AMERICAN HIGH-INCOME TRUST
Part B
Statement of Additional Information
December 1, 1998
as amended August 1, 1999
This document is not a prospectus but should be read in conjunction with a
current prospectus dated December 1, 1998 of American High-Income Trust (the
"fund"). A prospectus may be obtained from your investment dealer or financial
planner or by writing to the fund at the following address:
American High-Income Trust
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
Shareholders who purchase shares at net asset value through employer-sponsored
defined contribution plans should note that not all of the services or features
described below may be available to them, and they should contact their
employer for details.
Table of Contents
<TABLE>
<CAPTION>
Item Page No.
<S> <C>
Certain Investment Limitations 2
Description of Securities and Investment Techniques 2
Investment Restrictions 8
Fund Organization 10
Fund Officers and Trustees 11
Management 14
Dividends, Distributions and Federal Taxes 17
Purchase of Shares 20
Selling Shares 26
Shareholder Account Services and Privileges 27
Execution of Portfolio Transactions 29
General Information 30
Investment Results and Related Statistics 32
Appendix 37
Financial Statements Attached
</TABLE>
CERTAIN INVESTMENT LIMITATIONS
The following limitations and guidelines are considered at the time of
purchase, under normal market conditions, and are based on a percentage of the
fund's net assets unless otherwise noted. This summary is not intended to
reflect all of the fund's investment limitations.
DEBT SECURITIES
- - The fund will invest at least 65% of its assets in high-yield, high-risk
bonds (rated Ba or below by Moody's Investor Service, Inc. and BB or below by
Standard & Poor's Corporation or unrated but determined to be of equivalent
quality) and other similar securities including preferred stock.
EQUITY SECURITIES AND SECURITIES WITH DEBT AND EQUITY CHARACTERISTICS
- - The fund may invest up to 25% of its assets in equity securities
(including common stocks) and securities with a combination of debt and equity
characteristics (including preferred stocks and convertible debentures).
NON-U.S. SECURITIES
- - The fund may invest up to 25% of its assets in securities of issuers
domiciled outside the U.S.
DESCRIPTION OF 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 its assets in debt securities rated Ba and BB or below by
Moody's or S&P or in unrated securities that are determined to be of equivalent
quality. High-yield, high-risk bonds are described by the ratings agencies as
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness than higher rated bonds, or they may already
be in default. The market prices of these securities may fluctuate more than
higher quality securities and may decline significantly in periods of general
economic difficulty. It may be more difficult to dispose of, or to determine
the value of, high-yield, high-risk bonds.
The fund may invest in bonds rated as low as C by Moody's or D by S&P. See the
Appendix in the Prospectus for a complete description of the bond ratings.
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 political and corporate
developments and may be less sensitive to interest rate changes. 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. 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. 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.
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. 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.
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.
Capital Research and Management Company attempts to reduce the risks described
above through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
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.
EQUITY SECURITIES - Equity securities represent an ownership position in a
company. The prices of equity securities fluctuate based on changes in the
financial condition of their issuers and on market and economic conditions. The
fund's results will be related to the overall market for these securities.
OTHER SECURITIES - The fund may also invest in securities that have a
combination of equity and debt characteristics. 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.
Bonds, preferred stocks, and other securities may sometimes be converted into
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 issuer's credit
quality.
INVESTING IN VARIOUS COUNTRIES -- Investing in securities of issuers domiciled
outside the U.S. involves special risks, particularly in certain developing
countries, caused by, among other things: currency controls, 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.
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 purchase or sell securities under which it
gives or receives a commitment to complete the transaction beyond the normal
settlement period. When the fund agrees to purchase such securities it
assumes the uncertainty 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, the fund is authorized
to enter into reverse repurchase agreements and "roll" transactions. A reverse
repurchase agreement is the sale of a security by a fund and its agreement to
repurchase the security at a specified time and price. 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 and reverse repurchase agreements with broker-dealers (but no
collateral is required on reverse repurchase agreements with banks). Under the
Investment Company Act of 1940 (the "1940 Act"), 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 reverse repurchase or 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.
RESTRICTED SECURITIES AND LIQUIDITY -- The fund may purchase securities subject
to restrictions on resale. All such securities whose principal trading market
is in the U.S. will be considered illiquid unless they have been specifically
determined to be liquid under procedures adopted by the fund's board of
trustees, taking into account factors such as the frequency and volume of
trading, the commitment of dealers to make markets and the availability of
qualified investors, all of which can change from time to time. The fund may
incur certain additional costs in disposing of illiquid securities.
INFLATION-INDEXED BONDS -- The fund may invest in inflation-indexed bonds
issued by governments, their agencies or instrumentalities, and 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.
VARIABLE, FLOATING RATE AND SYNTHETIC OBLIGATIONS -- The interest rates payable
on certain securities in which the fund may invest may not be fixed but may
fluctuate based upon changes in market rates. Variable and floating rate
obligations bear coupon rates that are adjusted at designated intervals, based
on the then current market rates of interest on which the coupon rates are
based. Variable and floating rate obligations permit the fund to "lock in" the
current interest rate for only the period until the next scheduled rate
adjustment, but the rate adjustment feature tends to limit the extent to which
the market value of the obligation will fluctuate. Although the fund has no
current intention of doing so, the fund may also invest in "synthetic"
securities whose value depends on the level of currencies, commodities,
securities, securities indexes, or other financial indicators or statistics.
For example, these could include fixed-income securities whose value or
interest rate is determined by reference to the value of a foreign currency
relative to the U.S. dollar, or to the value of different foreign currencies
relative to each other. The value or interest rate of these securities may
increase or decrease as the value of the underlying instrument changes.
REINSURANCE RELATED NOTES AND BONDS -- The fund may invest in reinsurance
related notes and bonds. These instruments, which are typically issued by
special purpose reinsurance companies, transfer an element of insurance risk to
the note or bond holders. For example, the reinsurance company would not be
required to repay all or a portion of the principal value of the notes or bonds
if losses due to a catastrophic event under the policy (such as a major
hurricane) exceed certain dollar thresholds. Consequently, the fund may lose
the entire amount of its investment in such bonds or notes if such an event
occurs and losses exceed certain dollar thresholds. In this instance,
investors would have no recourse against the insurance company. These
instruments may be issued with fixed or variable interest rates and rated in a
variety of credit quality categories by the rating agencies.
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 do not affect the rights of
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 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 mortgages of commercial
property, such as hotels, office buildings, retail stores, hospitals, and other
commercial buildings. These securities may have a lower prepayment uncertainty
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.
CASH AND CASH EQUIVALENTS -- Subject to the requirement that it maintain at
least 65% of its assets in high-risk, high-yield bonds under normal market
conditions, the fund may maintain assets in cash or cash equivalents. Cash
equivalents include (1) commercial paper (short-term notes up to 9 months in
maturity issued by corporations or governmental bodies); (2) commercial bank
obligations such as certificates of deposit, (interest-bearing time deposits);
and bankers' acceptances, (time drafts on a commercial bank where the bank
accepts an irrevocable obligation to pay at maturity); (3) savings association
obligations (certificates of deposit issued by mutual savings banks or savings
and loan associations); (4) securities of the U.S. Government, its agencies or
instrumentalities that mature, or may be redeemed, in one year or less; and (5)
corporate bonds and notes that mature, or that may be redeemed, in one year or
less.
COMMERCIAL BANK OBLIGATIONS -- The fund will invest in certificates of deposit
(interest-bearing time deposits) and bankers' acceptances (time drafts drawn on
a commercial bank where the bank accepts an irrevocable obligation to pay at
maturity) only to the extent that such items represent direct or contingent
obligations of commercial banks with assets in excess of $1 billion, based on
latest published reports, or obligations issued by commercial banks with assets
of less than $1 billion if the principal amount of such obligation is federally
insured.
WARRANTS OR RIGHTS -- The fund has no current intention to invest in warrants
or rights, valued at the lower of cost or market, in excess of 5% of the value
of its net assets. Included within that amount, but not to exceed 2% of the
fund's net assets, may be warrants or rights that are not listed on either the
New York Stock Exchange or the American Stock Exchange. Warrants or rights
acquired by the fund in units or attached to securities will be deemed to be
without value for purposes of these restrictions. The fund's policy regarding
investments in warrants and rights is not a fundamental policy and may be
changed by the Board of Trustees without shareholder approval.
CURRENCY TRANSACTIONS -- The fund has the ability to 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, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. Forward currency contracts entered into by the fund will involve the
purchase or sale of a currency against the U.S. dollar. 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 Internal Revenue 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.
LOANS OF PORTFOLIO SECURITIES -- Although the fund has no current intention to
do so , the fund is authorized to lend portfolio securities to selected
securities dealers or 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 10% of the value of its total assets, computed at the time any
such loan is made.
REPURCHASE AGREEMENTS -- Although the fund has no current intention to do so,
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 the Investment Adviser. If
the seller under the repurchase agreement defaults, the fund may incur a loss
if the value of the collateral security under 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.
OPTIONS ON U.S. TREASURY SECURITIES -- Although the fund has no current
intention of doing so , from time to time, the fund may purchase put and call
options on U.S. Treasury securities ("Treasury securities"). A put (call)
option gives the fund as purchaser of the option the right (but not the
obligation) to sell (buy) a specified amount of Treasury securities at the
exercise price until the expiration of the option. The value of a put (call)
option on Treasury securities generally increases (decreases) with an increase
(decrease) in prevailing interest rates. Accordingly, the fund would purchase
puts (calls) in anticipation of, or to protect against, an increase in interest
rates. These options are listed on an exchange or traded over-the-counter
("OTC options"). Exchange-traded options have standardized exercise prices and
expiration dates; OTC options are two-party contracts with negotiated exercise
prices and expiration dates. OTC options differ from exchange-traded options
in that OTC options are transacted with dealers directly and not through a
clearing corporation (which guarantees performance). Consequently, there is a
risk of non-performance by the dealer. Since no exchange is involved, OTC
options are valued on the basis of a quote provided by the dealer. In the case
of OTC options, there can be no assurance that a liquid secondary market will
exist for any particular option at any specific time.
Although the fund may purchase options to reduce the risk of increases in
interest rates, it cannot thereby eliminate all such risks. For example, while
the value of options on Treasury securities principally is related to general
levels of interest rates on Treasury securities, the values of higher yielding
corporate obligations in which the fund primarily invests also are affected by
credit and other factors. The fund is subject to the loss of its entire
premium payment where the option is allowed to expire without exercise. The
fund may not purchase any additional options if, as a result, the value of all
options owned by the fund would exceed 5% of the fund's total assets.
PORTFOLIO TRADING -- The fund intends to engage in portfolio trading when
Capital Research and Management Company (the "Investment Adviser") believes
that the sale of a security owned by the fund and the purchase of another
security of better value can reduce prospective risk and/or increase
prospective return. 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.
PORTFOLIO TURNOVER -- Portfolio changes will be made without regard to the
length of time particular investments may have been held. High portfolio
turnover involves correspondingly greater transaction costs in the form of
dealer spreads or brokerage commissions, and may result in the realization of
net capital gains, which are taxable when distributed to shareholders.
Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved. The fund does not
anticipate its portfolio turnover to exceed 100% annually. The fund's
portfolio turnover rate would equal 100% if each security in the fund's
portfolio were replaced once per year. See "Financial Highlights" in the
Prospectus for the fund's portfolio turnover for each of the last five years.
