-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KTl+XvNglND/2oRlMP4GH+CVk8XkwieeeLXJp8txDLhkHDphOgsYUnnVnoW7mKQi b7B6YGtktckjVCQIRTIPVA== 0000004405-00-000006.txt : 20000110 0000004405-00-000006.hdr.sgml : 20000110 ACCESSION NUMBER: 0000004405-00-000006 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOND FUND OF AMERICA INC CENTRAL INDEX KEY: 0000013075 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 952884967 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 002-50700 FILM NUMBER: 503340 BUSINESS ADDRESS: STREET 1: 333 S HOPE ST - 52ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90071 BUSINESS PHONE: 2134869200 497 1 PROSPECTUS SUPPLEMENT January 10, 2000 for the following funds with prospectuses dated February 1, 1999 - December 1, 1999
AMCAP Fund, Inc. Limited Term Tax-Exempt Bond American Balanced Fund, Inc. Fund of America American High-Income Municipal The New Economy Fund Bond Fund, Inc. New Perspective Fund, Inc. American High-Income Trust SMALLCAP World Fund, Inc. The Bond Fund of America, Inc. The Tax-Exempt Bond Fund of Capital World Bond Fund, Inc. America, Inc. Capital World Growth and The Tax-Exempt Fund of Income Fund, Inc. California The Cash Management Trust of The Tax-Exempt Fund of America Maryland EuroPacific Growth Fund The Tax-Exempt Fund of Fundamental Investors, Inc. Virginia The Growth Fund of America, The Tax-Exempt Money Fund Inc. of America The Income Fund of America, U.S. Government Securities Inc. Fund Intermediate Bond Fund of The U.S. Treasury Money Fund America of America The Investment Company of Washington Mutual Investors America Fund, Inc.
The initial investment minimum for all funds in The American Funds Group(r), except the money market funds and the state tax-exempt funds, is now $250. The initial investment minimum for the money market funds (The Cash Management Trust of America, The Tax-Exempt Money Fund of America and The U.S. Treasury Money Fund of America) and the state tax-exempt funds (The Tax-Exempt Fund of California, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia) is $1,000. In addition, effective January 10, 2000, the sales charges applied to purchases of the equity and fixed-income funds in The American Funds Group are as follows:
EQUITY FUNDS FIXED-INCOME FUNDS Sales Charge Dealer Sales Charge Dealer as % of Concession as % of Concession as a % of as a % of Offering Offering Price Price AMOUNT OF SALE Offering Net Offering Net Price Amount Price Amount Invested Invested Less than $25,000 5.75% 6.10% 5.00% $25,000 but less than 5.00 5.26 4.25 3.75% 3.90% 3.00% $50,000 $50,000 but less than 4.50 4.71 3.75 $100,000 $100,000 but less than 3.50 3.63 2.75 3.50 3.63 2.75 $250,000 $250,000 but less than 2.50 2.56 2.00 2.50 2.56 2.00 $500,000 $500,000 but less than 2.00 2.04 1.60 2.00 2.04 1.60 $750,000 $750,000 but less than 1.50 1.52 1.20 1.50 1.52 1.20 $1 million $1 million and above none none see none none see prospectus prospectus
THE FUND PROVIDES SPANISH TRANSLATIONS IN CONNECTION WITH THE PUBLIC OFFERING AND SALE OF ITS SHARES. THE FOLLOWING IS A FAIR AND ACCURATE ENGLISH TRANSLATION OF A SPANISH LANGUAGE PROSPECTUS FOR THE FUND. /s/ Julie F. Williams Julie F. Williams Secretary PROSPECTUS SUPPLEMENT January 10, 2000 for the following funds with prospectuses dated February 1, 1999 - December 1, 1999
AMCAP Fund, Inc. Limited Term Tax-Exempt Bond American Balanced Fund, Inc. Fund of America American High-Income Municipal The New Economy Fund Bond Fund, Inc. New Perspective Fund, Inc. American High-Income Trust SMALLCAP World Fund, Inc. The Bond Fund of America, Inc. The Tax-Exempt Bond Fund of Capital World Bond Fund, Inc. America, Inc. Capital World Growth and The Tax-Exempt Fund of Income Fund, Inc. California The Cash Management Trust of The Tax-Exempt Fund of America Maryland EuroPacific Growth Fund The Tax-Exempt Fund of Fundamental Investors, Inc. Virginia The Growth Fund of America, The Tax-Exempt Money Fund Inc. of America The Income Fund of America, U.S. Government Securities Inc. Fund Intermediate Bond Fund of The U.S. Treasury Money Fund America of America The Investment Company of Washington Mutual Investors America Fund, Inc.
The initial investment minimum for all funds in The American Funds Group(r), except the money market funds and the state tax-exempt funds, is now $250. The initial investment minimum for the money market funds (The Cash Management Trust of America, The Tax-Exempt Money Fund of America and The U.S. Treasury Money Fund of America) and the state tax-exempt funds (The Tax-Exempt Fund of California, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia) is $1,000. In addition, effective January 10, 2000, the sales charges applied to purchases of the equity and fixed-income funds in The American Funds Group are as follows:
EQUITY FUNDS FIXED-INCOME FUNDS Sales Charge Dealer Sales Charge Dealer as % of Concession as % of Concession as a % of as a % of Offering Offering Price Price AMOUNT OF SALE Offering Net Offering Net Price Amount Price Amount Invested Invested Less than $25,000 5.75% 6.10% 5.00% $25,000 but less than 5.00 5.26 4.25 3.75% 3.90% 3.00% $50,000 $50,000 but less than 4.50 4.71 3.75 $100,000 $100,000 but less than 3.50 3.63 2.75 3.50 3.63 2.75 $250,000 $250,000 but less than 2.50 2.56 2.00 2.50 2.56 2.00 $500,000 $500,000 but less than 2.00 2.04 1.60 2.00 2.04 1.60 $750,000 $750,000 but less than 1.50 1.52 1.20 1.50 1.52 1.20 $1 million $1 million and above none none see none none see prospectus prospectus
THE BOND FUND OF AMERICA, INC. PART B STATEMENT OF ADDITIONAL INFORMATION MARCH 1, 1999 as amended January 10, 2000 This document is not a prospectus but should be read in conjunction with the current Prospectus of The Bond Fund of America, Inc. (the "fund") dated March 1, 1999. The Prospectus may be obtained from your investment dealer or financial planner or by writing to the fund at the following address: The Bond Fund of America, Inc. Attention: Secretary 333 South Hope Street Los Angeles, CA 90071 (213) 486-9200 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
ITEM PAGE NO. Certain Investment Limitations and Guidelines 2 Description of Certain Securities and Investment Techniques 2 Investment Restrictions 10 Fund Organization 11 Fund Officers and Directors 12 Management 16 Dividends, Distributions and Federal Taxes 19 Purchase of Shares 22 Selling Shares 28 Shareholder Account Services and Privileges 30 Execution of Portfolio Transactions 32 General Information 33 Investment Results and Related Statistics 34 Description of Bond Ratings 40 Financial Statements Attached
CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES 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. 0 The fund will invest at least 65% of its assets in bonds (any debt securities, including convertible securities and non-voting, non-convertible preferred securities having initial maturities in excess of one year). - - The fund will invest at least 60% of its assets in debt securities rated A or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation or in unrated securities which are determined to be of comparable quality at time of purchase, including U.S. Government securities, and cash or money market instruments. - - The fund may invest up to 40% of its assets in debt securities rated below A or in unrated securities that are determined to be of comparable quality. - - The fund may invest up to 35% of its assets in debt securities rated Ba and BB or below in unrated securities determined to be of comparable quality. - - The fund may invest up to 10% of its assets in preferred stocks. - - The fund may invest up to 25% of its assets in securities of issuers domiciled outside the U.S. DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES The descriptions below are intended to supplement the material in the Prospectus under "Investment Objective, Strategies and Risks." DEBT SECURITIES - Bonds and other debt securities are used by issuers to borrow money. Issuers pay investors interest and generally must repay the amount borrowed at maturity. Some debt securities, such as zero coupon bonds, do not pay current interest but are purchased at a discount from their face values. The prices of debt securities fluctuate depending on such factors as interest rates, credit quality, and maturity. In general their prices decline when interest rates rise and vice versa. The fund may invest up to 35% of its assets in debt securities rated Ba and BB or below by Moody's Investors Service, Inc. or Standard & Poor's Corporation or in unrated securities that are determined to be of equivalent quality. The fund's high-yield, high-risk securities may be rated as low as Ca or CC which are described by the rating agencies as "speculative in a high degree; often in default or [having] other marked shortcomings." Capital Research and Management Company attempts to reduce the risks described above through diversification of the portfolio and by credit analysis as well as by monitoring broad economic trends and corporate and legislative developments. CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk bonds can be sensitive to adverse economic changes and corporate developments. During an economic downturn or substantial period of rising interest rates, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet projected business goals, and to obtain additional financing. If the issuer of a bond defaulted on its obligations to pay interest or principal or entered into bankruptcy proceedings, the fund may incur losses or expenses in seeking recovery of amounts owed to it. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices and yields of high-yield, high-risk bonds. PAYMENT EXPECTATIONS - High-yield, high-risk bonds may contain redemption or call provisions. If an issuer exercised these provisions in a declining interest rate market, the fund would have to replace the security with a lower yielding security, resulting in a decreased return for investors. Conversely, a high-yield, high-risk bond's value will decrease in a rising interest rate market, as will the value of the fund's assets. LIQUIDITY AND VALUATION - There may be little trading in the secondary market for particular bonds, which may affect adversely the fund's ability to value accurately or dispose of such bonds. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high-yield, high-risk bonds, especially in a thin market. DOWNGRADE POLICY - The fund is not normally required to dispose of a security in the event that its rating is reduced below the current minimum rating for its purchase (or it is not rated and its quality becomes equivalent to such a security). The fund's investment adviser, Capital Research and Management Company (the Investment Adviser), attempts to reduce these risks through diversification of the portfolio, by credit analysis of each issuer as well as by monitoring broad economic trends and corporate developments, but there can be no assurance that it will be successful in doing so. INFLATION-INDEXED BONDS - The fund may invest in inflation-indexed bonds issued by governments, their agencies or instrumentalities or corporations. 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. OTHER SECURITIES - The fund may also invest in securities that have a combination of equity and debt characteristics such as non-convertible preferred stocks and convertible securities. These securities may at times resemble equity more than debt and vice versa. Non-convertible preferred stocks are similar to debt in that they have a stated dividend rate akin to the coupon of a bond or note even though they are often classified as equity securities. The prices and yields of non- convertible preferred stocks generally move with changes in interest rates and the issuer's credit quality, similar to the factors affecting debt securities. The fund may invest up to 10% of its assets in preferred stocks. Bonds, preferred stocks, and other securities may sometimes be converted into shares of common stock or other securities at a stated exchange ratio. These securities prior to conversion pay a fixed rate of interest or a dividend. Because convertible securities have both debt and equity characteristics their value varies in response to many factors, including the value of the underlying equity, general market and economic conditions, convertible market valuations, as well as changes in interest rates, credit spreads, and the credit quality of the issuer. While the fund may not make direct purchases of common stocks or warrants or rights to acquire common stocks, the fund may invest in debt securities that are issued together with common stock or other equity interests, or have equity conversion, exchange, or purchase rights. The fund may continue to hold up to 5% of its assets in common stock, warrants and rights so acquired after sales of the corresponding debt securities. U.S. GOVERNMENT SECURITIES - Securities guaranteed by the U.S. Government include: (1) direct obligations of the U.S. Treasury (such as Treasury bills, notes and bonds) and (2) federal agency obligations guaranteed as to principal and interest by the U.S. Treasury. Certain securities issued by U.S. Government instrumentalities and certain federal agencies are neither direct obligations of, nor guaranteed by, the Treasury. However, they generally involve federal sponsorship in one way or another; some are backed by specific types of collateral; some are supported by the issuer's right to borrow from the Treasury; some are supported by the discretionary authority of the Treasury to purchase certain obligations of the issuer; and others are supported only by the credit of the issuing government agency or instrumentality. PASS-THROUGH SECURITIES - The fund may invest in various debt obligations backed by a pool of mortgages or other assets including loans on single family residences, home equity loans, mortgages on commercial buildings, credit card receivables, and leases on airplanes or other equipment. Principal and interest payments made on the underlying asset pools backing these obligations are typically passed through to investors. Pass-through securities may have either fixed or adjustable coupons. These securities include those discussed below. "Mortgage-backed securities" are issued both by U.S. government agencies, including the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC), and by private entities. The payment of interest and principal on securities issued by U.S. government agencies is guaranteed by the full faith and credit of the U.S. government (in the case of GNMA securities) or the issuer (in the case of FNMA and FHLMC securities). However, the guarantees do not apply to the market prices and yields of these securities, which vary with changes in interest rates. Mortgage-backed securities issued by private entities are structured similarly to mortgage-backed securities issued by GNMA, FNMA, and FHLMC. These securities and the underlying mortgages are not guaranteed by government agencies. In addition, these securities generally are structured with one or more types of credit enhancement. Mortgage-backed securities generally permit borrowers to prepay their underlying mortgages. Prepayments can alter the effective maturity of these instruments. "Collateralized mortgage obligations" (CMOs) are also backed by a pool of mortgages, mortgage-backed securities or mortgage loans, which are divided into two or more separate bond issues. CMOs issued by U.S. government agencies are backed by agency mortgages, while privately issued CMOs may be backed by either government agency mortgages or private mortgages. Payments of principal and interest are passed-through to each bond at varying schedules resulting in bonds with different coupons, effective maturities, and sensitivities to interest rates. In fact, some CMOs may be structured in a way that when interest rates change the impact of changing prepayment rates on these securities' effective maturities is magnified. "Commercial mortgage-backed securities" are backed by commercial property, such as hotels, office buildings, retail stores, hospitals, and other commercial buildings. These securities may have a lower prepayment risk than other mortgage-related securities because commercial mortgage loans generally prohibit or impose penalties on prepayments of principal. In addition, commercial mortgage-related securities often are structured with some form of credit enhancement to protect against potential losses on the underlying mortgage loans. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans, including the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. "Asset-backed securities" are backed by other assets such as credit card, automobile or consumer loan receivables, retail installment loans, or participations in pools of leases. Credit support for these securities may be based on the underlying assets and/or provided through credit enhancements by a third party. The values of these securities are sensitive to changes in the credit quality of the underlying collateral, the credit strength of the credit enhancement, changes in interest rates, and at times the financial condition of the issuer. Some asset-backed securities also may receive prepayments which can change the securities' effective maturities. "IOs and POs" are issued in portions or tranches with varying maturities and characteristics; some tranches may only receive the interest paid on the underlying mortgages (IOs) and others may only receive the principal payments (POs); the values of IOs and POs are extremely sensitive to interest rate fluctuations and prepayment rates, and IOs are also subject to the risk of early repayment of the underlying mortgage which will substantially reduce or eliminate interest payments. The fund does not intend to invest more than 5% of its assets in IOs and POs. INVESTING IN VARIOUS COUNTRIES - The fund has the flexibility to invest up to 25% of its assets in securities of issuers domiciled outside the U.S. Investing outside the U.S. involves special risks caused by, among other things: fluctuating currency values; different accounting, auditing, and financial reporting regulations and practices in some countries; changing local and regional economic, political, and social conditions; expropriation or confiscatory taxation; greater market volatility; differing securities market structures; and various administrative difficulties such as delays in clearing and settling portfolio transactions or in receiving payment of dividends. However, in the opinion of Capital Research and Management Company, investing outside the U.S. also can reduce certain portfolio risks due to greater diversification opportunities. The risks described above are potentially heightened in connection with investments in developing countries. Although there is no universally accepted definition, a developing country is generally considered to be a country which is in the initial stages of its industrialization cycle with a low per capita gross national product. For example, political and/or economic structures in these countries may be in their infancy and developing rapidly. Historically, the markets of developing countries have been more volatile than the markets of developed countries. The fund may only invest in securities of issuers in developing countries to a limited extent. Additional costs could be incurred in connection with the fund's investment activities outside the U.S. Brokerage commissions may be higher outside the U.S., and the fund will bear certain expenses in connection with its currency transactions. Furthermore, increased custodian costs may be associated with the maintenance of assets in certain jurisdictions. FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell securities at a future date. When the fund agrees to purchase such securities it assumes the risk of any decline in value of the 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 a transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity, or could experience a loss beginning on the date of the agreement. 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 will 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. Although the fund has no current intention of doing so during the next 12 months, the fund is authorized to enter into "roll" transactions. A "roll" transaction is the sale of mortgage-backed securities or other securities together with a commitment to purchase similar, but not identical, securities at a future date. The fund will segregate liquid assets which will be marked to market daily in an amount sufficient to cover its obligations under "roll" transactions. Under the Investment Company Act of 1940 (the "1940 Act"), these transactions may be considered borrowings by the fund; accordingly, the fund will limit these transactions, together with any other borrowings, to no more than one-third of its total assets. Although these transactions will not be entered into for the purpose of leveraging, 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 will 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. As the fund's aggregate commitments under these transactions increase, the opportunity for leverage similarly increases. If the income and gains on securities purchased with the proceeds of roll 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. 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. 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. The fund only enters into repurchase agreements involving securities in which it could otherwise invest and with selected banks and securities dealers whose financial condition is monitored by Capital Research and Management Company. If the seller under the repurchase agreements 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. 