The American Funds Group(r)
U.S.
Government
Securities
Fund
The Dawn of Declining Debt
[abstract illustration of the same man at night and during the day]
2000
Annual Report for the year ended August 31
U.S. GOVERNMENT SECURITIES FUND(SM) seeks high current income, consistent with
prudent investment risk and preservation of capital, by investing primarily in
obligations backed by the full faith and credit of the United States
government.
U.S. Government Securities Fund is one of the 29 American Funds, the nation's
third-largest mutual fund family. For nearly seven decades, Capital Research
and Management Company, the American Funds adviser, has invested with a
long-term focus based on thorough research and attention to risk.
RESULTS AT A GLANCE (as of August 31, 2000, with all distributions reinvested)
<TABLE>
<CAPTION>
Average Annual
Cumulative Return Compound Return
<S> <C> <C>
One year + 7.04% -
Five years + 32.42 +5.78%
Ten years + 97.71 +7.05
Lifetime (since October 17, 1985) +192.56 +7.48
</TABLE>
Fund results in this report were calculated for Class A shares at net asset
value (without a sales charge) unless otherwise indicated. Please see back
cover for important information about Class A and B shares. Results for Class B
shares are not shown because of the brief time between their introduction on
March 15 and the end of the fund's reporting period.
Here are the average annual compound returns on a $1,000 investment for periods
ended September 30, 2000 (the most recent calendar quarter), with all
distributions reinvested:
CLASS A SHARES reflecting 3.75% maximum sales charge
<TABLE>
<CAPTION>
Average Annual
Compound Return
<S> <C>
One year +2.44%
Five years +4.88%
Ten years +6.62%
</TABLE>
The fund's 30-day yield for Class A shares as of September 30, 2000, calculated
in accordance with the Securities and Exchange Commission formula, was 5.58%.
The fund's distribution rate as of that date was 5.67%. The SEC yield reflects
income the fund expects to earn based on its current portfolio of securities,
while the distribution rate is based solely on the fund's past dividends.
Accordingly, the fund's SEC yield and distribution rate may differ.
FIGURES SHOWN ARE PAST RESULTS AND ARE NOT PREDICTIVE OF FUTURE RESULTS. SHARE
PRICE AND RETURN WILL VARY, SO YOU MAY LOSE MONEY. INVESTING FOR SHORT PERIODS
MAKES LOSSES MORE LIKELY. INVESTMENTS ARE NOT FDIC-INSURED, NOR ARE THEY
DEPOSITS OF OR GUARANTEED BY A BANK OR ANY OTHER ENTITY.
FELLOW SHAREHOLDERS:
The second half of fiscal 2000 coincided with a more favorable bond environment
than earlier in the year. Inflation fears weighed heavily on fixed-income
markets last autumn, pushing interest rates higher on most debt instruments.
Then, shortly after the new year, the shrinking supply of U.S. Treasury debt
captured the market's attention, boosting prices of Treasury securities and
sending yields lower. Other high-quality bonds benefited from this Treasury
rally, while lower rated debt generally lagged behind.
In this roller coaster environment, U.S. Government Securities Fund garnered
solid returns for its shareholders. For the fiscal year ended August 31, 2000,
the fund recorded a total return of 7.0%, assuming reinvestment of all
distributions. Shareholders who reinvested monthly dividends totaling 73 cents
a share earned an income return of 5.9%. Those who elected to receive dividends
in cash tallied an income return of 5.8%.
The strengthening of government bond prices also boosted returns for your
fund's benchmarks. The 185 U.S. government bond funds tracked by Lipper Inc.
posted an average 12-month return of 6.8% with dividends reinvested. Over the
same period, the unmanaged Lehman Brothers Government/Mortgage-Backed
Securities Index (which does not include expenses) rose 7.9%.
THE YEAR IN REVIEW
The fund's fiscal year began in September 1999 in a difficult environment for
bonds. The economy was expanding rapidly, fanning fears of inflation, and the
Federal Reserve had begun to apply the brakes through a series of short-term
interest rate hikes. Wage costs were rising, as was disposable personal income.
Equity markets were on a roll, and investors were avidly scooping up technology
stocks. Oil prices were climbing, and that great bond nemesis, inflation, began
to worry investors. By mid-January, long-term Treasury yields reached 6.75%,
having risen more than three-quarters of a percent since the start of your
fund's fiscal year, and bond prices fell commensurately. (Bond prices and
yields move in opposite directions.)
[abstract nature illustration]
Matters began to improve early in 2000, when the U.S. Treasury announced that
it would begin to buy back Treasury debt. Government surpluses had decreased
federal borrowing for almost two years; now the government would actually begin
to repurchase Treasury debt in the open market, focusing first on bonds with
the longest maturities. This news prompted a reversal in long-term Treasury
rates and a consequent rise in prices. From mid-January to early April, yields
declined a full percentage point, from about 6.75% to nearly 5.75%. This rally
helped to secure the positive returns reported by your fund for the 12-month
period. (Implications of this historic event are discussed in the following
article, "The Dawn of Declining Debt.")
The Treasury rally began to stall in mid-April with the renewed threat of
inflation, and bond prices fell. On May 16, the Federal Reserve hiked
short-term rates for the sixth time in less than a year in an effort to
engineer a "soft landing" for the economy; this time rates were raised half a
percent (50 basis points). The action proved decisive. Bond prices firmed and
began to rally again by late May, supported by fresh data that the economy was
slowing. This friendlier bond environment persisted through the summer to the
end of the fund's fiscal period.
BUILDING A BROADER PERSPECTIVE
U.S. government securities are sensitive to a variety of influences, notably
economic trends, monetary and fiscal policy, and political initiatives. We have
seen evidence of this in the past year as the Federal Reserve hiked interest
rates, as economic growth set a new record, and as the Treasury entered the
market to buy back its debt. Your fund's portfolio counselors and research
analysts continuously monitor and evaluate these influences, adjusting the mix
of securities in the portfolio when necessary to achieve the highest return
possible within the objectives of the fund. During the past year, for example,
they extended the average effective maturity of the portfolio to 7.7 years from
6.4 years to take advantage of the improving prices for long-term bonds.
Your fund's three counselors bring a broad perspective to portfolio management.
Each of them has a decade or more of experience with the American Funds family;
collectively, they have more than forty-five years of hands-on market
experience. They are familiar with the forces that move bond prices and with
the cycles of the market itself. That expertise has contributed to U.S.
Government Securities Fund's solid record of providing investors with
attractive current income through a variety of market conditions. Since its
inception in October 1985, the fund returned an average of 7.5% a year, for a
total of 192.6%.
We appreciate your ongoing support and look forward to reporting to you again
in six months.
Cordially,
/s/ Paul G. Haaga, Jr.
Paul G. Haaga, Jr.