INVESTMENT RESTRICTIONS
The fund has adopted the following fundamental policies and investment
restrictions which may not be changed without a majority vote of its
outstanding shares. Such majority is defined by the 1940 Act as the vote of
the lesser of (i) 67% or more of the outstanding voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy, or (ii) more than 50% of the outstanding
voting securities. Investment limitations expressed in the following
restrictions are considered at the time securities are purchased. These
restrictions provide that the fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities) if immediately after and
as a result of such investment, more than 5% of the fund's total assets would
be invested in securities of the issuer;
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry;
3. Invest in companies for the purpose of exercising control or management;
4. Knowingly purchase securities of other registered management investment
companies, except in connection with a merger, consolidation, acquisition, or
reorganization;
5. Buy or sell real estate or commodities or commodity contracts; however,
the fund may invest in debt securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein, including real estate investment trusts, and may purchase or sell
currencies (including forward currency contracts);
6. Acquire illiquid securities, if, immediately after and as a result, the
value of illiquid securities held by the fund would exceed, in the aggregate,
15% of the fund's net assets;
7. Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically cause
it to be considered an underwriter as that term is defined under the Securities
Act of 1933;
8. Make loans, except that this does not prevent the fund from purchasing
debt securities, entering into repurchase agreements or making loans of
portfolio securities;
9. Sell securities short, except to the extent that the fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
10. Purchase securities on margin, provided that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
11. Borrow money, except from banks for temporary or emergency purposes not in
excess of 5% of the value of the fund's total assets. The fund will not
purchase securities while such borrowings are outstanding. This restriction
shall not prevent the fund from entering into reverse repurchase agreements or
"roll" transactions, provided that these transactions and any other
transactions constituting borrowing by the fund may not exceed one-third of the
fund's total assets. In the event that the asset coverage for the fund's
borrowings falls below 300%, the fund will reduce, within three days (excluding
Sundays and holidays), the amount of its borrowings in order to provide for
300% asset coverage;
12. Mortgage, pledge, or hypothecate any of its assets, provided that this
restriction shall not apply to the transfer of securities in connection with
any permissible borrowing;
13. Purchase or retain the securities of any issuer, if those individual
officers and Trustees of the fund, its investment adviser, or distributor, each
owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer;
14. Invest in interests in oil, gas, or other mineral exploration or
development programs;
15. Invest more than 5% of its total assets in securities of companies having,
together with their predecessors, a record of less than three years of
continuous operation;
16. Write, purchase or sell put options, call options or combinations thereof,
except that this shall not prevent the purchase of put or call options on
currencies or U. S. Government securities.
A further investment policy of the fund, which may be changed by action of the
Board of Trustees without shareholder approval, is that the Fund will not
invest in securities of an issuer if the investment would cause the fund to own
more than 10% of the outstanding voting securities of any one issuer.
Notwithstanding Investment Restriction #4, the fund may invest in securities
of other managed investment companies if deemed advisable by its officers in
connection with the administration of a deferred compensation plan adopted by
Trustees and to the extent such investments are allowed by an exemptive order
granted by the U.S. Securities and Exchange Commission.
FUND ORGANIZATION
The fund, an open-end, diversified management investment company, was
organized as a Massachusetts business trust on October 1, 1987. All fund
operations are supervised by the fund's board of trustees 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 TRUSTEES
TRUSTEES AND TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
ADDRESS WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
AND AGE REGISTRANT DURING (INCLUDING (INCLUDING OF FUND
PAST 5 YEARS VOLUNTARILY VOLUNTARILY BOARDS ON
DEFERRED DEFERRED WHICH
COMPENSATION COMPENSATION TRUSTEE
/1/) FROM THE /1/) FROM ALL SERVES/2/
FUND DURING FUNDS MANAGED
FISCAL YEAR BY CAPITAL
ENDED RESEARCH AND
SEPTEMBER 30, MANAGEMENT
1998 COMPANY OR ITS
AFFILIATES /2/
FOR THE YEAR
ENDED
SEPTEMBER 30,
1998
<S> <C> <C> <C> <C> <C>
H. Frederick Christie Trustee Private $4,500/3/ $180,700 19
Age: 65 Investor.
P.O. Box 144 Former President
Palos Verdes Estates, and CEO, The
CA 90274 Mission Group
(non-utility
holding company,
subsidiary of
Southern
California
Edison Company)
+ Don R. Conlan Trustee President none/4/ none/4/ 12
Age: 62 (retired),
1630 Milan Avenue The Capital
South Pasadena, CA Group Companies,
91030 Inc.
Diane C. Creel Trustee CEO and $3,700/3/ $44,250 12
Age: 50 President,
100 W. Broadway The Earth
Suite 5000 Technology
Long Beach, CA 90802 Corporation
(international
consulting
engineering)
Martin Fenton, Jr. Trustee Chairman, Senior $4,100/3/ $122,584 15
Age: 63 Resource Group
4660 La Jolla Village LLC (management
Drive of senior living
Suite 725 centers)
San Diego, CA 92122
Leonard R. Fuller Trustee President, $4,500 $49,850 12
Age: 52 Fuller
4337 Marina City Drive Consulting
Suite 841 ETN (financial
Marina del Rey, CA management
90292 consulting firm)
+* Abner D. Goldstine Trustee Senior Vice none/4/ none/4/ 12
Age: 68 President and
Director,
Capital Research
and Management
Company
+** Paul G. Haaga, Jr. Chairman Executive Vice none/4/ none/4/ 14
Age: 49 of President and
the Board Director,
Capital Research
and Management
Company
Herbert Hoover III Trustee Private Investor $4,500 $68,484 13
Age: 71
1520 Circle Drive
San Marino, CA 91108
Richard G. Newman Trustee Chairman, $4,100/3/ $100,650 13
Age: 64 President and
3250 Wilshire Boulevard CEO, AECOM
Los Angeles, CA 90010- Technology
1599 Corporation
(architectural
engineering)
</TABLE>
+ Trustees who are considered "interested persons" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), on the basis of their
affiliation with the fund's Investment Adviser, Capital Research and Management
Company.
* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
** Address is 333 South Hope Street, Los Angeles, CA 90071
/1/ Amounts may be deferred by eligible Trustees under a non-qualified deferred
compensation plan adopted by the fund in 1994. Deferred amounts accumulate at
an earnings rate determined by the total return of one or more funds in The
American Funds Group as designated by the Trustee.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 29 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management
Trust of America, Capital Income Builder, Inc., Capital World Growth and Income
Fund, Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., New World Fund, Inc., SMALLCAP World Fund, Inc., The
Tax-Exempt Bond Fund of America, Inc., The Tax-Exempt Fund of California, The
Tax-Exempt Fund of Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt
Money Fund of America, The U. S. Treasury Money Fund of America, U.S.
Government Securities Fund and Washington Mutual Investors Fund, Inc. Capital
Research and Management Company also manages American Variable Insurance Series
and Anchor Pathway Fund which serve as the underlying investment vehicle for
certain variable insurance contracts; and Endowments, whose shareholders are
limited to (i) any entity exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended ("501(c)(3) organization"); (ii) any
trust, the present or future beneficiary of which is a 501(c)(3) organization,
and (iii) any other entity formed for the primary purpose of benefiting a
501(c)(3) organization. An affiliate of Capital Research and Management
Company, Capital International, Inc., manages Emerging Markets Growth Fund,
Inc.
/3/ Since the plan's adoption, the total amount of deferred compensation
accrued by the fund (plus earnings thereon) for participating Trustees is as
follows: H. Frederick Christie ($8,499), Diane C. Creel ($1,081), Martin
Fenton, Jr. ($10,509), and Richard G. Newman ($20,353). Amounts deferred and
accumulated earnings thereon are not funded and are general unsecured
liabilities of the fund until paid to the Trustee.
/4/ Don R. Conlan, Abner D. Goldstine and Paul G. Haaga, Jr. are affiliated
with the Investment Adviser and, accordingly, receive no compensation from the
fund.
OFFICERS
(with their principal occupations during the past five years)
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
REGISTRANT DURING PAST 5 YEARS
<S> <C> <C> <C>
David C. Barclay 41 Executive Vice Senior Vice President and
11100 Santa Monica Blvd. President Director, Capital Research
Los Angeles, CA 90025 Company
Michael J. Downer 43 Vice President Senior Vice President - Fund
333 South Hope Street Business Management Group,
Los Angeles, CA 90071 Capital Research and
Management Company
Susan M. Tolson 35 Vice President Senior Vice President and
11100 Santa Monica Blvd. Director, Capital Research
Los Angeles, CA 90025 Company
Julie F. Williams 50 Secretary Vice President - Fund
333 South Hope Street Business Management Group,
Los Angeles, CA 90071 Capital Research and
Management Company
Anthony W. Hynes, Jr. 35 Treasurer Vice President - Fund
135 South State College Business Management Group,
Blvd. Capital Research and
Brea, CA 92821 Management Company
Kimberly S. Verdick 33 Assistant Secretary Assistant Vice President -
333 South Hope Street Fund Business Management
Los Angeles, CA 90071 Group, Capital Research and
Management Company
Todd L. Miller 39 Assistant Treasurer Assistant Vice President -
135 South State College Fund Business Management
Blvd. Group, Capital Research and
Brea, CA 92821 Management Company
</TABLE>
No compensation is paid by the fund to any officer or Trustee who is a
director or officer of the Investment Adviser. The fund pays annual fees of
$3,000 to Trustees who are not affiliated with the Investment Adviser, plus
$200 for each Board of Trustees meeting attended, plus $200 for each meeting
attended as a member of a committee of the Board of Trustees. The Trustees may
elect, on a voluntary basis, to defer all or a portion of their fees through a
deferred compensation plan in effect for the fund. The fund also reimburses
certain expenses of the Trustees who are not affiliated with the Investment
Adviser. As of November 1, 1998, the officers and Trustees and their families
as a group, owned beneficially or of record fewer than 1% of the outstanding
shares of the fund.
MANAGEMENT
INVESTMENT ADVISER -- The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington, D.C., London, Geneva, Singapore, Hong Kong and Tokyo), with a
staff of professionals, many of whom have years of investment experience. The
Investment Adviser is located at 333 South Hope Street, Los Angeles, CA 90071,
and at 135 South State College Boulevard, Brea, CA 92821. The Investment
Adviser's research professionals travel several million miles a year, making
more than 5,000 research visits in more than 50 countries around the world.
The Investment Adviser believes that it is able to attract and retain quality
personnel. The Investment Adviser is a wholly owned subsidiary of The Capital
Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $175 billion of stocks,
bonds and money market instruments and 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 will continue in effect 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 Trustees or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the fund, and (ii) the vote of a majority of
Trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any such party, cast in person, at a meeting called for the
purpose of voting on such approval. The Agreement provides that the Investment
Adviser has no liability to the 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 voluntarily agreed to waive its fees by any amount
necessary to assure that the fund's expenses will not exceed 1.00% of the
average daily net assets. Additionally, the Investment Adviser has agreed to
waive its fees by any amount necessary to assure that such expenses do not
exceed applicable expense limitations in any state in which the fund's shares
are being offered for sale. Other expenses which are not subject to these
limitations include interest, taxes, brokerage commissions, transaction costs,
and extraordinary items such as litigation, as well as, for purposes of the
state expense limitations, any amounts excludable under the applicable
regulation. Expenditures, including costs incurred in connection with the
purchase or sale of portfolio securities, which are capitalized in accordance
with generally accepted accounting principles applicable to investment
companies, are accounted for as capital items and not as expenses.
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, and 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 trustees 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.
The management fee is based upon the net assets of the fund and monthly gross
investment income. Gross investment income means gross income, computed
without taking account of gains or losses from sales of capital assets, but
including original issue discount as defined for federal income tax purposes.
The Internal Revenue Code in general defines original issue discount to mean
the difference between the issue price and the stated redemption price at
maturity of certain debt obligations. The holder of such indebtedness is in
general required to treat as ordinary income the proportionate part of the
original issue discount attributable to the period during which the holder held
the indebtedness. The management fee is based upon the annual rates of 0.30%
of the first $60 million of the fund's average net assets, 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, plus 3% of the first $100 million of annual
gross investment income, plus 2.5% of annual gross investment income in excess
of $100 million. Assuming net assets of $2 billion and gross investment income
levels of 5%, 6%, 7%, 8% and 9%, management fees would be 0.35%, 0.37%, 0.40%,
0.42% and 0.45%, respectively.
During the fiscal years ended September 30, 1998, 1997, and 1996, the
Investment Adviser's total fees amounted to $10,751,000, $8,242,000, and
$6,481,000, 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 Trustees who are not affiliated with the
Investment Adviser.
PRINCIPAL UNDERWRITER - American Funds Distributors, Inc. (the "Principal
Underwriter") is the principal underwriter of the fund's shares. The 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 September 30, 1998 amounted to $3,016,000 after
allowance of $12,527,000 to dealers. During the fiscal years ended September
30, 1997 and 1996, the Principal Underwriter retained $2,289,000 and
$1,943,000, respectively.