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 directors, 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. MATURITY - There are no restrictions on the maturity composition of the portfolio, although it is anticipated that the fund normally will be invested substantially in securities with maturities in excess of three years. Under normal market conditions, longer term securities yield more than shorter term securities, but are subject to greater price fluctuations. REAL ESTATE INVESTMENT TRUSTS - The fund may invest in debt securities issued by real estate investment trusts (REITs), which are pooled investment vehicles that primarily invest in real estate or real estate related loans. REITs are not taxed on income distributed to shareholders provided they meet requirements imposed by the Internal Revenue Code. The risks associated with REIT debt investments are similar to the risks of investing in corporate-issued debt. In addition, the return on REITs is dependent on such factors as the skill of management and the real estate environment in general. Debt that is issued by REITs is typically rated by the credit rating agencies as investment grade or above. CASH AND CASH EQUIVALENTS - Subject to the requirement that it maintain at least 65% of its assets in bonds under normal market conditions, the fund may maintain assets in cash or cash equivalents. Cash equivalents include (1) commercial paper (notes issued by corporations or governmental bodies); (certificates of deposit, and bankers' acceptances, (time drafts on a commercial bank where the bank accepts an irrevocable obligation to pay at maturity); (3) savings association and bank obligations ; (4) securities of the U.S. Government, its agencies or instrumentalities; and (5) corporate bonds and notes. CURRENCY TRANSACTIONS - The fund may enter into forward currency contracts to protect against changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date and price, both of which are set at the time of the contract. The fund intends to enter into forward currency contracts solely to hedge into the U.S. dollar its exposure to other currencies. The fund will segregate liquid assets which will be marked to market daily to meet its forward contract commitments to the extent required by the Securities and Exchange Commission. Certain provisions of the Code may affect the extent to which the fund may enter into forward contracts. Such transactions may also affect, for U.S. federal income tax purposes, the character and timing of income, gain or loss recognized by the fund. LOAN PARTICIPATIONS AND ASSIGNMENTS - The fund may invest, subject to an overall 10% limit on loans, in loan participations or assignments. Loan participations are loans or other direct debt instruments which are interests in amounts owed by a corporate, governmental or other borrower to another party. They may represent amounts owed to lenders or lending syndicates to suppliers of goods or services, or to other parties. The fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by the lender of the payments from the borrower. In connection with purchasing participations, the fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to loan, nor any rights of set-off against the borrower, and the fund may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the fund will assume the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, a fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. When the fund purchases assignments from lenders it will acquire direct rights against the borrower on the loan. However, because assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by a fund as the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender. Investments in loan participations and assignments present the possibility that the fund could be held liable as a co-lender under emerging legal theories of lender liability. In addition, if the loan is foreclosed, the fund could be part owner of any collateral and could bear the costs and liabilities of owning and disposing of the collateral. Because there is no liquid market for such securities, the fund anticipates that such securities could be sold only to a limited number of institutional investors. In addition, loan participation and assignments are generally not rated by major rating agencies and may not be protected by the securities laws. 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 Capital Research and Management Company (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 in 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. INVERSE FLOATING RATE NOTES - The fund is authorized to invest up to 1% of the fund's net assets in inverse floating rate notes (a type of derivative instrument). These notes have rates that move in the opposite direction of prevailing interest rates; thus, a change in prevailing interest rates will often result in a greater change in the instruments' interest rates. As a result, these instruments may have a greater degree of volatility than other types of interest-bearing securities. PORTFOLIO TRADING - The fund intends to engage in portfolio trading when 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 above under "Forward Commitments." STRATEGIC PORTFOLIO ADJUSTMENT - The composition of the fund's portfolio will change from time to time primarily in response to expected changes in interest rates and in the yield relationships among sectors of the fixed-income market. The Investment Adviser continually monitors the creditworthiness of companies, the price and yield relationships among different sections of the debt market and the outlook for interest rates in general and in particular parts of the debt market. Yield relationships among securities of various types of issuers, maturities, coupon rates or quality ratings frequently change in response to changing supply-demand influences in the market. When it appears to the Investment Adviser that the yield relationships may change, the composition of the portfolio may be adjusted, should such changes offer the opportunity to further the fund's investment objective. Changes may also be made if the Investment Adviser believes that there is a temporary disparity among individual securities of comparable characteristics. Some such changes may result in short-term gains or losses to the fund. This information, which is shared among the Investment Adviser's other departments and its affiliates, makes up a part of the Investment Adviser's investment decisions. PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the length of time particular investments may have been held. High portfolio turnover (100% or more) 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 will 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 additional investment restrictions which may not be changed without approval of the holders of a majority of its outstanding shares. Such majority is defined by the Investment Company Act of 1940 ("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. Investment limitations expressed in the following restrictions are considered at the time securities are purchased. These restrictions provide that the fund may not: 1. With respect to 75% of the fund's total assets, purchase the security of any issuer (other than securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities), if as a result, (a) more than 5% of the fund's total assets would be invested in securities of that issuer, or (b) the fund would hold more than 10% of the outstanding voting securities of that issuer. Concentrate its investments in a particular industry, as that term is used in the Investment Company Act of 1940, as amended, and as interpreted or modified by regulatory authority having jurisdiction, from time to time. 2. Invest in companies for the purpose of exercising control or management; 3. Buy or sell real estate in the ordinary course of its business; however, the fund may invest in debt securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which invest in real estate or interests therein; 4. Buy or sell commodities or commodity contracts in the ordinary course of its business, provided, however, that this shall not prohibit the fund from purchasing or selling currencies including forward currency contracts; 5. Invest more than 15% of the value of its net assets in securities that are illiquid; 6. Engage in the business of underwriting of securities of other issuers, except to the extent that the disposal of an investment position may technically constitute the fund an underwriter as that term is defined under the Securities Act of 1933; 7. Make loans in an aggregate amount in excess of 10% of the value of the fund's total assets, taken at the time any loan is made, provided, (i) that the purchase of debt securities pursuant to the fund's investment objectives and entering into repurchase agreements maturing in seven days or less shall not be deemed loans for the purposes of this restriction, and (ii) that loans of portfolio securities as described under "Loans of Portfolio Securities," shall be made only in accordance with the terms and conditions therein set forth; 8. 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; 9. Purchase securities at margin; 10. Borrow money except from banks for temporary or emergency purposes, not in excess of 5% of the value of the fund's total assets; The fund has adopted the following non-fundamental investment policies, which may be changed by action of the Board of Directors without shareholder approval: (a) the fund will not invest more than 5% of its total assets in securities of companies having, together with their predecessors, a record of less than three years of continuous operation, (b) the fund will not purchase partnership interests or invest in leases to develop, or explore for, oil, gas or minerals; and (c) the fund may not invest in securities of other investment companies, except as permitted by the Investment Company Act of 1940, as amended. Notwithstanding Investment Restriction #8, the fund has no current intention (at least during the next 12 months) to sell securities short to the extent the fund contemporaneously owns or has the right to acquire at no additional cost securities identical to those sold short. FUND ORGANIZATION The fund, an open-end, diversified management investment company, was organized as a Maryland corporation on December 3, 1973. All fund operations are supervised by the fund's board of directors which 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 the statement of additional information. They may elect to defer all or a portion of these fees through a deferred compensation plan in effect for the fund. FUND OFFICERS AND DIRECTORS Directors and Director Compensation
NAME, POSITION PRINCIPAL AGGREGATE TOTAL TOTAL ADDRESS AND WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER AGE REGISTRANT DURING (INCLUDING (INCLUDING OF FUND PAST 5 YEARS VOLUNTARILY VOLUNTARILY BOARDS/2/ ON DEFERRED DEFERRED WHICH COMPENSATION/1/) COMPENSATION/1/) DIRECTOR FROM THE FUND FROM ALL FUNDS SERVES DURING FISCAL MANAGED BY YEAR ENDED CAPITAL RESEARCH DECEMBER 31, AND MANAGEMENT 1998 COMPANY OR ITS AFFILIATES/2/ FOR THE YEAR ENDED DECEMBER 31, 1998 H. Frederick Director Private $11,400/3/ $194,850 19 Christie Investor. Age: 65 Former P. O. Box President and 144 CEO, The Palos Mission Group Verdes, CA (non-utility 90274 holding company, subsidiary of Southern California Edison Company) +Don R. Director President none/4/ none/4/ 12 Conlan (retired), Age: 63 The Capital 1630 Milan Group Avenue Companies, South Inc. Pasadena, CA 91030 Diane C. Director CEO and $10,150/3/ $46,900 12 Creel President, Age: 50 The Earth 100 W. Technology Broadway Corporation Suite 5000 Long Beach, CA 90802 Martin Director Managing $10,750/3/ $128,134 15 Fenton Director, Age:63 Senior 4660 La Resource Jolla Group, LLC Village (development Drive and management Suite 725 of senior San Diego, living CA 92121-2116 communities) Leonard R. Director President, $11,150/3/ $54,900 12 Fuller Fuller Age: 52 Consulting 4333 (financial Admiralty management Way consulting Suite 841 firm) ETH Marina del Rey, CA 90292 +*Abner D. President, Senior Vice none/4/ none/4/ 12 Goldstine PEO and President and Age: 69 Director Director, Capital Research and Management Company +**Paul G. Chairman Executive Vice none/4/ none/4/ 14 Haaga, Jr. of the President and Age: 50 Board Director, Capital Research and Management Company Herbert Director Private $11,150 $73,334 13 Hoover III Investor Age: 71 1520 Circle Drive San Marino, CA 91108 Richard G. Director Chairman, $10,750/3/ $108,600 13 Newman President and Age: 64 CEO, 3250 AECOM Wilshire Technology Boulevard Corporation Los Angeles, (architectural CA 90010-1599 engineering)
+ Directors who are considered "interested persons of the fund as defined in 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 directors under a non-qualified deferred compensation plan adopted by the Fund in 1993. 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 Director. /2/ Capital Research and Management Company manages The American Funds Group consisting of 29 funds: AMCAP Fund, 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 deferred compensation plan's adoption, the total amount of deferred compensation accrued by the fund (plus earnings thereon) as of the fiscal year ended December 31, 1998 for participating Directors is as follows: H. Frederick Christie ($14,590), Diane C. Creel ($9,419), Martin Fenton ($27,054), Leonard R. Fuller ($25,356) and Richard G. Newman ($54,041). Amounts deferred and accumulated earnings thereon are not funded and are general unsecured liabilities of the fund until paid to the Director. /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
NAME AND ADDRESS AGE POSITION(S) PRINCIPAL OCCUPATION(S) HELD WITH DURING PAST 5 YEARS REGISTRANT David C. Barclay 41 Vice Senior Vice President 11100 Santa Monica President and Director, Capital Blvd. Research Company Los Angeles, CA 90025 Michael J. Downer 43 Vice Senior Vice President - 333 South Hope President Fund Business Street Management Group, Los Angeles, CA Capital Research and 90071 Management Company John H. Smet 42 Vice Vice President, Capital 11100 Santa Monica President Research and Management Blvd. Company Los Angeles, CA 90025 Julie F. Williams 50 Secretary Vice President - Fund 333 South Hope Business Management Street Group, Capital Research Los Angeles, CA and Management Company 90071 Anthony W. Hynes, 35 Treasurer Vice President - Fund Jr. Business Management 135 South State Group, Capital Research College Blvd. and Management Company Brea, CA 92821 Kimberly S. Verdick 33 Assistant Assistant Vice 333 South Hope Secretary President - Fund Street Business Management Los Angeles, CA Group, Capital Research 90071 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
All of the officers listed also are officers or employees of the Investment Adviser or affiliated companies. No compensation is paid by the fund to any officer or director who is a director, officer or employee of the Investment Adviser or affiliated companies. The fund pays annual fees of $10,000 to Directors who are not affiliated with the Investment Adviser, plus $200 for each Board of Directors meeting attended, plus $200 for each meeting attended as a member of a committee of the Board of Directors. No pension or retirement benefits are accrued as part of fund expenses. The Directors 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 Directors who are not affiliated with the Investment Adviser. As of February 1, 1999, the officers and Directors and their families, as a group, owned beneficially or of record less 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 managing more than $200 billion of stocks, bonds and money market instruments and serve 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 fund and the Investment Adviser dated as of April 1, 1996, was amended by the Board of Directors, effective November 1, 1998. The Agreement will continue until October 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 Directors, or by the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities, and (ii) the vote of a majority of directors 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 fund for its acts or omissions in the performance of its obligations to the fund 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 it, 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 has agreed to reduce the fee payable to it under the agreement, (a) by the amount by which the ordinary operating expenses of the fund for any fiscal year of the fund, excluding interest, taxes and extraordinary expenses such as litigation, shall exceed the greater of (i) one percent (1%) of the average month-end net assets of the fund for such fiscal year, or (ii) ten percent (10%) of the fund's gross investment income, and (b) by any additional amount necessary to assure that such ordinary operating expenses of the fund in any year after such reduction do not exceed the lesser of (i) one and one-half percent (1 1/2%) of the first $30 million of average month-end net assets of the fund, plus one percent (1%) of the average month-end net assets in excess thereof or (ii) twenty-five percent (25%) of the fund's gross investment income. 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 the designing, printing and mailing of reports, prospectuses, proxy statements, and notices to its shareholders; taxes; expenses of the issuance and redemption of shares (including stock certificates, registration and qualification fees and expenses); legal and auditing expenses; compensation, fees, and expenses paid to directors unaffiliated with the Investment Adviser; association dues; costs of stationery and forms prepared exclusively for the fund; and costs of assembling and storing shareholder account data. As compensation for its services, the Investment Adviser receives a monthly fee which is based on prior month-end net assets 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 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, 0.21% on average net assets in excess of $60 million but not exceeding $1 billion, 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 but not exceeding $6 billion, plus 0.15% on average net assets over $6 billion but not exceeding $10 billion, plus 0.14% on average net assets in excess of $10 billion, plus 2.25% of the first $8,333,333 of the fund's monthly gross investment income for the preceding month, plus 2% of such income in excess of $8,333,333 of the fund's gross investment income for the preceding month. Assuming net assets of $9 billion and gross investment income levels of 5%, 6%, 7%, 8% and 9%, management fees would be .27%, .29%, .31%, .33% and .35%, respectively. During the fiscal years ended December 31, 1998, 1997, and 1996, the Investment Adviser's total fees amounted to $28,879,000 , $24,460,000, and $22,728,000, 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, the expense of reports to existing shareholders, expenses of printing proxies and prospectuses, insurance premiums, legal and auditing fees, dividend disbursement expenses, the expense of the issuance, transfer and redemption of its shares, expenses pursuant to the fund's Plan of Distribution, custodian fees, costs of printing and preparation of registration statements, taxes and compensation and expenses of Directors 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 78230, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240, and 5300 Robin Hood Road, Norfolk, VA 23513. The fund has adopted a Plan of Distribution (the "Plan"), pursuant to rule 12b-1 under the 1940 Act. The Principal Underwriter receives amounts payable pursuant to the Plan (see below) and commissions consisting of that portion of the sales charge remaining after the discounts which it allows to investment dealers. Commissions retained by the Principal Underwriter on sales of fund shares during the fiscal year ended December 31, 1998 amounted to $7,117,000 after allowance of $36,612,000 to dealers. During the fiscal years ended December 31, 1997 and 1996 the Principal Underwriter retained $5,397,000 and $5,534,000, respectively. As required by rule 12b-1, the Plan (together with the Principal Underwriting Agreement) has been approved by the full Board of Directors and separately by a majority of the Directors who are not "interested persons" of the fund 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 directors who are "interested persons" of the fund due to present or past 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 Directors who are not "interested persons" of the fund is committed to the discretion of the Directors 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 Directors. Under the Plan the fund may expend up to 0.25% 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 Directors has approved the category of expenses for which payment is being made. These include service fees for qualified dealers and dealer commissions and wholesaler compensation on sales of shares exceeding $1 million (including purchases by any employer-sponsored 403(b) plan or purchases by any defined contribution plan qualified under Section 401(a) of the Internal Revenue Code including a "401(k)" plan with 100 or more eligible employees 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 fiscal year ended December 31, 1998, the fund paid $22,380,000 under the Plan as compensation to dealers. As of December 31, 1998 accrued and unpaid distribution expenses were $1,714,000. The Glass-Steagall Act and other applicable laws, among other things, generally prohibit commercial 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 the sum of its investment company taxable investment income (net investment income and the excess of net short-term capital gains over net long-term capital losses) and its tax-exempt interest, if any, it will be taxed only on that portion (if any) of the investment company taxable income and net capital gain that it retains. To qualify, the fund must (a) derive at least 90% of its gross income from dividends, interest, 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 total assets is represented by cash, U.S. Government securities and other securities which must be limited, in respect of any one issuer, to an amount not greater than 5% of the fund's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total 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 net capital gain 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. Distributions of investment company taxable income, including short-term capital gains, generally are taxable to the shareholder as ordinary income, regardless of whether such distributions are paid in cash or reinvested in additional shares of the fund. A capital gain distribution, whether paid in cash or reinvested in shares, is taxable to shareholders as long-term capital gains, regardless of the length of time a shareholder has held the shares or whether such gain was realized by the fund before the shareholder acquired such shares and was reflected in the price paid for the shares. 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 in effect be 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 generally are taxable to shareholders at the time they are paid. However, dividends and distributions 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 a 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. Under the Code, distributions of net investment income by the fund to a shareholder who, as to the U.S., is a nonresident alien individual, foreign trust or estate, non-U.S. corporation or non-U.S. partnership (a "non-U.S. shareholder") will be subject to U.S. withholding tax (at a rate of 30% or lower treaty rate). Withholding will not apply if a dividend paid by the fund to a non-U.S. shareholder is "effectively connected" with a U.S. trade or business, in which case the reporting and withholding requirements applicable to U.S. citizens, U.S. residents or domestic corporations will apply. However, if the distribution is effectively connected with the conduct of the non-U.S. shareholder's trade or business within the U.S., the distribution would be included in the net income of the shareholder and subject to U.S. income tax at the applicable marginal rate. Distributions of capital gains are not subject to tax withholding, but in the case of a non-U.S. shareholder who is a nonresident alien individual, such distributions ordinarily will be subject to U.S. income tax at the rate of 30% if the individual is physically present in the U.S. during the tax year for more than 182 days. The fund may be required to pay withholding and other taxes imposed by countries outside the United States which would reduce the fund's investment income, generally at rates from 10% to 40%. