[front cover]
MAY 1, 1999
AMERICAN CENTURY
Statement of Additional Information
International Bond Fund
[american century logo (reg. sm)]
American
Century
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This Statement of Additional Information adds to the discussion in the fund's
Prospectus, dated May 1, 1999, but is not a prospectus. The Statement of
Additional Information should be read in conjunction with the fund's current
Prospectus. If you would like a copy of the Prospectus, please contact us at one
of the addresses or phone numbers listed on the back cover or visit American
Century's Web site at www.americancentury.com.
This Statement of Additional Information incorporates by reference certain
information that appears in the fund's annual and semiannual reports, which are
delivered to all shareholders. You may obtain a free copy of the fund's annual
or semiannual report by calling 1-800-345-2021.
Distributed by Funds Distributor, Inc.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
TABLE OF CONTENTS
The Fund's History ........................................................ 2
Fund Investment Guidelines ................................................ 2
Portfolio Composition ................................................. 2
Currency Management ................................................... 2
Detailed Information about the Fund ....................................... 3
Investment Strategies and Risks ....................................... 3
Investment Policies ................................................... 9
Temporary Defensive Measures .......................................... 12
Portfolio Turnover .................................................... 12
Transactions with Subadvisor Affiliates ............................... 12
Management ................................................................ 13
The Board of Trustees ................................................. 13
Officers .............................................................. 17
The Fund's Principal Shareholders ......................................... 18
Service Providers ......................................................... 18
Investment Advisor .................................................... 18
Transfer Agent and Administrator ...................................... 20
Distributor ........................................................... 20
Other Service Providers ................................................... 21
Custodian Banks ....................................................... 21
Independent Accountants ............................................... 21
Brokerage Allocation ...................................................... 21
Information about Fund Shares ............................................. 21
Multiple Class Structure .............................................. 22
Buying and Selling Fund Shares ........................................ 24
Valuation of the Fund's Securities .................................... 24
Taxes ..................................................................... 24
Federal Income Taxes .................................................. 24
How Fund Performance
Information is Calculated .............................................. 26
Multiple Class Performance Advertising ................................. 27
Financial Statements ...................................................... 27
Explanation of Fixed-Income
Securities Ratings ...................................................... 27
Bond Ratings .......................................................... 28
Commercial Paper Ratings .............................................. 29
Note Ratings .......................................................... 29
Statement of Additional Information 1
THE FUNDS' HISTORY
American Century International Bond Funds (the "Trust") is a registered
open-end management investment company that was organized as a Massachusetts
business trust on August 28, 1991. The Trust was known as "Benham International
Funds" until January 1997.
The fund is a separate series of the Trust. The Trust may issue other
series; the fund would operate for many purposes as if it were an independent
company from any such future series.
Fund-Class (Ticker Symbol) Inception Date
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International Bond Fund--
Investor Class (BEGBX) 1/7/1992
International Bond Fund--
Advisor Class (N/A) 10/27/1998
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FUND INVESTMENT GUIDELINES
This section explains the extent to which the fund's advisor, American
Century Investment Management, Inc., can use various investment vehicles and
strategies in managing a fund's assets. Descriptions of the investment
techniques and risks associated with each appear in the section, "Investment
Strategies and Risks," which begins on page 3. In the case of the fund's
principal investment strategies, these descriptions elaborate upon discussion
contained in the Prospectus.
The fund is a nondiversified open-end investment company as defined in the
Investment Company Act of 1940 (the Investment Company Act). This means that the
fund may take larger positions in individual issuer's securities; for example,
the fund may invest more than 5% of its assets in the securities of a single
issuer. This can increase the amount of risk in the portfolio, because it may
become concentrated in fewer issuers than diversified funds.
To meet federal tax requirements for qualification as a regulated investment
company, the fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S. government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer.
PORTFOLIO COMPOSITION
The fund manager intends to keep the fund fully invested in foreign debt
securities. Under normal market conditions, the fund will invest at least 65% of
its total assets in bonds issued or guaranteed by foreign governments or their
agencies and by foreign authorities, provinces and municipalities. The fund may
invest up to 35% of its total assets in high-quality (i.e., rated "AA" or
higher) foreign corporate debt securities.
The fund's investments may include but shall not be limited to: (1) Debt
obligations issued or guaranteed by (a) a foreign sovereign government or one of
its agencies, authorities, instrumentalities or political subdivisions including
a foreign state, province or municipality, and (b) supranational organizations
such as the World Bank, Asian Development Bank, European Investment Bank, and
European Economic Community; (2) Debt obligations of (a) foreign banks and bank
holding companies, and (b) domestic banks and corporations issued in foreign
currencies; and (3) Foreign corporate debt securities and commercial paper. All
of these investments must satisfy the credit quality standards (i.e., "AA" or
higher) established by the trustees of the fund.
The fund's credit quality requirements effectively limit the countries in
which the fund may invest. As of the date of this Prospectus, the fund expects
to invest in the securities of issuers located in and governments of the
following countries: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Japan, Liechtenstein, Luxembourg, Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan and
United Kingdom. To limit the possibility that the fund will become unduly
concentrated in Japan, the fund currently limits its investment in issuers
located in Japan to no more than 15% of total assets.
For an explanation of the securities ratings referred to in the Prospectus
and this Statement of Additional Information, see "Additional Performance
Comparisons" on page 27.
CURRENCY MANAGEMENT
The rate of exchange between U.S. dollars and foreign currencies fluctuates,
which results in gains and losses to the fund. Even if the fund's foreign
security
2 American Century Investments
holdings perform well, an increase in the value of the dollar relative to the
currencies in which portfolio securities are denominated can offset net
investment income.
Because the fund is designed for U.S. investors seeking currency and
interest rate diversification, the subadvisor limits its use of hedging
strategies intended to minimize the effect of currency fluctuations. Although
hedging strategies (if they are successful) reduce exchange rate risk, they also
reduce the potential for share price appreciation when foreign currencies
increase in value relative to the U.S. dollar.
When the subadvisor considers the U.S. dollar to be attractive relative to
foreign currencies, as much as 25% of the fund's total assets may be hedged into
dollars. For temporary defensive purposes and under extraordinary circumstances
(such as significant political events), more than 25% of the fund's total assets
may be hedged in this manner.
In managing the fund's currency exposure, the subadvisor will buy and sell
foreign currencies regularly, either in the spot (i.e., cash) market or the
forward market. Forward foreign currency exchange contracts ("forward
contracts") are individually negotiated and privately traded between currency
traders (usually large commercial banks) and their customers. In most cases, no
deposit requirements exist, and these contracts are traded at a net price
without commission. Forward contracts involve an obligation to purchase or sell
a specific currency at an agreed-upon price on a future date. Most contracts
expire in less than one year. The fund also may use futures and options for
currency management purposes. For more information on futures and options,
please see "Futures and Options" on page 6.
DETAILED INFORMATION ABOUT THE FUND
INVESTMENT STRATEGIES AND RISKS
This section describes each of the investment vehicles and strategies that
the advisor can use in managing a fund's assets. It also details the risks
associated with each, because each technique contributes to a fund's overall
risk profile.
U.S. GOVERNMENT SECURITIES
U.S. government securities include bills, notes and bonds issued by the U.S.
Treasury and securities issued or guaranteed by agencies or instrumentalities of
the U.S. government.
Some U.S. government securities are supported by the direct full faith and
credit pledge of the U.S. government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as securities issued by
the Federal National Mortgage Association (FNMA), are supported by the
discretionary authority of the U.S. government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
REPURCHASE AGREEMENTS
The fund may invest in repurchase agreements when such transactions present
an attractive short-term return on cash that is not otherwise committed to the
purchase of securities pursuant to the investment policies of the fund.
A repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.
Because the security purchased constitutes security for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the ability of the seller to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to securities issued
by the U.S. government, its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy pursuant to criteria adopted by the fund's Board of Trustees.
Statement of Additional Information 3
The fund will not invest more than 15% of its assets in repurchase
agreements maturing in more than seven days.
SECURITIES LENDING
The fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, the fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased over the value of the collateral, the fund could suffer a loss.
To minimize the risk of default on securities loans, the manager adheres to
guidelines prescribed by the Board of Trustees governing lending of securities.
These guidelines strictly govern (1) the type and amount of collateral that must
be received by the fund; (2) the circumstances under which additions to that
collateral must be made by borrowers; (3) the return received by the fund on the
loaned securities; (4) the limitations on the percentage of fund assets on loan;
and (5) the credit standards applied in evaluating potential borrowers of
portfolio securities. In addition, the guidelines require that the fund have the
option to terminate any loan of a portfolio security at any time and set
requirements for recovery of securities from borrowers.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The fund expects to exchange dollars for the fund's underlying currencies,
and vice versa, in the normal course of managing the fund's underlying
investments. J.P. Morgan Investment Management Inc. (JPMIM), the fund's
subadvisor, does not expect that the fund will hold currency that is not earning
income on a regular basis, although the fund may do so temporarily when suitable
investments are not available. The fund may exchange currencies on a "spot"
basis (i.e., for prompt delivery and settlement), or by entering into forward
currency exchange contracts (also called forward contracts) or other contracts
to purchase and sell currencies for settlement at a future date. The fund will
incur costs in converting assets from one currency to another. Foreign exchange
dealers may charge a fee for conversion; in addition, they also realize a profit
based on the difference (i.e., the spread) between the prices at which they buy
and sell various currencies in the spot and forward markets. Thus, a dealer may
offer to sell a foreign currency to the fund at one rate, and repurchase it at a
lesser rate should the fund desire to resell the currency to the dealer.
