STATEMENT OF ADDITIONAL INFORMATION
[american century logo]
American
Century(sm)
SEPTEMBER 3, 1996
REVISED JANUARY 1, 1997
AMERICAN CENTURY MUTUAL FUNDS, INC.
[front cover]
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 3, 1996
REVISED JANUARY 1, 1997
AMERICAN CENTURY MUTUAL FUNDS, INC.
This statement is not a prospectus but should be read in conjunction with
American Century's current prospectuses dated September 3, 1996, revised January
1, 1997. Please retain this document for future reference. To obtain a
prospectus, call American Century toll-free at 1-800-345-2021 (international
calls: 816-531-5575), or write to P.O. Box 419200, Kansas City, Missouri
64141-6200.
TABLE OF CONTENTS
Investment Objectives of the Funds.............................................2
Fundamental Policies of the Funds..............................................2
Additional Investment Restrictions.............................................4
Forward Currency Exchange Contracts............................................6
An Explanation of Fixed Income Securities Ratings..............................7
Short Sales....................................................................8
Portfolio Turnover.............................................................8
Interest Rate Futures Contracts and Related Options............................9
Municipal Leases..............................................................13
Officers and Directors........................................................13
Management....................................................................15
Custodians....................................................................17
Independent Accountants.......................................................17
Capital Stock.................................................................17
Multiple Class Structure......................................................18
Brokerage.....................................................................20
Performance Advertising.......................................................21
Redemptions in Kind...........................................................23
Holidays......................................................................23
Financial Statements..........................................................23
Statement of Additional Information 1
INVESTMENT OBJECTIVES OF THE FUNDS
The investment objective of each fund comprising American Century Mutual
Funds, Inc. is described on page 2 of the applicable prospectus. One feature of
the various series of shares (funds) merits further explanation. As described in
the Growth Funds Prospectus, the chief investment difference among Growth, Ultra
and Vista, and between Select and Heritage, is the size of the fund, which
affects the nature of the investments in the fund's portfolio. A smaller fund
tends to be more responsive to changes in the value of its portfolio securities.
For example, if a $1,000,000 fund buys $5,000 of stock which then doubles in
value, the value of the fund increases by only one-half of 1%. However, if a
$100,000 fund buys $5,000 of such stock which then doubles in value, the value
of the fund increases by 5%, or at a rate 10 times as great. By the same token,
if the value of such stock declines by one-half, the small fund would decline in
value by 2.5%, while the larger fund would decline in value by only one-half of
1% or at a rate only one-tenth as great. Thus, a small fund with the same
objective as a large fund, and similarly managed, likely will have a greater
potential for profit and for loss as well.
FUNDAMENTAL POLICIES OF THE FUNDS
In achieving its objective, a fund must conform to certain fundamental
policies that may not be changed without shareholder approval, as follows:
SELECT, HERITAGE, GROWTH, ULTRA, VISTA, GIFTRUST, NEW OPPORTUNITIES AND THE
EQUITY INVESTMENTS OF BALANCED
In general, within the restrictions outlined herein, American Century has
broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It is our policy to retain maximum flexibility in
management without restrictive provisions as to the proportion of one or another
class of securities that may be held subject to the investment restrictions
described below. It is the manager's intention that each of these portfolios
will generally consist of common stocks. However, the manager may invest the
assets of each series in varying amounts in other instruments and in senior
securities, such as bonds, debentures, preferred stocks and convertible issues,
when such a course is deemed appropriate in order to attempt to attain its
financial objective. Senior securities that, in the opinion of the manager, are
high-grade issues may also be purchased for defensive purposes. [Note: The above
statement of fundamental policy gives American Century authority to invest in
securities other than common stocks and traditional debt and convertible issues.
Though the funds have not made such investments in the past, the manager may
invest in master limited partnerships (other than real estate partnerships) and
royalty trusts which are traded on domestic stock exchanges when such
investments are deemed appropriate for the attainment of the funds' investment
objectives.]
BALANCED
The manager will invest approximately 60% of the Balanced portfolio in
common stocks and the balance in fixed income securities. Common stock
investments are described above. At least 80% of the fixed income assets will be
invested in securities that are rated at the time of purchase by a nationally
recognized statistical rating organization to be within the three highest
categories. The fund may invest in securities of the United States government
and its agencies and instrumentalities, corporate, sovereign government,
municipal, mortgage-backed, and other asset-backed securities. It can be
expected that management will invest from time to time in bonds and preferred
stock convertible into common stock.
CASH RESERVE
The manager will invest the Cash Reserve portfolio in debt securities
payable in United States currency. Such securities may be obligations issued or
guaranteed by the United States government or its agencies and instrumentalities
or obligations issued by corporations and others, including repurchase
agreements, of such quality and with such maturities to permit Cash Reserve to
be designated as a money market fund and to enable it to maintain a stable
offering price per share.
The fund operates pursuant to a rule under the Investment Company Act that
permits valuation of portfolio securities on the basis of amortized cost.
As required by the rule, the Board of Directors has
2 American Century Investments
adopted procedures designed to stabilize, to the extent reasonably possible, the
fund's price per share as computed for the purpose of sales and redemptions at
$1.00. While the day-to-day operation of the fund has been delegated to the
manager, the quality requirements established by the procedures limit
investments to certain United States dollar-denominated instruments which the
board of directors has determined present minimal credit risks and which have
been rated in one of the two highest rating categories as determined by a
nationally recognized statistical rating organization or, in the case of an
unrated security, of comparable quality. The procedures require review of the
fund's portfolio holdings at such intervals as are reasonable in light of
current market conditions to determine whether the fund's net asset value
calculated by using available market quotations deviates from the per-share
value based on amortized cost. The procedures also prescribe the action to be
taken if such deviation should occur.
SHORT-TERM GOVERNMENT FUND AND
INTERMEDIATE-TERM GOVERNMENT FUND
The manager will invest the portfolios of Short-Term Government Fund and
Intermediate-Term Government Fund in direct obligations of the United States,
such as Treasury bills, Treasury notes and U.S. government bonds, that are
supported by the full faith and credit of the United States. The manager may
also invest in agencies and instrumentalities of the United States government
that are established under the authority of an act of Congress. The securities
of some of such agencies and instrumentalities are supported by the full faith
and credit of the United States Treasury; others are supported by the right of
the issuer to borrow from the Treasury; still others are supported only by the
credit of the instrumentality. Such agencies and instrumentalities include, but
are not limited to, the Government National Mortgage Association, Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation, Student
Loan Marketing Association, Federal Farm Credit Banks, Federal Home Loan Banks,
and Resolution Funding Corporation. Purchase of such securities may be made
outright or on a when-issued basis and may be made subject to repurchase
agreements.
LIMITED-TERM BOND, INTERMEDIATE-TERM BOND AND BENHAM BOND
The manager will invest the portfolios of the corporate bond funds in high-
and medium-grade debt securities payable in United States currency. The funds
may invest in securities that, at the time of purchase, are rated by a
nationally recognized statistical rating organization or, if not rated, are of
equivalent investment quality as determined by the management, as follows:
short-term notes within the two highest categories; corporate, sovereign
government and municipal bonds within the four highest categories; securities of
the United States government and its agencies and instrumentalities; and other
types of securities rated at least P-2 by Moody's or A-2 by S&P. The funds may
also purchase securities under repurchase agreements as described in the
prospectus and purchase and sell interest rate futures contracts and related
options. See "Interest Rate Futures Contracts and Related Options," page 9.
LIMITED-TERM TAX-EXEMPT, INTERMEDIATE-TERM TAX-EXEMPT AND LONG-TERM TAX-EXEMPT
The manager will invest the tax-exempt portfolios in high- and medium-grade
securities. At least 80% of each fund's net assets will be invested in
securities whose income is not subject to federal income taxes, including the
alternative minimum tax.
The two principal classifications of tax-exempt securities are notes and
bonds. Tax-exempt notes are of short maturity, generally less than three years,
and are issued to provide for short-term capital needs. These include tax
anticipation notes and revenue anticipation notes, among others, as well as
tax-exempt commercial paper. Tax-exempt bonds, which meet long-term capital
needs, generally have maturities longer than one year. The two categories of
tax-exempt bonds, general obligation and revenue, may be held by the funds in
any proportion. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a project or
facility or from the proceeds of a specific revenue source, but not from the
general taxing power. Industrial development revenue bonds are a type of revenue
bond secured by payments from a private user, and generally do not
Statement of Additional Information 3
enjoy a call upon the resources of the municipality that issued the bond on
behalf of the user.
