[front cover]
OCTOBER 31, 1998
ANNUAL REPORT
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AMERICAN CENTURY
[graphic of globe, U.S. Currency, and money managers overlooking monitors]
TWENTIETH CENTURY GROUP
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SELECT
HERITAGE
GROWTH
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
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We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
o FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
o Buy individual stocks and bonds
o 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
o Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund analysis
o Track your brokerage account on one easy-to-read statement
o Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card an
American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles
follow a standard SEC format and allow investors to compare funds
easily. You can request a profile or the full prospectus. Full
prospectuses contain more detailed fund information and you will
continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight
important information about our funds, including fees and expenses.
More technical data will be in the Statement of Additional
Information.
On the Cover:
Kevin Lewis and Cindy Brown are part of the investment group at American
Century.
[left margin]
TWENTIETH CENTURY GROUP
SELECT
(TWCIX)
TWENTIETH CENTURY GROUP
HERITAGE
(TWHIX)
TWENTIETH CENTURY GROUP
GROWTH
(TWCGX)
Our Message to You
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[photo James E. Stowers III and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
This report covers an investment year filled with sharp contrasts. Many
popular market averages set records earlier in the year, lifted by a healthy
economy, low inflation, and widespread market optimism, then tumbled
dramatically as the outlook for the U.S. economy and for corporate earnings
turned pessimistic almost overnight. The mood swing in market psychology seemed
especially sharp after the gains over the last several years--gains that were
interrupted by relatively few, and very shallow, downdrafts.
Often forgotten in the earlier, heady atmosphere, was the wide performance
disparity at work in the market. Large stocks outperformed midsize stocks. In
addition, the very largest stocks in each sector outperformed the smaller stocks
in that sector by a wide margin. For example, the largest midsize stocks
outperformed smaller midsize stocks. The same was true of large stocks. This
made for a very narrow market.
Given the gains of the last several years, and the low market volatility,
it is understandable that many investors--especially those who are new to the
stock market--might find the broad market price swings we've seen in 1998 fairly
stressful. In our experience, these swings are an inevitable, even necessary,
part of the investment process. They often set the stage for further advances--
which, in fact, we saw in late November. But whatever the market's direction, it
does not pay to get caught up in its excesses, whether overly optimistic or
overly pessimistic. If you have an investment plan, try to stay with it. If you
don't have a plan, this might be a good time to develop one.
Turning to the corporate front, it is our pleasure to announce that Jim Stowers
III is now overseeing the management teams of our domestic growth funds: Growth,
Select, Ultra, Heritage, Vista, Giftrust, and New Opportunities. In his new
role, Jim will work directly with the equity teams that run the funds'
day-to-day operations. This change is yet another important step in our ongoing
effort to bring all our funds' performance up to shareholders' expectations.
In addition to his new duties, Jim will continue to head the Ultra
portfolio team and will remain American Century's Chief Executive Officer.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
SELECT
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Portfolio at a Glance .................................................. 6
Top Ten Holdings ....................................................... 7
Top Five Industries .................................................... 7
Types of Investments ................................................... 8
Schedule of Investments ................................................ 9
HERITAGE
Performance Information ................................................ 12
Management Q&A ......................................................... 13
Portfolio at a Glance .................................................. 13
Top Ten Holdings ....................................................... 14
Top Five Industries .................................................... 14
Types of Investments ................................................... 15
Schedule of Investments ................................................ 16
GROWTH
Performance Information ................................................ 19
Management Q&A ......................................................... 20
Portfolio at a Glance .................................................. 20
Top Ten Holdings ....................................................... 21
Top Five Industries .................................................... 21
Types of Investments ................................................... 22
Schedule of Investments ................................................ 23
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ............................................................ 25
Statements of Operations ............................................... 26
Statements of Changes
in Net Assets .......................................................... 27
Notes to Financial
Statements ............................................................. 28
Financial Highlights ................................................... 32
Independent Auditors' Report ........................................... 41
OTHER INFORMATION
Share Class and Retirement
Account Information .................................................... 42
Background Information
Investment Philosophy
and Policies ..................................................... 43
Comparative Indices ................................................. 43
Portfolio Managers .................................................. 43
Glossary ............................................................... 44
www.americancentury.com 1
Report Highlights
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MARKET PERSPECTIVE
o Although stocks set records during the first seven months of the year, a
sell-off began in early July and accelerated into October, taking the S&P 500
Index down roughly 20%.
o The outperformance of a relatively small number of large and midsize stocks
masked much weaker returns in the rest of the equity universe.
o Even with the downturn this year, and the recession of 1990-1991, stocks have
produced unusually robust results during the '90s. The S&P 500's average
annual return from January 1, 1990, to October 31, 1998, was 16.67%, compared
to its historical average of approximately 11%.
o In general, U.S. business is productive and streamlined, which bodes well for
the economy. But we are probably in a more moderate phase of the economic
cycle--one marked by low inflation and global overcapacity.
o We believe the mid-cap sector looks relatively inexpensive. Companies with
sustainable earnings growth could be today's bargains and tomorrow's winners.
SELECT
o Select posted a very fine return for the year ended October 31, 1998,
outperforming its benchmark, the S&P 500. (See total returns on page 5.)
o Fund performance benefited from holdings in pharmaceutical companies, which
represented 18% of investments at October 31. Telecommunications companies
were Select's second-best performing sector. Deregulation and robust demand
for cellular and Internet data services helped this sector outperform the
broad market during a difficult third quarter.
o Investors continued to gravitate toward larger firms. Stocks that contributed
the most to performance included Tyco International, Ltd., a diversified
company; retailer Wal-Mart; Merck, a leading pharmaceutical company; and Cisco
Systems, a computer networking firm.
HERITAGE
o Total return for Heritage's Investor Class shares was -15.87% for the 12
months ended October 31, 1998. Heritage's benchmark, the S&P MidCap 400,
returned 6.71% during the same period.
o Heritage's performance relative to its benchmark was largely the result of
company size. Investors continued to pay a premium for larger companies in
1998, while small- and mid-cap stocks lagged. The disparity in performance
between very large companies, some of which were represented in the S&P MidCap
400, and the small- and mid-cap companies owned by Heritage approached
historically unprecedented levels.
o Investments in electronic components, computer software and apparel companies
dampened performance. Heritage benefited from its holdings in food and
beverage companies, pharmaceuticals, cable operators and electric utilities.
GROWTH
o Growth posted a solid return for the year ended October 31, 1998, but
underperformed its benchmark, the Russell 1000 Growth Index.
o Growth's top-performing sector was pharmaceuticals. Two strong contributors
were Pfizer and Schering-Plough, both of which benefited from new product
launches and limited exposure to generic competition.
o Selected telecommunications companies also performed well, notably industry
leaders MCI WorldCom and Airtouch Communications.
o Broadcasting and media companies, semiconductor manufacturers, and food and
beverage companies constrained performance. In nearly each case, stocks
suffered at least in part from worsening global economic conditions.
[LEFT MARGIN]
SELECT (TWCIX)(1)
TOTAL RETURNS: AS OF 10/31/98
6 Months 1.10%(2)
1 Year 22.96%
NET ASSETS: $5.6 billion
INCEPTION DATE: 6/30/71(3)
HERITAGE (TWHIX)(1)
TOTAL RETURNS: AS OF 10/31/98
6 Months -23.17%(2)
1 Year -15.87%
NET ASSETS: $978.4 million
INCEPTION DATE: 11/10/87
GROWTH (TWCGX)(1)
TOTAL RETURNS: AS OF 10/31/98
6 Months -0.25%(2)
1 Year 18.53%
NET ASSETS: $6.1 billion
INCEPTION DATE: 6/30/71(3)
(1) Investor Class.
(2) Not annualized.
(3) This inception date corresponds with the management company's implementation
of its current investment practices.
Investment terms are defined in the Glossary on page 44.
2 1-800-345-2021
Market Perspective from Robert C. Puff Jr.
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[photo Robert C. Puff, Jr.]
Robert C. Puff, Jr., chief investment officer of American Century Investment
Management
MARKET PSYCHOLOGY: THE RETURN OF FEAR
Sometimes a little pain can go a long way. This was certainly the case
during the final four months of our fiscal year (July-October)--a period that
marked an abrupt change in market psychology. Financial markets are motivated by
greed and fear, and during the '90s, greed has enjoyed a long run. In mid-July,
after the S&P 500 peaked, fear returned to the stock market. Its entrance was
dramatic, but not terribly surprising. Market declines are a normal part of the
investment process. Although they have been notably absent in the 1990s, in
prior decades, moderate corrections of 10% happened about once a year and more
severe corrections of up to 15% occurred about once every two years. A
correction in the 20% range occurred roughly every three to four years. On a
historical basis, a correction was overdue.
The decline in the S&P 500 accelerated into early October, propelled by an
increasingly restrained outlook for corporate earnings, apprehension about
further economic and political deterioration in Southeast Asia and Russia, and
stubbornly elevated short-term interest rates in the United States. Serious talk
of a U.S. recession also surfaced.
Money that had been earmarked for the stock market instead sought a safe
haven in U.S. Treasurys and a few popular megastocks. Banks pulled back from
lending, and professional investors were shaken by the problems at a large,
well-known hedge fund. While many of the pros panicked, individual investors
generally stayed the course, and used the decline as a buying opportunity.
ONCE AGAIN, SIZE MATTERED
August saw a sharp decline of 14.56% in the S&P 500 Index. Especially
disturbing, at least psychologically, was the sell-off in the handful of
blue-chip stocks that had accounted for much of the S&P 500's performance during
the last several years. In general, the returns of larger stocks have been very
impressive compared with small and midsize stocks. From January 1994 through
October 1998, large stocks outperformed smaller stocks 14 out of 19 calendar
quarters. However, closer analysis revealed that the strong performance of a
relatively limited number of blue-chip and midsize companies masked the price
deterioration of the vast majority of the other 9,000 stocks traded in the
United States. For example, through September 30 of this year, fewer than 20 of
the largest stocks in the S&P 500 Index were responsible for almost 100% of the
index's performance. Most stocks were correcting well before the decline in the
major market indices began.
A GOOD PLACE TO WORK AND INVEST
Still, as the chart on page 4 illustrates, U.S. stock returns since 1990
have been unusually robust, even with the recession of 1990-1991 and the recent
market decline. The S&P 500's average annual return from January 1, 1990, to
October 31, 1998, was 16.67%, well above its historical average
[RIGHT MARGIN]
" . . . THROUGH SEPTEMBER 30 OF THIS YEAR, FEWER THAN 20 OF THE LARGEST STOCKS
IN THE S&P 500 INDEX WERE RESPONSIBLE FOR ALMOST 100% OF THE INDEX'S
PERFORMANCE."
MARKET RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 21.96%
S&P MIDCAP 400 6.71%
RUSSELL 2000 -11.84%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large-, medium- and
small-capitalization stocks.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
10/31/97 $1.00 $1.00 $1.00
11/30/97 $1.05 $1.01 $0.99
12/31/97 $1.06 $1.05 $1.01
1/31/98 $1.08 $1.03 $0.99
2/28/98 $1.15 $1.12 $1.07
3/31/98 $1.21 $1.17 $1.11
4/30/98 $1.23 $1.19 $1.12
5/31/98 $1.20 $1.14 $1.06
6/30/98 $1.25 $1.15 $1.06
7/31/98 $1.24 $1.10 $0.97
8/31/98 $1.06 $0.90 $0.79
9/30/98 $1.13 $0.98 $0.85
10/31/98 $1.22 $1.07 $0.88
Value as of 10/31/98:
S&P 500 $1.22
S&P MidCap 400 $1.07
Russell 2000 $0.88
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
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(Continued)
of roughly 11%. Midsize and smaller stocks posted respectable gains during the
same period.
The fact is, the United States is a pretty good place to be. We have a
sound economy, a stable government, a generally reasonable regulatory
environment, and a culture that values creativity and entrepreneurialism. The
recent national elections suggest that our political attitudes remain solidly
practical and centrist. Our corporate sector is strong and relatively lean. Many
businesses have streamlined operations and enhanced productivity via
increasingly powerful--and less expensive--technology. Response time to changes
in economic activity and product demand is quite low. Economist Adam Smith's
"invisible hand" continues to be active in getting businesses to prune, manage
costs, and move toward greater efficiencies. Overall, it is a rich, dynamic
process.
The Federal Reserve has done a good job, too. It has kept interest rates
stable, but has been reasonable and flexible in its approach, lowering rates
three times this fall (its first such moves since 1995) to help stimulate the
economy.
A DIFFERENT PHASE OF GROWTH
We are probably now in a different, more moderate phase of the economic
cycle. There is, quite frankly, too much of almost everything--except
understanding. As an example, the global production capacity for automobiles is
estimated to be roughly 28-29 million per year, or about 50% higher than demand.
Much the same is true for other key commodities, including basic foodstuffs,
steel, petrochemicals, and energy. Overcapacity and global competition have
eliminated pricing flexibility from the marketplace, and have contributed to the
lowest inflation in more than 30 years. Lower interest rates may help the
situation, but I doubt they will have much impact on demand, at least right
away. Lowering rates at this stage is, in effect, like pushing on a string. Many
consumers already have all they need; lower rates won't necessarily induce them
to buy more.
At some point, of course, overcapacity will dissipate as many of the
world's economies begin to grow again. There are already signs, for example, of
a more responsible approach to the Japanese banking and economic crises. But in
the current environment, deflation remains a threat, and countries--including
our own--may be tempted to fall into the trap of protectionism. U.S.
manufacturers have already petitioned for tariffs to counteract the dumping of
steel and wheat by foreign producers. Trade with Asia is largely one-way: Ships
arrive full at our ports but travel empty on the return trip. If growth slows
too much, business will lose enthusiasm for new ventures, and the economy will
contract. That is the worst-case scenario, but, in my view, it is not the most
likely.
MID-CAP STOCKS: GROWTH IS INEXPENSIVE
We have been in a relatively narrow market for the last few years. Should
the market broaden, and reward stocks for their earnings strength and not simply
for their size, we believe the earnings acceleration discipline will do well. By
a number of measures, including price-earnings ratios, growth in midsized sector
is as inexpensive (with but a few exceptions) as it has been in decades. As
always, marginal companies will continue to have problems. However, those
midsize firms that have built solid positions in their markets, that have strong
balance sheets and that have deep enough pockets to get past the rough spots,
could be today's bargains and tomorrow's winners.
[LEFT MARGIN]
"THE FACT IS, THE UNITED STATES IS A PRETTY GOOD PLACE TO BE. WE HAVE A SOUND
ECONOMY, A STABLE GOVERNMENT, A GENERALLY REASONABLE REGULATORY ENVIRONMENT,
AND A CULTURE THAT VALUES CREATIVITY AND ENTREPRENEURIALISM."
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FROM JANUARY 1, 1990, TO OCTOBER 31, 1998
S&P 500 S&P MidCap 400 Russell 2000
12/31/89 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
YTD 1998 $3.91 $3.66 $2.59
Value as of 10/31/98:
S&P 500 $3.91
S&P MidCap 400 $3.66
Russell 2000 $2.59
Source: Lipper Analytical Services, Inc.
4 1-800-345-2021
Select--Performance
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<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS (INCEPTION 6/30/71)(1) ADVISOR CLASS (INCEPTION 8/8/97) INSTITUTIONAL CLASS (INCEPTION 3/13/97)
SELECT S&P 500 SELECT S&P 500 SELECT S&P 500
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(2) 1.10% -0.42% 0.98% -0.42% 1.20% -0.42%
1 YEAR 22.96% 21.96% 22.67% 21.96% 23.22% 21.96%
AVERAGE ANNUAL RETURNS
3 YEARS 23.52% 25.98% -- -- -- --
5 YEARS 14.94% 21.25% -- -- -- --
10 YEARS 15.21% 17.84% -- -- -- --
LIFE OF FUND 17.20% 13.29% 15.63% 16.01% 26.37% 24.58%
</TABLE>
(1) Although the fund's actual inception date was 10/31/58, this inception date
corresponds with the management company's implementation of its current
investment philosophy and practices.
(2) Returns for periods less than one year are not annualized.
See pages 42, 43 and 44 for information about share classes, the S&P 500 and
returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Select S&P 500
Date Value Return Value Return
10/31/88 $10,000 $10,000
10/31/89 $13,260 $12,627
10/31/90 $12,989 $11,677
10/31/91 $16,504 $15,589
10/31/92 $16,797 $17,137
10/31/93 $20,527 $19,689
10/31/94 $19,014 $20,451
10/31/95 $21,870 $25,842
10/31/96 $26,192 $32,052
10/31/97 $33,497 $42,341
10/31/98 $41,187 $51,636
Value as of 10/31/98:
Select $41,187
S&P 500 $51,636
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The S&P
500 is provided for comparison in each chart. Past performance does not
guarantee future results. Investment return and principal value will fluctuate,
and redemption value may be more or less than original cost. The charts are
based on Investor Class shares only; performance for other classes will vary due
to differences in fee structures (see the Total Returns table above). Select's
total returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the total returns of the S&P 500 do
not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING OCTOBER 31)
<TABLE>
10/89 10/90 10/91 10/92 10/93 10/94 10/95 10/96 10/97 10/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Select 32.59% -2.03% 27.05% 1.76% 22.20% -7.37% 15.02% 19.76% 27.89% 22.96%
S&P 500 26.27% -7.52% 33.50% 9.93% 14.89% 3.87% 26.36% 24.03% 32.10% 21.96%
</TABLE>
www.americancentury.com 5
Select--Q&A
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[photo of Jean Ledford and Richard Welsh}
Jean Ledford and Richard Welsh, portfolio managers on the Select investment team
An interview with Jean Ledford and Richard Welsh, portfolio managers on the
Select investment team.
HOW DID SELECT PERFORM DURING ITS FISCAL YEAR?
Select posted a healthy 22.96% total return for the year ended October 31,
1998.* It outperformed its benchmark, the Standard & Poor's 500 Index, which
gained 21.96%, and also outpaced most of its peers. Select ranked in the top 4%
of 726 growth and income funds, according to Lipper Analytical Services.(+)
As you can tell from the chart on page 5, Select's longer-term performance
also has been good. Select received a five-star rating for risk-adjusted
performance for the three years ended October 31, 1998, out of the 2,719
domestic equity funds tracked by Morningstar.(+)(+) Both Morningstar and Lipper
are independent mutual fund rating companies.
WHAT SECTORS CONTRIBUTED TO SELECT'S PERFORMANCE?
Our best-performing industry, pharmaceuticals, also was our largest
industry weighting. Although holdings ebbed and flowed as earnings dictated,
drug companies represented 18% of investments at October 31. Pharmaceuticals are
viewed as consistent earners and are less vulnerable to an economic slowdown
here and in foreign markets, and that proved to be true when the Asian economic
crisis began to spill over into other parts of the world.
We doubled Select's weighting in telecommunications companies to slightly
more than 10% of investments at October 31, and the sector ranked as our
second-best contributor to performance. Telecommunications companies are
benefiting from deregulation and robust demand for wireless and Internet data
services, which helped this sector outperform the broad market during the very
difficult third quarter.
Technology companies, including software manufacturer Microsoft and Cisco
Systems, a networking products company, also contributed to returns. These
companies are leaders in their industries and were less affected by problems in
Asia than were their smaller counterparts.
*All fund returns referenced in this interview are for Investor Class shares.
(+)According to Lipper, for the periods ending October 31, 1998, Select was
ranked 225 out of 296 growth and income funds for five years and was ranked 59
out of 146 growth and income funds for 10 years. Past performance is no
guarantee of future results.
(+)(+)Morningstar proprietary ratings reflect risk-adjusted performance as of
October 31, 1998. Select received three stars for the five- and 10-year periods
ending October 31, 1998, out of 1,622 and 728 domestic equity funds,
respectively. The overall rating, which may change monthly, is calculated from
the fund's three- and five-year returns in excess of 90-day Treasury bill
returns, with appropriate fee adjustments and a risk factor that reflects fund
performance below 90-day Treasury bill returns. Ten percent of the funds in an
investment category receive five stars, the next 22.5% receive four stars, and
the next 35% receive three stars. Past performance is no guarantee of future
results.
[LEFT MARGIN]
"PHARMACEUTICALS ARE VIEWED AS CONSISTENT EARNERS AND ARE LESS VULNERABLE TO AN
ECONOMIC SLOWDOWN HERE AND IN FOREIGN MARKETS, AND THAT PROVED TO BE TRUE WHEN
THE ASIAN ECONOMIC CRISIS BEGAN TO SPILL OVER INTO OTHER PARTS OF THE WORLD."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 96 86
MEDIAN P/E RATIO 32.0 24.4
MEDIAN MARKET $31.6 $30.8
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 165% 94%
EXPENSE RATIO (FOR
INVESTOR CLASS) 1.00% 1.00%
Investment terms are defined in the Glossary on page 44.
6 1-800-345-2021
Select--Q&A
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(continued)
WHICH STOCKS CONTRIBUTED THE MOST TO PERFORMANCE?
Investors continued to gravitate to the perceived safety of larger firms,
and paid a premium for industry leadership and growth sustainability. These
characteristics can be seen in Select's top-performing stocks, which included
Tyco International, a diversified manufacturing company, discount retailer
Wal-Mart, drug maker Merck, and computer networking manufacturer Cisco Systems.
Select's top contributor was Tyco, which has businesses in fire and safety
protection systems, flow control equipment, electrical and electronics
components, and disposable products. The company's long-running success is due
in part to its ability to acquire companies that fit well with existing
businesses and to manage its operations profitably. We continue to take profits
in this holding, which has appreciated substantially.
Wal-Mart was another successful investment. A strong economy, more
profitable private-label grocery items, and ongoing economies of scale have
driven the company's profits. Wal-Mart also is beginning to realize the benefits
of its 1997 acquisition of a retail chain in Germany and its majority interest
in Cifra, Mexico's largest retailer.
Merck was our top-contributing pharmaceutical company. Its earnings have
been buoyed by the successful launch of several new products, including
Propecia, for treating male-pattern hair loss, and Fosamax, which treats and
prevents osteoporosis.
Cisco Systems, which we mentioned earlier, significantly added to the
fund's performance. The company has sustained its earnings growth rate through
aggressive marketing of its Internet routers and related services.
WHICH SECTORS OR STOCKS DAMPENED PERFORMANCE?
Select's worst-performing stocks were, almost without exception, banks and
financial service companies. Growth in the financial industry began to stall in
mid-year in response to escalating turmoil in Southeast Asia, Russia and Latin
America. In hindsight, we were a bit tardy in our exit, although we had
substantially reduced holdings ahead of the rout that ensued in the third
quarter. Names we eliminated include Morgan Stanley Dean Witter, BankAmerica and
MBNA Corporation.
Another underperforming holding, Tellabs, Inc., suffered a perceived
slowdown in customer orders due to global economic problems and a failed merger.
Tellabs is a telecommunications equipment manufacturer with exposure to many
overseas markets. Its international sales representing more than a third of its
revenues. Investors' confidence in this stock diminished perceptibly as problems
abroad compounded. We have removed this stock from the portfolio.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO IN THE LAST SIX MONTHS?
Our greatest shifts have been in pharmaceutical stocks, where holdings
fluctuated in response to earnings. Good individual stock selection and
effective timing of buy and sell decisions helped this group emerge as Select's
top-contributing sector, and we believe the future continues to look bright for
pharmaceuticals, especially larger-cap drug companies.
As we mentioned earlier, we increased Select's stake in telecommunications
companies, such as AT&T and MCI WorldCom, which have done well since the
market's tumble in July 1998. AT&T's
[RIGHT MARGIN]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
GENERAL ELECTRIC
CO. (U.S.) 3.7% 4.5%
MICROSOFT CORP. 3.6% 2.5%
INTERNATIONAL BUSINESS
MACHINES CORP. 3.4% 1.0%
MERCK & CO., INC. 3.3% --
BRISTOL-MYERS
SQUIBB CO. 2.8% 1.5%
WAL-MART STORES, INC. 2.7% 2.6%
JOHNSON & JOHNSON 2.7% 0.9%
INTEL CORP. 2.7% 0.8%
MCI WORLDCOM, INC.(1) 2.6% 1.4%(2)
AT&T CORP. 2.3% 1.1%
(1) WorldCom, Inc. acquired MCI Communications on 9/15/98. Surviving name is MCI
WorldCom, Inc.
(2) Represents WorldCom shares owned by the fund.
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
PHARMACEUTICALS 18.0% 6.5%
COMMUNICATIONS
SERVICES 10.2% 8.7%
COMPUTER SYSTEMS 6.6% 3.4%
COMPUTER SOFTWARE
& SERVICES 6.2% 8.7%
DIVERSIFIED COMPANIES 5.8% 10.4%
www.americancentury.com 7
Select--Q&A
- --------------------------------------------------------------------------------
(continued)
arrangement with British Telecom (BT) to provide international communications
services bodes well for this company's growth. Meanwhile, MCI WorldCom, the
nation's second-largest long-distance company, is one of the first vertically
integrated telecommunications providers, which means it can supply its customers
with local, long-distance and Internet data service. We also increased holdings
in regional Bell operating companies, which are enjoying increasing demand for
newer services such as caller identification and additional phone lines to
support home-based Internet use.
On the sell side, we reduced our stake in energy companies, particularly
oilfield services companies. This sector suffered as ongoing weakness in crude
oil prices effectively slowed growth in oilfield exploration and production,
especially in North America. At this time, we do not expect the slowdown to
reverse itself in the near future.
WHAT'S YOUR OUTLOOK ON STOCKS HEADING INTO 1999?
We believe that investors will continue to gravitate toward companies with
the best chances of sustaining their growth--those with the highest earnings
visibility--and an ability to ride out a period of slowing economic activity
here and abroad. We will continue to search for and buy high-quality, large-cap
companies with good earnings acceleration and revenue growth.
[LEFT MARGIN]
"WE WILL CONTINUE TO SEARCH FOR AND BUY HIGH-QUALITY, LARGE-CAP COMPANIES WITH
GOOD EARNINGS ACCELERATION AND REVENUE GROWTH."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Temporary Cash Investments 6.0%
Common Stocks 94.0%
AS OF APRIL 30, 1998
Temporary Cash Investments 4.0%
Common Stocks 96.0%
8 1-800-345-2021
Select--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-94.0%
AEROSPACE & DEFENSE-1.1%
1,250,000 Boeing Co. $ 46,875
135,000 Lockheed Martin Corp. 15,036
-------------
61,911
-------------
BANKING-4.2%
500,000 Bank of New York Co., Inc. (The) 15,781
530,000 Chase Manhattan Corp. 30,111
1,300,000 Citigroup Inc. 61,180
480,000 Fifth Third Bancorp 31,815
970,000 First Union Corp. 56,260
300,000 Fleet Financial Group, Inc. 11,981
850,000 Norwest Corp. 31,609
-------------
238,737
-------------
BIOTECHNOLOGY-0.6%
450,000 Amgen Inc.(1) 35,367
-------------
BROADCASTING & MEDIA-1.5%
850,000 CBS Corporation 23,747
650,000 Time Warner Inc. 60,327
-------------
84,074
-------------
CHEMICALS & RESINS-1.2%
290,000 Dow Chemical Co. 27,151
675,000 du Pont (E.I.) de Nemours & Co. 38,813
-------------
65,964
-------------
COMMUNICATIONS EQUIPMENT-4.3%
1,580,000 Cisco Systems Inc.(1) 99,688
850,000 Lucent Technologies Inc. 68,158
950,000 Motorola, Inc. 49,400
572,700 Northern Telecom Ltd. 24,519
-------------
241,765
-------------
COMMUNICATIONS SERVICES-10.2%
909,800 AirTouch Communications, Inc.(1) 50,949
900,000 Ameritech Corp. 48,544
2,130,000 AT&T Corp. 132,593
1,000,000 Bell Atlantic Corp. 53,125
625,000 BellSouth Corp. 49,883
300,000 Century Telephone Enterprises, Inc. 17,044
610,000 GTE Corp. 35,799
2,700,000 MCI WorldCom, Inc.(1) 149,258
560,000 Sprint Corp. 42,980
-------------
580,175
-------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
COMPUTER PERIPHERALS-1.5%
880,000 3Com Corp.(1) $ 31,763
850,000 EMC Corp. (Mass.)(1) 54,719
-------------
86,482
-------------
COMPUTER SOFTWARE & SERVICES-6.2%
650,000 America Online Inc. 82,591
560,000 BMC Software, Inc.(1) 26,898
1,900,000 Microsoft Corp.(1) 201,222
1,360,000 Oracle Systems Corp.(1) 40,205
-------------
350,916
-------------
COMPUTER SYSTEMS-6.6%
2,260,000 Compaq Computer Corp. 71,473
1,100,000 Dell Computer Corp.(1) 72,084
1,300,000 International Business
Machines Corp. 192,969
620,000 Sun Microsystems, Inc.(1) 36,076
-------------
372,602
-------------
CONSUMER PRODUCTS-2.5%
400,000 Avon Products, Inc. 15,875
420,000 Colgate-Palmolive Co. 37,118
1,000,000 Procter & Gamble Co. (The) 88,875
-------------
141,868
-------------
DIVERSIFIED COMPANIES-5.8%
2,370,000 General Electric Co. (U.S.) 207,373
200,000 Honeywell Inc. 15,975
700,000 Minnesota Mining &
Manufacturing Co. 56,000
750,000 Tyco International Ltd. 46,453
-------------
325,801
-------------
ELECTRICAL &
ELECTRONIC
COMPONENTS-3.0%
1,700,000 Intel Corp. 151,671
350,000 Solectron Corp.(1) 20,038
-------------
171,709
-------------
ENERGY (PRODUCTION & MARKETING)-2.6%
400,000 Chevron Corp. 32,600
670,000 Enron Corp. 35,343
600,000 Exxon Corp. 42,750
500,000 Mobil Corp. 37,844
-------------
148,537
-------------
ENVIRONMENTAL SERVICES-0.3%
800,000 Republic Services, Inc. Cl A(1) 17,500
-------------
See Notes to Financial Statements
www.americancentury.com 9
Select--Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES-2.6%
490,000 Associates First Capital Corp. $ 34,545
670,000 Fannie Mae 47,444
460,000 Federal Home Loan Mortgage
Corporation 26,450
799,600 Schwab (Charles) Corp. 38,331
-------------
146,770
-------------
FOOD & BEVERAGE-4.8%
700,000 Anheuser-Busch Companies, Inc. 41,606
413,000 Campbell Soup Co. 22,018
1,400,000 Coca-Cola Company (The) 94,675
685,000 ConAgra, Inc. 20,850
415,000 Heinz (H.J.) Co. 24,122
900,000 PepsiCo, Inc. 30,375
99,600 Quaker Oats Co. (The) 5,883
500,000 Sara Lee Corp. 29,844
-------------
269,373
-------------
HEALTHCARE-1.3%
620,000 Baxter International, Inc. 37,161
390,000 Cardinal Health, Inc. 36,879
-------------
74,040
-------------
INSURANCE-2.2%
540,900 Allstate Corp. 23,293
680,000 American International Group, Inc. 57,970
600,000 SunAmerica, Inc. 42,300
-------------
123,563
-------------
LEISURE-0.6%
1,330,000 Disney (Walt) Co. 35,827
-------------
MEDICAL EQUIPMENT & SUPPLIES-1.9%
503,000 Guidant Corp. 38,480
1,050,300 Medtronic, Inc. 68,270
-------------
106,750
-------------
OFFICE EQUIPMENT & SUPPLIES-0.3%
350,000 Pitney Bowes Inc. 19,272
-------------
PAPER & FOREST PRODUCTS-0.8%
675,000 Kimberly-Clark Corp. 32,569
230,000 Weyerhaeuser Co. 10,767
-------------
43,336
-------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
PHARMACEUTICALS-18.0%
1,400,000 Abbott Laboratories $ 65,713
900,000 American Home Products Corp. 43,875
1,430,000 Bristol-Myers Squibb Co. 158,103
1,880,000 Johnson & Johnson 153,220
1,590,000 Lilly (Eli) & Co. 128,691
1,385,000 Merck & Co., Inc. 187,321
1,170,000 Pfizer, Inc. 125,556
1,150,000 Pharmacia & Upjohn Inc. 60,878
530,000 Schering-Plough Corp. 54,524
510,000 Warner-Lambert Co. 39,971
-------------
1,017,852
-------------
RESTAURANTS-0.5%
450,000 McDonald's Corp. 30,094
-------------
RETAIL (FOOD & DRUG)-1.7%
865,000 CVS Corp. 39,520
600,000 Rite Aid Corp. 23,813
1,290,000 SYSCO Corp. 34,749
-------------
98,082
-------------
RETAIL (GENERAL MERCHANDISE)-3.0%
350,000 Best Buy Co., Inc.(1) 16,800
2,250,000 Wal-Mart Stores, Inc. 155,250
-------------
172,050
-------------
RETAIL (SPECIALTY)-1.2%
1,500,000 Home Depot, Inc. 65,250
-------------
TOBACCO-2.3%
2,550,000 Philip Morris Companies Inc. 130,369
-------------
UTILITIES-1.2%
300,000 American Electric Power Co., Inc. 14,681
250,000 Duke Power Co. 16,172
600,000 PG&E Corp. 18,263
600,000 Southern Co. 16,913
-------------
66,029
-------------
TOTAL COMMON STOCKS 5,322,065
(Cost $4,268,613) -------------
See Notes to Financial Statements
10 1-800-345-2021
Select--Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS(2)-6.0%
$ 856 FHLB Discount Notes,
5.40%,
11/2/98 $ 856
50,000 FHLB Discount Notes, 5.14%,
11/4/98 49,987
286,544 FHLMC Discount Notes, 5.42%,
11/2/98 286,544
-------------
TOTAL TEMPORARY CASH INVESTMENTS 337,387
(Cost $337,336) -------------
TOTAL INVESTMENT SECURITIES-100.0% $5,659,452
(Cost $4,605,949) =============
================================================================================
FUTURES CONTRACTS
($ in Thousands)
Expiration Underlying Face Unrealized
Purchased Date Amount at Value Gain
- ------------------------------------------------------------------------
595 S&P 500 December
Futures 1998 $164,398 $13,523
==================================
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
(1) Non-income producing.
(2) The rates for U.S. Government Agency discount notes are the yield to
maturity at purchase.
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o a list of each investment
o the number of shares of each stock or the principal amount of each bond
o the market value of each investment
o the percentage of total investments in each industry
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
Heritage--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS (INCEPTION 11/10/87) ADVISOR CLASS (INCEPTION 7/11/97) INSTITUTIONAL CLASS (INCEPTION 6/16/97)
HERITAGE S&P MIDCAP 400 HERITAGE S&P MIDCAP 400 HERITAGE S&P MIDCAP 400
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) -23.17% -10.46% -23.21% -10.46% -23.08% -10.46%
1 YEAR -15.87% 6.71% -16.03% 6.71% -15.67% 6.71%
AVERAGE ANNUAL RETURNS
3 YEARS 6.38% 18.44% -- -- -- --
5 YEARS 7.57% 15.57% -- -- -- --
10 YEARS 12.25% 17.60% -- -- -- --
LIFE OF FUND 13.45% 18.63%(2) -9.63% 6.19%(3) -5.74% 13.53%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) Return from 11/30/87, the date nearest the class's inception for which data
are available.
(3) Return from 7/31/97, the date nearest the class's inception for which data
are available.
(4) Return from 6/30/97, the date nearest the class's inception for which data
are available.
See pages 42, 43 and 44 for information about share classes, the S&P MidCap 400
Index and returns.
[mountain chart - data below}
Growth of $10,000 Over 10 Years
Heritage S&P MidCap 400
Date Value Value
10/31/88 $10,000 $10,000
10/31/89 $13,266 $13,061
10/31/90 $11,723 $11,311
10/31/91 $15,622 $18,488
10/31/92 $17,130 $20,192
10/31/93 $22,038 $24,539
10/31/94 $21,789 $25,123
10/31/95 $26,373 $30,452
10/31/96 $29,126 $35,736
10/31/97 $37,736 $47,410
10/31/98 $31,748 $50,592
Value as of 10/31/98:
Heritage $31,748
S&P MidCap 400 $50,592
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The S&P
MidCap 400 Index is provided for comparison in each chart. Past performance does
not guarantee future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than original cost. The
charts are based on Investor Class shares only; performance for other classes
will vary due to differences in fee structures (see the Total Returns table
above). Heritage's total returns include operating expenses (such as transaction
costs and management fees) that reduce returns, while the total returns of the
S&P MidCap 400 Index do not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING OCTOBER 31)
<TABLE>
10/89 10/90 10/91 10/92 10/93 10/94 10/95 10/96 10/97 10/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Select 32.65% -11.62% 33.25% 9.65% 28.64% -1.13% 21.04% 10.44% 29.56% -15.87%
S&P MidCap 400 30.61% -13.40% 63.45% 9.22% 21.53% 2.38% 21.21% 17.35% 32.67% 6.71%
</TABLE>
12 1-800-345-2021
Heritage--Q&A
- --------------------------------------------------------------------------------
[photo of Harold Bradley and Linda Peterson]
Harold Bradley and Linda Peterson, portfolio managers on the Heritage investment
team
An interview with Harold Bradley and Linda Peterson, portfolio managers on
the Heritage investment team.
HOW DID HERITAGE PERFORM DURING THE PAST YEAR?
Heritage lost 15.87% during the 12 months ended October 31, 1998, in a year
characterized by unusually high volatility and wide disparity, based on market
capitalization, in the performance of stocks.* The S&P MidCap 400 Index gained
6.71% during the same period.
WILL YOU EXPLAIN HERITAGE'S PERFORMANCE RELATIVE TO THE S&P MIDCAP 400?
The S&P MidCap 400 Index is a capitalization-weighted index, meaning the
largest companies have the most significant impact on performance. For example,
America Online was the best-performing stock in this index, up 230% for the
year. At a market capitalization of $32 billion, AOL fits no definition of a
mid-cap investment. Of the top 10 performing stocks in the S&P MidCap 400, all
exceed the $5 billion market capitalization level that typically distinguishes
large-cap from mid-cap stocks.
Investors paid a significant premium for the presumed safety of larger
companies in 1998. The disparity in performance between very large companies and
the small- and mid-cap companies owned by Heritage approached historically
unprecedented levels.
In the first quarter of the year, small-capitalization companies (less than
$1 billion) represented a significant portion of Heritage's holdings. As a group
this year, small-capitalization stocks proved to be a victim of the market's
growing concerns that Asian economic problems might spread globally. A number of
reports conclude that the average small-capitalization stock lost more than 15%
in the year. The average mid-cap stock fared only marginally better.
Interestingly, many of these companies continued to demonstrate favorable
earnings and revenue patterns. At the same time, investors lost confidence that
such performance could continue and prices fell. Even though we shifted more
toward the mid-cap sector, small-cap stocks in the portfolio detracted from
performance.
WHAT WERE SOME THEMES OR HOLDINGS THAT HELPED DURING THE YEAR?
Heritage enjoyed favorable investment returns from food and beverage
companies, pharmaceuticals, cable operators and electric utilities.
Mylan Labs, our largest contributor, illustrates our interest in the
generic drug sector. As prices for branded pharmaceutical products continue to
escalate, the generic drug makers increasingly exploit opportunities to deliver
effective drug therapies at cheaper prices. Earnings and revenues grow as new
products are approved. Additionally, many health insurers now charge higher
co-payments for brand name drugs to control costs and foster greater consumer
reliance on generic products.
*All fund returns referenced in this interview are for Investor Class shares.
[RIGHT MARGIN]
"INVESTORS PAID A SIGNIFICANT PREMIUM FOR THE PRESUMED SAFETY OF LARGER
COMPANIES IN 1998. THE DISPARITY IN PERFORMANCE BETWEEN VERY LARGE COMPANIES AND
THE SMALL- AND MID-CAP COMPANIES OWNED BY HERITAGE APPROACHED HISTORICALLY
UNPRECEDENTED LEVELS."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 82 93
MEDIAN P/E RATIO 25.3 22.5
MEDIAN MARKET $2.97 $893
CAPITALIZATION BILLION MILLION
PORTFOLIO TURNOVER 148% 69%
EXPENSE RATIO (FOR
INVESTOR CLASS) 1.00% 1.00%
Investment terms are defined in the Glossary on page 44.
www.americancentury.com 13
Heritage--Q&A
- --------------------------------------------------------------------------------
(continued)
DEKALB Genetics was the fund's second-best contributor to performance.
Monsanto acquired the company in the second quarter at a large premium to the
market price. Chemical companies such as Monsanto continue to acquire leaders in
agricultural biotechnology applications.
Our investment in The Metzler Group, a leading provider of consulting
services to energy-based and other regulated industries, represents Heritage's
focus on both growth and recurring revenue streams. Metzler generally delivers
its services based on long-term contracts. Consolidation and emerging
competition in the utility industry should place Metzler in a strong position to
advise utility executives about cost management practices and operational
efficiency.
Cable companies also contributed positively to the fund's performance.
Strong cash flow from subscriber growth and a host of new services including
Internet access, telecommunications and data transfer create a compelling
investment theme. Many of these companies are nearing the end of large capital
expenditures to modernize systems, which should lead to strong earnings growth
in the very near future.
WHICH STOCKS OR INDUSTRIES HURT FUND PERFORMANCE DURING THE YEAR?
Investments in electronic components, computer software, and apparel
companies dampened investment performance. The technology group, including
software, was buffeted by concerns about the meltdown of Asian economies and
persistent worries that the Year 2000 "bug" in major computer systems might slow
new software purchases in 1999. One holding, FileNet, was among the software
companies that blamed an earnings shortfall on purchase deferrals by major
clients worried about introducing new complexity into newly Year 2000-compliant
computer systems.
The technology group represented 25% of the fund last year and was pared to
16% at year-end.
WHAT CHANGES DID YOU MAKE IN THE PORTFOLIO DURING THE YEAR?
The transition of the portfolio management team in March of this year led
to significant restructuring of the portfolio and the adoption of additional
processes to ensure appropriate diversification and growth consistent with an
accelerating rate of change in a company's revenues and earnings.
Heritage moved up in market capitalization to a more focused mid-cap
approach. This action created some transition costs as the sale of many
smaller-capitalization companies coincided with a sharp contraction in trading
volumes in the second and third quarters of the year.
The emphasis on diversification led the fund to build positions in
companies connected with the highway construction industry. These companies are
likely to benefit from a 40% increase in federal highway spending under the
recently passed five-year Federal Transportation Equity Act for the 21st
Century. Such companies appear positioned to generate strong growth with a
smaller risk to earnings from a possible general slowing of the economy.
We also directed more investment dollars into the biotechnology and
healthcare groups. Biotech companies specifically now exhibit earnings and
revenue growth after years of extensive and expensive research and development.
Biogen, for example, turned research into a dominant multiple sclerosis drug
called Avonex. Strong
[LEFT MARGIN]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
MYLAN LABORATORIES
INC. 5.8% 2.6%
OMNICARE, INC. 2.9% 1.2%
METZLER GROUP,
INC. (THE) 2.9% --
CRH PLC ORD 2.8% 0.7%
RELIASTAR FINANCIAL
CORP. 2.7% 1.2%
NETWORK ASSOCIATES
INC. 2.7% 2.0%
BIOMATRIX, INC. 2.6% --
LAFARGE SA ORD 2.4% 0.9%
HARLEY-DAVIDSON, INC. 2.3% --
GEMSTAR INTERNATIONAL
GROUP LTD. 2.2% --
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
COMPUTER SOFTWARE
& SERVICES 11.3% 15.5%
CONSTRUCTION &
PROPERTY DEVELOPMENT 8.9% 1.1%
COMMUNICATIONS
SERVICES 7.8% 0.8%
PHARMACEUTICALS 7.2% 5.1%
BUSINESS SERVICES &
SUPPLIES 6.3% 6.9%
14 1-800-345-2021
Heritage--Q&A
- --------------------------------------------------------------------------------
(continued)
European acceptance of this drug therapy is helping drive accelerating earnings.
WHAT EXPLAINS THE INCREASE IN NON-U.S. STOCKS IN THE FUND?
The increase in Heritage's international stock ownership from 7.6% to 17.2%
reflected an investment outlook for continued infrastructure spending in Europe
and the strong economic benefits likely to accrue to the Continent after the
European Economic Union begins on January 1, 1999.
The increase in international stock weightings was concentrated in
construction and financial themes and contributed positively to performance
during the year.
One of our top-contributing international stocks was CRH PLC. This Irish
company derives more than half of its revenues from the United States, where it
is a major supplier of concrete and aggregate materials used in roadbuilding.
This represents one of the ironies of investing in 1998. Many companies appear
to be non-U.S. concerns but derive significant percentages of revenue from U.S.
operations. At the same time, many mid-cap U.S. companies now have extensive
operations in Europe, Asia, and Latin America.
Alberta Energy, one of Canada's largest natural-gas producers, provides
another example of a foreign company taking aim at the U.S. market. Alberta
participates in a consortium building the Alliance gas pipeline that will
transport low-cost Canadian gas directly to the United States early next year.
WHAT IS YOUR OUTLOOK FOR HERITAGE AND MID-CAP STOCKS?
In 1998, the valuation placed on earnings and revenues of
large-capitalization companies reached historically extreme levels compared to
those of small- and mid-cap companies. While it is impossible to predict how
long such trends might continue, history shows that investors tend to correct
such disparities often after sharp market corrections such as those in 1973-74,
1987, and 1990-91.
[RIGHT MARGIN]
"WE FEEL CONFIDENT THAT OUR FOCUSED INVESTMENT PROCESS, AND MORE FAVORABLE
GLOBAL ECONOMIC CONDITIONS, WILL ULTIMATELY REWARD INVESTORS IN MID-CAP GROWTH
STOCKS."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Convertible Bonds 1.0%
Temporary Cash Investments 3.0%
Common Stocks 96.0%
AS OF APRIL 30, 1998
Temporary Cash Investments 7.0%
Common Stocks 93.0%
www.americancentury.com 15
Heritage--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-96.1%
AEROSPACE & DEFENSE-2.6%
1,561,500 Bombardier Inc. Cl B ORD $ 18,481
58,000 EG&G, Inc. 1,457
58,000 Lockheed Martin Corp. 6,460
-------------
26,398
-------------
AUTOMOBILES & AUTO PARTS-0.3%
108,000 Hayes Lemmerz International Inc.(1) 2,896
-------------
BANKING-1.9%
45,700 Dexia France ORD 6,739
37,600 First American Corp. (Tenn.) 1,551
22,000 M & T Bank Corporation 10,967
-------------
19,257
-------------
BIOTECHNOLOGY-5.6%
155,200 Biogen, Inc.(1) 10,782
555,400 Biomatrix, Inc.(1) 26,104
213,400 Centocor, Inc.(1) 9,490
141,200 Immunex Corp.(1) 9,752
-------------
56,128
-------------
BROADCASTING & MEDIA-1.9%
12,100 Media General, Inc. Cl A 541
816,600 USA Networks Inc.(1) 18,348
-------------
18,889
-------------
BUSINESS SERVICES & SUPPLIES-6.3%
491,600 Mastech Corp.(1) 11,568
687,900 Metzler Group, Inc. (The)(1) 28,720
716,300 National Computer Systems, Inc. 20,124
134,900 PAREXEL International Corp.(1) 2,980
-------------
63,392
-------------
COMMUNICATIONS EQUIPMENT-2.9%
450,500 ADC Telecommunications, Inc.(1) 10,347
387,600 Ascend Communications, Inc.(1) 18,690
-------------
29,037
-------------
COMMUNICATIONS SERVICES-6.9%
182,100 Adelphia Communications
Corp. Cl A(1) 6,943
183,300 Comcast Corp. Cl A 8,982
175,200 Cox Communications, Inc. Cl A(1) 9,614
397,600 Gemstar International Group Ltd.(1) 21,769
422,800 Global TeleSystems Group, Inc.(1) 16,886
159,700 Pacific Gateway Exchange, Inc.(1) 4,631
-------------
68,825
-------------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES-11.3%
209,500 Cap Gemini N.V. ORD $ 12,949
346,800 Getronics N.V. ORD 14,383
700,500 HBO & Co. 18,366
330,600 Henry (Jack) & Associates, Inc. 15,166
172,900 HNC Software Inc.(1) 5,814
295,200 Intuit Inc.(1) 14,871
630,910 Network Associates Inc.(1) 26,833
109,700 Synopsys, Inc.(1) 4,954
-------------
113,336
-------------
CONSTRUCTION & PROPERTY
DEVELOPMENT-8.9%
1,936,681 CRH plc ORD 28,234
400,000 Granite Construction Inc. 13,325
230,000 Lafarge SA ORD 23,522
321,700 Martin Marietta Materials, Inc. 15,783
134,300 Owens Corning 4,877
27,000 Vulcan Materials Co. 3,203
-------------
88,944
-------------
ELECTRICAL & ELECTRONIC COMPONENTS-2.6%
128,700 Altera Corp.(1) 5,353
96,200 Flextronics International Ltd.(1) 4,999
96,700 PMC-Sierra, Inc.(1) 4,345
178,900 Vitesse Semiconductor Corp.(1) 5,781
133,500 Xilinx, Inc.(1) 5,961
-------------
26,439
-------------
ENERGY (PRODUCTION & MARKETING)-3.2%
710,300 Alberta Energy Co. Ltd. ORD 16,583
122,000 Burlington Resources Inc. 5,025
306,400 Sun Company, Inc. 10,513
-------------
32,121
-------------
ENVIRONMENTAL SERVICES-1.2%
535,200 Republic Services, Inc. Cl A(1) 11,708
-------------
FINANCIAL SERVICES-3.4%
282,900 Affiliated Managers Group Inc.(1) 6,295
364,900 Countrywide Credit Industries, Inc. 15,759
29,895 Credit Commercial de France ORD 2,100
3,163 Julius Baer Holding AG ORD 9,695
-------------
33,849
-------------
FOOD & BEVERAGE-1.6%
384,400 Tyson Foods, Inc. Cl A 8,841
314,600 Whitman Corp. 6,744
-------------
15,585
-------------
See Notes to Financial Statements
16 1-800-345-2021
Heritage--Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
HEALTHCARE-4.9%
611,600 Total Renal Care Holdings, Inc.(1) $ 14,984
840,400 Omnicare, Inc. 29,046
73,900 Wellpoint Health Networks Inc.(1) 5,441
-------------
49,471
-------------
INSURANCE-4.4%
65,400 Lincoln National Corp. 4,962
257,500 Reinsurance Group of America,
Inc. Cl A(2) 12,231
613,200 ReliaStar Financial Corp. 26,866
-------------
44,059
-------------
LEISURE-3.4%
591,700 Harley-Davidson, Inc. 22,928
486,600 Premier Parks Inc.(1) 10,796
-------------
33,724
-------------
METALS & MINING-1.4%
197,100 Barrick Gold Corp. 4,213
345,600 Placer Dome Inc. 5,443
126,800 Stillwater Mining Co.(1) 4,105
-------------
13,761
-------------
PHARMACEUTICALS-7.2%
513,083 ALPHARMA INC. 14,206
1,680,600 Mylan Laboratories Inc. 57,876
-------------
72,082
-------------
REAL ESTATE-4.0%
423,900 Archstone Communities Trust 8,531
848,500 Developers Diversified Realty Corp. 16,015
666,300 Liberty Property Trust 15,325
-------------
39,871
-------------
RETAIL (APPAREL)-0.3%
182,500 Burlington Coat Factory
Warehouse Corp. 2,738
-------------
RETAIL (FOOD & DRUG)-0.8%
738,100 Food Lion, Inc. Cl A 8,096
-------------
RETAIL (GENERAL MERCHANDISE)-2.3%
163,000 Best Buy Co., Inc.(1) 7,824
307,100 Tandy Corp. 15,221
-------------
23,045
-------------
RETAIL (SPECIALTY)-1.3%
173,500 Hasbro, Inc. 6,083
244,200 Williams-Sonoma, Inc.(1) 6,654
-------------
12,737
-------------
Shares/Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------
UTILITIES-5.5%
179,300 Baltimore Gas & Electric Co. $ 5,626
105,600 CMS Energy Corp. 4,653
712,900 Nevada Power Co. 18,001
158,211 NIPSCO Industries, Inc. 4,736
493,600 SCANA Corp. 16,690
142,400 Utilicorp United Inc. 5,118
-------------
54,824
-------------
TOTAL COMMON STOCKS 961,212
(Cost $876,132) -------------
CONVERTIBLE BOND-0.9%
COMMUNICATIONS SERVICES
$11,400 Global Telesystems Group, Inc.,
5.75%, 7/1/10 9,320
-------------
(Cost $12,254)
TEMPORARY CASH INVESTMENTS-3.0%
Repurchase Agreement, BA Security Services, Inc.,
(U.S. Treasury obligations), in a joint trading
account at 5.42%, dated 10/30/98 due
11/2/98 (Delivery value $30,214) 30,200
(Cost $30,200) -------------
TOTAL INVESTMENT SECURITIES--100.0% $1,000,732
(Cost $918,586) ==============
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contracts Settlement Unrealized
to Sell Date Value Gain
- ------------------------------------------------------------------------
7,429,262 CHF 11/30/1998 $ 5,504 $16
94,326,206 FRF 11/30/1998 17,006 13
26,339,780 NLG 11/30/1998 14,117 8
----------------------------------
$36,627 $37
==================================
(Value on Settlement Date $36,664)
See Notes to Financial Statements
www.americancentury.com 17
Heritage--Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
CHF = Swiss Franc
FRF = French Franc
NLG = Netherlands Guilder
ORD = Foreign Ordinary Share
(1) Non-income producing.