Chairman of the Board
/s/ John H. Smet
John H. Smet
President
October 16, 2000
[begin mountain chart]
THE VALUE OF A LONG-TERM PERSPECTIVE
How a $10,000 Investment Has Grown
for the period October 17, 1985 to August 31, 2000, with dividends reinvested
$34,141 Lehman Brothers
Government/Mortgage-Backed
Securities Index(1)
$28,153 U.S. Government
Securities Fund(2)
$28,005 Lipper General
U.S. Government Funds
Average(3)
$15,897 Consumer Price
Index (inflation)(4)
$10,000 original investment
<TABLE>
<S> <C> <C> <C> <C> <C>
Lehman Brothers Lipper General
Government/ U.S. U.S. Consumer
Mortgage-Backed Government Government Price
Securities Securities Funds Index Original
Year Index (1) Fund(2) Average (3) (inflation)(4) Investment
10/17/85 $10,000 $9,625 $10,000 $10,000 $10,000
1986* $11,890 $10,888 $11,526 $10,092 $10,000
1987 $12,028 $11,064 $11,468 $10,524 $10,000
1988 $13,014 $11,993 $12,262 $10,948 $10,000
1989 $14,714 $13,171 $13,582 $11,463 $10,000
1990 $15,814 $14,240 $14,360 $12,107 $10,000
1991 $18,109 $15,997 $16,264 $12,567 $10,000
1992 $20,488 $18,085 $18,286 $12,962 $10,000
1993 $22,634 $20,333 $20,245 $13,321 $10,000
1994 $22,324 $19,576 $19,554 $13,707 $10,000
1995 $24,760 $21,260 $21,462 $14,066 $10,000
1996 $25,791 $21,983 $22,015 $14,471 $10,000
1997 $28,307 $23,979 $24,003 $14,793 $10,000
1998 $31,390 $26,304 $26,577 $15,032 $10,000
1999 $31,651 $26,300 $26,257 $15,373 $10,000
2000 $34,141 $28,153 $28,005 $15,897 $10,000
Year ended August 31
</TABLE>
(1) The index is unmanaged and does not reflect sales charges, commissions, or
expenses.
(2) Results reflect payment of the maximum sales charge of 3.75% on the $10,000
investment. Thus, the net amount invested was $9,625. As outlined in the
prospectus, the sales charge is reduced for larger investments. The
maximum sales charge was 4.75% prior to January 10, 2000. No adjustment
has been made for income or capital gains taxes.
(3) Calculated by Lipper Inc. The average does not reflect sales charges.
(4) Computed from data supplied by the U.S. Department of Labor, Bureau of
Labor Statistics.
* For the period 10/17/85 to 8/31/86.
[end mountain chart]
Here are the fund's average annual compound returns, with all distributions
reinvested and assuming payment of the 3.75% maximum sales charge at the
beginning of the stated periods. Sales charges are lower for accounts of
$100,000 or more.
<TABLE>
<CAPTION>
<S> <C>
PERIODS ENDED 8/31/00
CLASS A SHARES
10 years +6.64%
5 years +4.97%
1 year +3.05%
Past results are not predictive of future results.
</TABLE>
THE DAWN OF DECLINING DEBT
The U.S. government recorded a budget surplus for fiscal 1998, its first in
nearly 30 years. Since then, the surplus has grown even larger, swelled by the
record-breaking economic expansion still underway. Government officials now
project that escalating surpluses could extend through the remainder of this
decade.
[abstract illustration of a building and the sun]
How to "spend" the surplus is one of the hottest topics in Washington today -
indeed, it is a vital question for all Americans. As a result of the revenue
overflow, the U.S. Treasury has already reduced its annual borrowing and has
begun to buy back outstanding Treasury issues. According to some projections,
all publicly traded Treasuries could be retired before the end of this decade.
That prospect impacts all bond market participants, especially those invested
in government bond funds. On the following pages, we will examine some of the
recent effects of this historic windfall and its implications for U.S.
Government Securities Fund.
GOVERNMENT TURNS RED INK TO BLACK
Our federal government has experienced numerous cycles of deficit and surplus
throughout its history. For the past several decades, the government ran
substantial deficits and public debt levels rose steadily as a result (see
chart below). During the mid-1980s, when your fund began operations, the supply
of U.S. Treasuries was plentiful and growing rapidly. From 1985 to 1999, our
national debt increased almost threefold, to more than $5.6 trillion (see chart
on pg. 6: Total Treasury Debt). Of that, the public holds approximately $3.6
trillion, with the balance allotted to government agencies and trusts, such as
the Social Security fund. In an effort to slow the rapid accumulation of debt,
Congress passed legislation in 1997 providing for balanced budgets.
[begin bar chart]
BUDGET DEFICITS & SURPLUSES: 1980-2003
(In billions of dollars)
<TABLE>
<CAPTION>
<S> <C>
Year Amount
1980 -73.835
1981 -78.976
1982 -127.989
1983 -207.818
1984 -185.388
1985 -212.334
1986 -221.245
1987 -149.769
1988 -155.187
1989 -152.481
1990 -221.194
1991 -269.359
1992 -290.402
1993 -255.013
1994 -203.104
1995 -163.899
1996 -107.45
1997 -21.943
1998 69.2
1999 124.4
2000 232
2001 268
2002 312
2003 345
</TABLE>
Sources: 1999 U.S. Budget & Congressional Budget Office
[end bar chart]
Few people guessed then that the economy would continue to expand so
vigorously, exerting a tremendous impact on our fiscal outlook. In the past
year alone, estimates for the fiscal 2000 surplus have been revised upward on
three occasions. Most recently, the Congressional Budget Office (CBO) raised
its projection for the current fiscal year to $232 billion, or nearly double
the 1999 surplus of $124 billion. Even more astounding is the CBO revised
outlook for a cumulative surplus of more than $4.7 trillion by 2010.
[begin bar chart]
INTEREST COSTS AS A PERCENT OF GOVERNMENT EXPENSES
<TABLE>
<CAPTION>
<S> <C>
1980 8.9
1981 10.1
1982 11.4
1983 11.1
1984 13
1985 13.7
1986 13.7
1987 13.8
1988 14.3
1989 14.8
1990 14.7
1991 14.7
1992 14.4
1993 14.1
1994 13.9
1995 15.3
1996 15.4
1997 15.2
1998 14.6
1999 13.9
2000 13.2
2001 12.7
2002 12.2
2003 11.3
</TABLE>
Source: 1999 U.S. Budget
[end bar chart]
This glut of cash will allow the Treasury to borrow progressively less money at
its regular debt auctions: As debt matures, the government need not re-issue
(or roll over) as much because of the rising surplus. In addition, the surplus
affords a rare opportunity to buy back outstanding debt. That is exactly what
the Treasury began to do earlier this year and, in so doing, began exerting a
powerful influence on the bond market.
BLACK INK BOOSTS BONDS...