Forward contracts are agreements to exchange a specific amount of one
currency for a specified amount of another at a future date. The date may be any
agreed fixed number of days in the future. The amount of currency to be
exchanged, the price at which the exchange will take place, and the date of the
exchange are negotiated when the fund enters into the contract and are fixed for
the term of the contract. Forward contracts are traded in an interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement and is
consummated without payment of any commission. However, the fund may enter into
forward contracts with deposit requirements or commissions.
At the maturity of a forward contract, the fund may complete the contract by
paying for and receiving the underlying currency, or may seek to roll forward
its contractual obligation by entering into an "offsetting" transaction with the
same currency trader and paying or receiving the difference between the
contractual exchange rate and the current exchange rate. The fund also may be
able to enter into an offsetting contract prior to the maturity of the
underlying contract. This practice is sometimes referred to as "cross hedging"
and may be employed if, for example, JPMIM believes that one foreign currency
(in which a portion of the fund's foreign currency holdings are denominated)
will change in value relative to the U.S. dollar differently than another
foreign currency. There is no assurance that offsetting transactions, or new
forward contracts, will always be available to the fund.
Investors should realize that the use of forward contracts does not
eliminate fluctuations in the underlying prices of the securities. Such
contracts simply establish a rate of exchange that the fund can achieve at some
future point in time. Additionally, although such contracts tend to minimize the
risk of loss due to fluctuations in the value of the hedged currency when used
as a hedge against foreign currency declines, at the same time they tend to
limit any potential gain that might result from the change in the value of such
currency.
4 American Century Investments
Because investments in, and redemptions from, the fund will be in U.S.
dollars, JPMIM expects that the fund's normal investment activity will involve a
significant amount of currency exchange. For example, the fund may exchange
dollars for its underlying foreign currencies for dollars in order to meet
shareholder redemption requests or to pay expenses. These transactions may be
executed in the spot or forward markets.
In addition, the fund may combine forward transactions in its underlying
currency with investments in U.S. dollar-denominated instruments, in an attempt
to construct an investment position whose overall performance will be similar to
that of a security denominated in its underlying currency. If the amount of
dollars to be exchanged is properly matched with the anticipated value of the
dollar-denominated securities, the fund should be able to "lock in" the foreign
currency value of the securities, and the fund's overall investment return from
the combined position should be similar to the return from purchasing a foreign
currency-denominated instrument. This is sometimes referred to as a "synthetic"
investment position or a "position hedge."
The execution of a synthetic investment position may not be successful. It
is impossible to forecast with absolute precision what the dollar value of a
particular security will be at any given time. If the value of a
dollar-denominated security is not exactly matched with the fund's obligation
under the forward contract on the contract's maturity date, the fund may be
exposed to some risk of loss from fluctuation of the dollar. Although JPMIM will
attempt to hold such mismatchings to a minimum, there can be no assurance that
JPMIM will be successful in doing so.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The fund may engage in securities transactions on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
When purchasing securities on a when-issued or forward commitment basis, a
fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward commitment basis, a
fund will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents or other appropriate liquid securities in
an amount sufficient to meet the purchase price. When the time comes to pay for
the when-issued securities, the fund will meet its obligations with available
cash, through the sale of securities, or, although it would not normally expect
to do so, by selling the when-issued securities themselves (which may have a
market value greater or less than the fund's payment obligation). Selling
securities to meet when-issued or forward commitment obligations may generate
taxable capital gains or losses.
As an operating policy, no fund will commit more than 50% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 50% of a fund's total assets to be
committed under when-issued or forward commitment agreements, the advisor need
not sell such agreements, but it will be restricted from entering into further
agreements on behalf of the fund until the percentage of assets committed to
such agreements is below 50% of total assets.
SHORT-TERM SECURITIES
In order to meet anticipated redemptions, to hold pending the purchase of
additional securities for a fund's portfolio, or, in some cases, for temporary
defensive purposes, the fund may invest a portion of its assets in money market
and other short-term securities.
Examples of those securities include
* Securities issued or guaranteed by the U.S. government and its agencies
and instrumentalities
* Commercial Paper
* Certificates of Deposit and Euro Dollar Certificates of Deposit
* Bankers' Acceptances
* Short-term notes, bonds, debentures or other debt instruments
* Repurchase agreements
Statement of Additional Information 5
OTHER INVESTMENT COMPANIES
Each of the funds may invest up to 10% of its total assets in any other
mutual fund, including those of the advisor, provided that the investment is
consistent with the fund's investment policies and restrictions. Under the
Investment Company Act, each fund's investment in such securities, subject to
certain exceptions, currently is limited to (a) 3% of the total voting stock of
any one investment company, (b) 5% of the fund's total assets with respect to
any one investment company and (c) 10% of the fund's total assets in the
aggregate. Such purchases will be made in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than the customary
brokers' commissions. As a shareholder of another investment company, a fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the management fee that each fund bears directly in connection
with its own operations.
FUTURES AND OPTIONS
The fund may enter into futures contracts, options or options on futures
contracts. Some futures and options strategies, such as selling futures, buying
puts and writing calls, hedge a fund's investments against price fluctuations.
Other strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure. The fund does not use futures and options transactions
for speculative purposes.
Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency.
Although futures contracts, by their terms, call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date. A futures position may be closed by taking an
opposite position in an identical contract (i.e., buying a contract that has
previously been sold or selling a contract that has previously been bought).
To initiate and maintain open positions in a futures contract, a fund would
be required to make a good faith margin deposit in cash or government securities
with a futures broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums.
Once a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, the contract holder
is required to pay additional variation margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker for as long as the contract remains open and do not
constitute margin transactions for purposes of the fund's investment
restrictions.
PURCHASING PUT AND CALL OPTIONS
By purchasing a put option, the fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike price.
In return for this right, the fund pays the current market price for the option
(known as the option premium). Options have various types of underlying
instruments, including specific securities, indices of securities prices, and
futures contracts. The fund may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. If the option is
allowed to expire, the fund will lose the entire premium it paid. If the fund
exercises the option, it completes the sale of the underlying instrument at the
strike price. The fund also may terminate a put option position by closing it
out in the secondary market at its current price if a liquid secondary market
exists.
6 American Century Investments
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS
If the fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party chooses to exercise the option. When
writing an option on a futures contract, the fund will be required to make
margin payments to a broker or custodian as described above for futures
contracts. The fund may seek to terminate its position in a put option it writes
before exercise by closing out the option in the secondary market at its current
price. However, if the secondary market is not liquid for a put option the fund
has written, the fund must continue to be prepared to pay the strike price while
the option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices remain the same over time, the writer also would likely profit
by being able to close out the option at a lower price. If security prices fall,
the put writer would expect to suffer a loss. This loss should be less than the
loss from purchasing the underlying instrument directly, however, because the
premium received for writing the option should mitigate the effects of the
decline.
Writing a call option obligates the fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS
The fund may purchase and write options in combination with one another, or
in combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, the fund may purchase a
put option and write a call option on the same underlying instrument to
construct a combined position whose risk and return characteristics are similar
to selling a futures contract. Another possible combined position would involve
writing a call option at one strike price and buying a call option at a lower
price to reduce the risk of the written call option in the event of a
substantial price increase. Because combined options positions involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.
OVER-THE-COUNTER OPTIONS
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size, and strike price, the
terms of over-the-counter (OTC) options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organizations
of the exchanges where they are traded. The risk of illiquidity also is greater
with OTC options because these options generally can be closed out only by
negotiation with the other party to the option.
Statement of Additional Information 7
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS
Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the fund managers apply a hedge at an inappropriate
time or judge interest rate trends incorrectly, futures and options strategies
may lower a fund's return.
A fund could suffer losses if it is unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the fund managers consider it appropriate or desirable to
do so. In the event of adverse price movements, a fund would be required to
continue making daily cash payments to maintain its required margin. If the fund
had insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the fund managers would not otherwise elect
to do so. In addition, a fund may be required to deliver or take delivery of
instruments underlying futures contracts it holds. The fund managers will seek
to minimize these risks by limiting the contracts entered into on behalf of the
fund to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.
A fund could suffer losses if the prices of its futures and options
positions were poorly correlated with its other investments, or if securities
underlying futures contracts purchased by a fund had different maturities than
those of the portfolio securities being hedged. Such imperfect correlation may
give rise to circumstances in which a fund loses money on a futures contract at
the same time that it experiences a decline in the value of its hedged portfolio
securities. A fund also could lose margin payments it has deposited with a
margin broker, if, for example, the broker became bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
OPTIONS ON FUTURES
By purchasing an option on a futures contract, a fund obtains the right, but
not the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded futures and
options contracts, it is likely that the standardized contracts available will
not match the fund's current or anticipated investments exactly. The fund may
invest in futures and options contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests (for example, by hedging intermediate-term securities with a
futures contract based on an index of long-term bond prices); this involves a
risk that the futures position will not track the performance of the fund's
other investments.
Options and futures prices can diverge from the prices of their underlying
instruments even if the underlying instruments correlate well with the fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation also
may result from differing levels of demand in the options and futures markets
and securities markets,
8 American Century Investments
from structural differences in how options and futures and securities are
traded, or from the imposition of daily price fluctuation limits or trading
halts. The fund may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in an effort to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in the fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
FUTURES AND OPTIONS CONTRACTS RELATING TO FOREIGN CURRENCIES
The fund may purchase and sell currency futures and purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. A fund also may purchase and write currency options in connection
with currency futures or forward contracts.
