 10081, as Custodian.
TRANSFER AGENT -- American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee
of $807,000 for the fiscal year ended August 31, 1998.
INDEPENDENT AUDITORS -- Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, has served as the fund's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements included in this Statement of Additional
Information have been so included in reliance on the report of the independent
auditors given on the authority of said firm as experts in accounting and
auditing.
REPORTS TO SHAREHOLDERS -- The Trust's fiscal year ends on August 31. It
provides shareholders at least semiannually with reports showing the
investment portfolio, financial statements and other information. The fund's
annual financial statements are audited annually by the Trust's independent
auditors, Deloitte & Touche LLP, whose selection is determined by the Trustees.
In an effort to reduce the volume of mail shareholders receive from the fund
when a household owns more than one account, the Transfer Agent has taken steps
to eliminate duplicate mailings of shareholder reports. To receive additional
copies of a report shareholders should contact the Transfer Agent.
YEAR 2000 - The fund and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The fund understands that
these service providers are taking steps to address the "Year 2000 problem".
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the fund's investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the fund invests could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings of
individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
PERSONAL INVESTING POLICY -- The Investment Adviser and its affiliated
companies have adopted a personal investing policy consistent with Investment
Company Institute guidelines. This policy includes: a ban on acquisitions of
securities pursuant to an initial public offering; restrictions on acquisitions
of private placement securities; pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with codes of ethics; blackout periods on personal investing for
certain investment personnel; ban on short-term trading profits for investment
personnel; limitations on service as a trustee of publicly traded companies;
and disclosure of personal securities transactions. You may obtain a summary
of the personal investing policy by contacting the Secretary of the fund.
The financial statements including the investment portfolio and the report of
Independent Auditors contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
<TABLE>
<CAPTION>
<S> <C>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE -- AUGUST 31, 1998
Net asset value and redemption price per share
(Net assets divided by shares outstanding) $13.39
Offering price per share (100/95.25 of per share
net asset value, which takes into account the
fund's current maximum sales charge) $14.06
</TABLE>
SHAREHOLDER AND TRUSTEE RESPONSIBILITY -- Under the laws of certain states,
including Massachusetts, where the Trust was organized, and California, where
the Trust's principal office is located, shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. However, the risk of a shareholder
incurring any financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its
obligations. The Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification out of Trust property of any
shareholder held personally liable for the obligations of the Trust and also
provides for the Trust to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust
will provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
SHAREHOLDER VOTING RIGHTS -- All shares of the fund have equal voting rights
and may be voted in the elections of Trustees and on other matters submitted to
the vote of shareholders. As permitted by Massachusetts law, there will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders. At that time, the Trustees then in
office will call a shareholders' meeting for the election of Trustees. The
Trustees must call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when requested to do so by the record
holders of 10% of the outstanding shares. At such a meeting, a Trustee may be
removed after the holders of record of not less than a majority of the
outstanding shares of the fund have declared that the Trustee be removed either
by declaration in writing or by votes cast in person or by proxy. Except as
set forth above, the Trustees will continue to hold office and may appoint
successor Trustees. The shares do not have cumulative voting rights, which
means that the holders of a majority of the shares voting for the election of
Trustees can elect all the Trustees. No amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the fund except that amendments may be made upon the sole
approval of the Trustees to conform the Declaration of Trust to the
requirements of applicable Federal laws or regulations or the requirements of
the regulated investment company provisions of the Code, however, the Trustees
will not be liable for failing to do so. If not terminated by the vote or
written consent of a majority of the outstanding shares, the Trust will
continue indefinitely.
The Trust currently issues shares in one series (the fund), but the Board of
Trustees may establish additional series of shares in the future. When more
than one series of shares is outstanding, shares of all series will vote
together for a single set of Trustees, and on other matters affecting the
entire Trust, with each share entitled to a single vote. On matters affecting
only one series, only the shareholders of that series shall be entitled to
vote. On matters relating to more than one series but affecting the series
differently, separate votes by series are required.
INVESTMENT RESULTS AND RELATED STATISTICS
The fund's yield is 5.13% based on the 30-day (or one month) period ended
August 31, 1998, computed by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[( a-b/cd + 1)/6/ -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The fund may also calculate a distribution rate on a taxable and tax
equivalent basis. The distribution rate is computed by annualizing the current
month's dividend and dividing by average net asset value or maximum offering
price for the month. The distribution rate may differ from the yield.
In addition, investments in premium bonds may affect the fund's distribution
rate. A premium bond is bond which is purchased for more than its face value.
Because of this, the bond usually pays a higher than market rate interest, but
the value of the bond (which affects the net asset value of the fund) will be
lower than its purchase price as it nears maturity. The SEC yield takes into
account the long-term effects of premium bonds (I.E., for a premium bond, the
income must be regularly reduced (amortized) by an amount that provides for the
future decrease in value of the bond) whereas the distribution rate may not.
Therefore, the distribution rates of bond funds that invest in premium bonds
(and do not amortize) usually are higher than their SEC yields.
Income from "roll" transactions (the sale of GNMA certificates or other
securities together with a commitment, for which the Fund receives a fee, to
purchase similar securities at a future date) is recorded for accounting
purposes as interest income ratable over the term of each roll and is included
in net investment income for purposes of determining the fund's yield.