The funds may invest in fixed-, floating- and variable-rate securities.
Fixed-rate securities pay interest at the fixed rate until maturity. Floating-
and variable-rate securities normally have a stated maturity in excess of one
year, but may have a provision permitting the holder to demand payment of
principal and interest upon not more than seven days' notice. Floating rates of
interest are tied to a percentage of a designated base rate, such as rates on
Treasury bills or the prime rate at a major bank, and change whenever the
designated rate changes. Variable-rate securities provide for a periodic
adjustment in the rate.
For the purpose of determining the maturity of an individual security or
the average weighted portfolio maturity of one of the funds, the manager shall
consider the maturity to be the shorter of final maturity, the remaining
expected average life of a sinking fund bond, the remaining time until a
mandatory put date, the time until payment as the result of exercising a put or
demand-for-payment option, or the remaining time until the pre-refunding payment
date of a security whose redemption on a call date in advance of final maturity
is assured through contractual agreement and with high-quality collateral in
escrow.
The funds may invest in securities that, at the time of purchase, are rated
by a nationally recognized statistical rating organization or, if not rated, are
of equivalent investment quality as determined by the management, as follows:
short-term notes within the two highest categories, bonds within the four
highest categories, and other types of securities rated at least P-2 by Moody's
or A-2 by S&P. The funds may invest more than 25% of their assets in industrial
development revenue bonds. Each of the funds may invest in interest rate futures
contracts and related options. See "Interest Rate Futures Contracts and Related
Options," page 9.
BENHAM BOND, LIMITED-TERM TAX-EXEMPT,
INTERMEDIATE-TERM TAX-EXEMPT AND LONG-TERM TAX-EXEMPT
Benham Bond, Limited-Term Tax-Exempt, Intermediate-Term Tax-Exempt and
Long-Term Tax-Exempt (the funds) may buy and sell interest rate futures
contracts relating to debt securities ("debt futures," i.e., futures relating to
debt securities, and "bond index futures," i.e., futures relating to indexes on
types or groups of bonds) and write and buy put and call options relating to
interest rate futures contracts for the purpose of hedging against (i) declines
or possible declines in the market value of debt securities or (ii) inability to
participate in advances in the market values of debt securities at times when
the funds are not fully invested in long-term debt securities; provided that,
the funds may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on a fund's
existing futures positions and premiums paid for related options would exceed 5%
of the fund's assets.
ADDITIONAL INVESTMENT RESTRICTIONS
Additional fundamental policies that may be changed only with shareholder
approval provide that, with the exception of New Opportunities, each series of
shares:
(1) Shall not invest more than 15% of its assets in illiquid investments,
except for any fund intended to be a money market fund, which shall not
invest more than 10% of its assets in illiquid investments.
(2) Shall not invest in the securities of companies that, including
predecessors, have a record of less than three years of continuous
operation.
(3) Shall not lend its portfolio securities except to unaffiliated persons, and
is subject to the rules and regulations adopted under the Investment
Company Act. No such rules and regulations have been promulgated, but it is
the corporation's policy that such loans must be secured continuously by
cash collateral maintained on a current basis in an amount at least equal
to the market value of the securities loaned, or by irrevocable letters of
credit. During the existence of the loan, the corporation must continue to
receive the equivalent of the interest and dividends paid by the issuer on
the securities loaned and interest on the investment of the collateral; the
corporation must have the right to call the loan and obtain the securities
loaned at any time on five days' notice, including the right to call the
loan to enable the corporation to vote the securities. To comply with the
regulations of certain state secu-
4 American Century Investments
rities administrators, such loans may not exceed one-third of the
corporation's net assets taken at market. It is the policy of the
corporation not to permit interest on loaned securities of any series to
exceed 10% of the annual gross income of that series (without offset for
realized capital gains).
(4) Shall not purchase the security of any one issuer if such purchase would
cause more than 5% of the corporation's assets at market to be invested in
the securities of such issuer, except United States government securities,
or if the purchase would cause more than 10% of the outstanding voting
securities of any one issuer to be held in the corporation's portfolio.
(5) Shall not invest for control or for management, or concentrate its
investment in a particular company or a particular industry. No more than
25% of the assets of each series, exclusive of cash and government
securities, will be invested in securities of any one industry. The
corporation's policy in this respect includes the statement, "The
management's definition of the phrase `any one industry' shall be
conclusive unless clearly unreasonable." That statement may be ineffective
because it may be an attempt to waive a provision of the law, and such
waivers are void.
(6) Shall not buy securities on margin nor sell short (unless it owns, or by
virtue of its ownership of, other securities has the right to obtain
securities equivalent in kind and amount to the securities sold); however,
the corporation's funds may make margin deposits in connection with the use
of any financial instrument or any transaction in securities permitted by
their fundamental policies.
(7) Shall not invest in the securities of other investment companies except by
purchases in the open market involving only customary brokers' commissions
and no sales charges.
(8) Shall not issue any senior security.
(9) Shall not underwrite any securities.
(10) Shall not purchase or sell real estate. (In the opinion of management, this
restriction will not preclude the corporation from investing in securities
of corporations that deal in real estate.)
(11) Shall not purchase or sell commodities or commodity contracts; except that
Limited-Term Bond, Intermediate-Term Bond, Benham Bond, Limited-Term
Tax-Exempt, Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt may, for
non-speculative purposes, buy or sell interest rate futures contracts on
debt securities (debt futures and bond index futures) and related options.
(12) Shall not borrow any money with respect to any series of its stock, except
in an amount not in excess of 5% of the total assets of the series, and
then only for emergency and extraordinary purposes; this does not prohibit
the escrow and collateral arrangements in connection with investment in
interest rate futures contracts and related options by Limited-Term Bond,
Intermediate-Term Bond, Benham Bond, Limited-Term Tax-Exempt,
Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt.
Paragraphs 3, 5, 8 and 9 shall also apply as fundamental policies of New
Opportunities. Paragraphs 1, 2, 6, 7, 10, 11 and 12 shall also apply to New
Opportunities, but shall not be considered fundamental policies. Paragraph 4
shall apply to New Opportunities with respect to 75% of its portfolio and shall
not be considered a fundamental policy.
The Investment Company Act imposes certain additional restrictions upon
acquisition by the corporation of securities issued by insurance companies,
brokers, dealers, underwriters or investment advisers, and upon transactions
with affiliated persons as therein defined. It also defines and forbids the
creation of cross and circular ownership. Neither the Securities and Exchange
Commission nor any other agency of the federal government participates in or
supervises the corporation's management or its investment practices or policies.
The Investment Company Act also provides that the funds may not invest more
than 25% of their assets in the securities of issuers engaged in a single
industry. In determining industry groups for purposes of this standard, the
Securities and Exchange Commission 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 funds monitor
industry concentration
Statement of Additional Information 5
using a more restrictive list of industry groups than that recommended by the
SEC. The funds believe 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 funds to forego investment possibilities
which may otherwise be available to them under the Investment Company Act.
To comply with the requirements of a state securities administrator, the
corporation has agreed on behalf of all funds other than New Opportunities not
to invest in oil, gas or other mineral leases, or in warrants, except that a
fund may purchase securities with warrants attached.
Neither the SEC nor any other agency of the federal or state government
participates in or supervise the funds' management or their investment practices
or policies.
FORWARD CURRENCY EXCHANGE CONTRACTS
The funds conduct their foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward foreign currency exchange
contracts to purchase or sell foreign currencies.
The funds expect to use forward contracts under two circumstances:
(1) When the manager wishes to "lock in" the U.S. dollar price of a security
when a fund is purchasing or selling a security denominated in a foreign
currency, the fund would be able to enter into a forward contract to do so;
(2) When the manager believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, a fund would be
able to enter into a forward contract to sell foreign currency for a fixed
U.S. dollar amount approximating the value of some or all of its fund's
portfolio securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when a fund enters into a trade for the
purchase or sale of a security denominated in a foreign currency, it may be
desirable to establish (lock in) the U.S. dollar cost or proceeds. By entering
into forward contracts in U.S. dollars for the purchase or sale of a foreign
currency involved in an underlying security transaction, the fund will be able
to protect itself against a possible loss between trade and settlement dates
resulting from the adverse change in the relationship between the U.S. dollar at
the subject foreign currency.