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges and have standard contract
sizes and delivery dates. Most currency futures contracts call for payment or
delivery in U.S. dollars.
The uses and risks of currency futures are similar to those of futures
relating to securities or indices, as described above. Currency futures values
can be expected to correlate with exchange rates, but may not reflect other
factors that affect the value of the fund's investments. A currency hedge, for
example, should protect a German-mark-denominated security from a decline in the
German mark, but it will not protect the fund against a price decline resulting
from a deterioration in the issuer's creditworthiness.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS
There is no assurance that a liquid secondary market will exist for any
particular futures contract or option at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for futures contracts and options and
may halt trading if a contract's price moves upward or downward more than the
limit on a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for the fund to
enter into new positions or close out existing positions. If the secondary
market for a contract was not liquid, because of price fluctuation limits or
otherwise, prompt liquidation of unfavorable positions could be difficult or
impossible, and the fund could be required to continue holding a position until
delivery or expiration regardless of changes in its value. Under these
circumstances, the fund's access to assets held to cover its future positions
also could be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the U.S. and may not involve clearing
mechanisms or guarantees similar to those available in the U.S. The value of a
futures contract or option traded on a foreign exchange may be adversely
affected by the imposition of different exercise and settlement terms, trading
procedures, margin requirements and lesser trading volume.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS
Each fund may enter into futures contracts, options or options on futures
contracts.
Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for purposes other than
hedging, provided that assets committed to initial margin and option premiums do
not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash or securities on its records in an amount sufficient to
cover its obligations under the futures contracts and options.
INVESTMENT POLICIES
Unless otherwise indicated, with the exception of the percentage limitations
on borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in a fund's net assets will not be considered in
determining whether it has complied with its investment restrictions.
Statement of Additional Information 9
FUNDAMENTAL INVESTMENT POLICIES
The fund's investment restrictions are set forth below. These investment
restrictions are fundamental and may not be changed without approval of a
majority of the outstanding votes of shareholders of a fund, as determined in
accordance with the Investment Company Act.
For purposes of the investment restriction relating to concentration, the
fund shall not purchase any securities that would cause 25% or more of the value
of the fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments; (b) wholly owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; (c)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry; and (d) personal credit and business credit businesses will
be considered separate industries.
Subject Policy
- --------------------------------------------------------------------------------
Senior Securities A fund may not issue senior securities, except as
permitted under the Investment Company Act.
- --------------------------------------------------------------------------------
Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in
an amount not exceeding 33 1/3% of the fund's total
assets (including the amount borrowed) less liabilities
(other than borrowings).
- --------------------------------------------------------------------------------
Lending A fund may not lend any security or make any other loan
if, as a result, more than 33 1/3% of the fund's total
assets would be lent to other parties, except, (i) through
the purchase of debt securities in accordance with its
investment objective, policies and limitations or
(ii) by engaging in repurchase agreements with respect to
portfolio securities.
- --------------------------------------------------------------------------------
Real Estate A fund may not purchase or sell real estate unless
acquired as a result of ownership of securities or other
instruments. This policy shall not prevent a fund from
investing in securities or other instruments backed by real
estate or securities of companies that deal in real estate or
are engaged in the real estate business.
- --------------------------------------------------------------------------------
Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities).
- --------------------------------------------------------------------------------
Underwriting A fund may not act as an underwriter of securities issued
by others, except to the extent that the fund may be
considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted
securities.
- --------------------------------------------------------------------------------
Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments provided that this limitation shall not prohibit
the fund from purchasing or selling options and futures
contracts or from investing in securities or other
instruments backed by physical commodities.
- --------------------------------------------------------------------------------
Control A fund may not invest for purposes of exercising control over
management.
10 American Century Investments
NONFUNDAMENTAL INVESTMENT POLICIES
In addition, the fund is subject to the following additional investment
restrictions that are not fundamental and may be changed by the Board of
Trustees.
Subject Policy
- --------------------------------------------------------------------------------
Diversification The fund, to meet federal tax requirements for
qualification as a "regulated investment company," limits
its investment so that at the close of each quarter of
its taxable year: (i) with regard to at least 50% of
total assets, no more than 5% of total assets are invested
in the securities of a single issuer, and (ii) no more
than 25% of total assets are invested in the securities
of a single issuer. Limitations (i) and (ii) do not apply
to "Government securities" as defined for federal tax
purposes. The fund does not, with respect to 75% of its
total assets, currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed
by the U.S. government or any of its agencies or
instrumentalities) if, as a result thereof, the fund would
own more than 10% of the outstanding voting securities of
such issuer.
- --------------------------------------------------------------------------------
Liquidity The fund may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of
its net assets would be invested in repurchase agreements
not entitling the holder to payment of principal and
interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market.
- --------------------------------------------------------------------------------
Short Sales The fund may not sell securities short, unless it owns
or has the right to obtain securities equivalent in-kind and
amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed
to constitute selling securities short.
- --------------------------------------------------------------------------------
Margin The fund may not purchase securities on margin, except that
the fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided
that margin payments in connection with futures contracts
and options on futures contracts shall not constitute
purchasing securities on margin.
- --------------------------------------------------------------------------------
The Investment Company Act imposes certain additional restrictions upon
acquisition by the fund of securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as therein defined. It also defines and forbids the creation
of cross and circular ownership. Neither the SEC nor any other agency of the
federal or state government participates in or supervises the management of the
fund or its investment practices or policies.
The Investment Company Act also provides that the fund may not invest more
than 25% of its assets in the securities of issuers engaged in a single
industry. In determining industry groups for purposes of this restriction, the
SEC ordinarily uses the Standard Industry Classification codes developed by the
United States Office of Management and Budget. In the interest of ensuring
adequate diversification, the fund monitors industry concentration using a more
restrictive list of industry groups than that recommended by the SEC. The fund
believes that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these restrictive industry classifications may,
however, cause the fund to forego investment possibilities that may otherwise be
available to it under the Investment Company Act.
Statement of Additional Information 11
TEMPORARY DEFENSIVE MEASURES
For temporary defensive purposes, the fund may invest in securities that may
not fit its investment objective or its stated market. During a temporary
defensive period, the fund may direct its assets to the following investment
vehicles:
* interest-bearing bank accounts or Certificates of Deposit
* U.S. government securities and repurchase agreements collateralized by
U.S. government securities
* money market funds
PORTFOLIO TURNOVER
The portfolio turnover rates of the fund are shown in the Financial
Highlights table in the Prospectuses.
With respect to this fund, the managers will purchase and sell securities
without regard to the length of time the security has been held. Accordingly,
the fund's rate of portfolio turnover may be substantial.
The fund managers intend to purchase a given security whenever they believe
it may contribute to the stated objective of the fund. In order to achieve each
fund's investment objective, the managers may sell a given security, no matter
how long or how short a period it has been held in the portfolio, and no matter
whether the sale is at a gain or at a loss, if the managers believe that the
security is not fulfilling its purpose, either because, among other things, it
did not live up to the managers' expectations, or because it may be replaced
with another security holding greater promise, or because it has reached its
optimum potential, or because of a change in the circumstances of a particular
company or industry or in general economic conditions, or because of some
combination of such reasons. Under normal conditions, the fund's annual
portfolio turnover rates may exceed 150%.
Because investment decisions are based on the anticipated contribution of
the security in question to the fund's objectives, the managers believe that the
rate of portfolio turnover is irrelevant when they believe a change is in order
to achieve those objectives. As a result, a fund's annual portfolio turnover
rate cannot be anticipated and may be higher than other mutual funds with
similar investment objectives. Higher turnover would generate correspondingly
greater brokerage commissions, which is a cost the fund pays directly. Portfolio
turnover also may affect the character of capital gains realized and distributed
by the fund, if any, since short-term capital gains are taxable as ordinary
income. This disclosure regarding portfolio turnover is a statement of
fundamental policy and may be changed only by a vote of the shareholders.
Because the managers do not take portfolio turnover rate into account in
making investment decisions, (1) the managers have no intention of accomplishing
any particular rate of portfolio turnover, whether high or low, and (2) the
portfolio turnover rates in the past should not be considered as representative
of the rates that will be attained in the future.
TRANSACTIONS WITH SUBADVISOR AFFILIATES
As described in further detail under the section titled "MANAGEMENT," J.P.
Morgan Investment Management, Inc. (JPMIM) is subadvisor to the fund pursuant to
an agreement with American Century Investment Management, Inc.
JPMIM, Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), J.P.
Morgan Securities Inc., and J.P. Morgan Securities Limited are wholly owned
subsidiaries of J.P. Morgan & Co. Incorporated, hereafter referred to
collectively as "Morgan affiliates."
J. P. Morgan Securities Inc. is a broker-dealer registered with the SEC and
is a member of the National Association of Securities Dealers. It is active as a
dealer in U.S. government securities and an underwriter of and dealer in U.S.
government agency securities and money market instruments.
J.P. Morgan Securities Limited underwrites, distributes, and trades
international securities, including Eurobonds, commercial paper, and foreign
government bonds. J.P. Morgan & Co. Incorporated issues commercial paper and
long-term debt securities. Morgan Guaranty and some of its affiliates issue
certificates of deposit and create bankers' acceptances.
To the extent that the fund invests a portion of its assets in such
obligations, it will not invest in securities issued or created by Morgan
affiliates.
Certain activities of Morgan affiliates may affect the fund's portfolio or
the markets for securities in which the fund invests. In particular, activities
of Morgan affiliates may affect the prices of securities held by the
12 American Century Investments
fund and the supply of issues available for purchase by the fund. Where a Morgan
affiliate holds a large portion of a given issue, the price at which that issue
is traded may influence the price of similar securities the fund holds or is
considering purchasing.