Treasury bond prices fluctuated dramatically during the past year, reacting to
two distinct and potent government initiatives. The first began in June of
1999, when the Federal Reserve started to raise short-term interest rates in an
effort to slow growth and stem inflation. As the rate hikes continued into the
new year, yields on U.S. Treasuries rose, lowering prices. (Bond prices move
inversely to yields.) Then, in early 2000, the Treasury announced that it would
use some of the budget surplus to buy back bonds with the longest maturities to
help reduce interest costs and lower the debt burden. Interest payments
compound the debt burden and constitute a significant portion of the
government's expenses (see chart at left). As a result of these repurchases,
the supply of long-term Treasuries began to shrink. That raised prices on the
remaining long-term debt, pushing long yields lower. Since January 2000, the
yields on the bellwether 30-year Treasury and the 10-year bond have declined by
about one full percentage point.
[abstract illustration of two flowers]
The steady reduction of government debt has generally benefited Treasury
bondholders in recent months. The positive returns posted by your fund for this
fiscal year are due, in part, to the declining yields and rising prices
catalyzed by the Treasury repurchases. For the current calendar year, the
Treasury intends to buy back some $30 billion of outstanding obligations; for
the three fiscal years ended September 30, 2000, the Treasury expects to have
paid down an estimated $355 billion, or some 6% of the total debt outstanding
in 1999. John Smet, a portfolio counselor and president of your fund, notes
that, "Some market observers expect the Treasury to stop issuing 30-year bonds
altogether."
[abstract illustration of two flowers]
...AND BENDS THE CURVE
An unintended consequence of the debt repurchase is the diminishing use of
Treasuries as the benchmark for U.S. bond markets. The Treasury yield curve
represents the current yields on U.S. government debt in a range of maturities
from 3 months to 30 years. Under normal conditions, the range of yields forms
an upward sloping line called a positive yield curve. A positive slope is
formed because longer dated debt is usually more volatile in price and,
therefore, has a higher yield associated with that price risk. Bonds with
shorter maturities typically have less price risk and less volatility, hence,
lower yields. During the past fiscal year, the Federal Reserve's rate hikes and
the Treasury buy-backs have coincided to transform the Treasury yield curve
from positive to inverted (see charts at right).
For decades, the Treasury yield curve broadly reflected market sentiment
regarding interest rates, inflation and economic prospects. The vast majority
of non-Treasury debt issued in the U.S. was initially priced and subsequently
traded against comparable Treasury issues, or "off the curve." That fundamental
relationship has begun to change, however, as the overall supply of Treasury
debt continues to shrink. The distortion in the yield curve has lessened its
effectiveness as a measure for other bonds. Further substantial reductions in
Treasury debt could eliminate it as a benchmark altogether.
[begin sidebar]
TREASURY YIELD CURVES
[begin line chart]
POSITIVE YIELD CURVE
8/31/99
<TABLE>
<CAPTION>
<S> <C>
Bond Maturities %
3 Months 4.979
6 Months 5.158
1 Year 5.289
2 Years 5.726
5 Years 5.852
10 Years 5.953
30 Years 6.058
</TABLE>
[end line chart]
[begin line chart]
INVERTED YIELD CURVE
8/31/00
<TABLE>
<CAPTION>
<S> <C>
Bond Maturities %
3 Months 6.313
6 Months 6.382
1 Year 6.23
2 Years 6.226
5 Years 6.051
10 Years 5.795
30 Years 5.732
</TABLE>
[end line chart]
Source: Bloomberg
[end sidebar]
The bond market has already begun to look for other benchmarks to replace
Treasuries. One alternative under consideration was the bonds issued by
government agencies: the guaranteed mortgage pass-throughs of Government
National Mortgage Association (GNMA) and the various securities of
government-sponsored enterprises, such as Freddie Mac and Fannie Mae.
Unfortunately, these bonds have not proved an effective substitute. Much of the
debt issued by these entities<UNDEF>and all of the debt issued by GNMA<UNDEF>is
mortgage-backed; this makes it more difficult to value than plain Treasuries
and less appropriate as a benchmark for other bonds. Government officials have
pondered this dilemma and may ultimately elect to leave some portion of public
debt outstanding for market purposes.
[abstract butterfly illustration]
[begin bar chart]
TOTAL TREASURY DEBT
(In billions of dollars)
<TABLE>
<CAPTION>
<S> <C>
1999 5656.3
1998 5526.2
1997 5413.1
1996 5224.8
1995 4973.9
1994 4692.7
1993 4411.5
1992 4064.6
1991 3665.3
1990 3233.3
1989 2857.4
1988 2602.3
1987 2350.3
1986 2125.3
1985 1945.9
1984 1663
1983 1410.7
1982 1197.1
1981 1028.7
1980 930.2
</TABLE>
Source: U.S. Bureau of the Public Debt Online
[end bar chart]
A POSSIBLE SHORTAGE OF DEBT?
The elimination of government debt seemed an impossible dream scarcely a decade
ago. Today, that feat appears a tangible reality, if current government
forecasts prove correct. CBO projections suggest that the publicly held portion
of government debt could be eliminated by 2010, and perhaps as early as 2007.
This will have obvious consequences for investors, including shareholders in
U.S. Government Securities Fund. U.S. Treasuries comprise some 44% of your
fund's net assets. They have long been an important portfolio holding for many
insurance companies and pension funds as well, because they are the highest
quality fixed-income securities. Furthermore, many central banks around the
world maintain positions in short-term Treasury debt as part of their foreign
exchange reserves.
As bond market participants ponder alternatives to replace Treasury holdings,
professional knowledge and market experience become even more consequential.
Your fund's portfolio counselors and their colleagues at the American Funds are
well equipped to evaluate and manage these changes. Their extensive experience
through a variety of bond market cycles and transformations provides a scope of
insight necessary to interpret and respond to these historic alterations
appropriately.
PRESENT FORTUNES ARE NOT FUTURE FACT
Political changes in Washington could also greatly impact the extent and
momentum of future debt reduction. Recent revisions to projected surpluses have
set politicians scrambling for sharper pencils and plumper proposals. Some
political camps espouse greater tax cuts over the next several years, while
others envision increased public spending. Either proposal could significantly
reduce the anticipated surpluses and the scope of debt reduction. The victors
of the November elections will likely determine the thrust of future fiscal
policies.
The most important factor of all is the sustainability of the current economic
expansion. The CBO anticipates moderate growth (3.1% in 2001 and 2.7%
thereafter) over the balance of the decade; however, this forecast does not
accommodate a recession. A severe downturn or an extended economic slowdown
would undoubtedly curtail income tax receipts - the primary component of rising
government revenues. The current record-breaking expansion cannot last forever;
whether it extends through the remainder of this decade remains to be seen.