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% in value of the fund's total assets at the close of its taxable year consist of securities of non-U.S. corporations, the fund will be eligible to file elections with the Internal Revenue Service pursuant to which shareholders of the fund will be required to include their respective pro rata portions of such withholding taxes in their federal income tax returns as gross income, treat such amounts as foreign taxes paid by them, and deduct such amounts in computing their taxable incomes or, alternatively, use them as foreign tax credits against their federal income taxes. The fund does not currently expect to meet the eligibility requirement for filing this election as its investments in securities of non-U.S. issuers are limited. Sales of forward currency contracts which are intended to hedge against a change in the value of securities or currencies held by the fund may affect the holding period of such securities or currencies and, consequently, the nature of the gain or loss on such securities or currencies upon disposition. The amount of any realized gain or loss on closing out a forward currency contract such as a forward commitment for the purchase or sale of non-U.S. currency will generally result in a realized capital gain or loss for tax purposes. Under Code Section 1256, forward currency contracts held by the fund at the end of each fiscal year will be required to be "marked to market" for federal income tax purposes, that is, deemed to have been sold at market value. Except for transactions in forward currency contracts which are classified as part of a "mixed straddle," any gain or loss recognized with respect to forward currency contracts is considered to be 60% long-term capital gain or loss, and 40% short-term capital gain or loss, without regard to the holding period of the contract. In the case of a transaction classified as a "mixed straddle," the recognition of losses may be deferred to a later taxable year. Code Section 988 may also apply to forward currency contracts. Under Section 988, each non-U.S. currency gain or loss is generally computed separately and treated as ordinary income or loss. In the case of overlap between Sections 1256 and 988, special provisions determine the character and timing of any income, gain or loss. The fund will attempt to monitor Section 988 transactions to avoid an adverse tax impact. Under the Code, a fund's taxable income for each year will be computed without regard to any net non-U.S. currency loss attributable to transactions after October 31, and any such net non-U.S. currency loss will be treated as arising on the first day of the following taxable year. As of the date of this statement of additional information, the maximum federal individual stated tax rate generally applicable to ordinary income is 39.6% (effective tax rates may be higher for some individuals due to phase out of exemptions and elimination of deductions); the maximum individual tax rate applicable to net capital gains on assets held more than 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 for a taxable year will be required to pay an additional amount of income tax 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 of up to $100,000. Naturally, the amount of tax payable by an individual 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 and contribute to an Individual Retirement Account ("IRA") each year (prior to the tax return filing deadline for that year) whereby earnings on investments are tax-deferred. The maximum amount that an individual may contribute to all IRAs (deductible, nondeductible and Roth IRAs) per year is the lesser of $2,000 or the individual's compensation for the year. 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
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS See "Investment Minimums $50 minimum (except where and Fund Numbers" for a lower minimum is noted initial investment under "Investment Minimums minimums. and Fund Numbers"). By Visit any investment Mail directly to your contacting dealer who is registered investment dealer's your in the state where the address printed on your investment purchase is made and who account statement. dealer has a sales agreement with American Funds Distributors. By mail Make your check payable Fill out the account to the fund and mail to additions form at the the address indicated on bottom of a recent account the account application. statement, make your check Please indicate an payable to the fund, write investment dealer on the your account number on account application. your check, and mail the check and form in the envelope provided with your account statement. By Please contact your Complete the "Investments telephone investment dealer to by Phone" section on the open account, then account application or follow the procedures American FundsLink for additional Authorization Form. Once investments. 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 Sales and Exchanges" below). By computer Please contact your Complete the American investment dealer to FundsLink Authorization open account, then Form. Once you establish follow the procedures the privilege, you, your for additional financial advisor or any investments. person with your account information may access American FundsLine OnLine(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 Your bank should wire your obtain your account additional investments in number(s), if necessary. the same manner as Please indicate an described under "Initial investment dealer on the Investment." 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.
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):
MINIMUM INITIAL FUND FUND INVESTMENT NUMBER ---- ---------- ------ STOCK AND STOCK/BOND FUNDS AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250 02 American Balanced Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 11 American Mutual Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 03 Capital Income Builder/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 12 Capital World Growth and Income Fund/SM/ . . . . . . . . . . . . . . . . 250 33 EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 16 Fundamental Investors/SM/ . . . . . . . . . . . . . . . . . . . . . . . 250 10 The Growth Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 05 The Income Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . 250 06 The Investment Company of America/(R)/ . . . . . . . . . . . . . . . . . 250 04 The New Economy Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 14 New Perspective Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 250 07 New World Fund/SM/ . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 36 SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . 250 35 Washington Mutual Investors Fund/SM/ . . . . . . . . . . . . . . . . . . 250 01 BOND FUNDS American High-Income Municipal Bond Fund/(R)/ . . . . . . . . . . . . . 250 40 American High-Income Trust/SM/ . . . . . . . . . . . . . . . . . . . . . 250 21 The Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . . . . . . 250 08 Capital World Bond Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . 250 31 Intermediate Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . 250 23 Limited Term Tax-Exempt Bond Fund of America/SM/ . . . . . . . . . . . . 250 43 The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . . . . . . . . . . 250 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/ . . . . . . . . . . . . . . . . . . 250 22 MONEY MARKET FUNDS The Cash Management Trust of America/(R)/ . . . . . . . . . . . . . . . 1,000 09 The Tax-Exempt Money Fund of America/SM/ . . . . . . . . . . . . . . . . 1,000 39 The U.S. Treasury Money Fund of America/SM/ . . . . . . . . . . . . . . 1,000 49 ___________ *Available only in certain states.
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.)
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 $25,000 6.10% 5.75% 5.00% $25,000 but less than $50,000 5.26 5.00 4.25 $50,000 but less than $100,000 4.71 4.50 3.75 BOND FUNDS Less than $100,000 3.90 3.75 3.00 STOCK, STOCK/BOND, AND BOND FUNDS $100,000 but less than 3.63 3.50 2.75 $250,000 $250,000 but less than 2.56 2.50 2.00 $500,000 $500,000 but less than 2.04 2.00 1.60 $750,000 $750,000 but less than 1.52 1.50 1.20 $1,000,000 $1,000,000 or more none none (see below)
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, and employer-sponsored defined contribution-type plans with 100 or more eligible employees 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 foundations or endowments with assets of $50 million or more; (5) insurance company separate accounts; (6) accounts managed by subsidiaries of The Capital Group Companies, Inc.; and (7) The Capital Group Companies, Inc., its affiliated companies and Washington Management Corporation. Shares are offered at net asset value to these persons and organizations due to anticipated economies in sales effort and expense. 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 principally 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 offering prices set forth in the Prospectus apply to purchases of $25,000 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 American Funds Service Company (the "Transfer Agent"). All dividends and 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 of such 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 the Transfer Agent; 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 the Transfer Agent, 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 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, other than the money market funds, are valued, and the net asset value per share 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 into U.S. dollars at the prevailing market rates at the end of the reporting period. Purchase and sale of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in foreign currency exchange rates on investment securities are included with the net realized and unrealized gain or loss on investment securities. 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. 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 fund. The fund will not knowingly sell shares (other than for the reinvestment of dividends or capital gain distributions) directly or indirectly or through a unit investment trust to any other investment company, person or entity, where, after the sale, such investment company, person, or entity would own beneficially directly, indirectly, or through a unit investment trust more than 3% of the outstanding shares of the fund without the consent of a majority of the Board of Directors. Shareholders purchasing shares at a reduced sales charge under a Statement indicate their acceptance of these terms with their first purchase. 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) 0 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 other than the address of record, or an address of record which has been changed within the last 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 is an eligible guarantor institution. - - 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(R) - - Redemptions by telephone or fax (including American FundsLine and American FundsLine OnLine) 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 ivnestment. 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(other than redemptions by employer-sponsored retirement plans). 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 403(b) plans or IRAs due to death, disability or attainment of age 591/2; for tax-free returns of excess contributions to IRAs; and for redemptions through certain automatic withdrawals not exceeding 10% of the amount that would otherwise be subject to the charge. REDEMPTION OF SHARES - The fund's Articles of Incorporation permit the fund to direct the Transfer Agent to redeem your shares if, through redemptions, or otherwise, they have a value of less than $150 (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), or are fewer than ten shares. 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. While payment of redemptions normally will be in cash, the fund's Articles of Incorporation permit payment of the redemption price wholly or partly in securities or other property included in the assets belonging to the fund when in the opinion of the fund's Board of Directors, which shall be conclusive, conditions exist which make payment wholly in cash unwise or undesirable. SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES AUTOMATIC INVESTMENT PLAN - An automatic investment plan enables you to make regular monthly or quarterly investments into The American Funds through automatic debits from your bank account. To set up a plan you must fill out an account application and specify the amount you would like to invest ($50 minimum) and the date on which you would like your investments to occur. The plan will begin within 30 days after you r account application is received. Your bank accounts will be debited on the day or a few days before your investment is made, depending on the bank's capabilities. American Funds Service Company will then invest your money into the fund you specified on or around the date you specified. If your bank account cannot be debited 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, the Transfer Agent or your investment dealer. CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - You may cross-reinvest dividends or dividends and capital gain distributions into any other fund in The American Funds Group subject to the following conditions: (a) the aggregate value of your account(s) in the fund(s) paying distributions equals or exceeds $5,000 (this is waived if the value of the account in the fund receiving the distributions equals or exceeds that fund's minimum initial investment requirement), (b) If the value of the account of the fund receiving distributions is below the minimum initial investment requirement, dividends and capital gain distributions must be automatically reinvested, and (c) If you discontinue the cross-reinvestment of distributions,, the value of the account in the fund receiving distribution must equal or exceed the minimum initial investment requirement. If you do not meet this requirement within 90 days of notification, the fund has the right to automatically redeem the account. 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 the Transfer Agent (see "Redeeming Shares"), by contacting your investment dealer, by using American FundsLine and American FundsLine OnLine (see "American FundsLine and American FundsLine OnLine" below), or by telephoning 800/421-0180 toll-free, faxing (see "Shareholder Information -- American Funds Service Company Service Areas" in the Prospectus for the appropriate fax numbers) or telegraphing the Transfer Agent. (See "Telephone and Computer 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, computer, 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 AND AMERICAN FUNDSLINE ONLINE - 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 and American FundsLine OnLine. To use these services, call 800/325-3590 from a TouchTonet telephone or access the American Funds Web site on the Internet at www.americanfunds.com. Redemptions and exchanges through American FundsLine and American FundsLine OnLine are subject to the conditions noted above and in "Redeeming Shares--Telephone and Computer 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 or computer (including American FundsLine and American FundsLine OnLine), fax or telegraph redemption and/or exchange options, you agree to hold the fund, the Transfer Agent, 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 the Transfer Agent (you may also reinstate them at any time by writing the Transfer Agent). If the Transfer Agent 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. 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 agent) 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. The fund does not intend to pay a mark-up in exchange for research in connection with principal transactions. Brokerage commissions paid on portfolio transactions, including dealer concessions on underwritings, for the fiscal years ended December 31, 1998, 1997, and 1996, amounted to $11,959,000, $58,367,000, and $9,568,000, respectively. 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. Non-U.S. securities may be held by the Custodian pursuant to sub-custodial agreements in non-U.S. banks or non-U.S. branches of U.S. banks. 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 $5,411,000 for the fiscal year ended December 31, 1998. When fund shares are purchased by an insurance company separate account to serve as the underlying investment vehicle for variable insurance contracts, the fund may pay a fee to the insurance company or another party for performing certain transfer agent services with respect to contract owners having interests in the fund. The fund has entered into such an agreement with Nationwide Life Insurance Company. 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 from the attached Annual Report, have been so included in reliance on the independent auditors' report given on the authority of said firm as experts in accounting and auditing. The selection of the fund's independent auditor is reviewed and determined annually by the Board of Directors. REPORTS TO SHAREHOLDERS - The fund's fiscal year ends on December 31. The fund provides shareholders at least semi-annually with reports showing the investment portfolio, financial statements and other information. The fund's financial statements are audited annually by the fund's independent auditors, Deloitte & Touche LLP, whose selection is determined by the Board of Directors. 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; a ban on short-term trading profits for investment personnel; limitations on service as a director of publicly traded companies; and disclosure of personal securities transactions. You may obtain a summary of the personal investing policy by contacting the Secretary of the fund. SHAREHOLDER VOTING RIGHTS - At any meeting of shareholders, duly called and at which a quorum is present, the shareholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast thereon, remove any director or directors from office and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of removed directors. The fund has made an undertaking, at the request of the staff of the Securities and Exchange Commission, to apply the provisions of section 16(c) of the 1940 Act with respect to the removal of directors, as though the fund were a common-law trust. Accordingly, the Directors of the fund shall promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any Director when requested in writing to do so by the record holders of not less than 10% of the outstanding shares. The fund does not hold annual meetings of shareholders. However, significant matters that require shareholder approval, such as certain elections of board members or a change in a fundamental investment policy, will be presented to shareholders at a meeting called for such purpose. Shareholders have one vote per share owned. At the request of the holders of at least 10% of the shares, the fund will hold a meeting at which any member of the board could be removed by a majority vote. 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:
DETERMINATION OF NET ASSET VALUE, REDEMPTIONS PRICE AND MAXIMUM OFFERING PRICE PER SHARE - DECEMBER 31, 1998 Net asset value and redemption price per share $13.61 (Net assets divided by shares outstanding) Maximum offering price per share $14.29 (100/95.25 of net asset value per share, which takes into account the fund's current maximum sales charge)
INVESTMENT RESULTS AND RELATED STATISTICS The fund's yield was 6.64% based on a 30-day (or one month) period ended December 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 the average net asset value or maximum offering price for the month. The distribution rate may differ from the yield. The fund's total annual return over the past twelve months and average annual total returns over the past 5-year and 10-year periods ending on December 31, 1998, were 0.16%, 5.58%, and 8.66%, respectively. The fund's total return at net asset value over the past 12 months and average annual total return for the 5-and 10-year periods ending on December 31, 1998 was 5.17%%, 6.61%, and 9.19%, respectively. The average 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. In calculating average annual total return, the fund assumes: (1) deduction of the maximum sales charge 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. EXPERIENCE OF INVESTMENT ADVISER -- The Investment Adviser manages nine growth and growth-income funds that are at least 10 years old. In the rolling 10-year periods since January 1, 1968 (138 in all), those funds have had better total returns than their comparable Lipper Indexes in 128 of the 138 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 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 investment results for the fund (also referred to as "BFA") set forth below were calculated as described in the fund's prospectus. Data contained in Salomon Brothers' Market Performance and Lehman Brother's The Bond Market Report are used to calculate cumulative total return from their base period (12/31/79 and 12/31/72, respectively) for each index. The percentage increases shown in the table below or used in published reports of the fund are obtained by subtracting the index results at the beginning of the period from the index results at the end of the period and dividing the difference by the index results at the beginning of the period. THE FUND VS. VARIOUS UNMANAGED INDICES
Period The Fund Salomon Lehman Average 1/1 - 12/31 Brothers (1) Brothers (2) Savings Deposit (3) 1989 - 1998 + 129% + 143% + 156% + 60% 1988 - 1997 + 141 + 142 + 158 + 63 1987 - 1996 + 125 + 126 + 140 + 65 1986 - 1995 + 143 + 152 + 171 + 70 1985 - 1994 + 160 + 160 + 175 + 76 1984 - 1993 + 207 + 208 + 233 + 87 1983 - 1992 + 194 + 203 + 225 + 98 1982 - 1991 + 252 + 271 + 316 + 111 1981 - 1990 + 210 + 240 + 261 + 121 1980 - 1989 + 210 + 221 + 236 + 124 1979 - 1988 + 191 n/a + 189 + 124 1978 - 1987 + 168 n/a + 165 + 124 1977 - 1986 + 176 n/a + 167 + 125 1976 - 1985 + 184 n/a + 173 + 123 1975 - 1984 + 152 n/a + 157 + 119 1974*- 1983 + 134 n/a + 118 + 109
* From May 28. (1) The Salomon Brothers Broad Investment Grade Bond Index spans the available market for U.S. Treasury/Agency securities, investment grade corporate bonds which have a rating of BBB or better by Standard and Poor's Corporation, and mortgage pass-through securities. This index's inception date is 12/31/79. (2) The Lehman Brothers Corporate Bond Index is comprised of a large universe of bonds issued by industrial, utility and financial companies which have a minimum rating of Baa by Moody's Investors Service, BBB by Standard and Poor's Corporation or, in the case of bank bonds not rated by either of the previously mentioned services, BBB by Fitch Investors Service. (3) Based on figures supplied by the U.S. League of Savings Institutions and the Federal Reserve Board which reflect all kinds of savings deposits, including longer-term certificates. Savings accounts offer a guaranteed return of principal, but no opportunity for capital growth. During a portion of the period, the maximum rates paid on some savings deposits were fixed by law. IF YOU ARE CONSIDERING THE FUND FOR AN INDIVIDUAL RETIREMENT ACCOUNT . . .