The fund will not purchase securities directly from Morgan affiliates, and
the size of Morgan affiliates' holdings may limit the selection of available
securities in a particular maturity, yield, or price range. The fund will not
execute any transactions with Morgan affiliates and will use only unaffiliated
broker-dealers. In addition, the fund will not purchase any securities of U.S.
government agencies during the existence of an underwriting or selling group of
which a Morgan affiliate is a member, except to the extent permitted by law.
The fund's ability to engage in transactions with Morgan affiliates is
restricted by the SEC and the Federal Reserve Board. In JPMIM's opinion, these
limitations should not significantly impair the fund's ability to pursue its
investment objectives. However, there may be circumstances in which the fund is
disadvantaged by these limitations compared to other funds with similar
investment objectives that are not subject to these limitations.
In acting for its fiduciary accounts, including the fund, JPMIM will not
discuss its investment decisions or positions with the personnel of any Morgan
affiliate. JPMIM has informed the fund that, in making investment decisions, it
will not obtain or use material, non-public information in the possession of any
division or department of JPMIM or other Morgan affiliates.
The commercial banking divisions of Morgan Guaranty and its affiliates may
have deposit, loan, and other commercial banking relationships with issuers of
securities the fund purchases, including loans that may be repaid in whole or in
part with the proceeds of securities purchased by the fund. Except as may be
permitted by applicable law, the fund will not purchase securities in any
primary public offering when the prospectus discloses that the proceeds will be
used to repay a loan from Morgan Guaranty. JPMIM will not cause the fund to make
investments for the direct purpose of benefitting other commercial interests of
Morgan affiliates at the fund's expense.
MANAGEMENT
THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the fund and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the fund, it has hired the advisor to do so. Two-thirds
of the trustees are independent of the fund's advisor; that is, they are not
employed by and have no financial interest in the advisor.
The individuals listed in the following table whose names are marked by an
asterisk (*) are interested persons of the fund (as defined in the Investment
Company Act) by virtue of, among other considerations, their affiliation with
either the fund; the advisor, American Century Investment Management, Inc.
(ACIM); the fund's agent for transfer and administrative services, American
Century Services Corporation (ACSC); the fund's distribution agent and
co-administrator, Funds Distributor, Inc. (FDI); the parent corporation,
American Century Companies, Inc. (ACC) or ACC's subsidiaries; or other funds
advised by the advisor. Each trustee listed below serves as a trustee or
director of seven registered investment companies in the American Century family
of funds, which are also advised by the advisor.
Statement of Additional Information 13
Position(s)
Name (Age) Held Principal Occupation(s)
Address With Fund During Past Five Years
- --------------------------------------------------------------------------------
Albert A. Eisenstat (68) Trustee General Partner, Discovery Venturers
1665 Charleston Road (venture capital firm, 1996 to
Mountain View, CA 94043 present)
Independent Director, Commercial
Metals Co. (1982 to present)
Independent Director, Sungard
Data Systems (1991 to present)
Independent Director, Business
Objects S/A (software & programming,
1994 to present)
- --------------------------------------------------------------------------------
Ronald J. Gilson (52) Trustee Charles J. Meyers Professor of
1665 Charleston Road Law and Business, Stanford Law
Mountain View, CA 94043 School (since 1979)
Marc and Eva Stern Professor of
Law and Business, Columbia
University School of Law (since 1992)
Counsel, Marron, Reid & Sheehy
(a San Francisco law firm, since 1984)
- --------------------------------------------------------------------------------
William M. Lyons* (43) Trustee President, Chief Operating Officer
4500 Main Street and Assistant Secretary, ACC
Kansas City, MO 64111 Executive Vice President, Chief
Operating Officer and Secretary
ACSC and ACIS
- --------------------------------------------------------------------------------
Myron S. Scholes (57) Trustee Limited Partner, Long-Term Capital
1665 Charleston Road Management (since February 1999)
Mountain View, CA 94043 Principal, Long-Term Capital
Management (investment advisor,
1993-January 1999) Frank E. Buck
Professor of Finance, Stanford Graduate
School of Business (since 1981)
Director, Dimensional Fund Advisors
(investment advisor, since 1982)
Director, Smith Breeden Family of Funds
(since 1992)
- --------------------------------------------------------------------------------
Kenneth E. Scott (70) Trustee Ralph M. Parsons Professor of Law
1665 Charleston Road and Business, Stanford Law School
Mountain View, CA 94043 (since 1972)
Director, RCM Capital Funds, Inc.
(since 1994)
- -------------------------------------------------------------------------------
Isaac Stein (52) Trustee Director, Raychem Corporation
1665 Charleston Road (electrical equipment, since
1993)
Mountain View, CA 94043 President, Waverley Associates, Inc.
(private investment firm, since 1983)
Director, ALZA Corporation
(pharmaceuticals, since 1987)
Trustee, Stanford University
(since 1994)
Chairman, Stanford Health Services
(since 1994)
- --------------------------------------------------------------------------------
James E. Stowers III* (40) Trustee, Chief Executive Officer and
4500 Main Street Chairman Director, ACC
Kansas City, MO 64111 of the Board President, Chief Executive Officer
and Director, ACSC and ACIS
- --------------------------------------------------------------------------------
Jeanne D. Wohlers (53) Trustee Director and Partner, Windy Hill
1665 Charleston Road Productions, LP (edutainment software,
Mountain View, CA 94043 1994-present)
Director, Quintus Corporation,
(automation solutions, 1995-present)
Vice President and Chief Financial
Officer, Sybase, Inc. (software
company, 1988 to 1992)
- --------------------------------------------------------------------------------
14 American Century Investments
COMMITTEES
The Board has four committees to oversee specific functions of the Trust's
operations. Only independent trustees serve on these committees. Information
about these committees appears in the table below:
Committee Members Function of Committee
- --------------------------------------------------------------------------------
Audit Albert A. Eisenstat The Audit Committee selects and oversees
Kenneth E. Scott the activities of the Trust's independent
Jeanne D. Wohlers auditor. The Committee receives reports
from the advisor's Internal Audit
Department, which is accountable solely to
the Committee. The Committee also receives
reporting about compliance matters
affecting the Trust.
- --------------------------------------------------------------------------------
Nominating Albert A. Eisenstat The Nominating Committee primarily
Ronald J. Gilson considers and recommends individuals
Myron S. Scholes for nomination as trustees. The names
Kenneth E. Scott of potential trustee candidates are
Isaac Stein drawn from a number of sources,
Jeanne D. Wohlers including recommendations from Board
members, management and shareholders. This
committee also reviews and makes
recommendations to the Board with respect
to the composition of Board committees and
other Board-related matters, including its
organization, size, composition,
responsibilities, functions and
compensation.
- --------------------------------------------------------------------------------
Portfolio Ronald J. Gilson The Portfolio Committee reviews quarterly
Myron S. Scholes the investment activities and strategies
Isaac Stein used to manage fund assets. The Committee
regularly receives reports from portfolio
managers, credit analysts and other
investment personnel concerning the funds'
investments.
- --------------------------------------------------------------------------------
Quality of Ronald J. Gilson The Quality of Service Committee reviews
Service Myron S. Scholes the level and quality of transfer agent
Isaac Stein and administrative services provided to
the funds and their shareholders. It
receives and reviews reports comparing
those services to fund competitors and
seeks to improve such services where
feasible and appropriate.
- --------------------------------------------------------------------------------
Statement of Additional Information 15
COMPENSATION OF TRUSTEES
The trustees also serve as trustees for seven American Century investment
companies other than the Trust. Each trustee who is not an interested person as
defined in the Investment Company Act receives compensation for service as a
member of the Board of all seven such companies based on a schedule that is
based on the number of meetings attended and the assets of the fund for which
the meetings are held. These fees and expenses are divided among the seven
investment companies based, in part, upon their relative net assets. Under the
terms of the management agreement with the advisor, the funds are responsible
for paying such fees and expenses.
The following table shows the aggregate compensation paid by the Trust for
the periods indicated by the seven investment companies served by this Board to
each trustee who is not an interested person as defined in the Investment
Company Act.
The Trust has adopted the American Century Deferred Compensation Plan for
Non-Interested Directors and trustees. Under the plan, the independent trustees
may defer receipt of all or any part of the fees to be paid to them for serving
as trustees.
All deferred fees are credited to an account established in the name of the
trustees. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the trustee. The account balance continues to
fluctuate in accordance with the performance of the selected fund or funds until
final payment of all amounts credited to the account. Trustees are allowed to
change their designation of mutual funds from time to time.
No deferred fees are payable until such time as a trustee resigns, retires
or otherwise ceases to be a member of the Board of Trustees. Trustees may
receive deferred fee account balances either in a lump sum payment or in
substantially equal installment payments to be made over a period not to exceed
10 years. Upon the death of a trustee, all remaining deferred fee account
balances are paid to the trustee's beneficiary or, if none, to the trustee's
estate.
The plan is an unfunded plan and, accordingly, the Trust has no obligation
to segregate assets to secure or fund the deferred fees. The rights of trustees
to receive their deferred fee account balances are the same as the rights of a
general unsecured creditor of the Trust. The plan may be terminated at any time
by the administrative committee of the plan. If terminated, all deferred fee
account balances will be paid in a lump sum.
No deferred fees were paid to any trustee under the plan during the fiscal
year ended December 31, 1998.