[abstract illustration of two cornstalks growing]
Only a handful of times in our nation's history have we ever had the resources
to buy back Treasuries; the most recent was some seventy years ago under
Treasury Secretary Andrew Mellon. The greater part of our history, especially
the past century, has been one of indebtedness. Consequently, we savor this
rare event even as we ponder the future. Gradual, ongoing debt reduction could
serve to stabilize bond valuations over the near term, while improving the
fiscal posture of our nation. This could prove a further benefit to your fund,
with its substantial holdings in a wide variety of government-backed bonds. A
substantially lower debt burden would also free taxpayer dollars, now consigned
to servicing debt, for public initiatives or tax cuts-maybe both. Nonetheless,
portfolio counselor John Smet cautions: "It is much too early to sound the
death knell for Treasuries. There are simply too many variables, too many
factors that can influence the future course of debt reduction. No one can say
for certain whether the surpluses will continue and be applied to reducing the
debt."
As we enter this new era of lower debt, your fund's investment professionals
remain encouraged by the prospects for improving bond fundamentals over the
near term. Now, as in the past, U.S. Treasuries constitute a core holding of
this fund, and your portfolio counselors will continue to search for additional
values among all classes of government debt. Even as the mountain of Treasury
debt declines, the debt of government agencies, such as Fannie Mae or Freddie
Mac, continues to grow, affording a broad choice of bonds for your fund.
WHAT MAKES THE AMERICAN FUNDS DIFFERENT?
[abstract illustration of the United States of America flag]
As a shareholder in U.S. Government Securities Fund, you are also a member of
The American Funds Group, the nation's third-largest mutual fund family. You
won't find us advertised, yet thousands of financial advisers recommend the
American Funds for their clients' serious money-money set aside for education,
a home, retirement and other important dreams.
What the 29 funds in our group have in common is a commitment to your best
interests and the proven approach of our investment adviser, Capital Research
and Management Company. In business since 1931, Capital's calling cards
include:
A LONG-TERM, VALUE-ORIENTED APPROACH: Rather than follow short-term fads, we
rely on our own intensive research to find well-managed companies with
reasonably priced securities and solid, long-term potential. Despite our size,
we offer relatively few funds compared with many large fund families, allowing
us to maintain a careful focus on our objectives and enabling you to benefit
from economies of scale.
AN UNPARALLELED GLOBAL RESEARCH EFFORT: We opened our first overseas office in
1962, well before most mutual funds began investing internationally. Today, the
American Funds draw on one of the industry's most globally integrated research
networks. Capital Research spends substantial resources getting to know
companies and industries around the world.
A MULTIPLE PORTFOLIO COUNSELOR SYSTEM: More than 40 years ago, we developed a
unique strategy for managing investments that blends teamwork with individual
accountability. Every American Fund is divided among a number of portfolio
counselors, each of whom manages his or her portion independently, within each
fund's objectives; in most cases, research analysts manage a portion as well.
Over time, this method has contributed to consistency of results and continuity
of management.
EXPERIENCED INVESTMENT PROFESSIONALS: More than 75% of the portfolio counselors
who serve the American Funds were in the investment business before the sharp
stock market decline in October 1987. Long tenure and experience through a
variety of market conditions mean we aren't "practicing" with your money.
A COMMITMENT TO LOW OPERATING EXPENSES: You can't control market returns, but
you can control what you invest in and how much you pay to own it. American
Funds provide exceptional value for shareholders, with operating expenses that
are among the lowest in the mutual fund industry. Our portfolio turnover rates
are low as well, keeping transaction costs and tax consequences contained.
A PORTFOLIO FOR EVERY INVESTOR
MOST FINANCIAL ADVISERS SUGGEST THAT INVESTORS BALANCE THEIR PORTFOLIOS BY
INVESTING ACROSS SEVERAL TYPES OF INVESTMENTS. WHICH MIX IS RIGHT FOR YOU? THAT
DEPENDS ON A NUMBER OF THINGS-INCLUDING YOUR RISK TOLERANCE, INVESTMENT TIME
HORIZON AND FINANCIAL GOALS. THE AMERICAN FUNDS GROUP OFFERS 29 FUNDS WITH AN
ARRAY OF INVESTMENT OBJECTIVES TO HELP YOU AND YOUR FINANCIAL ADVISER BUILD A
PORTFOLIO SPECIFICALLY TAILORED TO YOUR NEEDS.
GROWTH FUNDS
Emphasis on long-term growth through stocks
AMCAP Fund(r)
EuroPacific Growth Fund(r)
The Growth Fund of America(r)
The New Economy Fund(r)
New Perspective Fund(r)
New World Fund(sm)
SMALLCAP World Fund(r)
GROWTH-AND-INCOME FUNDS
Emphasis on long-term growth and dividends through stocks
American Mutual Fund(r)
Capital World Growth and Income Fund(sm)
Fundamental Investors(sm)
The Investment Company of America(r)
Washington Mutual Investors Fund(sm)
EQUITY-INCOME FUNDS
Emphasis on above-average income and growth through stocks and/or bonds
Capital Income Builder(r)
The Income Fund of America(r)
BALANCED FUND
Emphasis on long-term growth and current income through stocks and bonds
American Balanced Fund(r)
INCOME FUNDS
Emphasis on current income through bonds
American High-Income Trust(sm)
The Bond Fund of America(sm)
Capital World Bond Fund(r)
Intermediate Bond Fund of America(r)
U.S. Government Securities Fund(sm)
TAX-EXEMPT INCOME FUNDS
Emphasis on tax-free current income through municipal bonds
American High-Income Municipal Bond Fund(r)
Limited Term Tax-Exempt Bond Fund of America(sm)
The Tax-Exempt Bond Fund of America(r)
STATE-SPECIFIC TAX-EXEMPT FUNDS:
The Tax-Exempt Fund of California(r)
The Tax-Exempt Fund of Maryland(r)
The Tax-Exempt Fund of Virginia(r)
MONEY MARKET FUNDS
Seek stable monthly income through money market instruments
The Cash Management Trust of America(r)
The Tax-Exempt Money Fund of America(sm)
The U.S. Treasury Money Fund of America(sm)
We also offer a full line of retirement plans and variable annuities.
FOR MORE COMPLETE INFORMATION ABOUT ANY OF THE FUNDS, INCLUDING CHARGES AND
EXPENSES, PLEASE OBTAIN A PROSPECTUS FROM YOUR FINANCIAL ADVISER, DOWNLOAD ONE
FROM OUR WEB SITE AT WWW.AMERICANFUNDS.COM, OR PHONE THE FUNDS' TRANSFER AGENT,
AMERICAN FUNDS SERVICE COMPANY AT 800/421-0180. PLEASE READ THE PROSPECTUS
CAREFULLY BEFORE YOU INVEST OR SEND MONEY. FOR MORE INFORMATION, ASK YOUR
FINANCIAL ADVISER FOR A COPY OF OUR BROCHURE A PORTFOLIO FOR EVERY INVESTOR.