Here's how much you would have if you had invested $2,000 on January 1 of each year in the Fund over the past 5 and 10 years: 5 Years 10 Years (1/1/94-12/31/98) (1/1/89-12/31/98) $11,912 $31,041
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
If you had invested ..and taken all $10,000 in the Fund distributions in shares, this many years your investment would ago... have been worth this much at Dec. 31, 1998 | Period | Number of Years 1/1-12/31 Value 1 1998 $10,016 2 1997 - 1998 10,940 3 1996 - 1998 11,679 4 1995 -1998 13,811 5 1994 -1998 13,116 6 1993 -1998 14,967 7 1992 -1998 16,671 8 1991 -1998 20,171 9 1990 -1998 20,833 10 1989 -1998 22,944 11 1988 -1998 25,391 12 1987 -1998 25,895 13 1986 -1998 29,823 14 1985 -1998 37,749 15 1984 -1998 42,268 16 1983 -1998 46,279 17 1982 -1998 61,515 18 1981 -1998 65,556 19 1980 -1998 67,882 20 1979 -1998 70,030 21 1978 -1998 71,453 22 1977 -1998 75,132 23 1976 -1998 88,774 24 1975 -1998 100,010 25 1974*-1998 103,771
* From May 28, 1974, the fund's inception date FUND COMPARISONS According to Lipper Analytical Services, during the period May 31, 1974 through December 31, 1998 (the fund's lifetime), the fund ranked second among the seventeen similar bond funds that were in existence for that period. The fund may include information on its investment results and/or comparisons of its investment results to various unmanaged indices or results of other mutual funds or investment or savings vehicles in advertisements or in reports furnished to present to prospective shareholders. The fund may also, from time to time, combine its results with those of other funds in The American Funds Group for purposes of illustrating investment strategies involving multiple funds. For educational purposes, fund literature may contain discussions and/or illustrations of volatility, risk tolerance, asset allocation and investment strategies. The fund may also refer to results and surveys compiled by organizations such as CDA Investment Technologies, Ibbottson 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 periodicals, including Barrons, Forbes, Institutional Investor, Kiplinger's Personal Finance Magazine, Money, U.S. News and World Report and The Wall Street Journal. In addition, the fund may also illustrate the benefits of tax deferral by comparing taxable investments to investments made through tax-deferred retirement plans. Past results are not an indication of future investment results. ILLUSTRATION OF A $10,000 INVESTMENT IN THE FUND WITH DIVIDENDS REINVESTED AND CAPITAL GAIN DISTRIBUTIONS TAKEN IN SHARES (For the lifetime of the Fund May 28, 1974 through December 31, 1998)
COST OF SHARES VALUE OF SHARES Fiscal Annual Dividends Total From From From Total Year End Dividends (cumulative) Investment Initial Capital Dividends Value Dec. 31 Cost Investment Gains Reinvested Reinvested 1974 $ 413 $ 413 $10,413 $ 9,473 $ 0 $ 411 $ 9,884 1975 897 1,310 11,310 9,799 0 1,338 11,137 1976 1,010 2,320 12,320 10,555 126 2,473 13,154 1977 1,114 3,434 13,434 10,125 240 3,466 13,831 1978 1,198 4,632 14,632 9,438 278 4,396 14,112 1979 1,387 6,019 16,019 8,848 260 5,448 14,556 1980 1,706 7,725 17,725 8,147 240 6,685 15,072 1981 2,096 9,821 19,821 7,564 222 8,287 16,073 1982 2,408 12,229 22,229 8,799 259 12,303 21,361 1983 2,529 14,758 24,758 8,612 253 14,517 23,382 1984 2,838 17,596 27,596 8,563 252 17,360 26,175 1985 3,193 20,789 30,789 9,722 286 23,132 33,140 1986 3,566 24,355 34,355 9,861 1,325 26,980 38,166 1987 3,746 28,101 38,101 9,119 1,225 28,571 38,915 1988 3,912 32,013 42,013 9,188 1,235 32,657 43,080 1989 4,425 36,438 46,438 9,181 1,234 37,028 47,443 1990 4,650 41,088 51,088 8,598 1,155 39,240 48,993 1991 4,859 45,947 55,947 9,507 1,277 48,519 59,303 1992 5,221 51,168 61,168 9,709 1,491 54,828 66,028 1993 5,269 56,437 66,437 10,028 3,501 61,833 75,362 1994 5,673 62,110 72,110 8,806 3,075 59,701 71,582 1995 6,112 68,222 78,222 9,632 3,363 71,650 84,645 1996 6,405 74,627 84,627 9,542 3,332 77,449 90,323 1997 6,635 81,262 91,262 9,715 3,392 85,563 98,670 1998 6,933 88,195 98,195 9,445 4,321 90,005 103,771
The dollar amount of capital gain distributions during the period was $4,524. DESCRIPTION OF BOND RATINGS MOODY'S INVESTORS SERVICE, INC. rates the long-term debt securities issued by various entities from "Aaa" to "C," according to quality as described below: "AAA -- Best quality. These securities carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues." "AA -- High quality by all standards. They are rated lower than the best bond because margins of protection may not be as large as in Aaa securities, fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat greater." "A -- Upper medium grade obligations. These bonds possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future." "BAA -- Medium grade obligations. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well." "BA -- Have speculative elements; future cannot be considered as well assured. The protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Bonds in this class are characterized by uncertainty of position." "B -- Generally lack characteristics of the desirable investment; assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small." "CAA -- Of poor standing. Issues may be in default or there may be present elements of danger with respect to principal or interest." "CA -- Speculative in a high degree; often in default or have other marked shortcomings." "C -- Lowest rated class of bonds; can be regarded as having extremely poor prospects of ever attaining any real investment standing." STANDARD & POOR'S CORPORATION rates the long-term securities debt of various entities in categories ranging from "AAA" to "D" according to quality as described below: "AAA -- Highest rating. Capacity to pay interest and repay principal is extremely strong." "AA -- High grade. Very strong capacity to pay interest and repay principal. Generally, these bonds differ from AAA issues only in a small degree." "A -- Have a strong capacity to pay interest and repay principal, although they are somewhat more susceptible to the adverse effects of change in circumstances and economic conditions, than debt in higher rated categories." "BBB -- Regarded as having adequate capacity to pay interest and repay principal. These bonds normally exhibit adequate protection parameters, but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for debt in higher rated categories." "BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions." "C1 -- Reserved for income bonds on which no interest is being paid." "D -- In default and payment of interest and/or repayment of principal is in arrears." The Bond Fund of America Principal INVESTMENT PORTFOLIO DECEMBER 31, 1998 Amount Market Percent of or Shares Value Net Assets BONDS, NOTES & PREFERRED STOCKS (000) (000) INDUSTRIALS, SERVICES & UTILITIES TELECOMMUNICATIONS NEXTEL Communications, Inc.: 1.48% 0%/9.75% 2004 (1) $20,750 $20,128 0%/10.125% 2004 (1) 12,750 12,495 0%/9.75% 2007 (1) 64,500 39,345 0%/10.65% 2007 (1) 11,750 7,549 0%/9.95% 2008 (1) 19,750 11,850 12.00% 2008 (2) 5,000 5,450 Series D, 13.00% exchangeable preferred, redeemable 2009 (3 15,762 SHARES 16,345 Series E, 11.25% exchangeable preferred, redeemable 2010 (3) 23,533 21,180 NEXTEL International, Inc. 0%/12.125% 2008 (1) $15,500 6,936 Omnipoint Corp.: .89 Units 12.00% 2000 (2) (4) (5) (6) 12,500 14,350 14.00% 2003 (2) (3) (5) 32,250 31,766 11.625% 2006 31,200 21,840 11.625% 2006 8,250 5,775 Loan Agreement, Tranche A, 8.66% 2006 (2) (6) 9,295 8,179 7.00% convertible preferred 120,000 SHARES 2,850 Bell Atlantic Financial Services, Inc.: (2) .70 5.75% convertible debentures 2003 $30,000 30,975 4.25% convertible debentures 2005 35,000 35,875 Centennial Cellular Corp.: .41 8.875% 2001 15,500 16,895 10.125% 2005 5,000 6,200 10.75% 2008 (2) 16,000 16,040 Clearnet Communications Inc.: (1) .39 0%/11.75% 2007 C$45,825 18,309 0%/10.40% 2008 53,500 18,758 Viatel, Inc.: .37 11.25% 2008 $15,000 15,000 0%/12.40% 2008 (1) DM4,500 1,538 0%/12.50% 2008 (1) $20,750 11,828 11.15% 2008 DM9,500 5,667 10.00% convertible subordinated debentures 2011 (2) (3) 742 507 Series A, 10.00% convertible preferred (3) 16,264 SHARES 1,073 Crown Castle International Corp.: .37 0%/10.625% 2007 (1) $17,000 11,815 12.75% preferred (2) (3) 23,500 SHARES 23,735 Comcast Cellular Corp., Series B, 9.50% 2007 $30,600 32,512 .34 COLT Telecom Group PLC: .33 Units 0%/12.00% 2006 (1) (4) 5,250 6,484 8.875% 2007 DM9,500 5,974 7.625% 2008 31,800 18,779 Cable & Wireless Communications PLC: .31 6.75% 2008 $17,500 17,802 6.75% 2008 12,000 12,222 QWest Communications International Inc.: .27 0%/9.47% 2007 (1) 26,000 20,215 0%/8.29% 2008 (1) 7,500 5,625 Loral Orion Network Systems, Inc. (formerly Orion Network ( 26,060 25,501 .26 Systems, Inc.) Units 11.25% 2007 U S WEST Capital Funding, Inc.: .25 6.25% 2005 3,250 3,361 6.50% 2018 20,000 20,466 PageMart Wireless, Inc.: .24 0%/15.00% 2005 (1) 8,000 7,040 0%/11.25% 2008 (1) 34,250 15,413 American Cellular Corp. 10.50% 2008 (2) 21,500 20,855 .22 Global TeleSystems Group, Inc. 8.75% convertible debentures 7,500 20,775 .22 McCaw International, Ltd. (owned by NEXTEL (1) (4) 37,850 20,704 .22 Communications, Inc.) 0%/13.00% 2007 Time Warner Telecom Inc. 9.75% 2008 18,050 18,862 .20 US Xchange LLC 15.00% 2008 16,125 16,931 .18 Esat Telecom Group PLC: .16 0%/12.50% 2007 (1) 4,000 2,640 Units 0%/12.50% 2007 (1) (4) 4,500 3,282 11.875% 2008 (2) 9,750 9,848 Comuncacion Celular SA Units 0%/14.125% 2005 (1) (2) (4) 17,550 14,128 .15 NEXTLINK Communications, Inc.: .15 12.50% 2006 3,000 3,225 9.625% 2007 3,000 2,895 9.00% 2008 8,250 7,714 MCI Worldcom, Inc. (formerly WorldCom, Inc.): .14 6.40% 2005 8,250 8,574 8.875% 2006 4,796 5,242 CCPR Services, Inc. 10.00% 2007 13,750 13,750 .14 Sprint Capital Corp. 6.875% 2028 10,000 10,514 .11 MobileTelecommunication Technologies Corp. 13.50% 2002 8,530 9,554 .10 PTC International Finance BV 0%/10.75% 2007 (1) 9,450 6,710 .07 CEI Citicorp Holdings SA 11.25% 2007 (2) ARP9,500 6,181 .06 PanAmSat Corp.: .06 6.125% 2005 $2,500 2,426 6.375% 2008 3,000 2,929 SpectraSite Holdings, Inc. 0%/12.00% 2008 (1) (2) 9,500 4,940 .05 Dobson/Sygnet Communications Co. 12.25% 2008 (2) 4,500 4,528 .05 Price Communications Cellular Holdings, Inc. 11.25% 2008 (3) 4,000 3,820 .04 Globalstar LP Units 11.375% 2004 (4) 4,500 3,645 .04 Hermes Euro Railtel BV 11.50% 2007 3,000 3,225 .03 Conecel Holdings Ltd. Units, Series A, 16.00% 2000 (2)(4)(5) 5,900 2,707 .03 Telesystem International Wireless Inc. 0%/13.25% 2007 (1) 6,000 2,550 .03 Dobson Communications Corp. 12.25% exchangeable preferred, 2,578 SHARES 2,364 .02 redeemable 2008 IMPSAT Corp. 12.375% 2008 $2,500 2,025 .02 Level 3 Communications, Inc. 9.125% 2008 1,000 99 .01 870,181 9.11 TRANSPORTATION Continental Airlines, Inc., pass-through certificates:(7) 1.68 Series 1998-3, Class C-1, 7.08% 2004 3,000 2,995 Series 1998-3, Class C-2, 7.25% 2005 12,000 12,072 Series 1997-1, Class C, 7.78% 2007(6) 2,454 2,478 Series 1998-3, Class A-2, 6.32% 2008 15,000 15,100 Series 1997-1, Class B, 7.461% 2014 989 1,017 Series 1996-2, Class B, 8.56% 2014 1,898 2,087 Series 1996, Class A, 6.94% 2015 3,816 3,928 Series 1996, Class B, 7.82% 2015 12,881 13,570 Series 1996, Class C, 9.50% 2015 4,771 5,382 Series 1997-1, Class A, 7.461% 2016 19,743 20,470 Series 1996-2, Class D, 11.50% 2016 4,361 4,726 Series 1997-4, Class A, 6.90% 2018 35,390 35,531 Series 1998-1, Class A, 6.648% 2019 41,500 40,841 Jet Equipment Trust:(2) .59 Series 1994-A, Class B1, 10.91% 2006 6,446 7,509 Series 1994-A, Class C1, 11.79% 2013 4,000 5,442 Series 1995-B, Class B2, 10.91% 2014 5,000 6,184 Series 1995-D, Class D, 11.44% 2014 10,000 12,849 Series 1995-B, Class A, 7.63% 2015 4,159 4,459 Series 1995-B, Class C, 9.71% 2015 5,500 6,458 Series 1995-A, Class C, 10.69% 2015 10,500 12,915 Airplanes Pass Through Trust, pass-through certificates, (7 41,164 42,245 .44 Series 1, Class C, 8.15% 2019 Atlas Air, Inc., Pass-Through Trusts, Series 1998-1, (7) 41,000 41,711 .44 Class A, 7.38% 2018 USAir, Inc.: .36 9.625% 2001 3,996 4,149 1990 Equipment Trust Certificates: Series A, 10.28% 2001 754 799 Series B, 10.28% 2001 754 799 Series C, 10.28% 2001 530 562 Enhanced Equipment Notes: Class B, 7.50% 2009 9,057 8,813 Class C, 8.93% 2009 8,314 8,734 pass-through trust: Series 1993-A2, 9.625% 2003 (7) 2,500 2,700 Series 1993-A3, 10.375% 2013 (7) 7,250 8,011 Delta Air Lines, Inc.: .34 pass-through certificates, Series 1992-A2, 9.20% 2014 (7) 11,500 12,746 1990 Equipment trust certificates: (2) Series I, 10.00% 2014 5,000 5,893 Series J, 10.00% 2014 10,000 11,787 Series F, 10.79% 2014 1,700 2,114 United Air Lines, Inc., pass-through certificates: (7) .22 Series 1995-A1, 9.02% 2012 10,393 11,635 Series 1995-A2, 9.56% 2018 8,000 9,050 Alaska Airlines: .15 Series A, 9.50% 2010 2,168 2,578 Series B, 9.50% 2010 2,780 3,296 Series C, 9.50% 2010 2,659 3,198 Series D, 9.50% 2012 4,524 5,459 American Airlines, Inc., pass-through certificates, (7) 6,000 7,202 .08 Series 1991-C2, 9.73% 2014 Teekay Shipping Corp. 8.32% 2008 6,000 5,940 .06 Union Pacific Capital Trust 6.25% TIDES convertible preferre 111,100 SHARES 5,083 .05 Southwest Airlines, pass-through