Under the second circumstance, when the manager believes that the currency
of a particular country may suffer a substantial decline relative to the U.S.
dollar, a fund could enter into a foreign contract to sell for a fixed dollar
amount the amount in foreign currencies approximating the value of some or all
of its portfolio securities either denominated in, or whose value is tied to,
such foreign currency. The fund will place cash or high-grade liquid securities
in a separate account with its custodian in an amount sufficient to cover its
obligation under the contract. If the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account equals the amount of
the fund's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The manager does not intend to enter into such contracts on
a regular basis. Normally, consideration of the prospect for currency parities
will be incorporated into the long-term investment decisions made with respect
to overall diversification strategies. However, the manager believes that it is
important to have flexibility to enter into such forward contracts when it
determines that a fund's best interests may be served.
Generally, a fund will not enter into a forward contract with a term of
greater than one year. At the maturity of the forward contract, the fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate the obligation to deliver the foreign
currency by purchasing an "offsetting" forward contract with
6 American Century Investments
the same currency trader obligating the fund to purchase, on the same maturity
date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the forward contract. Accordingly, it
may be necessary for a fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency the fund is obligated to deliver.
AN EXPLANATION OF FIXED INCOME SECURITIES RATINGS
As described in the applicable prospectus, certain of the funds will have,
at any given time, investments in fixed income securities. Those investments,
however, are subject to certain credit quality restrictions, as noted in the
applicable prospectus. The following is a description of the rating categories
referenced in the prospectus fund disclosure.
The following summarizes the highest four ratings used by Standard & Poor's
Corporation for bonds:
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in a small
degree.
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.
BBB - Debt rated BBB 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.
To provide more detailed indications of credit quality, the AA, A and BBB
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1.
The rating SP-1 is the highest rating assigned by S&P to municipal notes
and indicates very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are given
a plus (+) designation.
The following summarizes the highest four ratings used by Moody's
Investors Service, Inc. for bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A - Debt which is rated A possesses many favorable investment attributes
and is to be considered as an upper medium-grade obligation. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Debt which is rated Baa is considered as a medium-grade obligation,
i.e., it is neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such debt lacks outstanding
Statement of Additional Information 7
investment characteristics and in fact has speculative characteristics as
well.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated Aa, A and Baa. The modifier 1 indicates that the bond being rated ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
The rating Prime-1 or P-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 or P-2 (or related supporting institutions)
are considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. 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.
The following summarized the highest rating used by Moody's for short-term
notes and variable rate demand obligations:
MIG-1; VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
SHORT SALES
The common stock funds and the Balanced Fund may engage in short sales if,
at the time of the short sale, the fund owns or has the right to acquire an
equal amount of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If a fund engages in a short sale, the collateral account will be
maintained by the fund's custodian. While the short sale is open, the fund will
maintain in a segregated custodial account an amount of securities convertible
into, or exchangeable for, such equivalent securities at no additional cost.
These securities would constitute the fund's long position.
A fund may make a short sale, as described above, when it wants to sell the
security it owns at a current attractive price, but also wishes to defer
recognition of gain or loss for federal income tax purposes and for purposes of
satisfying certain tests applicable to regulated investment companies under the
Internal Revenue Code. In such a case, any future losses in the fund's long
position should be reduced by a gain in the short position. The extent to which
such gains or losses are reduced would depend upon the amount of the security
sold short relative to the amount the fund owns. There will be certain
additional transaction costs associated with short sales, but the fund will
endeavor to offset these costs with income from the investment of the cash
proceeds of short sales.
PORTFOLIO TURNOVER
The portfolio turnover rates of the funds are shown in the Financial
Highlights table in the prospectuses.
With respect to each series of shares, the manager will purchase and sell
securities without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The funds intend to purchase a given security whenever the manager believes
it will contribute to the stated objective of the series, even if the same
security has only recently been sold. In selling a given security, the manager
keeps in mind that (1) profits from sales of securities held less than three
months must be limited in order to meet the requirements of Subchapter M of the
Internal Revenue Code, and (2) profits from sales of securities are taxed to
shareholders as ordinary income. Subject to those considerations, the
corporation will sell a given security, no matter for how long or for 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 manager believes that it is not fulfilling its
purpose, either because,
8 American Century Investments
among other things, it did not live up to the manager's 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.
When a general decline in security prices is anticipated, the equity funds
may decrease or eliminate entirely their equity positions and increase their
cash positions, and when a rise in price levels is anticipated, the equity funds
may increase their equity positions and decrease their cash positions. However,
these funds have followed the practice of remaining essentially fully invested
in equity securities.
Since investment decisions are based on the anticipated contribution of the
security in question to the corporation's objectives, the manager believes that
the rate of portfolio turnover is irrelevant when it believes a change is in
order to achieve those objectives, and the corporation's annual portfolio
turnover rate cannot be anticipated and may be comparatively high. This
disclosure regarding portfolio turnover is a statement of fundamental policy and
may be changed only by a vote of the shareholders.
Since the manager does not take portfolio turnover rate into account in
making investment decisions, (1) the manager has 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 a
representation of the rates which will be attained in the future.
INTEREST RATE FUTURES CONTRACTS AND RELATED
OPTIONS
Limited-Term Bond, Intermediate-Term Bond, Benham Bond, Limited-Term
Tax-Exempt, Intermediate-Term Tax-Exempt and Long-Term Tax-Exempt (the funds)
may buy and sell interest rate futures contracts relating to debt securities
("debt futures," i.e., futures relating to debt securities, and "bond index
futures," i.e., futures relating to indexes on types or groups of bonds) and
write and buy put and call options relating to interest rate futures contracts.
A fund will not purchase or sell futures contracts and options thereon for
speculative purposes but rather only for the purpose of hedging against changes
in the market value of its portfolio securities or changes in the market value
of securities that American Century Investment Management, Inc. (manager)
anticipates that it may wish to include in the portfolio of a fund. A fund may
sell a future or write a call or purchase a put on a future if the manager
anticipates that a general market or market sector decline may adversely affect
the market value of any or all of the fund's holdings. A fund may buy a future
or purchase a call or sell a put on a future if the manager anticipates a
significant market advance in the type of securities it intends to purchase for
the fund's portfolio at a time when the fund is not invested in debt securities
to the extent permitted by its investment policies. A fund may purchase a future
or a call option thereon as a temporary substitute for the purchase of
individual securities which may then be purchased in an orderly fashion. As
securities are purchased, corresponding futures positions would be terminated by
offsetting sales.
The "sale" of a debt future means the acquisition by the fund of an
obligation to deliver the related debt securities (i.e., those called for by the
contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the fund of an obligation to acquire the related
debt securities at a specified time on a specified date. The "sale" of a bond
index future means the acquisition by the fund of an obligation to deliver an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the future and the price
at which the future is originally struck. No physical delivery of the bonds
making up the index is expected to be made. The "purchase" of a bond index
future means the acquisition by the fund of an obligation to take delivery of
such an amount of cash.
Unlike when the fund purchases or sells a bond, no price is paid or
received by the fund upon the purchase or sale of the future. Initially, the
fund will be required to deposit an amount of cash or securities equal to a
varying specified percentage of the contract amount. This amount is known as
initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily
Statement of Additional Information 9
basis as the price of the underlying debt securities or index fluctuates, making
the future more or less valuable, a process known as mark to the market. Changes
in variation margin are recorded by the fund as unrealized gains or losses. At
any time prior to expiration of the future, the fund may elect to close the
position by taking an opposite position that will operate to terminate its
position in the future. A final determination of variation margin is then made;
additional cash is required to be paid by or released to the fund and the fund
realizes a loss or a gain.
When a fund writes an option on a futures contract it becomes obligated, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the term of the option. If a fund
has written a call, it becomes obligated to assume a "long" position in a
futures contract, which means that it is required to take delivery of the
underlying securities. If it has written a put, it is obligated to assume a
"short" position in a futures contract, which means that it is required to
deliver the underlying securities. When the fund purchases an option on a
futures contract it acquires a right in return for the premium it pays to assume
a position in a futures contract.