(2) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment company Act of 1940. (See Note 5 in Notes to Financial Statements
for a summary of transactions for each issuer which is or was an affiliate
at or during the year ended October 31, 1998.)
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o a list of each investment
o the number of shares of each stock or the principal amount of each bond
o the market value of each investment
o the percentage of total investments in each industry
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
18 1-800-345-2021
Growth--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS ADVISOR CLASS INSTITUTIONAL CLASS
(INCEPTION 6/30/71)(1) (INCEPTION 6/4/97) (INCEPTION 6/16/97)
RUSSELL RUSSELL RUSSELL
1000 1000 1000
GROWTH GROWTH S&P 500 GROWTH GROWTH S&P 500 GROWTH GROWTH S&P 500
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6 MONTHS(2) -0.25% 1.28% -0.42% -0.39% 1.28% -0.42% -0.14% 1.28% -0.42%
1 YEAR 18.53% 24.64% 21.96% 18.23% 24.64% 21.96% 18.77% 24.64% 21.96%
AVERAGE ANNUAL RETURNS
3 YEARS 17.93% 25.67% 25.98% -- -- -- -- -- --
5 YEARS 15.52% 22.01% 21.25% -- -- -- -- -- --
10 YEARS 16.96% 18.76% 17.84% -- -- -- -- -- --
LIFE OF FUND 18.50% N/A(3) 13.29% 23.88% 21.08%(4) 23.10% 20.11% 21.08%(4) 18.24%
</TABLE>
(1) Although the fund's actual inception date was 10/31/58, this date
corresponds with the management company's implementation of its current
investment philosophy and practices.
(2) Returns for periods less than one year are not annualized.
(3) Benchmark began 1/1/79.
(4) Return from 6/30/97, the date nearest the class's inception for which data
are available.
See pages 42, 43 and 44 for information about share classes, the Russell 1000
Growth and S&P 500 indices and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Growth Russell 1000 Growth S&P 500
Date Value Value Value
10/31/88 $10,000 $10,000 $10,000
10/31/89 $14,274 $13,120 $12,627
10/31/90 $12,601 $12,377 $11,677
10/31/91 $20,242 $17,361 $15,589
10/31/92 $21,451 $19,239 $17,137
10/31/93 $23,270 $20,645 $19,689
10/31/94 $23,889 $21,760 $20,451
10/31/95 $29,218 $28,121 $25,842
10/31/96 $31,609 $34,321 $32,052
10/31/97 $40,412 $44,779 $42,341
10/31/98 $47,897 $55,813 $51,636
Value as of 10/31/98:
Growth $47,897
Russell 1000 Growth $55,813
S&P 500 $51,636
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The S&P
500 and the Russell 1000 Growth indices are provided for comparison in each
chart. Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. The charts are based on Investor Class shares only; performance
for other classes will vary due to differences in fee structures (see the Total
Returns table above). Growth's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the S&P 500 and the Russell 1000 Growth indices do not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING OCTOBER 31)
<TABLE>
10/89 10/90 10/91 10/92 10/93 10/94 10/95 10/96 10/97 10/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth 42.74% -11.72% 60.64% 5.96% 8.48% 2.66% 22.31% 8.18% 27.85% 18.53%
Russell
1000 Growth 31.20% -5.66% 40.26% 10.82% 7.31% 5.40% 29.23% 22.05% 30.47% 24.64%
S&P 500 26.27% -7.52% 33.50% 9.93% 14.89% 3.87% 26.36% 24.03% 32.10% 21.96%
</TABLE>
www.americancentury.com 19
Growth--Q&A
- --------------------------------------------------------------------------------
[photo of Greg Woodhams and C. Kim Goodwin]
Greg Woodhams and C. Kim Goodwin, portfolio managers on the Growth investment
team
An interview with C. Kim Goodwin and Greg Woodhams, portfolio managers on
the Growth investment team.
HOW DID GROWTH PERFORM DURING ITS FISCAL YEAR?
Growth posted an 18.53% return for the year ending October 31, 1998.* As we
explained in the semiannual report, the fund's benchmark was switched from the
S&P 500, which is considered representative of the broad market, to the Russell
1000 Growth Index. The Russell 1000 Growth Index measures the performance of
large-company stocks with higher forecasted growth rates than those in the S&P
500. In our opinion it is more representative of Growth's portfolio. The Russell
1000 Growth Index returned 24.64% for the year ending October 31, 1998, while
the S&P 500 gained 21.96%.
Although Growth's performance trailed that of its benchmark for the period
as a whole, the fund has outpaced many of its peers for much of its history.
According to Lipper Analytical Services, Inc., Growth finished in the top
quartile of 945 growth funds for the 12 months ended October 31. Growth also
ranked 335th out of 578 growth funds for the three years ended October 31, and
finished in the top 3% of 78 growth funds since its inception in 1971(+).
WHAT HELPED THE FUND ACHIEVE THIS PERFORMANCE?
A number of factors are responsible for the fund's performance, but perhaps
the most important is that we have four dedicated investment professionals
focusing exclusively on Growth. Together, we have more than 23 years of
investment experience. The team's size and depth of experience are important
because Growth is a very research-intensive fund. Unlike many funds its size,
Growth often establishes large, high-confidence positions in stocks. In fact, as
of October 31, 1998, Growth's top 10 holdings accounted for more than 30% of
investments. In order for us to take these more concentrated positions, we must
know the companies we select very well. We believe we have the investment talent
and resources in place to enable us to continue doing that successfully.
WHICH INDUSTRIES OR SECTORS CONTRIBUTED THE MOST TO RETURNS?
Growth's top-contributing industry was pharmaceuticals, where we built
positions in companies with strong new-product pipelines and limited exposure to
generic competition. Two contributors were Pfizer and Schering-Plough, both of
which benefited from new product launches and minimal exposure to generic drugs.
Selected telecommunications companies also performed well. Two companies
that underscore our confidence
* All fund returns referenced in this interview are for Investor Class shares.
(+) Growth was ranked 187 out of 1,076 funds, 220 out of 362 funds and 54 out of
177 funds for the one-, five- and 10-year periods ended October 31, 1998. Lipper
rankings are based on average annual total returns. Past performance is no
guarantee of future results.
[LEFT MARGIN]
"UNLIKE MANY FUNDS ITS SIZE, GROWTH OFTEN ESTABLISHES LARGE, HIGH-CONFIDENCE
POSITIONS IN STOCKS. IN FACT, AS OF OCTOBER 31, 1998, GROWTH'S TOP 10 HOLDINGS
ACCOUNTED FOR MORE THAN 30% OF INVESTMENTS.
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 53 65
MEDIAN P/E RATIO 34.9 25.7
MEDIAN MARKET $32.2 $25.7
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 126% 75%
EXPENSE RATIO (FOR
INVESTOR CLASS) 1.00% 1.00%
Investment terms are defined in the Glossary on page 44.
20 1-800-345-2021
Growth--Q&A
- --------------------------------------------------------------------------------
(continued)
in this area are MCI WorldCom and AirTouch Communications. The nation's
second-largest long-distance company, MCI WorldCom is one of the first
vertically integrated telecommunications providers, which means it can supply
its customers with local, long-distance and Internet data service. AirTouch, a
wireless service provider, has demonstrated its prowess in U.S. markets while
also participating in the growth of wireless communications in Europe and the
Far East.
Technology companies Microsoft and EMC Corp. also were among the stocks
that contributed significantly to Growth's performance. Robust sales of Windows
'98 software fueled Microsoft's profits, and the company's high percentage of
recurring revenues shielded it from the effects of slowing sales in Asia. EMC
makes information storage products. The company is unique in that its systems
can store data generated from any platform (mainframe, UNIX, or NT). EMC is a
leader in enterprise storage.
WHICH STOCKS OR INDUSTRIES WERE DISAPPOINTING?
If there was a common theme among Growth's underperformers, it was that in
nearly each case, the stock suffered at least in part from worsening global
economic conditions. Broadcasting and media companies, semiconductor
manufacturers, and food and beverage companies were among those that suffered
the most. In the case of broadcasting, it's clear that profits tapered off in
direct relationship to growing concerns that the U.S. economy was heading into
recession and that advertisers would probably spend less. Fortunately, our
exposure in this area was limited to radio broadcasting companies, which
performed relatively better than media companies that own newspapers or
television networks.
Semiconductor firms in general had a difficult year, mostly due to excess
inventories. In addition, growing economic problems in foreign markets such as
Asia and Latin America dampened demand for computers, particularly in the fourth
quarter of 1997. However, a number of companies persevered through this
difficult period and went on to become some of Growth's best performers.
The story was similar for food and beverage companies with foreign
exposure. Coca-Cola serves as a good example. Coke derives most of its sales and
earnings outside the United States. Its volume and earnings growth tapered off
as the global economy slowed. We reduced our position in Coke accordingly.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO SINCE THE SEMIANNUAL REPORT?
One of our greatest shifts was in the financial sector, where we reduced
holdings in banks and insurance companies as their earnings declined amid
economic troubles abroad.
As we mentioned earlier, we increased holdings in pharmaceutical companies,
making this Growth's largest industry weighting. We believe that strong product
pipelines will enable the leading drug firms to continue posting accelerating
earnings. We also boosted our stake in general retailers, specifically discount
chains, that we believe are well-positioned for growth in a slowing economy, and
in several food and beverage companies whose stocks slumped during the summer
but are now rebounding. In technology, we increased holdings in software
companies, which outperformed during the period, and moved away from companies
that man-
[RIGHT MARGIN]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
TYCO INTERNATIONAL LTD. 3.9% 3.8%
PFIZER, INC. 3.8% 3.9%
MCI WORLDCOM, INC.(1) 3.6% 3.1%(2)
SCHERING-PLOUGH CORP. 3.5% 1.6%
WAL-MART STORES, INC. 3.5% 2.5%
MICROSOFT CORP. 3.3% 2.8%
GENERAL ELECTRIC
CO. (U.S.) 3.1% 4.2%
AIRTOUCH
COMMUNICATIONS, INC. 3.0% 2.4%
EMC CORP. (MASS.) 2.9% 1.8%
BRISTOL-MYERS
SQUIBB CO. 2.9% 3.7%
(1) WorldCom, Inc. acquired MCI Communications on 9/15/98. Surviving name was
MCI WorldCom, Inc.
(2) Represents WorldCom, Inc. shares owned by the fund.
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
PHARMACEUTICALS 17.7% 11.4%
COMMUNICATIONS
SERVICES 9.8% 6.8%
DIVERSIFIED COMPANIES 7.1% 7.9%
COMPUTER SOFTWARE
& SERVICES 6.3% 8.6%
FOOD & BEVERAGE 4.8% 7.2%
www.americancentury.com 21
Growth--Q&A
- --------------------------------------------------------------------------------
(continued)
ufacture computers and computer parts as demand for computer gear abroad slowed.
We recently revisited this allocation, as hardware companies have now managed
through a year of difficulties in Asia and see easier earnings comparisons going
forward.
WHAT IS YOUR STRATEGY FOR GROWTH AS WE ENTER 1999?
We are optimistic that our research-intensive approach to selecting
securities for the portfolio will continue to enhance performance. We devote
significant time and resources to researching the companies we buy and the
business environments in which they operate. As a result, we are able to take
large positions in stocks that we believe have the greatest potential. We
believe this bottom-up approach, in combination with our strict
earnings-acceleration discipline, will continue to guide us well.
[LEFT MARGIN]
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Preferred Stocks 2.0%
Temporary Cash Investments 6.0%
Common Stocks 92.0%
AS OF APRIL 30, 1998
Preferred Stocks 1.0%
Temporary Cash Investments 4.0%
Common Stocks 95.0%
22 1-800-345-2021
Growth--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-92.2%
BANKING-2.6%
1,067,500 Fifth Third Bancorp $ 70,755
455,300 Northern Trust Corp. 33,564
1,611,800 SouthTrust Corp. 58,780
-------------
163,099
-------------
BROADCASTING & MEDIA-3.1%
2,456,000 CBS Corporation 68,615
2,681,800 Clear Channel Communications, Inc.(1) 122,190
-------------
190,805
-------------
BUSINESS SERVICES & SUPPLIES-0.9%
1,003,000 Ceridian Corp.(1) 57,547
-------------
COMMUNICATIONS EQUIPMENT-2.9%
1,879,250 Cisco Systems Inc.(1) 118,569
741,000 Lucent Technologies Inc. 59,419
-------------
177,988
-------------
COMMUNICATIONS SERVICES-9.8%
3,323,000 AirTouch Communications, Inc.(1) 186,088
4,006,000 MCI WorldCom, Inc.(1) 221,457
1,818,000 SBC Communications Inc. 84,196
1,423,000 Sprint Corp. 109,215
-------------
600,956
-------------
COMPUTER PERIPHERALS-2.9%
2,726,000 EMC Corp. (Mass.)(1) 175,486
-------------
COMPUTER SOFTWARE & SERVICES-6.3%
370,000 At Home Corp. Series A(1) 16,349
1,540,000 Automatic Data Processing, Inc. 119,831
1,908,000 Microsoft Corp.(1) 202,069
1,788,000 Unisys Corp.(1) 47,606
-------------
385,855
-------------
COMPUTER SYSTEMS-3.6%
2,006,000 Compaq Computer Corp. 63,440
1,410,000 Dell Computer Corp.(1) 92,399
424,000 International Business Machines Corp. 62,938
-------------
218,777
-------------
CONSUMER PRODUCTS-2.3%
1,574,000 Procter & Gamble Co. (The) 139,889
-------------
DIVERSIFIED COMPANIES-7.1%
2,193,000 General Electric Co. (U.S.) 191,888
3,909,724 Tyco International Ltd. 242,159
-------------
434,047
-------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
ELECTRICAL & ELECTRONIC COMPONENTS-3.2%
1,327,000 Intel Corp. $ 118,393
1,265,000 Texas Instruments Inc. 80,881
-------------
199,274
-------------
ENERGY (PRODUCTION & MARKETING)-3.7%
1,540,000 Amoco Corp. 86,433
1,129,000 Exxon Corp. 80,441
2,141,100 Williams Companies, Inc. (The) 58,746
-------------
225,620
-------------
FINANCIAL SERVICES-2.0%
1,703,000 Fannie Mae 120,594
-------------
FOOD & BEVERAGE-4.8%
2,826,400 Coca-Cola Enterprises, Inc. 101,927
2,160,000 ConAgra, Inc. 65,745
258,000 Groupe Danone ORD 68,239
915,000 Hershey Foods Corp. 62,048
-------------
297,959
-------------
FURNITURE & FURNISHINGS-1.1%
1,490,000 Newell Co. 65,560
-------------
HEALTHCARE-1.9%
1,238,000 Cardinal Health, Inc. 117,068
-------------
INSURANCE-0.8%
571,500 American International Group, Inc. 48,720
-------------
MEDICAL EQUIPMENT & SUPPLIES-3.4%
1,347,000 Guidant Corp. 103,046
1,595,000 Medtronic, Inc. 103,675
-------------
206,721
-------------
PHARMACEUTICALS-17.7%
2,466,000 American Home Products Corp. 120,218
1,587,000 Bristol-Myers Squibb Co. 175,463
937,000 Johnson & Johnson 76,366
757,000 Lilly (Eli) & Co. 61,270
2,181,800 Pfizer, Inc. 234,134
1,937,000 Pharmacia & Upjohn Inc. 102,540
2,105,000 Schering-Plough Corp. 216,552
1,289,000 Warner-Lambert Co. 101,025
-------------
1,087,568
-------------
RETAIL (FOOD & DRUG)-4.0%
2,036,800 CVS Corp. 93,056
3,162,000 Safeway Inc.(1) 151,183
-------------
244,239
-------------
RETAIL (GENERAL MERCHANDISE)-3.5%
3,089,000 Wal-Mart Stores, Inc. 213,141
-------------
See Notes to Financial Statements
www.americancentury.com 23
Growth--Schedule of Investments
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
Shares/Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
RETAIL (SPECIALTY)-1.4%
1,984,000 Home Depot, Inc. $ 86,304
-------------
TOBACCO-2.2%
2,709,000 Philip Morris Companies Inc. 138,498
-------------
UTILITIES-1.0%
978,000 Duke Power Co. 63,264
-------------
TOTAL COMMON STOCKS 5,658,979
(Cost $4,425,323) -------------
PREFERRED STOCKS-1.6%
PRINTING & PUBLISHING
4,091 News Corp. Ltd. ADR 98,951
(Cost $78,548) -------------
TEMPORARY CASH INVESTMENTS(2)-6.2%
$ 50,000 FHLB Discount Notes, 4.78%,
11/18/98 49,893
25,200 FHLB Discount Notes, 4.77%,
11/20/98 25,139
218,600 FHLMC Discount Notes, 5.42%,
11/2/98 218,600
14,048 FHLMC Discount Notes, 4.79%,
11/9/98 14,035
Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------
$ 27,210 FHLMC Discount Notes, 4.79%,
11/10/98 $ 27,180
45,863 FHLMC Discount Notes, 5.07%,
11/13/98 45,794
TOTAL TEMPORARY CASH INVESTMENTS 380,641
(Cost $380,587) -------------
TOTAL INVESTMENT SECURITIES-100.0% $6,138,571
(Cost $4,884,458) -------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contracts Settlement Unrealized
to Sell Date Value Gain
- -----------------------------------------------------------------------
185,889,000 FRF 11/30/1998 $33,514 $27
================================
(Value on Settlement Date $33,541)
FUTURES CONTRACTS
($ in Thousands)
Expiration Underlying Face Unrealized
Purchased Date Amount at Value Gain
- ----------------------------------------------------------------------------
940 S&P 500 December
Futures 1998 $259,722 $12,349
======================================
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FRF = French Franc
ORD = Foreign Ordinary Share
(1) Non-income producing.
(2) The rates for U.S. Government Agency discount notes are the yield to
maturity at purchase.
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o a list of each investment
o the number of shares of each stock or the principal amount of each bond
o the market value of each investment
o the percentage of total investments in each industry
o the percent and dollar breakdown of each investment category
See Notes to Financial Statements
24 1-800-345-2021
<TABLE>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
SELECT HERITAGE GROWTH
ASSETS (In Thousands, Except Per-Share Amounts)
<S> <C> <C> <C>
Investment securities, at value
(identified cost of $4,605,949, $918,586 and
$4,884,458, respectively) (Note 3 and Note 5) .............. $ 5,659,452 $ 1,000,732 $ 6,138,571
Cash .......................................................... 11,454 4,682 17,785
Receivable for investments sold ............................... 100,880 48,753 25,270
Receivable for forward foreign
currency exchange contracts ................................ -- 37 27
Dividends and interest receivable ............................. 4,881 946 2,538
Receivable for variation margin on
futures contracts .......................................... 1,295 -- 2,207
--------------- --------------- ---------------
5,777,962 1,055,150 6,186,398
--------------- --------------- ---------------
LIABILITIES
Disbursements in excess of demand deposit cash ................ 3,826 1,460 3,171
Payable for investments purchased ............................. 174,837 67,977 68,002
Payable for capital shares redeemed ........................... 1,682 5,676 7,177
Accrued management fees (Note 2) .............................. 4,502 773 4,842
Distribution and service fees payable (Note 2) ................ 1 -- 2
Payable for directors' fees and expenses (Note 2) ............. 3 1 4
Other liabilities ............................................. 6 3 7
184,857 75,890 83,205
--------------- --------------- ---------------
Net Assets .................................................... $ 5,593,105 $ 979,260 $ 6,103,193
=============== =============== ===============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ....................... $ 3,493,552 $ 904,770 $ 3,693,746
Undistributed net investment income (loss) .................... 13,643 1,960 (2,892)
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions ............... 1,018,905 (9,664) 1,145,850
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies (Note 3) .... 1,067,005 82,194 1,266,489
--------------- --------------- ---------------
$ 5,593,105 $ 979,260 $ 6,103,193
=============== =============== ===============
Investor Class, $0.01 Par Value ($ and shares in full)
Net assets .................................................... $ 5,591,315,134 $ 978,441,674 $ 6,097,158,446
Shares outstanding ............................................ 112,856,248 98,042,205 217,529,108
Net asset value per share ..................................... $ 49.54 $ 9.98 $ 28.03
Advisor Class, $0.01 Par Value ($ and shares in full)
Net assets .................................................... $ 1,616,860 $ 747,802 $ 5,569,848
Shares outstanding ............................................ 32,702 75,065 199,141
Net asset value per share ..................................... $ 49.44 $ 9.96 $ 27.97
Institutional Class, $0.01 Par Value ($ and shares in full)
Net assets .................................................... $ 173,273 $ 70,335 $ 464,764
Shares outstanding ............................................ 3,491 7,033 16,554
Net asset value per share ..................................... $ 49.63 $ 10.00 $ 28.08
</TABLE>
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (know as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 25
<TABLE>
<CAPTION>
Statements of Operations
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
SELECT HERITAGE GROWTH
INVESTMENT INCOME (LOSS) (In Thousands)
<S> <C> <C> <C>
Income:
Dividends (net of foreign taxes withheld of
$396, $279, and $326, respectively) ............................. $ 56,441 $ 11,683 $ 43,899
----------- ----------- -----------
Interest ........................................................... 11,019 4,445 12,311
67,460 16,128 56,210
----------- ----------- -----------
Expenses (Note 2):
Management fees .................................................... 53,875 12,490 57,395
Distribution fees -- Advisor Class ................................. 4 2 9
Service fees -- Advisor Class ...................................... 4 2 9
Directors' fees and expenses ....................................... 51 12 54
----------- ----------- -----------
53,934 12,506 57,467
----------- ----------- -----------
Net investment income (loss) ....................................... 13,526 3,622 (1,257)
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ........................................................ 1,121,080 (8,912) 1,172,146
Foreign currency transactions ...................................... 734 (1,650) (2,136)
----------- ----------- -----------
1,121,814 (10,562) 1,170,010
----------- ----------- -----------
Change in net unrealized appreciation on:
Investments ........................................................ (62,473) (186,940) (253,577)
Translation of assets and liabilities in foreign currencies ........ 165 97 693
----------- ----------- -----------
(62,308) (186,843) (252,884)
----------- ----------- -----------
Net realized and unrealized gain (loss) on investments ............. 1,059,506 (197,405) 917,126
----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations .... $ 1,073,032 $ (193,783) $ 915,869
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned from investments (dividend and interest)
o management fees and other expenses
o gains or losses from selling investments (known as realized gains or losses)
o gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
26 1-800-345-2021
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
SELECT HERITAGE GROWTH
Increase (Decrease) in Net Assets 1998 1997 1998 1997 1998 1997
OPERATIONS (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) ........... $ 13,526 $ 14,916 $ 3,622 $ 619 $ (1,257) $ 994
Net realized gain (loss) on investments
and foreign currency transactions ... 1,121,814 789,506 (10,562) 248,649 1,170,010 759,739
Change in net unrealized
appreciation on investments and
translation of assets and liabilities
in foreign currencies ............... (62,308) 270,066 (186,843) 52,273 (252,884) 400,028
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations .............. 1,073,032 1,074,488 (193,783) 301,541 915,869 1,160,761
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor Class ......................... (19,490) (31,065) (6,440) (8,095) -- (38,510)
Advisor Class .......................... (4) -- (1) -- -- --
Institutional Class .................... (65) -- (1) -- -- --
From net realized gains
from
investment
transactions:
Investor Class ......................... (783,150) (353,996) (241,135) (62,011) (763,692) (51,784)
Advisor Class .......................... (208) -- (22) -- (362) --
Institutional Class .................... (1,889) -- (23) -- (26) --
----------- ----------- ----------- ----------- ----------- -----------
Decrease in net assets
from
distributions .......................... (804,806) (385,061) (247,622) (70,106) (764,080) (90,294)
----------- ----------- ----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase (decrease) in net assets
from capital share transactions ........ 542,668 54,105 99,150 6,929 836,256 (720,743)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets .. 810,894 743,532 (342,255) 238,364 988,045 349,724
NET ASSETS
Beginning of year ...................... 4,782,211 4,038,679 1,321,515 1,083,151 5,115,148 4,765,424
----------- ----------- ----------- ----------- ----------- -----------
End of year ............................ $ 5,593,105 $ 4,782,211 $ 979,260 $ 1,321,515 $ 6,103,193 $ 5,115,148
=========== =========== =========== =========== =========== ===========
Undistributed net investment income .... $ 13,643 $ 18,942 $ 1,960 $ 6,439 $ (2,892) --
=========== =========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
each fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
o operations - a summary of the Statement of Operations from the previous page
for the most recent period
o distributions - income and gains distributed to shareholders
o capital share transactions - shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 27
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century Select Fund
(Select), American Century - Twentieth Century Heritage Fund (Heritage), and
American Century - Twentieth Century Growth Fund (Growth) (the Funds) are three
of the twelve series of funds issued by the Corporation. The Funds' investment
objective is to seek capital growth by investing primarily in equity securities.
The Funds are authorized to issue three classes of shares: the Investor Class,
the Advisor Class and the Institutional Class. The three classes of shares
differ principally in their respective shareholder servicing and distribution
expenses and arrangements. All shares of each Fund represent an equal pro rata
interest in the assets of the class to which such shares belong, and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except for class specific expenses and exclusive rights to vote on
matters affecting only individual classes. The following significant accounting
policies are in accordance with generally accepted accounting principles.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FUTURES CONTRACTS -- The Fund may enter into stock index futures contracts
in order to manage the Fund's exposure to changes in market conditions. One of
the risks of entering into futures contracts includes the possibility that the
change in value of the contract may not correlate with the changes in value of
the underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as unrealized gains and losses. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are translated into U.S. dollars at prevailing exchange
rates. Purchases and sales of investment securities, dividend and interest
income, and certain expenses are translated at the rates of exchange prevailing
on the respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Funds may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Funds will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Funds and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and
28 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
Liabilities. The Funds bear the risk of an unfavorable change in the foreign
currency exchange rate underlying the forward contract. Additionally, losses may
arise if the counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Funds may enter into repurchase agreements
with institutions that the Funds' investment manager, American Century
Investment Management, Inc. (ACIM), has determined are creditworthy pursuant to
criteria adopted by the Board of Directors. Each repurchase agreement is
recorded at cost. Each Fund requires that the collateral, represented by
securities, received in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable each Fund to obtain those securities in the
event of a default under the repurchase agreement. ACIM monitors, on a daily
basis, the securities transferred to ensure the value, including accrued
interest, of the securities under each repurchase agreement is equal to or
greater than amounts owed to each Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, each Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Funds to distribute all
taxable income and capital gains to shareholders and to otherwise qualify as a
regulated investment company under provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex- dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. The differences reflect the differing character of
certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
At October 31, 1998 accumulated net realized capital loss carryovers for
Heritage of $3,410,760 (expiring in 2006) may be used to offset future taxable
gains.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Funds with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee for the Investor Class, Advisor Class and
Institutional Class is 1.00%, 0.75% and 0.80%, respectively.
The Board of Directors has adopted the Advisor Class Master Distribution
and Shareholder Services Plan (the Plan), pursuant to Rule 12b-1 of the
Investment Company Act of 1940. The Plan provides that the Funds will pay ACIM
an annual distribution fee equal to 0.25% and service fee equal to 0.25%. The
fees are computed daily and paid monthly based on the Advisor Class's average
daily closing net assets during the previous month. The distribution fee
provides compensation for distribution expenses incurred by financial
intermediaries in connection with distributing shares of the Advisor Class
including, but not limited to, payments to brokers, dealers, and financial
institutions that have entered into sales agreements with respect to shares of
the Funds. The service fee provides compensation for shareholder and
administrative services rendered by ACIM, its affiliates or independent third
party providers. Fees incurred under the Plan for the year ended October 31,
1998 were $7,522, $3,500 and $17,927 for Select, Heritage and Growth,
respectively.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, the
Corporation's transfer agent, American Century Services Corporation, and the
registered broker-dealer, American Century Investment Services, Inc.
www.americancentury.com 29
Notes to Financial Statements
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions, exluding short-term investments, for the year ended
October 31, 1998, were as follows:
SELECT HERITAGE GROWTH
(In Thousands)
Purchases ................ $8,518,651 $1,753,672 $6,896,859
(In Thousands)
Proceeds from sales ...... $8,876,526 $1,877,459 $7,010,875
On October 31, 1998, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
SELECT HERITAGE GROWTH
(In Thousands)
Appreciation ............. $1,018,334 $118,633 $1,288,486
Depreciation ............. (28,504) (42,704) (41,476)
----------- ---------- ----------
Net ...................... $ 989,830 $ 75,929 $1,247,010
=========== =========== ==========
Federal Tax Cost ......... $4,834,020 $924,803 $5,151,283
=========== =========== ==========
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
<TABLE>
Transactions in shares of Funds were as follows:
SELECT HERITAGE GROWTH
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
INVESTOR CLASS (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Shares authorized ............................... 250,000 250,000 500,000
======== ========= ========
Year ended October 31, 1998
Sold ............................................ 19,809 $ 946,893 31,645 $368,862 52,968 $1,467,285
Issued in reinvestment of distributions ......... 18,613 773,188 21,904 240,789 31,652 740,696
Redeemed ........................................ (24,553) (1,165,999) (44,408) (511,235) (50,604) (1,375,210)
-------- ----------- -------- --------- -------- -----------
Net increase .................................... 13,869 $ 554,082 9,141 $ 98,416 34,016 $ 832,771
-------- ----------- -------- --------- -------- -----------
Year ended October 31, 1997
Sold ............................................ 17,600 $ 778,552 26,794 $355,329 35,274 $ 876,879
Issued in reinvestment of distributions ......... 9,470 371,414 5,793 68,885 3,935 87,875
Redeemed ........................................ (25,362) (1,106,798) (32,170) (418,518) (70,222) (1,687,973)
-------- ----------- -------- --------- -------- -----------
Net increase (decrease) ......................... 1,708 $ 43,168 417 $ 5,696 (31,013) $ (723,219)
======== =========== ======== ========= ======== ===========
</TABLE>
30 1-800-345-2021 or 816-531-5575
Notes to Financial Statements
- --------------------------------------------------------------------------------
(continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
SELECT HERITAGE GROWTH
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
ADVISOR CLASS (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Shares authorized ............................... 105,000 105,000 210,000
======== ========= ========
Year ended October 31, 1998
Sold ............................................ 17 $786 84 $950 122 $3,371
Issued in reinvestment of distributions ......... 5 213 2 22 15 346
Redeemed ........................................ (16) (745) (19) (217) (16) (447)
-------- ----------- -------- --------- -------- -----------
Net increase .................................... 6 $254 67 $755 121 $3,270
======== =========== ======== ========= ======== ===========
Period ended October 31, 1997(1)
Sold ............................................ 30 $1,512 12 $167 81 $2,368
Issued in reinvestment of distributions ......... -- -- -- -- -- --
Redeemed ........................................ (3) (163) (4) (52) (2) (50)
-------- ----------- -------- --------- -------- -----------
Net increase .................................... 27 $1,349 8 $115 79 $2,318
======== =========== ======== ========= ======== ===========
INSTITUTIONAL CLASS (In Thousands)
Shares authorized ............................... 41,000 41,000 80,000
======== ======== ========
Year ended October 31, 1998
Sold ............................................ 245 $ 12,081 -- -- 202 $5,257
Issued in reinvestment of distributions ......... 47 1,953 2 $24 1 26
Redeemed ........................................ (527) (25,702) (4) (45) (192) (5,068)
-------- ----------- -------- --------- -------- -----------
Net increase (decrease) ......................... (235) $(11,668) (2) $(21) 11 $ 215
======== =========== ======== ========= ======== ===========
Period ended October 31, 1997(2)
Sold ............................................ 258 $10,551 9 $1,118 6 $158
Issued in reinvestment of distributions ......... -- -- -- -- -- --
Redeemed ........................................ (20) (963) -- -- -- --
Net increase .................................... 238 $ 9,588 9 $1,118 6 $158
======== =========== ======== ========= ======== ===========
</TABLE>
- --------------------------------------------------------------------------------
5. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer who is or was an affiliate at or
during the year ended October 31, 1998, follows:
<TABLE>
Share October 31, 1998
Balance Purchase Sales Realized Dividend Share Market
Fund/Issuer 10-31-97 Cost Cost Gain Income Balance Value
HERITAGE (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
InaCom Corp ...................... 540,000 -- $14,928 $76 -- -- --
Reinsurance Group of
America,
Inc. CI A ........................ -- $12,379 -- -- $16 257,500 $12,231
-------- ------- ------ ----- ========
$12,379 $14,928 $76 $16 $12,231
======== ======= ====== ===== ========
</TABLE>
(1) Sale of the Advisor Class for Select, Heritage, and Growth commenced on
August 8, 1997, July 11, 1997, and June 4, 1997, respectively.
(2) Sale of the Institutional Class for Select commenced on March 13, 1997 and
for both Heritage and Growth on June 16, 1997.
www.americancentury.com 31
Select--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ......... $ 48.18 $ 41.52 $ 39.52 $ 37.67 $ 45.76
--------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income .................... 0.12(1) 0.15(1) 0.20(1) 0.33(1) 0.40
Net Realized and Unrealized Gain (Loss) on
Investment Transactions .................. 9.37 10.51 6.73 4.68 (3.59)
--------- --------- --------- --------- ---------
Total From Investment Operations ......... 9.49 10.66 6.93 5.01 (3.19)
--------- --------- --------- --------- ---------
Distributions
From Net Investment Income ............... (0.20) (0.32) (0.27) (0.28) (0.43)
From Net Realized Gains on
Investment Transactions .................. (7.93) (3.68) (4.66) (2.75) (4.47)
In Excess of Net Realized Gains .......... -- -- -- (0.13) --
Total Distributions ...................... (8.13) (4.00) (4.93) (3.16) (4.90)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ............... $ 49.54 $ 48.18 $ 41.52 $ 39.52 $ 37.67
========= ========= ========= ========= =========
Total Return(2) .......................... 22.96% 27.89% 19.76% 15.02% (7.37)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ................................. 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average
Net Assets ................................. 0.25% 0.33% 0.50% 0.90% 1.00%
Portfolio Turnover Rate .................... 165% 94% 105% 106% 126%
Net Assets, End of Year (in millions) ...... $ 5,591 $ 4,769 $ 4,039 $ 4,008 $ 4,278
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDNG THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o income and capital gains distributions paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return - the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio - operating expenses as a percentage of average net assets
o net income ratio - net investment income as a percentage of average net asset
o portfolio turnover - the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
32 1-800-345-2021
Select--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ................................... $ 48.16 $ 49.43
--------- ---------
Income From Investment Operations
Net Investment Loss(2) ............................................... -- (0.02)
Net Realized and Unrealized Gain (Loss) on Investment Transactions ... 9.37 (1.25)
--------- ---------
Total From Investment Operations ..................................... 9.37 (1.27)
--------- ---------
Distributions
From Net Investment Income ........................................... (0.16) --
From Net Realized Gains on Investment Transactions ................... (7.93) --
--------- ---------
Total Distributions .................................................. (8.09) --
--------- ---------
Net Asset Value, End of Period ......................................... $ 49.44 $ 48.16
========= =========
Total Return(3) ...................................................... 22.67% (2.57)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ...................... 1.25% 1.25%(4)
Ratio of Net Investment Loss to Average Net Assets ..................... -- (0.17)%(4)
Portfolio Turnover Rate ................................................ 165% 94%
Net Assets, End of Period (in thousands) ............................... $ 1,617 $ 1,289
</TABLE>
(1) August 8, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com 33
Select--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Institutional Class
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 48.24 $ 40.56
---------- ----------
Income From Investment Operations
Net Investment Income(2) ...................................... 0.22 0.13
Net Realized and Unrealized Gain on Investment Transactions ... 9.37 7.55
---------- ----------
Total From Investment Operations .............................. 9.59 7.68
---------- ----------
Distributions
From Net Investment Income .................................... (0.27) --
From Net Realized Gains on Investment Transactions ............ (7.93) --
Total Distributions ........................................... (8.20) --
---------- ----------
Net Asset Value, End of Period .................................. $ 49.63 $ 48.24
========== ==========
Total Return(3) ............................................... 23.22% 18.93%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ............... 0.80% 0.80%(4)
Ratio of Net Investment Income to Average Net Assets ............ 0.45% 0.45%(4)
Portfolio Turnover Rate ......................................... 165% 94%
Net Assets, End of Period (in thousands) ........................ $ 173 $ 11,486
</TABLE>
(1) March 13, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
35 1-800-345-2021
Heritage--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ......... $ 14.86 $ 12.24 $ 11.75 $ 10.32 $ 11.03
--------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income .................... 0.03(1) 0.01(1) --(1) 0.05(1) 0.07
Net Realized and Unrealized Gain (Loss) on
Investment Transactions .................. (2.14) 3.41 1.15 1.96 (0.21)
--------- --------- --------- --------- ---------
Total From Investment Operations ......... (2.11) 3.42 1.15 2.01 (0.14)
--------- --------- --------- --------- ---------
Distributions
From Net Investment Income ............... (0.07) (0.09) (0.05) (0.03) (0.06)
From Net Realized Gains on
Investment Transactions .................. (2.70) (0.71) (0.61) (0.52) (0.50)
In Excess of Net Realized Gains .......... -- -- -- (0.03) (0.01)
Total Distributions ...................... (2.77) (0.80) (0.66) (0.58) (0.57)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ............... $ 9.98 $ 14.86 $ 12.24 $ 11.75 $ 10.32
========= ========= ========= ========= =========
Total Return(2) .......................... (15.87)% 29.56% 10.44% 21.04% (1.13)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ................................. 1.00% 1.00% 0.99% 0.99% 1.00%
Ratio of Net Investment Income to Average
Net Assets ................................. 0.29% 0.05% -- 0.50% 0.70%
Portfolio Turnover Rate .................... 148% 69% 122% 121% 136%
Net Assets, End of Year (in millions) ...... $ 978 $ 1,321 $ 1,083 $ 1,008 $ 897
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDNG THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o income and capital gains distributions paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return - the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio - operating expenses as a percentage of average net assets
o net income ratio - net investment income as a percentage of average net asset
o portfolio turnover - the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 35
Heritage--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ................................... $ 14.85 $ 14.23
------- -------
Income From Investment Operations
Net Investment Income (Loss)(2) ...................................... 0.02 (0.01)
Net Realized and Unrealized Gain (Loss) on Investment Transactions ... (2.14) 0.63
------- -------
Total From Investment Operations ..................................... (2.12) 0.62
------- -------
Distributions
From Net Investment Income ........................................... (0.07) --
From Net Realized Gains on Investment Transactions ................... (2.70) --
------- -------
Total Distributions .................................................. (2.77) --
------- -------
Net Asset Value, End of Period ......................................... $ 9.96 $ 14.85
======= =======
Total Return(3) ...................................................... (16.03)% 4.36%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ...................... 1.25% 1.25%(4)
Ratio of Net Investment Income (Loss) to Average Net Assets ............ 0.04% (0.23)%(4)
Portfolio Turnover Rate ................................................ 148% 69%
Net Assets, End of Period (in thousands) ............................... $ 748 $ 120
</TABLE>
(1) July 11, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
36 1-800-345-2021
Heritage--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Institutional Class
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ................................... $ 14.87 $ 13.60
------- -------
Income From Investment Operations
Net Investment Income(2) ............................................. 0.06 0.01
Net Realized and Unrealized Gain (Loss) on Investment Transactions ... (2.14) 1.26
------- -------
Total From Investment Operations ..................................... (2.08) 1.27
------- -------
Distributions
From Net Investment Income ........................................... (0.09) --
From Net Realized Gains on Investment Transactions ................... (2.70) --
------- -------
Total Distributions .................................................. (2.79) --
------- -------
Net Asset Value, End of Period ......................................... $ 10.00 $ 14.87
======= =======
Total Return(3) ...................................................... (15.67)% 9.34%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ...................... 0.80% 0.80%(4)
Ratio of Net Investment Income to Average Net Assets ................... 0.49% 0.21%(4)
Portfolio Turnover Rate ................................................ 148% 69%
Net Assets, End of Period (in thousands) ............................... $ 70 $ 129
</TABLE>
(1) June 16, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com 37
Growth--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............. $ 27.86 $ 22.21 $ 23.88 $ 22.99 $ 25.27
--------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income (Loss) ................. (0.01)(1) 0.01(1) (0.01)(1) 0.08(1) 0.06
Net Realized and Unrealized Gain on
Investment Transactions ...................... 4.35 6.07 1.47 4.08 0.48
--------- --------- --------- --------- ---------
Total From Investment Operations ............. 4.34 6.08 1.46 4.16 0.54
--------- --------- --------- --------- ---------
Distributions
From Net Investment Income ................... -- (0.18) (0.07) (0.05) (0.06)
From Net Realized Gains on
Investment Transactions ...................... (4.17) (0.25) (2.98) (3.18) (2.76)
In Excess of Net Realized Gains ................ -- -- (0.08) (0.04) --
Total Distributions ............................ (4.17) (0.43) (3.13) (3.27) (2.82)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ................... $ 28.03 $ 27.86 $ 22.21 $ 23.88 $ 22.99
========= ========= ========= ========= =========
Total Return(2) .............................. 18.53% 27.85% 8.18% 22.31% 2.66%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to
Average
Net Assets ..................................... 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets ..................................... (0.02)% 0.02% (0.10)% 0.40% 0.30%
Portfolio Turnover Rate ........................ 126% 75% 122% 141% 100%
Net Assets, End of Year (in millions) .......... $ 6,097 $ 5,113 $ 4,765 $ 5,130 $ 4,363
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are
annualized.
- --------------------------------------------------------------------------------
UNDERSTANDNG THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o income and capital gains distributions paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return - the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio - operating expenses as a percentage of average net assets
o net income ratio - net investment income as a percentage of average net asset
o portfolio turnover - the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
38 1-800-345-2021
Growth--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 27.84 $ 24.36
--------- ---------
Income From Investment Operations
Net Investment Loss(2) ........................................ (0.08) (0.06)
Net Realized and Unrealized Gain on Investment Transactions ... 4.35 3.54
--------- ---------
Total From Investment Operations .............................. 4.27 3.48
--------- ---------
Distributions
From Net Realized Gains on Investment Transactions ............ (4.14) --
--------- ---------
Net Asset Value, End of Period .................................. $ 27.97 $ 27.84
========= =========
Total Return(3) ............................................... 18.23% 14.29%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ............... 1.25% 1.25%(4)
Ratio of Net Investment Loss to Average Net Assets .............. (0.27)% (0.47)%(4)
Portfolio Turnover Rate ......................................... 126% 75%
Net Assets, End of Period (in thousands) ........................ $ 5,570 $ 2,200
</TABLE>
(1) June 4, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com 39
Growth--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Institutional Class
1998 1997(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period ............................ $ 27.88 $ 25.75
------- -------
Income From Investment Operations
Net Investment Income(2) ...................................... 0.05 0.01
Net Realized and Unrealized Gain on Investment Transactions ... 4.34 2.12
------- -------
Total From Investment Operations .............................. 4.39 2.13
------- -------
Distributions
From Net Realized Gains on Investment Transactions ............ (4.19) --
------- -------
Net Asset Value, End of Period .................................. $ 28.08 $ 27.88
======= =======
Total Return(3) ............................................... 18.77% 8.27%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ............... 0.80% 0.80%(4)
Ratio of Net Investment Income to Average Net Assets ............ 0.18% 0.07%(4)
Portfolio Turnover Rate ......................................... 126% 75%
Net Assets, End of Period (in thousands) ........................ $ 465 $ 171
</TABLE>
(1) June 16, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
40 1-800-345-2021
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Century - Twentieth Century
Select Fund, American Century - Twentieth Century Heritage Fund and American
Century - Twentieth Century Growth Fund (collectively the "Funds"), three of the
funds comprising American Century Mutual Funds, Inc., as of October 31, 1998,
and the related statements of operations for the year then ended and changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the periods in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers, and other alternative
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Twentieth Century Select Fund, American Century - Twentieth Century Heritage
Fund and American Century - Twentieth Century Growth Fund as of October 31,
1998, the results of their operations, the changes in their net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
www.americancentury.com 41
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
Three classes of shares are authorized for sale by the fund: Investor
Class, Advisor Class and Institutional Class.
INVESTOR CLASS shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE INVESTOR CLASS
SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY LISTED.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
shares is 0.25% higher than the total expense ratio of the Investor Class
shares.
INSTITUTIONAL CLASS shares are available to endowments, foundations,
defined benefit pension plans or financial intermediaries serving these
investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class shares is 0.20% less
than the total expense ratio of the Investor Class shares.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)
account] are subject to federal income tax withholding at the rate of 10% of the
total amount withdrawn, unless you elect not to have withholding apply. If you
don't want us to withhold on this amount, you may send us a written notice not
to have the federal income tax withheld. Your written notice is valid for six
months from the date of receipt at American Century. Even if you plan to roll
over the amount you withdraw to another tax-deferred account, the withholding
rate still applies to the withdrawn amount unless we have received a written
notice not to withhold federal income tax within six months prior to the
withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
42 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the
stocks of growing companies, both domestically and internationally. The
philosophy behind these growth funds focuses on three important principles.
First, the funds seek to invest in successful companies, which we define as
those whose earnings and revenues are growing at accelerating rates. Second, we
attempt to keep the funds fully invested, regardless of short-term market
activity. Experience has shown that market gains can occur in unpredictable
spurts and that missing those opportunities can significantly limit potential
for gain. Third, the funds are managed by teams, rather than by one "star." We
believe this allows us to make better, more consistent management decisions.
In addition to these principles, each fund has its own investment policies:
TWENTIETH CENTURY SELECT seeks large, established companies that show
accelerating growth rates. Also, at least 80% of the fund's assets must be
invested in stocks or securities that pay regular dividends or otherwise produce
income. These dividends, and the established nature of the companies in which
Select invests, help lessen the fund's short-term price fluctuations.
TWENTIETH CENTURY HERITAGE seeks smaller and mid sized firms showing
accelerating growth rates, and at least 60% of its assets must be in stocks or
securities paying regular dividends or otherwise producing income. While
Heritage's dividend requirement should make the fund less volatile than funds
without dividends, it should also display somewhat more price variability -- and
greater long-term growth potential -- than Select. Historically, small-cap
stocks have been more volatile than the stocks of larger, more established
companies.
TWENTIETH CENTURY GROWTH invests in larger, more established firms that
exhibit accelerating growth. Because the value of established firms tends to
change relatively slowly, Growth can ordinarily be expected to show more
moderate price fluctuations than growth funds that invest in smaller or mid
sized firms.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
dominant industries. Created by Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock market performance.
The S&P MIDCAP 400 INDEX is a capitalization-weighted index of the stocks
of the 400 largest leading U.S. companies not included in the S&P 500. Created
by Standard & Poor's Corporation, it is considered to represent the performance
of mid-capitalization stocks generally. The index was created in March 1994.
Data presented for prior periods have been provided by Standard and Poors.
The RUSSELL 1000 INDEX, created by Frank Russell Company, measures the
performance of the 1,000 largest companies in the Russell 3000 Index (the 3,000
largest publicly traded U.S. companies, based on total market capitalization).
The RUSSELL 1000 GROWTH INDEX measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth rates.
The RUSSELL 2000 INDEX measures the performance of the 2,000 smallest of
the 3,000 largest publicly traded U.S. companies based on total market
capitalization. Created by Frank Russell Company, it is considered to represent
the performance of small-cap stocks in general.
[RIGHT MARGIN]
PORTFOLIO MANAGERS
SELECT
JEAN LEDFORD, CFA
RICHARD WELSH
HERITAGE
HAROLD BRADLEY
LINDA PETERSON, CFA
GROWTH
C. KIM GOODWIN
GREG WOODHAMS, CFA
www.americancentury.com 43
Glossary
- --------------------------------------------------------------------------------
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on pages 32-40.
INVESTMENT TERMS
o EXPENSE RATIO-- the operating expenses of the fund expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
o MEDIAN MARKET CAPITALIZATION-- Market Capitalization (market cap) is the total
value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
o NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
o PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
o PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
o PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
TYPES OF STOCKS
o BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P 400.
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Growth Index.
o VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
44 1-800-345-2021
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE: 1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
FUNDS DISTRIBUTOR, INC.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 Funds distributor, Inc.