[abstract illustration of the planet earth]
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
<S> <C>
Portfolio Composition
[begin pie chart]
U.S. Treasuries Obligations 44%
Federal Agency Obligations: Mortgage Pass-Throughs 40%
Federal Agency Debentures 8%
Collateralized Mortgage Obligations 3%
Collateralized Mortgage Obligations (Privately Originated) 1%
Cash & Equivalents 4%
100%
[end pie chart]
</TABLE>
<TABLE>
The American Funds Income Series
U.S. Government Securities Fund
Investment Portfolio
August 31, 2000
<S> <C> <C> <C>
Principal Market Percent
Amount Value of Net
(000) (000) Assets
-------- -------- --------
U.S. Treasury Obligations - 43.94%
5.75% November 2000 $ 33,000 $ 32,949 43.94%
6.375% August 2002 350 351
11.625% November 2002 17,500 19,417
7.25% May 2004 1,250 1,297
12.375% May 2004 245 295
0% November 2004 39,375 30,579
7.875% November 2004 3,655 3,897
11.625% November 2004 6,240 7,505
7.50% February 2005 7,980 8,429
0% May 2006 71,240 50,777
6.50% October 2006 27,000 27,657
6.25% February 2007 16,000 16,223
6.625% May 2007 39,000 40,340
6.125% August 2007 8,550 8,618
5.50% February 2008 3,140 3,053
5.50% May 2009 23,225 22,579
10.375% November 2009 14,750 16,953
10.375% November 2012 31,000 38,531
12.00% August 2013 10,000 13,636
9.875% November 2015 2,345 3,253
8.75% May 2017 5,550 7,172
8.875% August 2017 63,750 83,392
8.875% February 2019 230 304
7.875% February 2021 11,250 13,797
7.125% February 2023 8,375 9,612
0% November 2027 4,350 924
5.25% February 2029 16,800 15,473
---------- ----------
477,013 43.94
---------- ----------
Federal Agency Obligations:
Mortgage Pass-Throughs (1) - 39.46%
Fannie Mae:
6.00% 2008 3,000 2,842
6.25% 2029 3,900 3,606
6.35% 2005 2,931 2,861
6.50% 2028 500 478
7.00% 2009 - 2028 10,433 10,294
7.50% 2039 8026 7929
8.00% 2005 - 2030 16,363 16,516
8.26% 2002(2) 2,645 2,666
8.50% 2007 - 2030 1,708 1,750
9.00% 2009 - 2023 946 977
9.50% 2011 - 2022 805 839
10.00% 2017 - 2021 420 445
11.00% 2010 - 2020 2,593 2,811
11.50% 2015 - 2020 2,015 2,204
12.00% 2015 - 2029 6,874 7,576
12.25% 2011 - 2013 305 336
12.50% 2012 - 2019 5,208 5,828
Federal Housing Administration/Veterans Affairs 12.50% 2029
12.75% 2012 - -
13.00% 2028 2,478 2,783
13.25% 2011 - 2014 373 418
13.50% 2015 1,129 1,275
14.00% 2013 - 2014 411 474
15.00% 2013 762 888
Fannie Mae/Government National Mortgage Assn.: 15.00% 2013
15.50% 2012 10 11
16.00% 2012 8 9 6.98
Freddie Mac:
6.00% 2014 2,577 2,466
7.00% 2008 527 524
8.00% 2012 1,107 1,125
8.25% 2007 314 318
8.50% 2009 - 2021 3,935 4,031
8.75% 2008 284 289
9.00% 2010 - 2021 1,717 1,762
10.50% 2006 - 2016 215 231
10.75% 2010 112 118
11.00% 2015 - 2016 221 239
11.50% 2015 106 114
11.75% 2014 217 236
12.00% 2014 - 2017 3,380 3,708
12.25% 2015 225 246
12.50% 2015 - 2019 3,127 3,453
13.00% 2014 - 2015 2,040 2,293
13.50% 2018 100 113
13.75% 2014 12 14
14.00% 2011 - 2014 112 128
14.50% 2010 - 2011 54 62
14.75% 2010 47 53
15.00% 2011 21 24
15.50% 2011 12 13
16.00% 2012 18 21
16.25% 2011 62 71 2.00
[abstract illustration of a flower]
Government National Mortgage Assn.:
5.50% 2013 999 939
6.00% 2008 - 2029 74,917 70,525
GNMA I POOL #781014 6.0% 04-15-29
6.50% 2014 - 2029 72,924 70,384
GNMA I POOL #486598 6.5% 10-15-28
GNMA I POOL #486873 6.5% 01-15-29
7.00% 2008 - 2029 57,244 56,236
7.50% 2009 - 2030 35,539 35,553
Government National Mortgage Assn.: 7.50% 2029
8.00% 2002 - 2030 56,567 57,566
GNMA I POOL #433770 8.0% 03-15-30
GNMA I POOL #505455 8.0% 03-15-30
8.50% 2020 - 2023 2,221 2,282
9.00% 2009 - 2022 7,811 8,117
9.50% 2009 - 2021 3,258 3,419
9.75% 2011 - 2012 943 991
10.00% 2016 - 2022 18,798 20,068
10.25% 2012 65 69
10.50% 2015 - 2019 963 1,043
11.00% 2013 87 95
11.25% 2001 - 2016 1,359 1,443
11.75% 2013 - 2015 24 25
12.25% 2013 - 2015 108 115
12.75% 2014 - 2015 157 167
13.00% 2011 - 2015 989 1,118
13.25% 2013 - 2015 167 178
13.50% 2013 166 190
14.00% 2014 93 106
14.50% 2012 - 2014 231 270
16.00% 2011 - 2012 19 23 30.48
---------- ----------
428,390 39.46
---------- ----------
[illustration of a butterfly]
Federal Agency Debentures - 8.32%
Federal Home Loan Bank Bonds:
5.625% 2001 3,500 3,473
7.125% 2005 6,500 6,613
5.80% 2008 30,825 28,768 3.58
Freddie Mac 5.75% 2008 8,000 7,465 .69
Tennessee Valley Authority, Series G, 5.375% 2008 48,670 43,948 4.05
---------- ----------
90,267 8.32
---------- ----------
Collateralized Mortgage
Obligations(1) - 3.06%
Fannie Mae:
Series 91-50, Class H, 7.75% 2006 1,220 1,226
Series 1997-M5, Class C, ACES, 6.74% 2007 5,000 4,844
Series 1998-M6, Class A2, ACES, 6.32% 2008 2,500 2,361
Trust 35, Class 2, 12.00% 2018 200 225 2.81
Series 90-93, Class G, 5.50% 2020 1,136 1,060
Series 1992-119, Class Z, 8.00% 2022 4,477 4,464
Series 1994-4, Class ZA, 6.50% 2024 5,761 5,335
Series 1997-M6, Class ZA, 6.85% 2026 12,274 10,989
Freddie Mac:
Series 83-A, Class 3, 11.875% 2013 89 95
Series 83-B, Class 3, 12.50% 2013 599 642 .25
Series 178, Class Z, 9.25% 2021 997 1,030
Series 1567, Class A, 5.161% 2023(2) 1,009 982
---------- ----------
33,253 3.06
---------- ----------
Collateralized Mortgage Obligations
(Privately Originated)(1)(3) - 0.84%
Paine Webber CMO, Series O, Class 5, 9.50% 2019 1,915 2,003 .18
Ryland Acceptance Corp. Four, Series 88, 7,167 7,174 .66
Class E, 7.95% 2019
---------- ----------
9,177 .84
---------- ----------
Development Authorities - 0.25%
International Bank for Reconstruction and 2,000 2,671 .25
Development 12.25% 2008
---------- ----------
---------- ----------
Total Bonds and Notes (cost: $1,043,263,000) 1,040,771 95.87
---------- ----------
Short-Term Securities
Federal Agency Discount Notes - 4.23%
Federal Home Loan Bank due 9/01/00 24,900 24,896 2.29
Federal Home Loan Bank due 9/06/00 21,100 21,077 1.94
---------- ----------
45,973 4.23
---------- ----------
---------- ----------
Total Short-Term Securities (cost: $45,973,000) 45,973 4.23
---------- ----------
Total Investment Securities (cost: $1,089,236,000) 1,086,744 100.10
Excess of payables over cash and receivables -1,071 -.10
---------- ----------
Net Assets $1,085,673 100.00%
---------- ----------
(1) Pass-through securities backed by a
pool of mortgages or other loans on
which principal payments are periodically
made. Therefore, the effective
maturities are shorter than the stated maturities.