certificates, $2,408 2,979 .03 Series 1994-A, 9.15% 2016 (7) Canadian National Railway Company 6.45% 2036 (6) 2,750 2,828 .03 426,324 4.47 DIVERSIFIED MEDIA & CABLE TELEVISION Fox/Liberty Networks, LLC, FLN Finance, Inc.: .50 0%/9.75% 2007 (1) 33,325 22,661 8.875% 2007 24,250 24,735 NTL Inc.: .48 0%/12.75% 2005 (1) 17,750 16,153 Series B, 10.00% 2007 10,000 10,200 0%/9.75% 2008 (1)(2) 12,500 7,750 11.50% 2008 (2) 11,000 11,990 Falcon Holding Group, LP, Falcon Funding Corp.: .34 0%/9.285% 2010 (1) 25,300 17,394 8.375% 2010 14,750 14,824 TCI Communications, Inc.: .31 8.00% 2005 10,000 11,258 8.75% 2015 7,500 9,317 Tele-Communications, Inc. 8.75% 2023 8,000 8,921 News America Holdings Inc.: .26 8.625% 2014 A$3,250 2,166 8.00% 2016 $1,000 1,102 7.43% 2026 20,500 21,332 Lenfest Communications, Inc.: .23 8.375% 2005 11,000 11,880 7.625% 2008 6,750 7,020 8.25% 2008 3,250 3,356 Comcast UK Cable Partners Ltd. 0%/11.20% 2007 (1) 22,000 18,480 .19 Comcast Cable Communications, Inc.: .19 8.375% 2007 5,000 5,801 8.875% 2017 10,000 12,345 Time Warner Companies, Inc.: .18 9.125% 2013 7,000 8,862 7.25% 2017 7,000 7,610 6.95% 2028 1,000 1,059 Cox Communications, Inc. 6.40% 2008 15,000 15,709 .16 Cablevision Industries Corp.: .16 8.125% 2009 9,250 9,912 9.875% 2013 5,000 5,575 Telemundo Holdings, Inc. 0%/11.50% 2008(1)(2) 25,375 14,591 .15 Comcast Corp. 10.25% 2001 13,000 14,129 .15 Adelphia Communications Corp.: .13 8.125% 2003 5,000 5,100 8.375% 2008 7,500 7,687 TVN Entertainment Corp. 14.00% 2008(2) 13,250 12,190 .13 V2 Music (Holdings) PLC Units: (1)(2)(4) .13 0%/14.00% 2008 9,250 4,995 0%/14.00% 2008 POUNDS7,875 7,054 TeleWest PLC: .12 9.625% 2006 $4,700 4,794 0%/11.00% 2007(1) 8,000 6,660 Century Communications Corp.: .12 8.75% 2007 6,200 6,820 0% 2008 8,900 4,561 Globo Comunicacoes E Partcipacoes Ltd.: .08 10.50% 2006(2) 9,480 6,115 10.50% 2006 2,000 1,290 Coaxial Communications of Central Ohio, Inc. 10.00% 2006(2) 6,750 6,817 .07 Multicanal Participacoes SA, Series B, 12.625% 2004 7,250 6,308 .07 Clear Channel Communications, Inc. 7.25% 2027 4,000 4,003 .04 Fox Family Worldwide, Inc.: .04 0%/10.25% 2007(1) 2,500 1,575 9.25% 2007 2,000 1,980 FrontierVision 11.00% 2006 2,500 2,775 .03 Avalon Cable Holdings LLC 0% 2008(1)(2) 3,125 1,750 .02 TV Azteca, SA de CV, Series B, 10.50% 2007 1,000 82 .01 409,431 4.29 LEISURE & TOURISM Joseph E. Seagram & Sons, Inc.: .57 6.625% 2005 26,500 26,351 6.80% 2008 10,000 9,964 7.50% 2018 17,500 17,603 AMF Bowling Worldwide, Inc.: .22 0%/12.25% 2006 (formerly AMF Group Inc.)(1) 11,050 6,354 10.875% 2006 (formerly AMF Group Inc.) 13,839 11,279 0% convertible debentures 2018(2) 23,100 3,061 Mirage Resorts, Inc.: .21 6.625% 2005 7,500 7,281 6.75% 2007 6,500 6,295 6.75% 2008 6,750 6,507 Boyd Gaming Corp.: .21 9.25% 2003 13,725 14,308 9.50% 2007 5,500 5,500 Friendly Ice Cream Corp. 10.50% 2007 18,875 19,630 .21 William Hill Finance 10.625% 2008 POUNDS10,593 18,055 .19 FelCor Suites LP 7.375% 2004 $18,400 17,097 .18 Capstar Hotel Co. 8.75% 2007 12,020 11,780 .12 Punch Taverns 7.567% 2026 POUNDS5,000 8,667 .09 Premier Parks Inc.: .09 9.25% 2006 $5,000 5,213 0%/10.00% 2008(1) 4,500 3,060 Harrah's Operating Company, Inc. 7.875% 2005 6,000 6,000 .06 Royal Caribbean Cruises Ltd.: .06 7.25% 2018 2,000 1,926 7.50% 2027 4,000 3,939 Regal Cinemas, Inc. 9.50% 2008 (2) 5,000 5,200 .05 Six Flags Entertainment Corp. 8.875% 2006 5,000 5,181 .05 KSL Recreation Group, Inc. 10.25% 2007 5,000 5,000 .05 Sun International Hotels, Ltd., Sun International North 3,000 3,120 .03 America, Inc. 9.00% 2007 228,371 2.39 HEALTH & PERSONAL CARE Columbia/HCA Healthcare Corp.: .90 6.50% 1999 9,500 9,489 6.125% 2000 8,500 8,392 6.41% 2000 1,000 986 7.60% 2001 1,750 1,763 7.15% 2004 1,500 1,463 6.91% 2005 11,410 11,055 7.00% 2007 12,750 12,163 8.85% 2007 24,105 25,369 8.70% 2010 4,250 4,450 9.00% 2014 5,650 5,993 7.69% 2025 5,000 4,635 Integrated Health Services, Inc.: .54 5.75% convertible debentures 2001 6,500 5,647 10.25% 2006 (6) 9,350 9,257 Series A, 9.50% 2007 11,175 10,616 Series A, 9.25% 2008 27,500 25,850 Paracelsus Healthcare Corp. 10.00% 2006 20,575 18,518 .20 Tenet Healthcare Corp.: .10 8.00% 2005 6,000 6,090 8.125% 2008 (2) 3,000 3,075 Nationwide Health Properties Inc., Series A, 7.677% 100,000 SHARES 8,015 .09 preferred cumulative step-up premium rate McKesson Corp.: .08 6.30% 2005 $1,750 1,783 6.40% 2008 5,500 5,661 Mariner Health Group, Inc. 9.50% 2006 6,500 6,403 .07 Unison HealthCare Corp. 13.00% 2006 (2)(5)(8) 5,000 1,000 .01 187,673 1.99 BROADCASTING & PUBLISHING Chancellor Media Corp. of Los Angeles: .59 Chancellor Media Corp. of Los Angeles (formerly Chancellor Radio Broadcasting Co.): 9.375% 2004 (formerly Chancellor Radio Broadcasting Co.) $12,500 13,125 8.125% 2007 (formerly Chancellor Radio Broadcasting Co.) 21,000 21,000 Series B, 8.75% 2007 15,125 15,503 9.00% 2008(2) 7,000 7,367 Hearst-Argyle Television, Inc.: .25 7.00% 2018 18,500 18,419 7.50% 2027 5,500 5,696 Young Broadcasting Inc.: .19 10.125% 2005 3,500 3,666 Series B, 8.75% 2007 14,250 14,321 Cox Radio, Inc.: .17 6.25% 2003 2,000 2,016 6.375% 2005 14,000 14,194 American Radio Systems Corp. 9.00% 2006 $10,080 10,962 .11 Ziff-Davis Inc. 8.50% 2008 9,500 9,263 .10 Antenna TV SA 9.00% 2007 9,750 8,873 .09 TransWestern Publishing Co. LLC: .08 9.625% 2007(2) 6,250 6,563 9.625% 2007 1,000 1,050 RBS Participacoes SA 11.00% 2007(2) 10,000 6,100 .06 Sun Media Corp.: .06 9.50% 2007 3,834 4,237 9.50% 2007 1,305 1,442 STC Broadcasting, Inc. 11.00% 2007 3,250 3,437 .04 Newsquest Capital PLC 11.00% 2006 2,850 3,164 .03 EZ Communications, Inc. 9.75% 2005 1,250 1,359 .01 171,757 1.78 ENERGY & RELATED COMPANIES McDermott Inc. 9.375% 2002 13,250 13,787 .25 J. Ray McDermott, SA 9.375% 2006 9,500 10,070 Petrozuata Finance, Inc., Series A, 7.63% 2009(2) 21,280 16,598 .17 Pioneer Natural Resources Co. 7.20% 2028 20,000 13,930 .15 CalEnergy Co., Inc. (formerly California Energy 11,000 12,318 .13 Co., Inc.) 9.875% 2003 PDVSA Finance Ltd.:(2) .12 7.40% 2016 10,000 8,427 7.50% 2028 4,000 3,255 Oil Co. Ltd. 8.90% 2000 10,652 10,801 .11 YPF SA 7.75% 2007 10,000 8,900 .09 OXYMAR 7.50% 2016(2) 8,500 8,094 .08 Ocean Energy, Inc. 8.875% 2007 8,000 7,760 .08 Kelley Oil & Gas Corp. 10.375% 2006 8,750 6,388 .07 Benton Oil and Gas Co.: .05 11.625% 2003 6,000 4,020 9.375% 2007 1,750 1,137 Cross Timbers Oil Co. 8.75% 2009 2,000 1,780 .02 Clark Refining & Marketing, Inc. 8.375% 2007 1,500 1,414 .01 Pogo Producing Co. 8.75% 2007 1,500 1,388 .01 130,067 1.34 METALS BHP Finance Ltd.: .37 6.69% 2006 5,000 5,004 8.50% 2012 20,000 22,405 6.75% 2013 5,000 4,731 7.25% 2016 3,500 3,439 Freeport-McMoRan Copper & Gold Inc.: .35 7.50% 2006 34,000 21,590 7.20% 2026 18,000 11,700 Inco Ltd.: .27 9.875% 2019 7,500 7,842 9.60% 2022 16,000 17,854 Doe Run Resources Corp.: .16 11.696% 2003 (6) 3,000 2,400 11.25% 2005 16,000 12,960 AK Steel Corp. 9.125% 2006 5,000 5,237 .05 Pohang Iron & Steel Co., Ltd. 6.625% 2003 4,695 4,164 .04 Kaiser Aluminum and Chemical Corp. 12.75% 2003 2,000 1,960 .02 121,286 1.26 MULTI-INDUSTRY Swire Pacific Capital Ltd. 8.84% cumulative guaranteed (2) 1,500,000 SHARE 27,000 .36 perpetual capital securities Swire Pacific Offshore Financing Ltd. 9.33% cumulative (2) 400,000 7,600 guaranteed perpetual capital securities Wharf International Finance Ltd., Series A, 7.625% 2007 $25,000 20,056 .21 Hutchison Whampoa Finance Ltd.: (2) .20 7.45% 2017 3,000 2,598 Series D, 6.988% 2037 18,000 16,536 Reliance Industries Ltd.: (2) .18 8.25% 2027 10,000 8,525 10.50% 2046 250 198 10.25% 2097 10,750 8,063 Pan Pacific Industrial Investments PLC 0% 2007 (2) 33,500 13,199 .14 Federal-Mogul Corp. 7.75% 2006 10,000 10,154 .11 Tenneco Inc. 8.075% 2002 3,000 3,128 .03 117,057 1.23 FOREST PRODUCTS & PAPER Container Corp. of America: .34 10.75% 2002 4,800 4,992 9.75% 2003 18,815 19,191 Series A, 11.25% 2004 8,000 8,320 Scotia Pacific Company LLC: (2) .19 Timber Collateralized Notes, Class A-1, 6.55% 2028 1,500 1,473 Class A-2, 7.11% 2028 18,000 17,096 Norampac Inc.: .14 9.375% 2008 C$5,000 3,343 9.50% 2008 $10,250 10,353 Fort James Corp.: .12 6.625% 2004 5,000 5,092 6.875% 2007 6,000 6,207 Copamex Industrias, SA de CV, Series B, 11.375% 2004 11,880 11,227 .12 Grupo Industrial Durango, SA de CV: .10 12.00% 2001 3,000 2,790 12.625% 2003 7,625 6,863 P.T. Indah Kiat Pulp & Paper Corp. 8.875% 2000 300 20 .08 Indah Kiat: Finance Mauritius Ltd. 11.875% 2002 600 423 International Finance Co. B.V. 12.50% 2006 150 100 Finance Mauritius Ltd. 10.00% 2007 13,400 7,303 Pindo Deli Finance Mauritius Ltd.: .06 10.25% 2002 6,000 3,360 10.75% 2007 4,375 2,363 Paperboard Industries International Inc. 8.375% 2007 5,000 4,800 .05 James River Corp. 9.25% 2021 1,000 1,221 .01 APP International Finance Co. B.V. 11.75% 2005 525 34 .00 117,073 1.21 ELECTRICAL & GAS UTILITIES The Israel Electric Corp. Ltd.: (2) .74 7.125% 2005 12,500 12,563 7.25% 2006 7,165 7,279 7.70% 2018 8,500 8,297 7.875% 2026 8,000 7,862 7.75% 2027 25,000 24,216 8.10% 2096 10,405 9,997 Williams Holdings of Delaware, Inc.: .08 6.125% 2003 2,000 1,983 6.25% 2006 5,000 4,950 6.50% 2008 1,000 987 United Utilities 6.875% 2028 7,500 7,390 .08 Energen Corp., Series B, 7.125% 2028 6,000 5,951 .06 Tennessee Gas Pipeline Co. 7.625% 2037 5,000 5,392 .06 Transener SA 9.25% 2008 (2) 4,250 3,698 .04 100,565 1.06 GENERAL RETAILING & MERCHANDISING Sears Roebuck Acceptance Corp. 6.875% 2017 15,000 15,527 .16 Kmart Corp. 9.78% 2020 12,250 13,397 .14 Venator Group Inc.(formerly Woolworth Corp.): .13 6.98% 2001 9,000 8,510 Series A, 7.00% 2002 4,000 3,700 Federated Department Stores, Inc.: .10 8.125% 2002 5,000 5,390 7.45% 2017 2,000 2,153 7.00% 2028 2,000 2,027 DR Securitized Lease Trust Pass-Through Certificates, 8,000 8,640 .09 Series 1994 K-2, 9.35% 2019 Sunglass Hut International Ltd. 5.25% convertible debentures 11,150 7,694 .08 Carr-Gottstein Foods Co. 12.00% 2005 3,500 3,990 .04 Randall's Food Markets, Inc. 9.375% 2007 3,500 3,763 .04 Boyds Collection 9.00% 2008 (2) 2,960 3,019 .03 Dillard's, Inc. 7.13% 2018 2,750 2,775 .03 Fred Meyer, Inc.: .02 7.375% 2005 1,000 1,058 7.45% 2008 1,000 1,079 82,722 .86 ELECTRICAL & ELECTRONICS Micron Technology, Inc. 7.00% convertible subordinated notes 24,000 25,710 .27 Hyundai Semiconductor America, Inc.: (2) .22 8.25% 2004 7,705 6,087 8.625% 2007 20,700 15,318 Zilog, Inc. 9.50% 2005 12,250 9,923 .10 Samsung Electronics Co., Ltd. 7.45% 2002 (2) 11,000 9,790 .10 Advanced Micro Devices, Inc. 11.00% 2003 8,000 8,480 .09 Maxtor Corp. 5.75% convertible debentures 2012 3,000 1,800 .02 77,108 .80 MISCELLANEOUS MATERIALS & COMMODITIES Printpack, Inc.: .13 Series B, 9.875% 2004 2,775 2,775 10.625% 2006 9,465 9,465 Impress Metal Packaging Holdings BV 9.875% 2007 DM14,000 9,233 .10 Consumers International Inc. 10.25% 2005 (6) $8,125 8,491 .09 Anchor Glass Container Corp.: .09 11.25% 2005 7,000 7,315 9.875% 2008 1,000 945 Graham Packaging Co.: .08 8.75% 2008 3,625 3,661 0%/10.75% 2009 (1) 5,975 4,153 CellNet Data Systems, Inc. Units 0%/14.00% 2007 (1)(4) 26,561 5,168 .05 Ball Corp. 7.75% 2006 (2) 3,500 3,675 .04 Teletrac Holdings, Inc. Units 14.00% 2007 (4)(5) 6,850 2,436 .03 MC-Cuernavaca Trust 9.25% 2001 (1)(2) 3,109 2,176 .02 Key Plastics, Inc. 10.25% 2007 1,000 93 .01 60,428 .64 INDUSTRIAL COMPONENTS BREED Technologies Inc. 9.25% 2008 (2) 28,750 25,300 .27 Hayes Wheels International Inc. 9.125% 2007 11,000 11,495 .12 Tekni-Plex, Inc. 9.25% 2008 7,500 7,875 .08 Hayes Lemmerz International, Inc. 8.25% 2008 (2) 5,000 5,000 .05 49,670 .52 FOOD & FOOD PRODUCTS Nabisco, Inc.: .23 7.05% 2007 8,500 8,720 7.55% 2015 13,000 13,270 Fage Dairy Industry SA 9.00% 2007 10,000 8,700 .09 Gruma, SA de CV 7.625% 2007 8,000 7,040 .07 Home Products International, Inc. 9.625% 2008 6,000 5,910 .06 Favorite Brands International, Inc. 10.75% 2006 (2) 1,750 1,435 .02 45,075 .47 AUTOMOTIVE Ford Motor Credit Co. 5.25% 2008 DM32,000 19,870 .21 General Motors Corp. 9.45% 2011 $12,000 15,729 .16 35,599 .37 BEVERAGES & TOBACCO Canandaigua Wine Co., Inc.: .15 Series C, 8.75% 2003 7,500 7,725 8.75% 2003 6,000 6,150 Standard Commercial Tobacco Co., Inc. 8.875% 2005 11,750 11,280 .12 Delta Beverage Group, Inc. 9.75% 2003 $4,750 5,011 .05 Sparkling Spring Water Group Ltd. 11.50% 2007 3,750 3,338 .04 33,504 .36 MACHINERY & ENGINEERING John Deere Capital Corp. 8.625% 2019 16,850 19,144 .20 United Defense 8.75% 2007 2,790 2,825 .03 21,969 .23 PROTECTION SERVICES Protection One Alarm Monitoring, Inc.: .19 6.75% convertible debentures 2003 5,000 5,800 13.625% 2005 11,074 12,569 18,369 .19 APPLIANCES & HOUSEHOLD GOODS Lifestyle Furnishings International Ltd. 10.875% 2006 9,250 10,152 .11 Salton/Maxim Housewares, Inc. 10.75% 2005 (2) 8,000 8,000 .08 18,152 .19 TEXTILES & APPAREL Tultex Corp.: .10 10.625% 2005 11,500 5,175 9.625% 2007 11,500 4,830 WestPoint Stevens Inc. 7.875% 2005 1,000 1,015 .01 11,020 .11 DATA PROCESSING & REPRODUCTION First International Computer Corp. 1.00% 3,000 3,450 .04 convertible debentures 2004 (2) OTHER Cendant Corp. 7.75% 2003 25,500 25,772 .27 EarthWatch Inc. Units 12.50% 2001 (2)(4)(5)(8) 12,000 9,600 .10 Allied Waste North America, Inc.: (2) .06 7.375% 2004 4,000 4,020 7.625% 2006 2,000 2,015 Safety-Kleen Services, Inc. 