SH-BKT-14473 (c)1998 American Century Services Corporation
<PAGE>
[front cover]
OCTOBER 31, 1998
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of globe, U.S. Currency, and money managers overlooking monitors]
TWENTIETH CENTURY GROUP
- -----------------------
ULTRA
VISTA
[american century logo(reg.sm)]
American
Century
[inside front cover]
COMING SOON FROM AMERICAN CENTURY
- --------------------------------------------------------------------------------
CLASSIFYING OUR FUNDS BY OBJECTIVE AND RISK
In March, American Century will roll out a new and simpler way to evaluate which
fund is right for you. The new system is based on a fund's objective and its
risk. Funds are classified under four broad objectives:
* Growth * Income
* Growth & Income * Capital Preservation
Funds are also divided according to risk:
* Aggressive * Moderate * Conservative
The risk classification is based on a number of factors, including how much a
fund's share price has fluctuated in the past compared to two popular indices:
* Standard & Poor's 500 Stock Index
* Lehman Bros. Aggregate Bond Index
Aggressive funds tend to fluctuate more than the S&P 500 Index. Moderate funds
tend to fluctuate less than the S&P 500, but more than the Lehman Index.
Conservative funds tend to fluctuate less than the Lehman Index.
NEW, SIMPLER FUND NAMES
We are also going to simplify the names of our funds. For example,
Old Fund Name New Fund Name
- --------------------------------------------------------------------------------
American Century-Twentieth Century Ultra American Century Ultra
American Century-Benham GNMA Fund American Century GNMA Fund
Expect to hear more about these changes in the spring. They should make
investing more convenient, accurate, and understandable for you.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles
follow a standard SEC format and allow investors to compare funds
easily. You can request a profile or the full prospectus. Full
prospectuses contain more detailed fund information and you will
continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight
important information about our funds, including fees and expenses.
More technical data will be in the Statement of Additional
Information.
On the Cover:
Kevin Lewis and Cindy Brown are part of the investment group at American
Century.
[left margin]
TWENTIETH CENTURY GROUP
ULTRA
(TWCUX)
TWENTIETH CENTURY GROUP
VISTA
(TWCVX)
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE: 1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
FUNDS DISTRIBUTOR, INC.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
c/o Charles Schwab & Co., Inc. U.S. POSTAGE PAID
101 Montgomery Street AMERICAN CENTURY
San Francisco, CA 94104 COMPANIES
9812 Funds Distributor, Inc.
SH-BKT-14797 (c)1998 American Century Services Corporation
<PAGE>
[front cover]
OCTOBER 31, 1998
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of globe, U.S. Currency, and money managers overlooking monitors]
TWENTIETH CENTURY GROUP
- -----------------------
ULTRA
VISTA
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
o FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
o Buy individual stocks and bonds
o 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
o Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund
analysis
o Track your brokerage account on one easy-to-read statement
o Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card an
American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles
follow a standard SEC format and allow investors to compare funds
easily. You can request a profile or the full prospectus. Full
prospectuses contain more detailed fund information and you will
continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight
important information about our funds, including fees and expenses.
More technical data will be in the Statement of Additional
Information.
On the Cover:
Kevin Lewis and Cindy Brown are part of the investment group at American
Century.
[left margin]
TWENTIETH CENTURY GROUP
ULTRA
(TWCUX)
TWENTIETH CENTURY GROUP
VISTA
(TWCVX)
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers III and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
This report covers an investment year filled with sharp contrasts. Many
popular market averages set records earlier in the year, lifted by a healthy
economy, low inflation and widespread market optimism, then tumbled dramatically
as the outlook for the U.S. economy and corporate earnings turned pessimistic
almost overnight. The mood swing in market psychology seemed especially sharp
after the gains over the last several years--gains that were interrupted by
relatively few, and very shallow, downdrafts.
Often forgotten in the earlier, heady atmosphere, was the wide performance
disparity at work in the market. Large stocks outperformed midsize stocks. In
addition, the very largest stocks in each sector outperformed the smaller stocks
in that sector by a wide margin. For example, the largest midsize stocks
outperformed smaller midsize stocks. The same was true of large stocks. This
made for a very narrow market.
Given the gains of the last several years, and the low market volatility,
it is understandable that many investors--especially those who are new to the
stock market--might find the broad market price swings we've seen in 1998 fairly
stressful. In our experience, these swings are an inevitable, even necessary,
part of the investment process. They often set the stage for further
advances--which, in fact, we saw in November. But whatever the market's
direction, it does not pay to get caught up in its excesses, whether overly
optimistic or overly pessimistic. If you have an investment plan, try to stay
with it. If you don't have a plan, this might be a good time to develop one.
Turning to the corporate front, it is our pleasure to announce that Jim
Stowers III is now overseeing the management teams assigned to our domestic
growth funds: Growth, Select, Ultra, Heritage, Vista, Giftrust and New
Opportunities. In his new role, Jim will work directly with the equity teams
that run the funds' day-to-day operations. This change is yet another important
step in our ongoing effort to bring all our funds' performance up to
shareholders' expectations.
In addition to his new duties, Jim will continue to head the Ultra
portfolio team and will remain American Century's Chief Executive Officer.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
ULTRA
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Portfolio at a Glance .................................................. 6
Top Ten Holdings ....................................................... 7
Top Five Industries .................................................... 7
Types of Investments ................................................... 8
Schedule of Investments ................................................ 9
Financial Highlights ................................................... 26
VISTA
Performance Information ................................................ 13
Management Q&A ......................................................... 14
Portfolio at a Glance .................................................. 14
Top Ten Holdings ....................................................... 15
Top Five Industries .................................................... 15
Types of Investments ................................................... 16
Schedule of Investments ................................................ 17
Financial Highlights ................................................... 29
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities .......................................................... 19
Statements of Operations ............................................... 20
Statements of Changes
in Net Assets ........................................................ 21
Notes to Financial
Statements ........................................................... 22
OTHER INFORMATION
Independent Auditors'
Report ............................................................... 32
Share Class and Retirement
Account Information .................................................. 33
Background Information
Investment Philosophy
and Policies ...................................................... 34
Comparative Indices ................................................. 34
Portfolio Managers .................................................. 34
Glossary ............................................................... 35
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Although stocks set records during the first seven months of the year, a
sell-off began in early July and accelerated into October, taking the S&P
500 Index down roughly 20%.
* The outperformance of a relatively small number of large and midsize stocks
masked much weaker returns in the rest of the equity universe.
* Even with the downturn this year, and the recession of 1990-1991, stocks
have produced unusually robust results during the '90s. The S&P 500's
average annual return from January 1, 1990, to October 31, 1998, was
16.67%, compared to its historical average of approximately 11%.
* In general, U.S. business is productive and streamlined, which bodes well
for the economy. But we are probably in a more moderate phase of the
economic cycle--one marked by low inflation and global overcapacity.
* We believe the mid-cap sector looks relatively inexpensive. Companies with
sustainable earnings growth could turn out to be today's bargains and
tomorrow's winners.
ULTRA
* Ultra's Investor Class shares posted a 17.61% return for the year ended
October 31, 1998, versus a 21.96% return for the S&P 500. (See total
returns on page 5.)
* Ultra particularly benefited from holdings in cable television firms and
companies providing communications services, such as MCI Worldcom and
regional Bell operating companies. The biggest increase in the fund's
industry weightings was in pharmaceutical companies, which accounted for
over 15% of assets as of October 31, 1998.
* The fund's top-performing stock was America Online. This Internet provider
continues to see accelerating growth in membership. Another strong
contributor was EMC Corporation, a leading provider of storage software for
firms that need to store and back up vast amounts of data.
VISTA
* Vista's Investor Class shares declined 31.94% for the year ended October
31, 1998. Its benchmark, the Russell 2500 Growth Index, fell 13.85% over
the same period. (See total returns on page 13.)
* Vista struggled in a market that favored large-capitalization growth
companies. In addition, the fund's energy services stocks, mostly offshore
drilling and service companies, were especially hurt by declining oil
prices. Vista's holdings in computer software and services companies were
also disappointing, with businesses postponing software updates to
concentrate on Year 2000 compliance.
* Efforts underway to improve performance include an expanded management team
(three new members during the past year), exposure to a broader mix of
sectors and industries, and new technology to aid the investment process.
* Among the fund's top contributors were two of its largest holdings, Forest
Laboratories, an international pharmaceutical firm that has introduced a
new drug to treat depression, and Sunrise Assisted Living, a leading
provider of housing for seniors.
[left margin]
ULTRA (TWCUX)(1)
TOTAL RETURNS: AS OF 10/31/98
6 Months -3.27%(2)
1 Year 17.61%
NET ASSETS: $25.4 billion
INCEPTION DATE: 11/2/81
VISTA (TWCVX)(1)
TOTAL RETURNS: AS OF 10/31/98
6 Months -31.64%(2)
1 Year -31.94%
NET ASSETS: $895.2 million
INCEPTION DATE: 11/25/83
(1) Investor Class.
(2) Not annualized.
Investment terms are defined in the Glossary on page 35.
2 1-800-345-2021
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
[photo Robert C. Puff, Jr.]
Robert C. Puff, Jr., chief investment officer of American Century Investment
Management
MARKET PSYCHOLOGY: THE RETURN OF FEAR
Sometimes a little pain can go a long way. This was certainly the case over
the final four months of our fiscal year (July-October)--a period that marked an
abrupt change in market psychology. Financial markets are motivated by greed and
fear, and during the '90s greed has enjoyed a long run. In mid-July, after the
S&P 500 peaked, fear returned to the stock market. Its entrance was dramatic,
but not terribly surprising. Market declines are a normal part of the investment
process. Although they have been notably absent in the 1990s, in prior decades
moderate corrections of 10% happened about once a year and more severe
corrections of up to 15% occurred about once every two years. A correction in
the 20% range occurred roughly every three to four years. On a historical basis,
a correction was overdue.
The decline in the S&P 500 accelerated into early October, propelled by an
increasingly restrained outlook for corporate earnings, apprehension about
further economic and political deterioration in Southeast Asia and Russia, and
stubbornly elevated short-term interest rates in the United States. Serious talk
of a U.S. recession also surfaced.
Money that had been earmarked for the stock market instead sought a safe
haven in U.S. Treasurys and a few popular megastocks. Banks pulled back from
lending, and professional investors were shaken by the problems at a large,
well-known hedge fund. While many of the pros panicked, individual investors
generally stayed the course and used the decline as a buying opportunity.
ONCE AGAIN, SIZE MATTERED
August saw a sharp decline of 14.56% in the S&P 500 Index. Especially
disturbing, at least psychologically, was the sell-off in the handful of
blue-chip stocks that had accounted for much of the S&P 500's performance during
the last several years. In general, the returns of larger stocks have been very
impressive compared with small and midsize stocks. From January 1994 through
October 1998, large stocks outperformed smaller stocks 14 out of 19 calendar
quarters. However, closer analysis revealed that the strong performance of a
relatively limited number of blue-chip and midsize companies masked the price
deterioration of the vast majority of the other 9,000 stocks traded in the
United States. For example, through September 30 of this year, less than 20 of
the largest stocks in the S&P 500 Index were responsible for almost 100% of the
index's performance. Most stocks were correcting well before the decline in the
major market indices began.
A GOOD PLACE TO WORK AND INVEST
Still, as the chart on page 4 illustrates, U.S. stock returns since 1990
have been unusually robust, even with the recession of 1990-1991 and the recent
market decline. The S&P 500's average annual return from January 1, 1990, to
October 31, 1998, was 16.67%, well above its historical average of roughly 11%.
Midsize and smaller stocks posted respectable gains during the same period.
[right margin]
"...the U.S. is a pretty good place to be. We have a sound economy, a stable
government, a generally reasonable regulatory environment and a culture that
values creativity and entrepreneurialism."
MARKET RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 21.96%
S&P MIDCAP 400 6.71%
RUSSELL 2000 -11.84%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large-, medium- and
small-capitalization stocks.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
10/31/97 $1.00 $1.00 $1.00
11/30/97 $1.05 $1.01 $0.99
12/31/97 $1.06 $1.05 $1.01
1/31/98 $1.08 $1.03 $0.99
2/28/98 $1.15 $1.12 $1.07
3/31/98 $1.21 $1.17 $1.11
4/30/98 $1.23 $1.19 $1.12
5/31/98 $1.20 $1.14 $1.06
6/30/98 $1.25 $1.15 $1.06
7/31/98 $1.24 $1.10 $0.97
8/31/98 $1.06 $0.90 $0.79
9/30/98 $1.13 $0.98 $0.85
10/31/98 $1.22 $1.07 $0.88
Value on 10/31/98
S&P 500 $1.22
S&P MidCap 400 $1.07
Russell 2000 $0.88
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
(Continued)
The fact is, the United States is a pretty good place to be. We have a
sound economy, a stable government, a generally reasonable regulatory
environment, and a culture that values creativity and entrepreneurialism. The
recent national elections suggest that our political attitudes remain solidly
practical and centrist. Our corporate sector is strong and relatively lean. Many
businesses have streamlined operations and enhanced productivity via
increasingly powerful--and less expensive--technology. Response time to changes
in economic activity and product demand is quite low. Economist Adam Smith's
"invisible hand" continues to be active in getting businesses to prune, manage
costs and move toward greater efficiencies. Overall, it is a rich, dynamic
process.
The Federal Reserve has done a good job, too. It has kept interest rates
stable, but has been reasonable and flexible in its approach, lowering rates
three times this fall (its first such move since 1995) to help stimulate the
economy.
A DIFFERENT PHASE OF GROWTH
We are probably now in a different, more moderate phase of the economic
cycle. There is, quite frankly, too much of almost everything--except
understanding. As an example, the global production capacity for automobiles is
estimated to be roughly 28-29 million per year, or about 50% higher than demand.
Much the same is true for other key commodities, including basic foodstuffs,
steel, petrochemicals and energy. Overcapacity and global competition have
eliminated pricing flexibility from the marketplace, and have contributed to the
lowest inflation in more than 30 years. Lower interest rates may help the
situation, but I doubt they will have much impact on demand, at least right
away. Lowering rates at this stage is, in effect, like pushing on a string. Many
consumers already have all they need; lower rates won't necessarily induce them
to buy more.
At some point, of course, overcapacity will dissipate as many of the
world's economies begin to grow again. There are already signs, for example, of
a more responsible approach to the Japanese banking and economic crises. But in
the current environment, deflation remains a threat, and countries--including
our own--may be tempted to fall into the trap of protectionism. U.S.
manufacturers have already petitioned for tariffs to counteract the dumping of
steel and wheat by foreign producers. Trade with Asia is largely one-way: Ships
arrive full at our ports but travel empty on the return trip. If growth slows
too much, business will lose enthusiasm for new ventures, and the economy will
contract. That is the worst-case scenario, but, in my view, it is not the most
likely.
MID-CAP STOCKS: GROWTH IS INEXPENSIVE
We have been in a relatively narrow market for the last few years. Should
the market broaden, and reward stocks for their earnings strength and not simply
for their size, we believe the earnings acceleration discipline will do well. By
a number of measures, including price-earnings ratios, growth in the midsize
sector is as inexpensive as it has been in decades, with but a few exceptions.
As always, marginal companies will continue to have problems. However, those
midsize firms that have built solid positions in their markets and have deep
enough pockets to get past the rough spots, could be today's bargains and
tomorrow's winners.
[left margin]
"We have been in a relatively narrow market for the last few years. Should the
market broaden, and reward stocks for their earnings strength and not simply for
their size, we believe the earnings acceleration discipline will do well."
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FROM JANUARY 1, 1990 TO OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
1/1/90 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
10/31/98 $3.91 $3.66 $2.59
Value on 10/31/98
S&P 500 $3.91
S&P MidCap 400 $3.66
Russell 2000 $2.59
Source: Lipper Analytical Services, Inc.
4 1-800-345-2021
Ultra--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS(INCEPTION 11/2/81) ADVISOR CLASS(INCEPTION 10/2/96) INSTITUTIONAL CLASS(INCEPTION 11/14/96)
ULTRA S&P 500 ULTRA S&P 500 ULTRA S&P 500
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS* -3.27% -0.42% -3.40% -0.42% -3.17%
- -0.42%
1 YEAR 17.61% 21.96% 17.36% 21.96% 17.85%
21.96%
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS 16.06% 25.98% -- -- -- --
5 YEARS 15.93% 21.25% -- -- -- --
10 YEARS 22.33% 17.84% -- -- -- --
LIFE OF FUND 17.83% 17.53% 17.67% 26.80% 16.93% 24.83%
</TABLE>
* Returns for periods less than one year are not annualized.
See pages 33, 34 and 35 for information about share classes, the S&P 500 and
returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 10/31/98
Ultra $75,019
S&P 500 $51,639
Ultra S&P 500
10/31/88 $10,000 $10,000
10/31/89 $14,038 $12,627
10/31/90 $12,772 $11,677
10/31/91 $25,738 $15,589
10/31/92 $25,622 $17,137
10/31/93 $35,814 $19,689
10/31/94 $35,069 $20,451
10/31/95 $48,006 $25,842
10/31/96 $53,186 $32,052
10/31/97 $63,797 $42,341
10/31/98 $75,019 $51,639
$10,000 investment made 10/31/88
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The S&P
500 is provided for comparison in each chart. Past performance does not
guarantee future results. Investment return and principal value will fluctuate,
and redemption value may be more or less than original cost. The charts are
based on Investor Class shares only; performance for other classes will vary due
to differences in fee structures (see the Total Returns table above). Ultra's
total returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the total returns of the S&P 500 do
not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING OCTOBER 31)
Ultra S&P 500
10/89 40.37% 26.27%
10/90 -9.02% -7.52%
10/91 101.51% 33.50%
10/92 -0.45% 9.93%
10/93 39.78% 14.89%
10/94 -2.08% 3.87%
10/95 36.89% 26.36%
10/96 10.79% 24.03%
10/97 19.95% 32.10%
10/98 17.61% 21.96%
www.americancentury.com 5
Ultra--Q&A
- --------------------------------------------------------------------------------
[photo John Sykora, Jim Stowers III and Bruce Wimberly]
John Sykora, Jim Stowers III and Bruce Wimberly, portfolio managers on Ultra
An interview with Bruce Wimberly, John Sykora and Jim Stowers III,
portfolio managers on the Ultra investment team.
HOW DID THE FUND PERFORM FOR THE YEAR ENDED OCTOBER 31?
Ultra's Investor Class shares gained 17.61% for the year, versus a 21.96%
increase for the S&P 500 Index. That performance placed Ultra in the top
quartile of 945 growth funds for the 12 months, according to Lipper Analytical
Services.*
Much of the shortfall versus the S&P 500 can be traced to a third quarter
filled with anxiety about the Asian economic crisis and the outlook for
corporate earnings in the United States. Contending with one of the most
volatile periods for the stock market in recent memory--including a single-day
299-point plunge in the Dow Jones Industrials--investors shunned all but the
very largest companies, which cushioned the S&P 500.
WHICH COMPANIES OR SECTORS CONTRIBUTED TO PERFORMANCE?
Several investments in cable TV firms boosted Ultra's results. Two industry
leaders that demonstrated accelerating earnings and revenues, Time Warner and
Tele-Communications, Inc. (TCI), were among our largest holdings. The cable
industry continues to display positive trends. Subscriber counts continue to
increase and cash flow is strong. Cable is also one of few sites in the economy
with genuine pricing power.
Communications services companies were also significant contributors,
beginning with the fund's largest holding, MCI WorldCom. The nation's
second-largest long-distance company, MCI WorldCom is one of the first
telecommunications companies able to provide business customers with local,
long-distance and Internet data service. We also raised Ultra's stakes in some
of the regional Bell operating companies, which benefited from a continuing
flight to quality, the growing market for data traffic, and strong demand for
"add-on" services, such as caller identification and second phone lines for
home-based Internet users.
America Online was Ultra's top contributor, gaining 230% over the year. The
company has seen accelerating growth in membership (14 million subscribers),
usage and advertising revenues. Given the current outlook for declining personal
computer prices, we expect demand to continue. More than 45% of U.S. households
own at least one personal computer, and that figure is expected to reach 70%
within the next three years.
Ultra's second-best performing stock was EMC Corporation. EMC is the
leading provider of storage-related hardware, software and service products for
open systems. Its proprietary, high-end products are in great demand by
*Lipper rankings are based on average annual total returns. For the three-year
period ending October 31, 1998, Ultra ranked 405 out of 578 growth funds. For
the five-year period ending on the same date, Ultra ranked 202 out of 362
growth funds. Past performance is no guarantee of future results.
[left margin]
"America Online was Ultra's top contributor, gaining 230% over the year. The
company has seen accelerating growth in membership (14 million subscribers),
usage and advertising revenues."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 193 137
MEDIAN P/E RATIO 32.0 24.7
MEDIAN MARKET $17.4 $13.1
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 128% 107%
EXPENSE RATIO (FOR
INVESTOR CLASS) 1.00% 1.00%
Investment terms are defined in the Glossary on page 35.
6 1-800-345-2021
Ultra--Q&A
- --------------------------------------------------------------------------------
(Continued)
firms that need to store and back up vast amounts of data. Financial services
firms, defense companies, and educational institutions are good examples of
companies with high-volume storage requirements.
ULTRA'S SECOND-LARGEST INDUSTRY IS PHARMACEUTICALS, WHICH YOU INCREASED TO MORE
THAN 15% OF THE PORTFOLIO. WHY IS THIS INDUSTRY ATTRACTIVE?
This industry group was one of the portfolio's top contributors during the
year. We found accelerating growth in household names like Pfizer, Merck and
Bristol-Myers Squibb. The flow of new products continues to be strong, pricing
remains stable, and sales have been largely immune to slowing economic growth,
here and abroad. Pfizer makes the very successful drug Viagra, which treats
impotence. Viagra is just being released in Europe. Our approach centers on
owning companies displaying accelerating growth in earnings and revenues. We
also look for evidence that they can sustain their growth moving forward.
Pharmaceuticals are a high-confidence area for us.
WHICH STOCKS OR SECTORS HURT PERFORMANCE?
We sold Ultra's entire stake in Cendant Corp. As we discussed in the
semiannual report, the shares of this franchising business (Cendant owns names
like Ramada Inn, Howard Johnson's, and Coldwell Banker) fell significantly after
the company discovered accounting irregularities in some of its businesses. We
initially maintained our position, but when a fresh round of financial damage
emerged, we eliminated the holding entirely.
Another holding we closed out was Sears Roebuck & Co. Problems with Sears'
credit-card operation, which we discussed in our last report, were compounded by
decreasing revenues in its basic store business, the result of competition from
discount retailers such as Wal-Mart, one of Ultra's best contributors.
WHAT CHANGES HAVE YOU MADE TO THE PORTFOLIO SINCE THE SEMIANNUAL REPORT?
We reduced our holdings in more cyclically oriented industries such as
semiconductors, autos and retailers. In the case of semiconductors, a general
decline in technology prices, oversupply and slowing demand from Asia have led
to lower demand for microchips. In our hunt for companies experiencing
accelerating growth, we intend to focus our attention on market leaders that can
weather short-term changes in demand. We want a clear picture of how the
economic situation in Asia might affect a firm's ability to sustain its growth.
We also reduced financials--firms such as Chase Manhattan, CitiGroup and
BankAmerica--amid concerns about their exposure to the economic turmoil in Asia
and Russia. We placed that money in financial firms with more predictable
earnings acceleration, including Fannie Mae and the Federal Home Loan Mortgage
Corp.
A financial services company we are optimistic about, however, is American
International Group. AIG is the acknowledged world leader in virtually every
type of insurance product. Despite weaker results in Southeast Asia, we believe
AIG will emerge from the slowdown with greater market share and larger
opportunities for growth. The company has announced plans to acquire another
industry leader, SunAmerica, a top-drawer provider of retirement services,
notably variable annuity products.
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
MCI WORLDCOM, INC.(1) 4.5% 2.2%(2)
MICROSOFT CORP. 4.3% 2.3%
AMERICAN
INTERNATIONAL
GROUP, INC. 3.5% 1.7%
GENERAL ELECTRIC
CO. (U.S.) 3.5% 3.1%
TIME WARNER INC. 3.4% 2.4%
TELE-COMMUNICATIONS,
INC. CL A 3.1% 2.2%
PFIZER, INC. 3.0% 1.4%
MERCK & CO., INC. 2.6% 0.9%
WASTE
MANAGEMENT, INC. 2.4% 0.7%
FANNIE MAE 2.3% 0.6%
(1) WorldCom, Inc. acquired MCI Communications on 9/15/98. Surviving name was
MCI WorldCom, Inc.
(2) Represents WorldCom, Inc. shares owned by the fund.
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
COMMUNICATIONS
SERVICES 18.0% 13.7%
PHARMACEUTICALS 15.4% 6.1%
COMPUTER SOFTWARE
& SERVICES 6.5% 8.3%
DIVERSIFIED
COMPANIES 6.0% 6.6%
INSURANCE 5.6% 4.2%
www.americancentury.com 7
Ultra--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHAT'S YOUR STRATEGY AND OUTLOOK FOR ULTRA GOING FORWARD?
Our mantra for Ultra and our other aggressive stock funds is, "Money
follows earnings." While nearly anything can influence a company's share price
over the short term, it's our view that over time it all comes down to earnings.
We believe this so fervently that we hunt for companies whose earnings are
growing at an accelerating rate, and have spent nearly 30 years developing and
enhancing our proprietary database that seeks them out.
Many observers are forecasting a slowdown in corporate earnings in 1999 as
a result of the problems plaguing Japan, Southeast Asia, Russia and Latin
America. Our job in such a climate remains the same: Finding companies with
sustainable growth, pricing power, rising margins, leading market share, and
quality management teams. Over the long haul, we believe that all of us as
shareholders will be rewarded by this strategy.
[left margin]
"While nearly anything can influence a company's share price over the short
term, it's our view that over time it all comes down to earnings."
[pie charts]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Foreign & U.S. Preferred Stock 1.0%
Foreign Stocks 1.6%
Temporary Cash Investments 3.3%
U.S. Stocks 94.1%
AS OF APRIL 30, 1998
Temporary Cash Investments 0.6%
Foreign & U.S. Preferred Stock 1.1%
Foreign Stocks 3.3%
U.S. Stocks 95.0%
8 1-800-345-2021
Ultra--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-95.7%
AEROSPACE & DEFENSE--1.0%
20,000 AlliedSignal Inc. $ 779
40,000 Boeing Co. 1,500
15,000 General Dynamics Corp. 888
850,000 Lockheed Martin Corp. 94,669
1,633,000 Textron Inc. 121,454
450,000 United Technologies Corp. 42,863
---------------
262,153
---------------
AIRLINES(1)
10,000 AMR Corp.(2) 670
5,000 Delta Air Lines Inc. 528
40,000 Southwest Airlines Co. 848
---------------
2,046
---------------
AUTOMOBILES & AUTO PARTS--0.2%
1,375,000 General Motors Corp. Cl H 52,594
15,000 TRW Inc. 854
---------------
53,448
---------------
BANKING--2.2%
9,350,000 Bank of New York Co., Inc. (The) 295,109
20,000 BB & T Corp. 714
32,000 Fifth Third Bancorp 2,121
40,000 First Union Corp. 2,320
15,000 Firstar Corp. 851
705,000 Mellon Bank Corp. 42,388
15,000 PNC Bank Corp. 750
7,000 Providian Financial Corp. 556
15,000 Star Banc Corp. 1,134
2,175,000 U.S. Bancorp 79,388
20,000 Wachovia Corp. 1,818
20,000 Washington Mutual, Inc. 748
4,003,000 Norwest Corp. 149,860
---------------
577,757
---------------
BIOTECHNOLOGY(1)
40,000 Amgen Inc.(2) 3,144
---------------
BROADCASTING & MEDIA--3.4%
10,000 Cablevision Systems Corp. Cl A(2) 483
40,000 CBS Corporation 1,118
25,000 Clear Channel
Communications, Inc.(2) 1,139
9,453,600 Time Warner Inc. 877,412
---------------
880,152
---------------
BUILDING & HOME IMPROVEMENTS--0.1%
935,000 Masco Corp. 26,355
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
BUSINESS SERVICES & SUPPLIES(1)
10,000 Interpublic Group of Companies, Inc. $ 585
15,000 Omnicom Group Inc. 742
20,000 Paychex, Inc. 994
---------------
2,321
---------------
COMMUNICATIONS EQUIPMENT--1.7%
20,000 Ascend Communications, Inc.(2) 964
15,000 Corning Inc. 545
700,000 Loral Space &
Communications Ltd.(2) 13,256
1,025,000 Lucent Technologies Inc. 82,192
1,240,000 Motorola, Inc. 64,480
15,000 Tellabs, Inc.(2) 825
6,720,000 MediaOne Group, Inc.(2) 284,340
---------------
446,602
---------------
COMMUNICATIONS SERVICES--18.0%
6,466,000 AirTouch Communications, Inc.(2) 362,096
10,000 ALLTEL Corp. 468
2,410,800 Ameritech Corp. 130,033
125,000 AT&T Corp. 7,781
2,550,000 Bell Atlantic Corp. 135,469
3,417,900 BellSouth Corp. 272,791
8,050,000 Comcast Corp. Cl A 397,720
1,825,000 GTE Corp. 107,105
6,995,200 Liberty Media Group Cl A(2) 266,036
21,200,374 MCI WorldCom, Inc.(2) 1,171,971
818,100 Qwest Communications
International Inc.(2) 32,034
10,325,000 SBC Communications Inc. 478,177
1,425,000 Sprint Corp. 109,369
12,225,000 TCI Communications, Inc. Cl A(2) 227,309
19,192,700 Tele-Communications, Inc. Cl A(2) 807,293
1,310,000 U S WEST Communications Group 75,161
69,800 Vodafone Group plc ADR 9,397
3,527,000 Vodafone Group plc ORD 47,228
---------------
4,637,438
---------------
COMPUTER PERIPHERALS--2.9%
60,000 3Com Corp.(2) 2,166
4,077,000 Cisco Systems Inc.(2) 257,233
7,715,000 EMC Corp. (Mass.)(2) 496,653
15,000 Seagate Technology, Inc.(2) 396
---------------
756,448
---------------
See Notes to Financial Statements
www.americancentury.com 9
Ultra--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--6.5%
3,598,600 America Online Inc.(3) $ 457,247
20,000 Automatic Data Processing, Inc. 1,556
20,000 BMC Software, Inc.(2)(3) 961
1,737,600 Compuware Corp.(2) 94,102
30,000 HBO & Co. 787
10,000 IMS Health Inc. 665
10,564,800 Microsoft Corp.(2) 1,118,877
55,000 Oracle Systems Corp.(2) 1,626
25,000 Unisys Corp.(2) 666
---------------
1,676,487
---------------
COMPUTER SYSTEMS--2.6%
90,000 Compaq Computer Corp. 2,846
3,910,000 Dell Computer Corp.(2) 256,227
15,000 Gateway 2000, Inc.(2) 837
2,715,000 International Business
Machines Corp. 403,008
70,000 Sun Microsystems, Inc.(2)(3) 4,073
---------------
666,991
---------------
CONSUMER PRODUCTS--3.2%
15,000 Avon Products, Inc. 595
1,169,000 Colgate-Palmolive Co. 103,310
3,834,000 Gillette Company 172,290
1,910,000 Mattel, Inc. 68,521
5,365,000 Procter & Gamble Co. (The) 476,814
---------------
821,530
---------------
DIVERSIFIED COMPANIES--6.0%
10,182,500 General Electric Co. (U.S.) 890,969
715,000 Honeywell Inc. 57,111
1,150,000 Minnesota Mining &
Manufacturing Co. 92,000
4,456,800 Tyco International Ltd. 276,043
3,120,000 Unilever N.V. 234,780
---------------
1,550,903
---------------
ELECTRICAL & ELECTRONIC
COMPONENTS--0.5%
1,450,000 Intel Corp. 129,367
30,000 Micron Technology, Inc.(2) 1,140
15,000 Solectron Corp.(2) 859
---------------
131,366
---------------
ENERGY (PRODUCTION & MARKETING)--3.9%
1,875,000 Chevron Corp. 152,813
5,328,000 Enron Corp. 281,052
4,576,000 Exxon Corp. 326,040
1,000,000 Mobil Corp. 75,688
2,218,500 Royal Dutch Petroleum Co. 109,261
1,000,000 Texaco Inc. 59,313
---------------
1,004,167
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES--2.4%
13,591,422 Waste Management, Inc. $ 613,313
---------------
FINANCIAL SERVICES--5.1%
1,034,200 American Express Co. 91,397
273,916 Associates First Capital Corp. 19,311
8,401,400 Fannie Mae 594,924
7,150,500 Federal Home Loan
Mortgage Corporation 411,154
600,000 Franklin Resources, Inc. 22,688
60,000 MBNA Corp. 1,369
275,000 Merrill Lynch & Co., Inc. 16,294
200,000 Morgan Stanley Dean Witter,
Discover & Co. 12,950
796,400 Price (T. Rowe) Associates, Inc. 28,322
50,000 Schwab (Charles) Corp. 2,397
8,915,000 Skandia Forsakrings AB ORD 113,807
---------------
1,314,613
---------------
FOOD & BEVERAGE--2.8%
15,000 Anheuser-Busch Companies, Inc. 892
4,976,700 Coca-Cola Company (The) 336,549
4,050,000 Coca-Cola Enterprises, Inc. 146,053
1,680,000 ConAgra, Inc. 51,135
30,000 Heinz (H.J.) Co. 1,744
600,000 Hershey Foods Corp. 40,688
1,850,000 PepsiCo, Inc. 62,438
1,570,000 Sara Lee Corp. 93,709
---------------
733,208
---------------
HEALTHCARE(1)
30,000 Baxter International, Inc. 1,798
8,000 Cardinal Health, Inc. 757
---------------
2,555
---------------
INDUSTRIAL EQUIPMENT & MACHINERY(1)
20,000 Ingersoll-Rand Co. 1,010
---------------
INSURANCE--5.6%
15,000 AFLAC Inc. 572
5,700,000 Allstate Corp. 245,456
10,550,400 American International Group, Inc. 899,422
10,000 Aon Corp. 620
25,000 Conseco Inc. 867
955,000 General Re Corp. 209,802
15,000 Hartford Financial Services
Group Inc. (The) 797
1,035,000 SunAmerica, Inc. 72,968
---------------
1,430,504
---------------
LEISURE--1.7%
1,450,000 Eastman Kodak Co. 112,375
98,000 Viacom, Inc. Cl A(2) 5,819
5,119,000 Viacom, Inc. Cl B(2) 306,500
---------------
424,694
---------------
See Notes to Financial Statements
10 1-800-345-2021
Ultra--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
MEDICAL EQUIPMENT & SUPPLIES--3.2%
5,863,400 Becton, Dickinson and Co. $ 246,996
1,285,000 Guidant Corp. 98,303
7,506,700 Medtronic, Inc. 487,936
---------------
833,235
---------------
OFFICE EQUIPMENT & SUPPLIES--0.2%
25,000 Pitney Bowes Inc. 1,377
430,000 Xerox Corp. 41,656
---------------
43,033
---------------
PAPER & FOREST PRODUCTS(1)
20,000 Weyerhaeuser Co. 936
---------------
PERSONAL SERVICES--0.4%
2,338,000 Block (H & R), Inc. 104,772
---------------
PHARMACEUTICALS--15.4%
125,000 Abbott Laboratories 5,867
3,378,300 American Home Products Corp. 164,692
4,415,900 Bristol-Myers Squibb Co. 488,233
2,584,300 Elan Corp., plc ADR(2) 181,063
10,000 Genentech, Inc.(2) 716
5,650,000 Johnson & Johnson 460,475
4,662,000 Lilly (Eli) & Co. 377,331
20,000 McKesson Corp. 1,540
4,907,900 Merck & Co., Inc. 663,793
7,180,500 Pfizer, Inc. 770,557
1,050,000 Pharmacia & Upjohn Inc. 55,584
3,679,200 Schering-Plough Corp. 378,498
5,519,900 Warner-Lambert Co. 432,622
----------------
3,980,971
----------------
PRINTING & PUBLISHING--0.3%
375,000 New York Times Co. (The) Cl A 10,594
1,950,000 News Corp. Ltd. (The) ADR 53,259
15,000 Tribune Co. 864
---------------
64,717
---------------
RAILROAD(1)
20,000 Union Pacific Corp. 953
---------------
RESTAURANTS--0.5%
1,775,000 McDonald's Corp. 118,703
---------------
RETAIL (FOOD & DRUG)--0.8%
15,000 Albertson's, Inc. 833
20,000 American Stores Co. 651
40,000 CVS Corp. 1,828
30,000 Kroger Co. (The)(2) 1,665
35,000 Rite Aid Corp. 1,389
3,315,000 Safeway Inc.(2) 158,498
40,000 SYSCO Corp. 1,078
950,000 Walgreen Co. 46,253
---------------
212,195
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)--2.4%
1,839,000 Costco Companies, Inc.(2) $ 104,421
354,500 Dayton Hudson Corp. 15,022
10,000 Kohl's Corp.(2) 478
10,000 May Department Stores Co. (The) 610
7,064,300 Wal-Mart Stores, Inc. 487,437
---------------
607,968
---------------
RETAIL (SPECIALTY)--0.8%
4,946,000 Home Depot, Inc. 215,151
15,000 Lowe's Companies, Inc. 505
---------------
215,656
---------------
TOBACCO--1.6%
8,175,000 Philip Morris Companies Inc. 417,947
---------------
UTILITIES--0.3%
10,000 AES Corp. (The)(2) 409
10,000 American Electric Power Co., Inc. 489
10,000 Carolina Power & Light Co. 459
15,000 Dominion Resources, Inc. (Va.) 693
928,000 Duke Power Co. 60,030
10,000 Entergy Corp. 288
20,000 PECO Energy Co. 774
10,000 PG&E Corp. 304
---------------
63,446
---------------
TOTAL COMMON STOCKS 24,683,737
---------------
(Cost $18,556,247)
PREFERRED STOCKS-1.0%
PRINTING & PUBLISHING
11,102,000 News Corp. Ltd. ADR 268,530
---------------
(Cost $216,841)
See Notes to Financial Statements
www.americancentury.com 11
Ultra--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS(4)-3.3%
$ 70,000 FHLB Discount Notes,
5.12%, 11/6/98 $ 69,962
30,000 FHLB Discount Notes,
4.77%, 11/19/98 29,932
50,000 FHLB Discount Notes,
4.77%, 12/4/98 49,783
18,900 FHLMC Discount Notes,
5.42%, 11/2/98 18,900
15,000 FHLMC Discount Notes,
5.14%, 11/4/98 14,996
50,000 FHLMC Discount Notes,
5.14%, 11/9/98 49,953
139,003 FHLMC Discount Notes,
5.13%-5.16%, 11/12/98 138,814
155,295 FHLMC Discount Notes,
5.14%, 11/13/98 155,062
50,000 FHLMC Discount Notes,
5.06%, 11/18/98 49,893
50,000 FHLMC Discount Notes,
5.07%, 11/30/98 49,810
50,000 FHLMC Discount Notes,
5.04%, 12/8/98 49,755
50,000 FHLMC Discount Notes,
4.77%, 12/18/98 49,687
75,000 FNMA Discount Notes,
5.14%, 11/10/98 74,920
Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------
$ 50,000 FNMA Discount Notes,
5.11%, 11/23/98 $ 49,859
---------------
TOTAL TEMPORARY CASH INVESTMENTS 851,326
---------------
(Cost $851,161)
TOTAL INVESTMENT SECURITIES--100.0% $25,803,593
===============
(Cost $19,624,249)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contracts Settlement Unrealized
to Sell Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
317,234,286 NLG 11/30/98 $170,028 $ 95
450,207,500 SEK 11/30/98 57,813 (110)
--------------- ------------------
$227,841 $ (15)
=============== =================
(Value on Settlement Date $227,826)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS are used by the portfolio management
team in an effort to protect foreign investments against declines in foreign
currencies. This is also known as hedging. The contracts are called "forward"
because they allow your fund to exchange a foreign currency for U.S. dollars at
a date in the future--and at a price (known as the exchange rate) agreed upon
when the contract is initially entered into.
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
NLG = Netherlands Guilder
FHLB = Federal Home Loan Bank
ORD = Foreign Ordinary Share
FHLMC = Federal Home Loan Mortgage Corporation
SEK = Swedish Krona
FNMA = Federal National Mortgage Association
(1) Industry is less than 0.05% of total investment securities.
(2) Non-income producing.
(3) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment Company Act of 1940. (See Note 5 in Notes to Financial
Statements for a summary of transactions for each issuer which is or was an
affiliate at or during the year ended October 31, 1998.)
(4) The rate disclosed is the yield to maturity at purchase.
- -------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule shows you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percentage of total investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-2021
Vista--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS(INCEPTION 11/25/83) ADVISOR CLASS(INCEPTION 10/2/96) INSTITUTIONAL CLASS(INCEPTION 11/14/96)
RUSSELL 2500 RUSSELL 2500 RUSSELL 2500
VISTA GROWTH VISTA GROWTH VISTA GROWTH
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) -31.64% -21.72% -31.68% -21.72% -31.52% -21.72%
1 YEAR -31.94% -13.85% -32.08% -13.85% -31.72% -13.85%
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS -9.96% 6.94% -- -- -- --
5 YEARS 1.86% 8.99% -- -- -- --
10 YEARS 10.07% 11.99% -- -- -- --
LIFE OF FUND 9.16% N/A(2) -19.83% 0.81%(3) -17.63% 0.65%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) Benchmark began 1/1/86.
(3) Return from 9/30/96, the date nearest the class's inception for which data
are available.
(4) Return from 11/30/96, the date nearest the class's inception for which data
are available.
See pages 33, 34 and 35 for information about share classes, the Russell 2500
Growth Index and returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 10/31/98
Vista $26,099
Russell 2500 Growth $31,034
Vista Russell 2500 Growth
10/31/88 $10,000 $10,000
10/31/89 $14,819 $12,298
10/31/90 $11,532 $9,513
10/31/91 $19,337 $15,918
10/31/92 $20,219 $16,275
10/31/93 $23,802 $20,177
10/31/94 $24,792 $20,553
10/31/95 $35,750 $25,374
10/31/96 $38,238 $29,564
10/31/97 $38,349 $36,023
10/31/98 $26,099 $31,034
$10,000 investment made 10/31/88
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The
Russell 2500 Growth Index is provided for comparison in each chart. Past
performance does not guarantee future results. Investment return and principal
value will fluctuate, and redemption value may be more or less than original
cost. These charts are based on Investor Class shares only; performance for
other classes will vary due to differences in fee structures (see the Total
Returns table above). Vista's total returns include operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
returns of the Russell 2500 Growth Index do not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDING OCTOBER 31)
Vista Russell 2500 Growth Index
10/89 48.19% 22.98%
10/90 -22.17% -22.65%
10/91 67.67% 67.34%
10/92 4.55% 2.24%
10/93 17.72% 23.98%
10/94 4.16% 1.86%
10/95 44.20% 23.46%
10/96 6.96% 16.51%
10/97 0.29% 21.85%
10/98 -31.94% -13.85%
www.americancentury.com 13
Vista--Q&A
- --------------------------------------------------------------------------------
[photo Arnie Douville and Glenn Fogle]
Arnie Douville and Glenn Fogle, portfolio managers on Vista
An interview with Glenn Fogle and Arnie Douville, portfolio managers on the
Twentieth Century Vista investment team.
HOW DID VISTA PERFORM DURING THE FISCAL YEAR ENDED OCT. 31?
Vista's Investor Class shares finished the fiscal year ended October 31,
1998, down 31.94%, compared with the fund's benchmark, the Russell 2500 Growth
Index, which was down 13.85%. The year included one of the most volatile periods
on record for global equity markets, during which the U.S. market clearly
favored larger growth-oriented companies over the medium-sized firms that Vista
targets.
We spent the year working diligently to improve Vista's performance. We
recognize that our investors have not been well-served during the last two years
or so. Vista has not lived up to the high standards expected of us and that we
expect of ourselves. Getting Vista back on track has taken longer than
anticipated, but during the past year we have taken important steps to
strengthen the investment management process.
First, we have expanded and strengthened the Vista management team. Three
of the four members were not with the team one year ago. Every member is focused
on the American Century investment process of finding companies with
accelerating earnings and revenues.
We indicated six months ago that one of our goals was increased
diversification with exposure to a broader group of industries and sectors. The
portfolio has been expanded to include a larger number of stocks from a broader
range of industries. The number of stocks in the fund has been increased to more
than 80 from 59 a year ago. Our goal is for the portfolio to contain between 80
and 90 stocks. The portfolio is now much more diversified by sector and by
industry groups to reduce volatility without sacrificing performance potential.
Even though Vista is more diversified, we continue our policy of concentrating
on the top names. About 25% of assets are invested in the 10 largest positions.
During the past six months one of our most important objectives has been to
purchase companies earlier in their earnings acceleration cycle. Buying stocks
before their potential has become widely recognized by the market should help us
capture more of their price gains. In the past two years, Vista has been slower
on occasion to buy companies showing the first signs of faster growth and,
consequently, has not received the full benefit of their price appreciation.
The Vista team also has implemented new information systems to help screen
the universe of viable stock names for these early growth opportunities. Our
technology tools now are better suited and more efficient in helping to identify
stocks with the correct mix of fundamental and technical factors.
Finally, as the Stowerses indicated in their message on page 1, CEO Jim
Stowers III is working closely with the Vista team to ensure that our long-held,
[left margin]
"Getting Vista back on track has taken longer than anticipated, but during the
past year we have taken important steps to strengthen the investment management
process."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 83 59
MEDIAN P/E RATIO 28.4 32.1
MEDIAN MARKET $3.24 $1.86
CAPITALIZATION BILLION BILLION
PORTFOLIO TURNOVER 229% 96%
EXPENSE RATIO (FOR
INVESTOR CLASS) 1.00% 1.00%
Investment terms are defined in the Glossary on page 35.
14 1-800-345-2021
Vista--Q&A
- --------------------------------------------------------------------------------
(Continued)
earnings-based investment strategy is applied with consistency and discipline.
We have been working hard to strengthen our core investment approach of
finding companies with accelerating earnings and revenue growth in the mid-cap
segment of the stock market. We have the pieces in place and the burden is on us
to demonstrate that we can deliver.
WHICH SECTORS OR STOCKS CONTRIBUTED TO VISTA'S RESULTS?
While good news was difficult to find in the stock market during the second
half of the year, there were some successes. Vista was well-represented in the
telecommunications, broadcasting and airline industries. All contributed
positively to performance this year.
Forest Laboratories, an international pharmaceutical manufacturer, saw its
stock price rise sharply in 1998. Forest, one of Vista's largest holdings,
launched Celexa, a successful drug for treating depression, during the second
quarter. Industry experts estimate Celexa sales could reach $500 million within
three years and capture a significant share of the antidepressant drug market.
Another contributor to Vista's performance was Sunrise Assisted Living, one
of the oldest and largest providers of housing for seniors who can no longer
live on their own but do not need complex medical care. Assisted living
communities provide a variety of services, from help with eating, bathing and
dressing to programs for residents with Alzheimer's disease. Fundamentals in the
adult health-care industry are strong, and the retirement market is expected to
expand as the Baby Boom generation lives longer and retires earlier with more
disposable income.
Sunrise is an example of how our discipline helps us focus on the core
growth drivers of a business when other investors are reacting irrationally. The
stock lost nearly one third of its value in May following an earnings report
that was misunderstood by most investors. We examined the company and liked what
we saw. The fundamentals were strong, the stock's valuation seemed very
attractive, and earnings were still accelerating. We stepped in and bought the
stock, which has since moved back up nearly to its previous highs.
WHAT WERE SOME INVESTMENT DECISIONS THAT HURT PERFORMANCE?
Vista's investment style and market sector exposure were important factors
in performance. Most stock market gains in recent years have been concentrated
in very large capitalization growth stocks. The narrow market preference for
large-company stocks has resulted in a lengthy period of underperformance for
small- and mid-cap stocks in general.
Vista's weakest sector allocation was in energy services stocks. From early
1997, we owned stocks of several offshore oil drilling and service companies.
The rates charged per day for offshore drilling rigs were rising rapidly and oil
prices were stable. But the Asian economic crisis led to reduced demand for oil
in late 1997, and prices began to fall.
Most drillers had long-term contract commitments and appeared somewhat
insulated from short-term oil price weakness. However, as oil prices continued
to slide, these companies had to cut day rates as well. When it became
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
ASCEND COMMUNI-
CATIONS, INC. 4.0% --
SUNRISE ASSISTED
LIVING, INC. 2.7% --
FOREST
LABORATORIES, INC. 2.4% 1.9%
ANN TAYLOR
STORES CORP. 2.3% --
AMERICAN STORES CO. 2.2% --
PROVIDIAN
FINANCIAL CORP. 2.2% 1.4%
UNIPHASE CORP. 2.2% 1.9%
PROTEIN DESIGN
LABS, INC. 2.1% 1.5%
GENZYME CORP. 2.0% --
MYLAN
LABORATORIES, INC. 2.0% --
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
UTILITIES 12.5% --
COMPUTER SOFTWARE
& SERVICES 7.1% 14.0%
PHARMACEUTICALS 6.8% 4.3%
RETAIL (FOOD & DRUG) 6.4% 1.3%
BIOTECHNOLOGY 5.4% 5.8%
www.americancentury.com 15
Vista--Q&A
- --------------------------------------------------------------------------------
(Continued)
clear that earnings would suffer, we sold stocks in several energy exploration
and production firms including Noble Drilling Corp., Marine Drilling Co.,
Transocean Offshore and Diamond Offshore. These companies remain fundamentally
healthy, but the stocks suffered because of soft global energy prices.
The computer software and service sector was another disappointment. Many
business customers are postponing major software purchases until next year and
concentrating on Year 2000 compliance matters. Reduced demand for business
software updates hurt the earnings of some software developers.
Parametric Technology, one of the largest suppliers of computer-aided
design and manufacturing software, was one of Vista's best performers early in
the year. About 70% of Parametric's revenues come from repeat business. But the
introduction of an important new product line was poorly managed, and the
transition caused weakness in the company's core product line. Earnings were
affected, which led to a steep drop in stock price.
The financial services, biotechnology, communications equipment and retail
apparel groups were also among the worst-performing groups.
Stage Stores, a retail department store chain operating primarily in
smaller towns, was one of Vista's top-performing stocks as of April 30. More
than half of its stores are located in small strip shopping centers in Texas and
other Southern states. When the region suffered through weeks of record high
temperatures this past summer, shoppers stayed home. Cash flow slowed and some
store sales were off dramatically, causing Stage to miss its sales target. The
slowdown resulted in an earnings decline and the stock price dropped
dramatically.
ELECTRIC UTILITY STOCKS REPRESENTED THE LARGEST INDUSTRY GROUP AT THE END OF THE
YEAR. WHY?
We began accumulating electric utility stocks, not as a defensive move, but
because many utilities were demonstrating strong earnings acceleration. Earnings
growth in the utility sector is being driven by a combination of weather and
regulatory factors.