Aggregate Trustee Compensation for Fiscal Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Total Compensation
Total Compensation from the
Compensation from American Century
Name of Trustee the Fund(1) Family of Funds(2)
- --------------------------------------------------------------------------------
Albert A. Eisenstat $4,079 $65,750
Ronald J. Gilson $4,106 $73,000
Myron S. Scholes $4,045 $61,750
Kenneth E. Scott $4,096 $73,000
Isaac Stein $4,065 $67,500
Jeanne D. Wohlers $4,096 $73,000
- --------------------------------------------------------------------------------
(1) Includes compensation paid to the trustees during the fiscal year ended
December 31, 1998, and also includes amounts deferred at the election of the
trustees under the American Century Mutual Fund Deferred Compensation Plan for
Non-Interested Directors and Trustees. The total amount of deferred compensation
included in the preceding table is as follows: Mr. Eisenstat, $4,079; Mr.
Gilson, $2,053; Mr. Scholes, $4,045; Mr. Scott, $2,048 and Ms. Wohlers, $2,048.
(2) Includes compensation paid by the seven investment company members of the
American Century family of funds served by this Board.
16 American Century Investments
OFFICERS
Background information for the officers of the Trust is provided in the
following table. All persons named as officers of the Trust also serve in
similar capacities for the 12 other investment companies advised by ACIM. Not
all officers of the Trust are listed; only those officers with policy-making
functions for the Trust are listed. No officer is compensated for his or her
service as an officer of the Trust. The individuals listed in the table are
interested persons of the fund (as defined in the Investment Company Act) by
virtue of, among other considerations, their affiliation with either the fund;
ACC, ACC's subsidiaries (including ACIM and ACSC), or the fund's distributor
(FDI), as specified in the table.
Position(s)
Name (Age) Held With Principal Occupation(s)
Address Fund During Past Five Years
- --------------------------------------------------------------------------------
George A. Rio (44) President Executive Vice President and Director
60 State Street of Client Services, FDI (March 1998
Boston, MA 02109 to present)
Senior Vice President and Senior Key
Account Manager, Putnam Mutual Funds (June
1995 to March 1998) Director Business
Development, First Data Corporation (May
1994 to June 1995) Senior Vice President
and Manager of Client Services and
Director of Internal Audit, The Boston
Company, Inc. (September 1983 to May 1994)
- --------------------------------------------------------------------------------
Mary A. Nelson (34) Vice Vice President and Manager of Treasury
60 State Street President Services and Administration, FDI
Boston, MA 02109 (1994 to present)
Assistant Vice President and Client
Manager, The Boston Company, Inc.
(1989 to 1994)
- --------------------------------------------------------------------------------
Maryanne Roepke, Vice Senior Vice President, Treasurer and
CPA (43) President Principal Accounting Officer, ACSC
4500 Main Street and Treasurer
Kansas City, MO 64111
- --------------------------------------------------------------------------------
David C. Tucker (40) Vice Senior Vice President and General
4500 Main Street President Counsel, ACSC and ACIM (June 1998
Kansas City, MO 64111 to present)
General Counsel, ACC (June 1998
to present)
Consultant to mutual fund industry
May 1997-April 1998)
Vice President and General Counsel,
Janus Companies (1990 to 1997)
- --------------------------------------------------------------------------------
Christopher J. Vice Vice President and Associate General
Kelley (34) President Counsel, FDI (since July 1996)
60 State Street Assistant Counsel, Forum Financial Group
Boston, MA 02109 (April 1994 to July 1996)
Compliance Officer, Putnam Investments
(1992 to April 1994)
- --------------------------------------------------------------------------------
Douglas A. Paul (52) Secretary Vice President and Associate General
1665 Charleston Road and Vice Counsel, ACSC
Mountain View, CA 94043 President
- --------------------------------------------------------------------------------
C. Jean Wade (35) Controller Controller-Fund Accounting, ACSC
4500 Main Street
Kansas City, MO 64111
- --------------------------------------------------------------------------------
Jon Zindel (32) Tax Officer Director of Taxation, ACSC (1996
4500 Main Street to present)
Kansas City, MO 64111 Tax Manager, Price Waterhouse, LLP
(1989-1996)
- --------------------------------------------------------------------------------
Statement of Additional Information 17
THE FUNDS' PRINCIPAL SHAREHOLDERS
As of April 1, 1999 the following companies were the record owners of more
than 5% of a fund's outstanding shares. The fund is unaware of any other
shareholders, beneficial or of record, who own more than 5% of the fund's
outstanding shares. As of April 1, 1999 the officers and trustees of the fund,
as a group, own less than 1% of the fund's outstanding shares.
Percentage
of Shares
Fund Shareholder Outstanding
- -------------------------------------------------------------------------------
International Bond Charles Schwab & Co. 29.0%
101 Montgomery Street
San Francisco, CA 94101
SERVICE PROVIDERS
The fund has no employees. To conduct its day-to-day activities, the Trust
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the Trust and is described below.
ACIM and ACSC are both wholly owned by ACC. James E. Stowers Jr., Chairman
of ACC, controls ACC by virtue of his ownership of a majority of its voting
stock.
INVESTMENT ADVISOR
The fund has an investment management agreement with the advisor, dated
August 1, 1997. This agreement was approved by the shareholders of the fund on
July 30, 1997.
A description of the responsibilities of the advisor appears in the
Prospectus under the caption "Management."
For the services provided to the fund, the advisor receives a monthly fee
based on a percentage of the average net assets of the fund. The annual rate at
which this fee is assessed is determined monthly in a two-step process: First, a
fee rate schedule is applied to the assets of all of the funds of its investment
category managed by the advisor (the "Investment Category Fee"). For example,
when calculating the fee for a money market fund, all of the assets of the money
market funds managed by the advisor are aggregated. The three investment
categories are money market funds, bond funds and equity funds. Second, a
separate fee rate schedule is applied to the assets of all of the funds managed
by the advisor (the "Complex Fee"). The Investment Category Fee and the Complex
Fee are then added to determine the unified management fee payable by the fund
to the advisor.
The schedules by which the Investment Category Fees are determined are as
follows:
INVESTMENT CATEGORY FEE SCHEDULE FOR
* International Bond
Category Assets Fee Rate
- -------------------------------------------------------------------------------
First $1 billion 0.6100%
Next $1 billion 0.5580%
Next $3 billion 0.5280%
Next $5 billion 0.5080%
Next $15 billion 0.4950%
Next $25 billion 0.4930%
Thereafter 0.4925%
- -------------------------------------------------------------------------------
The Complex Fee is determined according to the schedule on the table below.
COMPLEX FEE SCHEDULE
Complex Assets Fee Rate
- -------------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15 billion 0.2985%
Next $25 billion 0.2970%
Next $50 billion 0.2960%
Next $100 billion 0.2950%
Next $100 billion 0.2940%
Next $200 billion 0.2930%
Next $250 billion 0.2920%
Next $500 billion 0.2910%
Thereafter 0.2900%
- -------------------------------------------------------------------------------
On the first business day of each month, the fund pays a management fee to
the advisor for the previous month at the specified rate. The fee for the
previous month is calculated by multiplying the applicable fee for the fund by
the aggregate average daily closing value of a fund's net assets during the
previous month by a fraction, the numerator of which is the number of days in
the previous month and the denominator of which is 365 (366 in leap years).
18 American Century Investments
The management agreement shall continue in effect until the earlier of the
expiration of two years from the date of its execution or until the first
meeting of shareholders following such execution and for as long thereafter as
its continuance is specifically approved at least annually by (1) the fund's
Board of Trustees, or by the vote of a majority of outstanding votes (as defined
in the Investment Company Act); and (2) by the vote of a majority of the
trustees of the funds who are not parties to the agreement or interested persons
of the advisor, cast in person at a meeting called for the purpose of voting on
such approval.
The management agreement provides that it may be terminated at any time
without payment of any penalty by the fund's Board of Trustees, or by a vote of
a majority of outstanding votes, on 60 days' written notice to the advisor, and
that it shall be automatically terminated if it is assigned.
The management agreement provides that the advisor shall not be liable to
the fund or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.
The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, devote time and attention
to any other business whether of a similar or dissimilar nature, and render
services to others.
Certain investments may be appropriate for the fund and also for other
clients advised by the advisor. Investment decisions for the fund and other
clients are made with a view to achieving their respective investment objectives
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investment generally. A particular
security may be bought or sold for only one client or fund, or in different
amounts and at different times for more than one but less than all clients or
fund. In addition, purchases or sales of the same security may be made for two
or more clients or fund on the same date. Such transactions will be allocated
among clients in a manner believed by the advisor to be equitable to each. In
some cases this procedure could have an adverse effect on the price or amount of
the securities purchased or sold by a fund.
The subadvisor may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the subadvisor believes that
such aggregation provides the best execution for the fund. The fund's Board of
Trustees has approved the policy of the advisor and subadvisor with respect to
the aggregation of portfolio transactions. Where portfolio transactions have
been aggregated, the fund participates at the average share price for all
transactions in that security on a given day and share transaction costs on a
pro rata basis. The subadvisor will not aggregate portfolio transactions of the
fund unless it believes such aggregation is consistent with its duty to seek
best execution on behalf of the fund and the terms of the management agreement.
The subadvisor receives no additional compensation or remuneration as a result
of such aggregation.
Prior to August 1, 1997, Benham Management Corporation served as the
investment advisor to the fund. Benham Management Corporation was merged into
the advisor in late 1997.
Unified management fees incurred by the fund by class for the fiscal periods
ended December 31, 1998, 1997 and 1996, are indicated in the following table.