If a fund writes an option on a futures contract it will be required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an option
on a future are included in the initial margin deposit.
For options sold, the fund will segregate cash or high-quality debt
securities equal to the value of securities underlying the option unless the
option is otherwise covered.
A fund will deposit in a segregated account with its custodian bank
high-quality debt obligations maturing in one year or less, or cash, in an
amount equal to the fluctuating market value of long futures contracts it has
purchased less any margin deposited on its long position. It may hold cash or
acquire such debt obligations for the purpose of making these deposits.
Changes in variation margin are recorded by a fund as unrealized gains or
losses. Initial margin payments will be deposited in the fund's custodian bank
in an account registered in the broker's name; access to the assets in that
account may be made by the broker only under specified conditions. At any time
prior to expiration of a futures contract or an option thereon, a fund may elect
to close the position by taking an opposite position that will operate to
terminate its position in the futures contract or option. A final determination
of variation margin is made at that time; additional cash is required to be paid
by or released to it and it realizes a loss or gain.
Although futures contracts by their terms call for the actual delivery or
acquisition of the underlying securities or cash, in most cases the contractual
obligation is so fulfilled without having to make or take delivery. The funds do
not intend to make or take delivery of the underlying obligation. All
transactions in futures contracts and options thereon are made, offset or
fulfilled through a clearinghouse associated with the exchange on which the
instruments are traded. Although the funds intend to buy and sell futures
contracts only on exchanges where there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular future at any particular time. In such event, it may not be possible
to close a futures contract position. Similar market liquidity risks occur with
respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that a fund
might not be fully invested at a time when the value of the securities in which
it invests is increasing is referred to as having a "long futures position." The
funds must operate within certain restrictions as to long and short positions in
futures contracts and options thereon under a rule (CFTC Rule) adopted by the
Commodity Futures Trading Commission under the Commodity Exchange Act to be
eligible for the exclusion provided by the CFTC Rule from registration by the
fund with the CFTC as a "commodity pool operator" (as defined under the CEA),
and must represent to the CFTC that it will operate within such restrictions.
Under these restrictions a fund will not, as to any positions, whether long,
short or a combination thereof, enter into futures contracts and options thereon
for which the aggregate initial margins and
10 American Century Investments
premiums exceed 5% of the fair market value of the fund's assets after taking
into account unrealized profits and losses on options the fund has entered into;
in the case of an option that is "in-the-money" (as defined under the CEA), the
in-the-money amount may be excluded in computing such 5%. (In general, a call
option on a futures contract is in-the-money if the value of the future exceeds
the strike, i.e., exercise, price of the call; a put option on a futures
contract is in-the-money if the value of the futures contract that is the
subject of the put is exceeded by the strike price of the put.) Under the
restrictions, a fund also must, as to short positions, use futures contracts and
options thereon solely for bona fide hedging purposes within the meaning and
intent of the applicable provisions under the CEA. As to its long positions that
are used as part of a fund's portfolio strategy and are incidental to the fund's
activities in the underlying cash market, the "underlying commodity value" (see
below) of the fund's futures contract and options thereon must not exceed the
sum of (i) cash set aside in an identifiable manner, or short-term U.S. debt
obligations or other U.S. dollar-denominated, high-quality, short-term money
market instruments so set aside, plus any funds deposited as margin; (ii) cash
proceeds from existing investments due in 30 days; and (iii) accrued profits
held at the futures commission merchant. [There are described above the
segregated accounts that a fund must maintain with its custodian bank as to its
options and futures contracts activities due to Securities and Exchange
Commission requirements. The fund will, as to its long positions, be required to
abide by the more restrictive of these SEC and CFTC requirements.] The
underlying commodity value of a futures contract is computed by multiplying the
size (dollar amount) of the futures contract by the daily settlement price of
the futures contract. For an option on a futures contract, that value is the
underlying commodity value of the future underlying the option.
Since futures contracts and options thereon can replicate movements in the
cash markets for the securities in which a fund invests without the large cash
investments required for dealing in such markets, they may subject a fund to
greater and more volatile risks than might otherwise be the case. The principal
risks related to the use of such instruments are (i) the offsetting correlation
between movements in the market price of the portfolio investments (held or
intended) being hedged and in the price of the futures contract or option may be
imperfect; (ii) possible lack of a liquid secondary market for closing out
futures or options positions; (iii) the need for additional portfolio management
skills and techniques; (iv) losses due to unanticipated market price movements;
and (v) the bankruptcy or failure of a futures commission merchant holding
margin deposits made by the funds and the funds' inability to obtain repayment
of all or part of such deposits. For a hedge to be completely effective, the
price change of the hedging instrument should equal the price change of the
security being hedged. Such equal price changes are not always possible because
the investment underlying the hedging instrument may not be the same investment
that is being hedged. The manager will attempt to create a closely correlated
hedge, but hedging activity may not be completely successful in eliminating
market value fluctuation. The ordinary spreads between prices in the cash and
futures markets, due to the differences in the natures of those markets, are
subject to the following factors which may create distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest trends by the manager may still not result in a successful transaction.
The manager may be incorrect in its expectations as to the extent of various
interest rate movements or the time span within which the movements take place.
Statement of Additional Information 11
The risk of imperfect correlation between movements in the price of a bond
index future and movements in the price of the securities that are the subject
of the hedge increases as the composition of a fund's portfolio diverges from
the securities included in the applicable index. The price of the bond index
future may move more than or less than the price of the securities being hedged.
If the price of the bond index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
security, a fund will experience either a loss or a gain on the futures contract
that will not be completely offset by movements in the price of the securities
that are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of the securities being hedged and movements in the
price of the bond index futures, a fund may buy or sell bond index futures in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the prices of such securities being hedged is less than
the historical volatility of the bond index. It is also possible that, where a
fund has sold futures contracts to hedge its securities against a decline in the
market, the market may advance and the value of securities held in the portfolio
may decline. If this occurred, a fund would lose money on the futures contract
and also experience a decline in value in its portfolio securities. However,
while this could occur for a brief period or to a very small degree, over time
the value of a portfolio of debt securities will tend to move in the same
direction as the market indexes upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible increase
in the price of bonds before a fund is able to invest in securities in an
orderly fashion, it is possible that the market may decline instead; if the fund
then concludes not to invest in securities at that time because of concern as to
possible further market decline or for other reasons, it will realize a loss on
the futures contract that is not offset by a reduction in the price of the
securities it had anticipated purchasing.
The risks of investment in options on bond indexes may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when a fund writes a call on a bond index it cannot provide in advance for
its potential settlement obligations by acquiring and holding the underlying
securities. A fund can offset some of the risk of its writing position by
holding a portfolio of bonds similar to those on which the underlying index is
based. However, a fund cannot, as a practical matter, acquire and hold a
portfolio containing exactly the same securities as the underlying index and, as
a result, bears a risk that the value of the securities held will vary from the
value of the index. Even if a fund could assemble a portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, a fund, as the call writer, will not
learn that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security because there, the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
securities that exactly match the composition of the underlying index, it will
not be able to satisfy its assignment obligations by delivering those securities
against payment of the exercise price. Instead, it will be required to pay cash
in an amount based on the closing index value of the exercise date; and by the
time it learns that it has been assigned, the index may have declined with a
corresponding decline in the value of its portfolio. This "timing risk" is an
inherent limita-
12 American Century Investments
tion on the ability of index call writers to cover their risk exposure by
holding securities positions.
If a fund has purchased an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the fund exercising the option must pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
MUNICIPAL LEASES
The tax-exempt funds may invest in municipal lease obligations and
certificates of participation in such obligations (collectively, lease
obligations). A lease obligation does not constitute a general obligation of the
municipality for which the municipality's taxing power is pledged, although the
lease obligation is ordinarily backed by the municipality's covenant to budget
for the payments due under the lease obligation.
Certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease obligation payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. In evaluating a potential investment in such a lease obligation,
management will consider: (i) the credit quality of the obligor, (ii) whether
the underlying property is essential to a governmental function, and (iii)
whether the lease obligation contains covenants prohibiting the obligor from
substituting similar property if the obligor fails to make appropriations for
the lease obligation.