Deregulation of electric utilities is progressing on a state-by-state
basis. As the industry becomes more competitive, some of these companies are
finding they can demonstrate definite earnings growth.
WHAT IS YOUR OUTLOOK FOR VISTA?
The 12 months ended Oct. 31 were some of the best and worst times for
stocks.
The valuation placed on earnings and revenues of large-cap companies
reached historically extreme levels compared to those of small- and mid-cap
companies in 1998. While it is impossible to predict how long such trends may
continue, history shows that the market tends to correct such disparities--often
after sharp market corrections, such as those in 1973-74, 1987, and 1990-91.
We feel confident that the changes we have implemented this year will
improve Vista's performance relative to its benchmark. We believe our focused
investment process and more favorable global economic conditions will ultimately
reward investors in mid-cap growth stocks.
[left margin]
"We feel confident that the changes we have implemented this year will improve
Vista's performance relative to its benchmark."
[pie charts]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Foreign Stocks 0.5%
Temporary Cash Investments 9.5%
U.S. Stocks 90.0%
AS OF APRIL 30, 1998
Foreign Stocks 2.2%
Temporary Cash Investments 3.8%
U.S. Stocks 94.0%
16 1-800-345-2021
Vista--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-90.5%
AEROSPACE & DEFENSE--3.0%
160,000 General Dynamics Corp. $ 9,470
135,000 Litton Industries, Inc.(1) 8,809
165,000 Raytheon Co. Cl A 9,240
---------------
27,519
---------------
AGRICULTURE--1.6%
425,000 Delta and Pine Land Company 14,184
---------------
BANKING--4.2%
135,000 BB & T Corp. 4,818
50,000 City National Corp. 1,709
31,600 Old Kent Financial Corp. 1,328
250,000 Providian Financial Corp. 19,844
195,000 Zions Bancorporation 10,353
---------------
38,052
---------------
BIOTECHNOLOGY--5.4%
250,000 Centocor, Inc.(1) 11,117
440,000 Genzyme Corp.(1) 18,494
800,000 Protein Design Labs, Inc.(1) 19,300
---------------
48,911
---------------
BUSINESS SERVICES & SUPPLIES--4.2%
162,000 CSG Systems International, Inc.(1) 8,839
202,200 Comdisco, Inc. 3,121
389,500 Metamor Worldwide, Inc.(1) 10,066
470,000 Quanta Services, Inc.(1) 6,786
200,000 Quintiles Transnational Corp.(1) 9,044
---------------
37,856
---------------
CHEMICALS & RESINS--0.5%
170,000 IMC Global Inc. 4,420
---------------
COMMUNICATIONS EQUIPMENT--4.0%
750,000 Ascend Communications, Inc.(1) 36,164
---------------
COMMUNICATIONS SERVICES--1.4%
220,000 Century Telephone Enterprises, I 12,499
---------------
COMPUTER PERIPHERALS--3.2%
140,000 Lexmark International
Group, Inc. Cl A(1) 9,791
400,000 Seagate Technology, Inc.(1) 10,550
300,000 Xircom, Inc.(1) 8,822
---------------
29,163
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES--7.1%
75,000 America Online Inc. $ 9,530
283,600 At Home Corp. Series A(1) 12,532
260,000 Excite, Inc.(1) 10,026
250,000 Lycos, Inc.(1) 10,164
775,000 Novell, Inc.(1) 11,552
80,000 Yahoo! Inc.(1) 10,467
---------------
64,271
---------------
COMPUTER SYSTEMS--0.7%
180,000 Apple Computer, Inc.(1) 6,688
---------------
CONSUMER PRODUCTS--0.2%
80,000 Blyth Industries, Inc.(1) 2,210
---------------
ELECTRICAL & ELECTRONIC
COMPONENTS--2.7%
215,000 Advanced Micro Devices, Inc.(1) 4,851
400,000 Uniphase Corp.(1) 19,775
---------------
24,626
---------------
ENERGY (PRODUCTION & MARKETING)--2.1%
135,000 Anadarko Petroleum Corp. 4,573
230,000 NICOR Inc. 9,746
165,000 Williams Companies, Inc. (The) 4,527
---------------
18,846
---------------
ENERGY (SERVICES)--0.5%
210,000 Petroleum Geo-Services ASA ADR(1) 4,489
---------------
ENVIRONMENTAL SERVICES--1.0%
205,000 Waste Management, Inc. 9,251
---------------
FINANCIAL SERVICES--0.9%
1,250,000 UniCapital Corp.(1) 8,672
---------------
FOOD & BEVERAGE--2.1%
250,000 Coors (Adolph) Co. Cl B 12,516
175,000 SYSCO Corp. 4,714
50,000 U.S. Foodservice, Inc.(1) 2,375
---------------
19,605
---------------
HEALTHCARE--0.9%
117,300 Access Health, Inc.(1) 4,230
237,000 Health Management
Associates, Inc.(1) 4,222
---------------
8,452
---------------
INSURANCE--2.4%
165,000 Reinsurance Group of America, Inc. 9,096
160,100 Transatlantic Holdings, Inc. 12,488
---------------
21,584
---------------
MEDICAL EQUIPMENT & SUPPLIES--2.8%
675,000 PSS World Medical, Inc.(1) 14,871
450,000 STERIS Corp.(1) 10,336
---------------
25,207
---------------
See Notes to Financial Statements
www.americancentury.com 17
Vista--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
METALS & MINING--2.1%
300,000 Barrick Gold Corp. $ 6,413
250,000 Newmont Mining Corp. 5,313
450,000 Placer Dome Inc. 7,088
---------------
18,814
---------------
PAPER & FOREST PRODUCTS--0.8%
400,000 Louisiana-Pacific Corp. 7,100
---------------
PERSONAL SERVICES--2.7%
570,000 Sunrise Assisted Living, Inc.(1) 24,492
---------------
PHARMACEUTICALS--6.8%
255,000 Bergen Brunswig Corp. Cl A 12,447
520,000 Forest Laboratories, Inc.(1) 21,742
130,000 Genentech, Inc.(1) 9,311
525,000 Mylan Laboratories Inc. 18,080
. ---------------
61,580
---------------
RESTAURANTS--3.8%
650,000 CKE Restaurants, Inc. 17,103
1,110,000 Foodmaker, Inc.(1) 17,552
---------------
34,655
---------------
RETAIL (APPAREL)--2.3%
735,000 AnnTaylor Stores Corp.(1) 21,315
---------------
RETAIL (FOOD & DRUG)--6.4%
615,000 American Stores Co. 20,026
415,000 Food Lion, Inc. Cl A 4,552
435,000 Food Lion, Inc. Cl B 4,445
295,000 Meyer (Fred), Inc.(1) 15,727
330,000 Rite Aid Corp. 13,097
---------------
57,847
---------------
RETAIL (SPECIALTY)--2.2%
1,000,000 Corporate Express, Inc.(1) 11,656
26,200 Starbucks Corp.(1) 1,137
193,000 Tech Data Corp.(1) 7,575
---------------
20,368
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
UTILITIES--12.5%
210,000 Carolina Power & Light Co. $ 9,634
280,000 Central & South West Corp. 7,788
180,000 Columbia Gas System, Inc. (The) 10,417
220,000 Dominion Resources, Inc. (Va.) 10,161
200,000 IPALCO Enterprises, Inc. 9,175
90,000 National Fuel Gas Co. 4,253
200,000 New Century Energies, Inc. 9,662
160,000 OGE Energy Corp. 4,250
410,000 Potomac Electric Power Co. 10,737
370,000 PP&L Resources, Inc. 10,036
300,000 TECO Energy, Inc. 8,287
230,000 Unicom Corp. 8,668
350,000 Wisconsin Energy Corp. 10,719
---------------
113,787
---------------
TOTAL COMMON STOCKS 822,627
---------------
(Cost $790,817)
TEMPORARY CASH INVESTMENTS-9.5%
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.42%, dated 10/30/98,
due 11/2/98 (Delivery value $44,720) 44,700
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 5.35%, dated 10/30/98,
due 11/2/98 (Delivery value $41,919) 41,900
---------------
TOTAL TEMPORARY CASH INVESTMENTS 86,600
---------------
(Cost $86,600)
TOTAL INVESTMENT SECURITIES--100.0% $909,227
===============
(Cost $877,417)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
(1) Non-income producing.
- -------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule shows you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percentage of total investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
18 1-800-345-2021
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
ULTRA VISTA
ASSETS (In Thousands Except Per-Share Amounts)
Investment securities, at value
(identified cost of $19,539,956
and $877,417,
respectively) (Note 3) ................. $ 25,341,312 $ 909,227
Investment securities--affiliated,
at value (identified cost of $84,293)
(Note 3 and 5) ......................... 462,281 --
Cash ...................................... 38,496 2,295
Receivable for investments sold ........... 9,223 31,571
Receivable for forward foreign
currency exchange contracts ............ 95 --
Dividends and interest receivable ......... 14,662 478
--------------- ---------------
25,866,069 943,571
--------------- ---------------
LIABILITIES
Disbursements in excess of
demand deposit cash .................... 10,915 1,266
Payable for investments purchased ......... 287,552 41,346
Payable for forward foreign currency
exchange contracts ..................... 110 --
Payable for capital shares redeemed ....... 15,828 938
Accrued management fees (Note 2) .......... 20,332 721
Distribution fees payable (Note 2) ........ 20 1
Service fees payable (Note 2) ............. 20 1
Payable for directors' fees and expenses .. 15 1
Other liabilities ......................... 28 4
--------------- ---------------
334,820 44,278
--------------- ---------------
Net Assets ................................ $ 25,531,249 $ 899,293
=============== ===============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ... $ 16,892,669 $ 899,375
Accumulated undistributed net realized
gain (loss) on investment and foreign
currency transactions .................. 2,459,251 (31,893)
Net unrealized appreciation on
investments and translation of assets
and liabilities
in foreign currencies (Note 3) ......... 6,179,329 31,811
--------------- ---------------
$ 25,531,249 $ 899,293
=============== ===============
Investor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $25,396,219,378 $ 895,180,026
Shares outstanding ........................ 817,698,541 96,529,132
Net asset value per share ................. $ 31.06 $ 9.27
Advisor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $ 98,964,745 $ 4,052,424
Shares outstanding ........................ 3,192,813 438,836
Net asset value per share ................. $ 31.00 $ 9.23
Institutional Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $ 36,064,889 $ 60,257
Shares outstanding ........................ 1,158,770 6,462
Net asset value per share ................. $ 31.12 $ 9.32
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the Fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders, if any, or net investment
losses; net gains earned on investments but not yet paid to shareholders or net
losses on investments (known as realized gains or losses); and finally, gains or
losses on securities still owned by the fund (known as unrealized appreciation
or depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 19
Statements of Operations
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
ULTRA VISTA
INVESTMENT LOSS (In Thousands)
Income:
Dividends (net of foreign taxes
withheld of $3,112 and $0,
respectively) (includes $135
from affiliates for Ultra) .................. $ 203,387 $ 3,635
Interest ....................................... 24,833 4,389
----------- -----------
228,220 8,024
----------- -----------
Expenses: (Note 2)
Management fees ................................ 246,986 13,890
Distribution fees -- Advisor Class ............. 167 14
Service fees -- Advisor Class .................. 167 14
Directors' fees and expenses ................... 232 13
----------- -----------
247,552 13,931
----------- -----------
Net investment loss ............................ (19,332) (5,907)
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments (includes $907,687 and
$66,267, respectively, from affiliates) ..... 2,491,499 (27,871)
Foreign currency transactions .................. 13,159 --
----------- -----------
2,504,658 (27,871)
----------- -----------
Change in net unrealized appreciation
(depreciation) on:
Investments .................................... 1,244,124 (416,761)
Translation of assets and liabilities
in foreign currencies ....................... 6,100 --
----------- -----------
1,250,224 (416,761)
----------- -----------
Net realized and unrealized gain
(loss) on investments ....................... 3,754,882 (444,632)
----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations ................... $ 3,735,550 $ (450,539)
=========== ===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (dividend and interest)
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
20 1-800-345-2021
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
ULTRA VISTA
Increase (Decrease) in Net Assets 1998 1997 1998 1997
OPERATIONS (In Thousands)
<S> <C> <C> <C> <C>
Net investment income (loss) ....................... $ (19,332) $ 7,130 $ (5,907) $ (14,409)
Net realized gain (loss) on investments and
foreign currency transactions .................... 2,504,658 4,609,668 (27,871) 96,402
Change in net unrealized appreciation (depreciation)
on investments and translation of assets and
liabilities in foreign currencies ................ 1,250,224 (1,018,159) (416,761) (87,061)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations .................................. 3,735,550 3,598,639 (450,539) (5,068)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor Class ................................... (8,654) -- -- --
Institutional Class .............................. (1) -- -- --
From net realized gains from
investment transactions:
Investor Class ................................... (4,593,562) (1,044,611) (98,425) (168,260)
Advisor Class .................................... (6,944) (778) (378) (449)
Institutional Class .............................. (73) (547) (750) (225)
------------ ------------ ------------ ------------
Decrease in net assets from distributions .......... (4,609,234) (1,045,936) (99,553) (168,934)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase (decrease) in net assets from capital
share transactions ............................... 4,679,017 894,267 (398,837) (259,254)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets .............. 3,805,333 3,446,970 (948,929) (433,256)
NET ASSETS
Beginning of year .................................. 21,725,916 18,278,946 1,848,222 2,281,478
------------ ------------ ------------ ------------
End of year ........................................ $ 25,531,249 $ 21,725,916 $ 899,293 $ 1,848,222
============ ============ ============ ============
Undistributed net investment income ................ -- $ 12,202 -- --
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* capital share transactions--shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 21
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century Ultra Fund
(Ultra) and American Century - Twentieth Century Vista Fund (Vista) (the Funds)
are two of the twelve series of funds issued by the Corporation. The Funds'
investment objective is to seek capital growth by investing primarily in equity
securities. The Funds are authorized to issue three classes of shares: the
Investor Class, the Advisor Class, and the Institutional Class. The three
classes of shares differ principally in their respective shareholder servicing
and distribution expenses and arrangements. All shares of each Fund represent an
equal pro rata interest in the assets of the class to which such shares belong,
and have identical voting, dividend, liquidation and other rights and the same
terms and conditions, except for class specific expenses and exclusive rights to
vote on matters affecting only individual classes. The following significant
accounting policies are in accordance with generally accepted accounting
principles.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Discount notes are
valued through a commercial pricing service. When valuations are not readily
available, securities are valued at fair value as determined in accordance with
procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are translated into U.S. dollars at prevailing exchange
rates. Purchases and sales of investment securities, dividend and interest
income, and certain expenses are translated at the rates of exchange prevailing
on the respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
investment securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investment securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Funds may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Funds will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Funds and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Funds
bear the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Funds may enter into repurchase agreements
with institutions that the Funds' investment manager, American Century
Investment Management, Inc. (ACIM), has determined are creditworthy pursuant to
criteria adopted by the Board of Directors. Each repurchase agreement is
recorded at cost. Each Fund requires that the collateral, represented by
securities, received in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable each Fund to obtain those securities in the
event of a default under the repurchase agreement. ACIM monitors, on a daily
basis, the securities transferred to ensure the value, including accrued
interest, of the securities under each repurchase agreement is equal to or
greater than amounts owed to each Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, each Fund, along with other registered
investment companies having
22 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
management agreements with ACIM, may transfer uninvested cash balances into a
joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Funds to distribute all
taxable income and realized gains to shareholders and to otherwise qualify as a
regulated investment company under provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
At October 31, 1998, Vista had accumulated net realized capital loss
carryovers for federal income tax purposes of $25,756,378 (expiring in 2006)
which may be used to offset future taxable gains.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Funds with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee is 1.00%, 0.75% and 0.80% for the Investor, Advisor,
and Institutional Classes, respectively.
The Board of Directors has adopted the Advisor Class Master Distribution
and Shareholder Services Plan (the Plan), pursuant to Rule 12b-1 of the
Investment Company Act of 1940. The Plan provides that the Funds will pay ACIM
an annual distribution fee equal to 0.25% and service fee equal to 0.25%. The
fees are computed daily and paid monthly based on the Advisor Class's average
daily closing net assets during the previous month. The distribution fee
provides compensation for distribution expenses incurred in connection with
distributing shares of the Advisor Class including, but not limited to, payments
to brokers, dealers, and financial institutions that have entered into sales
agreements with respect to shares of the Funds. The service fee provides
compensation for shareholder and administrative services rendered by ACIM, its
affiliates or independent third party providers. Fees incurred by the Funds
under the Plan during the year ended October 31, 1998, were $334,728 for Ultra
and $27,663 for Vista.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
Ultra and Vista totaled $30,865,779,718 and $3,015,926,732, respectively. Sales
of investment securities, excluding short-term investments, totaled
$30,851,095,630 and $3,531,796,396, respectively.
As of October 31, 1998, accumulated net unrealized appreciation for Ultra
and Vista was $6,068,732,536 and $25,673,628, respectively, based on the
aggregate cost of investments for federal income tax purposes of $19,734,860,947
and $883,553,756, respectively. Accumulated net unrealized appreciation
consisted of unrealized appreciation of $6,159,220,343 and $69,991,625 for Ultra
and Vista, respectively, and unrealized depreciation of $90,487,807 and
$44,317,997, respectively.
www.americancentury.com 23
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
<TABLE>
<CAPTION>
Transactions in shares of the Funds were as follows:
ULTRA VISTA
SHARES AMOUNT SHARES AMOUNT
INVESTOR CLASS (IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares authorized ............................ 1,050,000 500,000
============ ===========
Year ended October 31, 1998
Sold ......................................... 224,437 $ 7,006,778 98,587 $ 1,196,006
Issued in reinvestment of distributions ...... 170,508 4,526,262 7,926 95,322
Redeemed ..................................... (225,564) (6,959,796) (135,809) (1,678,583)
------------ -------------- ----------- --------------
Net increase (decrease) ...................... 169,381 $ 4,573,244 (29,296) $ (387,255)
============ ============== =========== ==============
Year ended October 31, 1997
Sold ......................................... 189,167 $ 5,961,963 77,210 $ 1,099,918
Issued in reinvestment of distributions ...... 35,345 1,024,466 11,437 164,509
Redeemed ..................................... (194,910) (6,109,186) (107,997) (1,538,006)
------------ -------------- ----------- --------------
Net increase (decrease) ...................... 29,602 $ 877,243 (19,350) $ (273,579)
============ ============== =========== ==============
ADVISOR CLASS (IN THOUSANDS)
Shares authorized ............................ 312,500 210,000
============ ===========
Year ended October 31, 1998
Sold ......................................... 2,873 $ 87,888 211 $ 2,555
Issued in reinvestment of distributions ...... 262 6,944 32 378
Redeemed ..................................... (866) (26,625) (256) (3,132)
------------ -------------- ----------- --------------
Net increase (decrease) ...................... 2,269 $ 68,207 (13) $ (199)
============ ============== =========== ==============
Year ended October 31, 1997
Sold ......................................... 793 $ 25,705 389 $ 5,265
Issued in reinvestment of distributions ...... 27 778 31 449
Redeemed ..................................... (338) (10,568) (328) (4,446)
------------ -------------- ----------- --------------
Net increase ................................. 482 $ 15,915 92 $ 1,268
============ ============== =========== ==============
INSTITUTIONAL CLASS (IN THOUSANDS)
Shares authorized ............................ 125,000 80,000
============ ===========
Year ended October 31, 1998
Sold ......................................... 3,132 $ 98,660 998 $ 12,315
Issued in reinvestment of distributions ...... 2 49 62 750
Redeemed ..................................... (1,985) (61,143) (1,986) (24,448)
------------ -------------- ----------- --------------
Net increase (decrease) ...................... 1,149 $ 37,566 (926) $(11,383)
============ ============== =========== ==============
November 14, 1996(1) through October 31, 1997
Sold ......................................... 334 $ 10,284 1,145 $ 15,662
Issued in reinvestment of distributions ...... 19 547 16 226
Redeemed ..................................... (343) (9,722) (228) (2,831)
------------ -------------- ----------- --------------
Net increase ................................. 10 $ 1,109 933 $ 13,057
============ ============== =========== ==============
</TABLE>
(1) Commencement of sale of the Institutional Class.
24 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
5. AFFILIATED COMPANY TRANSACTIONS
<TABLE>
<CAPTION>
A summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1998, follows:
SHARE BALANCE PURCHASE SALES REALIZED DIVIDEND OCTOBER 31, 1998
FUND/ISSUER 10/31/97 COST COST GAIN (LOSS) INCOME SHARE BALANCE MARKET VALUE
ULTRA ($ in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Altera Corp. 4,732,000 $ 12,211 $214,620 $ (25,109) -- -- --
America Online Inc. 6,059,300 38,538 265,206 488,094 $ 5 3,598,600(1) $457,247
BMC Software, Inc. 3,550,000 23,792 121,280 181,321 -- 20,000(1) 961
Chancellor Media Corp. 1,700,000 1,140 40,888 67,158 -- -- --
Starbucks Corp. 900,000 -- 13,496 16,017 -- -- --
Sun Microsystems, Inc. 6,800,600 3,616 69,739 215,006 -- 70,000 4,073
Tel-Save Holdings, Inc. 575,000 67,932 81,053 (11,524) -- -- --
Teva Pharmaceutical
Industries
Ltd. ADR 2,450,000 -- 133,342 (23,276) 130 -- --
---------- ---------- ----------- ------ -----------
$147,229 $939,624 $907,687 $135 $462,281
========== ========== =========== ====== ===========
VISTA ($ in Thousands)
Brightpoint, Inc. 1,350,000 -- $ 29,277 $18,104 -- -- --
Comverse Technology, Inc. 750,000 -- 21,844 4,322 -- -- --
Dura Pharmaceuticals, Inc. 425,000 $ 5,835 10,975 4,190 -- -- --
Hyperion Software Corp.(2) 1,400,000 3,625 35,975 18,158 -- -- --
IDEC Pharmaceuticals Corp. 650,000 18,842 33,415 (2,481) -- -- --
Medicis Pharmaceutical Corp. 810,000 -- 28,926 8,657 -- -- --
North Face, Inc. (The) -- 17,602 17,602 (6,891) -- -- --
Nutraceuticals
International, Inc. -- 4,589 4,589 (914) -- -- --
P-COM, Inc. 2,100,000 -- 30,246 9,003 -- -- --
Sanmina Corp. 770,000 17,515 55,293 14,119 -- -- --
---------- ---------- ----------- ------ -----------
$68,008 $268,142 $66,267 -- --
========== ========== =========== ====== ===========
</TABLE>
(1) Includes adjustments for shares received from a stock split and/or stock
spinoff during the period.
(2) Formerly known as Arbor Software Corp.
www.americancentury.com 25
Ultra--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............. $ 33.46 $ 29.52 $ 28.03 $ 21.16 $ 21.61
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income (Loss) ................. (0.02)(1) 0.01(1) (0.05)(1) (0.07)(1) (0.03)
Net Realized and Unrealized Gain (Loss) on
Investment Transactions ...................... 4.70 5.62 2.84 7.58 (0.42)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations ............. 4.68 5.63 2.79 7.51 (0.45)
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ................... (0.01) -- -- -- --
From Net Realized Gains on
Investment Transactions ...................... (7.07) (1.69) (1.19) (0.64) --
In Excess of Net Realized Gains .............. -- -- (0.11) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions .......................... (7.08) (1.69) (1.30) (0.64) --
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year ................... $ 31.06 $ 33.46 $ 29.52 $ 28.03 $ 21.16
========== ========== ========== ========== ==========
Total Return(2) .............................. 17.61% 19.95% 10.79% 36.89% (2.08)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ................................... 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income (Loss) to Average
Net Assets ................................... (0.08)% 0.03% (0.20)% (0.30)% (0.10)%
Portfolio Turnover Rate ........................ 128% 107% 87% 87% 78%
Net Assets, End of Year (in millions) .......... $ 25,396 $ 21,695 $ 18,266 $ 14,376 $ 10,344
</TABLE>
(1) Computed using average shares outstanding throughout the year.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
26 1-800-345-2021
Ultra--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997 1996(1)
PER-SHARE DATA
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 33.36 $ 29.52 $ 29.55
---------- ---------- ----------
Income From Investment Operations
Net Investment Loss(2) ................... (0.11) (0.07) (0.02)
Net Realized and Unrealized Gain (Loss) on
Investment Transactions .................. 4.73 5.60 (0.01)
---------- ---------- ----------
Total From Investment Operations ......... 4.62 5.53 (0.03)
---------- ---------- ----------
Distributions
From Net Realized Gains on
Investment Transactions .................. (6.98) (1.69) --
---------- ---------- ----------
Net Asset Value, End of Period ............. $ 31.00 $ 33.36 $ 29.52
========== ========== ==========
Total Return(3) .......................... 17.36% 19.59% (0.10)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ............................... 1.25% 1.25% 1.25%(4)
Ratio of Net Investment Loss to Average
Net Assets ............................... (0.33)% (0.22)% (0.80)%(4)
Portfolio Turnover Rate .................... 128% 107% 87%
Net Assets, End of Period (in thousands) ... $ 98,965 $ 30,827 $ 13,051
</TABLE>
(1) October 2, 1996 (commencement of sale) through October 31, 1996.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com 27
Ultra--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Institutional Class
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ......... $ 33.53 $ 30.78
---------- ----------
Income From Investment Operations
Net Investment Income(2) ................... 0.03 0.06
Net Realized and Unrealized Gain on
Investment Transactions .................... 4.72 4.38
---------- ----------
Total From Investment Operations ........... 4.75 4.44
---------- ----------
Distributions
From Net Investment Income ................. (0.09) --
From Net Realized Gains on
Investment Transactions .................... (7.07) (1.69)
---------- ----------
Total Distributions ........................ (7.16) (1.69)
---------- ----------
Net Asset Value, End of Period ............... $ 31.12 $ 33.53
========== ==========
Total Return(3) ............................ 17.85% 15.28%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ................................. 0.80% 0.80%(4)
Ratio of Net Investment Income to Average
Net Assets ................................. 0.12% 0.23%(4)
Portfolio Turnover Rate ...................... 128% 107%
Net Assets, End of Period (in thousands) ..... $ 36,065 $ 334
(1) November 14, 1996 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total return for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
28 1-800-345-2021
Vista--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ......... $ 14.53 $ 15.68 $ 15.73 $ 10.94 $ 12.24
--------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Loss ...................... (0.05)(1) (0.10)(1) (0.11)(1) (0.08)(1) (0.08)
Net Realized and Unrealized Gain (Loss) on
Investment Transactions .................. (4.41) 0.13 1.09 4.90 0.45
--------- --------- --------- --------- ---------
Total From Investment Operations ......... (4.46) 0.03 0.98 4.82 0.37
--------- --------- --------- --------- ---------
Distributions
From Net Realized Gains on
Investment Transactions .................. (0.80) (1.18) (1.02) (0.03) (1.66)
In Excess of Net Realized Gains .......... -- -- (0.01) -- (0.01)
--------- --------- --------- --------- ---------
Total Distributions ...................... (0.80) (1.18) (1.03) (0.03) (1.67)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ............... $ 9.27 $ 14.53 $ 15.68 $ 15.73 $ 10.94
========= ========= ========= ========= =========
Total Return(2) .......................... (31.94)% 0.29% 6.96% 44.20% 4.16%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ............................... 1.00% 1.00% 0.99% 0.98% 1.00%
Ratio of Net Investment Loss to Average
Net Assets ............................... (0.42)% (0.73)% (0.70)% (0.60)% (0.80)%
Portfolio Turnover Rate .................... 229% 96% 91% 89% 111%
Net Assets, End of Year (in millions) ...... $ 895 $ 1,828 $ 2,276 $ 1,676 $ 792
</TABLE>
(1) Computed using average shares outstanding throughout the year.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 29
Vista--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997 1996(1)
PER-SHARE DATA
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 14.50 $ 15.67 $ 16.87
--------- --------- ---------
Income From Investment Operations
Net Investment Loss(2) ................... (0.08) (0.14) (0.02)
Net Realized and Unrealized Gain (Loss) on
Investment Transactions .................. (4.39) 0.15 (1.18)
--------- --------- ---------
Total From Investment Operations ......... (4.47) 0.01 (1.20)
--------- --------- ---------
Distributions
From Net Realized Gains on
Investment Transactions .................. (0.80) (1.18) --
--------- --------- ---------
Net Asset Value, End of Period ............. $ 9.23 $ 14.50 $ 15.67
========= ========= =========
Total Return(3) .......................... (32.08)% 0.15% (7.11)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ............................... 1.25% 1.25% 1.25%(4)
Ratio of Net Investment Loss to Average
Net Assets ............................... (0.67)% (0.98)% (1.20)%(4)
Portfolio Turnover Rate .................... 229% 96% 91%
Net Assets, End of Period (in thousands) ... $ 4,052 $ 6,553 $ 5,646
</TABLE>
(1) October 2, 1996 (commencement of sale) through October 31, 1996.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
30 1-800-345-2021
Vista--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Institutional Class
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ........... $ 14.56 $ 15.73
---------- ----------
Income From Investment Operations
Net Investment Loss(2) ....................... (0.01) (0.07)
Net Realized and Unrealized Gain (Loss) on
Investment Transactions ...................... (4.43) 0.08
---------- ----------
Total From Investment Operations ............. (4.44) 0.01
---------- ----------
Distributions
From Net Realized Gains on
Investment Transactions ...................... (0.80) (1.18)
---------- ----------
Net Asset Value, End of Period ................. $ 9.32 $ 14.56
========== ==========
Total Return(3) .............................. (31.72)% 0.17%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets ................................... 0.80% 0.80%(4)
Ratio of Net Investment Loss to Average
Net Assets ................................... (0.22)% (0.53)%(4)
Portfolio Turnover Rate ........................ 229% 96%
Net Assets, End of Period (in thousands) ....... $ 60 $ 13,581
(1) November 14, 1996 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com
31
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Century--Twentieth Century
Ultra Fund and American Century--Twentieth Century Vista Fund (the "Funds"), two
of the funds comprising American Century Mutual Funds, Inc., as of October 31,
1998, and the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the periods in the five-year period
then ended. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers, and other alternative
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American
Century--Twentieth Century Ultra Fund and American Century--Twentieth Century
Vista Fund as of October 31, 1998, the results of their operations, the changes
in their net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
32 1-800-345-2021
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASS
Three classes of shares are authorized for sale by the fund: INVESTOR
CLASS, ADVISOR CLASS, and INSTITUTIONAL CLASS. INVESTOR CLASS shareholders do
not pay any commissions or other fees for purchase of fund shares directly from
American Century. Investors who buy Investor Class shares through a
broker-dealer may be required to pay the broker-dealer a transaction fee. THE
PRICE AND PERFORMANCE OF THE INVESTOR CLASS SHARES ARE LISTED IN NEWSPAPERS. NO
OTHER CLASS IS CURRENTLY LISTED.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
shares is 0.25% higher than the total expense ratio of the Investor Class
shares.
INSTITUTIONAL CLASS shares are available to endowments, foundations,
defined benefit pension plans or financial intermediaries serving these
investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class shares is 0.20% less
than the total expense ratio of the Investor Class shares.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
www.americancentury.com 33
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the
stocks of growing companies, both domestically and internationally. The
philosophy behind these growth funds focuses on three important principles.
First, the funds seek to own successful companies, which we define as those with
growing earnings and revenues. Second, we attempt to keep the funds fully
invested, regardless of short-term market activity. Experience has shown that
market gains can occur in unpredictable spurts and that missing those
opportunities can significantly limit the potential for gain. Third, the funds
are managed by teams, rather than by one "star." We believe this allows us to
make better, more consistent management decisions.
In addition to these principles, each fund has its own investment policies:
TWENTIETH CENTURY ULTRA generally invests in the securities of midsized and
larger companies that exhibit growth. It will typically have significant price
fluctuations.
TWENTIETH CENTURY VISTA invests mainly in the securities of smaller and
medium-sized firms that exhibit growth. The fund is subject to significant price
volatility but offers high long-term growth potential. Historically, small-cap
stocks have been more volatile than the stocks of larger, more established
companies.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
dominant industries. Created by Standard & Poor's Corporation, it is considered
to be a broad measure of U.S. stock market performance.
The S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest publicly
traded U.S. companies based on total market capitalization. The Russell 2000
Index represents approximately 10% of the total market capitalization of the top
3,000 companies. The weighted average market capitalization of the index is
approximately $780 million.
The RUSSELL 2500 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,500 smallest of the 3,000 largest publicly
traded U.S. companies based on total market capitalization. The Russell 2500
represents approximately 23% of the total market capitalization of the top 3,000
companies. The weighted average market capitalization of the index is
approximately $1.7 billion. The RUSSELL 2500 GROWTH INDEX measures the
performance of those Russell 2500 companies with higher price-to-book ratios and
higher forecasted growth rates.
[left margin]
PORTFOLIO MANAGERS
ULTRA
JIM STOWERS III
BRUCE WIMBERLY
JOHN SYKORA, CFA
VISTA
GLENN FOGLE, CFA
ARNIE DOUVILLE
34 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 26-31.
INVESTMENT TERMS
* EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
* MEDIAN MARKET CAPITALIZATION -- Market capitalization (market cap) is the
total value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
* NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
* PORTFOLIO TURNOVER -- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
* PRICE/BOOK RATIO -- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
* PRICE/EARNINGS (P/E) RATIO -- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
TYPES OF STOCKS
* BLUE-CHIP STOCKS -- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS -- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
* GROWTH STOCKS -- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples companies.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS --generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P 400.
* SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
* VALUE STOCKS -- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
www.americancentury.com 35
Notes
- --------------------------------------------------------------------------------
36 1-800-345-2021
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE: 1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
FUNDS DISTRIBUTOR, INC.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 Funds Distributor, Inc.
SH-BKT-14472 (c)1998 American Century Services Corporation
<PAGE>
[front cover]
OCTOBER 31, 1998
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of globe, U.S. Currency, and money managers overlooking monitors]
TWENTIETH CENTURY GROUP
- -----------------------
GIFTRUST
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
o FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
o Buy individual stocks and bonds
o 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
o Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund analysis
o Track your brokerage account on one easy-to-read statement
o Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card an
American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles
follow a standard SEC format and allow investors to compare funds
easily. You can request a profile or the full prospectus. Full
prospectuses contain more detailed fund information and you will
continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight
important information about our funds, including fees and expenses.
More technical data will be in the Statement of Additional
Information.
On the Cover:
Kevin Lewis and Cindy Brown are part of the investment group at American
Century.
[left margin]
TWENTIETH CENTURY GROUP
GIFTRUST
(TWGTX)
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stowers III and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
This report covers an investment year filled with sharp contrasts. Many
popular market averages set records early in the year, lifted by a healthy
economy, low inflation and widespread market optimism, then tumbled dramatically
as the outlook for the U.S. economy and corporate earnings turned pessimistic,
almost overnight. The mood swing in market psychology seemed especially sharp
after the gains of the last several years--gains that were interrupted by
relatively few, and very shallow, downdrafts.
Often forgotten in the earlier, heady atmosphere, was the wide performance
disparity at work in the market. For the year, large stocks outperformed the
small stocks in that sector by a significant margin. That margin widened in the
second half of the year, when small caps dropped sharply in the face of
uncertainty over global economic conditions and the strength of the U.S.
economy.
Given the gains of the last several years, and the low market volatility,
it is understandable that many investors--especially those who are new to the
stock market--might find the broad market price swings we've seen in 1998 fairly
stressful. In our experience, these swings are an inevitable, even necessary,
part of the investment process. They often set the stage for further
advances--which, in fact, we saw in November. But whatever the market's
direction, it does not pay to get caught up in its excesses, whether overly
optimistic or overly pessimistic. If you have an investment plan, try to stay
with it. If you don't have a plan, this might be a good time to develop one.
Turning to the corporate front, it is our pleasure to announce that Jim
Stowers III is now overseeing the management teams of our domestic growth funds:
Growth, Select, Ultra, Heritage, Vista, Giftrust, and New Opportunities. In his
new role, Jim will work directly with the equity teams that run the funds'
day-to-day operations. This change is yet another important step in our ongoing
effort to bring our funds' performance up to shareholders' expectations.
In addition to his new duties, Jim will continue to head the Ultra
portfolio team and will remain American Century's Chief Executive Officer.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
GIFTRUST
Performance Information ................................................ 5
Management Q&A ......................................................... 6
Portfolio at a Glance .................................................. 6
Top Ten Holdings ....................................................... 7
Top Five Industries .................................................... 7
Types of Investments ................................................... 8
Schedule of Investments ................................................ 9
Financial Highlights ................................................... 17
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities .......................................................... 12
Statement of Operations ................................................ 13
Statements of Changes
in Net Assets ........................................................ 14
Notes to Financial
Statements ........................................................... 15
OTHER INFORMATION
Independent Auditors'
Report ............................................................... 18
Background Information
Investment Philosophy
and Policies ...................................................... 19
Comparative Indices ................................................. 19
Portfolio Managers .................................................. 19
Glossary ............................................................... 20
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Although stocks set records during the first seven months of the year, a
sell-off began in early July and accelerated into October, pulling small
stocks lower.
* Until July, the outperformance of a relatively small number of large and
midsize stocks masked much weaker returns in the rest of the equity
universe.
* Even with the downturn this year, the recession of 1990-1991, and the
favoritism shown the most popular large stocks, small stocks have produced
respectable results during the '90s. The Russell 2000's average annual
return was 11.40% from January 1, 1990 to October 31, 1998, compared to its
20-year average of 14.40%.
* In general, U.S. business is productive and streamlined, which bodes well
for the economy. But we are probably in a more moderate phase of the
economic cycle--one marked by low inflation and global overcapacity.
* We believe small stocks look relatively inexpensive. Companies with
sustainable revenue and earnings growth could be today's bargains and
tomorrow's winners.
GIFTRUST
* Giftrust's performance was undistinguished during fiscal 1998. The fund
roughly doubled the loss of its benchmark, the Russell 2000 Growth Index.
* This short-term record is not one we are proud of. Both our investment team
and top management at American Century are making every effort to improve
results and preserve Giftrust's exceptional long-term record.
* In the past, Giftrust has snapped back from occasional periods of
underperformance. We think the fund is positioned to take advantage of any
recovery in the small- and mid-cap stock sectors which have been under huge
pressure the last few years.
* Although our basic investment strategy has not changed, we are working
diligently to improve our execution of that strategy. In addition, we have
enlarged our investment team.
* Returns were hurt this year because several large positions suffered
earnings disappointments. Holdings in the energy, business services, and
healthcare fields were weak.
* We did well with selected broadcasters, retailers, medical equipment
makers, and semiconductor manufacturers, though share prices were unusually
volatile.
* We recognize that many children's educations are riding on how Giftrust
performs, and we are dedicated to generating the competitive returns
necessary to help make that possible.
[left margin]
"WE BELIEVE SMALL STOCKS LOOK RELATIVELY INEXPENSIVE. COMPANIES WITH SUSTAINABLE
REVENUE AND EARNINGS GROWTH COULD BE TODAY'S BARGAINS AND TOMORROW'S WINNERS."
GIFTRUST (TWGTX)
TOTAL RETURNS: AS OF 10/31/98
6 Months -32.55%*
1 Year -31.55%
NET ASSETS: $757.4 million
INCEPTION DATE: 11/25/83
* Not annualized.
Investment terms are defined in the Glossary on page 20.
2 1-800-345-2021
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
[photo Robert C. Puff, Jr.]
Robert C. Puff, Jr., Chief Investment Officer of American Century Investment
Management
MARKET PSYCHOLOGY: THE RETURN OF FEAR
Sometimes a little pain can go a long way. This was certainly the case over
the final four months of our fiscal year (July-October)--a period that marked an
abrupt change in market psychology. Financial markets are motivated by greed and
fear, and during the '90s, greed has enjoyed a long run. In mid-July, after the
S&P 500 peaked, fear returned to the stock market. Its entrance was dramatic,
but not terribly surprising. Market declines are a normal part of the investment
process. Although they have been notably absent in the 1990s, in prior decades
moderate corrections of 10% happened about once a year and more severe
corrections of up to 15% occurred about once every two years. A correction in
the 20% range occurred roughly every three to four years. On a historical basis,
a correction was overdue.
The decline in the S&P 500 accelerated into early October, propelled by an
increasingly restrained outlook for corporate earnings, apprehension about
further economic and political deterioration in Southeast Asia and Russia, and
stubbornly elevated short-term interest rates in the United States. Serious talk
of a U.S. recession also surfaced.
Money that had been earmarked for the stock market instead sought a safe
haven in U.S. Treasurys and a few popular megastocks. Banks pulled back from
lending, and professional investors were shaken by the problems at a large,
well-known hedge fund. While many of the pros panicked, individual investors
generally stayed the course and used the decline as a buying opportunity.
ONCE AGAIN, SIZE MATTERED
August saw a sharp decline of 14.56% in the S&P 500 Index. Especially
disturbing, at least psychologically, was the sell-off in the handful of
blue-chip stocks that had accounted for much of the S&P 500's performance during
the last several years. In general, the returns of larger stocks have been very
impressive compared with small and midsize stocks. From January 1994 through
October 1998, large stocks outperformed smaller stocks 14 out of 19 calendar
quarters. However, closer analysis revealed that the strong performance of a
relatively limited number of blue-chip and midsize companies masked the price
deterioration of the vast majority of the other 9,000 stocks traded in the U.S.
For example, through September 30 of this year, fewer than 20 of the largest
stocks in the S&P 500 Index were responsible for almost 100% of the index's
performance. Most stocks were correcting well before the decline in the major
market indices began.
A GOOD PLACE TO WORK AND INVEST
Still, as the chart on page 4 illustrates, U.S. stock returns since 1990
have been robust, even with the recession of 1990-1991 and this year's market
decline. The Russell 2000's average annual return from January 1, 1990, to
October 31, 1998, was a respectable 11.40%. However, this was below the index's
20-year average of 14.40%. Large stocks posted the most impressive gains during
the decade.
[right margin]
"...THROUGH SEPTEMBER 30 OF THIS YEAR, FEWER THAN 20 OF THE LARGEST STOCKS IN
THE S&P 500 INDEX WERE RESPONSIBLE FOR ALMOST 100% OF THE INDEX'S PERFORMANCE."
MARKET RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 21.96%
S&P MIDCAP 400 6.71%
RUSSELL 2000 -11.84%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large-, medium- and
small-capitalization stocks.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
10/31/97 $1.00 $1.00 $1.00
11/30/97 $1.05 $1.01 $0.99
12/31/97 $1.06 $1.05 $1.01
1/31/98 $1.08 $1.03 $0.99
2/28/98 $1.15 $1.12 $1.07
3/31/98 $1.21 $1.17 $1.11
4/30/98 $1.23 $1.19 $1.12
5/31/98 $1.20 $1.14 $1.06
6/30/98 $1.25 $1.15 $1.06
7/31/98 $1.24 $1.10 $0.97
8/31/98 $1.06 $0.90 $0.79
9/30/98 $1.13 $0.98 $0.85
10/31/98 $1.22 $1.07 $0.88
Value on 10/31/98
S&P 500 $1.22
S&P MidCap 400 $1.07
Russell 2000 $0.88
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
(Continued)
All things considered, the U.S. is a pretty good place to be. We have a
sound economy, a stable government, a generally reasonable regulatory
environment, and a culture that values creativity and entrepreneurialism. The
recent national elections suggest that our political attitudes remain solidly
practical and centrist. Our corporate sector is strong and relatively lean. Many
businesses have streamlined operations and enhanced productivity via
increasingly powerful--and less expensive--technology. Response time to changes
in economic activity and product demand is quite low. Economist Adam Smith's
"invisible hand" continues to be active in getting businesses to prune, manage
costs, and move toward greater efficiencies. Overall, it is a rich, dynamic
process.
The Federal Reserve has done a good job, too. It has kept interest rates
stable, but has been reasonable and flexible in its approach, lowering rates
three times this fall (its first such move since 1995) to help stimulate the
economy.
A DIFFERENT PHASE OF GROWTH
We are probably now in a different, more moderate phase of the economic
cycle. There is, quite frankly, too much of almost everything--except
understanding. As an example, the global production capacity for automobiles is
estimated to be roughly 28-29 million per year, or about 50% higher than demand.
Much the same is true for other key commodities, including basic foodstuffs,
steel, petrochemicals, and energy. Overcapacity and global competition have
eliminated pricing flexibility from the marketplace, and have contributed to the
lowest inflation in more than 30 years. Lower interest rates may help the
situation, but I doubt they will have much impact on demand, at least right
away. Lowering rates at this stage is, in effect, like pushing on a string. Many
consumers already have all they need; lower rates won't necessarily induce them
to buy more.
At some point, of course, overcapacity will dissipate as many of the
world's economies begin to grow again. There are already signs, for example, of
a more responsible approach to the Japanese banking and economic crises. But in
the current environment, deflation remains a threat, and countries--including
our own--may be tempted to fall into the trap of protectionism. U.S.
manufacturers have already petitioned for tariffs to counteract the dumping of
steel and wheat by foreign producers. Trade with Asia is largely one-way: Ships
arrive full at our ports but travel empty on the return trip. If growth slows
too much, business will lose enthusiasm for new ventures, and the economy will
contract. That is the worst-case scenario, but, in my view, it is not the most
likely.
SMALL STOCKS: GROWTH IS INEXPENSIVE
We have been in a relatively narrow market for the last few years. Should
the market broaden, and reward stocks for their earnings strength and not simply
for their size, we believe the earnings acceleration discipline will do well. By
a number of measures, including price-earnings ratios, growth in the small-cap
sector is as inexpensive (with but a few exceptions) as it has been in decades.
As always, marginal companies will continue to have problems. However, those
smaller firms that have built solid positions in their markets and have deep
enough pockets to get past the rough spots could be today's bargains and
tomorrow's winners.
[left margin]
"ALL THINGS CONSIDERED, THE U.S. IS A PRETTY GOOD PLACE TO BE. WE HAVE A SOUND
ECONOMY, A STABLE GOVERNMENT, A GENERALLY REASONABLE REGULATORY ENVIRONMENT, AND
A CULTURE THAT VALUES CREATIVITY AND ENTREPRENEURIALISM."
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FROM JANUARY 1, 1990, TO OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
1/1/90 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
10/31/98 $3.91 $3.66 $2.59
Value on 10/31/98
S&P 500 $3.91
S&P MidCap 400 $3.66
Russell 2000 $2.59
Source: Lipper Analytical Services, Inc.
4 1-800-345-2021
Giftrust--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1998
RUSSELL
GIFTRUST 2000 GROWTH
6 MONTHS(1) ................................. -32.55% -23.47%
1 YEAR ...................................... -31.55% -15.86%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ..................................... -8.53% 4.93%
5 YEARS ..................................... 3.79% 6.66%
10 YEARS .................................... 16.12% 9.85%
LIFE OF FUND(2) ............................. 15.36% 7.69%(3)
(1) Returns for less than one year are not annualized.
(2) Inception was 11/25/83.
(3) Return since 11/30/83, the date nearest the fund's inception for which data
are available.
See pages 19 and 20 for information about the Russell 2000 Growth Index and
returns.
[mountain chart - data below]
PERFORMANCE OF $10,000 OVER 10 YEARS
Value on 10/31/98
Giftrust $44,578
Russell 2000 Growth $25,577
Giftrust Russell 2000 Growth Index
10/31/88 $10,000 $10,000
10/31/89 $14,982 $11,872
10/31/90 $12,019 $8,745
10/31/91 $21,519 $14,563
10/31/92 $23,742 $14,510
10/31/93 $37,002 $18,526
10/31/94 $43,940 $18,357
10/31/95 $58,229 $22,137
10/31/96 $63,889 $25,087
10/31/97 $65,135 $30,398
10/31/98 $44,578 $25,577
$10,000 investment made 10/31/88
The chart at left shows the performance of a $10,000 investment in the fund over
10 years, while the chart below shows the fund's year-by-year performance. The
Russell 2000 Growth Index is provided for comparison in each chart. Past
performance does not guarantee future results. Investment return and principal
value will fluctuate, and redemption value may be more or less than the original
cost. Giftrust's total returns include operating expenses (such as transaction
costs and management fees) that reduce returns, while the total returns of the
Russell 2000 Growth Index do not.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED OCTOBER 31)
Giftrust Russell 2000 Growth
10/89 49.81% 18.72%
10/90 -19.77% -26.34%
10/91 79.04% 66.53%
10/92 10.32% -0.36%
10/93 55.84% 27.67%
10/94 18.75% -0.91%
10/95 32.52% 20.59%
10/96 9.72% 13.33%
10/97 1.95% 21.08%
10/98 -31.55% -15.86%
www.americancentury.com 5
Giftrust--Q&A
- --------------------------------------------------------------------------------
[photo Chris Boyd and John Seitzer]
Chris Boyd and John Seitzer, portfolio managers on Giftrust
An interview with Chris Boyd and John Seitzer, portfolio managers on the
Giftrust investment team.
WHAT WAS GIFTRUST'S RETURN FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1998?
Giftrust was down 31.55%. Its benchmark index, the Russell 2000 Growth
Index, which is made up of smaller growth stocks, lost 15.86% for the year. When
you measure performance in terms of fiscal years (November - October), this was
Giftrust's worst showing versus its benchmark since the fund's inception in
1983. Obviously, we're not proud of that, and our investment team along with our
top investment officers have spent a great deal of time trying to understand the
reasons for the fund's poor showing and making changes to improve returns.
As a firm, American Century is committed to improving Giftrust's
performance and getting it back among the leaders in the mutual fund industry.
As the Stowerses indicated in their message on page 1, CEO Jim Stowers III is
now working closely with the Giftrust team to ensure that our long-held,
earnings-based investment strategy is applied with consistency and discipline.
In the past, Giftrust has snapped back and more than compensated for
periods of weakness. Since its inception on November 25, 1983, the fund has
generated an average annual return of 15.36%, well ahead of the 7.69% produced
by the Russell 2000 Growth.* We're not trying to take credit for those numbers,
but we believe Giftrust is a good long-term investment--despite periods of
underperformance and higher volatility than more conservative funds.
CAN YOU IDENTIFY THE PRIMARY REASONS GIFTRUST STRUGGLED THIS YEAR?
We believe there were three factors: Small-cap stocks were extremely weak;
Giftrust's portfolio was (and is) more concentrated and volatile than its
benchmark; and we had difficulty with our stock selection.
As we mentioned in our last report, the economic turmoil in Southeast Asia
hurt profits and revenues at many small companies. As the Asian "flu" spread to
other parts of the world, there was talk of a recession in the U.S. and an
intense search for safe havens, such as U.S. Treasury bonds and the bluest of
the blue-chip stocks. The general atmosphere was extremely risk-averse.
Companies that disappointed market expectations, even just slightly, were
severely punished. Some small stocks dropped 30-50%--or more--very quickly. It
was one of the most turbulent times we've seen.