9.25% 2008 250 25 .00 41,665 .43 FINANCE BANKS & THRIFTS Capital One Bank: .72 6.97% 2002 5,000 5,001 6.375% 2003 15,000 14,700 6.40% 2003 5,600 5,509 6.78% 2005 10,000 9,828 7.15% 2006 11,000 11,057 6.70% 2008 10,000 9,670 Capital One Capital I 6.769% 2027 (2)(6) 10,000 8,454 Capital One Financial Corp. 7.25% 2003 5,000 4,952 Tokai Preferred Capital Co. LLC, Series A, 75,500 64,175 .67 9.98% noncumulative preferred (2) BNP U.S. Funding LLC, Series A, 7.738% 64,000 61,460 .65 noncumulative preferred (2) SocGen Real Estate Co. LLC, Series A, 62,500 57,569 .60 7.64%/8.406% 2049 (1) (2) MBNA Corp., MBNA: .59 6.75% 2008 2,500 2,475 Capital A, Series A, 8.278% 2026 28,000 28,727 Capital B, Series B, 6.019% 2027(6) 30,000 24,924 Fuji JGB Investment LLC, Series A, 9.87% 56,000 40,055 .42 noncumulative preferred (2) Bankers Trust New York Corp.: 8.25% 2005 10,000 11,042 .41 6.70% 2007 20,000 20,665 7.90% 2027 5,000 5,245 BT Preferred Capital Trust II 7.875% 2027 1,500 1,565 NB Capital: .36 Trust IV 8.25% 2027 3,000 3,401 Corp. 8.35% exchangeable depositary shares 1,200,000 SHARE 31,200 Skandinaviska Enskilda Banken: .33 6.875% 2009 $8,250 8,663 7.50% (undated) (6) 24,000 23,047 IBJ Preferred Capital Co. LLC, Series A, 35,450 31,095 .33 8.79% noncumulative preferred (2) Advanta Corp.: .30 Series D, 6.54% 2000 10,600 10,070 Series D, 6.60% 2000 6,000 5,719 Series B, 7.00% 2001 4,000 3,709 Series D, 6.925% 2002 2,500 2,172 6.925% 2002 2,000 1,738 Advanta Capital Trust I 8.99% 2026 10,000 5,000 Washington Mutual Capital I Subordinated 22,000 24,130 .27 Capital Income Securities 8.375% 2027 Great Western Financial Trust II, Series A, 8.206% 2027 2,055 2,318 Paribas, New York Branch 6.95% 2013 25,000 24,442 .26 Barnett Capital I 8.06% 2026 20,000 22,470 .24 HSBC America Capital 8.38% 2027 (2) 19,375 19,557 .21 Royal Bank of Scotland 8.375% 2007 POUNDS9,400 17,832 .19 Imperial Capital Trust I, Imperial Bancorp 9.98% 2026 $15,000 16,309 .17 Riggs Capital TrustII 8.625% 2026 (2) 1,500 1,525 .17 Riggs National Corp.: 8.625% 2026 3,900 3,964 8.875% 2027 (2) 10,000 10,519 Bayerische Vereinsbank 5.50% 2008 DM24,000 15,724 .16 Chevy Chase Bank, FSB 9.25% 2005 $2,000 2,000 .15 Chevy Chase Preferred Capital Corp. 10.375% 242,900 SHARES 12,692 Dime Capital Trust I, Dime Bancorp, Inc., Series A, 9.33% 20 $12,500 13,501 .14 Abbey National PLC 6.70% (undated) (6) 12,500 12,270 .13 Chase Capital I, Capital Securities, Series A, 7.67% 2026 6,000 6,457 .13 Chase Capital II, Global Floating Rate Capital Securities, ( 6,000 5,672 Series B, 5.719% 2027 Fleet Financial Group, Inc. 6.375% 2008 1,000 1,045 .13 Fleet Capital Trust II 7.92% 2026 1,000 1,111 Fleet Capital Trust V 6.226% 2028 (6) 10,000 9,901 Bankunited Capital Trust, Bankunited Financial Corp., 10.25% 10,000 10,225 .11 J.P. Morgan & Co. Inc., Series A, 5.861% 2012 (6) 10,000 8,714 .09 Korea Development Bank: .07 7.125% 2001 1,000 948 6.625% 2003 750 670 7.375% 2004 6,000 5,475 Fuji International Finance (Bermuda) Trust, 10,000 6,600 .07 Fuji Bank, Ltd. 7.30% (undated) (6) Den Danske Bank 7.40%/7.961% 2010 (1)(2) 6,000 6,366 .07 SB Treasury Co. LLC, Series A, 9.40% noncumulative preferred 6,000 5,700 .06 Bay View Capital 9.125% 2007 5,500 5,280 .06 MBI Finance 0% convertible debentures 2001 6,000 4,020 .04 PNC Institutional Capital B, PNC Financial Corp. 8.315% 2027 3,000 3,354 .04 Svenska Handelsbanken 8.125% 2007 1,000 1,134 .01 Kansallis-Osake-Pankki 10.00% 2002 1,000 1,124 .01 Banco General, SA 7.70% 2002 (2) 500 47 .00 796,408 8.36 REAL ESTATE CarrAmerica Realty Corp.: .42 6.875% 2008 16,000 15,243 Series C, 8.55% cumulative redeemable preferred 400,000 SHARES 8,925 Series B, 8.57% cumulative redeemable preferred 700,000 15,750 Land Securities PLC 9.00% 2000 POUNDS12,000 28,569 .30 ProLogis Trust (formerly Secruity Capital Industrial Trust): .29 7.25% 2002 $1,000 995 7.05% 2006 5,000 4,879 7.875% 2009 7,500 7,498 Series D, 7.92% preferred 380,000 SHARES 9,358 Archstone Communities Trust (formerly Security .13 Capital Pacific Trust): 7.20% 2013 $13,500 12,380 Series C, 8.625% convertible preferred 200,000 SHARES 5,100 EOP Operating LP: .17 6.75% 2008 $11,500 11,308 7.25% 2018 5,000 4,723 Irvine Co. 7.46% 2006(5) 17,000 15,846 .17 ERP Operating LP: .13 7.57% 2026 8,000 8,228 7.95% 2002 3,750 3,890 Shopping Center Associates 6.75% 2004 (2) 12,000 11,858 .12 Irvine Apartment Communities, LP 7.00% 2007 9,500 8,632 .09 Beverly Finance Corp. 8.36% 2004 (2) 7,500 8,201 .09 IAC Capital Trust, Series A, 8.25% TOPRS preferred 300,000 SHARES 7,313 .08 Simon DeBartolo Group, Inc., Series C, 7.89% preferred 150,000 6,903 .07 cumulative step-up premium rate Duke Realty Investments, Inc., Series B, 7.99% preferred 150,000 6,825 .07 cumulative step-up premium rate New Plan Realty Trust, Series A, 7.80% preferred 112,500 5,259 .06 cumulative step-up premium rate Wellsford Residential Property Trust: .02 7.25% 2000 $1,000 1,009 7.75% 2005 1,000 1,043 209,735 2.21 FINANCIAL SERVICES AT&T Capital Corp. 6.60% 2005 30,000 28,742 .30 Newcourt Credit Group Inc., Series A, 7.125% 2003 (2) 10,000 9,951 .10 Household Finance Corp.: .36 5.519% 2005 (6) 8,000 7,783 6.40% 2008 25,750 26,588 Nykredit 6.00% 2029 DKr107,685 16,585 .17 Wilshire Financial Services Group, Inc.: .17 13.00% 2004 $4,000 1,080 13.00% 2004 11,500 3,105 Series A, 13.00% 2004 (5) 20,000 12,000 AB Spintab: .12 6.00% 2009 SKr23,000 3,068 7.50% (Undated) (2)(6) $8,500 8,617 Halifax Building Society 8.75% 2006 POUNDS5,500 10,733 .11 Ocwen Financial Corp. 12.00% 2005 $6,000 5,460 .11 Ocwen Capital Trust I 10.875% 2027 6,500 5,005 Associates Corp. of North America 5.85% 2001 10,000 10,087 .11 Providian Financial Corp. 9.525% 2027(2) 7,000 7,091 .07 Wharf Capital International, Ltd. 8.875% 2004 7,457 6,794 .07 Amresco, Inc. 9.875% 2005 8,950 6,444 .07 Green Tree Financial Corp. 6.50% 2002 4,000 3,778 .04 Lend Lease (US) Finance Inc. 6.75% 2005 1,500 1,561 .02 174,472 1.82 INSURANCE C$ C$16,000 10,275 .11 Jefferson Pilot Corp. 8.14% 2046(2) $6,000 6,544 .07 16,819 .18 COLLATERALIZED MORTGAGE/ASSET - BACKED OBLIGATIONS (Excluding Those Issued by Federal Agencies)(7) Morgan Stanley Capital I Inc.: 1.18 Series 1998-1, Class A-5, 6.75% 2013 17,449 17,449 Series 1995-GA1, Class A-1, 7.00% 2002(2) 5,441 5,502 Series 1998-HF1, Class A-1, 6.19% 2007(6) 34,447 35,039 Series 1996-WF1, Class A-1, 7.00% 2028(2)(6) 9,548 9,641 Series 1998-WF2, Class A-1, 6.34% 2030(6) 9,699 9,930 Series 1998-HF2, Class A-2, 6.48% 2030 34,000 35,295 Chase Commercial Mortgage Securities Corp.: .89 Series 1996-1, Class A1, 7.60% 2005 4,667 4,967 Series 1997-I, Class A1, 7.27% 2029 6,856 7,138 Series 1998-1, Class A1, 6.34% 2030 30,829 31,474 Series 1998-2, Class A-2, 6.39% 2030 32,000 32,954 Series 1998-2, Class E, 6.39% 2030 10,000 8,671 DLJ Mortgage Acceptance Corp.: .87 Series 1997-CF1, Class A1A, 7.40% 2006(2) 6,333 6,642 Series 1996-CF2, Class A1B, 7.29% 2021(2) 11,200 11,797 Series 1995-CF2, Class A1B, 6.85% 2027(2) 30,845 31,829 Series 1996-CF1, Class A1A, 7.28% 2028 9,428 9,755 Series 1998-CF1, Class A-1A, 6.14% 2006(6) 22,797 23,037 Green Tree Financial Corp, pass-through certificates: .75 Series 1994-A, Class NIM, 6.90% 2004 4,121 4,131 Series 1995-A, Class NIM, 7.25% 2005 8,845 8,885 Series 1993-2, Class B, 8.00% 2018 2,250 2,123 Series 1997-A, Class HI-M1, 7.47% 2023 1,000 1,027 Series 1995-8, Class B2, 7.65% 2026 4,000 3,430 Series 1995-6, Class B2, 8.00% 2026 2,450 2,239 Series 1995-9, Class A-5, 6.80% 2027 8,000 8,100 Series 1996-7, Class A6, 7.65% 2027 2,100 2,212 Series 1996-6, Class B2, 8.35% 2027 10,611 9,932 Series 1997-1, Class A-5, 6.86% 2028 1,500 1,538 Series 1996-10, Class A-6, 7.30% 2028 8,500 8,851 Series 1998-4, Class B2, 8.11% 2028 13,350 11,648 Series 1997-6, Class A6, 6.90% 2029 7,500 7,699 GMAC Commercial Mortgage Securities, Inc.: .66 Series 1997-C1, Class A1, 6.83% 2003 23,979 24,578 Series 1997-C1, Class A3, 6.869% 2007 35,000 37,079 Series 1996-C1, Class A2A, 6.79% 2028 866 885 CSFB Finance Co. Ltd., Series 1995-A, 7.142% 2005(2)(6) 36,775 34,510 .63 CSFB, Series 98-FL1, Class E, 6.397% 2013(2)(6) 10,000 9,739 CS First Boston Mortgage Securities Corp., Series 1998-C1, 16,295 16,629 Class A-1A, 6.26% 2040 Norwest Asset Securities Corp.: .46 Series 1998-8, Class A-1, 6.50% 2013 34,156 34,262 Series 1998-31, Class A-1, 6.25% 2014 9,775 9,761 Asset Securitization Corp.: .42 Series 1996-D3, Class A-1B, 7.21% 2026 3,000 3,147 Series 1997-D4, Class A-1A, 7.35% 2029 9,476 9,782 Series 1997-D5, Class A-PS1, interest only, 1.385% 2043(6) 277,376 26,905 Merrill Lynch Mortgage Investors, Inc., .41 Mortgage Pass-Through Certificates:(6) Series 1995-C2, Class A-1, 7.189% 2021 5,770 5,866 Series 1995-C2, Class D, 7.959% 2021 579 593 Series 1995-C3, Class A-1, 6.762% 2025 2,283 2,332 Series 1995-C3, Clas A-3, 7.062% 2025 15,855 16,524 Series 1996-C2, Class A-1, 6.69% 2028 13,397 13,801 The Money Store Trust: .41 Series 1996-D, Class A-12, 6.37% 2011 20,000 20,012 Series 1997-1, Class A-2, 6.81% 2011 15,000 15,037 Series 1996-D, Class A-14, 6.985% 2016 4,000 4,062 Structured Asset Securities Corp., pass-through certificates: .37 Series 1998-RF2, Class A, 8.572% 2027(2)(6) 23,810 25,567 Series 1998-RF1, Class A, 8.696% 2027(2)(6) 3,992 4,303 Series 1996-CFL, Class A1C, 5.944% 2028(6) 1,942 1,938 Series 1996-CFL, Class D, 7.034% 2028 2,950 2,941 Series 1996-CFL, Class A2A, 7.75% 2028(6) 728 728 ComEd Transitional Funding Trust, Transitional .35 Funding Trust Note: Series 1998, Class A-4, 5.39%, 2005 6,000 5,965 Series 1998, Class A-5, 5.44% 2007 21,500 21,334 Series 1998, Class A-6, 5.63% 2009 6,000 5,956 First USA Credit Card Master Trust, Class A .31 Floating Rate (2)(6) Asset Backed Certificates: Series 1998-7, 6.151% 2004 4,000 3,912 Series 1998-4, 6.051% 2008 15,000 14,511 Series 1998-8, 6.451% 2008 4,400 4,298 Series 1997-4, 6.274% 2010 6,630 6,543 Sears Credit Account Master Trust II, Series 25,300 24,786 .26 1998-2, Class A, 5.25% 2008 Deutsche Mortgage & Asset Receiving Corp., Series 1998-C1, 19,592 19,735 .21 Class A-1, 6.22% 2031 DLJ Commercial Mortage Corp., Commercial Mortgage .21 Pass-Through Certificates: Series 1998-CF2, Class A-1B, 6.24% 2031 10,000 10,188 Series 1998-CF2, Class B-1, 7.066% 2031(6) 9,538 9,520 Structured Asset Notes Transaction, Ltd., Series 1996-A, (2) 17,891 18,156 .19 Class A1, 7.156% 2003 Commercial Mortgage Acceptance Corp.: .18 Series 1998-C2, Class A-1, 5.80% 2006 4,925 4,970 Series 1998-C1, Class A-1, 6.23% 2007 12,206 12,443 Resolution Trust Corp.: .18 Series 1991-M5, Class B, 9.00% 2017 1,683 1,683 Series 1993-C1, Class D, 9.45% 2024 9,352 9,352 Series 1993-C1, Class E, 9.50% 2024 155 155 Series 1993-C2, Class C, 8.00% 2025 3,000 2,999 Series 1993-C2, Class D, 8.50% 2025 2,732 2,724 Ocwen Residential MBS Corp., Series 1998-R1, 16,699 16,731 .18 Class AWAC, 1.083% 2027(2)(6) Nomura Asset Securities Corp., Series 1998-D6, 15,905 16,068 .17 ClassA-A1, 6.28% 2030(6) EquiCredit Funding Asset Backed Certificates, Series 1996-A, 15,790 15,873 .17 Class A2, 6.95% 2012 G E Capital Mortgage Services, Series 1994-15, 16,376 15,731 .17 Class A10, 6.00% 2009 IMC Home Equity Loan Trust, Series 1996-4, 15,585 15,588 .16 Class A3, 6.81% 2011 Chase Manhattan Credit Card Master Trust, Series 15,000 15,061 .16 1996-4, Class A, 6.73% 2003 FIRSTPLUS Home Loan Owner Trust: .16 Series 1997-1, Class A-7, 7.16% 2018 10,000 10,173 Series 1997-3, Class B-1, 7.79% 2023 5,000 4,764 Asset-Backed Securities Investment Trust, 10,534 10,547 .11 Series 1997-D, 6.79% 2003(2) Grupo Financiero Banamex Accival, SA de CV 0% 2002 11,856 10,496 .11 LB Commerical Mortgage Trust, Series 1998-C1, 9,994 10,153 .11 Class A1, 6.33% 2030 Metris Master Trust, Series 1998-1A, Class C, 10,000 9,719 .10 6.412% 2005(2)(6) Prudential Home Mortgage Securities Co., Inc.: .10 Series 1993-34, Class A-1, 7.00% 2023 5,216 5,206 Series 1993-48, Class A-6, 6.25% 2008 4,466 4,416 Residental Asset Securitization Trust, Series 1997-A3, 9,267 9,365 .10 Class B1, 7.75% 2027 PNC Mortgage Securities Corp., Series 1998-10, 9,597 9,336 .10 Class 1-B1, 6.50% 2028(2) Ditech Home Loan Owner Trust, Series 1998-1, Class B1, 9.50% 10,500 9,092 .10 Bear Stearns Commercial Mortgage Securities Inc., 8,767 9,032 .10 Series 1998-C1, Class A-1, 6.34% 2007 Mortgage Capital Funding, Inc., Series 1998-MC1, 8,158 8,393 .09 Class A-1, 6.417% 2030 Bear Asset Trust Securities, Series 1997-1, 7,853 7,858 .08 Class A, 6.686% 2006(2) Green Tree Recreational, Equipment and Consumer Trust, 8,500 7,732 .08 Series 1997-D, Class CTFS, 7.25% 2029 Collateralized Mortgage Obligation Trust, 6,546 6,850 .07 Series 63, Class Z, 9.00% 2020 Residential Funding Mortgage Securities I, Inc.: .07 Series 1998-S17, Class M-1, 6.75% 2028 3,988 3,935 Series 1992-S6, Class A-10, 13.164% 2022(6)(9) 2,742 2,793 Travelers Mortgage Securities Corp., Series 1, 5,676 6,337 .07 Class Z2, 12.00% 2014 Capstead Securities Corp. IV, Series 1992-4, 5,945 5,959 .06 Class J, 19.277% 2022(6)(9) Ryland Acceptance Corp. Four, Series 88, Class E, 5,455 5,595 .06 7.95% 2019 Chase Manhattan Bank, NA, Series 1993-I, 5,362 5,375 .06 Class 2A5, 7.25% 2024 Standard Credit Card Master Trust I, 5,000 5,406 .06 Series 1994-2, Class