Fee amounts are net of amounts reimbursed or recouped under the fund's previous
investment advisory agreement with Benham Management Corporation.
UNIFIED MANAGEMENT FEES*
Fund 1998 1997 1996
- ----------------------------------------------------------------------------
International Bond
Investor $1,263,294 $1,219,730 $1,060,306
Advisor 61 0 0
- ----------------------------------------------------------------------------
* Net of reimbursements
The investment management agreement provides that the manager may delegate
certain responsibilities under the agreement to a subadvisor. Currently, JPMIM
serves as subadvisor to the fund under a subadvisory agreement between the
manager and JPMIM dated August 1, 1997, that was approved by shareholders on
July 30, 1997. This supersedes subadvisory agreements dated June 1, 1995,
December 31, 1991, and June 1, 1994. The subadvisory agreement continues for an
initial period of two years and thereafter so long as continuance is
specifically approved by vote of a majority of the fund's outstanding voting
securities or by vote of a majority of the fund's trustees, including a majority
of those trustees who are neither parties to the agreement
Statement of Additional Information 19
nor interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The subadvisory agreement is subject to
termination without penalty on 60 days' written notice by the manager, the Board
of Trustees, or a majority of the fund's outstanding shares or 12 months'
written notice by JPMIM and will terminate automatically in the event of (i) its
assignment or (ii) termination of the investment advisory agreement between the
fund and the manager.
The subadvisory agreement provides that JPMIM will make investment decisions
for the fund in accordance with the fund's investment objective, policies, and
restrictions, and whatever additional written guidelines it may receive from the
manager from time to time. For these services, the manager pays JPMIM a monthly
fee at an annual rate of .20% of the fund's average daily net assets up to $200
million; and .15% of average daily net assets over $200 million. Under the 1991
subadvisory agreement, the manager paid JPMIM a monthly fee at an annual rate of
.25% of average daily net assets up to $200 million, and .05% of average daily
net assets in excess of $200 million, with a minimum annual fee of $250,000.
For the fiscal years ended December 31, 1998, 1997 and 1996, the manager
paid JPMIM subadvisory fees as listed in the following table:
JPMIM SUBADVISORY FEES
1998 $340,185
1997 $315,813
1996 $470,287
OTHER ADVISORY RELATIONSHIPS
In addition to managing the funds, the advisor also serves as an investment
advisor to seven institutional accounts and to the following registered
investment companies:
American Century Mutual Funds, Inc.
American Century World Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Variable Portfolios, Inc.
American Century Capital Portfolios, Inc.
American Century Strategic Asset Allocations, Inc.
American Century Municipal Trust
American Century Government Income Trust
American Century Investment Trust
American Century Target Maturities Trust
American Century Quantitative Equity Funds
American Century California Tax-Free and Municipal Funds
TRANSFER AGENT AND ADMINISTRATOR
American Century Services Corporation, 4500 Main Street, Kansas City,
Missouri 64111, acts as transfer agent and dividend-paying agent for the fund.
It provides physical facilities, computer hardware and software and personnel,
for the day-to-day administration of the fund and of the advisor. The advisor
pays ACSC for such services.
Prior to August 1, 1997, the fund paid ACSC directly for its services as
transfer agent and administrative services agent.
Administrative service and transfer agent fees paid by the fund for the
fiscal years ended December 31, 1997 and 1996, are indicated in the table below.
Fee amounts are net of expense limitations.
ADMINISTRATIVE FEES
Fiscal Fiscal
Fund 1997 1996
- ----------------------------------------------------------------------------
International Bond $120,327 $263,533
- ----------------------------------------------------------------------------
TRANSFER AGENT FEES
Fiscal Fiscal
Fund 1997 1996
- ----------------------------------------------------------------------------
International Bond $134,632 $239,896
- ----------------------------------------------------------------------------
DISTRIBUTOR
The fund's shares are distributed by FDI, a registered broker-dealer. The
distributor is a wholly owned indirect subsidiary of Boston Institutional Group,
Inc. The distributor's principal business address is 60 State Street, Suite
1300, Boston, Massachusetts 02109.
The distributor is the principal underwriter of the fund's shares. The
distributor makes a continuous, best-efforts underwriting of the fund's shares.
This means that the distributor has no liability for unsold shares.
20 American Century Investments
OTHER SERVICE PROVIDERS
CUSTODIAN BANKS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the assets of the fund. The custodians take no part
in determining the investment policies of the fund or in deciding which
securities are purchased or sold by the fund. The fund, however, may invest in
certain obligations of the custodians and may purchase or sell certain
securities from or to the custodians.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP is the independent accountant of the fund for the
fiscal years ended December 31, 1997 and 1998. The address of
PricewaterhouseCoopers LLP is 1055 Broadway, 10th Floor, Kansas City, Missouri
64105. As the independent accountant of the fund, PricewaterhouseCoopers
provides services including (1) audit of the annual financial statements for the
fund, (2) assistance and consultation in connection with SEC filings and (3)
review of the annual federal income tax return filed for the fund.
KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas City, Missouri 64106,
served as independent auditors for the fund and examined the financial
statements of the fund for all fiscal years ending prior to January 1, 1997.
BROKERAGE ALLOCATION
Under the management agreement between the fund and the advisor and under
the Subadvisory Agreement between the advisor and the subadvisor, the subadvisor
has the responsibility of selecting brokers and dealers to execute portfolio
transactions. In many transactions, the selection of the broker or dealer is
determined by the availability of the desired security and its offering price.
In other transactions, the selection of broker or dealer is a function of the
selection of market and the negotiation of price, as well as the broker's
general execution and operational and financial capabilities in the type of
transaction involved. The subadvisor will seek to obtain prompt execution of
orders at the most favorable prices or yields. The subadvisor may choose to
purchase and sell portfolio securities to and from dealers who provide
statistical and other information and services, including research, to the fund
and to the subadvisor. Such information or services will be in addition to and
not in lieu of the services required to be performed by the subadvisor, and the
expenses of the subadvisor will not necessarily be reduced as a result of the
receipt of such supplemental information.
INFORMATION ABOUT FUND SHARES
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in series (or funds). Shares issued are fully paid and
nonassessable and have no preemptive, conversion or similar rights.
Voting rights are not cumulative, so that investors holding more than 50% of
the Trust's (i.e., all funds') outstanding shares may be able to elect a Board
of Trustees. The Trust understates dollar-based voting, meaning that the number
of votes you are entitled to is based upon the dollar amount of your investment.
The election of trustees is determined by the votes received from all Trust
shareholders without regard to whether a majority of shares of any one fund
voted in favor of a particular nominee or all nominees as a group.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding and errors and omissions
insurance)
Statement of Additional Information 21
for the protection of the Trust, its shareholders, trustees, officers, employees
and agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss as a result of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the Trust
is unable to meet its obligations.
The assets belonging to each fund or class of shares are held separately by
the custodian and the shares of each fund or class represent a beneficial
interest in the principal, earnings and profit (or losses) of investments and
other assets held for each fund or class. Your rights as a shareholder are the
same for all funds or class of securities unless otherwise stated. Within their
respective fund or class, all shares have equal redemption rights. Each share,
when issued, is fully paid and non-assessable.
In the event of complete liquidation or dissolution of the fund,
shareholders of each series or class of shares shall be entitled to receive, pro
rata, all of the assets less the liabilities of that series or class.
Each shareholder has rights to dividends and distributions declared by the
fund he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
MULTIPLE CLASS STRUCTURE
The Trust's Board of Trustees has adopted a multiple class plan (the
Multiclass Plan) pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the fund may issue up to three classes of shares: an Investor Class, an
Institutional Class and an Advisor Class. Not all American Century funds offer
all three classes.
The Investor Class is made available to investors directly without any load
or commission, for a single unified management fee. The Institutional and
Advisor Classes are made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge these classes a lower total management
fee. In addition to the management fee, however, Advisor Class shares are
subject to a Master Distribution and Shareholder Services Plan (described on
this page). The plan has been adopted by the Board of Trustees and initial
shareholder in accordance with Rule 12b-1 adopted by the SEC under the
Investment Company Act.
RULE 12B-1
Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by the investment
company's Board of Trustees and approved by its shareholders. Pursuant to such
rule, the Board of Trustees and initial shareholder of the Advisor Class have
approved and entered into a Master Distribution and Shareholder Services Plan
(the "Plan"). The Plan is described below.
In adopting the Plan, the Board of Trustees [including a majority of
trustees who are not interested persons of the fund (as defined in the
Investment Company Act), hereafter referred to as the "independent trustees"]
determined that there was a reasonable likelihood that the Plan would benefit
the fund and the shareholders of the affected class. Pursuant to Rule 12b-1,
information with respect to revenues and expenses under the Plan is presented to
the Board of Trustees quarterly for its consideration in connection with its
deliberations as to the continuance of the Plan. Continuance of the Plan must be
approved by the Board of Trustees (including a majority of the independent
trustees) annually. The Plan may be amended by a vote of the Board of Trustees
(including a majority of the independent trustees), except that the Plan may not
be amended to materially increase the amount to be spent for distribution
without majority approval of the shareholders of the affected class. The Plan
terminates automatically in the event of an assignment and may be terminated
upon a vote of a majority of the independent trustees or by vote of a majority
of the outstanding voting securities of the affected class.
All fees paid under the Plan will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers.