The portfolio's concentration, which can help performance in a strong
market, also hurt us badly this year. We held several positions that were over
4% of portfolio holdings. By comparison, the largest positions in the Russell
2000 Growth are around .50%, and the index
*The return for the Russell 2000 Growth Index is from November 30, 1983, the
month-end closest to Giftrust's inception. Past performance does not guarantee
future results.
[left margin]
"IN THE PAST, GIFTRUST HAS SNAPPED BACK AND MORE THAN COMPENSATED FOR PERIODS OF
WEAKNESS SINCE ITS INCEPTION ON NOVEMBER 25, 1983, THE FUND HAS GENERATED AN
AVERAGE ANNUAL RETURN OF 15.36%, WELL AHEAD OF THE 7.69% PRODUCED BY THE RUSSELL
2000 GROWTH."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 105 67
MEDIAN P/E RATIO 26.4 31.8
MEDIAN MARKET $1.16 $760
CAPITALIZATION BILLION MILLION
PORTFOLIO TURNOVER 147% 118%
EXPENSE RATIO 1.00% 1.00%
Investment terms are defined in the Glossary on page 20.
6 1-800-345-2021
Giftrust--Q&A
- --------------------------------------------------------------------------------
(Continued)
is also made up of far more companies than Giftrust. Because of these factors,
the Russell 2000 Growth is less volatile than the Giftrust portfolio.
Finally, our stock selection was not as good as we would have liked.
Returns were hampered by several large positions that suffered earnings
disappointments and fell sharply. Two examples are Applied Graphics, which
provides computerized formatting for the publishing industry, and Kos
Pharmaceuticals, a biotech company that developed a cholesterol-lowering drug.
Kos's new drug, Niaspan, failed to take off as strongly as anticipated, and
Applied Graphics stumbled when management's attention was diverted from its core
operations to focus on integrating an acquisition. Another holding, Concentra
Managed Care, which was building share in the workmen's compensation market by
acquiring physicians' groups, had trouble finalizing acquisitions of some of its
targeted clinics. Finally, NBTY, a manufacturer and marketer of nutritional
supplements, ran into increased competition. The lack of liquidity (or
tradability) of small stocks compounded the problem. When these stocks sold off,
they tended to do so very rapidly because buyers pulled back. Prices often
didn't stabilize until much lower levels were reached.
BEFORE WE DISCUSS THE PORTFOLIO IN MORE DETAIL, WHAT ARE YOU DOING DIFFERENTLY
TO IMPROVE PERFORMANCE?
We've made a number of changes that we believe will help. One step we've
taken is to increase the size of Giftrust's investment team. We've added
analysts and another portfolio manager. We also work more closely with other
American Century investment teams and exchange ideas. This creates greater
synergy throughout our investment group. We've also diversified the portfolio
with more holdings across a wider variety of sectors and industries.
Giftrust's core investment strategy hasn't changed. The foundation of our
investment process remains accelerating revenues and earnings.
However, we are also paying more attention to the quality of revenue and
earnings growth. We prefer companies that are generating solid internal
growth--instead of those growing through acquisitions--and that have a
significant share of their market. Growth via acquisitions was a problem with
Applied Graphics. The merged company had a good stable of customers, GM and
Disney to name two. But its management team stretched itself too thinly in
trying to bring on a large acquisition.
FROM A BROADER PERSPECTIVE, WHICH AREAS HURT PERFORMANCE AND WHICH HELPED?
On the minus side, energy, business services, and healthcare were weak.
Trico Energy Services, an oil service company that does business in the Gulf of
Mexico, was hit by falling energy prices, a result of the Asian crisis. When
prices fell, oil drillers cut back activity, which, in turn, slowed demand for
Trico's fleet of service vessels. Two stocks mentioned earlier, Applied Graphics
and Contentra, constrained results in business services and healthcare.
On the plus side, broadcasting, retailers, environmental services, and
pharmaceuticals produced positive returns. In the broadcast area, we took
profits in Clear Channel Communications, Jacor Communications, and Heftel
Broadcasting. These companies have portfolios of radio and/or television
stations in growing markets.
Our most successful retailer was Family Dollar Stores, a value-added
discount chain. Allied Waste Industries,
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
NOVA CORP. 2.8% --
VITESSE
SEMICONDUCTOR CORP. 2.5% 2.8%
FAMILY DOLLAR
STORES, INC. 2.4% 2.5%
EXPRESS SCRIPTS,
INC. CL A 2.4% 1.2%
CSG SYSTEMS
INTERNATIONAL, INC. 2.2% 1.0%
PATHOGENESIS CORP. 2.0% 1.5%
UNIPHASE CORP. 1.8% 2.1%
NCO GROUP, INC. 1.8% --
TEKELEC 1.7% 2.7%
ADAC LABORATORIES 1.7% --
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
BUSINESS SERVICES
& SUPPLIES 16.6% 9.1%
COMPUTER SOFTWARE
& SERVICES 9.0% 12.6%
ELECTRICAL & ELECTRONIC
COMPONENTS 7.7% 6.7%
BIOTECHNOLOGY 5.6% 6.0%
COMMUNICATIONS
SERVICES 4.3% 3.7%
www.americancentury.com 7
Giftrust--Q&A
- --------------------------------------------------------------------------------
(Continued)
a well-run garbage and commercial debris collector, was a strong performer in
environmental services. Among our pharmaceutical-related holdings, Express
Scripts, which manages pharmacy benefits programs for employers and insurance
companies, Pharmaceutical Product Development, and R.P. Scherer, a developer of
drug delivery systems, all did well.
WHICH STOCKS WERE THE BEST PERFORMERS?
In addition to Family Dollar Stores, Spine-Tech and Vitesse Semiconductor
produced solid returns. Spine-Tech makes spinal cages--metal columns that are
inserted between vertebrae when a disc is removed. Vitesse produces specialized
computer chips for the industrial, automotive, and telecommunications markets.
It bounced back after declining in the wake of the Asian crisis.
WHAT ARE SOME OF THE CHANGES IN GIFTRUST'S LARGER INDUSTRY AND STOCK HOLDINGS
THIS YEAR?
For the year, we increased business services and reduced software
companies. Business services include stocks in the outsourcing arena. U.S.
businesses continue to look for outside help in solving problems beyond their
core operations, and we don't believe that trend is going to change any time
soon. Outsourcing allows companies to focus on what they do best; it provides
scalability--projects can be expanded or reined in quickly. Resources can be
deployed or reallocated more efficiently. Among our largest business services
positions at year-end were Nova Corporation, a credit card processor that
services small and medium businesses, CSG Systems International, which provides
customer service and billing for the cable industry, and NCO Group, a provider
of billing collection services.
In software, we sold CBT Group, which develops interactive education
software, when it experienced a slowdown in earnings. HBO & Co., a provider of
software to hospitals and physicians' groups, was reduced after it announced an
acquisition, which we anticipate will slow its growth rate.
Earlier in the year, PathoGenesis, a biotech company with a very promising
drug to treat cystic fibrosis, was added to the top 10 holdings. ADAC
Laboratories, a rapidly growing developer of imaging and healthcare information
systems, joined the top 10 during the final six months.
WHAT IS YOUR OUTLOOK HEADING INTO FISCAL 1999?
Until October, small stocks had taken a drubbing. Many small and midsize
companies were selling at valuations not seen in more than a decade. We think
this sector will bounce back, and we are continuing to build positions in
companies with revenue and earnings acceleration we believe are sustainable.
Such companies should fare well when smaller stocks return to favor.
In closing, we would like to reiterate that Giftrust's performance has been
a serious and ongoing topic of concern at American Century. We recognize that
many children's educations are riding on how Giftrust performs, and we are
dedicated to generating the competitive returns necessary to help make that
possible.
[left margin]
"WE THINK THIS SECTOR (SMALL-CAP STOCKS) WILL BOUNCE BACK, AND WE ARE CONTINUING
TO BUILD POSITIONS IN COMPANIES WITH REVENUE AND EARNINGS ACCELERATION WE
BELIEVE ARE SUSTAINABLE."
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Temporary Cash Investments 9%
Common Stocks 91.0%
AS OF APRIL 30, 1998
Temporary Cash Investments 2%
Common Stocks 98.0%
8 1-800-345-2021
Giftrust--Schedule of Investments
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OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS-91.0%
AEROSPACE & DEFENSE--3.8%
27,000 Alliant Techsystems Inc.(1) $ 1,890
426,000 BE Aerospace, Inc.(1) 9,186
63,800 General Dynamics Corp. 3,776
27,900 Litton Industries, Inc.(1) 1,820
74,400 Newport News Shipbuilding Inc. 1,958
250,000 Orbital Sciences Corp.(1) 8,250
32,600 Raytheon Co. Cl B 1,893
---------------
28,773
---------------
BANKING--3.2%
90,000 Centura Banks, Inc. 6,210
180,000 First Tennessee National Corp. 5,709
110,000 Marshall & Ilsley Corp. 5,359
150,000 Mercantile Bancorporation Inc. 6,853
---------------
24,131
---------------
BIOTECHNOLOGY--5.6%
144,000 Centocor, Inc.(1) 6,403
300,000 IDEC Pharmaceuticals Corp.(1) 8,981
360,000 IDEXX Laboratories, Inc.(1) 8,224
379,000 PathoGenesis Corp.(1) 15,207
150,000 Sangstat Medical Corp.(1) 3,136
---------------
41,951
---------------
BUILDING & HOME IMPROVEMENTS--1.3%
560,000 Shaw Industries, Inc. 9,730
---------------
BUSINESS SERVICES & SUPPLIES--16.6%
135,000 ABR Information Services, Inc.(1) 2,540
245,000 Acxiom Corp.(1) 6,171
450,000 Billing Information Concepts Corp.(1) 6,328
140,000 Boron, LePore & Associates, Inc.(1) 3,789
390,000 CKS Group, Inc.(1) 7,386
305,000 CSG Systems International, Inc.(1) 16,641
210,000 Fiserv, Inc.(1) 9,778
320,600 HA-LO Industries, Inc.(1) 9,057
144,000 International Telecommunication
Data Systems, Inc.(1) 3,442
417,000 NCO Group, Inc.(1) 13,240
719,365 Nova Corp.(1) 20,772
256,500 PAREXEL International Corp.(1)(2) 5,667
362,900 Pharmaceutical Product
Development, Inc.(1) 9,844
260,000 Snyder Communications, Inc.(1) 9,279
---------------
123,934
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
CHEMICALS & RESINS--0.9%
405,000 Catalytica, Inc.(1) $ 6,556
---------------
COMMUNICATIONS EQUIPMENT--3.6%
400,600 ANTEC Corp.(1) 6,622
275,000 Polycom, Inc.(1) 3,592
90,000 Superior TeleCom Inc. 3,870
724,300 Tekelec(1) 12,969
---------------
27,053
---------------
COMMUNICATIONS SERVICES--4.3%
210,000 American Tower Corp. Cl A(1) 4,594
478,500 Crown Castle International Corp.(1) 6,146
155,700 Gemstar International Group Ltd.(1) 8,524
330,000 IDT Corp.(1) 5,496
120,000 Pacific Gateway Exchange, Inc.(1) 3,480
110,000 PanAmSat Corp.(1) 4,170
---------------
32,410
---------------
COMPUTER PERIPHERALS--0.6%
290,000 Xylan Corp.(1) 4,658
---------------
COMPUTER SOFTWARE & SERVICES--9.0%
65,000 American Management
System, Inc.(1) 2,003
360,000 BEA Systems, Inc.(1) 7,054
90,900 CIBER, Inc.(1) 1,784
105,100 Concord Communications, Inc.(1) 3,889
260,000 HBO & Co. 6,817
500,000 Health Management
Systems, Inc.(1) 3,391
120,000 Keane, Inc.(1) 3,990
45,000 Legato Systems, Inc.(1) 1,758
50,000 Mercury Interactive Corp.(1) 2,072
43,000 Peregrine Systems, Inc.(1) 1,505
450,000 Rational Software Corp.(1) 9,942
96,800 Sapient Corp.(1) 4,362
375,600 Sterling Software, Inc.(1) 9,836
50,000 Veritas Software Corp.(1) 2,503
145,000 Wind River Systems, Inc.(1) 6,394
---------------
67,300
---------------
CONSUMER PRODUCTS--1.8%
1,037,200 NBTY, Inc.(1) 8,265
250,400 Twinlab Corp.(1) 5,556
---------------
13,821
---------------
EDUCATION--1.5%
352,500 Sylvan Learning Systems, Inc.(1) 10,883
---------------
See Notes to Financial Statements
www.americancentury.com
9
Giftrust--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
ELECTRICAL & ELECTRONIC COMPONENTS--7.7%
250,000 Electronics for Imaging, Inc.(1) $ 6,023
83,000 Flextronics International Ltd. ADR(1) 4,313
210,000 Microchip Technology Inc.(1) 5,696
90,000 PMC-Sierra, Inc.(1) 4,044
100,000 Power Integrations, Inc.(1) 1,597
23,000 Qlogic Corp.(1) 2,115
45,900 Sanmina Corp.(1) 1,888
270,200 Uniphase Corp.(1) 13,358
572,000 Vitesse Semiconductor Corp.(1) 18,483
---------------
57,517
---------------
ENVIRONMENTAL SERVICES--1.2%
405,000 Allied Waste Industries, Inc.(1) 8,720
---------------
FINANCIAL SERVICES--0.9%
285,600 Heller Financial, Inc. 6,854
---------------
FOOD & BEVERAGE--3.6%
550,000 Aurora Foods Inc.(1) 9,625
161,600 Suiza Foods Corp.(1) 5,272
245,000 U.S. Foodservice, Inc.(1) 11,638
---------------
26,535
---------------
HEALTHCARE--1.1%
330,000 Health Management
Associates, Inc.(1) 5,878
42,000 Universal Health
Services, Inc. Cl B(1) 2,155
---------------
8,033
---------------
INSURANCE--4.3%
170,000 Everest Reinsurance Holdings, Inc. 5,854
180,000 Express Scripts, Inc. Cl A(1) 17,612
172,400 Fremont General Corp. 8,512
---------------
31,978
---------------
LEISURE--2.1%
110,000 Harley-Davidson, Inc. 4,263
85,000 Imax Corporation(1) 2,183
340,000 King World Productions, Inc.(1) 8,925
---------------
15,371
---------------
MACHINERY & EQUIPMENT--1.9%
160,000 Pall Corp. 4,040
310,000 Premark International, Inc. 9,823
---------------
13,863
---------------
Shares ($ in Thousands) Value
- -------------------------------------------------------------------------------
MEDICAL EQUIPMENT & SUPPLIES--3.9%
425,000 ADAC Laboratories(1) $ 12,538
75,200 ResMed Inc.(1) 3,845
190,000 Safeskin Corp.(1) 4,216
226,500 Schein (Henry), Inc.(1) 8,763
---------------
29,362
---------------
OFFICE EQUIPMENT & SUPPLIES--0.2%
95,000 Daisytek International Corp.(1) 1,425
---------------
PHARMACEUTICALS--0.6%
235,000 IVAX Corp.(1) 2,233
40,800 Medicis Pharmaceutical
Corp. Cl A(1) 2,045
---------------
4,278
---------------
PRINTING & PUBLISHING--0.9%
145,000 Consolidated Graphics, Inc.(1) 6,878
---------------
RESTAURANTS--1.2%
260,000 CKE Restaurants, Inc. 6,841
50,000 Papa John's International, Inc.(1) 1,898
---------------
8,739
---------------
RETAIL (GENERAL MERCHANDISE)--3.3%
45,000 99 Cents Only Stores(1) 2,081
160,000 Bed Bath & Beyond Inc.(1) 4,405
995,000 Family Dollar Stores, Inc. 18,034
---------------
24,520
---------------
RETAIL (SPECIALTY)--2.7%
330,000 Action Performance Cos. Inc.(1) 9,735
178,600 Guitar Center, Inc.(1) 3,059
180,000 O'Reilly Automotive, Inc.(1) 7,054
---------------
19,848
---------------
TEXTILES & APPAREL--0.9%
460,000 Fruit of the Loom, Inc.(1) 7,015
---------------
TRANSPORTATION--1.8%
265,000 Atlas Air, Inc.(1) 9,143
210,000 Avis Rent A Car, Inc.(1) 4,279
---------------
13,422
---------------
UTILITIES--0.5%
169,100 Conectiv, Inc. 3,868
---------------
TOTAL COMMON STOCKS 679,426
---------------
(Cost $668,071)
See Notes to Financial Statements
10 1-800-345-2021
Giftrust--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS-9.0%
Repurchase Agreement, BA Security Services
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.42%, dated 10/30/98,
due 11/2/98 (Delivery value $37,617) $ 37,600
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 5.35%, dated 10/30/98,
due 11/2/98 (Delivery value $29,813) 29,800
---------------
TOTAL TEMPORARY CASH INVESTMENTS 67,400
---------------
(Cost $67,400)
TOTAL INVESTMENT SECURITIES--100.0% $746,826
===============
(Cost $735,471)
FUTURES CONTRACTS
($ in Thousands)
Underlying
Expiration Face Amount Unrealized
Purchased Date at Value Gain
- -------------------------------------------------------------------------------
65 S&P 500 December
Futures 1998 $17,960 $1,673
========================================
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
(1) Non-income producing.
(2) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment Company Act of 1940. (See Note 4 in Notes to Financial Statements for
a summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1998.)
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule shows you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the number of shares of each stock
* the market value of each investment
* the percentage of total investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
ASSETS
(In Thousands Except Per-Share Amounts)
Investment securities, at value
(identified cost of $728,491) (Note 3) ........................ $ 741,159
Investment securities -- affiliated, at value
(identified cost of $6,980) (Note 3 and Note 4) ............... 5,667
Cash ............................................................ 879
Receivable for investments sold ................................. 24,963
Receivable for variation margin on futures contracts ............ 141
Dividends and interest receivable ............................... 167
---------
772,976
---------
LIABILITIES
Disbursements in excess of demand deposit cash .................. 1,221
Payable for investments purchased ............................... 13,749
Payable for capital shares redeemed ............................. 5
Accrued management fees (Note 2) ................................ 597
---------
15,572
---------
Net Assets ...................................................... $ 757,404
=========
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ...................................................... 200,000
=========
Outstanding ..................................................... 44,961
=========
Net Asset Value Per Share ....................................... $ 16.85
=========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ......................... $ 893,077
Accumulated net realized loss on investment transactions ........ (148,701)
Net unrealized appreciation on investments (Note 3) ............. 13,028
---------
$ 757,404
=========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the Fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
12 1-800-345-2021
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
INVESTMENT LOSS (In Thousands)
Income:
Interest ....................................................... $ 2,824
Dividends ...................................................... 1,641
---------
4,465
---------
Expenses (Note 2):
Management fees ................................................ 9,585
Directors' fees and expenses ................................... 9
---------
9,594
---------
Net investment loss ............................................ (5,129)
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3)
Net realized loss on investments (includes $(16,720)
from affiliates) ............................................. (147,006)
Change in net unrealized appreciation on investments ........... (188,500)
---------
Net realized and unrealized loss on investments ................ (335,506)
---------
Net Decrease in Net Assets Resulting from Operations ........... $(340,635)
=========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments (dividend and interest)
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 13
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
Increase (Decrease) in Net Assets 1998 1997
OPERATIONS (In Thousands)
<S> <C> <C>
Net investment loss ................................................$ (5,129) $ (6,690)
Net realized gain (loss) on investments ............................ (147,006) 30,092
Change in net unrealized appreciation on investments ............... (188,500) 4,921
----------- -----------
Net increase (decrease) in net assets resulting from operations .... (340,635) 28,323
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains on investment transactions ................. (29,001) (27,032)
In excess of net realized gains on investment transactions ......... (1,705) --
----------- -----------
Decrease in net assets from distributions .......................... (30,706) (27,032)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .......................................... 91,178 144,894
Proceeds from reinvestment of distributions ........................ 30,700 27,026
Payments for shares redeemed ....................................... (16,773) (15,321)
----------- -----------
Net increase in net assets from capital share transactions ......... 105,105 156,599
----------- -----------
Net increase (decrease) in net assets .............................. (266,236) 157,890
NET ASSETS
Beginning of year .................................................. 1,023,640 865,750
----------- -----------
End of year ........................................................$ 757,404 $ 1,023,640
=========== ===========
TRANSACTIONS IN SHARES OF THE FUND
Sold ............................................................... 4,100 6,139
Issued in reinvestment of distributions ............................ 1,395 1,126
Redeemed ........................................................... (740) (631)
----------- -----------
Net increase ....................................................... 4,755 6,634
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations-a summary of the Statement of Operations from the previous page for
the most recent period
* distributions-income and gains distributed to shareholders
* share transactions-shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
14 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century -- Twentieth Century Giftrust
(the Fund) is one of the twelve series of funds issued by the Corporation. The
Fund's investment objective is to seek capital growth by investing primarily in
common stocks. The following significant accounting policies are in accordance
with generally accepted accounting principles.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any)
is recorded as of the ex-dividend date. Interest income is recorded on the
accrual basis and includes accretion of discounts and amortization of premiums.
FUTURES CONTRACTS -- The Fund may enter into stock index futures contracts
in order to manage the Fund's exposure to changes in market conditions. One of
the risks of entering into futures contracts includes the possibility that the
change in value of the contract may not correlate with the changes in value of
the underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as unrealized gains and losses. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively.
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
At October 31, 1998, accumulated net realized capital loss carryovers of
$141,675,075 (expiring 2006) may be used to offset future taxable gains.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
certain income items and net gains and losses for financial statement and tax
purposes and may result in reclassification among certain capital accounts.
ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the
Corporation's distributor. Certain officers of FDI are also officers of the
Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee. The Agreement provides that all expenses
of the Fund, except brokerage commissions, taxes, interest, expenses of those
directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's average daily closing net assets during the previous month. The
annual management fee for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, were $1,365,866,114 and $1,319,651,339, respectively.
As of October 31, 1998, accumulated net unrealized appreciation on
investments was $7,674,464, based on the aggregate cost of investments for
federal income tax purposes of $757,111,347, which consisted of unrealized
appreciation of $75,011,435 and unrealized depreciation of $67,336,971.
- --------------------------------------------------------------------------------
4. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1998, follows:
<TABLE>
SHARE BALANCE PURCHASE SALES REALIZED OCTOBER 31, 1998
ISSUER(1) 10/31/97 COST COST GAIN (LOSS) SHARE BALANCE MARKET VALUE
($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
DONCASTERS plc ADR 498,900 -- $ 9,523 $ (1,393) -- --
PAREXEL International Corp. 440,000 $ 6,980 9,355 6,142 256,500 $5,667
P-COM, Inc. 1,300,000 -- 16,965 6,737 -- --
Spine-Tech, Inc. 510,000 -- 17,908 8,487 -- --
Teledata Communications 612,000 -- 13,412 (3,948) -- --
Trico Marine Services, Inc. 890,000 -- 20,422 1,224 -- --
Applied Graphics Technologies, Inc. 450,000 24,567 44,209 (33,969) -- --
--------- ---------- ----------- ------------
$31,547 $131,794 $(16,720) $5,667
========= ========== =========== ============
</TABLE>
(1) None of the securities produced income during the period.
16 1-800-345-2021
Giftrust--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .......... $ 25.46 $ 25.79 $ 25.63 $ 20.50 $ 19.23
--------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Loss ....................... (0.12)(1) (0.18)(1) (0.20)(1) (0.16)(1) (0.10)
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ................ (7.74) 0.63 2.46 6.37 3.28
--------- --------- --------- --------- ---------
Total From Investment Operations .......... (7.86) 0.45 2.26 6.21 3.18
--------- --------- --------- --------- ---------
Distributions
From Net Realized Gains
on Investment Transactions ................ (0.75) (0.78) (2.10) (1.08) (1.91)
In Excess of Net Realized Gains ........... --(2) -- -- -- --
--------- --------- --------- --------- ---------
Total Distributions ....................... (0.75) (0.78) (2.10) (1.08) (1.91)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year ................ $ 16.85 $ 25.46 $ 25.79 $ 25.63 $ 20.50
--------- --------- --------- --------- ---------
Total Return(3) ............................. (31.55)% 1.95% 9.72% 32.52% 18.75%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 1.00% 1.00% 0.98% 0.98% 1.00%
Ratio of Net Investment Loss
to Average Net Assets ..................... (0.54)% (0.74)% (0.80)% (0.70)% (0.70)%
Portfolio Turnover Rate ..................... 147% 118% 121% 105% 115%
Net Assets, End of Year (in millions) ....... $ 757 $ 1,024 $ 866 $ 561 $ 266
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Distributions in excess of net realized gains were less than $0.005
per share.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years.
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
www.americancentury.com 17
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century -- Twentieth Century
Giftrust Fund (the "Fund"), one of the funds comprising American Century Mutual
Funds, Inc., as of October 31, 1998, and the related statement of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century --
Twentieth Century Giftrust Fund as of October 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
18 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the
stocks of growing companies, both domestically and internationally. The
philosophy behind these growth funds focuses on three important principles.
First, the funds seek to invest in successful companies, which we define as
those with growing earnings and revenues. Second, we attempt to keep the funds
fully invested, regardless of short-term market activity. Experience has shown
that market gains can occur in unpredictable spurts and that missing those
opportunities can significantly limit the potential for gain. Third, the funds
are managed by teams, rather than by one "star." We believe this allows us to
make better, more consistent management decisions.
In addition to these principles, each fund has its own policies.
TWENTIETH CENTURY GIFTRUST generally invests in the securities of small
companies that exhibit accelerating growth. Shares of Giftrust can be given only
as a gift to someone other than yourself or spouse, and all investments must
remain in the fund for a minimum of 10 years or until the recipient reaches the
age of majority, whichever is later. Historically, small-cap stocks have been
more volatile than the stocks of larger, more-established companies. Therefore,
the fund is subject to significant price volatility but offers high long-term
growth potential.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
THE S&P 500 is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
dominant industries. Created by Standard & Poor's Corporation, it is considered
to be a broad measure of U.S. stock market performance.
THE S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
THE RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest publicly
traded U.S. companies, based on total market capitalization. The Russell 2000
represents approximately 10% of the total market capitalization of the top 3,000
companies. The index is further broken down into two mutually exclusive value
and growth indices. The RUSSELL 2000 GROWTH INDEX, used in this report, measures
the performance of those Russell 2000 companies with higher price-to-book ratios
and higher forecasted growth rates.
[right margin]
PORTFOLIO MANAGERS
GIFTRUST
CHRIS BOYD, CFA
JOHN SEITZER, CFA
www.americancentury.com 19
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 17.
INVESTMENT TERMS
* EXPENSE RATIO -- the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
* MEDIAN MARKET CAPITALIZATION -- Market capitalization (market cap) is the
total value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
* NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
* PORTFOLIO TURNOVER -- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
* PRICE/BOOK RATIO -- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
* PRICE/EARNINGS (P/E) RATIO -- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
TYPES OF STOCKS
* BLUE-CHIP STOCKS -- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS -- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
* GROWTH STOCKS -- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples companies.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS --generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P 400.
* SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
* VALUE STOCKS -- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
20 1-800-345-2021
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE: 1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
FUNDS DISTRIBUTOR, INC.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 Funds Distributor, Inc.
SH-BKT-14474 (c)1998 American Century Services Corporation
<PAGE>
[front cover] OCTOBER 31, 1998
ANNUAL REPORT
- ----------------
AMERICAN CENTURY
[graphic of glasses]
AMERICAN CENTURY GROUP
- ------------------------------------
BALANCED
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
* FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
* Buy individual stocks and bonds
* 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
* Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund analysis
* Track your brokerage account on one easy-to-read statement
* Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card
with an American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles follow a
standard SEC format and allow investors to compare funds easily. You can request
a profile or the full prospectus. Full prospectuses contain more detailed fund
information and you will continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight important
information about our funds, including fees and expenses. More technical data
will be in the Statement of Additional Information.
[left margin]
AMERICAN CENTURY GROUP
BALANCED
(TWBIX)
- ----------------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The fiscal year ended October 31, 1998, exhibited sharp contrasts. Several
major U.S. stock indices soared to record highs in the spring and early summer,
lifted by a healthy economy, low inflation, and widespread market optimism.
Then, abruptly, stocks tumbled and U.S. government bonds rallied in August and
September as the outlook for the U.S. economy and for corporate earnings turned
pessimistic. The 30-year Treasury bond yield hit a record low as bond prices
jumped. Then, just as suddenly, stocks rebounded in October after the Federal
Reserve cut short-term interest rates to bolster global financial markets and
stimulate economic growth.
This unstable environment demonstrated how a diversified portfolio with
both stocks and bonds can help reduce performance volatility. Balanced's bond
portfolio bolstered the fund in the third quarter when stocks sank, and the bond
portfolio's income also provided a longer-term stabilizing factor. The fiscal
year clearly showed how allocating assets among stocks, bonds, and money market
funds can help your portfolio weather dramatic changes in the economic or
investment environment.
In the third quarter, we sent Balanced investors a letter describing
changes to the equity portfolio's management style. The investment objective of
the fund --growth and income--has not changed, just the way it is achieved.
After considering Balanced's mission and comparing its performance to other
balanced funds, the board of directors of Balanced decided to change the
management style of the equity portfolio to a less volatile quantitative style.
Historically, the equity holdings, which comprise about 60% of the fund's
assets, were managed according to our growth investment strategy, which involves
investing in companies with earnings and revenues that are growing at an
accelerating pace. Over time, it became clear that the growth investment
strategy created more share price volatility than is preferred by most balanced
fund investors. To bring Balanced more in line with investor expectations, we
began managing it in our quantitative style on November 1, after the fund's
fiscal year-end and the close of its 1998 tax year. Our investment team provides
more details on the quantitative style and the new equity managers in the
Management Q&A beginning on page 6.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
Balanced
Performance Information ................................................ 5
Management Q & A ....................................................... 6
Types of Investments ................................................ 7
Top Ten Stock Holdings .............................................. 8
Top Five Stock
Industries .......................................................... 8
Fixed-Income
Portfolio ........................................................... 9
Schedule of Investments ................................................ 10
Financial Statements
Statement of Assets and
Liabilities ............................................................ 14
Statement of Operations ................................................ 15
Statements of Changes
in Net Assets .......................................................... 16
Notes to Financial
Statements ............................................................. 17
Financial Highlights ................................................... 20
Independent Auditors'
Report ................................................................. 22
Other Information
Share Class and Retirement
Account Information .................................................... 23
Background Information ................................................. 24
Investment Philosophy and
Policies ............................................................ 24
Comparative Indices ................................................. 24
Investment Team
Leaders ............................................................. 24
Glossary ............................................................... 25
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* Stocks of large, growing U.S. companies and U.S. Treasury bonds were among
the top-performing investments for the year ended October 31. Large-company
(large-cap) stocks overcame market turbulence in the third quarter of 1998
to post above-average returns.
* Large-cap stocks outperformed mid-cap and small-cap stocks. Investors
displayed a preference for larger companies.
* U.S. stocks reached all-time highs in July because of a strong domestic
economic environment, then plunged for six weeks due to deteriorating global
economic and financial conditions. Difficulties in foreign economies and
markets threatened corporate profits.
* U.S. bonds benefited from low inflation, weakening economic conditions, and
falling interest rates. Treasury bonds in particular benefited from a
"flight to quality"--strong demand from investors seeking a safe haven from
global market turmoil. The 30-year Treasury bond yield fell to an all-time
low in October as Treasury bond prices soared.
* Other types of bonds, such as corporate bonds and mortgage-backed
securities, lagged Treasurys because of lower demand. Corporates were also
affected by the weakening profit outlook, and mortgage-backed performance
was dampened by mortgage refinancings.
FUND PERFORMANCE
* Balanced's performance reflected the blended returns of its two portfolios.
Stocks, representing about 60% of the fund, returned 10.73%, while bonds,
representing about 40% of the fund, returned 8.14%.
* The performance of the stock portfolio can be attributed to mixed returns
from large-cap stocks, which performed well, and mid-cap stocks, which
lagged. The best-performing sector was pharmaceuticals. The worst-performing
sector was energy services.
* The bond returns reflected primarily the performance of corporate and other
non-Treasury securities, which represented the majority of Balanced's
fixed-income holdings.
FUND STRATEGY
* We changed the management style of the equity portfolio and made an
adjustment to the investment target for the fixed-income portfolio.
Balanced's investment objective has not changed, just the manner in which
it's achieved.
* Beginning November 1, we changed from a growth equity style that focused on
accelerating earnings to a quantitative style that incorporates relative
value as well as growth factors. One of the benefits anticipated from this
change is a reduction in the relative volatility of the fund's share price
versus the benchmark.
* An experienced quantitative equity management team that manages several
other American Century funds is implementing the new equity management
approach.
* In the bond portfolio, we'll continue to use an index-based approach managed
by the existing fixed-income team. We're just switching the benchmark index
from the Lehman Intermediate Government/Corporate Index to the Lehman
Aggregate Bond Index, which we believe better represents the broader U.S.
taxable bond market.
[left margin]
"BALANCED'S PERFORMANCE REFLECTED THE BLENDED RETURNS OF ITS TWO PORTFOLIOS."
BALANCED(1)
(TWBIX)
TOTAL RETURNS: AS OF 10/31/98
6 Months 0.37%(2)
1 Year 10.46%
NET ASSETS: $938.1 million
30-DAY SEC YIELD: 2.08%
INCEPTION DATE: 10/20/88
(1) Investor Class.
(2) Not annualized.
See Total Returns on page 5.
Investment terms are defined in the Glossary on page 25.
2 1-800-345-2021
Market Perspective from Mark Mallon
- --------------------------------------------------------------------------------
/photo of Mark Mallon/
Mark Mallon, head of conservative equity, specialty, and asset allocation funds
at American Century
STOCKS TURN VOLATILE
The year ended October 31, 1998, saw U.S. stocks reach an all-time high,
then enter one of the most volatile periods since the end of World War II. As
deteriorating global economic and financial conditions turned market psychology
negative, stock prices dropped sharply, and wide intra-day swings became common.
For example, the S&P 500 (representing the largest and most influential U.S.
companies) fell almost 20% between July 17 and August 31. Then, just as
suddenly, the market rebounded. From August 31 to October 31, the S&P 500 gained
over 15%.
The sharp drop and increased volatility were not a complete surprise. Major
market declines are a normal part of the investment process, but they have been
notably absent in the 1990s. In prior decades, moderate downturns of 10%
happened about once a year, and more severe corrections of up to 15% occurred
about once every two years. A market decline in the 20% range occurred about
every three to four years. We haven't seen downturns this frequently in the
1990s.
KEEPING IT IN PERSPECTIVE
The stock market decline and rebound also provided a tangible lesson about
long-term investing and staying the course. Those who panicked and sold their
stock holdings in August or early September missed the opportunity to recoup
much of their losses. Many investors, particularly those who held large company
(large-cap) stocks or large-cap mutual funds, were rewarded for their patience.
In spite of the correction in July and August, the S&P 500 still returned nearly
22% for the year ended October 31, about double its historical average.
The above-average return for the S&P 500 continued a nearly decade-long
trend. Even with the recession in 1990-91 and the recent stock market decline,
returns for large-company stocks have been unusually robust since 1990. In 1998,
the strong performance of a handful of blue-chip companies, which make up the
bulk of large-company indices such as the Dow Jones Industrial Average and the
S&P 500, masked the price deterioration of smaller stocks. The vast majority of
the 9,000 stocks traded in the U.S. began to correct well before the decline in
the major market indices began.
TREASURY BONDS BENEFITED
The catalyst for the building stock market correction was a series of
financial crises around the world. Financial and economic problems that first
surfaced in Asia in late 1997 mushroomed in 1998. By mid-1998, the contagion had
spread
[right margin]
"IN SPITE OF THE CORRECTION IN JULY AND AUGUST, THE S&P 500 STILL RETURNED
NEARLY 22% FOR THE YEAR ENDED OCTOBER 31, ABOUT DOUBLE ITS HISTORICAL AVERAGE."
MARKET RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 21.96%
BLENDED INDEX 16.85%
LEHMAN INTERMEDIATE
GOVT./CORP. INDEX 9.12%
Source: Lipper Analytical Services, Inc.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED OCTOBER 31, 1998
Value on 10/31/98
Lehman Int
S&P 500 Blended Index Govt/Corp
10/31/97 $1.00 $1.00 $1.00
11/30/97 $1.05 $1.03 $1.00
12/31/97 $1.06 $1.04 $1.01
1/31/98 $1.08 $1.05 $1.02
2/28/98 $1.15 $1.10 $1.02
3/31/98 $1.21 $1.14 $1.03
4/30/98 $1.23 $1.14 $1.03
5/31/98 $1.20 $1.14 $1.04
6/30/98 $1.25 $1.17 $1.05
7/31/98 $1.24 $1.16 $1.05
8/31/98 $1.06 $1.07 $1.07
9/30/98 $1.13 $1.12 $1.09
10/31/98 $1.22 $1.17 $1.09
Source: Lipper Analytical Services, Inc.
These indices are defined on page 24.
www.americancentury.com 3
Market Perspective
- --------------------------------------------------------------------------------
(Continued)
to Russia, which defaulted on its government debt and devalued its currency, as
well as to Latin America, where Brazil tried to fend off its own currency
devaluation.
By August, it was clear that the world's economic engine was downshifting.
Plummeting global stock and bond prices created greater demand for the safety
and liquidity of U.S. Treasury bonds.
This "flight to quality" sent U.S. Treasury yields down to levels not seen
in nearly three decades--for example, the 30-year Treasury bond yield dipped to
an all-time low of 4.71% in early October. For the one-year period, long-term
Treasury yields fell 100-120 basis points (a basis point equals 0.01%), while
short- and intermediate-term yields dropped 130-150 basis points (see the yield
curve graph at left).
The Treasury market also saw a surge in demand from international bond
traders and hedge funds who were buying Treasurys to unwind short positions.
Many traders and hedge funds "shorted" Treasury securities--by borrowing
Treasurys and selling them--and used the proceeds to buy emerging-market bonds
and other types of debt, which they expected to outperform Treasurys. When the
opposite happened, these investors were forced to sell the debt and buy back
Treasurys to cut their losses. This further supported the rise in Treasury
prices and the decline in yields.
OTHER BONDS LAGGED TREASURYS
Supply and demand was a different story in the corporate and
mortgage-backed bond markets. Investors were fleeing bonds with any type of
risk. Concerns about global economic problems and falling equity markets
convinced investors to avoid corporate bonds. The lack of demand for corporate
bonds was so pronounced that liquidity dried up in the third quarter. On some
days, investors looking to sell corporate bonds were unable to get even a single
bid from potential buyers.
In the mortgage-backed securities market, the sharp decline in interest
rates produced a negative byproduct--many homeowners took the opportunity to
refinance their mortgages. Investors that owned these mortgages received the
cash and had to reinvest it in a lower interest rate environment.
The reduced demand for non-Treasury securities was reflected in their
returns, shown in the table to the left. The one-year returns for corporates and
mortgage-backeds lagged Treasurys by more than 350 basis points.
[left margin]
"THIS 'FLIGHT TO QUALITY' SENT U.S. TREASURY YIELDS DOWN TO LEVELS NOT SEEN IN
NEARLY THREE DECADES."
[line chart - data below]
FALLING U.S. TREASURY YIELD CURVE
Years to Maturity 10/31/97 10/31/98
1 5.340% 4.170%
2 5.600% 4.110%
3 5.681% 4.350%
4 5.740% 4.380%
5 5.710% 4.220%
6 5.775% 4.365%
7 5.840% 4.510%
8 5.837% 4.540%
9 5.833% 4.570%
10 5.830% 4.600%
11 5.867% 4.673%
12 5.904% 4.746%
13 5.941% 4.819%
14 5.978% 4.892%
15 6.015% 4.965%
16 6.052% 5.038%
17 6.089% 5.111%
18 6.126% 5.184%
19 6.163% 5.257%
20 6.200% 5.330%
21 6.195% 5.312%
22 6.190% 5.294%
23 6.185% 5.276%
24 6.180% 5.258%
25 6.175% 5.240%
26 6.170% 5.222%
27 6.165% 5.204%
28 6.160% 5.186%
29 6.155% 5.168%
30 6.150% 5.150%
Source: Bloomberg Financial Markets
BOND INDEX RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
LEHMAN TREASURY BOND INDEX 11.57%
LEHMAN CORPORATE BOND INDEX 7.99%
LEHMAN MORTGAGE-BACKED
SECURITIES INDEX 7.30%
Source: Bloomberg Financial Markets
4 1-800-345-2021
Balanced--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS (INCEPTION 10/20/88) ADVISOR CLASS (INCEPTION 1/6/97)
BALANCED BLENDED INDEX BALANCED BLENDED INDEX
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) 0.37% 2.09% 0.25% 2.09%
1 YEAR 10.46% 16.85% 10.15% 16.85%
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS 13.60% 18.58% -- --
5 YEARS 11.05% 15.38% -- --
10 YEARS 12.58% 14.08% -- --
LIFE OF FUND 12.44% 14.08%(2) 13.06% 17.42%(3)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) Return from 10/31/88, the date nearest the class's inception for which data
are available.
(3) Return from 1/31/97, the date nearest the class's inception for which data
are available.
See pages 23-25 for information about share classes, the Blended Index, and
returns.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 10/31/98
Balanced $32,705
Blended Index $37,736
Balanced Blended Index
DATE VALUE VALUE
10/31/88 $10,000 $10,000
10/31/89 $12,095 $12,005
10/31/90 $11,840 $11,820
10/31/91 $16,923 $14,844
10/31/92 $17,031 $16,324
10/31/93 $19,356 $18,433
10/31/94 $19,176 $18,717
10/31/95 $22,313 $22,621
10/31/96 $25,445 $26,414
10/31/97 $29,603 $32,294
10/31/98 $32,705 $37,736
$10,000 investment made 10/31/88
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The
Blended Index is provided for comparison in each chart. Balanced's total returns
include operating expenses (such as transaction costs and management fees) that
reduce returns, while the total returns of the index do not. These charts are
based on Investor Class shares only; performance for other classes will vary due
to differences in fee structures (see Total Returns table above). Past
performance does not guarantee future results. Investment return and principal
value will fluctuate, and redemption value may be more or less than original
cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS
(PERIODS ENDED OCTOBER 31)
Balanced Blended Index
DATE RETURN RETURN
10/89 20.94% 20.05%
10/90 -2.11% -1.54%
10/91 42.92% 25.58%
10/92 0.63% 9.97%
10/93 13.64% 12.92%
10/94 -0.93% 1.54%
10/95 16.36% 20.86%
10/96 14.04% 16.77%
10/97 16.34% 22.26%
10/98 10.46% 16.85%
www.americancentury.com 5
Balanced--Q&A
- --------------------------------------------------------------------------------
Based on interviews with Bruce Wimberly and Jeff Houston, portfolio
managers on the Balanced fund investment teams (pictured at left), and Mark
Mallon (pictured on page 3), managing director of conservative equity,
specialty, and asset allocation funds at American Century.
HOW DID THE FUND PERFORM FOR THE YEAR ENDED OCTOBER 31?
In a volatile period that underscored the value of a diversified investment
approach, Balanced's portfolio of approximately 60% U.S. stocks and 40% U.S.
bonds posted a solid 10.46% total return. This return reflected the blended
performance of the fund's two portfolios. Balanced's stock holdings returned
10.73%, while the bonds returned 8.14%.*
Balanced's benchmark (a blended index that combines the S&P 500 and the
Lehman Intermediate Government/ Corporate Index in the same 60/40 proportion as
the asset mix of the portfolio) returned an even more impressive 16.85%. This
reflected the combined 21.96% return of the S&P 500 and the 9.12% return of the
Lehman index.
HOW DO YOU EXPLAIN THE RETURN DIFFERENTIAL BETWEEN THE FUND AND THE BLENDED
INDEX?
It's primarily due to the fact that the total return of Balanced's stock
holdings (10.73%) was about half that of the S&P 500 (21.96%). This happened
because the fund's equity portfolio had a significantly different composition
than the S&P. While the S&P 500 is composed of large, industry-leading companies
(large-cap stocks), Balanced owned a significant percentage of mid-size
(mid-cap) companies. Large-cap stocks outperformed mid-cap stocks. To give you
an idea of how much size influenced returns, the S&P MidCap 400 index returned
just 6.71% for the year ended October 31, while the Russell 2500 Growth index (a
mid-cap index with growth characteristics similar to Balanced's mid-cap
holdings) returned -13.85%.
Not surprisingly, large-cap growth stocks such as General Electric, Pfizer,
MCI WorldCom, Bristol-Myers Squibb, America Online, and Tele-Communications,
Inc. (TCI), were among the fund's top performers for the period. They were also
among Balanced's largest holdings (see the table on page 8).
WHAT WAS THE ATTRACTION OF MID-CAP STOCKS?
In managing growth equity portfolios, our mantra has been, "Money follows
earnings." If you can identify companies whose earnings are growing at an
accelerating rate, regardless of company size, we believe that other investors
will eventually follow. We found mid-size companies that looked like excellent
opportunities based on their behavior and our criteria, but the market didn't
like them as much as we did. Domestic stock investors, many of whom are
relatively new to the equity markets, have displayed a preference for larger
companies. So have foreign investors, who have been looking for a safe haven
after a difficult period in many of the developing markets around the world.
* All fund returns referenced in this interview are for Investor Class shares.
[left margin]
/photo of John Sykora, Jim Sowers III, Bruce Wimberly/
Equity team: John Sykora, Jim Stowers III, Bruce Wimberly
/photo of Bud Hoops, Jeff Houston/
Fixed-income team: Bud Hoops, Jeff Houston
6 1-800-345-2021
Balanced--Q&A
- --------------------------------------------------------------------------------
(Continued)
YOU RECENTLY ANNOUNCED A CHANGE IN THE METHODOLOGY USED TO MANAGE BALANCED'S
EQUITY PORTFOLIO. CAN YOU PROVIDE MORE DETAILS ON HOW THE NEW QUANTITATIVE
EQUITY APPROACH DIFFERS FROM THE OLD ONE?
Our quantitative style relies more on computer-based decision tools, though
the fund managers still remain in control of the process and make all final
decisions. It basically involves a two-step, computer-driven screening process.
First, we rank the 1,500 largest publicly traded companies in the U.S. based on
their growth potential and relative value. Next, we implement a technique called
portfolio optimization, in which we use the rankings from the first step to
build a portfolio that we think will provide the optimal balance between risk
and expected return. The goal is to create a portfolio that provides better
returns than the S&P 500 without taking on significantly more risk than would be
involved in investing in the index directly. Historically, this approach has
provided less price volatility than Balanced's previous growth strategy, and we
think it's more consistent with the expectations of most balanced fund
investors.
IS THERE A NEW INVESTMENT TEAM IMPLEMENTING THIS STRATEGY?
Yes. Since November 1, Balanced's stock portfolio has been managed by
American Century's quantitative equity team, which has been using this approach
to manage American Century funds since 1990. John Schniedwind and Jeff Tyler are
now the lead equity managers on the Balanced team. They have been with American
Century for 15 and 10 years, respectively. With three other experienced managers
and a team of analysts, they use our quantitative methodology to manage American
Century's Income & Growth, Equity Growth, Utilities, and VP Income & Growth
funds.
ARE SIMILAR CHANGES BEING MADE TO THE FIXED-INCOME PORTFOLIO?
We're making one change. We're switching to a benchmark index that we
believe better represents the broader U.S. taxable bond market--the Lehman
Brothers Aggregate Bond Index. One primary difference between the Aggregate
Index and the former benchmark (the Lehman Intermediate Government/Corporate
Index) is that the Aggregate includes mortgage-backed securities, while the
Intermediate Government/Corporate does not. This is important because Balanced
has owned mortgage-backed securities in recent years. Also, the Lehman Aggregate
has a smaller percentage of corporate bonds than we've typically held in
Balanced. We expect to gradually reduce our corporate bond holdings as corporate
bond yields decline.
HOW WILL THESE CHANGES AFFECT BALANCED'S BENCHMARK, THE BLENDED INDEX?
The blended index will continue to be 60% S&P 500, but the 40% bond portion
will be represented by the Lehman Aggregate Bond Index instead of the
Intermediate Government/ Corporate Index. This change will be reflected in
Balanced's April 30, 1999 semiannual report.
[right margin]
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Common Stocks 53%
Corporate Bonds 21%
U.S. Treasury Securities 10%
Mortgage- & Asset-Backed
Securities 9%
Other 7%
AS OF APRIL 30, 1998
Common Stocks 60%
Corporate Bonds 24%
U.S. Treasury Securities 7%
Mortgage- & Asset-Backed
Securities 7%
Other 2%
Security types are defined on page 25.
www.americancentury.com 7
Balanced--Q&A
- --------------------------------------------------------------------------------
(Continued)
RETURNING TO BALANCED'S RECENT PERFORMANCE, WHAT FACTORS BESIDES COMPANY SIZE
AFFECTED THE EQUITY PORTFOLIO'S RETURNS?
On the plus side, the top-performing sector was pharmaceuticals. We found
accelerating growth in well-known names such as Pfizer (maker of Viagra) and
Bristol-Myers Squibb (maker of Excedrin, Bufferin, and Comtrex). Their flow of
new products continues to be strong, pricing remains stable, and sales have been
largely immune to slowing economic growth.
Balanced's top-performing stock was America Online (AOL), the Internet
provider, which gained 230% over the year. Accelerating growth in membership,
usage, and advertising revenues made AOL attractive. The portfolio's second-best
performer was SunAmerica, Inc., which was also the largest equity holding as of
October 31. SunAmerica is an insurance company that also provides retirement and
investment products and services. In addition to posting strong earnings,
SunAmerica's price soared when it agreed to be acquired by American
International Group, one of the top insurance providers in the world.
Another top performer, and Balanced's third-largest holding as of October
31, was TCI, the cable television provider. The cable industry displayed
positive trends such as increased subscriber counts, strong cash flow, and
growth through strategic alliances.
WHAT STOCKS OR SECTORS HURT PERFORMANCE?
The worst-performing sector was energy services, such as oil drilling and
oil drilling equipment companies. Falling oil prices hurt these stocks.
Banks also underperformed. We reduced our holdings in firms such as Chase
Manhattan and BankAmerica amid concerns about their exposure to the economic
turmoil in Asia and Russia.
Our worst-performing stock was Cendant. As we discussed in the April 30
semiannual report, the shares of this franchising business (which owns names
such as Ramada Inns, Howard Johnson's, and Coldwell Banker) fell significantly
because of accounting irregularities.
WHAT FACTORS AFFECTED THE PERFORMANCE OF THE FIXED-INCOME PORTFOLIO?
The most important factor was that U.S. bonds in general rallied in 1998 as
inflation remained low and global economic conditions weakened, causing interest
rates to fall. Also, Treasury bonds outperformed "spread product" (bonds with
traditionally higher yields, such as corporates and mortgage-backeds). Treasury
bonds benefited from the "flight to quality" that occurred as stocks plunged in
the third quarter. On the other hand, corporate bonds, like stocks, were
negatively
[left margin]
TOP TEN STOCK HOLDINGS
% OF EQUITY PORTFOLIO
AS OF AS OF
10/31/98 4/30/98
SUNAMERICA, INC. 5.8% 3.0%
GENERAL ELECTRIC CO.