As required by rule 12b-1 the Plan (together with the Principal Underwriting
Agreement) has been approved by the full Board of Trustees and separately by a
majority of the Trustees who are not interested persons of the 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 a vote
of a majority of the outstanding voting securities of the fund. The officers
and Trustees 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 Trustees who
are not "interested persons" of the fund shall be committed to the discretion
of the Trustees who are not "interested persons" during the existence of the
Plan. Plan expenditures are reviewed quarterly and must be renewed annually by
the Board of Trustees.
Under the Plan the fund may expend up to 0.30% of its average net assets
annually to finance any activity which is primarily intended to result in the
sale of fund shares, provided the fund's Board of Trustees has approved the
category of expenses for which payment is made. These include service fees for
qualified dealers and dealers commissions and wholesaler compensation on sales
of shares exceeding $1 million (including purchases by any employer-sponsored
403(b) plan or any defined contribution plan qualified under Section 401(a) of
the Internal Revenue Code, including a "401(k)" plan with 100 or more eligible
employees or a community foundation).
Commissions on sales of shares exceeding $1 million (including purchases by
any employer-sponsored 403(b) plan or purchases by any defined contribution
plan qualified under Section 401(a) of the Internal Revenue Code, including any
"401(k)" plan with 100 or more eligible employees) in excess of the Plan
limitation not reimbursed during the most recent fiscal quarter are recoverable
for five quarters, provided that such commissions do not exceed the annual
expense limit. After five quarters, commissions are not recoverable. During
the fund's fiscal year ended September 30, 1998, the fund paid $5,960,000 under
the Plan as compensation to dealers. As of September 30, 1998, accrued and
unpaid distribution expenses were $363,000.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries of affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a
bank were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the fund and alternate means for continuing
the servicing of such shareholders would be sought. In such event, changes in
the operation of the fund might occur and shareholders serviced by such bank
might no longer be able to avail themselves of any automatic investment or
other services then being provided by such bank. It is not expected that
shareholders would suffer adverse financial consequences as a result of any of
these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to be registered as dealers pursuant to state law.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The fund intends to meet all the requirements and has elected the tax status
of a "regulated investment company" under the provisions of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Under Subchapter M, if
the fund distributes within specified times at least 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gains over net long-term capital losses), it will be taxed only on that
portion (if any) of such investment company taxable income and any 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 assets is
represented by cash, cash items, U.S. Government securities, securities of
other regulated investment companies and other securities (but such other
securities must be limited, in respect of any one issuer, to an amount not
greater than 5% of the fund's assets and 10% of the outstanding voting
securities of such issuer) and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or in two or more issuers which the fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses.
Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company's "required distribution" for the calendar year
ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 (as though the one-year period
ending on October 31 were the regulated investment company's taxable year), and
(iii) the sum of any untaxed, undistributed net investment income and net
capital gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the fund from its current year's ordinary income and capital
gain net income and (ii) any amount on which the fund pays income tax for the
year. The fund intends to distribute net investment income and net capital
gains so as to minimize or avoid the excise tax liability.
The fund also intends to distribute to shareholders all of the excess of net
long-term capital gain over net short-term capital loss on sales of
securities. If the net asset value of shares of the fund should, by reason of
a distribution of realized capital gains, be reduced below a shareholder's
cost, such distribution would 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.
If a shareholder exchanges or otherwise disposes of shares of the fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales charge for
shares of the fund, or of a different fund, the sales charge previously
incurred in acquiring the fund's shares will not be taken into account (to the
extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of
such other shares. Also, any loss realized on a redemption or exchange of
shares of the fund will be disallowed to the extent substantially identical
shares are reacquired within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of.
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, nonresident
alien fiduciary of a 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 not effectively connected with a U.S. trade or business are
not subject to the withholding, but if the non-U.S. shareholder was an
individual who was physically present in the U.S. during the tax year for more
than 182 days and such shareholder is nonetheless treated as a nonresident
alien, the distributions would be subject to a 30% tax.
The fund may be required to pay withholding and other taxes imposed by
countries outside the U.S. which would reduce the fund's investment income,
generally at rates from 10% to 40%. Tax conventions between certain countries
and the U. S. 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 to 25% of its assets.
The fund may enter into forward currency contracts in connection with its
non-U.S. investments. The amount of any realized gain or loss on closing out a
forward contract 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. Sixty percent of any net gain or loss recognized on these deemed sales
and 60% of any net realized gain or loss from any actual sales, will be treated
as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss. Code Section 988 may also apply to forward
contracts. Under Section 988, each foreign 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.
Dividends and distributions generally are taxable to shareholders at the time
they are paid. However, dividends declared in October, November and December
and made payable to shareholders of record in such a month are treated as paid
and are thereby taxable as of December 31, provided that the fund pays the
dividend no later than the end of January of the following year.
As of the date of this statement of additional information, the maximum
Federal individual tax rate applicable to ordinary income is 39.6% (effective
tax rates may be higher for some individuals due to phase out of exemptions and
elimination of deductions); the maximum individual tax rate generally
applicable to net capital gain on assets held more than one year is 20%, and
the maximum corporate tax applicable to ordinary income and net capital gain is
35%. However, to eliminate the benefit of lower marginal corporate income tax
rates, corporations which have taxable income in excess of $100,000 in a
taxable year will be required to pay an additional amount of 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
up to $100,000. Naturally, the amount of tax payable by a taxpayer will be
affected by a combination of tax law rules covering, E.G., deductions, credits,
deferrals, exemptions, sources of income and other matters. Under the Code, an
individual is entitled to establish an IRA each year (prior to the tax return
filing deadline for that year) whereby earnings on investments are
tax-deferred. In addition, in some cases, the IRA contribution itself may be
deductible.
The foregoing is limited to a summary discussion of federal taxation and
should not be viewed as a comprehensive discussion of all provisions of the
Code relevant to investors. Dividends and distributions may also be subject to
state or local taxes. Investors should consult their own tax advisers for
additional details to their own tax status.
PURCHASE OF SHARES
<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS
<S> <C> <C>
See "Investment Minimums and Fund $50 minimum (except where a lower
Numbers" for initial investment minimum is noted under
minimums. "Investment Minimums and Fund
Numbers").
By contacting Visit any investment dealer who is Mail directly to your investment
your registered in the state where the dealer's address printed on your
investment purchase is made and who has a account statement.
dealer sales agreement with American Funds
Distributors.
By mail Make your check payable to the fund Fill out the account additions
and mail to the address indicated form at the bottom of a recent
on the account application. Please account statement, make your
indicate an investment dealer on check payable to the fund, write
the account application. your account number on your
check, and mail the check and
form in the envelope provided
with your account statement.
By telephone Please contact your investment Complete the "Investments by
dealer to open account, then follow Phone" section on the account
the procedures for additional application or American FundsLink
investments. Authorization Form. Once you
establish the privilege, you,
your financial advisor or any
person with your account
information can call American
FundsLine(R) and make investments
by telephone (subject to
conditions noted in "Telephone
Purchases, Sales and Exchanges"
below).
By computer Please contact your investment Complete the American FundsLink
dealer to open account, then follow Authorization Form. Once you
the procedures for additional establish the privilege, you,
investments. your financial advisor or any
person with your account
information may access American
FundsLine(R) on the Internet and
make investments by computer
(subject to conditions noted in
"Telephone and Computer
Purchases, Redemptions and
Exchanges" below).
By wire Call 800/421-0180 to obtain Your bank should wire your
your account number(s), if additional investments in the
necessary. Please indicate an same manner as described under
investment dealer on the "Initial 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.
</TABLE>
INVESTMENT MINIMUMS AND FUND NUMBERS -- Here are the minimum initial
investments required by the funds in The American Funds Group along with fund
numbers for use with our automated phone line, American FundsLine(R) (see
description below):
<TABLE>
<CAPTION>
<S> <C> <C>
FUND MINIMUM FUND
INITIAL NUMBER
INVESTMENT
STOCK AND STOCK/BOND FUNDS
AMCAP Fund(R) $1,000 02
American Balanced Fund(R) 500 11
American Mutual Fund(R) 250 03
Capital Income Builder(R) 1,000 12
Capital World Growth and Income 1,000 33
Fund(SM)
EuroPacific Growth Fund(R) 250 16
Fundamental Investors(SM) 250 10
The Growth Fund of America(R) 1,000 05
The Income Fund of America(R) 1,000 06
The Investment Company of America(R) 250 04
The New Economy Fund(R) 1,000 14
New Perspective Fund(R) 250 07
New World Fund(SM) 1,000+ 36
SMALLCAP World Fund(R) 1,000 35
Washington Mutual Investors Fund(SM) 250 01
BOND FUNDS
American High-Income Municipal Bond 1,000 40
Fund(R)
American High-Income Trust(SM) 1,000 21
The Bond Fund of America(SM) 1,000 08
Capital World Bond Fund(R) 1,000 31
Intermediate Bond Fund of 1,000 23
America(SM)
Limited Term Tax-Exempt Bond Fund of 1,000 43
America(SM)
The Tax-Exempt Bond Fund of 1,000 19
America(R)
The Tax-Exempt Fund of 1,000 20
California(R)*
The Tax-Exempt Fund of Maryland(R)* 1,000 24
The Tax-Exempt Fund of Virginia(R)* 1,000 25
U.S. Government Securities Fund(SM) 1,000 22
MONEY MARKET FUNDS
The Cash Management Trust of 2,500 09
America(R)
The Tax-Exempt Money Fund of 2,500 39
America(SM)
The U.S. Treasury Money Fund of 2,500 49
America(SM)
*Available only in certain states.
+Effective September 15, 1999.
</TABLE>
For retirement plan investments, the minimum is $250, except that the money
market funds have a minimum of $1,000 for individual retirement accounts
(IRAs). Minimums are reduced to $50 for purchases through "Automatic
Investment Plans" (except for the money market funds) or to $25 for purchases
by retirement plans through payroll deductions and may be reduced or waived for
shareholders of other funds in The American Funds Group. TAX-EXEMPT FUNDS
SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The minimum is $50 for
additional investments (except as noted above).
SALES CHARGES -- The sales charges you pay when purchasing the stock,
stock/bond, and bond funds of The American Funds Group are set forth below.
The money market funds of The American Funds Group are offered at net asset
value. (See "Investment Minimums and Fund Numbers" for a listing of the
funds.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AMOUNT OF PURCHASE SALES CHARGE AS DEALER
AT THE OFFERING PRICE PERCENTAGE OF THE: CONCESSION
AS PERCENTAGE
OF THE
OFFERING
PRICE
NET AMOUNT OFFERING
INVESTED PRICE
STOCK AND STOCK/BOND
FUNDS
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than 4.71 4.50 3.75
$100,000
BOND FUNDS
Less than $25,000 4.99 4.75 4.00
$25,000 but less than 4.71 4.50 3.75
$50,000
$50,000 but less than 4.17 4.00 3.25
$100,000
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
$1,000,000
$1,000,000 or more none none (see below)
</TABLE>
PURCHASES NOT SUBJECT TO SALES CHARGES -- Investments of $1 million or more and
investments made by employer-sponsored defined contribution-type plans with 100
or more eligible employees are sold with no initial sales charge. A contingent
deferred sales charge may be imposed on certain redemptions by these accounts
made within one year of purchase. Investments by retirement plans, foundations
or endowments with $50 million or more in assets, 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 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 $50,000 or more made
within a 13-month period subject to the following statement of intention (the
Statement) terms. The Statement is not a binding obligation to purchase the
indicated amount. When a shareholder elects to use the Statement in order to
qualify for a reduced sales charge, shares equal to 5% of the dollar amount
specified in the Statement will be held in escrow in the shareholder's account
out of the initial purchase (or subsequent purchases, if necessary) by the
Transfer Agent. All dividends and capital gain distributions on these shares
held in escrow will be credited to the shareholder's account in shares (or paid
in cash, if requested). If the intended investment is not completed within the
specified 13-month period, the purchaser will pay to the Principal Underwriter
the difference between the sales charge actually paid and the sales charge
which would have been paid if the total purchases had been made at a single
time. If the difference is not paid by the close of the period, the
appropriate number of escrowed shares 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 account
application) and any individual investments in American Legacy products
(American Legacy, American Legacy II and American Legacy III variable
annuities, American Legacy Life, American Legacy Variable Life, and American
Legacy Estate Builder) may be credited toward satisfying the Statement. During
the Statement period reinvested dividends and capital gain distributions,
investments in money market funds, and investments made under a right of
reinstatement will not be credited toward satisfying the Statement.