As of August 31, 1998, the fund's total return over the past 12 months and
annual total return for the five-year and ten-year periods was 4.49%, 4.27%
and 7.64%. The average annual total return ("T") is computed by equating the
value at the end of the period ("ERV") with a hypothetical initial investment
of $1,000 ("P") over a period of years ("n") according to the following formula
as required by the Securities and Exchange Commission: P(1+T)/n/ = ERV. The
fund's average annual total returnover the past 12 months and annual total
return at net asset value for the five- and ten-year periods ended on August
31, 1998 were 9.70%, 5.28%, and 8.17%, respectively.
In calculating average annual total return, the fund assumes: (1) deduction
of the maximum sales load of 4.75% from the $1,000 initial investment; (2)
reinvestment of dividends and distributions at net asset value on the
reinvestment date determined by the Board; and (3) a complete redemption at the
end of any period illustrated. The fund will calculate total return for five
and ten-year periods after such periods have elapsed. In addition, the fund
may provide lifetime average total return figures.
EXPERIENCE OF INVESTMENT ADVISER --Capital Research and Management Company
manages nine growth and growth-income funds that are at least 10 years old. In
the rolling 10-year periods since January 1, 1968 (133 in all), those funds
have had better total returns than the Standard & Poor's 500 Composite Stock
Index in 124 of the 133 periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company.
The fund may include, in advertisements or in reports furnished to present or
prospective shareholders, information on its investment results and/or
comparisons of its investment results to various unmanaged indices (such as The
Dow Jones Average of 30 Industrial Stocks and The Standard & Poor's 500 Stock
Composite Index) or results of other mutual funds or investment or savings
vehicles. . The fund may also combine its results with those of other funds in
The American Funds Group for purposes of illustrating investment strategies
involving multiple funds.
The fund may also refer to results and surveys compiled by organizations such
as CDA Investment Technologies, Ibbotson Associates, Lipper Analytical Services
("Lipper"), Morningstar, Inc., Wiesenberger Investment Companies Services and
the U.S. Department of Commerce. Additionally, the fund may refer to results
published in various newspapers or periodicals, including Barrons, Forbes,
Fortune, Institutional Investor, Kiplinger's Personal Finance Magazine, Money,
U.S. News and World Report and The Wall Street Journal.
THE BENEFITS OF SYSTEMATIC INVESTING
<TABLE>
<CAPTION>
<S> <C> <C>
Here's how much you would have if you invested $2,000 a year in the Fund:
2 Years 4 Years Lifetime
(9/1/96 - 8/31/98) (9/1/94 - 8/31/98) (10/17/85 - 8/31/98)
$4,369 $9,285 $43,381
</TABLE>
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
If you had invested ... and taken all
$10,000 in the Fund distributions in shares,
this many years ago... your investment would
| have been worth this
much at August 31, 1998
|
Periods
Number of Years 9/1-8/31, 1998 Value**
<S> <C> <C>
1 1997 - 1998 $10,449
2 1996 - 1998 11,395
3 1995 - 1998 11,785
4 1994 - 1998 12,796
5 1993 - 1998 12,326
6 1992 - 1998 13,858
7 1991 - 1998 15,658
8 1990 - 1998 17,596
9 1989 - 1998 19,025
10 1988 - 1998 20,884
11 1987 - 1998 22,639
12 1986 - 1998 23,015
Lifetime 1985* - 1998 26,041
</TABLE>
Illustration of a $10,000 investment in the Fund
with dividends reinvested
(For the lifetime of the Fund October 17, 1985 - August 31, 1998)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES**
Fiscal Total From From From
Year End Annual Dividends Investment Initial Capital Gains Dividends Total
August 31 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1986* $ 825 $ 825 $10,825 $9,920 $26 $ 833 $10,779
1987 1,035 1,860 11,860 9,167 38 1,748 10,953
1988 1,099 2,959 12,959 9,027 37 2,809 11,873
1989 1,211 4,170 14,170 8,987 37 4,016 13,040
1990 1,289 5,459 15,459 8,833 37 5,227 14,097
1991 1,383 6,842 16,842 9,047 37 6,753 15,837
1992 1,382 8,224 18,224 9,420 39 8,445 17,904
1993 1,417 9,641 19,641 9,820 41 10,269 20,130
1994 1,440 11,081 21,081 8,787 36 10,557 19,380
1995 1,547 12,628 22,628 8,827 37 12,184 21,048
1996 1,493 14,121 24,121 8,520 35 13,208 21,763
1997 1,545 15,666 25,666 8,687 36 15,016 23,739
1998 1,624 17,290 27,290 8,927 37 17,077 26,041
</TABLE>
The dollar amount of capital gain distributions during the period was $41.
* From inception on October 17, 1985.
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.: "Prime-1" is the highest commercial paper
rating and issuers rated in this category have the following characteristics:
"Issuers rated 'Prime-1' have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced
by
-- leading market positions in well-established industries
-- high rates of return on funds employed
-- conservative capitalization structures with moderate reliance on debt and
ample asset protections
-- broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- well-established access to a range of financial markets and assured
sources of alternate liquidity."
STANDARD & POOR'S CORPORATION'S: "A-1" is the highest commercial paper rating,
and issuers rated in this category have the following characteristics:
"A-1 -- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation."
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 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.