(U.S.) 4.9% 5.9%
TELE-COMMUNICATIONS,
INC. CLASS A 4.7% 2.9%
MICROSOFT CORP. 4.4% --
BRISTOL-MYERS
SQUIBB CO. 4.3% 3.2%
FANNIE MAE 4.2% 2.2%
JOHNSON & JOHNSON 4.1% --
PFIZER, INC. 4.1% 2.7%
MCI WORLDCOM, INC.(1) 4.0% 2.0%(2)
MEDTRONIC, INC. 3.6% 2.4%
TOP FIVE STOCK INDUSTRIES
% OF EQUITY PORTFOLIO
AS OF AS OF
10/31/98 4/30/98
PHARMACEUTICALS 20.5% 9.8%
INSURANCE 10.1% 9.1%
COMMUNICATIONS
SERVICES 10.1% 9.3%
COMPUTER SOFTWARE
& SERVICES 8.6% 6.4%
DIVERSIFIED COMPANIES 6.4% 10.7%
(1) WorldCom, Inc. acquired MCI Communications on 9/15/98. The surviving name
was MCI WorldCom, Inc.
(2) Represents percentage of WorldCom, Inc. shares owned by the fund.
8 1-800-345-2021
Balanced--Q&A
- --------------------------------------------------------------------------------
(Continued)
affected by concerns about corporate profits, while increased mortgage
refinancing as interest rates fell hurt mortgage-backed securities. Because the
portfolio held mostly spread product, it underperformed Treasurys.
WHAT'S YOUR OUTLOOK FOR THE U.S. ECONOMY AND THE MARKETS?
By cutting short-term interest rates three times from September through
November, we believe the Federal Reserve has done several important things:
* Demonstrated its willingness to help support the weakened global economy
and shown its concern about the vulnerability of the U.S. economy;
* Taken aggressive steps against recession by stimulating borrowing and
spending;
* Restored confidence to the U.S. markets, and even more importantly, to
the U.S. consumer, who is key to economic growth.
The U.S. economy remains vulnerable to financial events overseas, but it
also has underlying strength that has been bolstered by the Fed. As a result,
many economic pundits predict a "controlled slowdown" for the U.S. in 1999, not
a recession. They see slower economic growth, continued low inflation, and more
interest rate stability. Corporate profits could weaken, but they may be
somewhat stronger than some overly pessimistic predictions. Low inflation should
help provide a good environment for both stocks and bonds, and spread product
should benefit from greater interest rate stability.
WHAT'S YOUR OUTLOOK FOR BALANCED?
We believe strongly that the transition to the quantitative approach in the
equity portfolio will have a positive long-term impact on the fund. We've
already restructured Balanced's stock holdings significantly, which could create
capital gains for fund investors in 1999 (the changes came after the close of
the fund's 1998 tax year). Some stocks that looked attractive from a growth
acceleration standpoint didn't look as attractive using the more value-oriented
quantitative screens or didn't display risk characteristics consistent with the
new style. Similarly, some new stocks were added that looked more attractive
based on the quantitative team's disciplines.
On the fixed-income side, the yields on spread product, especially
corporates, continue to look attractive, and therefore corporate bonds remain
the primary focus of the portfolio.
[right margin]
"ON THE FIXED-INCOME SIDE, THE YIELDS ON SPREAD PRODUCT, ESPECIALLY CORPORATES,
CONTINUE TO LOOK ATTRACTIVE, AND THEREFORE CORPORATE BONDS REMAIN THE PRIMARY
FOCUS OF THE PORTFOLIO."
BALANCED'S FIXED-INCOME PORTFOLIO
AS OF AS OF
10/31/98 4/30/98
PORTFOLIO SENSITIVITY TO INTEREST RATES
WEIGHTED AVERAGE MATURITY 7.1 YEARS 6.8 YEARS
DURATION 4.5 YEARS 4.4 YEARS
PORTFOLIO CREDIT QUALITY % OF FIXED-INCOME PORTFOLIO
(S&P RATINGS)
AAA 46% 43%
AA 5% 10%
A 31% 29%
BBB 13% 18%
BB 5% --
100% 100%
Investment terms are defined in the Glossary on page 25.
www.americancentury.com 9
Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS--52.6%
BANKING--0.3%
80,000 Norwest Corp. $2,975
-----------
BROADCASTING & MEDIA--2.3%
280,500 Outdoor Systems, Inc.(1) 6,188
168,000 Time Warner Inc. 15,592
-----------
21,780
-----------
COMMUNICATIONS SERVICES--5.3%
360,000 MCI WorldCom, Inc.(1) 19,901
146,000 SBC Communications Inc. 6,762
550,000 Tele-Communications, Inc. Cl A(1) 23,134
-----------
49,797
-----------
COMPUTER PERIPHERALS--1.0%
149,000 Cisco Systems Inc.(1) 9,401
-----------
COMPUTER SOFTWARE & SERVICES--4.5%
138,000 America Online Inc. 17,535
56,000 Compuware Corp.(1) 3,033
207,000 Microsoft Corp.(1) 21,923
-----------
42,491
-----------
COMPUTER SYSTEMS--2.3%
129,000 Dell Computer Corp.(1) 8,453
91,000 International Business Machines
Corp. 13,508
-----------
21,961
-----------
CONSUMER PRODUCTS--1.7%
120,000 Gillette Company 5,392
123,000 Procter & Gamble Co. (The) 10,932
-----------
16,324
-----------
DIVERSIFIED COMPANIES--3.4%
276,000 General Electric Co. (U.S.) 24,150
119,000 Tyco International Ltd. 7,371
-----------
31,521
-----------
ENERGY (PRODUCTION & MARKETING)--0.8%
48,000 Chevron Corp. 3,912
65,000 Texaco Inc. 3,855
-----------
7,767
-----------
ENVIRONMENTAL SERVICES--1.7%
244,800 Republic Services, Inc. Cl A(1) 5,355
240,875 Waste Management, Inc. 10,869
-----------
16,224
-----------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES--3.1%
48,000 American Express Co. $4,242
149,000 CIT Group Holdings, Inc. (The) Cl A 4,070
290,000 Fannie Mae 20,536
-----------
28,848
-----------
FOOD & BEVERAGE--0.8%
105,000 Coca-Cola Company (The) 7,101
-----------
HEALTHCARE--1.7%
169,000 Cardinal Health, Inc. 15,981
-----------
INSURANCE--5.3%
116,000 Allstate Corp. 4,995
191,500 American International Group, Inc. 16,325
405,000 SunAmerica, Inc. 28,552
-----------
49,872
-----------
LEISURE--1.0%
159,000 Viacom, Inc. Cl B(1) 9,520
-----------
MEDICAL EQUIPMENT & SUPPLIES--2.3%
47,000 Guidant Corp. 3,595
270,000 Medtronic, Inc. 17,550
-----------
21,145
-----------
PHARMACEUTICALS--10.8%
191,000 Bristol-Myers Squibb Co. 21,117
250,000 Johnson & Johnson 20,375
111,000 Merck & Co., Inc. 15,013
187,000 Pfizer, Inc. 20,067
118,000 Schering-Plough Corp. 12,139
161,000 Warner-Lambert Co. 12,618
-----------
101,329
-----------
PRINTING & PUBLISHING--0.9%
88,000 McGraw-Hill Companies, Inc. (The) 7,914
-----------
RETAIL (GENERAL MERCHANDISE)--1.7%
103,000 Costco Companies, Inc.(1) 5,848
146,000 Wal-Mart Stores, Inc. 10,074
-----------
15,922
-----------
RETAIL (SPECIALTY)--0.4%
88,000 Home Depot, Inc. 3,828
-----------
TOBACCO--1.3%
239,000 Philip Morris Companies Inc. 12,219
-----------
TOTAL COMMON STOCKS 493,920
-----------
(Cost $375,240)
See Notes to Financial Statements
10 1-800-345-2021
Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--9.8%
$4,000 U.S. Treasury Notes, 5.50%,
12/31/00 $4,099
2,500 U.S. Treasury Notes, 5.375%,
2/15/01 2,559
4,075 U.S. Treasury Notes, 7.75%,
2/15/01 4,377
2,000 U.S. Treasury Notes, 6.625%,
6/30/01 2,115
4,500 U.S. Treasury Notes, 6.625%,
7/31/01 4,767
7,150 U.S. Treasury Notes, 6.25%,
8/31/02 7,611
5,800 U.S. Treasury Notes, 7.25%,
5/15/04 6,589
5,000 U.S. Treasury Notes, 7.25%,
8/15/04 5,699
3,000 U.S. Treasury Notes, 7.875%,
11/15/04 3,525
4,200 U.S. Treasury Notes, 5.875%,
11/15/05 4,550
2,400 U.S. Treasury Notes, 7.00%,
7/15/06 2,765
10,500 U.S. Treasury Notes, 5.625%,
5/15/08 11,315
5,000 U.S. Treasury Bonds, 12.00%,
8/15/08 7,717
4,000 U.S. Treasury Bonds, 9.125%,
5/15/18 5,810
2,500 U.S. Treasury Bonds, 8.875%,
2/15/19 3,570
4,500 U.S. Treasury Bonds, 7.50%,
11/15/24 5,836
5,000 U.S. Treasury Bonds, 6.375%,
8/16/27 5,772
3,500 U.S. Treasury Bonds, 5.50%,
8/15/28 3,685
-----------
TOTAL U.S. TREASURY SECURITIES 92,361
-----------
(Cost $87,493)
MORTGAGE--BACKED SECURITIES(2)--4.4%
4,802 FHLMC Pool #C00578, 6.50%,
1/1/28 4,846
281 FHLMC Series 106-EPAC
REMIC, 6.95%, 12/15/20 282
2,000 FHLMC Series 77-HPAC REMIC,
8.50%, 9/15/20 2,121
5,862 FNMA Pool #050985, 6.00%,
3/1/00 5,902
651 FNMA Pool #347879, 6.50%,
5/1/11 661
103 FNMA Pool #398955, 6.50%,
10/1/12 104
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 387 FNMA Pool #251700, 6.50%,
5/1/13 $ 393
167 FNMA Pool #429525, 6.50%,
5/1/13 170
425 FNMA Pool #421163, 6.50%,
6/1/13 432
738 FNMA Pool #421173, 6.50%,
6/1/13 750
544 FNMA Pool #421501, 6.50%,
6/1/13 552
374 FNMA Pool #429306, 6.50%,
6/1/13 380
199 FNMA Pool #433184, 6.50%,
6/1/13 203
3,807 FNMA Pool #413812, 6.50%,
1/1/28 3,840
6,994 FNMA Pool #411821, 7.00%,
1/1/28 7,155
6,097 GNMA Pool #002202, 7.00%,
4/20/26 6,198
2,937 GNMA Pool #467626, 7.00%,
2/15/28 3,008
3,658 GNMA Pool #458862, 7.50%,
2/15/28 3,774
-----------
TOTAL MORTGAGE-BACKED SECURITIES 40,771
-----------
(Cost $40,006)
ASSET-BACKED SECURITIES(2)--4.7%
2,800 CIT RV Trust, Series 1998 A,
Class A4 SEQ, 6.09%, 2/15/12 2,872
5,000 First Merchants Auto Receivables
Corp., Series 1996 B, Class A2,
6.80%, 5/15/01 5,091
5,879 First Union-Lehman Brothers
Commercial Mortgage, Series
1998 C2, Class A1 SEQ,
6.28%, 6/18/07 5,994
3,750 FNMA Whole Loan,
Series 1995 W1, Class A6,
8.10%, 4/25/25 3,916
3,000 Money Store (The) Home Equity
Trust, Series 1997 C, Class
AF6 SEQ, 6.67%, 3/1/03 3,087
5,000 NationsBank Auto Owner Trust,
Series 1996 A, Class B1,
6.75%, 6/15/01 5,096
5,000 Premier Auto Trust, Series 1996-4,
Class CTFS, 6.65%, 8/6/02 5,105
3,000 Union Acceptance Corp.,
Series 1996 D, Class A3,
6.30%, 1/8/04 3,074
4,350 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 D1, Class A4,
6.78%, 2/15/16 4,447
See Notes to Financial Statements
www.americancentury.com 11
Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$2,100 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 D1, Class A5,
6.92%, 10/15/18 $2,168
3,200 United Companies Financial Corp.,
Home Equity Loan,
Series 1997 C, Class A7, 6.85%,
1/15/29 3,313
-----------
TOTAL ASSET-BACKED SECURITIES 44,163
-----------
(Cost $43,102)
CORPORATE BONDS--20.9%
BANKING--1.1%
5,000 First Union Corp., 8.77%,
11/15/99 5,204
5,000 NationsBank Corp., 6.875%,
2/15/05 5,271
-----------
10,475
-----------
COMMUNICATIONS SERVICES--2.1%
6,600 Cable & Wireless Communications,
6.625%, 3/6/05 6,707
2,250 CSC Holdings Inc., 7.625%,
7/15/18 2,081
5,500 GTE Corp., 7.51%, 4/1/09 6,273
3,000 GTE South, 7.25%, 8/1/02 3,201
1,750 Qwest Communications
International Inc., 7.50%,
11/1/08 (Acquired 10/28/98,
Cost $1,738)(3) 1,781
-----------
20,043
-----------
ELECTRICAL & ELECTRONIC
COMPONENTS--1.1%
6,000 Anixter International Inc., 8.00%,
9/15/03 6,431
4,200 Yorkshire Power Finance,
Series B, 6.15%, 2/25/03
(Acquired 2/19/98,
Cost $4,200)(3) 4,267
-----------
10,698
-----------
ENERGY (PRODUCTION & MARKETING)--0.3%
3,000 USX Corp., 6.85%, 3/1/08 3,064
-----------
ENERGY (SERVICES)--0.2%
2,000 Petroleum Geo-Services ASA,
7.125%, 3/30/28 1,916
-----------
FINANCIAL SERVICES--6.1%
2,800 Advanta Corp., MTN, Series B,
7.00%, 5/1/01 2,463
3,500 Associates Corp., N.A., 6.375%,
10/15/02 3,584
4,000 Associates First Capital Corp.,
6.75%, 7/15/01 4,125
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$4,000 Comdisco, Inc., 6.375%,
11/30/01 $4,152
6,000 Dean Witter, Discover & Co.,
6.875%, 3/1/03 6,408
5,000 First USA, Inc., 7.00%, 8/20/01 5,260
3,500 Ford Motor Credit Co., 6.125%,
4/28/03 3,608
6,500 Ford Motor Credit Co., 6.75%,
5/15/05 6,871
4,300 Lehman Brothers Holdings Inc.,
6.625%, 11/15/00 4,284
3,000 Money Store Inc. (The), 8.05%,
4/15/02 3,269
6,000 Norwest Financial, Inc., 6.25%,
11/1/02 6,238
7,000 Salomon Inc., 6.65%, 7/15/01 7,223
-----------
57,485
-----------
HEALTHCARE--0.6%
5,000 Aetna Services, Inc., 6.75%,
8/15/01 5,169
-----------
INSURANCE--1.5%
3,750 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired
2/9/96, Cost $3,782)(3) 3,942
5,000 Underwriters Reinsurance Co.,
7.875%, 6/30/06 (Acquired
8/6/96, Cost $5,156)(3) 5,660
4,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired
5/28/97-6/11/97,
Cost $4,039)(3) 4,465
-----------
14,067
-----------
LEISURE--0.8%
4,200 Hilton Hotels Corp., 7.00%,
7/15/04 4,088
2,750 Time Warner Inc., 6.85%,
1/15/26 2,904
-----------
6,992
-----------
METALS & MINING--1.1%
9,150 Barrick Gold Corp., 7.50%,
5/1/07 9,826
-----------
PAPER & FOREST PRODUCTS--0.4%
4,100 Abitibi-Consolidated Inc., 7.40%,
4/1/18 3,725
-----------
PRINTING & PUBLISHING--0.3%
3,000 News America Inc., 6.625%,
1/9/08 2,982
-----------
REAL ESTATE--2.1%
1,100 Chelsea GCA Realty Partners,
7.25%, 10/21/07 1,096
See Notes to Financial Statements
12 1-800-345-2021
Balanced--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$6,800 Price REIT, Inc. (The), 7.25%,
11/1/00 $7,045
3,800 Price REIT, Inc. (The), 7.125%,
6/15/04 4,005
2,500 Simon DeBartolo Group Inc.,
6.625%, 6/15/03 (Acquired
6/17/98, Cost $2,494)(3) 2,460
5,000 Spieker Properties, Inc., 6.80%,
12/15/01 5,088
-----------
19,694
-----------
RETAIL (GENERAL MERCHANDISE)--0.5%
4,000 Sears, Roebuck & Co., MTN,
7.12%, 6/4/04 4,342
-----------
TOBACCO--1.0%
3,500 Philip Morris Companies Inc.,
6.80%, 12/1/03 3,723
5,500 Philip Morris Companies Inc.,
6.95%, 6/1/06 5,773
-----------
9,496
-----------
UTILITIES--1.7%
5,000 Avon Energy Partners Holdings,
7.05%, 12/11/07 (Acquired
1/20/98, Cost $5,198)(3) 5,278
6,000 CalEnergy Co. Inc., 7.63%,
10/15/07 6,244
2,000 Kansas Power & Light Co.,
8.875%, 3/1/00 2,100
2,000 Texas Utilities Electric Co.,
8.125%, 2/1/02 2,177
-----------
15,799
-----------
TOTAL CORPORATE BONDS 195,773
-----------
(Cost $189,084)
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENTS & AGENCIES--0.7%
$6,000 Hydro-Quebec, MTN, 7.02%,
3/23/05 $6,399
-----------
(Cost $5,569)
TEMPORARY CASH INVESTMENTS--6.9%
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.35%, dated 10/30/98,
due 11/2/98 (Delivery value $17,908) 17,900
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 5.42%, dated 10/30/98,
due 11/2/98 (Delivery value $47,021) 47,000
-----------
TOTAL TEMPORARY CASH INVESTMENTS 64,900
-----------
(Cost $64,900)
TOTAL INVESTMENT SECURITIES--100.0% $938,287
===========
(Cost $805,394)
FUTURES CONTRACTS
($ in Thousands)
Underlying
Expiration Face Amount Unrealized
Purchased Date at Value Gain
- ----------------------------------------------------------------
179 S&P 500 December
Futures 1998 $49,458 $3,359
===============================
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
MTN = Medium Term Note
(1) Non-income producing.
(2) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(3) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at October 31, 1998, was $27,853
which represented 2.9% of net assets.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the share amount (stocks) or principal amount (bonds) of each investment
* the market value of each investment
* the percentage of investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 13
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
ASSETS (In Thousands Except Per-Share Amounts)
Investment securities, at value
(identified cost of $805,394)
(Note 3) ................................................ $ 938,287
Cash ...................................................... 3,292
Receivable for investments sold ........................... 35
Receivable for variation margin on
futures contracts ....................................... 389
Dividends and interest receivable ......................... 6,583
------------
948,586
------------
LIABILITIES
Disbursements in excess of
demand deposit cash ..................................... 729
Payable for investments purchased ......................... 1,738
Payable for capital shares redeemed ....................... 480
Accrued management fees (Note 2) .......................... 771
Distribution fees payable (Note 2) ........................ 1
Service fees payable (Note 2) ............................. 1
Payable for directors' fees and expenses .................. 1
Accrued expenses and other liabilities .................... 1
------------
3,722
------------
Net Assets ................................................ $ 944,864
============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ................... $ 709,149
Undistributed net investment income ....................... 2,690
Accumulated undistributed net
realized gain on investment
and foreign currency transactions ....................... 96,773
Net unrealized appreciation on
investments and translation
of assets and liabilities in foreign
currencies (Note 3) ..................................... 136,252
------------
$ 944,864
============
Investor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................................ $938,140,799
Shares outstanding ........................................ 48,384,825
Net asset value per share ................................. $ 19.39
Advisor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................................ $ 6,722,899
Shares outstanding ........................................ 346,887
Net asset value per share ................................. $ 19.38
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
14 1-800-345-2021
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
INVESTMENT INCOME (In Thousands)
Income:
Interest .................................................. $ 26,326
Dividends ................................................. 3,933
---------
30,259
---------
Expenses (Note 2):
Management fees ........................................... 9,549
Distribution fees -- Advisor Class ........................ 16
Service fees -- Advisor Class ............................. 16
Directors' fees and expenses .............................. 9
---------
9,590
---------
Net investment income ..................................... 20,669
---------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY (NOTE 3)
Net realized gain (loss) on:
Investments ............................................... 101,425
Foreign currency transactions ............................. (94)
---------
101,331
---------
Change in net unrealized
appreciation on:
Investments ............................................... (26,665)
Translation of assets and
liabilities in foreign currencies ....................... 116
---------
(26,549)
---------
Net realized and unrealized
gain on investments ..................................... 74,782
---------
Net Increase in Net Assets
Resulting from Operations ............................... $ 95,451
=========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
www.americancentury.com 15
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
Increase in Net Assets 1998 1997
OPERATIONS (In Thousands)
Net investment income .......................... $ 20,669 $ 19,451
Net realized gain on investments
and foreign currency transactions ............ 101,331 75,936
Change in net unrealized
appreciation on investments and
translation of assets and liabilities
in foreign currencies ........................ (26,549) 41,356
--------- ---------
Net increase in net assets
resulting from operations .................... 95,451 136,743
--------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income:
Investor Class ............................... (20,729) (20,449)
Advisor Class ................................ (125) (55)
From net realized gains from
investment transactions:
Investor Class ............................... (75,512) (64,787)
Advisor Class ................................ (492) --
--------- ---------
Decrease in net assets
from distributions ........................... (96,858) (85,291)
--------- ---------
CAPITAL SHARE TRANSACTIONS
(NOTE 4)
Net increase in net assets from
capital share transactions ................... 14,410 1,241
--------- ---------
Net increase in net assets ..................... 13,003 52,693
NET ASSETS
Beginning of year .............................. 931,861 879,168
--------- ---------
End of year .................................... $ 944,864 $ 931,861
========= =========
Undistributed net investment income ............ $ 2,690 $ 2,562
========= =========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
16 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century Balanced Fund (the Fund) is one
of the twelve series of funds issued by the Corporation. The Fund's investment
objective is to seek capital growth and current income. The Fund is authorized
to issue three classes of shares: the Investor Class, the Advisor Class, and the
Institutional Class. The three classes of shares differ principally in their
respective shareholder servicing and distribution expenses and arrangements. All
shares of the Fund represent an equal pro rata interest in the assets of the
class to which such shares belong, and have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except for class
specific expenses and exclusive rights to vote on matters affecting only
individual classes. The following significant accounting policies are in
accordance with generally accepted accounting principles.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
FOREIGN CURRENCY TRANSACTIONS--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are translated into U.S. dollars at prevailing exchange
rates. Purchases and sales of investment securities, dividend and interest
income, and certain expenses are translated at the rates of exchange prevailing
on the respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at October 31, 1998.
FUTURES CONTRACTS--The Fund may enter into stock index futures contracts in
order to manage the Fund's exposure to changes in market conditions. One of the
risks of entering into futures contracts includes the possibility that the
change in value of the contract may not correlate with the changes in value of
the underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as unrealized gains and losses. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively.
www.americancentury.com 17
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that collateral, represented by securities, received in
a repurchase transaction be transferred to the custodian in a manner sufficient
to enable the Fund to obtain those securities in the event of a default under
the repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income are declared
and paid quarterly. Distributions from net realized gains are declared and paid
annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net gains and losses for financial statement and tax
purposes and may result in reclassification among certain capital accounts.
ADDITIONAL INFORMATION--Funds Distributor, Inc. (FDI) is the Corporation's
distributor. Certain officers of FDI are also officers of the Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Fund, except brokerage commissions, taxes, interest, expenses of
those directors who are not considered interested persons as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's class average daily closing net assets during the previous month.
The annual management fee is 1.00% for the Investor Class and 0.75% for the
Advisor Class.
The Board of Directors has adopted the Advisor Class Master Distribution
and Shareholder Services Plan (the Plan), pursuant to Rule 12b-1 of the
Investment Company Act of 1940. The Plan provides that the Fund will pay ACIM an
annual distribution fee equal to 0.25% and annual service fee equal to 0.25%.
The fees are computed daily and paid monthly based on the Advisor Class's
average daily closing net assets during the previous month. The distribution fee
provides compensation for distribution expenses incurred by financial
intermediaries in connection with distributing shares of the Advisor Class
including, but not limited to, payments to brokers, dealers, and financial
institutions that have entered into sales agreements with respect to shares of
the Fund. The service fee provides compensation for shareholder and
administrative services rendered by ACIM, its affiliates or independent third
party providers. Fees incurred by the Fund under the Master Distribution and
Shareholder Services Plan during the year ended October 31, 1998 were $32,134.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
18 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
the year ended October 31, 1998, totaled $939,529,592, of which $146,524,230
represented U.S. Treasury and Agency obligations. Sales of investment
securities, excluding short-term investments, totaled $1,032,487,005, of which
$116,255,803 represented U.S. Treasury and Agency obligations.
As of October 31, 1998, accumulated net unrealized appreciation was
$130,096,821, based on the aggregate cost of investments of $808,190,005 for
federal income tax purposes, which consisted of unrealized appreciation of
$135,285,306 and unrealized depreciation of $5,188,485.
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are 100,000,000 shares of the Investor Class and 50,000,000 shares of
the Advisor Class authorized for issuance. Transactions in shares of the Fund
were as follows:
SHARES AMOUNT
INVESTOR CLASS (In Thousands)
Year ended October 31, 1998
Sold ............................................. 9,532 $ 184,305
Issued in reinvestment of distributions .......... 5,211 94,198
Redeemed ......................................... (13,720) (265,088)
--------- ---------
Net increase ..................................... 1,023 $ 13,415
========= =========
Year ended October 31, 1997
Sold ............................................. 13,169 $ 242,933
Issued in reinvestment of distributions .......... 4,752 83,837
Redeemed ......................................... (17,963) (330,837)
--------- ---------
Net decrease ..................................... (42) $ (4,067)
========= =========
ADVISOR CLASS
Year ended October 31, 1998
Sold ............................................. 79 $ 1,523
Issued in reinvestment of distributions .......... 34 616
Redeemed ......................................... (59) (1,144)
--------- ---------
Net increase ..................................... 54 $ 995
========= =========
January 6, 1997(1) through October 31, 1997
Sold ............................................. 296 $ 5,372
Issued in reinvestment of distributions .......... 3 55
Redeemed ......................................... (6) (119)
--------- ---------
Net increase ..................................... 293 $ 5,308
========= =========
(1) Commencement of sale of the Advisor Class.
www.americancentury.com 19
Balanced--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ..... $ 19.55 $ 18.55 $ 17.70 $ 15.94 $ 16.52
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income .................. 0.42(1) 0.40(1) 0.44(1) 0.48(1) 0.42
Net Realized and Unrealized Gain
(Loss) on Investment Transactions ...... 1.45 2.41 1.88 2.03 (0.58)
------- ------- ------- ------- -------
Total From Investment Operations ....... 1.87 2.81 2.32 2.51 (0.16)
------- ------- ------- ------- -------
Distributions
From Net Investment Income ............. (0.43) (0.43) (0.46) (0.48) (0.42)
From Net Realized Gains on
Investment Transactions ................ (1.60) (1.38) (1.01) (0.27) --
------- ------- ------- ------- -------
Total Distributions .................... (2.03) (1.81) (1.47) (0.75) (0.42)
------- ------- ------- ------- -------
Net Asset Value, End of Year ........... $ 19.39 $ 19.55 $ 18.55 $ 17.70 $ 15.94
======= ======= ======= ======= =======
Total Return(2) ........................ 10.46% 16.34% 14.04% 16.36% (0.93)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................. 1.00% 1.00% 0.99% 0.98% 1.00%
Ratio of Net Investment Income
to Average Net Assets .................. 2.16% 2.15% 2.50% 2.90% 2.70%
Portfolio Turnover Rate ................ 102% 110% 130% 85% 94%
Net Assets, End of Year
(in millions) .......................... $ 938 $ 926 $ 879 $ 816 $ 704
</TABLE>
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
20 1-800-345-2021
Balanced--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ........ $ 19.55 $ 17.46
--------- ---------
Income From Investment Operations
Net Investment Income(2) .................. 0.37 0.29
Net Realized and Unrealized Gain
on Investment Transactions ................ 1.44 2.04
--------- ---------
Total From Investment Operations .......... 1.81 2.33
--------- ---------
Distributions
From Net Investment Income ................ (0.38) (0.24)
From Net Realized Gains on
Investment Transactions ................... (1.60) --
--------- ---------
Total Distributions ....................... (1.98) (0.24)
--------- ---------
Net Asset Value, End of Period .............. $ 19.38 $ 19.55
========= =========
Total Return(3) ........................... 10.15% 13.42%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 1.25% 1.25%(4)
Ratio of Net Investment Income
to Average Net Assets ..................... 1.91% 1.90%(4)
Portfolio Turnover Rate ..................... 102% 110%
Net Assets, End of Period
(in thousands) ............................ $ 6,723 $ 5,724
(1) January 6, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
www.americancentury.com 21
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of American Century Balanced Fund (the "Fund"), one
of the funds comprising American Century Mutual Funds, Inc., as of October 31,
1998, and the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the periods in the five-year period
then ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Balanced Fund as of October 31, 1998, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
22 1-800-345-2021
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
American Century offers three classes of shares for Balanced. One class is
for investors who buy directly from American Century, one is for investors who
buy through financial intermediaries, and the third is for large institutional
customers.
The original class of Balanced shares is called the INVESTOR CLASS. All
shares issued and outstanding before September 3, 1996, have been designated as
Investor Class shares. Investor Class shares may also be purchased after
September 3, 1996. Investor Class shareholders do not pay any commissions or
other fees for purchase of fund shares directly from American Century. Investors
who buy Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE INVESTOR CLASS
SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY LISTED.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies, and financial advisors. Advisor Class
shares are subject to a 0.50% Rule 12b-1 service and distribution fee. Half of
that fee is available to pay for recordkeeping and administrative services, and
half is available to pay for distribution services provided by the financial
intermediary through which the Advisor Class shares are purchased. The total
expense ratio of the Advisor Class is 0.25% higher than the total expense ratio
of the Investor Class.
An INSTITUTIONAL CLASS is also available to endowments, foundations,
defined-benefit pension plans, or financial intermediaries serving these
investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class is 0.20% less than the
total expense ratio of the Investor Class shares.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century to obtain
either form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
www.americancentury.com 23
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The American Century Group consists of mostly moderate-risk and specialty
funds including conservative equity, balanced, asset allocation, gold, natural
resources, utilities, and real estate funds. In general, aside from the
specialty funds, which have unique risks, this fund group is for investors
seeking core portfolio holdings in the middle ground between aggressive stock
funds and money market and bond funds.
BALANCED seeks capital growth and current income. The fund keeps about 60%
of its assets in U.S. stocks. Under normal market conditions, the remaining
assets are held in quality intermediate-term bonds.
The stock and bond portfolios are managed by teams, rather than by
individual "star" managers. We believe this allows us to make better, more
consistent management decisions.
We attempt to keep the fund fully invested at all times, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of those opportunities may
significantly limit the potential for gain.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The BLENDED INDEX is considered the benchmark for Balanced. It combines two
widely known indices in proportion to the asset mix of the fund. Accordingly,
60% of the index is represented by the S&P 500, which reflects the 60% of the
fund's assets invested in equity securities. The remaining 40% of the index is
represented by the Lehman Intermediate Government/Corporate Index, which
reflects the 40% of the fund's assets invested in intermediate-term bonds and
other fixed-income securities.
The LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE INDEX is considered to
represent the performance of a portfolio of intermediate-term U.S. government
and corporate bonds. The index includes the Lehman Government and Corporate Bond
indices, which are composed of U.S. government, Treasury, and agency securities
with one- to 10-year maturities, as well as corporate and Yankee bonds with one-
to 10-year maturities.
The S&P 500 is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
dominant industries. Created by Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock market performance.
INVESTMENT TEAM LEADERS
EQUITY PORTFOLIO MANAGERS
JIM STOWERS III
BRUCE WIMBERLY
JOHN SYKORA, CFA
FIXED-INCOME PORTFOLIO MANAGERS
BUD HOOPS
JEFF HOUSTON, CFA
24 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
FIXED-INCOME TERMS
* CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
* DURATION is a measure of the sensitivity of a fixed-income portfolio to
interest rate changes. It is a time-weighted average of the interest and
principal payments of the securities in a portfolio. As the duration of a
portfolio increases, the impact of a change in interest rates on the value of
the portfolio also increases.
* STANDARD & POOR'S (S&P) is an independent rating company. The credit ratings
issued by S&P reflect the perceived financial strength (credit quality) of debt
issuers. Debt securities rated "investment grade" (deemed to be of high enough
credit quality to be appropriate investments for banks and other institutions)
by S&P are those rated BBB or higher (the highest rating is AAA).
* WEIGHTED AVERAGE MATURITY (WAM) is another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and interest rate sensitivity
the portfolio has.
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on pages 20 and 21.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
EQUITY TERMS
* BLUE-CHIP STOCKS--generally considered to be the stocks of the most
established companies in American industry. They are generally large, fairly
stable companies that have demonstrated consistent earnings and usually have
long-term growth potential. Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS--generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers, and textile
operators.
* GROWTH STOCKS--generally considered to be the stocks of companies that have
experienced above-average earnings growth and appear likely to continue such
growth. These stocks often sell at high P/E ratios. Examples can include the
stocks of high-tech, healthcare, and consumer staple companies.
* VALUE STOCKS--generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS--generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS--generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
www.americancentury.com 25
Notes
- --------------------------------------------------------------------------------
26 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 27
Notes
- --------------------------------------------------------------------------------
28 1-800-345-2021
[inside back cover]
American Century Funds
Benham Group(reg.sm)
TAXABLE BOND FUNDS
U.S. Treasury & Government
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
Corporate & Diversified
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
International
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
Multiple-State
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
Single-State
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
Taxable
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
Tax-Free & Municipal
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY[reg.sm] GROUP
Asset Allocation Funds
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
Balanced Fund
Balanced
Conservative Equity Funds
Income and Growth
Equity Income
Value
Equity Growth
Specialty Funds
Utilities
Real Estate
Global Natural Resources
Global Gold
Small Cap Funds
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
Growth Funds
Select
Heritage
Growth
Ultra
Aggressive Growth Funds
Vista
Giftrust
New Opportunities
International Growth Funds
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 (c)1998 American Century Services Corporation
SH-BKT-14773 Funds Distributor, Inc.
<PAGE>
[front cover] OCTOBER 31, 1998
ANNUAL REPORT
- ----------------
AMERICAN CENTURY
[graphic of stairs]
BENHAM GROUP
- ------------------------------------
LIMITED-TERM BOND
INTERMEDIATE-TERM BOND
BENHAM BOND
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
* FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
* Buy individual stocks and bonds
* 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
* Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund
analysis
* Track your brokerage account on one easy-to-read statement
* Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card
with an American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles follow a
standard SEC format and allow investors to compare funds easily. You can request
a profile or the full prospectus. Full prospectuses contain more detailed fund
information and you will continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight important
information about our funds, including fees and expenses. More technical data
will be in the Statement of Additional Information.
[left margin]
BENHAM GROUP
LIMITED-TERM BOND
(ABLIX)
- ----------------------
BENHAM GROUP
INTERMEDIATE-TERM BOND
(TWITX)
- ----------------------
BENHAM GROUP
BENHAM BOND
(TWLBX)
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The year ended October 31, 1998, was an eventful one in the global
financial markets. Weakening economic and financial conditions, brought on by
problems in Asia, Russia, and Latin America, led to significant stock market
volatility and a dramatic decline in U.S. interest rates.
The third quarter of 1998 served as a good example of the markets'
extremes. Several major U.S. stock indices hit record highs in mid-July before
plunging 20% in the following six weeks. In the bond market, high demand for the
safety of Treasury bonds pushed yields down to their lowest levels ever, but
demand for corporate bonds thinned to the point where trading was all but
impossible.
This volatile market environment illustrates the importance of a
diversified investment portfolio. As we saw in the summer and fall of 1998,
diversifying your assets among stocks, bonds, and money market funds can help
your portfolio weather changes in the economic or investment climate.
By investing broadly across a variety of bond sectors, American Century's
diversified bond funds--Limited-Term Bond, Intermediate-Term Bond, and Benham
Bond--proved to be steady, solid performers despite the turbulent conditions.
Our experienced management and credit research teams also contributed to
the funds' performance. We recently took steps to strengthen these teams by
adding another portfolio manager and reorganizing our research group to take
better advantage of the skills and knowledge of our credit analysts. We think
these additional resources will enhance the performance of the diversified bond
funds going forward.
On the corporate front, we have a substantial effort underway to prepare
American Century's computer systems for the year 2000. Throughout 1999, our team
of technology professionals will be extensively testing our systems, including
those involved with dividend payments.
As we celebrate our 40th anniversary, we wish to thank you for your
investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
Corporate Credit Review ................................................ 5
LIMITED-TERM BOND
Performance Information ................................................ 6
Management Q&A ......................................................... 7
Schedule of Investments ................................................ 10
INTERMEDIATE-TERM BOND
Performance Information ................................................ 12
Management Q&A ......................................................... 13
Schedule of Investments ................................................ 16
BENHAM BOND
Performance Information ................................................ 19
Management Q&A ......................................................... 20
Schedule of Investments ................................................ 23
FINANCIAL STATEMENTS
Statements of Assets and
Liabilities ............................................................ 26
Statements of Operations ............................................... 27
Statements of Changes
in Net Assets .......................................................... 28
Notes to Financial
Statements ............................................................. 29
Financial Highlights ................................................... 32
Independent Auditors'
Report ................................................................. 38
OTHER INFORMATION
Share Class and Retirement
Account Information .................................................... 39
Background Information
Investment Philosophy
and Policies ........................................................ 40
Comparative Indices ................................................. 40
Lipper Rankings ..................................................... 40
Investment Team
Leaders ............................................................. 40
Credit Rating
Guidelines .......................................................... 40
Glossary ............................................................... 41
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* A sharp decline in interest rates helped U.S. bonds produce solid returns
during the year ended October 31, 1998.
* Slowing global economic growth was the catalyst for falling rates.
* Strong demand for Treasury bonds as a safe haven from worldwide market
volatility sent their prices soaring and their yields to all-time lows.
* Corporate, asset-backed, and mortgage-backed bonds saw reduced demand as
investors shied away from risk.
CORPORATE CREDIT REVIEW
* Corporate credit conditions remained strong, but upgrades began to taper off
as economic growth slowed late in the period.
* Lack of demand for asset-backed securities hurt the profitability of
issuers, leading several to file for bankruptcy.
* Credit quality in emerging markets remains bleak, and we've kept our bond
funds away from companies with exposure to these areas.
LIMITED-TERM BOND
* The one-year return of the fund's Investor Class shares beat the return of
the average short investment-grade debt fund, according to Lipper Inc.
* The fund's higher percentage of Treasury securities compared with its peers
contributed to its stronger performance.
* We positioned Limited-Term Bond's corporate holdings more defensively during
the last half of the year.
* Looking ahead, we plan to remain overweighted in corporate bonds, which we
think currently offer very attractive values.
INTERMEDIATE-TERM BOND
* The fund's Investor Class shares posted a solid return but trailed the
return of the average intermediate investment-grade debt fund, according to
Lipper Inc.
* The fund's emphasis on corporate bonds hurt its performance relative to its
peers.
* We positioned Intermediate-Term Bond's corporate holdings more defensively
during the last half of the year.
* Looking ahead, we will look to add more corporate bonds, which we think
currently offer very attractive values.
BENHAM BOND
* The fund's Investor Class shares posted a solid return but trailed the
return of the average A-rated corporate debt fund, according to Lipper Inc.
* The fund's emphasis on corporate bonds hurt its performance relative to its
peers.
* We positioned Benham Bond's corporate holdings more defensively during the
last half of the year.
* Looking ahead, we plan to remain overweighted in corporate bonds, which we
think currently offer very attractive values.
[left margin]
LIMITED-TERM BOND(1)
(ABLIX)
TOTAL RETURNS: AS OF 10/31/98
6 Months 3.83%(2)
1 Year 6.58%
NET ASSETS: $18.8 million
30-DAY SEC YIELD: 4.59%
INCEPTION DATE: 3/1/94
INTERMEDIATE-TERM BOND(1)
(TWITX)
TOTAL RETURNS: AS OF 10/31/98
6 Months 4.70%(2)
1 Year 7.71%
NET ASSETS: $26.8 million
30-DAY SEC YIELD: 4.95%
INCEPTION DATE: 3/1/94
BENHAM BOND(1)
(TWLBX)
TOTAL RETURNS: AS OF 10/31/98
6 Months 3.79%(2)
1 Year 6.79%
NET ASSETS: $145.5 million
30-DAY SEC YIELD: 5.24%
INCEPTION DATE: 3/2/87
(1) Investor Class.
(2) Not annualized.
See Total Returns on pages 6, 12, and 19. Investment terms are defined in the
Glossary on page 41.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, director of fixed-income investing at American Century
STRONG U.S. BOND RETURNS
U.S. interest rates fell sharply during the year ended October 31, 1998,
leading to strong bond market returns. U.S. Treasury bonds performed the best,
with the 30-year Treasury bond returning more than 20% for the one-year period.
Other types of fixed-income securities--such as corporate bonds, mortgage-backed
securities, and asset-backed bonds--also posted healthy returns but trailed
Treasurys (see the accompanying table for broad index returns).
GLOBAL ECONOMIC TURMOIL
The catalyst for falling interest rates was a series of financial crises
around the world that threatened to apply the brakes to global economic growth.
Financial and economic problems that first surfaced in Asia in late 1997
mushroomed in 1998. By mid-1998, the contagion had spread to Russia, which
devalued its currency and defaulted on government debt, as well as Latin
America, where Venezuela and Brazil tried to fend off currency devaluations.
These crises calmed fears that inflationary pressures were intensifying.
This was especially welcome in the U.S., where healthy economic growth, robust
consumer spending, and a 28-year low in unemployment had raised the possibility
of a short-term interest rate increase by the Federal Reserve.
By August, however, it was clear that the world's economic engine was
downshifting. The tranquilizing effect on inflation and the U.S. economy was so
pronounced that the Fed lowered short-term interest rates in late September--
its first rate cut in almost three years. The Fed followed up with another rate
cut just two weeks later, giving a psychological boost to investors as well as
to the domestic economy.
A SAFE HAVEN IN TREASURY BONDS
The global economic problems wreaked havoc on stock and bond markets
worldwide--investors grew concerned about the outlook for corporate profits,
while a number of foreign debt markets suffered downgrades and defaults. The
ensuing market volatility created greater demand for the safety and liquidity of
U.S. Treasury bonds.
This "flight to quality" sent U.S. Treasury yields down to levels not seen
in nearly three decades--the 30-year Treasury bond yield dipped to an all-time
low of 4.71% in early October. For the one-year period, long-term Treasury
yields fell 100-120 basis points (a basis point equals 0.01%), while short- and
intermediate-term yields dropped 130-150 basis points (see the chart at right).
The Treasury market also benefited from international bond traders and
hedge funds, who were buying Treasurys to unwind short positions. Many traders
and hedge funds "shorted" Treasury securities--by borrowing Treasurys and
selling them--and used the proceeds to buy emerging-market bonds and other types
of debt, which they expected to outperform Treasurys. When the opposite
happened, these investors were forced to
[right margin]
"THE CATALYST FOR FALLING INTEREST RATES WAS A SERIES OF FINANCIAL CRISES AROUND
THE WORLD THAT THREATENED TO APPLY THE BRAKES TO GLOBAL ECONOMIC GROWTH."
BOND INDEX RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
LEHMAN AGGREGATE BOND INDEX 9.34%
Lehman Treasury Bond Index 11.57%
Lehman Corporate Bond Index 7.99%
Lehman Mortgage-Backed
Securities Index 7.30%
Lehman Asset-Backed
Securities Index 7.34%
[line chart - data below]
TREASURY YIELD CURVE
Years to Maturity 10/31/97 4/30/98 10/31/98
1 5.340% 5.370% 4.170%
2 5.600% 5.560% 4.110%
3 5.681% 5.600% 4.350%
4 5.740% 5.660% 4.380%
5 5.710% 5.630% 4.220%
6 5.775% 5.680% 4.365%
7 5.840% 5.730% 4.510%
8 5.837% 5.710% 4.540%
9 5.833% 5.690% 4.570%
10 5.830% 5.670% 4.600%
11 5.867% 5.705% 4.673%
12 5.904% 5.740% 4.746%
13 5.941% 5.775% 4.819%
14 5.978% 5.810% 4.892%
15 6.015% 5.845% 4.965%
16 6.052% 5.880% 5.038%
17 6.089% 5.915% 5.111%
18 6.126% 5.950% 5.184%
19 6.163% 5.985% 5.257%
20 6.200% 6.020% 5.330%
21 6.195% 6.013% 5.312%
22 6.190% 6.006% 5.294%
23 6.185% 5.998% 5.276%
24 6.180% 5.991% 5.258%
25 6.175% 5.984% 5.240%
26 6.170% 5.977% 5.222%
27 6.165% 5.970% 5.204%
28 6.160% 5.964% 5.186%
29 6.155% 5.957% 5.168%
30 6.150% 5.950% 5.150%
Source: Bloomberg Financial Markets
www.americancentury.com 3
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
(Continued)
sell the debt and buy back Treasurys to cut their losses.
Another positive factor was the first federal budget surplus in 30 years,
which reduced the amount of new Treasury bond issuance. Less supply generally
leads to higher bond prices.
CORPORATE BONDS LAGGED TREASURYS
Supply and demand in the corporate bond market was a different story. In
the wake of the Russian bond default, investors fled bonds riskier than
Treasurys, and that included corporate bonds. Falling stock prices and concerns
that the global economic problems would hurt profits also convinced investors to
avoid corporate debt.
The lack of demand was so pronounced that liquidity dried up in the third
quarter--there was very little trading activity in the corporate market. On some
days, investors looking to sell corporate bonds were unable to get even a single
bid from potential buyers.
Increased supply also weighed on corporate bond prices. Falling interest
rates encouraged many companies to issue new debt or refinance existing debt.
Through the first 10 months of 1998, corporate bond issuance was up 90% compared
with the same period in 1997.
Because of these factors, corporate bond yields did not experience the
sharp declines that Treasury yields did. As a result, the difference in
yield--or spread--between corporates and Treasurys widened significantly,
especially in the last few months (see the chart at left). Since bond prices
move in the opposite direction of yields, Treasurys experienced sizable price
gains, while corporate bond prices were relatively steady.
OTHER BOND SECTORS
The rest of the U.S. bond market also saw reduced demand as investors shied
away from any bonds that weren't Treasurys. In the mortgage-backed securities
market, the sharp decline in interest rates produced a negative byproduct--many
homeowners took the opportunity to refinance their mortgages. Investors who
owned these mortgages received the cash and had to reinvest it in a lower
interest rate environment.
Increased refinancing activity limits the price appreciation of
mortgage-backed securities when interest rates fall rapidly. Like corporate
bonds, mortgage-backed securities experienced little price appreciation during
the one-year period--almost all of the return came from interest payments.
Other asset-backed securities, such as bonds backed by credit-card debt or
auto loans, also suffered from refinancings. The proliferation of consolidation
and home equity loans allowed many consumers to refinance their debt at much
lower rates.
[left margin]
"CORPORATE BOND YIELDS DID NOT EXPERIENCE THE SHARP DECLINES THAT TREASURY
YIELDS DID. AS A RESULT, THE DIFFERENCE IN YIELD--OR SPREAD--BETWEEN CORPORATES
AND TREASURYS WIDENED SIGNIFICANTLY."
[line chart - data below]
YIELD SPREAD BETWEEN 10-YEAR A-RATED
CORPORATE BOND AND 10-YEAR TREASURY BOND
(IN BASIS POINTS)
Yield Spread
December-89 103
March-90 91
June-90 96
September-90 84
December-90 152
March-91 100
June-91 84
September-91 96
December-91 101
March-92 82
June-92 68
September-92 78
December-92 96
March-93 68
June-93 66
September-93 58
December-93 68
March-94 64
June-94 63
September-94 66
December-94 73
March-95 56
June-95 70
September-95 60
December-95 64
March-96 61
June-96 57
September-96 55
December-96 52
March-97 48
June-97 56
September-97 64
December-97 70
March-98 68
June-98 72
September-98 148
October-98 108
Source: J.P. Morgan Investment
4 1-800-345-2021
Corporate Credit Review
- --------------------------------------------------------------------------------
HEALTHY CREDIT CONDITIONS...FOR NOW
For much of the year ended October 31, 1998, corporate credit conditions in
the U.S. remained strong. Moderate growth in the U.S. economy supported earnings
growth for many businesses and led to further credit upgrades.
However, upgrades tapered off somewhat in the third quarter as the global
economy began to slow. Some companies in economically sensitive industries, such
as financial services and real estate, struggled amid slower growth and
financial-market chaos. In contrast, noncyclical industries like
telecommunications and utilities remained stable and solid.
Despite the slowdown, many U.S. corporations are better prepared for an
economic downturn than they were a few years ago. We expect corporate credit
quality to hold up reasonably well even if the U.S. economy slows further in
1999.
ILLIQUIDITY HURTS ASSET-BACKED ISSUERS
In the third quarter, several issuers of asset-backed bonds ran into cash
flow problems, and a couple of these companies were forced to file for
bankruptcy. The problem was liquidity--the ability to buy and sell securities
easily.
Many asset-backed bond issuers rely on liquidity to fuel their business.
The companies buy loans from credit card companies, auto lenders, and commercial
mortgage lenders. They convert these loans into bonds and sell them in the
marketplace. The cash they get from selling the bonds is used to buy more loans
and keep their businesses running.
In August, concerns about global economic and financial problems caused
many investors to avoid all bonds except for the safest U.S. Treasury
securities. With fewer buyers for their bonds, asset-backed issuers had little
cash coming in. On top of that, with interest rates at historically low levels,
loans were being refinanced faster than expected. The combination eroded the
profitability of many issuers.
ASIAN FLU
The financial meltdown in Asia hurt credit quality in all emerging markets,
and we've kept our funds away from this area of the market. This includes not
only emerging-market bonds, but also domestic bonds issued by companies with
significant exposure to emerging markets. Many of these companies are seeing
lower profits because of reduced emerging-market demand for their products, and
this has negative implications for the credit quality of their bonds.
CREDIT TEAM EXPANSION
American Century's corporate credit research team continued to grow over
the past year, bringing the total number of analysts to ten. We've expanded our
international expertise, which gives our fund managers more investment
alternatives without compromising our high credit standards.