(2) Coupon rate may change periodically.
(3) Comprised of federal agency originated
or guaranteed loans.
See Notes to Financial Statements
</TABLE>
[abstract illustration of the sun shining on grass]
<TABLE>
U.S. GOVERNMENT SECURITIES FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
at August 31, 2000 (dollars in thousands)
<S> <C> <C>
Assets:
Investment securities at market
(cost: $1,089,236) $1,086,744
Cash 117
Receivables for--
Sales of investments $10,805
Sales of fund's shares 1,388
Forward currency contracts - net 0
Accrued interest 10,538
Other 4 22,735
1,109,596
Liabilities:
Payables for--
Purchases of investments 18,807
Repurchases of fund's shares 2,005
Forward currency contracts - net 0
Dividends on fund's shares 1,992
Management services 361
Chase Manhattan Bank 0
Other expenses 758 23,923
Net Assets at August 31, 2000 $1,085,673
Unlimited shares authorized
Class A shares, $1.00 par value:
Net assets $1,082,620
Shares outstanding 84,861,308
Net asset value per share $12.76
Class B shares, $1.00 par value:
Net assets $3,053
Shares outstanding 239,293
Net asset value per share $12.76
STATEMENT OF OPERATIONS
for the year ended August 31, 2000 (dollars in thousands)
Investment Income:
Income:
Interest $78,543
Amortization 3,529
Other 31 $82,103
Expenses:
Management services fee 4,622
Distribution expenses - Class A 3,395
Distribution expenses - Class B 7
Transfer agent fee - Class A 1,323
Transfer agent fee - Class B 1
Reports to shareholders 93
Registration statement and prospectus 130
Postage, stationery and supplies 239
Trustees' fees 27
Auditing and legal fees 59
Custodian fee 23
Taxes other than federal income tax 37
Other expenses 45 10,001
Net investment income 72,102
Realized Loss and Unrealized
Appreciation on Investments:
Net realized loss (34,097)
Net change in unrealized depreciation
on investments 38,351
Net realized loss and
unrealized appreciation
on investments 4,254
Net Increase in Net Assets Resulting
from Operations $76,356
STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands)
Year ended August 31
2000 1999
Operations:
Net investment income 72102.00 77125.00
Net realized loss on investments (34097.00) (1614.00)
Net unrealized appreciation (depreciation)
on investments 38351.00 (77976.00)
Net increase (decrease) in net assets
resulting from operations 76356.00 (2465.00)
Dividends Paid to Shareholders:
Dividends from net investment income:
Class A (68250.00) (77414.00)
Class B (35.00) -
Total dividends (68285.00) (77414.00)
Capital Share Transactions:
Proceeds from shares sold 306116.00 788396.00
Proceeds from shares issued in reinvestment
of net investment income dividends 54239.00 61070.00
Cost of shares repurchased (604472.00) (657673.00)
Net (decrease) increase in net assets (244117.00) 191793.00
resulting from capital share transactions
Total (Decrease) Increase in Net Assets (236046.00) 111914.00
Net Assets:
Beginning of year 1321719.00 1209805.00
End of year (including
undistributed net investment
income of: $4,993 and $1,176,
respectively) $1,085,673 $1,321,719
See Notes to Financial Statements
</TABLE>
[abstract illustration of the sun shining on a sun dial]
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The American Funds Income Series (the "trust") is registered
under the Investment Company Act of 1940 as an open-end diversified management
investment company and has initially issued two 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 fund offers Class A and Class B shares. Class A
shares are sold with an initial sales charge of up to 3.75%. Class B shares
are sold without an initial sales charge but are subject to a contingent
deferred sales charge paid upon redemption. This charge declines from 5% to
zero over a period of six years. Class B shares have higher distribution
expenses and transfer agent fees than Class A shares. Class B shares are
automatically converted to Class A shares eight years after the date of
purchase. Holders of both classes of shares have equal pro rata rights to
assets and identical voting, dividend, liquidation and other rights, except
that each class bears different distribution and transfer agent expenses, and
each class shall have exclusive rights to vote on matters affecting only their
class.
SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States which require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of the
significant accounting policies consistently followed by the fund in the
preparation of its financial statements:
SECURITY VALUATION - Fixed-income securities are valued at prices obtained from
a pricing service, when such prices are available; however, in circumstances
where the investment adviser deems it appropriate to do so, such securities
will be valued at the mean quoted bid and asked prices or at prices for
securities of comparable maturity, quality and type. Short-term securities
maturing within 60 days are valued at amortized cost, which approximates market
value.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith by a
committee appointed by the Board of Trustees. The ability of the issuers of the
fixed-income securities held by the fund to meet their obligations may be
affected by economic developments in a specific industry, state or region.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are
accounted for as of the trade date. Realized gains and losses from securities
transactions are determined based on specific identified cost. In the event
securities are purchased on a delayed delivery or "when-issued" basis, the fund
will instruct the custodian to segregate liquid assets sufficient to meet its
payment obligations in these transactions. Dividend income is recognized on the
ex-dividend date, and interest income is recognized on an accrual basis. Market
discounts, premiums and original issue discounts on fixed-income securities are
amortized daily over the expected life of the security.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends to shareholders are
declared daily after the determination of the fund's net investment income and
are paid to shareholders monthly.