Municipal lease obligations may be determined to be liquid in accordance
with the guidelines established by the funds' board of directors for purposes of
complying with the funds' investment restrictions. In determining the liquidity
of a lease obligation, the manager will consider: (1) the frequency of trades
and quotes for the lease obligation, (2) the number of dealers willing to
purchase or sell the lease obligation and the number of other potential
purchasers, (3) dealer undertakings to make a market in the lease obligation,
(4) the nature of the marketplace trades, including the time needed to dispose
of the lease obligation, the method of soliciting offers, and the mechanics of
transfer, (5) whether the lease obligation is of a size that will be attractive
to institutional investors, (6) whether the lease obligation contains a
non-appropriation clause and the likelihood that the obligor will fail to make
an appropriation therefore, and (7) such other factors as the manager may
determine to be relevant to such determination.
OFFICERS AND DIRECTORS
The principal officers and directors of the corporation, their principal
business experience during the past five years, and their affiliations with the
fund's investment manager, American Century Investment Management, Inc. and its
transfer agent, American Century Services Corporation, are listed below. Unless
otherwise noted, the business address of each director and officer is American
Century Tower, 4500 Main Street, Kansas City, Missouri 64111. All persons named
as officers of the Corporation also serve in similar capacities for other funds
advised by the manager. Those directors that are "interested persons" as defined
in the Investment Company Act of 1940 are indicated by an asterisk(*).
JAMES E. STOWERS JR.,* Chairman of the Board and Director; Chairman of
the Board, Director and controlling shareholder of American Century Companies,
Inc., parent corporation of American Century Investment Management, Inc. and
American Century Services Corporation; Chairman of the Board and Director of
American Century Investment Management, Inc. and American Century Services
Corporation; father of James E. Stowers III.
JAMES E. STOWERS III,* President, Chief Executive Officer and Director;
President, Chief Executive Officer and Director, American Century Companies,
Inc., American Century Investment Management, Inc. and American Century
Services Corporation.
THOMAS A. BROWN, Director; 2029 Wyandotte, Kansas City, Missouri; Chief
Executive Officer, Associated Bearing Company, a corporation engaged in the
sale of bearings and power transmission products.
ROBERT W. DOERING, M.D., Director; 6420 Prospect, Kansas City, Missouri;
general surgeon.
Statement of Additional Information 13
D. D. (DEL) HOCK, Director; 1225 Seventeenth Street #900, Denver,
Colorado; Chairman, President and Chief Executive Officer, Public Service
Company of Colorado.
LINSLEY L. LUNDGAARD, Vice Chairman of the Board and Director; 18648 White
Wing Drive, Rio Verde, Arizona; retired; formerly Vice President and National
Sales Manager, Flour Milling Division, Cargill, Inc.
DONALD H. PRATT, Director; P.O. Box 419917, Kansas City, Missouri;
President, Butler Manufacturing Company.
LLOYD T. SILVER JR., Director; 2300 West 70th Terrace, Mission Hills,
Kansas; President, LSC, Inc., manufacturer's representative.
M. JEANNINE STRANDJORD, Director; 908 West 121st Street, Kansas City,
Missouri; Senior Vice President and Treasurer, Sprint Corporation.
WILLIAM M. LYONS, Executive Vice President, Chief Operating Officer,
Secretary and General Counsel; Executive Vice President, Chief Operating
Officer and General Counsel, American Century Companies, Inc., American
Century Investment Management, Inc. and American Century Services Corporation.
ROBERT T. JACKSON, Executive Vice President and Principal Financial
Officer; Executive Vice President and Treasurer, American Century Companies,
Inc., American Century Investment Management, Inc. and American Century
Services Corporation; formerly Executive Vice President, Kemper Corporation.
MARYANNE ROEPKE, CPA, Vice President, Treasurer and Principal Accounting
Officer; Vice President, American Century Services Corporation.
PATRICK A. LOOBY, Vice President; Vice President, American Century
Services Corporation.
MERELE A. MAY, Controller.
C. JEAN WADE, CPA, Controller; formerly, accountant, Baird, Kurtz &
Dobson.
The Board of Directors has established four standing committees, the
Executive Committee, the Audit Committee, the Compliance Committee and the
Nominating Committee.
Messrs. Stowers Jr., Stowers III, and Lundgaard constitute the Executive
Committee of the Board of Directors. The committee performs the functions of the
Board of Directors between meetings of the Board, subject to the limitations on
its power set out in the Maryland General Corporation Law, and except for
matters required by the Investment Company Act to be acted upon by the whole
Board.
Messrs. Lundgaard (chairman), Doering and Hock and Ms. Strandjord
constitute the Audit Committee. The functions of the Audit Committee include
recommending the engagement of the funds' independent accountants, reviewing the
arrangements for and scope of the annual audit, reviewing comments made by the
independent accountants with respect to internal controls and the considerations
given or the corrective action taken by management, and reviewing nonaudit
services provided by the independent accountants.
Messrs. Brown (chairman), Pratt and Silver constitute the Compliance
Committee. The functions of the Compliance Committee include reviewing the
results of the funds' compliance testing program, reviewing quarterly reports
from the manager to the Board regarding various compliance matters and
monitoring the implementation of the funds' Code of Ethics, including violations
thereof.
The Nominating Committee has as its principal role the consideration and
recommendation of individuals for nomination as directors. The names of
potential director candidates are drawn from a number of sources, including
recommendations from members of the Board, 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. The members of the nominating committee are Messrs. Pratt
(Chairman), Lundgaard and Stowers III.
The Directors of the corporation also serve as Directors for other funds
advised by the manager. Each Director who is not an "interested person" as
defined in the Investment Company Act receives for service as a member of the
Board of all Twentieth Century investment companies an annual director's fee of
$44,000, and an additional fee of $1,000 per regular Board meeting attended and
$500 per special Board meeting and committee meeting attended. In addition,
those Directors who are not "interested persons" and serve as chairman of a
committee of the Board of Directors receive an additional $2,000 for such
services. These fees and expenses are divided
14 American Century Investments
among the six investment companies based upon their relative net assets. Under
the terms of the management agreement with the manager, the funds are
responsible for paying such fees and expenses. Set forth below is the aggregate
compensation paid for the periods indicated by the funds and by the American
Century family of funds as a whole to each Director who is not an "interested
person" as defined in the Investment Company Act.
Aggregate Total Compensation from
Compensation the American Century
Director from the corporation1 Family of Funds2
Thomas A. Brown $37,370.13 $44,000
Robert W. Doering, M.D. 37,370.13 44,000
Linsley L. Lundgaard 38,052.39 46,000
Donald H. Pratt 21,292.80 28,000
Lloyd T. Silver Jr. 37,370.13 44,000
M. Jeannine Strandjord 37,370.13 44,000
John M. Urie 39,269.48 46,000
1 Includes compensation actually paid by the corporation during the fiscal
year ended October 31, 1995.
2 Includes compensation paid by the fifteen investment company members of the
American Century family of funds for the calendar year ended December 31,
1995.
The corporation has adopted the American Century Mutual Funds Deferred
Compensation Plan for Non-Interested Directors. Under the Plan, the
non-interested person Directors may defer receipt of all or any part of the fees
to be paid to them for serving as Directors of the corporation.
Under the Plan, all deferred fees are credited to an account established in
the name of the participating Directors. 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 participating Director. 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. Directors are allowed to change
their designation of mutual funds from time to time.
No deferred fees are payable until such time as a participating Director
resigns, retires or otherwise ceases to be a member of the Board of Directors.
Directors 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 Director, all remaining deferred fee
account balances are paid to the Director's beneficiary or, if none, to the
Director's estate.
The Plan is an unfunded plan and, accordingly, American Century has no
obligation to segregate assets to secure or fund the deferred fees. The rights
of Directors to receive their deferred fee account balances are the same as the
rights of a general unsecured creditor of the corporation. 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 participating Directors under the Plan
during the fiscal year ended October 31, 1995.
Those Directors who are "interested persons," as defined in the Investment
Company Act, receive no fee as such for serving as a Director. The salaries of
such individuals, who are also officers of the funds, are paid by the manager.