In addition, we are able to look into and get comfortable in complex areas
that others are not as familiar with, such as asset-backed securities. As a
result, we believe our management teams can get better value out of their
investments in these areas.
[right margin]
"MANY U.S. CORPORATIONS ARE BETTER PREPARED FOR AN ECONOMIC DOWNTURN THAN THEY
WERE A FEW YEARS AGO. WE EXPECT CORPORATE CREDIT QUALITY TO HOLD UP REASONABLY
WELL EVEN IF THE U.S. ECONOMY SLOWS FURTHER IN 1999."
CORPORATE CREDIT
RESEARCH TEAM
DIRECTOR:
GREG AFIESH
CORPORATE CREDIT ANALYSTS:
DANIEL BAKER
KALPESH DADBHAWALA
MICHAEL DIFLEY
TANYA FLEISCHER
ED GRANT
KRISTINE IWAFUCHI
LYNDA LOWRY
SUDHA MANI
GINA SANCHEZ
TOM VAIANA
www.americancentury.com 5
Limited-Term Bond--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1998
<TABLE>
INVESTOR CLASS (INCEPTION 3/1/94) ADVISOR CLASS (INCEPTION 11/12/97)
LIMITED-TERM MERRILL LYNCH 1-5 YR. SHORT INVESTMENT-GRADE DEBT FUNDS(2) LIMITED-TERM MERRILL LYNCH 1-5 YR.
BOND GOVT./CORP. INDEX AVERAGE RETURN FUND'S RANKING BOND GOVT./CORP. INDEX
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) ....... 3.83% 5.30% 3.27% -- 3.70% 5.30%
1 YEAR ............ 6.58% 8.44% 6.02% 37 OUT OF 101 -- --
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS ........... 6.12% 7.09% 5.93% 25 OUT OF 79 -- --
LIFE OF FUND ...... 5.79% 6.79% 5.92%(3) 16 OUT OF 58(3) 6.23% 8.44%
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 3/31/94, the date nearest the class's inception for which data are
available.
See pages 39-41 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND Value on 10/31/98 Merrill Lynch 1- to 5-Year
Govt./Corp. Index $13,552
Limited-Term Bond $13,001
Limited-Term Merrill Lynch 1- to 5-Year
Bond Govt./Corp. Index
DATE VALUE VALUE
3/1/94 $10,000 $10,000
3/31/94 $9,933 $9,909
6/30/94 $9,906 $9,885
9/30/94 $9,989 $9,974
12/31/94 $9,979 $9,961
3/31/95 $10,291 $10,348
6/30/95 $10,620 $10,764
9/30/95 $10,794 $10,928
12/31/95 $11,072 $11,253
3/31/96 $11,094 $11,243
6/30/96 $11,193 $11,336
9/30/96 $11,364 $11,529
12/31/96 $11,560 $11,772
3/31/97 $11,638 $11,817
6/30/97 $11,886 $12,111
9/30/97 $12,115 $12,386
12/31/97 $12,300 $12,614
3/31/98 $12,463 $12,809
6/30/98 $12,650 $13,023
9/30/98 $13,019 $13,509
10/31/98 $13,001 $13,552
$10,000 investment made 3/1/94
The chart at left shows the growth of a $10,000 investment over the life of the
fund, while the chart below shows the fund's year-by-year performance. The
Merrill Lynch 1- to 5-Year Government/ Corporate Index is provided for
comparison in each chart. Limited-Term Bond's total returns include operating
expenses (such as transaction costs and management fees) that reduce returns,
while * From the fund's 3/1/94 inception date to 10/31/94.
the total returns of the index do not. These charts are based on Investor Class
shares only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED OCTOBER 31)
Limited-Term Merrill Lynch 1- to 5-Year
Bond Govt./Corp. Index
DATE RETURN RETURN
10/31/94* -0.08% 0.16%
10/31/95 8.89% 10.48%
10/31/96 5.48% 5.92%
10/31/97 6.30% 6.93%
10/31/98 6.58% 8.44%
6 1-800-345-2021
Limited-Term Bond--Q&A
- --------------------------------------------------------------------------------
/photo of Bud Hoops and Jeff Houston/
An interview with Bud Hoops and Jeff Houston, portfolio managers on the
Limited-Term Bond fund investment team.
HOW DID LIMITED-TERM BOND PERFORM DURING THE FISCAL YEAR ENDED OCTOBER 31, 1998
The fund produced a solid return and beat its peer group average by a wide
margin. For the year ended October 31, Limited-Term Bond's Investor Class shares
returned 6.58%, compared with the 6.02% average return of the 101 "Short
Investment-Grade Debt Funds" tracked by Lipper Inc.
Limited-Term Bond's longer-term returns have also been strong, consistently
placing in the top third of its Lipper category. (See the Total Returns table on
the previous page for other fund performance comparisons.)
WHY DID THE FUND OUTPERFORM THE AVERAGE SHORT INVESTMENT-GRADE DEBT FUND?
We held a higher percentage of Treasury securities than many of the funds
in our Lipper category. We kept about a third of the portfolio in Treasurys for
much of the fiscal year, while our Lipper group averaged about a 20% position in
Treasurys.
Treasury securities were by far the best-performing sector of the U.S. bond
market over the past year, so our heavier weighting gave the fund a significant
performance edge.
BUT LIMITED-TERM BOND CURRENTLY HOLDS A LOWER PERCENTAGE OF TREASURY SECURITIES
THAN IT DID A YEAR AGO (29% VS. 35%). WHY?
It's partly a function of cash flows--Treasury securities are the most
liquid (easiest to buy and sell), so we use them to meet cash flow needs. As a
result, our Treasury holdings fluctuate as cash comes in or goes out of the
fund.
Treasurys have also appreciated dramatically in the past year, so we sold
some recently to lock in the gains. We invested the proceeds in other bond
sectors, especially corporate bonds and mortgage-backed securities, because we
think they now offer better values.
In general, our Treasury position hovers around 25-30% of the portfolio. We
look at the fund as primarily a corporate bond fund, so corporate securities
will continue to be Limited-Term Bond's biggest holding (see the charts on page
8).
DID YOU MAKE ANY ADJUSTMENTS TO THE PORTFOLIO'S CORPORATE HOLDINGS?
We shifted to a more defensive position in the last six months. We avoided
the bonds of companies that had direct exposure to turbulent foreign markets,
and we reduced our holdings in industries that are sensitive to slower economic
growth, such as financial services companies.
Instead, we bought the bonds of companies that do most of their business
domestically and are in industries that are less affected by economic downturns.
Examples include companies in the telecommunications, cable television, and
utilities industries.
[right margin]
"THE FUND PRODUCED A SOLID RETURN AND BEAT ITS PEER GROUP AVERAGE BY A WIDE
MARGIN."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NUMBER OF SECURITIES 54 43
WEIGHTED AVERAGE
MATURITY 2.4 YRS 3.2 YRS
AVERAGE DURATION 2.1 YRS 1.7 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.70% 0.69%
YIELD AS OF OCTOBER 31, 1998
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 4.59% 4.34%
Investment terms are defined in the Glossary on page 41.
www.americancentury.com 7
Limited-Term Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
Ultimately, though, it didn't matter what types of corporate bonds we
owned--they all suffered when the corporate sector got pounded in the third
quarter.
CAN YOU TALK MORE ABOUT THE MARKET ENVIRONMENT IN THE THIRD QUARTER?
It was really one of the most extreme periods we've seen since the early
1990s. We typically gauge the attractiveness of corporate bond yields by
comparing them to Treasury yields. Historically, short-term corporate bonds have
yielded around 60 basis points (0.60%--a basis point equals 0.01%) more than
short-term Treasury bonds as compensation for the greater credit risk.
When this yield difference--known as a spread--widens, corporate bonds look
more attractive; when spreads are narrower than this, Treasurys are the better
bargain.
In August, when Russia surfaced as yet another victim of global economic
turmoil, many investors finally decided they'd had enough international trauma
and scurried for the safest investments they could find--Treasury bonds. It
didn't matter what else was out there--if it wasn't a Treasury bond, they didn't
want it.
With huge demand for Treasurys and virtually none for corporates, the yield
spread between the two more than doubled, peaking at around 150 basis points
(see the chart on page 4). For many individual issues, the spreads were even
wider--some high-quality corporates were yielding as much as 200 basis points
more than Treasurys.
The last time yield spreads were this wide was in 1990, when the economy
was in recession. But this time the underlying quality of the bonds and the
corporations that issued them hadn't changed; it was all the result of a
risk-aversion mentality. Federal Reserve Chairman Alan Greenspan aptly called
this behavior a "disengage" from the market.
HOW DID THIS AFFECT YOUR MANAGEMENT OF THE FUND?
Liquidity (the ability to easily buy and sell bonds) in the corporate and
asset-backed markets was almost non-existent, which made it virtually impossible
to trade. For example, we tried to sell some AAA-rated asset-backed securities
and couldn't get a bid for them. These were top-rated bonds, and no one would
touch them.
The sizable losses at many hedge funds played a big part in the liquidity
crunch. These private, often-speculative funds were active traders in the
corporate and asset-backed bond markets. After a number of them sustained big
losses by betting against Treasury bonds, they became much more conservative,
and that took some big investors away from the market.
HAVE MARKET CONDITIONS IMPROVED SINCE THEN?
A little bit. Liquidity in the corporate market has improved, and the yield
spread between corporates and Treasurys has narrowed to about 100 basis points.
But it may be a while before we see the once-bitten hedge funds return to the
marketplace.
[left margin]
"WE LOOK AT THE FUND AS PRIMARILY A CORPORATE BOND FUND, SO CORPORATE SECURITIES
WILL CONTINUE TO BE LIMITED-TERM BOND'S BIGGEST HOLDING."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF OCTOBER 31, 1998
Corporate Bonds 46%
U.S. Treasury 29%
Asset-Backed 16%
Mortgage-Backed 9%
AS OF APRIL 30, 1998
Corporate Bonds 39%
U.S. Treasury 26%
Asset-Backed 20%
Mortgage-Backed 5%
Other 10%
Security types are defined on page 41.
8 1-800-345-2021
Limited-Term Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
Interest rates in the U.S. are going to depend on how global economic
conditions play out. Overseas, we're seeing some Asian countries, such as Korea
and Thailand, possibly reaching the bottom and starting to bounce back from
their financial calamities. But we're not out of the woods yet--Russia is still
a basket case, Brazil will likely lead Latin America into recession in 1999, and
Japan remains unable to work its way out of a decade-long recession.
Domestically, the Fed has cut short-term interest rates three times (most
recently in mid-November) in an effort to prevent a recession. Inflation remains
extremely low--falling commodities prices, corporate restructuring, and modest
wage increases have kept prices from rising.
Interestingly, the health of the U.S. economy may come down to the
performance of the stock market. With excess capacity around the globe,
businesses are likely to reduce their capital investments in the coming year.
That means economic growth will be even more dependent on consumer spending. And
as we've seen this year, consumers tend to spend more money when their stock
portfolios are doing well.
If the Fed is successful in achieving a "soft landing" for the U.S. economy
and consumers remain confident--as we expect--corporate bonds should perform
very well compared with Treasury securities. The corporate/ Treasury yield
spread is still wider than it's been historically, so corporates look very
attractive right now.
The one scenario that would favor Treasurys over corporates is a runaway
downtrend in interest rates, which would likely be the result of a full-blown
recession and a squeeze on corporate profits. However, we don't think that's
going to happen.
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR LIMITED-TERM BOND OVER THE NEXT SIX
MONTHS?
We plan to maintain our emphasis on non-Treasury securities--corporate
bonds, asset-backed securities, and mortgage-backed bonds--which we think will
outperform going forward. We've been able to buy bonds issued by great
corporations with the biggest yield advantage over Treasurys we've seen in
years.
However, because we expect the economy to slow a little, we'll continue to
look toward defensive industries that are not economically sensitive.
We also intend to maintain Limited-Term Bond's longer duration. (Duration
measures the portfolio's sensitivity to changes in interest rates. The longer
the fund's duration, the greater the share price fluctuates when interest rates
change.) We extended the duration from 1.8 years to 2.1 years during the last
six months of the fiscal year, and we expect to keep it around this level in the
coming months.
[right margin]
"IF THE FED IS SUCCESSFUL IN ACHIEVING A 'SOFT LANDING' FOR THE U.S. ECONOMY AND
CONSUMERS REMAIN CONFIDENT--AS WE EXPECT--CORPORATE BONDS SHOULD PERFORM VERY
WELL COMPARED WITH TREASURY SECURITIES."
PORTFOLIO COMPOSITION BY
CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
AAA 52% 58%
AA 2% 1%
A 18% 17%
BBB 22% 23%
BB 6% 1%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 40
for more information.
www.americancentury.com 9
Limited-Term Bond--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--28.6%
$ 100 U.S. Treasury Notes, 5.00%,
2/15/99 $ 100
200 U.S. Treasury Notes, 5.875%,
8/31/99 203
1,000 U.S. Treasury Notes, 5.75%,
9/30/99 1,012
500 U.S. Treasury Notes, 5.625%,
12/31/99 507
500 U.S. Treasury Notes, 5.50%,
3/31/00 508
500 U.S. Treasury Notes, 6.375%,
5/15/00 516
500 U.S. Treasury Notes, 5.375%,
7/31/00 509
1,000 U.S. Treasury Notes, 6.625%,
7/31/01 1,059
250 U.S. Treasury Notes, 6.50%,
5/31/02 267
200 U.S. Treasury Notes, 5.25%,
8/15/03 209
150 U.S. Treasury Notes, 7.875%,
11/15/04 176
450 U.S. Treasury Notes, 5.625%,
5/15/08 485
---------
TOTAL U.S. TREASURY SECURITIES 5,551
---------
(Cost $5,155)
MORTGAGE-BACKED SECURITIES(1)--9.0%
417 FNMA Pool #313224, 7.00%,
12/1/11 426
343 FNMA Pool #378698, 8.00%,
5/1/12 354
499 FNMA Pool #426145, 6.00%,
5/1/13 501
465 FNMA Pool #433184, 6.50%,
6/1/13 473
---------
TOTAL MORTGAGE-BACKED SECURITIES 1,754
---------
(Cost $1,740)
ASSET-BACKED SECURITIES(1)--16.6%
500 Case Equipment Loan Trust,
Series 1998 B, Class A4 SEQ,
5.92%, 10/15/05 510
500 CIT RV Trust, Series 1997 A,
Class A5 SEQ, 6.25%,
11/17/08 514
200 First Merchants Auto Receivables
Corp., Series 1996 B,
Class A2, 6.80%, 5/15/01 204
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 250 FNMA Whole Loan,
Series 1995 W1, Class A6,
8.10%, 4/25/25 $ 261
373 Green Tree Financial Corp.,
Series 1995-7, Class A3,
6.35%, 11/15/26 375
376 Money Store (The) Home Equity
Trust, Series 1994 B,
Class A4 SEQ, 7.60%,
7/15/21 390
28 Money Store (The) Home Equity
Trust, Series 1996 D, Class A3
SEQ, 6.30%, 11/15/11 28
200 NationsBank Auto Owner Trust,
Series 1996 A, Class B1,
6.75%, 6/15/01 204
281 Textron Financial Corp.
Receivables Trust,
Series 1997 A, Class A, 6.05%,
3/16/09 (Acquired 9/18/97,
Cost $281)(2) 283
13 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 B1, Class A2,
7.08%, 4/15/10 13
150 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 D1, Class A4,
6.78%, 2/15/16 153
298 World Omni Automobile Lease
Securitization, Series 1996 B,
Class A2, 6.20%, 11/15/02 299
---------
TOTAL ASSET-BACKED SECURITIES 3,234
---------
(Cost $3,179)
CORPORATE BONDS--45.6%
AUTOMOBILES & AUTO PARTS--1.7%
300 General Motors Corp. Global
Notes, 9.625%, 12/1/00 326
---------
BANKING--1.0%
200 Capital One Bank, 6.74%,
5/31/99 201
---------
COMMUNICATIONS SERVICES--9.4%
500 MCI WorldCom, Inc., 8.875%,
1/15/01 549
200 TCI Communications, Inc.,
6.375%, 9/15/99 202
500 TKR Cable Inc., 10.50%,
10/30/99 549
500 U S West Capital Funding Inc.,
6.125%, 7/15/02 516
---------
1,816
---------
See Notes to Financial Statements
10 1-800-345-2021
Limited-Term Bond--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
ENERGY (PRODUCTION & MARKETING)--2.1%
$ 400 Oryx Energy Co., 9.50%, 11/1/99 $ 414
---------
FINANCIAL SERVICES--19.5%
300 Advanta Corp., MTN, Series B,
7.00%, 5/1/01 264
500 Caterpillar Financial Services,
MTN, 6.49%, 10/15/99 507
300 CIT Group Holdings, MTN,
6.625%, 9/13/99 304
350 Comdisco Inc., 7.75%, 9/1/99 357
250 Ford Motor Credit Co., 6.125%,
4/28/03 258
200 Franchise Finance Corp., 7.00%,
11/30/00 199
300 International Lease Finance Corp.,
6.375%, 1/18/00 304
250 Lehman Brothers Holdings Inc.,
MTN, Series 1998 E, 6.00%,
2/26/01 245
250 Merrill Lynch & Co., Inc., 6.50%,
4/1/01 255
200 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 204
385 Paine Webber Group Inc., MTN,
6.65%, 10/15/02 384
500 Salomon Inc., 6.65%, 7/15/01 516
---------
3,797
---------
RAILROAD--2.3%
415 Norfolk Southern Corp., 6.95%,
5/1/02 438
---------
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
REAL ESTATE--5.7%
$ 300 Price REIT, Inc. (The), 7.25%,
11/1/00 $ 311
500 Simon DeBartolo Group Inc.,
6.625%, 6/15/03 (Acquired
6/17/98, Cost $499)(2) 492
300 Spieker Properties, Inc., 6.80%,
12/15/01 305
---------
1,108
---------
TOBACCO--2.6%
500 Philip Morris Companies Inc.,
7.75%, 5/1/99 506
---------
UTILITIES--1.3%
250 CalEnergy Co. Inc., 7.23%,
9/15/05 254
---------
TOTAL CORPORATE BONDS 8,860
---------
(Cost $9,082)
TEMPORARY CASH INVESTMENTS--0.2%
41,000 Units of Participation in Chase Vista
Prime Money Market Fund (Institutional
Shares 41
---------
(Cost $41)
TOTAL INVESTMENT SECURITIES--100.0% $19,440
=========
(Cost $19,197)
NOTES TO SCHEDULE OF INVESTMENTS
FNMA = Federal National Mortgage Association
MTN = Medium Term Note
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at October 31, 1998, was $775,
which represented 3.9% of net assets.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percentage of investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 11
<TABLE>
<CAPTION>
Intermediate-Term Bond--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS (INCEPTION 3/1/94) ADVISOR CLASS (INCEPTION 8/14/97)
INTERMEDIATE- LEHMAN INTERM. INTERM. INVESTMENT-GRADE DEBT FUNDS(2) INTERMEDIATE- LEHMAN INTERM.
TERM BOND GOVT./CORP. INDEX AVERAGE RETURN FUND'S RANKING TERM BOND GOVT./CORP. INDEX
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) ...... 4.70% 5.82% 4.58% -- 4.57% 5.82%
1 YEAR ........... 7.71% 9.12% 7.94% 139 OUT OF 220 7.44% 9.12%
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
RETURNS
3 YEARS .......... 6.97% 7.46% 7.04% 85 OUT OF 159 -- --
LIFE OF FUND ..... 6.75% 7.09% 7.45%(3) 70 OUT OF 114(3) 8.13% 9.87%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 3/31/94, the date nearest the class's inception for which data are
available.
(4) Since 8/31/97, the date nearest the class's inception for which data are
available.
See pages 39-41 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
Value on 10/31/98
Lehman Intermediate
Govt./Corp. Index $13,766
Intermediate-Term Bond $13,565
Intermediate-Term Lehman Intermediate
Bond Govt./Corp. Index
DATE VALUE VALUE
3/1/94 $10,000 $10,000
3/31/94 $9,856 $9,835
6/30/94 $9,801 $9,776
9/30/94 $9,882 $9,856
12/31/94 $9,880 $9,845
3/31/95 $10,265 $10,278
6/30/95 $10,754 $10,790
9/30/95 $10,950 $10,969
12/31/95 $11,374 $11,356
3/31/96 $11,217 $11,261
6/30/96 $11,255 $11,332
9/30/96 $11,451 $11,533
12/31/96 $11,745 $11,815
3/31/97 $11,714 $11,802
6/30/97 $12,089 $12,151
9/30/97 $12,469 $12,479
12/31/97 $12,707 $12,746
3/31/98 $12,906 $12,945
6/30/98 $13,135 $13,188
9/30/98 $13,676 $13,780
10/31/98 $13,565 $13,766
$10,000 investment made 3/1/94
The chart at left shows the growth of a $10,000 investment over the life of the
fund, while the chart below shows the fund's year-by-year performance. The
Lehman Intermediate Government/ Corporate Index is provided for comparison in
each chart. Intermediate-Term Bond's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not. These charts are based on Investor Class
shares only; performance for other classes will vary due to differences in fee
structures (see Total Returns table above). Past performance does not guarantee
future results. Investment return and principal value will fluctuate, and
redemption value may be more or less than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED OCTOBER 31)
Intermediate-Term Lehman Intermediate
Bond Govt./Corp. Index
DATE RETURN RETURN
10/31/94* -1.24% -1.45%
10/31/95 12.19% 12.54%
10/31/96 5.36% 5.81%
10/31/97 7.87% 7.49%
10/31/98 7.71% 9.12%
* From the fund's 3/1/94 inception date to 10/31/94.
12 1-800-345-2021
Intermediate-Term Bond--Q&A
- --------------------------------------------------------------------------------
An interview with Bud Hoops and Jeff Houston (pictured on page 7),
portfolio managers on the Intermediate-Term Bond fund investment team.
HOW DID INTERMEDIATE-TERM BOND PERFORM DURING THE FISCAL YEAR ENDED OCTOBER 31,
1998?
The fund produced a solid return but trailed its peer group average. For
the year ended October 31, Intermediate-Term Bond's Investor Class shares
returned 7.71%, compared with the 7.94% average return of the 220 "Intermediate
Investment-Grade Debt Funds" tracked by Lipper Inc. (See the Total Returns table
on the previous page for other fund performance comparisons.)
WHY DID THE FUND UNDERPERFORM THE AVERAGE INTERMEDIATE INVESTMENT-GRADE DEBT
FUND?
We look at Intermediate-Term Bond as primarily a corporate bond fund, so we
typically hold more corporate bonds and fewer Treasury securities than many of
the funds in our Lipper category. For much of the fiscal year, we kept about 60%
of the portfolio in corporate bonds, well above the Lipper group average of
around 40%. Meanwhile, our Treasury holdings were 15-20% of the portfolio, while
the Lipper group averaged 25%.
Treasury securities were by far the best-performing sector of the U.S. bond
market over the past year, so our heavier weighting in non-Treasury bonds was a
disadvantage compared with the Lipper group.
BUT INTERMEDIATE-TERM BOND'S PERCENTAGE OF TREASURY SECURITIES DOUBLED IN THE
LAST SIX MONTHS (SEE THE CHARTS ON PAGE 14). WHY?
It was partly a function of cash flows--Treasury securities are the most
liquid (easiest to buy and sell), so we use them to meet cash flow needs. As a
result, our Treasury holdings fluctuate as cash comes in or goes out of the
fund. In the last six months, fund assets grew by about 30%, and we invested a
majority of the new money in Treasurys.
Performance was also a factor. Treasury securities appreciated dramatically
in the past six months, while the other bonds in the portfolio did not do as
well. Our percentage of Treasurys naturally grew as a result of this
outperformance.
WHAT OTHER CHANGES DID YOU MAKE TO THE PORTFOLIO?
We extended Intermediate-Term Bond's duration from 4.3 years to 4.9 years
during the last six months of the fiscal year. (Duration measures the
portfolio's sensitivity to changes in interest rates. The longer the fund's
duration, the greater the share price fluctuates when interest rates change.)
As interest rates fell, our longer duration helped the fund earn more gains
on its Treasury holdings. This helped offset some of the underperformance of our
corporate bond holdings.
[right margin]
"WE LOOK AT INTERMEDIATE-TERM BOND AS PRIMARILY A CORPORATE BOND FUND, SO WE
TYPICALLY HOLD MORE CORPORATE BONDS AND FEWER TREASURY SECURITIES THAN MANY OF
THE FUNDS IN OUR LIPPER CATEGORY."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NUMBER OF SECURITIES 76 58
WEIGHTED AVERAGE
MATURITY 7.6 YRS 6.7 YRS
AVERAGE DURATION 4.9 YRS 4.1 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.75% 0.75%
YIELD AS OF OCTOBER 31, 1998
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 4.95% 4.70%
Investment terms are defined in the Glossary on page 41.
www.americancentury.com 13
Intermediate-Term Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
DID YOU MAKE ANY ADJUSTMENTS TO THE PORTFOLIO'S CORPORATE HOLDINGS?
We shifted to a more defensive position in the last six months. We avoided
the bonds of companies that had direct exposure to turbulent foreign markets,
and we reduced our holdings in industries that are sensitive to slower economic
growth, such as financial services companies.
Instead, we bought the bonds of companies that do most of their business
domestically and are in industries that are less affected by economic downturns.
Examples include companies in the telecommunications, cable television, and
utilities industries.
Ultimately, though, it didn't matter what types of corporate bonds we
owned--they all suffered when the corporate sector got pounded in the third
quarter.
CAN YOU TALK MORE ABOUT THE MARKET ENVIRONMENT IN THE THIRD QUARTER?
It was really one of the most extreme periods we've seen since the early
1990s. We typically gauge the attractiveness of corporate bond yields by
comparing them to Treasury yields. Historically, corporate bonds have yielded
around 75 basis points (0.75%--a basis point equals 0.01%) more than Treasury
bonds as compensation for the greater credit risk.
When this yield difference--known as a spread--widens, corporate bonds look
more attractive; when spreads are narrower than this, Treasurys are the better
bargain.
In August, when Russia surfaced as yet another victim of global economic
turmoil, many investors finally decided they'd had enough international trauma
and scurried for the safest investments they could find--Treasury bonds. It
didn't matter what else was out there--if it wasn't a Treasury bond, they didn't
want it.
With huge demand for Treasurys and virtually none for corporates, the yield
spread between the two doubled, peaking at around 150 basis points (see the
chart on page 4). For many individual issues, the spreads were even wider--some
high-quality corporates were yielding as much as 200 basis points more than
Treasurys.
The last time yield spreads were this wide was in 1990, when the economy
was in recession. But this time the underlying quality of the bonds and the
corporations that issued them hadn't changed; it was all the result of a
risk-aversion mentality. Federal Reserve Chairman Alan Greenspan aptly called
this behavior a "disengage" from the market.
HOW DID THIS AFFECT YOUR MANAGEMENT OF THE FUND?
Liquidity (the ability to easily buy and sell bonds) in the corporate and
asset-backed markets was almost non-existent, which made it virtually impossible
to trade. For example, we tried to sell some AAA-rated asset-backed securities
and couldn't get a bid for them. These were top-rated bonds, and no one would
touch them.
The sizable losses at many hedge funds played a big part in the liquidity
crunch. These private, often-speculative funds were active traders in the
corporate and asset-backed bond markets. After a number of them sustained big
losses by betting against Treasury bonds, they became much more conservative,
and that took some big investors away from the market.
[left margin]
"WE BOUGHT THE BONDS OF COMPANIES THAT DO MOST OF THEIR BUSINESS DOMESTICALLY
AND ARE IN INDUSTRIES THAT ARE LESS AFFECTED BY ECONOMIC DOWNTURNS. EXAMPLES
INCLUDE COMPANIES IN THE TELECOMMUNICATIONS, CABLE TELEVISION, AND UTILITIES
INDUSTRIES."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF OCTOBER 31, 1998
Corporate Bonds 46%
U.S. Treasury 33%
Asset-Backed 7%
Mortgage-Backed 12%
Other 2%
AS OF APRIL 30, 1998
Corporate Bonds 52%
U.S. Treasury 16%
Asset-Backed 9%
Mortgage-Backed 10%
Other 13%
Security types are defined on page 41.
14 1-800-345-2021
Intermediate-Term Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
HAVE MARKET CONDITIONS IMPROVED SINCE THEN?
A little bit. Liquidity in the corporate market has improved, and the yield
spread between corporates and Treasurys has narrowed to about 100 basis points.
But it may be a while before we see the once-bitten hedge funds return to the
marketplace.
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
Interest rates in the U.S. are going to depend on how global economic
conditions play out. Overseas, we're seeing some Asian countries, such as Korea
and Thailand, possibly reaching the bottom and starting to bounce back from
their financial calamities. But we're not out of the woods yet--Russia is still
a basket case, Brazil will likely lead Latin America into recession in 1999, and
Japan remains unable to work its way out of a decade-long recession.
Domestically, the Fed has cut short-term interest rates three times (most
recently in mid-November) in an effort to prevent a recession. Inflation remains
extremely low--falling commodities prices, corporate restructuring, and modest
wage increases have kept prices from rising.
Interestingly, the health of the U.S. economy may come down to the
performance of the stock market. With excess capacity around the globe,
businesses are likely to reduce their capital investments in the coming year.
That means economic growth will be even more dependent on consumer spending. And
as we've seen this year, consumers tend to spend more money when their stock
portfolios are doing well.
If the Fed is successful in achieving a "soft landing" for the U.S. economy
and consumers remain confident--as we expect--corporate bonds should perform
very well compared with Treasury securities. The corporate/ Treasury yield
spread is still wider than it's been historically, so corporates look very
attractive right now.
The one scenario that would favor Treasurys over corporates is a runaway
downtrend in interest rates, which would likely be the result of a full-blown
recession and a squeeze on corporate profits. However, we don't think that's
going to happen.
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR INTERMEDIATE-TERM BOND OVER THE NEXT
SIX MONTHS?
We plan to increase our holdings of non-Treasury securities--corporate
bonds, asset-backed securities, and mortgage-backed bonds--which we think will
outperform going forward. We're currently able to buy bonds issued by great
corporations with the biggest yield advantage over Treasurys we've seen in
years.
However, because we expect the economy to slow a little, we'll continue to
look toward defensive industries that are not economically sensitive.
[right margin]
"IF THE FED IS SUCCESSFUL IN ACHIEVING A 'SOFT LANDING' FOR THE U.S. ECONOMY AND
CONSUMERS REMAIN CONFIDENT--AS WE EXPECT--CORPORATE BONDS SHOULD PERFORM VERY
WELL COMPARED WITH TREASURY SECURITIES."
PORTFOLIO COMPOSITION BY
CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
AAA 52% 48%
AA 4% 6%
A 18% 20%
BBB 18% 25%
BB 8% 1%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 40
for more information.
www.americancentury.com 15
Intermediate-Term Bond--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--32.8%
$ 350 U.S. Treasury Notes, 5.50%,
12/31/00 $ 359
300 U.S. Treasury Notes, 5.375%,
2/15/01 307
100 U.S. Treasury Notes, 7.75%,
2/15/01 107
500 U.S. Treasury Notes, 6.625%,
7/31/01 530
300 U.S. Treasury Notes, 6.50%,
5/31/02 321
1,000 U.S. Treasury Notes, 5.25%,
8/15/03 1,044
300 U.S. Treasury Notes, 5.75%,
8/15/03 318
1,300 U.S. Treasury Notes, 7.25%,
5/15/04 1,477
750 U.S. Treasury Notes, 7.875%,
11/15/04 881
350 U.S. Treasury Notes, 5.50%,
2/15/08 374
1,900 U.S. Treasury Notes, 5.625%,
5/15/08 2,047
300 U.S. Treasury Bonds, 9.25%,
2/15/16 433
350 U.S. Treasury Bonds, 9.125%,
5/15/18 508
400 U.S. Treasury Bonds, 7.50%,
11/15/24 519
350 U.S. Treasury Bonds, 6.375%,
8/16/27 404
-----------
TOTAL U.S. TREASURY SECURITIES 9,629
-----------
(Cost $9,412)
MORTGAGE-BACKED SECURITIES(1)--11.6%
555 FHLMC Pool #E00279, 6.50%,
2/1/09 562
288 FHLMC Pool #C00578, 6.50%,
1/1/28 291
244 FHLMC Pool #G00907, 7.00%,
2/1/28 249
349 FNMA Pool #427913, 6.00%,
5/1/13 351
238 FNMA Pool #413812, 6.50%,
1/1/28 240
365 FNMA Pool #411821, 7.00%,
1/1/28 373
406 GNMA Pool #002202, 7.00%,
4/20/26 413
295 GNMA Pool #467626, 7.00%,
2/15/28 302
229 GNMA Pool #458862, 7.50%,
2/15/28 236
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 402 GNMA Pool #436277, 6.50%,
3/15/28 $ 407
-----------
TOTAL MORTGAGE-BACKED SECURITIES 3,424
-----------
(Cost $3,365)
ASSET-BACKED SECURITIES(1)--7.2%
300 First Merchants Auto Receivables
Corp., Series 1996 B, Class A2,
6.80%, 5/15/01 305
490 First Union-Lehman Brothers
Commercial Mortgage,
Series 1998 C2, Class A1 SEQ,
6.28%, 6/18/07 499
300 NationsBank Auto Owner Trust,
Series 1996 A, Class B1,
6.75%, 6/15/01 306
20 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 B1, Class A2,
7.08%, 4/15/10 20
250 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 D1, Class A4,
6.78%, 2/15/16 256
400 United Companies Financial Corp.,
Home Equity Loan,
Series 1996 D1, Class A5,
6.92%, 10/15/18 413
300 United Companies Financial Corp.,
Home Equity Loan,
Series 1997 C, Class A7,
6.85%, 1/15/29 311
-----------
TOTAL ASSET-BACKED SECURITIES 2,110
-----------
(Cost $2,060)
CORPORATE BONDS--46.5%
BANKING--3.7%
500 BankAmerica Corp., 7.75%,
7/15/02 537
300 Capital One Bank, 5.95%,
2/15/01 302
250 Corestates Capital Corp., 5.875%,
10/15/03 256
-----------
1,095
-----------
COMMUNICATIONS SERVICES--10.7%
500 Cable & Wireless Communications,
6.625%, 3/6/05 508
250 CSC Holdings Inc., 7.625%,
7/15/18 231
450 GTE Corp., 7.51%, 4/1/09 513
400 LCI International, Inc., 7.25%,
6/15/07 402
See Notes to Financial Statements
16 1-800-345-2021
Intermediate-Term Bond--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 500 MCI WorldCom, Inc., 8.875%,
1/15/01 $ 549
400 MCI WorldCom, Inc., 6.40%,
8/15/05 416
250 Qwest Communications
International Inc., 7.50%,
11/1/08 (Acquired 10/28/98,
Cost $248)(2) 254
250 TKR Cable Inc., 10.50%,
10/30/99 274
-----------
3,147
-----------
ELECTRICAL & ELECTRONIC
COMPONENTS--2.1%
300 Anixter International Inc., 8.00%,
9/15/03 322
300 Yorkshire Power Finance, Series B,
6.15%, 2/25/03 (Acquired
2/19/98, Cost $300)(2) 305
-----------
627
-----------
ENERGY (PRODUCTION & MARKETING)--2.8%
500 Enron Corp., 6.625%, 11/15/05 520
300 USX Corp., 6.85%, 3/1/08 306
-----------
826
-----------
ENERGY SERVICES--0.7%
200 Petroleum Geo-Services ASA,
7.125%, 3/30/28 192
-----------
FINANCIAL SERVICES--8.9%
400 Advanta Corp., MTN, Series B,
7.00%, 5/1/01 352
300 Dean Witter, Discover & Co.,
6.875%, 3/1/03 320
250 Ford Motor Credit Co., 6.125%,
4/28/03 258
250 Ford Motor Credit Co., 6.75%,
5/15/05 264
300 Franchise Finance Corp., 7.00%,
11/30/00 299
250 Merrill Lynch & Co., Inc., 6.50%,
4/1/01 254
250 Norwest Financial, Inc., 6.25%,
11/1/02 260
300 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 306
300 Salomon Inc., 6.65%, 7/15/01 310
-----------
2,623
-----------
HEALTHCARE--1.1%
300 Aetna Services, Inc., 6.75%,
8/15/01 310
-----------
INSURANCE--2.0%
250 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired
2/9/96, Cost $252)(2) 263
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 300 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired
5/28/97-6/11/97,
Cost $304)(2) $ 335
-----------
598
-----------
LEISURE--0.9%
250 Time Warner Inc., 6.85%,
1/15/26 264
-----------
METALS & MINING--1.8%
500 Barrick Gold Corp., 7.50%,
5/1/07 537
-----------
PAPER & FOREST PRODUCTS--0.9%
300 Abitibi-Consolidated Inc., 7.40%,
4/1/18 273
-----------
PRINTING & PUBLISHING--0.9%
250 News America Inc., 6.625%,
1/9/08 249
-----------
REAL ESTATE--5.5%
400 Chelsea GCA Realty Partners,
7.25%, 10/21/07 398
200 Price REIT, Inc. (The), 7.125%,
6/15/04 211
350 Price REIT, Inc. (The), 7.25%,
11/1/00 363
350 Simon DeBartolo Group Inc.,
6.625%, 6/15/03 (Acquired
6/17/98, Cost $349)(2) 344
300 Spieker Properties, Inc., 6.80%,
12/15/01 305
-----------
1,621
-----------
RETAIL (GENERAL MERCHANDISE)--0.8%
200 Sears, Roebuck & Co., Inc., MTN,
8.29%, 6/10/02 220
-----------
TOBACCO PRODUCTS--0.9%
250 Philip Morris Companies Inc.,
6.95%, 6/1/06 262
-----------
UTILITIES--2.8%
300 Avon Energy Partners Holdings,
7.05%, 12/11/07 (Acquired
1/20/98, Cost $312)(2) 317
150 CalEnergy Co. Inc., 7.23%,
9/15/05 152
350 CalEnergy Co. Inc., 7.63%,
10/15/07 364
-----------
833
-----------
TOTAL CORPORATE BONDS 13,677
-----------
(Cost $13,405)
See Notes to Financial Statements
www.americancentury.com 17
Intermediate-Term Bond--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENTS & AGENCIES--1.0%
$ 300 Province of British Columbia,
5.375%, 10/29/08 $ 298
-----------
(Cost $298)
TEMPORARY CASH INVESTMENTS--0.9%
264,000 Units of Participation in Chase Vista
Prime Money Market Fund (Institutional
Shares) 264
-----------
(Cost $264)
TOTAL INVESTMENT SECURITIES--100.0% $29,402
===========
(Cost $28,804)
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
MTN = Medium Term Note
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at October 31, 1998 was $1,818,
which represented 6.1% of net assets.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percentage of investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
18 1-800-345-2021
Benham Bond--Performance
- --------------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1998
<TABLE>
INVESTOR CLASS (INCEPTION 3/2/87) ADVISOR CLASS (INCEPTION 8/8/97)
BENHAM BOND LEHMAN AGGREGATE A-RATED CORPORATE DEBT FUNDS(2) BENHAM BOND LEHMAN AGGREGATE
BOND INDEX AVERAGE RETURN FUND'S RANKING BOND INDEX
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6 MONTHS(1) ...... 3.79% 5.55% 4.32% -- 3.66% 5.55%
1 YEAR ........... 6.79% 9.34% 7.72% 110 OUT OF 150 6.52% 9.34%
- ---------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
3 YEARS .......... 6.75% 8.01% 7.06% 78 OUT OF 120 -- --
5 YEARS .......... 6.14% 7.02% 6.15% 35 OUT OF 71 -- --
10 YEARS ......... 8.40% 9.04% 8.61% 23 OUT OF 39 -- --
LIFE OF FUND ..... 7.69% 8.67%(3) 8.25%(3) 22 OUT OF 28(3) 8.06% 10.67%(4)
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
(3) Since 3/31/87, the date nearest the class's inception for which data are
available.
(4) Since 8/31/97, the date nearest the class's inception for which data are
available.
See pages 39-41 for more information about share classes, returns, the
comparative index, and Lipper fund rankings.
[mountain chart - data below]
GROWTH OF $10,000 OVER 10 YEARS
Value on 10/31/98
Lehman Aggregate Bond Index $23,766
Benham Bond $22,412
Benham Bond Lehman Aggregate Bond Index
DATE VALUE VALUE
10/31/88 $10,000 $10,000
10/31/89 $11,352 $11,190
10/31/90 $11,571 $11,896
10/31/91 $13,475 $13,777
10/31/92 $14,883 $15,131
10/31/93 $16,637 $16,927
10/31/94 $15,727 $16,306
10/31/95 $18,426 $18,858
10/31/96 $19,329 $19,961
10/31/97 $20,985 $21,736
10/31/98 $22,412 $23,766
$10,000 investment made 10/31/88
The chart at left shows the growth of a $10,000 investment in the fund over 10
years, while the chart below shows the fund's year-by-year performance. The
Lehman Aggregate Bond Index is provided for comparison in each chart. Benham
Bond's total returns include operating expenses (such as transaction costs and
management fees) that reduce returns, while the total returns of the index do
not. These charts are based on Investor Class shares only; performance for other
classes will vary due to differences in fee structures (see Total Returns table
above). Past performance does not guarantee future results. Investment return
and principal value will fluctuate, and redemption value may be more or less
than original cost.
[bar chart - data below]
ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED OCTOBER 31)
Lehman Aggregate
Benham Bond Bond Index
DATE RETURN RETURN
10/31/89 13.52% 11.90%
10/31/90 1.93% 6.31%
10/31/91 16.45% 15.81%
10/31/92 10.43% 9.83%
10/31/93 11.81% 11.87%
10/31/94 -5.47% -3.67%
10/31/95 17.16% 15.65%
10/31/96 4.91% 5.85%
10/31/97 8.57% 8.89%
10/31/98 6.79% 9.34%
www.americancentury.com 19
Benham Bond--Q&A
- --------------------------------------------------------------------------------
An interview with Bud Hoops and Jeff Houston (pictured on page 7),
portfolio managers on the Benham Bond fund investment team.
HOW DID BENHAM BOND PERFORM DURING THE FISCAL YEAR ENDED OCTOBER 31, 1998?
The fund produced a solid return but trailed its peer group average. For
the year ended October 31, Benham Bond's Investor Class shares returned 6.79%,
compared with the 7.72% average return of the 150 "A-Rated Corporate Debt Funds"
tracked by Lipper Inc. (See the Total Returns table on the previous page for
other fund performance comparisons.)
WHY DID THE FUND UNDERPERFORM THE AVERAGE A-RATED CORPORATE DEBT FUND?
We look at Benham Bond as primarily a corporate bond fund, so we typically
hold more corporate bonds and fewer Treasury securities than many of the funds
in our Lipper category. For much of the fiscal year, we kept about two-thirds of
the portfolio in corporate bonds, well above the Lipper group average of around
40%. Meanwhile, Treasury holdings were 15% of our portfolio, while the Lipper
group averaged 25%.
Treasury securities were by far the best-performing sector of the U.S. bond
market over the past year, so our emphasis on corporate bonds was a disadvantage
compared with the Lipper group.
Another drawback was our holdings of corporate bonds rated BBB, which made
up about a quarter of the portfolio. During the past six months, quality was in
great demand--that's why Treasury bonds performed so well. In the corporate
sector, higher-quality bonds outperformed lower-quality bonds, and BBB-rated
bonds in particular trailed A-rated bonds by a wide margin.
Many of the funds in our Lipper category focus their investments in bonds
rated A or higher, so our BBB holdings hurt our performance relative to the
category average.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
We extended Benham Bond's duration slightly from 5.0 years to 5.3 years
during the fiscal year. (Duration measures the portfolio's sensitivity to
changes in interest rates. The longer the fund's duration, the greater the share
price fluctuates when interest rates change.)
As interest rates fell, our longer duration helped the fund earn more gains
on its Treasury holdings. This helped offset some of the underperformance of our
corporate bond holdings.
DID YOU MAKE ANY ADJUSTMENTS TO THE PORTFOLIO'S CORPORATE HOLDINGS?
We shifted to a more defensive position in the last six months. We avoided
the bonds of companies that had direct exposure to turbulent foreign markets,
and we reduced our holdings in industries that are sensitive to slower economic
growth, such as financial services companies.
Instead, we bought the bonds of companies that do most of their business
domestically and are in industries that are less affected by economic downturns.
Examples include companies in the telecommunications, cable television, and
utilities industries.
Ultimately, though, it didn't matter what types of corporate bonds we
owned--they all suffered when the corporate sector got pounded in the third
quarter.
[left margin]
"WE LOOK AT BENHAM BOND AS PRIMARILY A CORPORATE BOND FUND, SO WE TYPICALLY HOLD
MORE CORPORATE BONDS AND FEWER TREASURY SECURITIES THAN MANY OF THE FUNDS IN OUR
LIPPER CATEGORY."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NUMBER OF SECURITIES 56 46
WEIGHTED AVERAGE
MATURITY 10.6 YRS 10.8 YRS
AVERAGE DURATION 5.3 YRS 5.0 YRS
EXPENSE RATIO (FOR
INVESTOR CLASS) 0.80% 0.80%
YIELD AS OF OCTOBER 31, 1998
INVESTOR ADVISOR
CLASS CLASS
30-DAY SEC YIELD 5.24% 4.99%
Investment terms are defined in the Glossary on page 41.
20 1-800-345-2021
Benham Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
CAN YOU TALK MORE ABOUT THE MARKET ENVIRONMENT IN THE THIRD QUARTER?
It was really one of the most extreme periods we've seen since the early
1990s. We typically gauge the attractiveness of corporate bond yields by
comparing them to Treasury yields. Historically, corporate bonds have yielded
around 75 basis points (0.75%--a basis point equals 0.01%) more than Treasury
bonds as compensation for the greater credit risk.
When this yield difference--known as a spread--widens, corporate bonds look
more attractive; when spreads are narrower than this, Treasurys are the better
bargain.
In August, when Russia surfaced as yet another victim of global economic
turmoil, many investors finally decided they'd had enough international trauma
and scurried for the safest investments they could find--Treasury bonds. It
didn't matter what else was out there--if it wasn't a Treasury bond, they didn't
want it.
With huge demand for Treasurys and virtually none for corporates, the yield
spread between the two doubled, peaking at around 150 basis points (see the
chart on page 4). For many individual issues, the spreads were even wider--some
high-quality corporates were yielding as much as 200 basis points more than
Treasurys.
The last time yield spreads were this wide was in 1990, when the economy
was in recession. But this time the underlying quality of the bonds and the
corporations that issued them hadn't changed; it was all the result of a
risk-aversion mentality. Federal Reserve Chairman Alan Greenspan aptly called
this behavior a "disengage" from the market.
HOW DID THIS AFFECT YOUR MANAGEMENT OF THE FUND?
Liquidity (the ability to easily buy and sell bonds) in the corporate and
asset-backed markets was almost non-existent, which made it virtually impossible
to trade. For example, we tried to sell some AAA-rated asset-backed securities
and couldn't get a bid for them. These were top-rated bonds, and no one would
touch them.
The sizable losses at many hedge funds played a big part in the liquidity
crunch. These private, often-speculative funds were active traders in the
corporate and asset-backed bond markets. After a number of them sustained big
losses by betting against Treasury bonds, they became much more conservative,
and that took some big investors away from the market.
HAVE MARKET CONDITIONS IMPROVED SINCE THEN?
A little bit. Liquidity in the corporate market has improved, and the yield
spread between corporates and Treasurys has narrowed to about 100 basis points.
But it may be a while before we see the once-bitten hedge funds return to the
marketplace.
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
Interest rates in the U.S. are going to depend on how global economic
conditions play out. Overseas, we're seeing some Asian countries, such as Korea
and Thailand, possibly reaching the bottom and starting to bounce back from
their financial calamities. But we're not out of the woods yet--Russia is still
a basket case, Brazil will likely lead Latin America into recession in 1999, and
Japan remains unable to work its way out of a decade-long recession.
[right margin]
"WE BOUGHT THE BONDS OF COMPANIES THAT DO MOST OF THEIR BUSINESS DOMESTICALLY
AND ARE IN INDUSTRIES THAT ARE LESS AFFECTED BY ECONOMIC DOWNTURNS. EXAMPLES
INCLUDE COMPANIES IN THE TELECOMMUNICATIONS, CABLE TELEVISION, AND UTILITIES
INDUSTRIES."
[pie charts - data below]
PORTFOLIO COMPOSITION BY SECURITY TYPE
AS OF OCTOBER 31, 1998
Corporate Bonds 64%
U.S. Treasury 18%
Asset-Backed 5%
Mortgage-Backed 4%
Other 4%
AS OF APRIL 30, 1998
Corporate Bonds 70%
U.S. Treasury 13%
Asset-Backed 4%
Mortgage-Backed 9%
Other 4%
Security types are defined on page 41.
www.americancentury.com 21
Benham Bond--Q&A
- --------------------------------------------------------------------------------
(Continued)
Domestically, the Fed has cut short-term interest rates three times (most
recently in mid-November) in an effort to prevent a recession. Inflation remains
extremely low--falling commodities prices, corporate restructuring, and modest
wage increases have kept prices from rising.
Interestingly, the health of the U.S. economy may come down to the
performance of the stock market. With excess capacity around the globe,
businesses are likely to reduce their capital investments in the coming year.
That means economic growth will be even more dependent on consumer spending. And
as we've seen this year, consumers tend to spend more money when their stock
portfolios are doing well.
If the Fed is successful in achieving a "soft landing" for the U.S. economy
and consumers remain confident--as we expect--corporate bonds should perform
very well compared with Treasury securities. The corporate/ Treasury yield
spread is still wider than it's been historically, so corporates look very
attractive right now.
The one scenario that would favor Treasurys over corporates is a runaway
downtrend in interest rates, which would likely be the result of a full-blown
recession and a squeeze on corporate profits. However, we don't think that's
going to happen.
GIVEN YOUR OUTLOOK, WHAT ARE YOUR PLANS FOR BENHAM BOND OVER THE NEXT SIX
MONTHS?
We plan to maintain our emphasis on non-Treasury securities--corporate
bonds, asset-backed securities, and mortgage-backed bonds--which we think will
outperform going forward. We've been able to buy bonds issued by great
corporations with the biggest yield advantage over Treasurys we've seen in
years.
However, because we expect the economy to slow a little, we'll continue to
look toward defensive industries that are not economically sensitive.
[left margin]
"IF THE FED IS SUCCESSFUL IN ACHIEVING A 'SOFT LANDING' FOR THE U.S. ECONOMY AND
CONSUMERS REMAIN CONFIDENT--AS WE EXPECT--CORPORATE BONDS SHOULD PERFORM VERY
WELL COMPARED WITH TREASURY SECURITIES."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
AAA 35% 32%
AA 3% 3%
A 27% 35%
BBB 27% 28%
BB 8% 2%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 40
for more information.