ALLOCATIONS - Income, expenses (other than class-specific expenses) and
realized and unrealized gains and losses are allocated daily between Class A
and Class B based on their relative net asset values. Distribution expenses,
transfer agent fees and any other class-specific expenses, are accrued daily
and charged to the applicable share class.
2. FEDERAL INCOME TAXATION
The fund complies with the requirements of the Internal Revenue Code applicable
to regulated investment companies and intends to distribute all of its net
taxable income and net capital gains for the fiscal year. As a regulated
investment company, the fund is not subject to income taxes if such
distributions are made. Required distributions are determined on a tax basis
and may differ from net investment income and net realized gains for financial
reporting purposes. In addition, the fiscal year in which amounts are
distributed may differ from the year in which the net investment income and net
realized gains are recorded by the fund.
As of August 31, 2000, net unrealized depreciation on investments for book
and federal income tax purposes aggregated $2,492,000, of which $16,626,000
related to appreciated securities and $19,118,000 related to depreciated
securities. There was no difference between book and tax realized losses on
securities transactions for the year ended August 31, 2000. During the year
ended August 31, 2000, the fund realized, on a tax basis, a net capital loss of
$34,097,000 on securities transactions. During the year ended August 31, 2000,
a net capital loss totaling $3,462,000 expired. In addition, the fund has
recognized, for tax purposes, capital losses totaling $4,005,000 which were
realized during the period November 1, 1998 through August 31, 1999 and has
deferred the recognition of capital losses totaling $32,439,000 which were
realized during the period November 1, 1999 through August 31, 2000. The fund
had available at August 31, 2000 a net capital loss carryforward totaling
$65,491,000 which may be used to offset capital gains realized during
subsequent years through 2008 and thereby relieve the fund and its shareholders
of any federal income tax liability with respect to the capital gains that are
so offset. The fund will not make distributions from capital gains while a
capital loss carryforward remains. The cost of portfolio securities for book
and federal income tax purposes was $1,089,236,000 at August 31, 2000.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEE - The fee of $4,622,000 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 based
on the following rates and month-end net asset levels:
<TABLE>
<CAPTION>
Net Asset Level
Rate In Excess of Up to
<S> <C> <C>
0.30% $0 $60 million
0.21 $60 million $1 billion
0.18 $1 billion $3 billion
0.16 $3 billion
</TABLE>
The agreement also provides for fees based on monthly gross investment income
at the following rates:
<TABLE>
<CAPTION>
Monthly Gross Investment Income
Rate In Excess of Up to
<S> <C> <C>
3.00% $ 0 $3,333,333
2.25 3,333,333 8,333,333
2.00 8,333,333
</TABLE>
DISTRIBUTION EXPENSES - Pursuant to a Plan of Distribution for Class A shares,
the fund may expend up to 0.30% of Class A average daily 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 in advance by the fund's Board of Trustees. Fund expenses under the
Plan include payments to dealers to compensate them for their selling and
servicing efforts. Pursuant to a Plan of Distribution for Class B shares, the
fund may expend 1.00% of Class B daily net assets annually to compensate
dealers for their selling and servicing efforts. During the year ended August
31, 2000, distribution expenses under the Plans of Distribution for Class A and
Class B shares were $3,395,000 and $7,000, respectively. As of August 31, 2000,
accrued and unpaid distribution expenses for Class A and Class B shares were
$573,000 and $2,000, respectively.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $410,000 (after allowances to dealers) during the year
ended August 31, 2000, as its portion of the sales charges paid by purchasers
of the fund's Class A shares. Such sales charges are not an expense of the fund
and, hence, are not reflected in the accompanying statement of operations.
TRANSFER AGENT FEE - A fee of $1,324,000 was incurred during the year ended
August 31, 2000 pursuant to an agreement with American Funds Service Company
(AFS), the transfer agent for the fund.
DEFERRED TRUSTEES' FEES - Trustees who are unaffiliated with CRMC may elect to
defer part or all of the fees earned for services as members of the Board.
Amounts deferred are not funded and are general unsecured liabilities of the
fund. As of August 31, 2000, aggregate deferred amounts and earnings thereon
since the deferred compensation plan's adoption (1993), net of any payments to
Trustees, were $100,000.
AFFILIATED DIRECTORS' AND OFFICERS - CRMC is owned by The Capital Group
Companies, Inc. AFS and AFD are both wholly owned subsidiaries of CRMC.
Officers of the trust and certain Trustees are or may be considered to be
affiliated with CRMC, AFS and AFD. No such persons received any remuneration
directly from the fund.
4. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities of $704,660,000 and $953,575,000, respectively, during
the year ended August 31, 2000.
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 $23,000 was paid by these credits rather than in cash.
As of August 31, 2000, net assets consisted of the following:
<TABLE>
<S> <C>
(dollars in thousands)
Capital paid in on shares of
beneficial interest $1,192,020
Undistributed net investment income 4,993
Accumulated net realized loss (108,848)
Net unrealized depreciation (2,492)
Net assets $1,085,673
</TABLE>
Capital share transactions in the fund were as follows:
<TABLE>
Year ended August 31, 2000 Year ended August 31, 1999
Amount (000) Shares Amount (000) Shares
<S> <C> <C> <C> <C>
Class A Shares:
Sold $ 302,736 24,095,858 $ 788,396 59,582,486
Reinvested dividends 54,013 4,303,427 61,070 4,640,790
Repurchased (603,875) (48,180,501) (657,673) (49,917,467)
Net (decrease) increase in Class A (247,126) (19,781,216) 191,793 14,305,809
Class B Shares:*
Sold 3,582 284,619 - -
Reinvested dividends 24 1,925 - -
Repurchased (597) (47,251) - -
Net increase in Class B 3,009 239,293 - -
Total net (decrease) increase in fund $ (244,117) (19,541,923) $ 191,793 14,305,809
*Class B shares were not offered
before March 15, 2000
</TABLE>
<TABLE>
PER-SHARE DATA AND RATIOS (1)
<S> <C> <C> <C>
Net
Net asset gains/(losses)
value, Net on securities
beginning investment (both realized
Year ended of year income and unrealized)
Class A:
2000 $12.63 $.77 (2) $.09 (2)
1999 13.39 .77 (.76)
1998 13.03 .83 .40
1997 12.78 .88 .25
1996 13.24 .93 (.49)
Class B:
2000 12.49 .50 (2) .07 (2)
Dividends
Total from (from net Net asset
investment investment value, end
Year ended operations income) of year
Class A:
2000 $.86 $(.73) $12.76
1999 .01 (.77) 12.63
1998 1.23 (.87) 13.39
1997 1.13 (.88) 13.03
1996 .44 (.90) 12.78
Class B:
2000 .57 (.30) 12.76
Ratio of
Net assets, expenses
Total end of year to average
Year ended return (in millions) net assets
Class A:
2000 7.04% $1,083 .85%
1999 (.01) 1,322 .80
1998 9.70 1,210 .79
1997 9.08 1,106 .80
1996 3.40 1,216 .81
Class B:
2000 4.43 3 1.53 (3)
Ratio of
net income Portfolio
to average turnover
Year ended net assets rate
Class A:
2000 6.13% 63.18% (4)
1999 5.80 81.10
1998 6.24 81.99
1997 6.74 28.16
1996 7.04 40.01
Class B:
2000 5.28 (3) 63.18 (4)
(1) The periods 1996 through 2000 represent
fiscal years ended August 31. The period ended
2000 represents, for Class B shares, the
169-day period ended August 31, 2000.