MANAGEMENT
A description of the responsibilities and method of compensation of the
funds' investment manager, American Century Investment Management, Inc., appears
in each prospectus under the caption, "Management."
During the past three years, the management fees of the manager were:
Fund Years Ending October 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Select
Management fees $ 40,918,896 $ 46,147,911 $ 48,480,096
Average net assets 4,100,172,070 4,616,441,587 4,848,159,470
Heritage
Management fees 8,900,956 8,238,322 5,498,048
Average net assets 899,947,177 822,480,118 548,884,570
Growth
Management fees 45,713,727 43,916,916 47,176,779
Average net assets 4,575,064,437 4,404,299,518 4,709,124,282
Ultra
Management fees 113,284,379 91,474,921 60,984,145
Average net assets 11,330,063,925 9,149,558,371 6,112,235,221
Vista
Management fees 11,104,694 7,226,302 8,705,024
Average net assets 1,123,979,069 732,311,586 871,068,426
Statement of Additional Information 15
Fund Years Ending October 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Giftrust
Management fees 3,840,425 1,875,098 1,124,267
Average net assets 389,827,724 189,487,155 112,725,430
Balanced
Management fees $ 7,303,148 $ 6,861,248 $ 6,958,709
Average net assets 743,379,550 687,079,027 693,537,849
Cash Reserve
Management fees 9,546,843 10,282,495 13,085,631
Average net assets 1,367,481,447 1,294,838,404 1,306,730,840
Short-Term Government Fund
Management fees 2,708,850 3,611,805 5,286,712
Average net assets 387,845,926 447,658,784 530,918,127
Benham Bond
Management fees 1,038,120 1,233,251 1,639,343
Average net assets 132,239,065 141,750,838 164,545,497
Limited-Term
Tax-Exempt
Management fees 0 0 0
Average net assets 59,645,970 57,545,359 35,996,656
Intermediate-Term
Tax-Exempt
Management fees 471,159 537,893 632,802
Average net assets 78,781,379 89,751,385 87,858,747
Long-Term Tax-Exempt
Management fees 317,622 361,732 471,123
Average net assets 53,244,618 60,383,665 64,889,290
Limited-Term Bond
Management fees 40,530 17,509 --
Average net assets 5,906,790 3,690,814 --
Intermediate-Term Bond
Management fees 59,552 17,532 --
Average net assets 8,128,357 3,458,399 --
Intermediate-Term
Government Fund
Management fees 104,141 19,566 --
Average net assets 14,092,947 3,821,083 --
- --------------------------------------------------------------------------------
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 (i) the funds'
Board of Directors, or by the vote of a majority of the outstanding votes (as
defined in the Investment Company Act), and (ii) by the vote of a majority of
the Directors of the funds who are not parties to the agreement or interested
persons of the manager, 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 funds' Board of Directors, or by a vote of
a majority of the funds' shareholders, on 60 days' written notice to the
manager, and that it shall be automatically terminated if it is assigned.
The management agreement provides that the manager shall not be liable to
the funds or its shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations or duties.
The management agreement also provides that the manager and its officers,
directors 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 one or more funds and also for
other clients advised by the manager. Investment decisions for the funds 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 series, or in
different amounts and at different times for more than one but less than all
clients or series. In addition, purchases or sales of the same security may be
made for two or more clients or series on the same date. Such transactions will
be allocated among clients or series in a manner believed by the manager 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 manager may aggregate purchase and sale orders of the funds with
purchase and sale orders of its other clients when the manager believes that
such aggregation provides the best execution for the funds. The funds' Board of
Directors has approved the policy of the manager with respect to the aggregation
of portfolio transactions. Where portfolio transactions have been aggregated,
the funds participate 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
manager will not aggregate portfolio transactions of the funds unless it
believes such aggregation is consistent with its duty to seek best execution on
behalf of the funds and the terms of the management agreement. The manager
receives no additional compensation or remuneration as a result of such
aggregation.
16 American Century Investments
On February 1, 1996, the manager was acting as an investment advisor to 10
institutional accounts with an aggregate value of $369,906,144. While each of
these clients has unique investment restrictions and guidelines, they have all
elected to have their portfolios managed in a manner similar to the portfolio of
either Growth or Select. Accordingly, anytime a security is being bought or sold
for the Growth or Select funds, it may also be bought or sold for some or all of
such institutional accounts. The manager anticipates acquiring additional such
accounts in the future.
American Century Services Corporation provides physical facilities,
including computer hardware and software and personnel, for the day-to-day
administration of the funds and of the manager. The manager pays American
Century Services Corporation for such services. The payments by the manager to
American Century Services Corporation for the years ending October 31, 1995,
1994 and 1993 have been, respectively, $100,504,910, $139,895,701, and
$99,610,260.
As stated in each prospectus, all of the stock of American Century
Services Corporation and American Century Investment Management, Inc. is owned
by American Century Companies, Inc.
CUSTODIANS
Chase Manhattan Bank, 770 Broadway, 10th Floor, New York, New York
10003-9598, Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, and
United Missouri Bank of Kansas City, N.A., 10th and Grand, Kansas City, Missouri
64105, each serves as custodian of the assets of the funds. The custodians take
no part in determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds, however, may invest in
certain obligations of the custodians and may purchase or sell certain
securities from or to the custodians.
INDEPENDENT ACCOUNTANTS
Baird, Kurtz & Dobson, 1100 Main Street, Kansas City, Missouri 64105,
serves as American Century's independent accountants for the funds, providing
services including (1) audit of the annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
federal income tax return filed for each fund.
CAPITAL STOCK
The funds' capital stock is described in the prospectuses under the
caption, "Further Information About American Century."
American Century may in the future issue additional series or class of
shares without a vote of shareholders. The assets belonging to each series or
classes of shares are held separately by the custodian and the shares of each
series or class represent a beneficial interest in the principal, earnings and
profit (or losses) of investments and other assets held for each series or
class. Your rights as a shareholder are the same for all series or class of
securities unless otherwise stated. Within their respective series or class, all
shares have equal redemption rights. Each share, when issued, is fully-paid and
non-assessable. Each share, irrespective of series or class, is entitled to one
vote for each dollar of net asset value represented by such share on all
questions.
In the event of complete liquidation or dissolution of American Century,
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.
As of February 5, 1996, in excess of 5% of the outstanding shares of the
following funds were owned of record by:
Name of Shareholder
Fund and Percentage
- --------------------------------------------------------------------------------
Growth Nationwide Life Insurance Company
Columbus, Ohio -- 12.2%
Ultra Charles Schwab & Co.
San Francisco, California -- 9.2%
Vista Charles Schwab & Co.-- 9.8%
Heritage Charles Schwab & Co.-- 6.6%
Bankers Trust Company as trustee for Kraft General
Foods -- 7.3%
Cash Reserve Twentieth Century Companies, Inc.-- 5.6%
Kansas City, Missouri
Limited-Term
Tax-Exempt Twentieth Century Companies, Inc.--11.9%
Long-Term
Tax-Exempt Twentieth Century Companies, Inc.-- 6.4%
Limited-Term Bond Twentieth Century Companies, Inc.-- 36.5%
Intermediate-Term
Bond Twentieth Century Companies, Inc.--19.3%
The Chase Manhattan Bank as Trustee for
Gza Geo Environmental Inc. Restated
401(k) Profit Sharing Plan and Trust
New York, New York -- 5.6%
Statement of Additional Information 17
Name of Shareholder
Fund and Percentage
- --------------------------------------------------------------------------------
The Chase Manhattan Bank as trustee for
Fujisawa USA Inc. Savings and Retirement
Plan Trust New York, New York -- 5.3%
Short-Term
Government Fund Nationwide Life Insurance Company -- 8.6%
Intermediate-Term
Government Fund The Chase Manhattan Bank as Trustee for
Robert Bosch Corporation Star Plan and Trust
New York, New York -- 15.7%
The Chase Manhattan Bank as Trustee for
The Petroleum Helicopters Inc. 401(k)
Retirement Plan and Trust New York, New
York -- 5.7%
- --------------------------------------------------------------------------------
MULTIPLE CLASS STRUCTURE
The funds' Board of Directors has adopted a multiple class plan (the
"Multiclass Plan") pursuant to Rule 18f-3 adopted by the SEC. Pursuant to such
plan, the funds may issue up to four classes of funds: an Investor Class, an
Institutional Class, a Service Class and an Advisor Class. Not all funds offer
all four classes.