22 American Century Investments
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectus, the fund's Advisor Class of shares also is
made available to participants in employer-sponsored retirement or savings plans
and to persons purchasing through financial intermediaries, such as banks,
broker-dealers and insurance companies. The fund's distributor enters into
contracts with various banks, broker-dealers, insurance companies and other
financial intermediaries, with respect to the sale of the fund's shares and/or
the use of the fund's shares in various investment products or in connection
with various financial services.
Certain recordkeeping and administrative services that are provided by the
fund's transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for shareholders in
the Advisor Class. In addition to such services, the financial intermediaries
provide various distribution services.
To enable the fund's shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the fund's
advisor has reduced its management fee by 0.25% per annum with respect to the
Advisor Class shares and the fund's Board of Trustees has adopted a Master
Distribution and Shareholder Services Plan (the Distribution Plan). Pursuant to
such Plan, the Advisor Class shares pay a fee of 0.50% annually of the aggregate
average daily assets of the fund's Advisor Class shares, 0.25% of which is paid
for Shareholder Services (as described below) and 0.25% of which is paid for
distribution services.
Payments may be made for a variety of shareholder services, including, but
are not limited to, (a) receiving, aggregating and processing purchase, exchange
and redemption requests from beneficial owners (including contract owners of
insurance products that utilize the fund as an underlying investment media) of
shares and placing purchase, exchange and redemption orders with the
Distributor; (b) providing shareholders with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(c) processing dividend payments from a fund on behalf of shareholders and
assisting shareholders in changing dividend options, account designations and
addresses; (d) providing and maintaining elective services such as check writing
and wire transfer services; (e) acting as shareholder of record and nominee for
beneficial owners; (f) maintaining account records for shareholders and/or other
beneficial owners; (g) issuing confirmations of transactions; (h) providing
subaccounting with respect to shares beneficially owned by customers of third
parties or providing the information to a fund as necessary for such
subaccounting; (i) preparing and forwarding shareholder communications from the
fund (such as proxies, shareholder reports, annual and semiannual financial
statements and dividend, distribution and tax notices) to shareholders and/or
other beneficial owners; and (j) providing other similar administrative and
sub-transfer agency services. Shareholder Services do not include those
activities and expenses that are primarily intended to result in the sale of
additional shares of the fund.
Distribution services include any activity undertaken or expense incurred
that is primarily intended to result in the sale of Advisor Class shares, which
services may include but are not limited to, (a) the payment of sales
commissions, on going commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
Selling Agreements; (b) compensation to registered representatives or other
employees of distributor who engage in or support distribution of the fund's
Advisor Class shares; (c) compensation to, and expenses (including overhead and
telephone expenses) of distributor; (d) the printing of prospectuses, statements
of additional information and reports for other than existing shareholders; (e)
the preparation, printing and distribution of sales literature and advertising
materials provided to the fund's shareholders and prospective shareholders; (f)
receiving and answering correspondence from prospective shareholders, including
distributing prospectuses, statements of additional information, and shareholder
reports; (g) the providing of facilities to answer questions from prospective
investors about fund shares; (h) complying with federal and state securities
laws pertaining to the sale of fund shares; (i) assisting investors in
completing application forms and selecting dividend and other account options;
(j) the providing of other reasonable assistance in connection with the
distribution of fund shares; (k) the organizing and conducting of sales seminars
and payments
Statement of Additional Information 23
in the form of transactional and compensation or promotional incentives; (l)
profit on the foregoing; (m) the payment of "service fees" for the provision of
personal, continuing services to investors, as contemplated by the Rules of Fair
Practice of the NASD and (n) such other distribution and services activities as
the advisor determines may be paid for by the fund pursuant to the terms of this
Agreement and in accordance with Rule 12b-1 of the Investment Company Act.
BUYING AND SELLING FUND SHARES
Information about buying, selling and exchanging fund shares is contained in
the American Century Investor Services Guide. The guide is available to
investors without charge and may be obtained by calling us.
VALUATION OF THE FUND'S SECURITIES
The fund's net asset value per share (NAV) is calculated as of the close of
business of the New York Stock Exchange (the Exchange), usually at 4 p.m.
Eastern time each day the Exchange is open for business. The Exchange typically
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Although the fund expects the same holidays
to be observed in the future, the Exchange may modify its holiday schedule at
any time.
The subadvisor typically completes its trading on behalf of the fund in
various markets before the Exchange closes for the day. Foreign currency
exchange rates also are determined prior to the close of the Exchange. However,
if extraordinary events occur that are expected to affect the value of a
portfolio security after the close of the primary exchange on which it is
traded, the security will be valued at fair market value as determined in good
faith under the direction of the Board of Trustees. The fund's share price is
calculated by adding the value of all portfolio securities and other assets,
deducting liabilities and dividing the result by the number of shares
outstanding. Expenses and interest earned on portfolio securities are accrued
daily.
TAXES
FEDERAL INCOME TAX
The fund intends to qualify annually as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
By so qualifying, a fund will be exempt from federal income taxes to the extent
that it distributes substantially all of its net investment income and net
realized capital gains (if any) to shareholders. If a fund fails to qualify as a
regulated investment company, it will be liable for taxes, significantly
reducing its distributions to shareholders and eliminating shareholders' ability
to treat distributions of the fund in the manner they were realized by the fund
If fund shares are purchased through taxable accounts, distributions of net
investment income and net short-term capital gains are taxable to you as
ordinary income. The dividends from net income may qualify for the 70% dividends
received deduction for corporations to the extent that the fund held shares
receiving the dividend for more than 45 days. Distributions from gains on assets
held greater than 12 months are taxable as long-term gains regardless of the
length of time you have held the shares. However, you should note that any loss
realized upon the sale or redemption of shares held for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
long-term capital gain to you with respect to such shares.
Dividends and interest received by a fund on foreign securities may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Foreign countries generally do not impose taxes on capital
gains in respect to investments by non-resident investors. The foreign taxes
paid by a fund will reduce its dividends.
If more than 50% of the value of a fund's total assets at the end of each
quarter of its fiscal year consists of securities of foreign corporations, the
fund may qualify for and make an election with the Internal Revenue Service with
respect to such fiscal year so that fund shareholders may be able to claim a
foreign tax credit in lieu of a deduction for foreign income taxes paid by the
fund. If such an election is
24 American Century Investments
made, the foreign taxes paid by the fund will be treated as income received by
you. In order for the shareholder to utilize the foreign tax credit, the mutual
fund shares must have been held for 16 days or more during the 30-day period,
beginning 15 days prior to the ex-dividend date for the mutual fund shares. The
mutual fund must meet a similar holding period requirement with respect to
foreign securities to which a dividend is attributable. Any portion of the
foreign tax credit that is ineligible as a result of the fund not meeting the
holding period requirement will be separately disclosed and may be eligible as
an itemized deduction.
If a fund purchases the securities of certain foreign investment funds or
trusts called passive foreign investment companies (PFIC), capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the fund holds its investment. The fund also may be subject to corporate
income tax and an interest charge on certain dividends and capital gains earned
from these investments, regardless of whether such income and gains are
distributed to shareholders. In the alternative, the fund may elect to recognize
cumulative gains on such investments as of the last day of its fiscal year and
distribute it to shareholders. Any distribution attributable to a PFIC is
characterized as ordinary income.
If you have not complied with certain provisions of the Internal Revenue
Code and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit to the IRS 31% of reportable
payments (which may include dividends, capital gains distributions and
redemptions). Those regulations require you to certify that the Social Security
number or tax identification number you provide is correct and that you are not
subject to 31% withholding for previous under-reporting to the IRS. You will be
asked to make the appropriate certification on your application. Payments
reported by us that omit your Social Security number or tax identification
number will subject us to a penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed, and is not refundable.
Redemption of shares of a fund (including redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
shareholders will generally recognize gain or loss in an amount equal to the
difference between the basis of the shares and the amount received. If a loss is
realized on the redemption of fund shares, the reinvestment in additional fund
shares within 30 days before or after the redemption may be subject to the "wash
sale" rules of the Code, resulting in a postponement of the recognition of such
loss for federal income tax purposes.
The fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund, defer fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the fund to mark to market certain types of the positions in
its portfolio (i.e., treat them as if they were sold), which may cause the fund
to recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the 90% and 98% distribution requirements for
relief from income and excise taxes, respectively. The fund will monitor its
transactions and may make such tax elections as fund management deems
appropriate with respect to foreign currency, options, futures contracts or
forward contracts. The fund's status as a regulated investment company may limit
its transactions involving foreign currency, futures, options and forward
contracts.
Under the Code, gains or losses attributable to fluctuations in exchange
rates that occur between the time the fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the fund actually collects such receivables or pays such liabilities
generally
Statement of Additional Information 25
are treated as ordinary income or loss. Similarly, in disposing of debt
securities denominated in foreign currencies, certain forward currency
contracts, or other instruments, gains or losses attributable to fluctuations in
the value of a foreign currency between the date the security, contract, or
other instrument is acquired and the date it is disposed of are also usually
treated as ordinary income or loss. Under Section 988 of the Code, these gains
or losses may increase or decrease the amount of the fund's investment company
taxable income distributed to shareholders as ordinary income.
Earnings derived by the fund from sources outside the U.S. may be subject to
non-U.S. withholding and possibly other taxes. Such taxes may be reduced or
eliminated under the terms of a U.S. income tax treaty, and the fund intends to
undertake any procedural steps required to claim the benefits of such a treaty.
With respect to any non-U.S. taxes actually paid by the fund, if more than 50%
in value of the fund's total assets at the close of any taxable year consists of
securities of foreign corporations, the fund may elect to treat any non-U.S.
income and similar taxes it pays as though the taxes were paid by its
shareholders.