Class B shares were not offered before March
15, 2000. Total returns for such periods are
based on activity during the period and thus
are not representative of a full year.
Total returns exclude all sales charges,
including contingent deferred sales charges.
(2) Based on average shares outstanding.
(3) Annualized.
(4) Represents portfolio turnover rate
(equivalent for all share classes) for the year
ended August 31, 2000.
</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, 2000, 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 for Class A shares and the period March 15, 2000 through August 31, 2000
for Class B shares. 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 auditing standards generally
accepted in the United States of America. 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, 2000, 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, 2000, 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 for Class A shares and the period March 15, 2000 through August 31, 2000
for Class B shares, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 2, 2000
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, 55% 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 2001 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO
BE INCLUDED ON THEIR RESPECTIVE 2000 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.
The American Funds Group(r)
U.S. GOVERNMENT SECURITIES FUND
BOARD OF TRUSTEES
AMBASSADOR RICHARD G. CAPEN, JR.
Rancho Santa Fe, California
Corporate director and author; former United States
Ambassador to Spain; former Vice Chairman of the
Board, Knight-Ridder, Inc.; former Chairman of the
Board and Publisher, The Miami Herald
H. FREDERICK CHRISTIE
Rolling Hills Estates, California
Private investor; former President and Chief
Executive Officer, The Mission Group; former
President, Southern California Edison Company
DIANE C. CREEL, Long Beach, California
President and Chief Executive Officer,
The Earth Technology Corporation
(international consulting engineering)
MARTIN FENTON, San Diego, California
Managing Director, Senior Resource Group,
LLC (development and management of senior
living communities)
LEONARD R. FULLER, Marina del Rey, California
President, Fuller Consulting
(financial management consulting firm)
ABNER D. GOLDSTINE, Los Angeles, California
Vice Chairman of the Board of the fund
Senior Vice President and Director,
Capital Research and Management Company
PAUL G. HAAGA, JR., Los Angeles, California
Chairman of the Board of the fund
Executive Vice President and Director,
Capital Research and Management Company
RICHARD G. NEWMAN, Los Angeles, California
Chairman of the Board and Chief Executive
Officer, AECOM Technology Corporation
(architectural engineering)
FRANK M. SANCHEZ, Los Angeles, California
Chairman of the Board and Chief Executive Officer,
The Sanchez Family Corporation dba McDonald's
Restaurants (McDonald's licensee)
JOHN H. SMET, Los Angeles, California
President of the fund
Senior Vice President, Capital Research
and Management Company
Don R. Conlan, a Trustee since 1996, has retired from the board. The Trustees
thank him for his many contributions to the fund.
OTHER OFFICERS
MICHAEL J. DOWNER, Los Angeles, California
Vice President of the fund
Senior Vice President-Fund Business
Management Group, Capital Research
and Management Company
JULIE F. WILLIAMS, Los Angeles, California
Secretary of the fund
Vice President-Fund Business
Management Group, Capital Research
and Management Company
ANTHONY W. HYNES, JR., Brea, California
Treasurer of the fund
Vice President-Fund Business
Management Group, Capital Research
and Management Company
KIMBERLY S. VERDICK, Los Angeles, California
Assistant Secretary of the fund
Assistant Vice President-Fund Business
Management Group, Capital Research
and Management Company
OFFICES OF THE FUND AND OF THE
INVESTMENT ADVISER,
CAPITAL RESEARCH AND
MANAGEMENT COMPANY
333 South Hope Street
Los Angeles, California 90071-1443
135 South State College Boulevard
Brea, California 92821-5823
TRANSFER AGENT FOR SHAREHOLDER ACCOUNTS
American Funds Service Company
(Please write to the address nearest you.)
P.O. Box 2205
Brea, California 92822-2205
P.O. Box 659522
San Antonio, Texas 78265-9522
P.O. Box 6007
Indianapolis, Indiana 46206-6007
P.O. Box 2280
Norfolk, Virginia 23501-2280
CUSTODIAN OF ASSETS
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, New York 10081-0001
COUNSEL
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071-2371
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two California Plaza
350 South Grand Avenue
Los Angeles, California 90071-3462
PRINCIPAL UNDERWRITER
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, California 90071-1462
FOR INFORMATION ABOUT YOUR ACCOUNT OR ANY OF THE FUND'S SERVICES, OR FOR A
PROSPECTUS FOR ANY OF THE AMERICAN FUNDS, PLEASE CONTACT YOUR FINANCIAL
ADVISER. YOU MAY ALSO CALL AMERICAN FUNDS SERVICE COMPANY, TOLL-FREE, AT
800/421-0180 OR VISIT WWW.AMERICANFUNDS.COM ON THE WORLD WIDE WEB. PLEASE READ
THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
This report is for the information of shareholders of U.S. Government
Securities Fund, but it may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details about charges,
expenses, investment objectives and operating policies of the fund. If used as
sales material after December 31, 2000, this report must be accompanied by an
American Funds Group Statistical Update for the most recently completed
calendar quarter.
CLASS A AND B SHARES-THERE ARE TWO WAYS TO INVEST IN U.S. GOVERNMENT SECURITIES
FUND. CLASS A SHARES ARE SUBJECT TO A 3.75% MAXIMUM UP-FRONT SALES CHARGE THAT
DECLINES FOR ACCOUNTS OF $100,000 OR MORE. CLASS B SHARES, WHICH ARE NOT
AVAILABLE FOR CERTAIN EMPLOYER-SPONSORED RETIREMENT PLANS, HAVE NO UP-FRONT
CHARGE. THEY ARE, HOWEVER, SUBJECT TO ADDITIONAL EXPENSES OF APPROXIMATELY
0.75% A YEAR OVER THE FIRST EIGHT YEARS OF OWNERSHIP. IF REDEEMED WITHIN SIX
YEARS, THEY MAY ALSO BE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (5%
MAXIMUM) THAT DECLINES OVER TIME.
Printed on recycled paper
Litho in USA DD/GRS/4819
Lit. No. GVT-011-1000