The Investor Class is made available to investors directly by the
investment manager through its affiliated broker-dealer, American Century
Investment Services, Inc., for a single unified management fee, without any load
or commission. The Institutional, Service 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
manager as Investor Class shareholders. As a result, the manager is able to
charge these classes a lower management fee. In addition to the management fee,
however, Service Class shares are subject to a Shareholder Services Plan
(described below), and the Advisor Class shares are subject to a Master
Distribution and Shareholder Services Plan (also described below). Both plans
have been adopted by the funds' board of directors and initial shareholder in
accordance with Rule 12b-1 adopted by the SEC under the 1940 Act.
RULE 12-B1
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 Directors and approved by its shareholders.
Pursuant to such rule, the Board of Directors and initial shareholder of the
funds' Service Class and Advisor Class have approved and entered into a
Shareholder Services Plan, with respect to the Service Class, and a Master
Distribution and Shareholder Services Plan, with respect to the Advisor Class
(collectively, the "Plans"). Both Plans are described below.
In adopting the Plans, the Board of Directors (including a majority of
directors who are not "interested persons" of the funds (as defined in the 1940
Act), hereafter referred to as the "independent directors") determined that
there was a reasonable likelihood that the Plans would benefit the funds and the
shareholders of the affected classes. Pursuant to Rule 12b-1, information with
respect to revenues and expenses under the Plans is presented to the Board of
Directors quarterly for its consideration in connection with its deliberations
as to the continuance of the Plans. Continuance of the Plans must be approved by
the Board of Directors (including a majority of the independent directors)
annually. The Plans may be amended by a vote of the Board of Directors
(including a majority of the independent directors), except that the Plans 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 Plans
terminate automatically in the event of an assignment and may be terminated upon
a vote of a majority of the independent directors or by vote of a majority of
the outstanding voting securities of the affected class.
All fees paid under the plans will be made in accordance with Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers.
SHAREHOLDER SERVICES PLAN
As described in the Prospectuses, the funds' Service Class of shares are
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. In such circumstances, certain
recordkeeping and administrative services that are provided by the funds'
transfer agent for the Investor Class shareholders may be performed by a plan
sponsor (or its agents) or by a financial intermediary. To enable the funds'
shares to be made available through
18 American Century Investments
such plans and financial intermediaries, and to compensate them for such
services, the funds' investment manager has reduced its management fee by 0.25%
per annum with respect to the Service Class shares and the funds' Board of
Directors has adopted a Shareholder Services Plan. Pursuant to the Shareholder
Services Plan, the Service Class shares pay a shareholder services fee of 0.25%
annually of the aggregate average daily assets of the funds' Service Class
shares.
American Century Investment Services, Inc. (the "Distributor") enters into
contracts with each financial intermediary for the provision of certain
shareholder services and utilizes the shareholder services fees received under
the Shareholder Services Plan to pay for such 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 request
from beneficial owners (including contract owners of insurance products that
utilize the funds as 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 funds (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to shareholders and/or other beneficial owners;
(j) providing other similar administrative and sub-transfer agency services; and
(k) paying "service fees" for the provision of personal, continuing services to
investors, as contemplated by the Rules of Fair Practice of the NASD
(collectively referred to as "Shareholder Services"). Shareholder Services do
not include those activities and expenses that are primarily intended to result
in the sale of additional shares of the funds.
MASTER DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
As described in the Prospectuses, the funds' Advisor Class of shares are
also 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 Distributor enters into contracts
with various banks, broker-dealers, insurance companies and other financial
intermediaries with respect to the sale of the funds' shares and/or the use of
the funds' shares in various investment products or in connection with various
financial services.
As with the Service Class, certain recordkeeping and administrative
services that are provided by the funds' 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 funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
investment manager has reduced its management fee by 0.25% per annum with
respect to the Advisor Class shares and the funds' Board of Directors has
adopted a Master Distribution and Shareholder Services Plan (the "Distribution
Plan"). Pursuant to such Plan, the Advisor Class shares pay the Distributor a
fee of 0.50% annually of the aggregate average daily assets of the funds'
Advisor Class shares, 0.25% of which is paid for Shareholder Services (as
described above) and 0.25% of which is paid for distribution services.
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
commission, ongoing commissions and other payments to brokers, dealers,
financial institutions or others who sell Advisor Class shares pursuant to
Selling Agreements; (b) compensation to
Statement of Additional Information 19
registered representatives or other employees of Distributor who engage in or
support distribution of the funds' 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
funds' 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 in the form of
transactional 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
manager determines may be paid for by the funds pursuant to the terms of this
Agreement and in accordance with Rule 12b-1 of the 1940 Act.
BROKERAGE
SELECT, HERITAGE, GROWTH, ULTRA, VISTA, GIFTRUST AND THE EQUITY
INVESTMENTS OF BALANCED
Under the management agreement between the funds and the manager, the
manager has the responsibility of selecting brokers to execute portfolio
transactions. The funds' policy is to secure the most favorable prices and
execution of orders on its portfolio transactions. So long as that policy is
met, the manager may take into consideration the factors discussed under this
caption when selecting brokers.
The manager receives statistical and other information and services without
cost from brokers and dealers. The manager evaluates such information and
services, together with all other information that it may have, in supervising
and managing the investment portfolios of the funds. Because such information
and services may vary in amount, quality and reliability, their influence in
selecting brokers varies from none to very substantial. The manager proposes to
continue to place some of the funds' brokerage business with one or more brokers
who provide information and services. Such information and services will be in
addition to and not in lieu of services required to be performed by the manager.
The manager does not utilize brokers that provide such information and services
for the purpose of reducing the expense of providing required services to the
funds.
In the years ended October 31, 1995, 1994 and 1993, the brokerage
commissions of each fund were as follows:
Years Ending October 31,
- --------------------------------------------------------------------------------
Fund 1995 1994 1993
- --------------------------------------------------------------------------------
Select $11,363,976 $14,844,437 $10,619,773
Heritage 3,180,082 3,620,144 1,952,642
Growth 13,577,767 10,144,618 10,384,958
Ultra 18,911,590 19,240,703 9,269,314
Vista 1,750,665 1,895,400 3,034,885
Giftrust 571,349 588,145 359,785
Balanced 875,207 979,903 1,023,195
In 1995, $43,452,273 of the total brokerage commissions was paid to brokers
and dealers who provided information and services on transactions of
$24,992,668,210 (69% of all transactions).
The brokerage commissions paid by the funds may exceed those which another
broker might have charged for effecting the same transactions, because of the
value of the brokerage and research services provided by the broker. Research
services furnished by brokers through whom the funds effect securities
transactions may be used by the manager in servicing all of its accounts, and
not all such services may be used by the manager in managing the portfolios of
the funds.
The staff of the SEC has expressed the view that the best price and
execution of over-the-counter transactions in portfolio securities may be
secured by dealing directly with principal market makers, thereby avoiding the
payment of compensation to another broker. In certain situations, the officers
of the funds and the manager believe that the facilities,
20 American Century Investments
expert personnel and technological systems of a broker often enable the funds to
secure as good a net price by dealing with a broker instead of a principal
market maker, even after payment of the compensation to the broker. The funds
regularly place its over-the-counter transactions with principal market makers,
but may also deal on a brokerage basis when utilizing electronic trading
networks or as circumstances warrant.
CASH RESERVE, SHORT-TERM GOVERNMENT FUND, INTERMEDIATE-TERM GOVERNMENT
FUND, LIMITED-TERM BOND, INTERMEDIATE-TERM BOND, BENHAM BOND, LIMITED-TERM
TAX-EXEMPT, INTERMEDIATE-TERM TAX-EXEMPT, LONG-TERM TAX-EXEMPT AND THE FIXED
INCOME INVESTMENTS OF BALANCED
Under the management agreement between the funds and the manager, the
manager 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 manager will seek to obtain prompt execution
of orders at the most favorable prices or yields. The manager may choose to
purchase and sell portfolio securities to and from dealers who provide services
or research, statistical and other information to the funds and to the manager.