TAXATION OF NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who is a non-resident alien or a non-U.S.
corporation, partnership, trust, or estate depends on whether the payments
received from a fund are "effectively connected" with a U.S. trade or business
carried on by such a shareholder. Ordinarily, income from the fund will not be
treated as "effectively connected."
If the payments received from the fund are effectively connected with a U.S.
trade or business of the shareholder, then all distributions of net investment
income and net capital gains of the fund and gains realized upon the redemption,
exchange, or other taxable disposition of shares will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens, residents, or
domestic entities, although the tax may be eliminated under the terms of an
applicable U.S. income tax treaty. Non-U.S. corporate shareholders also may be
subject to a branch profits tax with respect to payments from the fund.
If the shareholder is not engaged in a U.S. trade or business, or the
payments received from the fund are not effectively connected with the conduct
of such a trade or business, the shareholder will generally be subject to U.S.
tax withholding at the rate of 30% (or a lower rate under an applicable U.S.
income tax treaty) on distributions of net investment income and net realized
short-term capital received. Non-U.S. shareholders not engaged in a U.S. trade
or business, or having no effectively connected income, may also be subject to
U.S. tax at the rate of 30% (or a lower treaty rate) on additional distributions
resulting from the fund's election to treat any non-U.S. taxes it pays as though
the taxes were paid by its shareholders.
Distributions of net realized long-term capital gains to non-U.S.
shareholders and any capital gains realized by them upon the redemption or other
taxable disposition of shares generally will not be subject to U.S. tax. In the
case of individuals and other non-exempt, non-U.S. shareholders who fail to
furnish the fund with required certifications regarding their foreign status on
IRS Form W-8 or an appropriate substitute, the fund may be required to impose
backup withholding of U.S. tax at the rate of 31% on distributions of net
realized capital gains and proceeds of redemptions and exchanges.
The information above is only a summary of some of the tax considerations
affecting the fund and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local or foreign tax authorities to determine
whether the fund is a suitable investment.
HOW FUND PERFORMANCE INFORMATION IS CALCULATED
The fund may quote performance in various ways. Historical performance
information will be used in advertising and sales literature.
Yield is calculated by adding over a 30-day (or one-month) period all
interest and dividend income (net of fund expenses) calculated on each day's
market values, dividing this sum by the average number of fund shares
outstanding during the period, and expressing the result as a percentage of the
fund's share price on the last day of the 30-day (or one-month) period. The
percentage is then annualized. Capital gains and losses are not included in the
calculation.
26 American Century Investments
The following table sets forth yield quotations for the two classes of the
fund for the 30-day period ended December 31, 1998 (the last day of the fiscal
year pursuant to computation methods prescribed by the SEC).
Investor Advisor
Fund Class Class
- --------------------------------------------------------------------------------
International Bond 3.04% N/A
- --------------------------------------------------------------------------------
The fund also may elect to advertise cumulative total return and average
annual total return, computed as described above.
The following table shows the cumulative total return and the average annual
total return of the Investor Class of the fund since its inception (as noted)
through December 31, 1998.
Fund 1 Year From Inception
- --------------------------------------------------------------------------------
International Bond 17.87% 78.41%
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(1) Commenced operations on January 7, 1992.
ADDITIONAL PERFORMANCE COMPARISONS
The fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indices of market
performance. This may include comparisons with funds that, unlike the American
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be used for such comparisons may include, but are not
limited to, U.S. Treasury bill, note and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major, nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indices of stock market
performance; and indices and historical data supplied by major securities
brokerage or investment advisory firms. The fund also may utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
MULTIPLE CLASS PERFORMANCE ADVERTISING
Pursuant to the Multiple Class Plan, the Trust may issue additional classes
of its existing fund or introduce new funds with multiple classes available for
purchase. To the extent a new class is added to an existing fund, the manager
may, in compliance with SEC and NASD rules, regulations and guidelines, market
the new class of shares using the historical performance information of the
original class of shares. When quoting performance information for the new class
of shares for periods prior to the first full quarter after inception, the
original class' performance will be restated to reflect the expenses of the new
class and for periods after the first full quarter after inception, actual
performance of the new class will be used.
FINANCIAL STATEMENTS
The financial statements of the fund are included in the Annual Report to
shareholders for the fiscal year ended December 31, 1998. The Annual Report is
incorporated herein by reference. You may receive copies of the Reports without
charge upon request to American Century at the address and telephone number
shown on the back cover of this Statement of Additional Information.
EXPLANATION OF FIXED-INCOME SECURITIES RATINGS
As described in the Prospectus, the fund invests in fixed-income securities.
Those investments, however, are subject to certain credit quality restrictions,
as noted in the Prospectus and in this Statement of Additional Information. The
following is a summary of the rating categories referenced in the prospectus
disclosure.
Statement of Additional Information 27
BOND RATINGS
S&P Moody's Description
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AAA Aaa These are the highest ratings assigned by S&P and Moody's to
a debt obligation and indicates an extremely strong capacity to
pay interest and repay principal.
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AA Aa Debt rated in this category is considered to have a very
strong capacity to pay interest and repay principal and differs
from AAA/Aaa issues only in a small degree.
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A A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
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BBB Baa Debt rated BBB/Baa is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
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BB Ba Debt rated BB/Ba has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions that could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category also is used for debt subordinated to senior debt that
is assigned an actual or implied BBB- rating.
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B B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category also is used
for debt subordinated to senior debt that is assigned an actual
or implied BB/Ba or BB-/Ba3 rating.
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CCC Caa Debt rated CCC/Caa has a currently identifiable vulnerability
to default and is dependent upon favorable business, financial
and economic conditions to meet timely payment of interest
and repayment of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC/Caa
rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied B or B-/B3 rating.
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CC Ca The rating CC/Ca typically is applied to debt subordinated
to senior debt that is assigned an actual or implied
CCC/Caa rating.
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C C The rating C typically is applied to debt subordinated to
senior debt, which is assigned an actual or implied CCC-/Caa3
debt rating. The C rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
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CI - The rating CI is reserved for income bonds on which no
interest is being paid.
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D D Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will
be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
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28 American Century Investments
To provide more detailed indications of credit quality, the Standard &
Poor's ratings from AA to CCC may be modified by the addition of a plus or minus
sign to show relative standing within these major rating categories. Similarly,
Moody's adds numerical modifiers (1,2,3) to designate relative standing within
its major bond rating categories. Fitch Investors Service, Inc. also rates bonds
and uses a ratings system that is substantially similar to that used by Standard
& Poor's.
COMMERCIAL PAPER RATINGS
S&P Moody's Description
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A-1 Prime-1 This indicates that the degree of safety regarding
(P-1) timely payment is strong. Standard & Poor's rates
those issues determined to possess extremely strong
safety characteristics as A-1+.
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A-2 Prime-2 Capacity for timely payment on commercial paper is
(P-2) satisfactory, but the relative degree of safety is
not as high as for issues designated A-1. Earnings
trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics,
while still appropriated, may be more affected by
external conditions. Ample alternate liquidity is
maintained.
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A-3 Prime-3 Satisfactory capacity for timely repayment. Issues
(P-3) that carry this rating are somewhat more vulnerable
to the adverse changes in circumstances than
obligations carrying the higher designations.
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NOTE RATINGS
S&P Moody's Description
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SP-1 MIG-1; VMIG-1 Notes are of the highest quality enjoying
strong protection from established cash flows of funds
for their servicing or from established and broad-based
access to the market for refinancing,
or both.
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SP-2 MIG-2; VMIG-2 Notes are of high quality, with margins of protection
ample, although not so large as in the preceding
group.
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SP-3 MIG-3; VMIG-3 Notes are of favorable quality, with all security
elements accounted for, but lacking the undeniable
strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less
well established.
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SP-4 MIG-4; VMIG-4 Notes are of adequate quality, carrying
specific risk but having protection and not distinctly
or predominantly speculative.
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Statement of Additional Information 29
MORE INFORMATION ABOUT THE FUND IS CONTAINED THESE DOCUMENTS
ANNUAL AND SEMIANNUAL REPORTS
These contain more information about the fund's investments and the market
conditions and investment strategies that significantly affected the fund's
performance during the most recent fiscal period. The annual and semiannual
reports are incorporated by reference into this SAI. This means that these are
legally part of this SAI.
You can receive a free copy of the annual and semiannual reports, and ask any
questions about the funds, by contacting us at one of the addresses or telephone
numbers listed below.
If you own or are considering purchasing fund shares through
* an employer-sponsored retirement plan
* a bank
* a broker-dealer
* an insurance company
* another financial intermediary
you can receive the annual and semiannual reports directly from them.
You also can get information about the funds from the Security and Exchange
Commission (SEC).
* In person SEC Public
Reference Room
Washington, D.C.
Call 1-800-SEC-0330 for location and hours.
* On the Internet www.sec.gov
* By mail SEC Public Reference Section
Washington, D.C. 20549-6009
(The SEC will charge a fee for copying
the documents.)
Investment Company Act File No. 811-3706
[american century logo (reg. sm)]
American
Century
AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
INVESTOR SERVICES
1-800-345-2021 or 816-531-5575
AUTOMATED INFORMATION LINE
1-800-345-8765
WWW.AMERICANCENTURY.COM
FAX
816-340-7962
TELECOMMUNICATIONS DEVICE FOR THE DEAF
1-800-634-4113 or 816-444-3485
BUSINESS; NOT-FOR-PROFIT AND EMPLOYER-SPONSORED RETIREMENT PLANS
1-800-345-3533
SH-SAI-18622 9910