A, 7.25% 2008 Chase Credit Card Master Trust, Series 1996-4, 5,000 4,959 .05 Class A, 5.665% 2006(6) MBNA Master Credit Card Trust, Series 1998-E, 5,000 4,958 .05 Class C, 6.60% 2010(2) GE Capital Mortgage Services, Inc., 4,628 4,483 .05 Series 1994-9, Class A9, 6.50% 2024 Bear Stearns Structured Securities Inc., Series 1997-2, (2)( 3,859 3,854 .04 Class AWAC, 4.028% 2036 J.P. Morgan Commercial Mortgage Finance Corp.: .04 Series 1995-C1, Class A-2, 7.395% 2010(6) 1,000 1,021 Series 1996-C3, Class A-1, 7.33% 2028 1,550 1,621 Series 1997-C4, Class A-1, 6.939% 2028 1,137 1,152 Nationsbanc Montgomery Funding Corp., Series 1998-5, 3,000 2,978 .03 Class A-1, 6.00% 2013 Aames Mortgage Trust, Series 1996-D, Class A-1B, 6.34% 2012 2,623 2,620 .03 Financial Asset Securitization, Inc., Series 1997-NAM1, 2,564 2,620 .03 Class B1, 7.75% 2027 UCFC Acceptance Corp., Series 1996-D1, Class A-4, 6.776% 201 2,400 2,411 .03 Bombardier Capital Mortgage Securitization Corp., 2,000 1,990 .02 Series 1998-A, Class A-3, 6.23% 2008 GS Mortgage Securities Corp., Series 1998-2, 1,187 1,230 .01 Class M, 7.75% 2027 (2) Blackrock Capital Finance LP, Series 1996-C2, 1,000 1,000 .01 Class C, 7.888% 2026 GCC Home Equity Trust, Series 1990-1, Class A, 10.00% 2005 927 92 .01 1,154,553 12.14 GOVERNMENTAL U.S. TREASURY OBLIGATIONS 9.125% May 1999 7,750 7,872 .08 6.875% July 1999 6,000 6,074 .06 6.00% August 2000 5,000 5,103 .05 7.75% February 2001 27,500 29,197 .31 13.125% May 2001 21,500 25,531 .27 3.625% July 2002(10) 51,197 50,845 .53 11.625% November 2002 92,000 113,965 1.20 6.25% February 2003 1,250 1,322 .01 10.75% May 2003 7,500 9,255 .10 11.875% November 2003 10,000 13,052 .14 7.25% May 2004 185,820 208,263 2.18 11.625% November 2004 106,175 143,004 1.50 7.50% February 2005 27,730 31,751 .33 6.50% May 2005 9,000 9,863 .10 7.00% July 2006 465 52 .01 6.50% October 2006 27,000 29,949 .31 3.375% January 2007(10) 46,577 45,005 .47 6.125% August 2007 8,515 9,300 .10 5.625% May 2008 40,000 42,681 .45 8.75% November 2008 7,500 8,745 .09 9.125% May 2009 18,000 21,569 .23 10.375% November 2009 12,500 15,965 .17 10.00% May 2010 7,500 9,573 .10 10.375% November 2012 15,000 20,695 .22 12.00% August 2013 10,000 15,267 .16 7.50% November 2016 32,000 39,750 .42 8.875% August 2017 194,350 273,759 2.87 8.750% May 2020 4,270 6,064 .06 7.875% February 2021 19,250 25,317 .27 8.125% May 2021 98,000 132,208 1.39 6.375% August 2027 20,750 23,849 .25 1,375,322 14.43 FEDERAL AGENCY OBLIGATIONS Mortgage Pass-Throughs(7) Government National Mortgage Assn.: 5.31 6.00% 2028 1,968 1,951 6.50% 2008-2028 31,879 32,240 6.63% 2022-2023(6) 10,297 10,450 6.88% 2022-2024(6) 82,636 83,660 7.00% 2008-2026(6) 194,238 198,480 7.50% 2007-2028 82,094 84,683 8.00% 2017-2026 26,535 27,648 8.50% 2020-2028 22,285 23,696 9.00% 2009-2022 17,907 19,269 9.50% 2009-2021 14,756 12,746 10.00% 2017-2019 6,384 6,931 10.50% 2015-2019 291 319 11.00% 2013-2016 729 815 12.00% 2014-2015 3,027 3,405 12.50% 2010-2015 582 663 13.25% 2014 77 88 Fannie Mae: 2.27 6.00% 2013-2014 40,435 40,536 6.16% 2033(6) 28,243 28,411 6.50% 2013-2028 29,356 29,762 7.00% 2009-2028 46,845 47,799 7.50% 2009-2028 8,062 8,289 7.69% 2026(6) 9,562 9,794 8.00% 2023 1,889 1,965 8.28% 2002(6) 6,992 7,245 8.50% 2009-2027 6,663 6,979 9.00% 2018-2025 3,247 3,450 9.50% 2009-2025 2,895 3,096 10.00% 2018-2025 9,101 9,803 10.50% 2012-2019 2,893 3,161 11.00% 2015-2020 1,875 2,070 11.25% 2014 31 34 11.50% 2010-2014 147 165 12.00% 2015-2028 985 1,126 12.50% 2015 1,178 1,362 13.00% 2015-2028 9,432 11,215 15.00% 2013 45 54 Freddie Mac: .68 6.00% 2013 13,959 14,007 7.50% 2012 15,919 16,367 8.00% 2003-2010 2,776 2,836 8.25% 2007 1,753 1,818 8.50% 2002-2020 18,411 19,222 8.75% 2008 2,176 2,283 9.00% 2021 574 612 10.00% 2011-2019 147 158 10.50% 2020 1,839 2,038 10.75% 2010 66 72 11.50% 2000 18 20 12.00% 2016-2017 2,189 2,493 12.50% 2015-2019 1,985 2,288 12.75% 2019 359 414 13.00% 2014 30 35 13.50% 2018 10 12 13.75% 2014 12 14 788,049 8.26 Collateralized Mortgage Obligations (7) Fannie Mae: .43 Series 1991-146, Class Z, 8.00% 2006 4,771 4,923 Series 1990-93, Class G, 5.50% 2020 887 871 Series 1991-2, Class Z, 6.50% 2021 15,584 15,662 Series 1993-247, Class Z, 7.00% 2023 4,230 4,281 Series 1994-4, Class ZA, 6.50% 2024 3,782 3,726 Series 1997-28, Class C, 7.00% 2027 7,000 7,168 Series 1998-W5, Class B3, 6.50% 2028(2) 4,900 4,318 Freddie Mac: .36 Series 1849, Class Z, 6.00% 2008 5,836 5,794 Series 1716, Class A, 6.50% 2009 4,750 4,772 Series 41, Class F, 10.00% 2020 3,168 3,440 Series 178, Class Z, 9.25% 2021 2,704 2,854 Series 1657, Class SA, 6.988% 2023(6)(9) 7,520 6,535 Series 1673, Class SA, 5.245% 2024(6)(9) 7,879 6,224 Series 1948, Class PJ, 6.65% 2027 3,000 3,019 Series 2030, Class F, 6.035% 2028(6) 2,152 2,161 75,748 .79 Other Fannie Mae: 7.70% 2004 12,500 12,688 .29 Medium-Term Note, 6.75% 2028 15,000 15,005 Federal Home Loan Bank Bonds: 6.27% 2004 5,000 4,987 .16 7.013% 2007 10,000 10,080 42,760 .45 GOVERNMENT & GOVERNMENTAL BODIES (EXCLUDING U.S. GOVERNMENT) Hellenic Republic: 1.22 8.90% 2004 GRD4,900,000 18,759 2.90% 2007 YEN1,270,000 11,439 8.80% 2007 GRD6,500,000 25,835 6.95% 2008 $4,500 4,830 8.60% 2008 GRD13,320,000 52,966 7.50% 2013 620,000 2,344 Canadian Government: 1.06 9.00% 2004 C$20,000 15,806 4.25% 2021(10) 23,229 15,426 4.25% 2026(10) 105,154 69,936 Deutschland Republic: .87 8.00% 2002 DM34,050 23,541 5.25% 2008 90,000 59,595 Bundesrepublik: .78 7.125% 2003 22,250 15,201 7.50% 2004 32,000 22,997 Treuhandanstalt: 7.125% 2002 24,000 16,377 6.00% 2007 29,000 19,990 Japanese Government 1.50% 2008 YEN7,300,000 61,359 .64 Spanish Government 6.00% 2008 Pta6,000,000 48,665 .51 United Kingdom: .49 8.50% 2005 POUNDS17,000 35,013 8.00% 2015 $5,000 11,782 Polish Government: .38 12.00% 2001 PLZ20,000 5,792 13.00% 2001 25,000 7,340 12.00% 2002 8,375 2,443 12.00% 2003 70,000 20,870 Norwegian Government 6.75% 2007 NOK155,000 22,240 .23 Italian Government BTPS 6.00% 2007 Lr31,375,000 21,691 .23 Netherland Government 5.50% 2028 NLG34,000 20,035 .21 Kingdom of Denmark 6.00% 2009 DKr90,000 16,149 .17 Ontario (Province of): .15 7.75% 2002 $3,500 3,773 5.50% 2008 10,750 10,791 New Zealand Government 4.50% 2016(10) NZ$27,210 14,187 .15 United Mexican States Government Eurobonds: .13 Global, 11.375% 2016 $9,015 9,493 Series A, 6.25% 2019 1,000 778 Global, 11.50% 2026 2,125 2,274 Argentina (Republic of): .12 Eurobonds, Series L, 6.188% 2005(6) 235 199 Units 11.00% 2005(4) 5,000 5,011 11.00% 2006 1,500 1,485 11.75% 2007 ARP2,650 2,255 11.375% 2017 $1,500 1,504 9.75% 2027 1,050 937 Swedish Government 6.50% 2008 SKr60,000 8,689 .09 Quebec (Province of): .09 8.625% 2005 $2,250 2,587 13.25% 2014 5,500 6,035 Hungarian Government 13.00% 2003 HUF1,800,000 8,463 .09 Panama (Republic of):(6) .07 Interest Reduction Bond 4.00% 2014(2) $6,500 4,908 Past Due Interest Bond, 6.688% 2016(2) 1,582 1,186 Past Due Interest Eurobond 6.688% 2016 264 198 Venezuela (Republic of):(6) .03 Front Loaded Interest Reduction Bonds: Series A, 6.125% 2007 810 514 Series B, 6.125% 2007 202 129 Eurobond 5.9375% 2007 4,071 2,606 Mendoza (Province of) 10.00% 2007(2) 4,150 2,947 .03 Philippines (Republic of): .03 8.875% 2008 1,750 1,748 8.75% 2016 1,000 991 Manitoba (Province of) 9.625% 1999 2,000 2,017 .02 Poland (Republic of) Past Due Interest 2,000 1,875 .02 Registered Bond 5.00% 2014 Peru (Republic of) Past Due Interest Eurobond 4.00% 2017(6) 750 47 .00 Ecuador (Republic of) Past Due Interest:(6) .00 Registered Bond 6.625% 2015 283 115 Bearer Bond 6.625% 2015 424 173 Discount Bond 6.625% 2025 250 130 Brazil (Federal Republic of), Debt Conversion 500 26 .00 Bond, Series L, 6.188% 2012(6) 747,153 7.81 FLOATING RATE EURODOLLAR NOTES (UNDATED)(6) Bank of Scotland 7.00% (2) 30,000 29,944 .31 National Westminster Bank PLC 7.75% 23,000 24,268 .26 Canadian Imperial Bank of Commerce 5.813% 25,000 19,187 .20 Standard Chartered Bank: 5.275% 5,000 3,063 .13 5.625% 15,000 9,050 Bank of Nova Scotia 5.813% 10,000 7,700 .08 BCI U.S. Funding Trust I 8.01% (2) 8,000 7,683 .08 Hongkong and Shanghai Banking Corp. 6.06% 10,000 7,351 .08 Lloyds Bank (#2) 5.438% 8,000 6,560 .07 Allied Irish Banks Ltd. 5.75% 7,000 5,985 .06 Merita Bank Ltd. 7.15% (2) 4,000 3,870 .04 Midland Bank 5.375% 5,000 3,847 .04 Bergen Bank 5.813% 5,000 3,586 .04 National Bank of Canada 5.047% 5,000 3,550 .04 Christiana Bank Og Kreditkasse 5.625% 4,000 2,920 .03 138,564 1.46 OTHER SECURITIES & MISCELLANEOUS Shares STOCKS AND WARRANTS NEXTEL Communications, Inc., Class A(11) 122,392 2,892 .03 NEXTEL Communications, Inc. warrants, expire 1999 (5)(11) 38,750 5 Verio Inc., warrants, expire 2004 (11) 52,200 2,610 .03 Cellular Communications International, Inc. 15,071 1,206 .02 warrants, expire 2003 (11) CellNet Data Systems, Inc. (11) 219,400 1,097 .01 NTL Inc., warrants, expire 2008 (2)(5)(11) 26,362 79 .01 Protection One Alarm Monitoring, Inc. warrants, expire 2005 54,400 40 .01 ICG Communications, Inc. (formerly IntelCom Group, 19,800 31 .00 Inc.), warrants, expire 2005 (2)(11) Discovery Zone, Inc. (5)(8) 13,966 .00 9,397 .11 MISCELLANEOUS Investment securities in initial period of acquisition 14,944 .17 TOTAL BONDS, NOTES AND EQUITY SECURITIES (cost: $8,993,173,000) 8,922,440 93.53 Principal Market Amount Value Percent of SHORT-TERM SECURITIES (000) (000) Net Assets COMMERCIAL PAPER Associates First Capital Corp.: 5.125 due 1/4/99 25,000 24,986 .67 5.31% due 1/14/99 38,700 38,620 A .I. Credit Corp.: 5.05% due 1/5/99 7,600 7,595 .53 5.02% due 1/6/99 10,000 9,991 5.13%-5.15% due 1/14/99 33,500 33,433 Johnson & Johnson 5.00% due 1/4/99(2) 50,000 49,972 .52 Commercial Credit Co. 5.16% due 1/21/99 37,500 37,387 .39 Ameritech Corp.: 5.00% due 1/11/99 (2) 25,000 24,962 .39 5.04% due 1/12/99 (2) 12,000 11,980 American General Finance Corp. 5.32% due 1/19/99 36,500 36,401 .38 Household Finance Corp. 5.03 due 1/22/99 36,000 35,887 .38 Xerox Capital (Europe) PLC 5.27% due 1/14/99 30,500 30,439 .32 Amoco Co. 5.12% due 2/8/99 30,000 29,836 .31 Eastman Kodak Co.: 5.26% due 5.26% 1/12/99 20,000 19,965 .30 5.45% due 1/28/99 9,000 8,962 Gillette Co. 5.10% due 1/4/99(2) 25,000 24,986 .26 Lucent Technologies Inc. 5.03% due 1/8/99 25,000 24,972 .26 St. Paul Companies Inc. 5.32% due 1/12/99(2) 25,000 24,956 .26 Arco British Ltd. 5.14% due 1/15/99(2) 21,000 20,955 .22 National Rural Utilities Cooperative Finance Corp.: 5.00% due 1/11/99 1,500 1,497 .22 5.00% due 2/11/99 19,400 19,285 Chevron Transport Corp. 5.20% due 1/21/99(2) 20,000 19,940 .21 TOTAL SHORT-TERM SECURITIES (COST $537,004,000) 537,007 5.62 TOTAL INVESTMENT SECURITIES (COST $9,530,177,000) 9,459,447 99.15 Excess of cash and receivables over payables 81,146 .85 NET ASSETS $ 9,540,593 100.00% 1 Step bond; coupon rate will increase at a later date. 2 Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. 3 Payment in kind; the issuer has the option of paying additional securities in lieu of cash. 4 Purchased as a unit; issue was separated but reattached for reporting purposes. 5 Valued under procedures established by the Board of Directors. 6 Coupon rate may change periodically. 7 Pass-through security backed by a pool of mortgages or other loans on which principal payments are periodically made. Therefore, the effective maturities is shorter than the stated maturity. 8 Company not making interest or dividend payments; bankruptcy proceedings pending. 9 Inverse floater, which is a floating-rate note whose interest rate moves in the opposite direction of prevailing interest rates. 10 Index-linked bond whose principal amount moves with a government retail price index. 11 Non-income-producing security. See Notes to Financial Statements