Such information or services will be in addition to and not in lieu of the
services required to be performed by the manager, and the expenses of the
manager will not necessarily be reduced as a result of the receipt of such
supplemental information.
PERFORMANCE ADVERTISING
Individual fund performance may be compared to various indices including
the Standard & Poor's 500 Index, the Dow Jones Industrial Average, Donoghue's
Money Fund Average and the Bank Rate Monitor National Index of 21/2-year CD
rates.
EQUITY FUNDS
The following table sets forth the average annual total return of the
equity funds and Balanced for the one-, five- and 10-year periods (or period
since inception) ended October 31, 1995, the last day of the funds' fiscal year.
Average annual total return is calculated by determining each fund's cumulative
total return for the stated period and then computing the annual compound return
that would produce the cumulative total return if the fund's performance had
been constant over that period. Cumulative total return includes all elements of
return, including reinvestment of dividends and capital gains distributions.
From
Fund 1 year 5 year 10 year Inception(1)
- --------------------------------------------------------------------------------
Select 15.02% 10.98% 12.70% --
Heritage 21.04% 17.60% -- 16.23%
Growth 22.31% 18.32% 16.45% --
Ultra 36.89% 30.32% 21.59% --
Vista 44.20% 25.39% 18.38% --
Giftrust 32.52% 37.11% 25.29% --
Balanced 16.36% 13.51% -- 11.95%
- --------------------------------------------------------------------------------
1 Data from inception shown for funds that are less than 10 years old.
The funds may also advertise average annual total return over periods of
time other than one, five and 10 years and cumulative total return over various
time periods.
The following table shows the cumulative total return of the equity funds
and Balanced since their respective dates of inception. The table also shows
annual compound rates for Growth and Select from June 30, 1971, which
corresponds with the funds' implementation of its current investment philosophy
and practices and for all other funds from their respective dates of inception
(as noted previously) through October 31, 1995.
Cumulative Total Average Annual
Fund Return Since Inception Compound Rate
- --------------------------------------------------------------------------------
Select 3972.41% 16.45%
Heritage 231.68% 16.23%
Growth 6212.00% 18.56%
Ultra 939.25% 18.21%
Vista 406.80% 14.57%
Giftrust 1002.15% 22.28%
Balanced 121.18% 11.95%
- --------------------------------------------------------------------------------
Statement of Additional Information 21
FIXED INCOME FUNDS AND BALANCED
Cash Reserve. The yield of Cash Reserve is calculated by measuring the
income generated by an investment in the fund over a seven-day period (net of
fund expenses). This income is then "annualized." That is, the amount of income
generated by the investment over the seven-day period is assumed to be generated
over each similar period throughout a full year and is shown as a percentage of
the investment. The "effective yield" is calculated in a similar manner but,
when annualized, the income earned by the investment is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of the assumed reinvestment.
Based upon these methods of computation, the yield and effective yield for
Cash Reserve for the seven days ended October 31, 1995, the last seven days of
the fund's fiscal year, was 5.16% and 5.30%, respectively.
Other Fixed Income Funds and Balanced. 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.
The following table sets forth yield quotations for the fixed income funds
(other than Cash Reserve) and Balanced for the 30-day period ended October 31,
1995, the last day of the fiscal year pursuant to computation methods prescribed
by the SEC.
Intermediate-
Short-Term Intermediate-Term Limited-Term Term
Government Fund Government Fund Bond Bond
- --------------------------------------------------------------------------------
5.18% 5.39% 5.59% 5.63%
- --------------------------------------------------------------------------------
Intermediate-
Benham Limited-Term Term Long-Term Balanced
Bond Tax-Exempt Tax-Exempt Tax-Exempt
- --------------------------------------------------------------------------------
6.16% 4.18% 4.21% 4.79% 2.42%
- --------------------------------------------------------------------------------
The following table sets forth tax-equivalent yields for the Limited-Term
Tax-Exempt, Intermediate-Term Tax-Exempt and the Long-Term Tax-Exempt funds for
the 30-day period ended October 31, 1995. The example assumes a 36% tax rate.
The tax-equivalent yield is computed as follows:
tax- tax-exempt yield
equivalent = ---------------------- + non tax-exempt yield
yield 1-assumed tax rate
Tax-Exempt Tax-Exempt Tax-Exempt
Short-Term Intermediate-Term Long-Term
- --------------------------------------------------------------------------------
6.53% 6.58% 7.48%
- --------------------------------------------------------------------------------
The fixed income funds may also elect to advertise cumulative total return
and average annual total return, computed as described above.
The table below shows the cumulative total return and the average annual
total return of the fixed income funds since their respective dates of inception
(as noted below) through October 31, 1995.
Cumulative
Total Return Average Annual Date of
Fund Since Inception Total Return Inception
- --------------------------------------------------------------------------------
Short-Term
Government Fund 154.81% 7.53% 12/15/82
Intermediate-Term
Government Fund 10.46% 6.14% 3/1/94
Limited-Term Bond 8.81% 5.19% 3/1/94
Intermediate-Term Bond 10.80% 6.34% 3/1/94
Benham Bond 95.10% 8.02% 3/2/87
Limited-Term
Tax-Exempt 11.65% 4.22% 3/1/93
Intermediate-Term
Tax-Exempt 67.17% 6.11% 3/2/87
Long-Term Tax-Exempt 84.24% 7.31% 3/2/87
- --------------------------------------------------------------------------------
ADDITIONAL PERFORMANCE COMPARISONS
Investors may judge the performance of the funds by comparing their
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices such as the EAFE(R) Index and those prepared by Dow Jones &
Co., Inc., Standard & Poor's Corporation, Shearson Lehman Brothers, Inc. and The
Russell 2000 Index, and to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc. and the Consumer Price Index. Comparisons may also be made to
indices or data published in Money, Forbes, Barron's, The Wall Street
22 American Century Investments
Journal, The New York Times, Business Week, Pensions and Investments, USA Today,
and other similar publications or services. In addition to performance
information, general information about the funds that appears in a publication
such as those mentioned above or in the Prospectus under the heading
"Performance Advertising" may be included in advertisements and in reports to
shareholders.
PERMISSIBLE ADVERTISING INFORMATION
From time to time, the funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the funds; (7)
comparisons of investment products (including the funds) with relevant market or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) testimonials
describing the experience of persons that have invested in one or more of the
funds. The funds may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the funds.
REDEMPTIONS IN KIND
The funds' policy with regard to redemptions in excess of the lesser of one
half of 1% of a fund's assets or $250,000 from its equity funds and Balanced is
described in the applicable fund prospectus under the heading "Special
Requirements for Large Redemptions."
The funds have elected to be governed by Rule 18f-1 under the Investment
Company Act, pursuant to which the funds are obligated to redeem shares solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the fund
during any 90-day period for any one shareholder. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets to cash. The method of valuing portfolio securities used to make
redemptions in kind will be the same as the method of valuing portfolio
securities described in the Prospectus under the caption "How Share Price is
Determined," and such valuation will be made as of the same time the redemption
price is determined.
HOLIDAYS
The funds do not determine the net asset value of its shares on days when
the New York Stock Exchange is closed. Currently, the Exchange is closed on
Saturdays and Sundays, and on holidays, namely New Year's Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
FINANCIAL STATEMENTS
The financial statements of the various series of shares of American
Century for the fiscal year ended October 31, 1995, are included in the annual
reports to shareholders, and the financial statements for the six months ended
April 30, 1996 are included in the semiannual report to shareholders. Both
reports are incorporated herein by reference. While the financial statements
incorporated herein from the semiannual report are unaudited, all adjustments,
in the opinion of management, necessary for a fair presentation of the financial
position and results of operations at April 30, 1996 and for the six months
ended April 30, 1996, have been made. You may receive copies of the Annual and
Semiannual Reports without charge upon request to American Century at the
address and phone number shown on the cover of this Statement of Additional
Information.
Statement of Additional Information 23
NOTES
24 American Century Investments
NOTES
Statement of Additional Information 25
P.O. Box 419200
Kansas City, Missouri
64141-6200
Person-to-person assistance:
1-800-345-2021 or 816-531-5575
Automated Information Line:
1-800-345-8765
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-753-1865
Fax: 816-340-7962
Internet: www.americancentury.com
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American
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