When the trustees of certain retirement plans purchase shares by payroll
deduction, the sales charge for the investments made during the 13-month period
will be handled as follows: The regular monthly payroll deduction investment
will be multiplied by 13 and then multiplied by 1.5. The current value of
existing American Funds investments (other than money market fund investments),
any rollovers or transfers reasonably anticipated to be invested in non-money
market American Funds during the 13-month period, and any individual
investments in American Legacy products are added to the figure determined
above. The sum is the Statement amount and applicable breakpoint level. On
the first investment and all other investments made pursuant to the statement
of intention, a sales charge will be assessed according to the sales charge
breakpoint thus determined. There will be no retroactive adjustments in sales
charges on investments previously made during the 13-month period.
Shareholders purchasing shares at a reduced sales charge under a Statement
indicate their acceptance of these terms with their first purchase.
AGGREGATION -- Sales charge discounts are available for certain aggregated
investments. Qualifying investments include those by you, your spouse and your
children under the age of 21, if all parties are purchasing shares for their
own account(s), which may include purchases through employee benefit plan(s)
such as an IRA, individual-type 403(b) plan or single-participant Keogh-type
plan or by a business solely controlled by these individuals (for example, the
individuals own the entire business) or by a trust (or other fiduciary
arrangement) solely for the benefit of these individuals. Individual purchases
by a trustee(s) or other fiduciary(ies) may also be aggregated if the
investments are (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above or (2) made for two
or more employee benefit plans of a single employer or of affiliated employers
as defined in the 1940 Act, again excluding employee benefit plans described
above, or (3) for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating fund shares.
Purchases made for nominee or street name accounts (securities held in the name
of an investment dealer or another nominee such as a bank trust department
instead of the customer) may not be aggregated with those made for other
accounts and may not be aggregated with other nominee or street name accounts
unless otherwise qualified as described above.
CONCURRENT PURCHASES -- You may combine purchases of two or more funds in The
American Funds Group, except direct purchases of the money market funds.
Shares of money market funds purchased through an exchange, reinvestment or
cross-reinvestment from a fund having a sales charge do qualify.
RIGHT OF ACCUMULATION -- You may take into account the current value of your
existing holdings in The American Funds Group, as well as your holdings in
Endowments (shares of which may be owned only by tax-exempt organizations), to
determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity. When
determining your sales charge, you may also take into account the value of your
individual holdings, as of the end of the week prior to your investment in
various American Legacy products (American Legacy, American Legacy II and
American Legacy III variable annuities, American Legacy Life, American Legacy
Variable Life, and American Legacy Estate Builder). Direct purchases of the
money market funds are excluded.
PRICE OF SHARES -- Shares are purchased at the offering price next determined
after the purchase order is received and accepted by the fund or American Funds
Service Company. This offering price is effective for orders received prior to
the time of determination of the net asset value and, in the case of orders
placed with dealers, accepted by the Principal Underwriter prior to its close
of business. In case of orders sent directly to the fund or American Funds
Service Company, an investment dealer MUST be indicated. The dealer is
responsible for promptly transmitting purchase orders to the Principal
Underwriter. Orders received by the investment dealer, the Transfer Agent, or
the fund after the time of the determination of the net asset value will be
entered at the next calculated offering price. Prices which appear in the
newspaper do not always indicate the prices at which you will be purchasing and
redeeming shares of the fund, since such prices generally reflect the previous
day's closing price whereas purchases and redemptions are made at the next
calculated price.
The price you pay for fund shares, the public 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.'s 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 non-U.S. currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.
Any purchase order may be rejected by the Principal Underwriter or by
the fund. The fund will not knowingly sell fund 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
beneficially own directly, indirectly, or through a unit investment trust more
than 4.5% of the outstanding shares of the fund without the consent of a
majority of the Board of Trustees.
SELLING SHARES
Shares are sold at the net asset value next determined after your request is
received in good order by American Funds Service Company. You may sell
(redeem) shares in your account in any of the following ways:
THROUGH YOUR DEALER (certain charges may apply)
- - Shares held for you in your dealer's street name must be sold through the
dealer.
WRITING TO AMERICAN FUNDS SERVICE COMPANY
- - Requests must be signed by the registered shareholder(s).
- - A signature guarantee is required if the redemption is:
-- Over $50,000;
-- Made payable to someone other than the registered shareholder(s); or
-- Sent to an address 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 are eligible guarantor institutions.
- - Additional documentation may be required for sales of shares held in
corporate, partnership or fiduciary accounts.
- - You must include any shares you wish to sell that are in certificate form.
TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
FUNDSLINE(R) OR AMERICAN FUNDSLINE ONLINE(R)
- - Redemptions by telephone or fax (including American FundsLine(R) and American
FundsLine OnLine(R)) 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.
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; and for redemptions in connection with loans made by
qualified retirement plans.
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
AUTOMATIC INVESTMENT PLAN -- The automatic investment plan enables you to make
regular monthly or quarterly investments in shares through automatic charges to
your bank accounts. With shareholder authorization and bank approval, the
Transfer Agent will automatically charge the bank account for the amount
specified ($50 minimum), which will be automatically invested in shares at the
offering price on or about the dates you select. Bank accounts will be charged
on the day or a few days before investments are credited, depending on the
bank's capabilities, and you will receive a confirmation statement at least
quarterly. Participation in the plan will begin within 30 days after receipt
of the account application. If your bank account cannot be charged due to
insufficient funds, a stop-payment order or closing of the account, the plan
may be terminated and the related investment reversed. You may change the
amount of the investment or discontinue the plan at any time by writing the
Transfer Agent.
AUTOMATIC REINVESTMENT -- Dividends and capital gain distributions are
reinvested in additional shares at no sales charge unless you indicate
otherwise on the account application. You also may elect to have dividends
and/or capital gain distributions paid in cash by informing the fund, American
Funds Service Company or your investment dealer.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS --You may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by
that fund (the "paying fund") into any other fund in The American Funds Group
(the "receiving fund") subject to the following conditions: (i) the aggregate
value of your account(s) in the paying fund(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving fund
equals or exceeds that fund's minimum initial investment requirement), (ii) as
long as the value of the account in the receiving fund is below that fund's
minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving fund must be automatically reinvested in
the receiving fund, and (iii) if this privilege is discontinued with respect to
a particular receiving fund, the value of the account in that fund must equal
or exceed the fund's minimum initial investment requirement or the fund will
have the right, if you fail to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, automatically to
redeem the account and send the proceeds to you. These cross-reinvestments of
dividends and capital gain distributions will be at net asset value (without
sales charge).
EXCHANGE PRIVILEGE -- You may exchange shares into other funds in The American
Funds Group. Exchange purchases are subject to the minimum investment
requirements of the fund purchased and no sales charge generally applies.
However, exchanges of shares from the money market funds are subject to
applicable sales charges on the fund being purchased, unless the money market
fund shares were acquired by an exchange from a fund having a sales charge, or
by reinvestment or cross-reinvestment of dividends or capital gain
distributions.
You may exchange shares by writing to American Funds Service Company (see
"Redeeming Shares"), by contacting your investment dealer, by using American
FundsLine or American FundsLine OnLine (see "American FundsLine and American
FundsLine OnLine" below), or by telephoning 800/421-0180 toll-free, faxing (see
"Principal Underwriter and Transfer Agent" in the Prospectus for the
appropriate fax numbers) or telegraphing American Funds Service Company. (See
"Telephone and Computer Purchases, Redemptions and Exchanges" below.) Shares
held in corporate-type retirement plans for which Capital Guardian Trust
Company serves as trustee may not be exchanged by telephone, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares--Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS
ORDINARY SALES AND PURCHASES.
AUTOMATIC EXCHANGES -- You may automatically exchange shares (in amounts of $50
or more) among any of the funds in The American Funds Group on any day (or
preceding business day if the day falls on a non-business day) of each month
you designate. You must either meet the minimum initial investment requirement
for the receiving fund OR the originating fund's balance must be at least
$5,000 and the receiving fund's minimum must be met within one year.
AUTOMATIC WITHDRAWALS -- Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.
ACCOUNT STATEMENTS -- Your account is opened in accordance with your
registration instructions. Transactions in the account, such as additional
investments , will be reflected on regular confirmation statements from
American Funds Service Company. Dividend and capital gain reinvestments and
purchases through automatic investment plans and certain retirement plans will
be confirmed at least quarterly.
AMERICAN FUNDSLINE 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
this service, call 800/325-3590 from a TouchTone(TM) 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 Purchases, Redemptions and Exchanges" below. You will need your fund
number (see the list of funds in The American Funds Group under "Purchase of
Shares--Investment Minimums and Fund Numbers"), personal identification number
(the last four digits of your Social Security number or other tax
identification number associated with your account) and account number.
TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES -- By using the
telephone (including American FundsLine) and American FundsLine OnLine, fax or
telegraph redemption and/or exchange options, you agree to hold the fund,
American Funds Service Company, any of its affiliates or mutual funds managed
by such affiliates, and each of their respective directors, trustees, officers,
employees and agents harmless from any losses, expenses, costs or liability
(including attorney fees) which may be incurred in connection with the exercise
of these privileges. Generally, all shareholders are automatically eligible to
use these options. However, you may elect to opt out of these options by
writing American Funds Service Company (you may also reinstate them at any time
by writing American Funds Service Company). If American Funds Service Company
does not employ reasonable procedures to confirm that the instructions received
from any person with appropriate account information are genuine, the fund may
be liable for losses due to unauthorized or fraudulent instructions. In the
event that shareholders are unable to reach the fund by telephone because of
technical difficulties, market conditions, or a natural disaster, redemption
and exchange requests may be made in writing only.
SHARE CERTIFICATES -- Shares are credited to your account and certificates are
not issued unless you request them by writing to American Funds Service
Company.
REDEMPTION OF SHARES -- The fund's Declaration of Trust permits the fund to
direct the Transfer Agent to redeem your shares if, through redemptions, or
otherwise, they have a value of less than the minimum initial investment amount
required of new shareholders (determined, for this purpose only, as the greater
of the shareholder's cost or the current net asset value of the shares,
including any shares acquired through reinvestment of income dividends and
capital gain distributions). We will give you prior notice of at least 60 days
before the involuntary redemption provision is made effective with respect to
your account. You will have not less than 30 days from the date of such notice
within which to bring the account up to the minimum determined as set forth
above.
EXECUTION OF PORTFOLIO TRANSACTIONS
The Investment Adviser places orders for the fund's portfolio securities
transactions. The Investment Adviser strives to obtain the best available
prices in its portfolio transactions taking into account the costs and
promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research statistical, or other related
services to the Investment Adviser or has sold shares of the fund or other
funds served by the Investment Adviser. The fund does not have an obligation
to obtain the lowest available commission rate to the exclusion of price,
service and qualitative considerations.
Portfolio transactions for the fund may be executed as part of concurrent
authorizations to purchase or sell the same security for other funds served by
the Investment Adviser, or for trusts or other accounts served by affiliated
companies of the Investment Adviser. Although such concurrent authorizations
potentially could be either advantageous or disadvantageous to the fund, they
are effected only when the Investment Adviser believes that to do so is in the
interest of the fund. When such concurrent authorizations occur, the objective
is to allocate the executions in an equitable manner. 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 year ended September 30, 1998
amounted to $9,619,000. Dealer concessions on underwritings for the fiscal
years ended September 30, 1997 and 1996 amounted to $19,318,000 and $8,510,000,
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 securities
depositories 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 $1,388,000 for the fiscal year ended September 30, 1998.
INDEPENDENT AUDITORS -- Deloitte & Touche LLP, 1000 Wilshire Boulevard, 15th
Floor, Los Angeles, CA 90017, has served as the fund's independent auditors
since its inception, providing audit services, preparation of tax returns and
review of certain documents to be filed with the Securities and Exchange
Commission. The financial statements included in this Statement of Additional
Information have been so included in reliance on the report of the independent
auditors given on the authority of said firm as experts in accounting and
auditing.
REPORTS TO SHAREHOLDERS -- The fund's fiscal year ends on September 30. It
provides shareholders at least semiannually 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 annually by the Trustees.
In an effort to reduce the volume of mail shareholders receive from the fund
when a household owns more than one account, the Transfer Agent has taken steps
to eliminate duplicate mailings of shareholder reports. To receive additional
copies of a report shareholders should contact the Transfer Agent.