The Bond Fund of America FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES at December 31,1998 (dollars in thousands) Assets: Investment securities at market (cost: $9,530,177) $9,459,447 Cash 12,038 Receivables for-- Sales of investments $41,851 Sales of fund's shares 23,979 Dividends and accrued interest 138,030 203,860 ------------ --------------- 9,676,206 Liabilities: Payables for-- Purchases of investments 105,630 Repurchases of fund's shares 22,385 Forward currency contracts 3,243 Management services 2,641 Accrued expenses 1,714 135,613 ------------ --------------- Net Assets at at December 31,1998-- Equivalent to $13.61 per share on 701,079,276 shares of $1 par value capital stock outstanding (authorized capital stock - 1,000,000,000 shares) $9,540,593 =============== STATEMENT OF OPERATIONS for the year ended at December 31,1998 (dollars in thousands) Investment Income: Income: Interest $666,776 Dividends from investment in stocks 13,913 $680,689 ------------ Expenses: Management services fee 28,879 Distribution expenses 22,380 Transfer agent fee 5,411 Reports to shareholders 173 Registration statement and prospectus 452 Postage, stationery and supplies 770 Directors' fees 69 Auditing and legal fees 58 Custodian fee 522 Taxes other than federal income tax 60 Other expenses 62 58,836 ------------ --------------- Net investment income 621,853 --------------- Realized Gain and Unrealized Depreciation on Investments: Net realized gain 45,203 Net change in unrealized appreciation (depreciation) on: Investments (217,264) Open forward currency contracts (8,303) ------------ Net unrealized depreciation (225,567) --------------- Net realized gain and unrealized depreciation on investments (180,364) --------------- Net Increase in Net Assets Resulting $441,489 from Operations =============== STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands) Year ended December 31 1998 1997 Operations: Net investment income $621,853 $520,154 Net realized gain on investments 45,203 99,025 Net unrealized (depreciation) appreciation on investments (225,567) 44,044 ------------ --------------- Net increase in net assets resulting from operations 441,489 663,223 ------------ --------------- Dividends and Distributions Paid to Shareholders: Dividends from net investment income (612,126) (526,643) Distributions from net realized gain on investments (92,338) - ------------ --------------- Total dividends and distributions (704,464) (526,643) ------------ --------------- Capital Share Transactions: Proceeds from shares sold: 219,927,964 and 159,869,358 shares, respectively 3,045,786 2,214,949 Proceeds from shares issued in reinvestment of net investment income dividends: 40,515,125 and 28,414,675 shares, respectively 559,111 393,612 Cost of shares repurchased: 143,192,216 and 113,580,749 shares, respectively (1,977,460) (1,571,399) ------------ --------------- Net increase in net assets resulting from capital share transactions 1,627,437 1,037,162 ------------ --------------- Total Increase in Net Assets 1,364,462 1,173,742 Net Assets: Beginning of year 8,176,131 7,002,389 ------------ --------------- End of year (including undistributed net investment income: $(1,158) and $11,969 respectively) $9,540,593 $8,176,131 ============ =============== See Notes to Financial Statements
Notes To Financial Statements 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - The Bond Fund of America, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks as high a level of current income as is consistent with preservation of capital through a diversified portfolio of bonds and other fixed-income obligations. SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of the significant accounting policies consistently followed by the fund in the preparation of its financial statements: SECURITY VALUATION - 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 their representative quoted bid and asked prices. 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 Directors. NON-U.S. CURRENCY TRANSLATION - Assets or liabilities initially expressed in terms of non-U.S. currencies are translated into U.S. dollars at the prevailing market rates at the end of the reporting period. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities are included with the net realized and unrealized gain or loss on investment securities. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - 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 and dividend income is reported on the accrual basis. Discounts and premiums on securities purchased are amortized. 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. Distributions paid to shareholders are recorded on the ex-dividend date. FORWARD CURRENCY CONTRACTS - The fund may enter into forward currency contracts, which represent agreements to exchange currencies of different countries at specified future dates at specified rates. The fund enters into these contracts to reduce its exposure to fluctuations in foreign exchange rates arising from investments denominated in non-U.S. currencies. The fund's use of forward currency contracts involves market risk in excess of the amount recognized in the statement of assets and liabilities. The contracts are recorded in the statement of assets and liabilities at their net unrealized value. The fund records realized gains or losses at the time the forward contract is closed or offset by a matching contract. The face or contract amount in U.S. dollars reflects the total exposure the fund has in that particular contract. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from possible movements in non-U.S. exchange rates and securities values underlying these instruments. FEDERAL INCOME TAXATION - 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 December 31, 1998, net unrealized depreciation on investments, excluding forward currency contracts, for book and federal income tax purposes aggregated $70,730,000, of which $284,851,000 related to appreciated securities and $355,581,000 related to depreciated securities. During the year ended December 31, 1998, the fund realized, on a tax basis, a net capital gain of $60,804,000 on securities transactions. Net losses related to non-U.S. currency transactions of $23,368,000 were treated as an adjustment to ordinary income for federal income tax purposes. The cost of portfolio securities, excluding forward currency contracts, for book and federal income tax purposes was $9,530,177,000 at December 31, 1998. 2 FEES AND TRANSACTIONS WITH RELATED PARTIES - INVESTMENT ADVISORY FEE - The fee of $28,879,000 for management services was incurred pursuant to an agreement with Capital Research and Management Company (CRMC), with which certain officers and Directors of the fund 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; 0.16% of such assets in excess of $3 billion but not exceeding $6 billion; 0.15% of such assets in excess of $6 billion but not exceeding $10 billion; and 0.14% of such assets in excess of $10 billion; plus 2.25% on the first $8,333,333 of the fund's monthly gross investment income; and 2.00% of such income in excess of $8,333,333. The Board of Directors approved this amended agreement effective November 1, 1998, which reduced the income-based fee from 3.00% on the first $450,000 of the fund's monthly gross investment income; 2.25% of such income in excess of $450,000 but not exceeding $8,333,333; and 2.00% of such income in excess of $8,333,333. In addition, CRMC agreed, effective September 1, 1998, to waive any fees in excess of what it would have received under the new fee schedule. Had such a waiver not taken place, the fee for management services would have been $28,886,000. DISTRIBUTION EXPENSES - Pursuant to a Plan of Distribution, the fund may expend up to 0.25% 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 fund's Board of Directors. Fund expenses under the Plan include payments to dealers to compensate them for their selling and servicing efforts. During the year ended December 31, 1998, distribution expenses under the Plan were limited to $22,380,000. Had no limitation been in effect, the fund would have paid $23,472,000 in distribution expenses under the Plan. As of December 31, 1998, accrued and unpaid distribution expenses were $1,714,000. American Funds Distributors, Inc. (AFD), the principal underwriter of the fund's shares, received $7,117,000 (after allowances to dealers) as its portion of the sales charges paid by purchasers of the fund's shares. Such sales charges are not an expense of the fund and, hence, are not reflected in the accompanying statement of operations. TRANSFER AGENT FEE - American Funds Service Company (AFS), the transfer agent for the fund, was paid a fee of $5,411,000. DEFERRED DIRECTORS' FEES - Directors 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 December 31, 1998, aggregate amounts deferred and earnings thereon were $130,000. CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both wholly owned subsidiaries of CRMC. Certain Directors and officers of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No such persons received any remuneration directly from the fund. 3. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES - The fund made purchases and sales of investment securities, excluding short-term securities, of $7,141,553,000 and $5,478,437,000, respectively, during the year ended December 31, 1998. As of December 31, 1998, there was no accumulated undistributed net realized gain on investments and additional paid-in capital was $8,911,014,000. The fund reclassified $15,601,000 of realized currency losses from accumulated net realized losses to undistributed net investment income in the year ended December 31, 1998. The fund also reclassified $9,242,000 and $7,253,000 from accumulated net realized losses and undistributed net investment income, respectively, to additional paid-in capital in the year ended December 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 $522,000 includes $315,000 that was paid by these credits rather than in cash. Net realized currency losses on interest and sales of non-U.S. bonds and notes, on a book basis, were $24,085,000 for the year ended December 31, 1998. At December 31, 1998, the fund had outstanding forward currency contracts to sell non-U.S. currencies as follows: Contract Amount ----------- ---------- Non-U.S. Currency Sales Contracts Non-U.S. U.S. Australian Dollars A$ 2,489,000 $1,557,000 expiring 1/27/1999 British Pounds expiring Pounds 50,459,000 84,120,000 1/15/1999 to 8/10/1999 German Deutsche Marks DM 91,333,000 54,885,000 expiring 1/28/1999 to 3/11/1999 Japanese Yen expiring 2/24/1999 Yen 1,000,000,000 8,403,000 New Zealand Dollars expiring NZ$ 25,798,000 13,557,000 1/15/1999 to 1/27/1999 ---------- $162,522,000 ========= U.S. Valuations at 12/31/98 ---------- ---------- Unrealized Appreciation Amount (Depreciation) Non-U.S. Currency Sales Contracts $1,525,000 $32,000 Australian Dollars 83,596,000 524,000 expiring 1/27/1999 British Pounds expiring 54,865,000 20,000 1/15/1999 to 8/10/1999 German Deutsche Marks 8,861,000 (458,000) expiring 1/28/1999 to 3/11/1999 13,580,000 (23,000) Japanese Yen expiring 2/24/1999 New Zealand Dollars expiring ---------- ---------- 1/15/1999 to 1/27/1999 $162,427,000 $95,000 ========= =========
Per-Share Data and Ratios Year ended December 31 1998 1997 1996 1995 1994 Net Asset Value, Beginning of Year $14.00 $13.75 $13.88 $12.69 $14.45 ------- ------- ------- ------- ------- Income from Investment Operations: Net investment income 0.94 0.98 1.02 1.05 1.05 Net gains or losses on securities (both (0.24) 0.25 (0.13) 1.18 (1.76) realized and unrealized) ------- ------- ------- ------- ------- Total from investment operations 0.70 1.23 0.89 2.23 (0.71) ------- ------- ------- ------- ------- Less Distributions: Dividends (from net investment income) (0.95) (0.98) (1.02) (1.04) (1.05) Distributions (from capital gains) (0.14) - - - - ------- ------- ------- ------- ------- Total distributions (1.09) (0.98) (1.02) (1.04) (1.05) ------- ------- ------- ------- ------- Net Asset Value, End of Year $13.61 $14.00 $13.75 $13.88 $12.69 ======= ======= ======= ======= ======= Total Return* 5.17% 9.24% 6.71% 18.25% (5.02%) Ratios/Supplemental Data: Net assets, end of year (in millions) $9,541 $8,176 $7,002 $6,290 $4,941 Ratio of expenses to average net assets 0.66 0.68 .71% .74% .69% Ratio of net income to average net assets 6.94% 6.95% 7.47% 7.87% 7.77% Portfolio turnover rate 66.25% 51.96% 43.43% 43.80% 56.98% *Excludes maximum sales charge of 4.75%
Independent Auditors' Report To the Board of Directors and Shareholders of The Bond Fund of America, Inc.: We have audited the accompanying statement of assets and liabilities of The Bond Fund of America, Inc. (the "fund"), including the investment portfolio as of December 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 per-share data and ratios for each of the five years in the period then ended. These financial statements and 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 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 December 31, 1998 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other 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 Bond Fund of America, Inc. as of December 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 per-share data and ratios for each of the five years in the period then ended, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California January 29, 1999 Tax Information (unaudited) We are required to advise you within 60 days of the fund's fiscal year-end regarding the federal tax status of distributions received by shareholders during such fiscal year. Corporate shareholders may exclude up to 70% of qualifying dividends received during the year. For purposes of computing this exclusion, 2% of the dividends paid by the fund from net investment income represent qualifying dividends. Certain states may exempt from income taxation that portion of the dividends paid from net investment income that was derived from direct U.S. Treasury obligations. For purposes of computing this exclusion, 15% of the dividends paid by the fund from net investment income were derived from interest on direct U.S. Treasury obligations. Dividends and distributions received by retirement plans such as IRAs, Keogh-type plans and 403(b) plans need not be reported as taxable income. However, many retirement plan trusts may need this information for their annual information reporting. The fund designates as a capital gain distribution a portion of earnings and profits paid to shareholders in redemption of their shares. Shareholders should consult their tax advisers. -----END PRIVACY-ENHANCED MESSAGE-----