YEAR 2000 - The fund and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The fund understands that
these service providers are taking steps to address the "Year 2000 problem".
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the fund. In addition, the fund's investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the fund invests could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings of
individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
PERSONAL INVESTING POLICY -- The Investment Adviser and its affiliated
companies have adopted a personal investing policy consistent with Investment
Company Institute guidelines. This policy includes: a ban on acquisitions of
securities pursuant to an initial public offering; restrictions on acquisitions
of private placement securities; pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with codes of ethics; blackout periods on personal investing for
certain investment personnel; ban on short-term trading profits for investment
personnel; limitations on service as a 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.
The financial statements including the investment portfolio and the report of
Independent Auditors contained in the Annual Report are included in this
Statement of Additional Information. The following information is not included
in the Annual Report:
<TABLE>
<CAPTION>
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE -- September 30, 1998
<S> <C>
Net asset value and redemption price per share
(Net assets divided by shares outstanding) $13.75
Offering price per share (100/95.25 of per share
net asset value, which takes into account the
fund's current maximum sales charge) $14.44
</TABLE>
SHAREHOLDER AND TRUSTEE RESPONSIBILITY -- Under the laws of certain states,
including Massachusetts, where the Fund was organized, and California, where
the Fund's principal office is located, shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Fund. However, the risk of a shareholder
incurring any financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund and provides that notice of the
disclaimer may be given in each agreement, obligation, or instrument which is
entered into or executed by the Fund or Trustees. The Declaration of Trust
provides for indemnification out of Fund property of any shareholder held
personally liable for the obligations of the Fund and also provides for the
Fund to reimburse such shareholder for all legal and other expenses reasonably
incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Fund will
provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
SHAREHOLDER VOTING RIGHTS -- 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
trustee or trustees from office and may elect a successor or successors to fill
any resulting vacancies for the unexpired terms of removed trustees. The fund
has made an undertaking, at the request of the staff of the Securities and
Exchange Commission, to apply the provisions of section 16E of the 1940 Act
with respect to the removal of trustees, as though the fund were a common-law
trust. Accordingly, the trustees of the fund will promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee when requested in writing to do so by the record holders of not less
than 10% of the outstanding shares.
INVESTMENT RESULTS AND RELATED STATISTICS
The fund's yield is 9.93% based on the 30-day (or one month) period ended
September 30, 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 return over the past 12 months and average annual total
return for the five-year and ten-year periods ending on September 30, 1998 was
- -7.03%, 6.89% and 9.90%, respectively. The fund's total return at net asset
value over the past 12 months and average annual total return for the five- and
ten-year periods ending on September 30, 1998 was -2.40%, 7.94%, and 10.44%.
The average annual total return ("T") will be 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 load of 4.75% from the $1,000 initial investment; (2)
reinvestment of dividends and distributions at net asset value on the
reinvestment date determined by the Board; and (3) a complete redemption at the
end of any period illustrated. The Fund will calculate total return for one,
five and ten-year periods after such periods have elapsed. In addition, the
Fund will provide lifetime average total return figures.
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 (133 in all), those funds have had better
total returns than their comparable Lipper indexes in 124 of 133 periods.
Note that past results are not an indication of future investment results.
Also, the fund has different investment policies than the funds mentioned
above. These results are included solely for the purpose of informing
investors about the experience and history of Capital Research and Management
Company.
The fund may include, in advertisements or in reports furnished to present or
prospective shareholders, information on its investment results and/or
comparisons of its investment results to various unmanaged indices or results
of other mutual funds or investment or savings vehicles. The fund may also
combine its results with those of other funds in The American Funds Group for
purposes of illustrating investment strategies involving multiple funds.
The fund may compare its investment results with the following:
(1) The Credit Suisse First Boston High Yield Index is an unmanaged, trader
priced portfolio constructed to mirror the high yield debt market (revisions to
the index are effected weekly). The Index has several modules representing
different sectors of the high yield market including a cash paying module, a
zerofix module, a pay-in-kind module, and a defaulted module. The Index is
divided into other categories including industry, rating, seniority, liquidity,
market value, security price range, yield range and other sector divisios.
There are a total of 250 sectors which are followed by the Index.
(2) Salomon Smith Barney High-Yield Index, which is a market value weighted
index of bonds having a minimum issue size of $50 million, a minimum maturity
of 10 years and that carry a minimum/maximum quality rating of CCC/BB+.
(3) Salomon Smith Barney Broad Investment-Grade Bond Index, which is a market
capitalization weighted index and includes Treasury, Government-sponsored
mortgage and investment-grade fixed-rate corporates (BBB/Baa3) with a maturity
of one year or longer and a minimum of $50 million outstanding at entry, and
remain in the Index until their amount falls below $25 million.
(4) Lipper's "High Current Yield" funds average, which is the arithmetic
average of Total Return of a number of mutual funds with investment objectives
and policies similar to those of the Fund, as published by Lipper Analytical
Services. The number of funds contained in the data base varies as funds are
added or deleted over time.
(5) Average of Savings Accounts, which is a measure of all kinds of savings
deposits, including longer-term certificates (based on figures supplied by the
U.S. League of Savings Institutions). Savings accounts offer a guaranteed rate
of return on principal, but no opportunity for capital growth. The period
shown may include periods during which the maximum rates paid on some savings
deposits were fixed by law.
(6) The Consumer Price Index, which is a measure of the average change in
prices over time in a fixed market basket of goods and services (e.g. food,
clothing, shelter, and fuels, transportation fares, charges for doctors' and
dentists' services, prescription medicines, and other goods and services that
people buy for day-to-day living).
The fund may also refer to results compiled by organizations such as CDA
Investment Technologies, Ibbotson Associates, Lipper Analytical Services
("Lipper"), Morningstar, Inc. Wiesenberger Investment Companies Services and
the U.S. Department of Commerce. Additionally, the fund may, from time to
time, refer to results published in various newspapers or periodicals,
including Barrons, Forbes, Fortune, Institutional Investor, Kiplinger's
Personal Finance Magazine, Money, U.S. News and World Report and The Wall
Street Journal.
<TABLE>
<CAPTION>
Here's how much you would have if you
invested $2,000 a year in the fund:
<S> <C> <C>
1 year 3 years Lifetime
(10/1/97-9/30/98) (10/1/95-9/30/98) (2/19/88-9/30/98)
$1,859 $6,416 $37,830
</TABLE>
SEE THE DIFFERENCE TIME CAN MAKE IN AN INVESTMENT PROGRAM
<TABLE>
<CAPTION>
... and taken all distributions
If you had invested in shares your investment
$10,000 in the Fund would have been worth this
this many years ago... much at September 30, 1998
<S> <C> <C>
Periods
Number of Years 10/1-9/30 Value**
1 1997 - 1998 $9,298
2 1996 - 1998 10,660
3 1995 - 1998 12,120
4 1994 - 1998 13,731
5 1993 - 1998 13,951
6 1992 - 1998 15,987
7 1991 - 1998 18,876
8 1990 - 1998 24,378
9 1989 - 1998 23,405
10 1988 - 1998 25,713
Lifetime 2/19/88 - 1998 27,202
</TABLE>
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
* * * * *
ILLUSTRATION OF A $10,000 INVESTMENT IN THE FUND WITH DIVIDENDS REINVESTED
(For the lifetime of the fund February 19, 1988 - September 30, 1998)
<TABLE>
<CAPTION>
COST OF SHARES VALUE OF SHARES**
Fiscal Total From From From
Year End Annual Dividends Investment Initial Capital Gains Dividends Total
September 30 Dividends (cumulative) Cost Investment Reinvested Reinvested Value
<S> <C> <C> <C> <C> <C> <C> <C>
1988* $ 640 $ 640 $10,640 $9,433 --- $ 641 $10,074
1989 1,188 1,828 11,828 9,273 --- 1,800 11,073
1990 1,334 3,162 13,162 7,873 --- 2,755 10,628
1991 1,411 4,573 14,573 9,040 --- 4,683 13,723
1992 1,404 5,977 15,977 9,720 --- 6,484 16,204
1993 1,503 7,480 17,480 10,120 155 8,293 18,568
1994 1,555 9,035 19,035 9,313 438 9,115 18,866
1995 1,879 10,914 20,914 9,533 561 11,288 21,382
1996 2,046 12,960 22,960 9,907 583 13,818 24,308
1997 2,108 15,068 25,068 10,460 641 16,771 27,872
1998 2,448 17,516 27,516 9,167 1,111 16,924 27,202
</TABLE>
The dollar amount of capital gain distributions during the period was $1,202.
* From inception on February 19, 1988.
** Results assume deduction of the maximum sales charge of 4.75% from the
initial purchase payment.
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc. employs the designations "Prime-1," "Prime-2"
and "Prime-3" to indicate commercial paper having the highest capacity for
timely repayment. Issuers rated Prime-1 have a superior capacity for repayment
of short-term promissory obligations. Prime-1 repayment capacity will normally
be evidenced by the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protections; broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and well-established access to a
range of financial markets and assured sources of alternate liquidity. Issuers
rated Prime-2 have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3
have an acceptable capacity for repayment of short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Standard & Poor's Corporation's ratings of commercial paper are graded into
four categories ranging from "A" for the highest quality obligations to "D" for
the lowest. A -- Issues assigned its highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2, and 3 to indicate the relative degree of safety. A-1 --
This designation indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation. A-2 -- Capacity for timely payments on issues with this
designation is strong. However, the relative degree of safety is not as high
as for issues designated "A-1." A-3 -- Issues carrying this designation have a
satisfactory capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations.
<TABLE>
American High-Income Trust
Investment Portfolio
September 30, 1998
<S> <C> <C> <C> <C>
- --------------------------------------------------
U.S. Corporate Bonds 70%
Non-U.S. Corporate Bonds 17%
U.S. Treasuries 2%
Non-U.S. Government Bonds 2%
Mortgage & Asset-Backed Bonds 1%
Stocks 2%
Cash Equivalents 6%
Ten Largest Corporate Percent of Net
Bond Holdings Assets
- -------------------------------------------------- -------------
NEXTEL Communications 3.99%
Integraged Health Services 2.45
Fox/Liberty Networks 1.96
Omnipoint 1.95
CBS 1.74
Falcon Holding 1.66
Clearnet Communications 1.46
Chancellor Media 1.45
Container Corp. of America 1.45
COLT Telecom 1.41
- -------------------------------------------------- --------- ----------- --------
Shares or
Principal Market Percent
Amount Value of Net
Bonds, Notes & Equity Securities (000) (000) Assets
Broadcasting & Media - 18.04%
Fox/Liberty Networks, LLC, FLN Finance, Inc.:
0%/9.75% 2007(1) $28,750 $19,119 1.96
8.875% 2007 27,625 27,072
American Radio Systems Corp. 9.00% 2006 17,470 18,693 1.74
CBS RADIO INC 11.375% 2009(2) 16,197 18,707
EZ Communications, Inc. 9.75% 2005 3,250 3,551
Falcon Holding Group, LP, Falcon Funding Corp.:
0%/9.285% 2010(1) 31,750 21,114 1.66
8.375% 2010 18,250 18,067
Chancellor Media Corp. of Los Angeles 9.00% 2008(3) 1,000 1,010 1.45
Chancellor Media Corp. of Los Angeles, (formerly Chancellor
Radio Broadcasting Co.):
9.375% 2004 14,500 14,790
8.125% 2007 9,500 9,167
Series B, 8.75% 2007 9,350 9,350
NTL Inc.:
0%/12.75% 2005(1) 1,000 870 1.30
Series B, 10.00% 2007 5,750 5,821
0%/9.75% 2008(1),(3) 12,500 7,563
Sterling, 0%/10.75% 2008(1),(3) L18,500 16,335
Adelphia Communications Corp.:
Series B, 9.25% 2002 $6,000 6,240 .97
8.125% 2003(3) 5,000 4,975
10.50% 2004 8,500 9,265
Series B, 13.00% 2009(4) 20shares 2,300
Comcast UK Cable Partners Ltd. 0%/11.20% 2007(1) $22,000 17,820 .75
Lenfest Communications, Inc.:
8.375% 2005 6,000 6,270 .69
7.625% 2008(3) 6,750 6,733
8.25% 2008(3) 3,250 3,226
Ziff-Davis Inc. 8.50% 2008 16,500 16,005 .68
Cablevision Industries Corp.:
8.125% 2009 8,500 9,079 .66
9.875% 2013 6,000 6,480
Telemundo Holdings, Inc. 0%/11.50% 2008(1),(3) 23,000 12,190 .52
Century Communications Corp.:
8.75% 2007 4,000 4,200 .50
0.00% 2008 16,000 7,520
Sun Media Corp.:
9.50% 2007 2,434 2,483 .46
9.50% 2007 8,386 8,386
Big City Radio, Inc. 0%/11.25% 2005(1) 13,000 9,100 .39
TeleWest PLC 9.625% 2006 9,000 9,045 .38
GRAY Communication Systems, Inc. 10.625% 2006 8,120 8,485 .36
TransWestern Publishing Co. 9.625% 2007 7,750 7,905 .33
ACME Intermediate Holdings, LLC/ACME Intermediate Finance, Inc.
%/12.00% 2005(1) 12,689 7,486 .32
Antenna TV SA 9.00% 2007 8,000 7,280 .31
RCN Corp.:
0%/11.125% 2007(1) 4,500 2,498 .28
10.00% 2007 4,500 4,208
Newsquest Capital PLC:
11.00% 2006 3,150 3,528 .28
Series B, 11.00% 2006 2,750 3,080
Young Broadcasting Inc.:
10.125% 2005 3,500 3,675 .24
Series B, 8.75% 2007 2,000 1,990
V2 Music (Holdings) PLC:
Dollar Units 0%/14.00% 2008(1),(3) 7,250 3,589 .23
Sterling Units 0%/14.00% 2008(1),(3) L2,250 1,891
Globo Comunicacoes E Partcipacoes Ltd.:
10.50% 2006 2,000 1,030 .22
10.50% 2006(3) 8,280 4,264
FrontierVision 11.00% 2006 4,500 4,927 .21
American Media Operations, Inc. 11.625% 2004 4,650 4,813 .20
Radio One, Inc. 7.00%/12.00% 2004(1) 4,750 4,608 .20
Multicanal Participacoes SA, Series B, 12.625% 2004 5,150 3,605 .15
STC Broadcasting, Inc. 11.00% 2007 3,000 3,165 .13
Fox Family Worldwide, Inc.:
0%/10.25% 2007(1) 2,000 1,240 .12
9.25% 2007 1,750 1,654
Coaxial Communications of Central Ohio, Inc. 10.00% 2006(3) 3,000 2,850 .12
Jones Intercable, Inc. 9.625% 2002 2,000 2,140 .09
RBS Participacoes SA 11.00% 2007(3) 4,500 1,665 .07
Tevecap SA 12.625% 2004 2,025 871 .04
Grupo Televisa, SA 0%/13.25% 2008(1) 1,000 680 .03
----------- --------
425,673 18.04
----------- --------
Wireless Communications - 16.78%
NEXTEL Communications, Inc.:
0%/9.75% 2004(1) 1,750 1,680 3.99
0%/9.75% 2007(1) 13,500 7,965
0%/10.65% 2007(1) 14,000 8,120
0%/9.95% 2008(1) 44,000 25,520
Series D, 13.00% exchangeable preferred, redeemable 2009(2),(4) 14shares 14,756
Series E, preferred, 11.125% 2010(2),(4) 29shares 27,049
NEXTEL International, Inc. 0%/12.125% 2008(1) $21,000 9,135
Omnipoint Corp.:
Units 12.00% 2000(3),(5) 12,500 11,200 1.95
8.938% 2006(3) 13,455 12,446
11.625% 2006 2,500 1,700
11.625% 2006 23,500 15,980
7.00% convertible preferred(3) 185shares 4,625
Clearnet Communications Inc.:
0%/11.75% 2007(1) C$52,375 18,540 1.46
0%/10.40% 2008(1) 50,325 15,835
PageMart Wireless, Inc. 0%/11.25% 2008(1) $49,760 27,119 1.15
American Cellular Corp. 10.50% 2008(3) 24,250 23,401 .99
Mobile Telecommunication Technologies Corp.:
13.50% 2002 17,875 20,020 .97
Convertible preferred $2.25 100shares 2,875
Centennial Cellular Corp.:
8.875% 2001 $14,500 15,515 .79
10.125% 2005 2,500 3,087
CCPR Services, Inc. 10.00% 2007 19,500 16,770 .71
CellNet Data Systems, Inc. 0%/14.00% 2007(1) 34,985 11,370 .48
Cellular Communications International, Inc. 0%/9.50% 2005(1) ECU13,500 10,884 .46
Comunicacion Celular SA 0%/13.125% 2003(1) $16,000 10,400 .44
Crown Castle International Corp. 0%/10.625% 2007(1) 16,250 9,750 .41
Comcast Cellular Corp., Series B, 9.50% 2007 9,500 9,738 .41
McCaw International, Ltd. 0%/13.00% 2007(1) 17,625 8,813 .37
Esat Holdings Ltd. 0%/12.50% 2007(1) 13,250 8,480 .36
Teletrac Holdings, Inc. 14.00% 2007(3),(4) 13,550 8,333 .35
Netia Holdings BV:
0%/11.25% 2007(1) 5,750 2,300 .23
10.25% 2007 4,125 3,094
Price Communications Cellular Holdings, Inc. 11.25% 2008(2) 5,000 4,500 .19
Pinnacle Holdings Inc. 0%/10.00% 2008(1) 7,700 4,004 .17
Spectrasite Holdings 0%/12.00% 2008(1),(3) 8,500 3,910 .17
OCCIDENTE Y CARI 0%/14.00% 2004(1) 5,000 3,600 .15
PILTEL INTL HLDG REG S CV 1.75% 2006 5,875 3,349 .14
Western Wireless Corp. 10.50% 2006 3,000 3,090 .13
Conecel Holdings Ltd., Series A, 14.00% 2000(3) 5,500 2,750 .12
Vanguard Cellular Systems, Inc. 9.375% 2006 2,000 2,020 .09
Globalstar LP 11.375% 2004 3,000 1,980 .08
CELLCO FINANCE 15.00% 2005(3) 500 401 .02
----------- --------
396,104 16.78
----------- --------
Telecommunications - 10.90%
COLT Telecom Group PLC:
0%/12.00% 2006(1) 26,250 20,475 1.41
8.875% 2007 DM15,000 8,578
7.625% 2008 8,250 4,347
Viatel, Inc.:
0%/12.40% 2008(1),(3) $22,500 6,737 1.38
0%/12.50% 2008(1),(3) 24,500 12,005
11.15% 2008(3) DM5,000 2,695
11.25% 2008(3) $10,000 9,050
10.00% convertible 2011(3) 1,443 959
Series A, convertible preferred 10.00%(2),(4) 17shares 1,029
Nextlink Capital, Inc. 12.50% 2006 $1,750 1,890 1.00
NEXTLINK Communications, Inc.:
9.625% 2007 13,000 12,707
9.00% 2008 9,500 8,977
Orion Network Systems, Inc. 11.25% 2007 21,475 19,757 .84
Time Warner Telecommunications 9.75% 2008 19,250 19,346 .82
Global TeleSystems Group, Inc.:(3)
8.75% convertible debentures 2000 7,500 13,275 .78
9.875% 2005 6,000 5,100
US Xchange 15.00% 2008(3) 18,375 18,375 .78
TVN Entertainment 14.00% 2008(3) 13,250 12,190 .52
PTC International Finance BV 0%/10.75% 2007(1) 18,500 11,100 .47
Hermes Euro Railtel BV 11.50% 2007 10,000 10,450 .44
KMC Telecom Holdings, Inc. 0%/12.50% 2008(1) 22,500 10,350 .44
GST Equipment Funding, Inc. 13.25% 2007 9,000 9,450 .40
Teligent, Inc. 11.50% 2007 10,500 8,085 .34
IXC Communications, Inc., preferred 12.50% 2009(2),(4) 7shares 7,708 .33
Level 3 Communications, Inc. 9.125% 2008 $7,750 7,343 .31
QWest Communications International Inc. 0%/9.47% 2007(1) 6,000 4,620 .20
IMPSAT Corp. 12.375% 2008(3) 5,750 4,111 .17
Allegiancetelecom, Inc. 0%/11.75% 2008(1) 5,000 2,150 .09
Intermedia Communications Inc. 0%/11.25% 2007(1) 3,000 2,130 .09
Telesystem International Wireless, Inc. 0%/13.25% 2007(1) 3,600 1,908 .08
CEI Citicorp Holdings SA 11.25% 2007(3) ARP500 270 .01
----------- --------
257,167 10.90
----------- --------
Manufacturing - 7.21%
Graham Packaging:
Graham Packaging Co., GPC Capital Corp. I 8.75% 2008 17,250 16,733 1.13
Graham Packaging Holdings Co., GPC Capital Corp. II 16,500 9,900
0%/10.75% 2009(1),(3)
Anchor Glass Container Corp.:
11.25% 2005 17,250 17,897 1.09
9.875% 2008 8,250 7,714
BREED Technologies Inc. 9.25% 2008(3) 28,500 23,370 .99
Printpack Inc.:
Series B, 9.875% 2004 5,750 5,750 .83
10.625% 2006 13,730 13,730
Lifestyle Furnishings International Ltd. 10.875% 2006 17,755 18,465 .78
Consumers International Inc. 10.25% 2005 12,250 12,556 .53
Impress Metal Packaging Holdings B.V. 9.875% 2007 DM17,250 10,329 .44
Ball Corp.:
7.75% 2006(3) $7,500 7,725 .40
8.25% 2008(3) 1,750 1,798
Key Plastics, Inc., Series B, 10.25% 2007 9,650 9,071 .38
Westinghouse Air Brake Co. 9.375% 2005 5,750 5,808 .25
Tekni-Plex, Inc. 9.25% 2008 5,250 5,040 .21
Hayes Wheels International Inc. 9.125% 2007 2,500 2,513 .11
Tultex Corp. 10.625% 2005 1,500 1,290 .05
Reliance Industries Ltd. 10.50% 2046(3) 500 402 .02
----------- --------
170,091 7.21
----------- --------
Health & Personal Care - 4.77%
Integrated Health Services, Inc.:
10.25% 2006 11,250 11,250 2.45
Series A:
9.50% 2007 22,250 21,138
9.25% 2008 27,000 25,380
Paracelsus Healthcare Corp. 10.00% 2006 34,825 32,039 1.35
Mariner Health Group, Inc. 9.50% 2006 11,875 11,756 .50
Tenet Healthcare Corp.:
8.00% 2005 4,750 4,821 .27
8.125% 2008(3) 1,500 1,508
Unison HealthCare Corp.:
13.50% 1999(3),(6),(7) 2,000 1,900 .20
13.75% 2006(3),(7) 8,750 2,800
----------- --------
112,592 4.77
----------- --------
Energy Related - 4.76%
Kelley Oil & Gas Corp.:
7.875% 1999 3,245 3,018 1.00
8.50% 2000 2,291 2,108
10.375% 2006(3) 7,950 6,519
Series C, 10.375% 2006 11,225 9,204
Convertible preferred $2.62 170shares 2,720
Cross Timbers Oil Co.:
Series B, 9.25% 2007 $9,275 8,533 1.00
8.75% 2009 16,620 14,958
Pogo Producing Co. 8.75% 2007 18,000 17,100 .72
Benton Oil and Gas Co.:
11.625% 2003 7,000 5,950 .52
9.375% 2007 8,750 6,300
Petro Stopping Centers, LP 10.50% 2007 11,500 10,983 .47
Michael Petoleum Corp. 11.50% 2005(3) 7,750 6,897 .29
Clark Refining & Marketing, Inc.:
8.375% 2007 1,500 1,350 .22
8.875% 2007 4,500 3,937
Lomak Petroleum, Inc. 8.75% 2007 4,000 3,560 .15
Ocean Energy, Inc. 8.875% 2007 3,500 3,500 .15
Casecnan Water and Energy Co., Inc., Series B, 11.95% 2010 3,500 2,905 .12
McDermott Inc. 9.375% 2002 2,525 2,726 .12
----------- --------
112,268 4.76
----------- --------
Leisure & Tourism - 4.47%
AMF Bowling, Inc. 0% convertible debentures 2018(3) 21,900 2,300 1.26
AMF Bowling Worldwide, Inc. (formerly AMF Group Inc.):
0%/12.25% 2006(1) 12,543 7,714
10.875% 2006 22,250 19,580
William Hill Finance PLC 10.625% 2008(3) L16,200 24,894 1.06
Boyd Gaming Corp. 9.25% 2003 $18,250 18,706 .79
Friendly Ice Cream Corp. 10.50% 2007 16,625 14,713 .62
Premier Parks Inc.:
9.25% 2006 4,000 3,920 .38
0%/10.00% 2008(1) 8,000 4,980
Sun International Hotels, Ltd., Sun International
North America, Inc.
9.00% 2007 4,000 4,080 .17
Rio Hotel & Casino, Inc. 10.625% 2005 1,500 1,635 .07
Hard Rock Hotel, Inc. 9.25% 2005(3) 1,500 1,500 .06
KSL Recreation Group, Inc. 10.25% 2007 1,000 1,000 .04
Six Flags Entertainment Corp. 8.875% 2006 500 496 .02
----------- --------
105,518 4.47
----------- --------
Banking & Financial Services - 3.72%
Advanta Corp.:
7.50% 2000 7,500 7,342 .78
6.814% 2002 10,000 9,412
6.98% 2002 2,000 1,892
Chevy Chase Bank, FSB 9.25% 2008 2,000 1,940 .55
Chevy Chase Preferred Capital Corp. 10.375% 214shares 11,021
Amresco, Inc. 9.875% 2005 $12,900 10,320 .44
Fuji JGB Investment LLC, Series A, 9.87% noncumulative
preferred securities, perpetual(3) 22,500 9,979 .42
Tokai Preferred Capital Co. LLC, Series A,
9.98% noncumulative preferred(3) 12,500 9,375 .40
Komercni Finance BV 9.0%/10.75% 2008(1),(3) 9,950 8,009 .34
Superior Financial Corp. 8.65% 2003(3) 6,000 6,075 .26
SB Treasury Co. LLC, Series A, 9.40% noncumulative
preferred securities, perpetual(3) 5,500 4,673 .20
BNP U.S. Funding LLC, Series A, 7.738% 2049(3) 4,750 4,400 .19
IBJ Preferred Capital Co. LLC, Series A, 8.79% noncumulative
preferred securities, perpetual(3) 4,650 3,389 .14
----------- --------
87,827 3.72
----------- --------
Consumer Products - 3.31%
Canandaigua Wine Co., Inc.:
8.75% 2003 11,000 11,083 .80
Series C, 8.75% 2003 7,750 7,847
Delta Beverage Group, Inc. 9.75% 2003 13,735 13,598 .58
Standard Commercial Tobacco Co., Inc. 8.875% 2005 13,750 13,475 .57
Fage Dairy Industry SA 9.00% 2007 9,250 8,232 .35
Favorite Brands International, Inc. 10.75% 2006(3) 9,375 7,266 .31
AKI Inc. 10.50% 2008(3) 4,500 4,230 .25
AKI Holding Inc. 0%/13.50% 2009(1),(3) 3,750 1,631
DGS International Finance Co. BV:
10.00% 2007 275 154 .15
10.00% 2007(3) 6,250 3,500
Home Products International, Inc. 9.625% 2008 3,250 2,893 .12
Sparkling Spring Water Group Ltd. 11.50% 2007 2,250 2,261 .10
Westpoint Stevens Inc. 7.875% 2005 1,000 1,010 .04
Aurora Foods Inc., Series B, 8.75% 2008 1,000 1,007 .04
----------- --------
78,187 3.31
----------- --------
Forest Products & Paper - 3.12%
Container Corp. of America:
Series B, 10.75% 2002 5,250 5,355 1.45
9.75% 2003 23,500 23,265
Series A, 11.25% 2004 5,500 5,665
Norampac Inc.:
9.375% 2008 C$5,000 3,196 .70
9.50% 2008 $13,500 13,230
Advance Agro PCL 13.00% 2007(3) 10,500 7,980 .34
Indah Kiat Finance Mauritius Ltd.:
11.875% 2002 4,750 2,565 .24
10.00% 2007 6,875 3,059
Pindo Deli Finance Mauritius Ltd.:
10.25% 2002 7,500 3,188 .20
10.75% 2007 3,775 1,548
Copamex Industrias, SA de CV, Series B, 11.375% 2004 4,625 3,746 .16
Grupo Industrial Durango, SA de CV 12.00% 2001 1,000 730 .03
----------- --------
73,527 3.12
----------- --------
Merchandising - 2.32%
Boyds Collection Ltd. 9.00% 2008(3) 14,750 14,013 .59
Randall's Food Markets, Inc. 9.375% 2007 12,000 12,480 .53
K Mart Corp. 9.78% 2020(8) 10,500 11,267 .48
DR Securitized Lease Trust Pass-Through Certificates,
Series 1994 K-2, 9.35% 2019(8) 9,855 10,279 .44
Carr-Gottstein Foods Co. 12.00% 2005 4,000 4,560 .19
Fred Meyer, Inc.:
7.375% 2005 1,000 1,038 .09
7.45% 2008 1,000 1,047
----------- --------
54,684 2.32
----------- --------
Miscellaneous Service Companies - 2.24%
Allied Waste North America, Inc. 10.25% 2006 22,435 24,454 1.04
LES, Inc. 9.25% 2008(3) 13,125 13,125 .56
Iron Mountain Inc.:
8.75% 2009 5,370 5,209 .35
10.125% 2009 3,000 3,150
Protection One Alarm Monitoring, Inc. 0%/13.625% 2005(1) 6,166 6,921 .29
----------- --------
52,859 2.24
----------- --------
Technology and Electronics - 2.10%
Flextronics International Ltd. 8.75% 2007 15,750 14,805 .63
Zilog Inc. 9.50% 2005 11,750 7,403 .31
Advanced Micro Devices, Inc. 11.00% 2003 6,000 6,060 .25
Therma-Wave, Inc. 10.625% 2004 13,250 5,962 .25
Fairchild Semiconductor Corp. 10.125% 2007 6,000 5,400 .23
EarthWatch Inc.:
Units 12.50% 2001(3),(5),(7) 6,000 4,800 .22
Series C, convertible preferred, 12.00%(2),(3),(4),(5),(7) 675shares 338
Samsung Electronics Co., Ltd. 7.45% 2002(3) $6,000 4,905 .21
----------- --------
49,673 2.10
----------- --------
Transportation - 1.11%
Teekay Shipping Corp. 8.32% 2008 12,500 12,063 .51
USAir, Inc., pass-through trust, Series 1993-A3, 10.375% 2013(8) 5,650 6,209 .26
Northwest Airlines, Inc. 7.625% 2005 5,000 4,996 .21
Kitty Hawk Inc. 9.95% 2004 3,000 3,030 .13
----------- --------
26,298 1.11
----------- --------
Miscellaneous - 1.07%
M.D.C. Holdings, Inc. 8.375% 2008 9,250 8,880 .38
Felcor Suites LP 7.375% 2004 8,250 8,074 .34
Wharf International Finance Ltd., Series A, 7.625% 2007 10,000 5,903 .25
Swire Pacific Offshore Financing Ltd. 9.33% cumulative
guaranteed perpetual capital securities (Hong Kong)(3) 146shares 2,370 .10
----------- --------
25,227 1.07
----------- --------
Metals and Materials - 0.80%
Doe Run Co. 11.25% 2005(3) $9,500 7,410 .31
AK Steel Corp. 9.125% 2006 5,500 5,500 .23
Kaiser Aluminum & Chemical Corp.:
12.75% 2003 4,500 4,365 .23
Series B, 10.875% 2006 1,000 970
Texas Petrochemicals Corp. 11.125% 2006 650 611 .03
----------- --------
18,856 .80
----------- --------
Governments (Excluding U.S.) - 1.87%
United Mexican States Government Eurobonds:
Series C, 0.00% 2003(5) 768 0
Global, 11.375% 2016 7,695 7,416 .55
Series A, Units, 6.594% 2019(6) 500 392
Global, 11.50% 2026 5,125 5,125
Panama (Republic of):
Interest Reduction Bond 4.00% 2014(3),(6) 11,500 8,280 .41
Past Due Interest Eurobond 6.688% 2016(6) 527 380
8.875% 2027 1,250 1,059
Argentina (Republic of):
Series L, 6.625% Eurobonds 2005(6) 950 760 .31
11.00% 2006 250 230
11.75% 2007(3) ARP4,130 2,984
11.375% 2017 $2,250 2,070
9.75% 2027 1,575 1,307
Philippines (Republic of):
8.875% 2008 4,500 3,746 .19
8.75% 2016 1,000 750
Korea (Republic of) 8.875% 2008 5,000 4,294 .18
Poland (Republic of), Past Due Interest Bond, Bearer 4.00% 2,500 2,163 .09
2014(6)
Venezuela (Republic of):
Eurobond 6.625% 2007(6) 1,810 1,040 .07
Front Loaded Interest Reduction Bond, Series A, 6.625% 2007(6) 857 472
Peru (Republic of):
Past Due Interest Eurobond 4.00% 2017(6) 750 420 .03
Front Loaded Interest Reduction Bond 3.25% 2049(3),(6) 500 236
Ecuador (Republic of):
Past Due Interest Registered Bond 6.625% 2015(6) 707 251 .02
Past Due Interest Bearer Bond 6.625% 2015(6) 425 151
Past Due Interest Discount Bond 6.625% 2025(6) 250 121
Brazil (Federal Republic of), Debt Conversion Bond, Series L, 750 383 .02
6.688% 2012(6)
----------- --------
44,030 1.87
----------- --------
U.S. Treasury Obligations - 1.83%
6.875% July 1999 19,000 19,336 .82
7.50% November 2001 10,000 10,898 .46
7.50% February 2005 11,000 12,867 .55
-------- --------
43,101 1.83
----------- --------
Private Issue Collateralized Mortgage Obligations/Asset-Backed
!Securities - 0.84%
Gramercy, Series 1998-A, Class C, 8.95% 2002(3) 10,000 10,050 .43
Trinity Re, Ltd., Class A-2, 10.071% 1998(3),(6) 6,600 6,468 .27
Residential Reinsurance Limited 9.848% 1999(3),(6) 3,250 3,234 .14
Resolution Trust Corp., Series 1993-C1, Class E, 9.50% 2024 98 98 .00
----------- --------
19,850 .84
----------- --------
Number of
Common Stocks & Warrants Shares
Nortel Inversora SA, preferred, Class A
(American Depositary Receipts) (Argentina)(3),(5) 1,057,146 12,369 .53
Integrated Health Services, Inc. 506,206 8,511 .36
COLT Telecom Group PLC, warrants, expire 2006 18,250 3,650 .16
(United Kingdom),(3),(4)
Jacor Communications, Inc.(4) 70,000 3,544 .15
Cellular Communications International, Inc.(4) 49,200 2,669 .14
Cellular Communications International, Inc., warrants, 17,250 604
expire 2003(4)
Omnipoint Corp.(3),(4) 278,001 2,068 .09
CellNet Data Systems, Inc.(4),(5) 256,000 1,229 .07
CellNet Data Systems, Inc., warrants, expire 2007(3),(4) 47,786 478
ACME Intermediate Holdings, LLC (3),(4) 11,939 716 .06
Acme Televison LLC(4) 725 725
Comunicacion Celular SA, Class B, warrants, expire 2003 15,000 1,200 .05
(Colombia),(3),(4)
WorldCom, Inc.(4) 21,000 1,026 .04
KMC Telecom Holdings Inc., warrants, expire 2008(3),(4) 22,500 990 .04
Verio Inc., warrants, expire 2004(3),(4) 18,450 719 .03
Teletrac Holdings, Inc., warrants, expire 2007(3) 13,550 461 .02
Esat Holdings Ltd., warrants, expire 2007 (Ireland),(3),(4) 11,250 349 .02
Protection One Alarm Monitoring, Inc., warrants, 30,400 319 .01
expire 2005(3),(4)
NEXTEL Communications, Inc., Class A(4) 13,942 281
NEXTEL Communications, Inc., warrants, expire 1999(4),(5) 21,250 2 .01
Orion Network Systems, Inc., warrants, expire 2007(4) 25,475 194 .01
Conecel Holdings Ltd., Class B, warrants, expire 2000 74,250 111 .00
(Ecuador),(3),(4),(5)
Globalstar Telecommunications Ltd., warrants, expire 2004(4) 3,000 105 .00
Allegiance Telecom Inc., warrants, expire 2008(3),(4) 5,000 100 .00
McCaw International, Ltd., warrants, expire 2007(3),(4) 8,500 32 .00
----------- --------
42,452 1.79
----------- --------
Principal
Amount
(000)
Miscellaneous
Investment securities in initial period of acquisition $6,033 17,693 .75
----------- --------
Total Bonds, Notes and Equity Securities (cost: $2,399,838,000) 2,213,677 93.80
----------- --------
Short-Term Securities
Associates Corp. of North America 5.77% due 11/2/98 38,470 38,464 1.63
Ford Motor Credit Co.:
5.40% due 10/1/98 15,000 14,998 1.41
5.52% due 10/6/98 8,200 8,192
5.53% due 10/6/98 10,000 9,991
Ciesco LP 5.50% due 10/1/98 15,000 14,998 .64
Duke University 5.48% due 10/23/98 15,000 14,947 .63
----------- --------
Total Short-Term Securities (cost: $101,590,000) 101,590 4.31
----------- --------
Total Investment Securities (cost: $2,501,428,000) 2,315,267 98.11
Excess of cash and receivables over payables 44,626 1.89
----------- --------
$2,359,893 100.00
Net Assets =========== ========
(1)Step bond; coupon rate will increase at a later date.
(2)Payment in kind. The issuer has the option of paying
additional securities in lieu of cash.
(3)Purchased in a private placement transaction; resale may be
limited to qualified institutional buyers; resale to the
public may require registration.
(4)Non-income-producing security.
(5)Valued under procedures established by the Board of Trustees.
(6)Coupon rate may change periodically.
(7)Company not making interest payments, bankruptcy
proceedings pending.
(8)Pass-through security backed by a pool of mortgages or other l
loans on which principal payments are periodically made.
Therefore, the effective maturity is shorter than the stated
maturity.
See Notes to Financial Statements
</TABLE>
<TABLE>
American High-Income Trust
Financial Statements
Statement of Assets and Liabilities
at September 30, 1998 (dollars in thousands)
<S> <C> <C>
Assets:
Investment securities
(cost: $2,501,428) $ 2,315,267
Cash 4,159
Receivables for--
Sales of investments $ 6,439
Sales of fund's shares 7,885
Accrued dividends and interest 49,457 63,781
- -
2,383,207
Liabilities:
Payables for--
Purchases of investments 14,969
Repurchases of fund's shares 3,094
Dividends on fund's shares 1,200
Forward currency contracts 2,742
Management services 890
Accrued expenses 419 23,314
- -
Net Assets at September 30, 1998 --
Equivalent to $13.75 per share on
171,624,748 shares of beneficial
interest issued and outstanding;
unlimited shares authorized $ 2,359,893
=
Statement of Operations
for the year ended September 30, 1998
(dollars in thousands)
Investment Income:
Income:
Dividends $ 5,931
Interest 219,681 $ 225,61
-
Expenses:
Management services fee 10,751
Distribution expenses 5,960
Transfer agent fee 1,388
Reports to shareholders 123
Registration statement and prospectus 377
Postage, stationery and supplies 296
Trustees' fees 27
Auditing and legal fees 49
Custodian fee 52
Taxes other than federal income tax 29
Other expenses 18 19,070
- -
Net investment income 206,542
-
Realized Gain and Change in Unrealized
Depreciation on Investments:
Net realized gain 16,864
Net unrealized depreciation on:
Investments (296,102)
Open forward currency contracts (2,750) (298,852)
- -
Net realized gain and unrealized
depreciation on investments (281,988)
-
Net Decrease in Net Assets
Resulting from Operations ($75,446)
=
Statement of Changes in Net Assets
(dollars in thousands)
Year ended September 30
1998 1997
Operations: - -
Net investment income $ 206,542 $ 151,05
Net realized gain on investments 16,864 42,701
Net increase in unrealized appreciation
on investments (298,852) 56,861
- -
Net increase in net assets
resulting from operations (75,446) 250,616
- -
Dividends and Distributions
Paid to Shareholders:
Dividends from net investment income (200,841) (147,273)
Distributions from net realized
gain on investments (47,160) (1,653)
- -
Total dividends and distributions (248,001) (148,926)
- -
Capital Share Transactions:
Proceeds from shares sold:
64,577,666 and 52,744,058
shares, respectively 986,681 800,316
Proceeds from shares issued in
reinvestment of net investment
income dividends and distributions
of net realized gain on
investments: 11,414,562 and
6,173,899 shares, respectively 172,376 93,692
Cost of shares repurchased:
38,731,190 and 28,680,906
shares, respectively (583,545) (434,766)
- -
Net increase in net assets
resulting from capital share
transactions 575,512 459,242
- -
Total Increase in Net Assets 252,065 560,932
Net Assets:
Beginning of year 2,107,828 1,546,896
- -
End of year (including undistributed
net investment income: $14,347
and $10,740, respectively) $ 2,359,893 $ 2,107,828
= =
See Notes to Financial Statements
</TABLE>
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - American High-Income Trust(the "fund") is registered under the
Investment Company Act of 1940 as an open-end, diversified management
investment company. The fund seeks a high level of current income and,
secondarily, capital appreciation through a diversified, carefully supervised
portfolio consisting primarily of lower rated, higher risk corporate bonds.
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 Trustees.
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. Dividend and interest 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.
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.
2. 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 September 30, 1998, net unrealized depreciation on investments, excluding
forward currency contracts, for book and federal income tax purposes aggregated
$186,161,000, of which $52,616,000 related to appreciated securities and
$238,777,000 related to depreciated securities. During the year ended September
30, 1998, the fund realized, on a tax basis, a net capital gain of $18,492,000
on securities transactions. Net losses related to non-U.S. currency
transactions of $254,000 are treated as an adjustment to ordinary income for
federal income tax purposes. In addition, the fund has deferred, for tax
purposes, to fiscal year ending September 30, 1999, the recognition of losses
related to non-U.S. currency transactions totaling $4,121,000 which were
realized during the period November 1, 1997 through September 30, 1998. The
cost of portfolio securities, excluding forward currency contracts, for book
and federal income tax purposes was $2,501,428,000 at September 30, 1998.
3. FEES AND TRANSACTIONS WITH RELATED PARTIES
INVESTMENT ADVISORY FEES - The fee of $10,751,000 for management services was
incurred pursuant to an agreement with Capital Research and Management Company
(CRMC), with which certain officers and Trustees of the 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; and 0.18% of such assets in excess of $1 billion; plus
3.00% on the first $100 million of the fund's annual gross investment income;
and 2.50% of such income in excess of $100 million.
DISTRIBUTION EXPENSES - Pursuant to a Plan of Distribution, the fund may expend
up to 0.30% of its average net assets annually for any activities primarily
intended to result in sales of fund shares, provided the categories of expenses
for which reimbursement is made are approved by the fund's Board of Trustees.
Fund expenses under the Plan include payments to dealers to compensate them for
their selling and servicing efforts. During the year ended September 30, 1998,
distribution expenses under the Plan were $5,960,000. As of September 30, 1998,
accrued and unpaid distribution expenses were $363,000.
TRANSFER AGENT FEES - American Funds Service Company (AFS), the transfer agent
for the fund, was paid a fee of $1,388,000. American Funds Distributors, Inc.
(AFD), the principal underwriter of the fund's shares, received $3,016,000
(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.
DEFERRED TRUSTEES' FEES - Trustees who are unaffiliated with CRMC may elect to
defer part or all of the fees earned for services as members of the Board.
Amounts deferred are not funded and are general unsecured liabilities of the
fund. As of September 30, 1998, aggregate amounts deferred and earnings thereon
were $40,000.
CRMC is owned by The Capital Group Companies, Inc. AFS and AFD are both wholly
owned subsidiaries of CRMC. Certain Trustees and officers of the fund are or
may be considered to be affiliated with CRMC, AFS and AFD. No such persons
received any remuneration directly from the fund.
4. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES
The fund made purchases and sales of investment securities, excluding
short-term securities, of $1,725,448,000 and $1,205,545,000, respectively,
during the year ended September 30, 1998.
As of September 30, 1998, accumulated undistributed net realized gain on
investments was $10,079,000 paid-in capital was $2,524,231,000. The fund
reclassified $2,094,000 and $30,000 of realized currency losses from
undistributed net realized gain to undistributed net investment income and
additional paid-in capital in the year ended September 30, 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 $52,000 was paid by these credits rather than in cash.
Net realized currency losses on interest and sales of non-U.S. bonds, on a book
basis, were $1,757,000 for the year ended September 30, 1998.
At September 30, 1998, the fund had outstanding forward currency contracts to
sell non-U.S. currencies as follows:
<TABLE>
<S> <C> <C> <C> <C>
Contract Amount U.S. Valuation at 9/30/98
------------------------------------------------------------
Unrealized
Non-U.S. Currency Sales Contracts Non-U.S. U.S. Amount Depreciation
- -----------------------------------------------------------------------------------------------
German Deutsche Marks
expiring 10/5/98 to 2/26/99 DM47,562,000 $26,859,000 $28,535,000 $(1,676,000)
European Currency Units
expiring 11/16/98 ECU8,425,000 9,778,000 9,936,000 $(158,000)
British Pounds
expiring 11/16/98 to 8/10/99 L16,338,000 26,598,000 27,441,000 $(843,000)
---------------------------------------------
$63,235,000 $65,912,000 $(2,677,000)
============= ============= =============
</TABLE>
<TABLE>
Per-Share
Data and Ratios
<S> <C> <C> <C> <C> <C>
Year endedSeptember 30
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net Asset Value, Beginning
of Year $15.69 $14.86 $14.30 $13.97 $15.18
-------- -------- -------- -------- --------
Income from Investment
Operations:
Net investment income 1.30 1.26 1.29 1.33 1.25
Net realized and
unrealized gain
(loss) on investments (1.60) .83 .59 .39 (.99)
-------- -------- -------- -------- --------
Total income from
investment operations (.30) 2.09 1.88 1.72 .26
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net
investment income (1.30) (1.24) (1.32) (1.32) (1.21)
Distributions from net
realized gains (.34) (.02) - (.07) (.26)
-------- -------- -------- -------- --------
Total distributions (1.64) (1.26) (1.32) (1.39) (1.47)
-------- -------- -------- -------- --------
Net Asset Value, End of Yea $13.75 $15.69 $14.86 $14.30 $13.97
======== ======== ======== ======== ========
Total Return* (2.40)% 14.66% 13.68% 13.34% 1.60%
Ratios/Supplemental Data:
Net assets, end of year
(in millions) $2,360 $2,108 $1,547 $1,111 $835
Ratio of expenses to average
net assets .81% .82% .87% .89% .86%
Ratio of net income to
average net assets 8.76% 8.35% 8.90% 9.72% 8.63%
Portfolio turnover rate 54.63% 53.55% 39.74% 29.56% 42.03%
*Excludes maximum sales charge of 4.75%.
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Independent Auditors' Report
To the Board of Trustees and Shareholders of
American High-Income Trust:
We have audited the accompanying statement of assets and liabilities of
American High-Income Trust (the "fund"), including the schedule of portfolio
investments, as of September 30, 1998, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the per-share data and ratios for each
of the five years in the period then ended. These financial statements and
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 as of
September 30, 1998, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and per-share data and ratios
referred to above present fairly, in all material respects, the financial
position of American High-Income Trust as of September 30, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the per-share data and ratios
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
/s/Deloitte & Touche LLP
Los Angeles, California
November 6, 1998
1998 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.
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 represents qualifying
dividends.
Certain states may exempt from income taxation a portion of the dividends
paid from net investment income that was derived from direct U.S. Treasury
obligations. For purposes of computing this exclusion, 2% of the dividends paid
by the fund from net investment income was 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 plan retirement 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.
SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FISCAL YEAR AND NOT THE
CALENDAR YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV WHICH WILL BE
MAILED IN JANUARY 1999 TO DETERMINE THE CALENDAR YEAR AMOUNTS TO BE INCLUDED ON
THEIR 1999 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS.