22 1-800-345-2021
Benham Bond--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES--17.9%
$4,000 U.S. Treasury Notes, 5.625%,
12/31/02 $ 4,189
2,500 U.S. Treasury Notes, 5.50%,
1/31/03 2,610
4,000 U.S. Treasury Notes, 7.25%,
5/15/04 4,544
2,000 U.S. Treasury Notes, 7.875%,
11/15/04 2,350
5,500 U.S. Treasury Notes, 5.625%,
5/15/08 5,927
2,500 U.S. Treasury Bonds, 7.50%,
11/15/24 3,242
3,000 U.S. Treasury Bonds, 5.50%,
8/15/28 3,158
------------
TOTAL U.S. TREASURY SECURITIES 26,020
------------
(Cost $25,730)
U.S. GOVERNMENT AGENCY SECURITIES--1.4%
2,000 Tennessee Valley Authority,
6.875%, 12/15/43 2,076
------------
(Cost $1,854)
MORTGAGE-BACKED SECURITIES(1)--9.0%
4,676 FHLMC Pool #E68681, 6.00%,
1/1/13 4,701
160 FHLMC REMIC, Series 19,
Class E PAC, 8.00%, 8/15/19 161
423 FHLMC REMIC, Series 116,
Class F PAC, 8.50%, 2/15/20 427
3,860 FNMA Pool #250452, 6.50%,
1/1/26 3,893
671 FNMA REMIC, Series 1989-35,
Class G, 9.50%, 7/25/19 711
3,000 FNMA REMIC, Series 1997-10,
Class M SEQ, 6.60%, 8/18/24 3,088
------------
TOTAL MORTGAGE-BACKED SECURITIES 12,981
------------
(Cost $12,615)
ASSET-BACKED SECURITIES(1)--5.3%
2,500 AMRESCO, INC., Series 1998-2,
Class A4 SEQ, 6.45%,
4/25/27 2,547
420 Money Store (The) Home Equity
Trust, Series 1996 D, Class A3
SEQ, 6.30%, 11/15/11 419
1,690 United Companies Financial Corp.,
Home Equity Loan,
Series 1995 D1, Class A2,
6.20%, 3/10/14 1,698
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$3,000 United Companies Financial Corp.,
Home Equity Loan,
Series 1998 B, Class A4 SEQ,
6.22%, 11/15/20 $ 3,035
------------
TOTAL ASSET-BACKED SECURITIES 7,699
------------
(Cost $7,601)
CORPORATE BONDS--64.1%
AEROSPACE & DEFENSE--1.5%
2,000 Lockheed Martin Corp., 7.25%,
5/15/06 2,184
------------
AIRLINES--2.3%
3,101 Delta Air Lines, Inc., 7.54%,
10/11/11 3,285
------------
BANKING--15.9%
5,000 Citicorp Euro, 7.00%, 1/2/04 5,370
2,000 Corestates Capital Corp., 5.875%,
10/15/03 2,047
3,000 First Union Corp., 8.77%,
11/15/99 3,123
3,000 Mellon Financial Co., 6.00%,
3/1/04 3,057
5,000 National Bank of Canada, 8.125%,
8/15/04 5,581
2,000 Santander Financial Issuances
Ltd., 6.375%, 2/15/11 1,842
2,000 Wells Fargo Capital, 7.96%,
12/15/26 2,080
------------
23,100
------------
CHEMICALS & RESINS--4.1%
5,000 ARCO Chemical Co., 10.25%,
11/1/10 6,026
------------
COMMUNICATIONS SERVICES--6.2%
2,000 Cable & Wireless Communications,
6.375%, 3/6/03 2,042
1,350 Cable & Wireless Communications,
6.625%, 3/6/05 1,372
2,000 CSC Holdings Inc., 7.25%,
7/15/08 1,951
2,000 MCI WorldCom, Inc., 6.40%,
8/15/05 2,080
1,500 Qwest Communications
International Inc., 7.50%,
11/1/08 (Acquired 10/28/98,
Cost $1,490)(2) 1,526
------------
8,971
------------
COMPUTER SYSTEMS--1.1%
1,500 International Business Machines
Corp., 7.125%, 12/1/96 1,639
------------
See Notes to Financial Statements
www.americancentury.com 23
Benham Bond--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
ENERGY (PRODUCTION & MARKETING)--6.2%
$3,000 Columbia Gas Systems, 7.42%,
11/28/15 $ 3,121
2,500 Enron Corp., 6.625%, 11/15/05 2,602
3,000 Oryx Energy Co., 8.125%,
10/15/05 3,241
------------
8,964
------------
FINANCIAL SERVICES--7.0%
2,000 Comdisco, Inc., 6.375%,
11/30/01 2,076
3,000 Ford Motor Credit Co., 6.50%,
2/28/02 3,086
2,000 Lehman Brothers Holdings Inc.,
6.625%, 11/15/00 1,993
3,000 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 3,061
------------
10,216
------------
INSURANCE--4.8%
1,000 Delphi Financial Group, Inc.,
9.31%, 3/25/27 1,157
3,000 Lincoln National Corp., 9.125%,
10/1/04 3,569
2,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired 6/11/97,
Cost $2,059)(2) 2,233
------------
6,959
------------
LEISURE--1.5%
2,000 Time Warner Inc., 6.85%,
1/15/26 2,112
------------
METALS & MINING--1.5%
2,000 Barrick Gold Corp., 7.50%,
5/1/07 2,148
------------
PAPER & FOREST PRODUCTS--0.8%
1,350 Abitibi-Consolidated Inc., 7.40%,
4/1/18 1,226
------------
PRINTING & PUBLISHING--2.3%
3,000 News America Holdings Inc.,
8.50%, 2/15/05 3,341
------------
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
REAL ESTATE--5.6%
$1,000 Chelsea GCA Realty Partners,
7.25%, 10/21/07 $ 996
2,000 Price REIT, Inc. (The), 7.125%,
6/15/04 2,108
2,000 Simon DeBartolo Group Inc.,
6.625%, 6/15/03 (Acquired
6/17/98, Cost $1,995)(2) 1,968
3,000 Spieker Properties Inc., MTN,
7.58%, 12/17/01 3,118
------------
8,190
------------
TOBACCO--1.1%
1,500 Philip Morris Companies Inc.,
6.80%, 12/1/03 1,595
------------
UTILITIES--2.2%
3,000 CalEnergy Co. Inc., 7.63%,
10/15/07 3,122
------------
TOTAL CORPORATE BONDS 93,078
------------
(Cost $89,548)
SOVEREIGN GOVERNMENTS & AGENCIES--1.4%
2,000 Province of Quebec Bonds,
7.125%, 2/9/24 2,087
------------
(Cost $1,838)
TEMPORARY CASH INVESTMENTS--0.9%
1,280,000 Units of Participation in Chase
Vista Prime Money Market Fund
(Institutional Shares) 1,280
------------
(Cost $1,280)
TOTAL INVESTMENT SECURITIES--100.0% $145,221
============
(Cost $140,466)
See Notes to Financial Statements
24 1-800-345-2021
Benham Bond--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
MTN = Medium Term Note
(1) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at October 31, 1998, was $5,727,
which represented 3.9% of net assets.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal amount of each investment
* the market value of each investment
* the percentage of investments in each industry, as applicable
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
www.americancentury.com 25
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998 LIMITED-TERM INTERMEDIATE- BENHAM BOND
TERM
ASSETS (In Thousands Except Per-Share Amounts)
Investment securities, at value
(identified cost of
$19,197, $28,804 and $140,466,
respectively) (Note 3) .............$ 19,440 $ 29,402 $ 145,221
Cash ................................. 2 375 64
Receivable for investments sold ...... -- -- 1,666
Interest receivable .................. 315 493 2,808
------------ ------------ ------------
19,757 30,270 149,759
------------ ------------ ------------
LIABILITIES
Disbursements in excess of
demand deposit cash ................ 54 30 403
Payable for capital shares redeemed .. 4 23 88
Payable for investments purchased .... -- 248 1,490
Accrued management fees (Note 2) ..... 11 18 101
Distribution and service fees
payable (Note 2) ................... -- 1 1
Dividends payable .................... 4 3 27
------------ ------------ ------------
73 323 2,110
------------ ------------ ------------
Net Assets ...........................$ 19,684 $ 29,947 $ 147,649
============ ============ ============
NET ASSETS CONSIST OF:
Capital (par value and
paid in surplus) ...................$ 19,349 $ 29,156 $ 142,872
Accumulated undistributed net
realized gain from investment
transactions ....................... 92 193 22
Net unrealized appreciation on
investments (Note 3) ............... 243 598 4,755
------------ ------------ ------------
$ 19,684 $ 29,947 $ 147,649
============ ============ ============
Investor Class, $0.01 Par Value
($ and shares in full)
Net assets ...........................$ 18,838,347 $ 26,797,090 $145,496,244
Shares outstanding ................... 1,874,910 2,618,068 14,892,807
Net asset value per share ............$ 10.05 $ 10.24 $ 9.77
Advisor Class, $0.01 Par Value
($ and shares in full)
Net assets ...........................$ 845,394 $ 3,150,202 $ 2,152,531
Shares outstanding ................... 84,158 307,752 220,311
Net asset value per share ............$ 10.05 $ 10.24 $ 9.77
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. For each class of shares, the net assets
divided by the total number of shares outstanding gives you the price of an
individual share, or the net asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
26 1-800-345-2021
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1998 LIMITED-TERM INTERMEDIATE- BENHAM BOND
TERM
INVESTMENT INCOME (In Thousands)
Income:
<S> <C> <C> <C>
Interest ............................ $1,187 $1,552 $9,177
------------- -------------- -------------
Expenses (Note 2):
Management fees ..................... 132 173 1,096
Distribution fees -- Advisor Class .. 1 7 4
Service fees -- Advisor Class ....... 1 7 4
Directors' fees and expenses ........ -- -- 1
------------- -------------- -------------
134 187 1,105
------------- -------------- -------------
Net investment income ............... 1,053 1,365 8,072
------------- -------------- -------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS (NOTE 3)
Net realized gain on investments .... 92 179 47
Change in net unrealized
appreciation on investments ....... 115 206 699
------------- -------------- -------------
Net realized and unrealized
gain on investments ............... 207 385 746
------------- -------------- -------------
Net Increase in Net Assets
Resulting from Operations ......... $1,260 $1,750 $8,818
============= ============== =============
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down how each
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* interest income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized gains or losses
See Notes to Financial Statements
www.americancentury.com 27
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
LIMITED-TERM INTERMEDIATE-TERM BENHAM BOND
Increase (Decrease) in Net Assets 1998 1997 1998 1997 1998 1997
OPERATIONS (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net investment income ............. $ 1,053 $ 634 $ 1,365 $ 1,058 $ 8,072 $ 8,276
Net realized gain on investments .. 92 26 179 19 47 350
Change in net unrealized
appreciation on investments ..... 115 76 206 316 699 2,059
--------- --------- --------- --------- --------- ---------
Net increase in net assets
resulting from operations ....... 1,260 736 1,750 1,393 8,818 10,685
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income:
Investor Class .................. (1,026) (634) (1,219) (1,052) (7,993) (8,273)
Advisor Class ................... (27) -- (146) (6) (79) (3)
From net realized gains
from investment transactions:
Investor Class .................. (28) -- -- -- (368) (1,310)
Advisor Class ................... -- -- (1) --
--------- --------- --------- --------- --------- ---------
Decrease in net assets
from distributions .............. (1,081) (634) (1,365) (1,058) (8,441) (9,586)
--------- --------- --------- --------- --------- ---------
CAPITAL SHARE
TRANSACTIONS (NOTE 4)
Net increase (decrease) in
net assets from capital
share transactions .............. 4,236 7,075 9,419 4,182 20,229 (16,623)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in
net assets ...................... 4,415 7,177 9,804 4,517 20,606 (15,524)
NET ASSETS
Beginning of year ................. 15,269 8,092 20,143 15,626 127,043 142,567
--------- --------- --------- --------- --------- ---------
End of year ....................... $ 19,684 $ 15,269 $ 29,947 $ 20,143 $ 147,606 $ 127,043
========= ========= ========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* capital share transactions--shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
28 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Limited-Term Bond Fund
(Limited-Term), American Century - Benham Intermediate-Term Bond Fund
(Intermediate-Term), and American Century - Benham Bond Fund (Benham Bond) (the
Funds) are three of the twelve series of funds issued by the Corporation. The
Funds' investment objective is to seek income by investing in bonds and other
debt obligations. The Funds are authorized to issue two classes of shares: the
Investor Class and the Advisor Class. The two classes of shares differ
principally in their respective shareholder servicing and distribution expenses
and arrangements. All shares of the Fund represent an equal pro rata interest in
the assets of the class to which such shares belong, and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
for class specific expenses and exclusive rights to vote on matters affecting
only individual classes. The following significant accounting policies are in
accordance with generally accepted accounting principles.
SECURITY VALUATIONS--Portfolio securities are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
REPURCHASE AGREEMENTS--The Funds may enter into repurchase agreements with
institutions the Funds' investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Funds require that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Funds to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Funds under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Funds, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the Funds' policy to distribute all taxable income
and realized gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
ADDITIONAL INFORMATION--Funds Distributor, Inc. (FDI) is the Corporation's
distributor. Certain officers of FDI are also officers of the Corporation.
www.americancentury.com 29
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Funds with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreements provide that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will by paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee for the Investor Class of Limited-Term,
Intermediate-Term, and Benham Bond is 0.70%, 0.75% and 0.80%, respectively. The
annual management fee for the Advisor Class of Limited-Term, Intermediate-Term
and Benham Bond is 0.45%, 0.50% and 0.55%, respectively.
The Board of Directors has adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the Plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The Plan provides that the Funds will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the funds. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers. Fees incurred
under the Plan for the year ended October 31, 1998 for Limited-Term,
Intermediate-Term and Benham Bond were $2,544, $13,376 and $7,085, respectively
Certain officers and directors of the Corporation are also officers and/or
directors, and as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
<TABLE>
Investment transactions, excluding short-term investments, for the year ended
October 31,1998, were as follows:
LIMITED-TERM INTERMEDIATE-TERM BENHAM BOND
PURCHASES (In Thousands)
<S> <C> <C> <C>
U.S. Treasury & Agency Obligations ...... $17,691 $19,623 $68,144
Other Debt Obligations .................. 6,443 10,385 41,568
PROCEEDS FROM SALES (In Thousands)
U.S. Treasury & Agency Obligations ...... $14,230 $11,824 $51,343
Other Debt Obligations .................. 2,995 8,515 36,205
On October 31, 1998, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
LIMITED-TERM INTERMEDIATE-TERM BENHAM BOND
(In Thousands)
Appreciation ............................ $297 $597 $5,501
Depreciation ............................ (54) (5) (792)
------------ --------------- --------------
Net ..................................... $243 $592 $4,709
============ =============== ==============
Federal Tax Cost ........................ $19,197 $28,810 $140,512
============ =============== ==============
</TABLE>
30 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
<TABLE>
Transactions in shares of the Funds were as follows:
LIMITED-TERM INTERMEDIATE-TERM BENHAM
BOND BOND BOND
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
INVESTOR CLASS (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Shares authorized ........ 100,000 100,000 100,000
======== ========== ==========
Year ended
October 31, 1998
Sold ..................... 1,763 $ 17,594 1,851 $ 18,810 8,501 $ 83,134
Issued in reinvestment
of distributions ....... 100 999 108 1,093 799 7,783
Redeemed ................. (1,518) (15,196) (1,140) (11,569) (7,418) (72,377)
-------- ---------- ---------- ----------- ---------- -----------
Net increase ............. 345 $ 3,397 819 $ 8,334 1,882 $ 18,540
======== ========== ========== =========== ========== ===========
Year ended
October 31, 1997
Sold ..................... 1,315 $13,023 1,569 $ 15,513 5,099 $ 48,694
Issued in reinvestment
of distributions ....... 62 615 95 942 946 9,015
Redeemed ................. (662) (6,563) (1,442) (14,279) (7,835) (74,792)
-------- ---------- ---------- ----------- ---------- -----------
Net increase (decrease) .. 715 $7,075 222 $ 2,176 (1,790) $(17,083)
======== ========== ========== =========== ========== ===========
ADVISOR CLASS (In Thousands)
Shares authorized ........ 50,000 50,000 50,000
======== ========== ==========
Period ended
October 31, 1998(1)
Sold ..................... 107 $ 1,072 284 $ 2,873 279 $ 2,721
Issued in reinvestment
of distributions ....... 3 26 14 143 8 80
Redeemed ................. (26) (259) (190) (1,931) (114) (1,112)
-------- ---------- ---------- ----------- ---------- -----------
Net increase ............. 84 $ 839 108 $ 1,085 173 $ 1,689
======== ========== ========== =========== ========== ===========
Period ended
October 31, 1997(2)
Sold ..................... -- -- 199 $2,000 61 $ 588
Issued in reinvestment
of distributions ....... -- -- 1 6 1 3
Redeemed ................. -- -- -- -- (14) (131)
-------- ---------- ---------- ----------- ---------- -----------
Net increase ............. -- -- 200 $2,006 48 $ 460
======== ========== ========== =========== ========== ===========
</TABLE>
(1) November 1, 1997 through October 31, 1998 for Intermediate-Term and Benham
Bond and November 12, 1997 (commencement of sale of the Advisor Class)
through October 31, 1998 for Limited-Term.
(2) August 14, 1997 (commencement of sale of the Advisor Class) through October
31, 1997 for Intermediate-Term. August 8, 1997 (commencement of sale of the
Advisor Class) through October 31, 1997 for Benham Bond.
www.americancentury.com 31
Limited-Term Bond--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor Class
1998 1997 1996 1995 1994(1)
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 9.98 $ 9.93 $ 9.96 $ 9.68 $ 10.00
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ............... 0.55 0.56 0.56 0.56 0.31
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ........................ 0.08 0.05 (0.03) 0.28 (0.32)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations .... 0.63 0.61 0.53 0.84 (0.01)
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income .......... (0.55) (0.56) (0.56) (0.56) (0.31)
From Net Realized Gains on
Investment Transactions ............. (0.01) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ................. (0.56) (0.56) (0.56) (0.56) (0.31)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ........ $ 10.05 $ 9.98 $ 9.93 $ 9.96 $ 9.68
========== ========== ========== ========== ==========
Total Return(2) ..................... 6.58% 6.30% 5.48% 8.89% (0.08)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............... 0.70% 0.69% 0.68% 0.69% 0.70%(3)
Ratio of Net Investment Income
to Average Net Assets ............... 5.56% 5.63% 5.63% 5.70% 4.79%(3)
Portfolio Turnover Rate ............... 97% 109% 121% 116% 48%
Net Assets, End of Period
(in thousands) ...................... $ 18,838 $ 15,269 $ 8,092 $ 7,193 $ 4,375
</TABLE>
(1) March 1, 1994 (inception) through October 31, 1994.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
32 1-800-345-2021
Limited-Term Bond--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED
Advisor Class
1998(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ..................... $ 9.97
-------
Income From Investment Operations
Net Investment Income .................................. 0.51
Net Realized and Unrealized Gain
on Investment Transactions ............................. 0.09
-------
Total From Investment Operations ....................... 0.60
-------
Distributions
From Net Investment Income ............................. (0.51)
From Net Realized Gains on
Investment Transactions ................................ (0.01)
-------
Total Distributions .................................... (0.52)
-------
Net Asset Value, End of Period ........................... $ 10.05
=======
Total Return(2) ........................................ 6.23%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................................. 0.95%(3)
Ratio of Net Investment Income
to Average Net Assets .................................. 5.26%(3)
Portfolio Turnover Rate .................................. 97%
Net Assets, End of Period
(in thousands) ......................................... $ 845
(1) November 12, 1997 (commencement of sale) through October 31, 1998.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 33
Intermediate-Term Bond--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor Class
1998 1997 1996 1995 1994(1)
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 10.07 $ 9.91 $ 10.07 $ 9.53 $ 10.00
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ............... 0.58 0.59 0.58 0.59 0.34
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ........................ 0.17 0.16 (0.06) 0.54 (0.47)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations .... 0.75 0.75 0.52 1.13 (0.13)
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income .......... (0.58) (0.59) (0.58) (0.59) (0.34)
From Net Realized Gains on
Investment Transactions ............. -- -- (0.10) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ................. (0.58) (0.59) (0.68) (0.59) (0.34)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ........ $ 10.24 $ 10.07 $ 9.91 $ 10.07 $ 9.53
========== ========== ========== ========== ==========
Total Return(2) ..................... 7.71% 7.87% 5.36% 12.19% (1.24)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............... 0.75% 0.75% 0.74% 0.74% 0.75%(3)
Ratio of Net Investment Income
to Average Net Assets ............... 5.73% 5.99% 5.90% 6.05% 5.23%(3)
Portfolio Turnover Rate ............... 89% 99% 87% 133% 48%
Net Assets, End of Period
(in thousands) ...................... $ 26,797 $ 18,126 $ 15,626 $ 12,827 $ 4,262
</TABLE>
(1) March 1, 1994 (inception) through October 31, 1994.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
34 1-800-345-2021
Intermediate-Term Bond--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ........ $ 10.07 $ 9.96
--------- ---------
Income From Investment Operations
Net Investment Income ..................... 0.56 0.12
Net Realized and Unrealized Gain
on Investment Transactions ................ 0.17 0.11
--------- ---------
Total From Investment Operations .......... 0.73 0.23
--------- ---------
Distributions
From Net Investment Income ................ (0.56) (0.12)
--------- ---------
Net Asset Value, End of Period .............. $ 10.24 $ 10.07
========= =========
Total Return(2) ........................... 7.44% 2.33%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 1.00% 1.00%(3)
Ratio of Net Investment Income
to Average Net Assets ..................... 5.48% 6.05%(3)
Portfolio Turnover Rate ..................... 89% 99%
Net Assets, End of Period
(in thousands) ............................ $ 3,150 $ 2,017
(1) August 14, 1997 (commencement of sale) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 35
Benham Bond--Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1998 1997 1996 1995 1994
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ... $ 9.73 $ 9.63 $ 9.78 $ 8.91 $ 10.21
----------- ----------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Income .............. 0.57 0.60 0.60 0.61 0.58
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ....................... 0.07 0.19 (0.14) 0.87 (1.12)
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ... 0.64 0.79 0.46 1.48 (0.54)
----------- ----------- ----------- ----------- -----------
Distributions
From Net Investment Income ......... (0.57) (0.60) (0.60) (0.61) (0.58)
From Net Realized Gains on
Investment Transactions ............ (0.03) (0.09) (0.01) -- (0.18)
----------- ----------- ----------- ----------- -----------
Total Distributions ................ (0.60) (0.69) (0.61) (0.61) (0.76)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year ......... $ 9.77 $ 9.73 $ 9.63 $ 9.78 $ 8.91
=========== =========== =========== =========== ===========
Total Return(1) .................... 6.79% 8.57% 4.91% 17.16% (5.47%)
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .............. 0.80% 0.80% 0.79% 0.78% 0.88%
Ratio of Net Investment Income
to Average Net Assets .............. 5.87% 6.25% 6.18% 6.53% 6.07%
Portfolio Turnover Rate .............. 66% 52% 100% 105% 78%
Net Assets, End of Year
(in thousands) ..................... $ 145,496 $ 126,580 $ 142,567 $ 149,223 $ 121,012
</TABLE>
(1) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--These statements itemize current period
activity and statistics and provide comparison data for the last five fiscal
years (or less, if the class is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* income and capital gains distributions paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
36 1-800-345-2021
Benham Bond--Financial Highlights
- --------------------------------------------------------------------------------
(Continued)
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Advisor Class
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ........ $ 9.73 $ 9.55
--------- ---------
Income From Investment Operations
Net Investment Income ..................... 0.55 0.13
Net Realized and Unrealized Gain
on Investment Transactions ................ 0.07 0.18
--------- ---------
Total From Investment Operations .......... 0.62 0.31
--------- ---------
Distributions
From Net Investment Income ................ (0.55) (0.13)
From Net Realized Gains on
Investment Transactions ................... (0.03) --
--------- ---------
Total Distributions ....................... (0.58) (0.13)
--------- ---------
Net Asset Value, End of Period .............. $ 9.77 $ 9.73
========= =========
Total Return(2) ........................... 6.52% 3.27%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 1.05% 1.05%(3)
Ratio of Net Investment Income
to Average Net Assets ..................... 5.62% 5.92%(3)
Portfolio Turnover Rate ..................... 66% 52%
Net Assets, End of Period
(in thousands) ............................ $ 2,141 $ 462
(1) August 8, 1997 (commencement of sale) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
www.americancentury.com 37
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of American Century - Benham Limited-Term Bond
Fund, American Century - Benham Intermediate-Term Bond Fund and American Century
- - Benham Bond Fund (collectively the "Funds"), three of the funds comprising
American Century Mutual Funds, Inc., as of October 31, 1998, and the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the periods in the five-year period then ended. These
financial statements and the financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of American Century -
Benham Limited-Term Bond Fund, American Century - Benham Intermediate-Term Bond
Fund and American Century - Benham Bond Fund as of October 31, 1998, the results
of their operations, the changes in their net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
38 1-800-345-2021
Share Class and Retirement Account Information
- --------------------------------------------------------------------------------
SHARE CLASSES
American Century offers two classes of shares for Limited-Term Bond,
Intermediate-Term Bond, and Benham Bond: the Investor Class and the Advisor
Class.
INVESTOR CLASS shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE INVESTOR CLASS
SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY LISTED.
ADVISOR CLASS shares are sold through banks, broker-dealers, insurance
companies, and financial advisors. Advisor Class shares are subject to a 0.50%
Rule 12b-1 service and distribution fee. Half of that fee is available to pay
for recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
is 0.25% higher than the total expense ratio of the Investor Class.
Both classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
www.americancentury.com 39
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
LIMITED-TERM BOND seeks to provide interest income by investing in a
diversified portfolio of fixed-income securities. The fund maintains a weighted
average maturity of five years or less.
INTERMEDIATE-TERM BOND seeks to provide interest income by investing in a
diversified portfolio of fixed-income securities. The fund maintains a weighted
average maturity of 3-10 years.
BENHAM BOND seeks to provide interest income by investing in a diversified
portfolio of fixed-income securities. The fund has no weighted average maturity
limitations, but the fund typically invests in intermediate- and long-term
bonds.
COMPARATIVE INDICES
The indices listed are used in the report for fund performance comparisons.
They are not investment products available for purchase.
The MERRILL LYNCH 1- TO 5-YEAR GOVERNMENT/CORPORATE INDEX is an index
composed of corporate and Treasury debt with an overall maturity of
approximately three years. The index consists of approximately 24% corporate
debt and 76% government debt. The corporate debt issues are rated BBB or better
by Standard & Poor's.
The LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE INDEX includes the Lehman
Government Index and the Lehman Intermediate Corporate Bond Index, which reflect
the price fluctuations of U.S. Treasury and government agency securities,
corporate bonds, and Yankee bonds with maturities of 1-10 years.
The LEHMAN AGGREGATE BOND INDEX is composed of the Lehman
Government/Corporate Index and the Lehman Mortgage-Backed Securities Index. It
reflects the price fluctuations of Treasury securities, U.S. government agency
securities, corporate bond issues, and mortgage-backed securities.
LIPPER RANKINGS
LIPPER INC. is an independent mutual fund ranking service that groups funds
according to their investment objectives. Rankings are based on average annual
returns for each fund in a given category for the periods indicated. Rankings
are not included for periods less than one year.
The Lipper categories for the funds are:
SHORT INVESTMENT-GRADE DEBT FUNDS (Limited-Term Bond)--funds with
dollar-weighted average maturities of five years or less that invest at least
65% of their assets in investment-grade debt.
INTERMEDIATE INVESTMENT-GRADE DEBT FUNDS (Intermediate-Term Bond)-- funds
with dollar-weighted average maturities of 5-10 years that invest at least 65%
of their assets in investment-grade debt.
A-RATED CORPORATE DEBT FUNDS (Benham Bond)--funds that invest at least 65%
of their assets in government issues or corporate debt issues rated A or better
[left margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGERS
BUD HOOPS
JEFF HOUSTON
CREDIT RESEARCH MANAGER
GREG AFIESH
CREDIT RATING GUIDELINES
CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS
STANDARD & POOR'S AND MOODY'S. RATINGS ARE BASED ON AN ISSUER'S FINANCIAL
STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE"
SECURITIES, WHICH MEANS THEY ARE RELATIVELY SAFE FROM DEFAULT. SECURITIES RATED
BB OR BELOW ARE CONSIDERED TO HAVE MORE SPECULATIVE CHARACTERISTICS.
IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE
OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY.
40 1-800-345-2021
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 32-37.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF FIXED-INCOME SECURITIES
* ASSET-BACKED SECURITIES--debt securities that represent ownership in a pool of
receivables, such as credit-card debt, auto loans, and commercial mortgages.
* CORPORATE BONDS--debt securities or instruments issued by companies and
corporations. Short-term corporate securities are typically issued to raise cash
and cover current expenses in anticipation of future revenues; long-term
corporate securities are issued to finance capital expenditures, such as new
plant construction or equipment purchases.
* MORTGAGE-BACKED SECURITIES--debt securities that represent ownership in pools
of mortgage loans. Most mortgage-backed securities are structured as
"pass-throughs"--the monthly payments of principal and interest on the mortgages
in the pool are collected by the bank that is servicing the mortgages and are
"passed through" to investors. While the payments of principal and interest are
considered secure (many are backed by government agency guarantees), the cash
flow is less certain than in other fixed-income investments. Mortgages that are
paid off early reduce future interest payments from the pool.
* U.S. TREASURY SECURITIES--debt securities issued by the U.S. Treasury and
backed by the direct "full faith and credit" pledge of the U.S. government.
Treasury securities include bills (maturing in one year or less), notes
(maturing in two to 10 years), and bonds (maturing in more than 10 years).
www.americancentury.com 41
Notes
- --------------------------------------------------------------------------------
42 1-800-345-2021
Notes
- --------------------------------------------------------------------------------
www.americancentury.com 43
Notes
- --------------------------------------------------------------------------------
44 1-800-345-2021
[inside back cover]
American Century Funds
Benham Group(reg.sm)
TAXABLE BOND FUNDS
U.S. Treasury & Government
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
Corporate & Diversified
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
International
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
Multiple-State
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
Single-State
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
Taxable
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
Tax-Free & Municipal
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY[reg.sm] GROUP
Asset Allocation Funds
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
Balanced Fund
Balanced
Conservative Equity Funds
Income and Growth
Equity Income
Value
Equity Growth
Specialty Funds
Utilities
Real Estate
Global Natural Resources
Global Gold
Small Cap Funds
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
Growth Funds
Select
Heritage
Growth
Ultra
Aggressive Growth Funds
Vista
Giftrust
New Opportunities
International Growth Funds
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
[recycled logo]
Recycled
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 (c)1998 American Century Services Corporation
SH-BKT-14771 Funds Distributor, Inc.
<PAGE>
[front cover]
OCTOBER 31, 1998
ANNUAL REPORT
- -----------------
AMERICAN CENTURY
[graphic of globe, U.S. Currency, and money managers overlooking monitors]
TWENTIETH CENTURY GROUP
- -----------------------
NEW OPPORTUNITIES
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
o FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
o Buy individual stocks and bonds
o 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
o Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over 500,000
reports on industry trends, corporate earnings, and mutual fund analysis
o Track your brokerage account on one easy-to-read statement
o Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card an
American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles
follow a standard SEC format and allow investors to compare funds
easily. You can request a profile or the full prospectus. Full
prospectuses contain more detailed fund information and you will
continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight
important information about our funds, including fees and expenses.
More technical data will be in the Statement of Additional
Information.
On the Cover:
Kevin Lewis and Cindy Brown are part of the investment group at American
Century.
[left margin]
TWENTIETH CENTURY GROUP
NEW OPPORTUNITIES
(TWNOX)
Our Message to You
- --------------------------------------------------------------------------------
[photo James E. Stower III and James E. Stowers, Jr.]
James E. Stowers III, seated, with James E. Stowers, Jr.
This report covers an investment year filled with sharp contrasts. Many
popular market averages set records early in the year, lifted by a healthy
economy, low inflation, and widespread market optimism, then tumbled
dramatically as the outlook for the U.S. economy and corporate earnings turned
pessimistic, almost overnight. The mood swing in market psychology seemed
especially sharp after the gains of the last several years--gains that were
interrupted by relatively few, and very shallow, downdrafts.
Often forgotten in the earlier, heady atmosphere, was the wide performance
disparity at work in the market. For the year, large stocks outperformed the
small stocks by a significant margin. That margin widened in the second half of
the year, when small caps dropped sharply in the face of uncertainty over global
economic conditions and the strength of the U.S. economy.
Given the gains of the last several years, and the low market volatility, it
is understandable that many investors--especially those who are new to the stock
market--might find the broad market price swings we've seen in 1998 fairly
stressful. In our experience, these swings are an inevitable, even necessary,
part of the investment process. They often set the stage for further advances
- --which, in fact, we saw in November. But whatever the market's direction, it
does not pay to get caught up in its excesses, whether overly optimistic or
overly pessimistic. If you have an investment plan, try to stay with it. If you
don't have a plan, this might be a good time to develop one.
Turning to the corporate front, it is our pleasure to announce that Jim
Stowers III is now overseeing the management teams of our domestic growth funds:
Growth, Select, Ultra, Heritage, Vista, Giftrust, and New Opportunities. In his
new role, Jim will work directly with the equity teams that run the funds'
day-to-day operations. This change is yet another important step in our ongoing
effort to bring our funds' performance up to shareholders' expectations.
In addition to his new duties, Jim will continue to head the Ultra portfolio
team and will remain American Century's Chief Executive Officer.
We appreciate your investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
TABLE OF CONTENTS
Report Highlights ......................................................... 2
Market Perspective ........................................................ 3
NEW OPPORTUNITIES
Performance Information ................................................... 5
Management Q & A .......................................................... 6
Portfolio at a Glance ..................................................... 6
Top Ten Holdings ............................................... 7
Top Five Industries ............................................ 7
Types of Investments ........................................... 8
Schedule of Investments ................................................... 9
Statement of Assets and
Liabilities .................................................... 11
Statement of Operations ................................................... 12
Statements of Changes
in Net Assets .................................................. 13
Notes to Financial
Statements ..................................................... 14
Financial Highlights ...................................................... 16
OTHER INFORMATION
Independent Auditors'
Report ................................................................. 17
Retirement Account
Information .................................................... 18
Background Information
Investment Philosophy
and Policies ................................................... 19
Comparative Indices ....................................................... 19
Portfolio Managers ........................................................ 19
Glossary .................................................................. 20
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
o Although stocks set records during the first seven months of the year, a
sell-off began in early July and accelerated into October, pulling small
stocks lower.
o Until July, the outperformance of a relatively small number of large and
midsize stocks masked much weaker returns in the rest of the equity
universe.
o Even with the downturn this year, the recession of 1990-1991, and the
favoritism shown the most popular large stocks, small stocks have produced
respectable results during the '90s. The Russell 2000's average annual
return was 11.40% from January 1, 1990, to October 31, 1998, compared to
its 20-year average of 14.40%.
o In general, U.S. business is productive and streamlined, which bodes well
for the economy. But we are probably in a more moderate phase of the
economic cycle--one marked by low inflation and global overcapacity.
o We believe small stocks look relatively inexpensive. Companies with
sustainable revenue and earnings growth could turn out to be today's
bargains and tomorrow's winners.
NEW OPPORTUNITIES
o The environment for small stocks was very difficult throughout the year.
o New Opportunities' performance was competitive. Although returns were in
negative territory, the fund beat its benchmark, the Russell 2000 Growth
Index.
o The fund's competitive performance can be largely attributed to the
eclectic nature of its portfolio. New Opportunities holds a number of small
companies that are underfollowed by other investment analysts, which limits
some of the research "noise" associated with more widely followed
companies.
o Many of the fund's better individual contributors came from diverse
industries, including pharmaceuticals, semiconductors, biotechnology,
medical devices, and a video systems developer.
o Technology, communications, and business services also displayed solid
earnings growth.
o Energy, healthcare, and food companies were weak.
o In the past, small stocks have snapped back from periods of
underperformance. We believe New Opportunities is positioned to take
advantage of a recovery in the small-cap sector.
[LEFT MARGIN]
"WE BELIEVE SMALL STOCKS LOOK RELATIVELY INEXPENSIVE. COMPANIES WITH
SUSTAINABLE REVENUE AND EARNINGS GROWTH COULD TURN OUT TO BE TODAY'S BARGAINS
AND TOMORROW'S WINNERS."
NEW OPPORTUNITIES (TWNOX)
TOTAL RETURNS: AS OF 10/31/98
6 Months -20.76%*
1 Year -10.17%
NET ASSETs: $213.5 million
INCEPTION DATE: 12/26/96
* Not annualized.
Investment terms are defined in the Glossary on page 20.
2 1-800-345-2021
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
[photo Robert C. Puff, Jr.]
Robert C. Puff, Jr., chief investment officer of American Century Investment
Management
MARKET PSYCHOLOGY: THE RETURN OF FEAR
Sometimes a little pain can go a long way. This was certainly the case over
the final four months of our fiscal year (July-October)--a period that marked an
abrupt change in market psychology. Financial markets are motivated by greed and
fear, and during the '90s, greed has enjoyed a long run. In mid-July, after the
S&P 500 peaked, fear returned to the stock market. Its entrance was dramatic,
but not terribly surprising. Market declines are a normal part of the investment
process. Although they have been notably absent in the 1990s, in prior decades
moderate corrections of 10% happened about once a year and more severe
corrections of up to 15% occurred about once every two years. A correction in
the 20% range occurred roughly every three to four years. On a historical basis,
a correction was overdue.
The decline in the S&P 500 accelerated into early October, propelled by an
increasingly restrained outlook for corporate earnings, apprehension about
further economic and political deterioration in Southeast Asia and Russia, and
stubbornly elevated short-term interest rates in the United States. Serious talk
of a U.S. recession also surfaced.
Money that had been earmarked for the stock market instead sought a safe
haven in U.S. Treasurys and a few popular megastocks. Banks pulled back from
lending, and professional investors were shaken by the problems at a large,
well-known hedge fund. While many of the pros panicked, individual investors
generally stayed the course and used the decline as a buying opportunity.
ONCE AGAIN, SIZE MATTERED
August saw a sharp decline of 14.56% in the S&P 500 Index. Especially
disturbing, at least psychologically, was the sell-off in the handful of
blue-chip stocks that had accounted for much of the S&P 500's performance during
the last several years. In general, the returns of larger stocks have been very
impressive compared with small and midsize stocks. From January 1994 through
October 1998, large stocks outperformed smaller stocks 14 out of 19 calendar
quarters. However, closer analysis revealed that the strong performance of a
relatively limited number of blue-chip and midsize companies masked the price
deterioration of the vast majority of the other 9,000 stocks traded in the U.S.
For example, through September 30 of this year, fewer than 20 of the largest
stocks in the S&P 500 Index were responsible for almost 100% of the index's
performance. Most stocks were correcting well before the decline in the major
market indices began.
A GOOD PLACE TO WORK AND INVEST
Still, as the chart on page 4 illustrates, U.S. stock returns since 1990 have
been robust, even with the recession of 1990-1991 and this year's market
decline. The Russell 2000's average annual return from January 1, 1990, to
October 31, 1998, was a respectable 11.40%. However, this was below the index's
20-year average of 14.40%. Large stocks posted the most impressive gains during
the decade.
[RIGHT MARGIN]
". . . THROUGH SEPTEMBER 30 OF THIS YEAR, FEWER THAN 20 OF THE LARGEST STOCKS IN
THE S&P 500 INDEX WERE RESPONSIBLE FOR ALMOST 100% OF THE INDEX'S PERFORMANCE."
MARKET RETURNS
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 21.96%
S&P MIDCAP 400 6.71%
RUSSELL 2000 -11.84%
Source: Lipper Analytical Services, Inc.
These indices represent the performance of large-, medium- and
small-capitalization stocks.
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FOR THE YEAR ENDED OCTOBER 31, 1998
S&P 500 S&P Mid-Cap 400 Russell 2000
10/31/97 $1.00 $1.00 $1.00
11/30/97 $1.05 $1.01 $0.99
12/31/97 $1.06 $1.05 $1.01
1/31/98 $1.08 $1.03 $0.99
2/28/98 $1.15 $1.12 $1.07
3/31/98 $1.21 $1.17 $1.11
4/30/98 $1.23 $1.19 $1.12
5/31/98 $1.20 $1.14 $1.06
6/30/98 $1.25 $1.15 $1.06
7/31/98 $1.24 $1.10 $0.97
8/31/98 $1.06 $0.90 $0.79
9/30/98 $1.13 $0.98 $0.85
10/31/98 $1.22 $1.07 $0.88
Value as of 10/31/98:
S&P 500 $1.22
S&P MidCap 400 $1.07
Russell 2000 $0.88
www.americancentury.com 3
Market Perspective from Robert C. Puff, Jr.
- --------------------------------------------------------------------------------
(Continued)
All things considered, the U.S. is a pretty good place to be. We have a
sound economy, a stable government, a generally reasonable regulatory
environment, and a culture that values creativity and entrepreneurialism. The
recent national elections suggest that our political attitudes remain solidly
practical and centrist. Our corporate sector is strong and relatively lean. Many
businesses have streamlined operations and enhanced productivity via
increasingly powerful--and less expensive--technology. Response time to changes
in economic activity and product demand is quite low. Economist Adam Smith's
"invisible hand" continues to be active in getting businesses to prune, manage
costs, and move toward greater efficiencies. Overall, it is a rich, dynamic
process.
The Federal Reserve has done a good job, too. It has kept interest rates
stable, but has been reasonable and flexible in its approach, lowering rates
three times this fall (its first such move since 1995) to help stimulate the
economy.
A DIFFERENT PHASE OF GROWTH
We are probably now in a different, more moderate phase of the economic
cycle. There is, quite frankly, too much of almost everything--except
understanding. As an example, the global production capacity for automobiles is
estimated to be roughly 28-29 million per year, or about 50% higher than demand.
Much the same is true for other key commodities, including basic foodstuffs,
steel, petrochemicals, and energy. Overcapacity and global competition have
eliminated pricing flexibility from the marketplace, and have contributed to the
lowest inflation in more than 30 years. Lower interest rates may help the
situation, but I doubt they will have much impact on demand, at least right
away. Lowering rates at this stage is, in effect, like pushing on a string. Many
consumers already have all they need; lower rates won't necessarily induce them
to buy more.
At some point, of course, overcapacity will dissipate as many of the
world's economies begin to grow again. There are already signs, for example, of
a more responsible approach to the Japanese banking and economic crises. But in
the current environment, deflation remains a threat, and countries -- including
our own -- may be tempted to fall into the trap of protectionism. U.S.
manufacturers have already petitioned for tariffs to counteract the dumping of
steel and wheat by foreign producers. Trade with Asia is largely one-way: Ships
arrive full at our ports but travel empty on the return trip. If growth slows
too much, business will lose enthusiasm for new ventures, and the economy will
contract. That is the worst-case scenario, but, in my view, it is not the most
likely.
SMALL STOCKS: GROWTH IS INEXPENSIVE
We have been in a relatively narrow market for the last few years. Should
the market broaden, and reward stocks for their earnings strength and not simply
for their size, we believe the earnings acceleration discipline will do well. By
a number of measures, including price-earnings ratios, growth in the small-cap
sector is as inexpensive (with but a few exceptions) as it has been in decades.
As always, marginal companies will continue to have problems. However, those
smaller firms that have built solid positions in their markets and have deep
enough pockets to get past the rough spots could be today's bargains and
tomorrow's winners.
[LEFT MARGIN]
"ALL THINGS CONSIDERED, THE U.S. IS A PRETTY GOOD PLACE TO BE. WE HAVE A SOUND
ECONOMY, A STABLE GOVERNMENT, A GENERALLY REASONABLE REGULATORY ENVIRONMENT, AND
A CULTURE THAT VALUES CREATIVITY AND ENTREPRENEURIALISM."
[line chart - data below]
MARKET PERFORMANCE (GROWTH OF $1.00)
FROM JANUARY 1, 1990 TO OCTOBER 31, 1998
S&P 500 S&P MidCap 400 Russell 2000
12/31/89 $1.00 $1.00 $1.00
12/31/90 $0.97 $0.95 $0.81
12/31/91 $1.26 $1.42 $1.18
12/31/92 $1.36 $1.59 $1.39
12/31/93 $1.50 $1.82 $1.66
12/31/94 $1.52 $1.75 $1.63
12/31/95 $2.08 $2.29 $2.09
12/31/96 $2.56 $2.73 $2.43
12/31/97 $3.41 $3.61 $2.98
YTD 1998 $3.91 $3.66 $2.59
Value as of 10/31/98:
S&P 500 $3.91
S&P MidCap 400 $3.66
Russell 2000 $2.59
Source: Lipper Analytical Services, Inc.
4 1-800-345-2021
New Opportunities--Performance
- -----------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1998
NEW OPPORTUNITIES RUSSELL 2000 GROWTH
6 MONTHS(1) -20.76% -23.47%
1 YEAR -10.17% -15.86%
AVERAGE ANNUAL RETURNS
LIFE OF FUND(2) -2.52% -1.48%(3)
(1) Returns for periods less than one year are not annualized.
(2) Inception was 12/26/96.
(3) Return since 12/31/96, the date nearest the fund's inception for which data
are available.
See pages 19 and 20 for information about the Russell 2000 Growth Index and
returns.
[mountain chart - data below]
PERFORMANCE OF $10,000 OVER LIFE OF FUND
New Opportunities Russell 2000 Growth Index
12/31/96 $10,000 $10,000
1/31/97 $9,745 $10,250
2/28/97 $8,763 $9,631
3/31/97 $7,957 $8,951
4/30/97 $7,860 $8,847
5/31/97 $9,294 $10,177
6/30/97 $9,962 $10,522
7/31/97 $10,847 $11,061
8/31/97 $10,945 $11,392
9/30/97 $11,712 $12,301
10/31/97 $10,434 $11,562
11/30/97 $10,060 $11,287
12/31/97 $10,316 $11,294
1/31/98 $10,001 $11,144
2/28/98 $10,826 $12,128
3/31/98 $11,455 $12,636
4/30/98 $11,829 $12,713
5/31/98 $11,043 $11,789
6/30/98 $11,633 $11,909
7/31/98 $11,024 $10,914
8/31/98 $8,784 $8,395
9/30/98 $9,117 $9,247
10/31/98 $9,371 $9,729
Value on 10/31/98
Russell 200 Growth $9,729
New Opportunities $9,371
The chart at left shows the performance of a $10,000 investment in the fund
since 12/31/96 while the chart below shows the fund's year-by-year performance.
The Russell 2000 Growth Index is provided for comparison. Past performance does
not guarantee future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than the original cost. New
Opportunities' total returns include operating expenses (such as transaction
costs and management fees) that reduce returns, while the total returns of the
Russell 2000 Growth Index do not.
[bar chart - data below]
ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED OCTOBER 31)
10/97 10/98
New Opportunities 6.20% -10.17%
Russell 2000 Growth Index 15.64% -15.86%
www.americancentury.com 5
New Opportunities--Q&A
- --------------------------------------------------------------------------------
[photo Chris Boyd and John Seitzer]
Chris Boyd and John Seitzer, portfolio managers on the New Opportunities
investment team.
An interview with Chris Boyd and John Seitzer, portfolio managers on the New
Opportunities investment team.
WHAT WAS NEW OPPORTUNITIES' RETURN FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1998?
New Opportunities was down 10.17%. Its benchmark index, the Russell 2000
Growth, which is made up of small growth stocks, lost 15.86% for the year. While
no one likes to post negative returns, this has been a very tough year for
small-capitalization stocks, and relative to its benchmark, New Opportunities
performed reasonably well.
WHAT WERE THE PRIMARY REASONS SMALLER STOCKS STRUGGLED THIS YEAR?
As we mentioned in the semiannual report, the economic turmoil in Southeast
Asia hurt profits and revenues in many industries. When the Asian "flu" began to
spread around the world, there was talk of a recession in the U.S., accompanied
by an intense search for safe havens, such as U.S. Treasury bonds and the bluest
of blue-chip stocks. The general atmosphere was extremely risk-averse. Large,
blue-chip stocks had performed well into mid-July, but small and midsize stocks
were already in a bear market. They didn't rally until early October, after the
Federal Reserve had lowered interest rates and talk of a recession receded. It
was a tough environment. Companies whose results fell short of expectations,
even slightly, were severely punished. Prices dropped 30-50% --or more--very
quickly. The lack of liquidity (or tradability) in the small stock sector only
compounded the problem. When stocks sold off, buyers pulled back and prices
didn't stabilize until much lower levels. It was one of the most turbulent times
we've seen.
WHAT ARE SOME OF THE OTHER FACTORS THAT INFLUENCED RETURNS?
We believe the portfolio's eclectic nature was one reason we outperformed
the index. Our approach is to look for revenue and earnings acceleration in
companies that tend to be less closely followed by other investment analysts,
which limits some of the "noise" associated with companies that are widely
followed. If analysts make a false assumption about a company, investors may
overreact if events vary from the "story line." When that happens, stocks can go
into a tailspin, and many did this year. The companies we tend to favor are
sometimes quite small, and some are in the first phase of growth. They are pure
accelerators, because they are starting from the business equivalent of zero.
That's a very exciting time. We've also diversified the portfolio by owning more
companies than in the past.
CAN YOU DESCRIBE YOUR INVESTMENT APPROACH IN MORE DETAIL?
Yes. Accelerating revenues and earnings are the foundation of the process,
and we look for those features in a wide range of sectors and industries. In
some industries, the absolute growth may be somewhat low, but the rate of growth
is accelerating and appears to be more sustainable. In other words, we're not
just purchasing companies that are growing, say, 50%
[LEFT MARGIN]
"LARGE, BLUE-CHIP STOCKS HAD PERFORMED WELL INTO MID-JULY, BUT SMALL AND MIDSIZE
STOCKS WERE ALREADY IN A BEAR MARKET. THEY DIDN'T RALLY UNTIL EARLY OCTOBER,
AFTER THE FEDERAL RESERVE HAD LOWERED INTEREST RATES AND TALK OF A RECESSION
RECEDED."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NO. OF COMPANIES 95 64
MEDIAN P/E RATIO 23.7 28.5
MEDIAN MARKET $446 $398
CAPITALIZATION MILLION MILLION
PORTFOLIO TURNOVER 147% 118%(1)
EXPENSE RATIO 1.50% 1.49%(2)
(1) For the period from 12/26/96 to 10/31/97.
(2) Annualized
Investment terms are defined in the Glossary on page 20.
6 1-800-345-2021
New Opportunities--Q&A
- ------------------------------------------------------------------------------
(Continued)
a year. We're also trying to find companies with an expanding growth rate, i.e.,
15% one quarter, 20% the next, and so on. Oftentimes, these are companies with
earnings potential that hasn't been fully recognized by the market and we can
get positions in the stock more easily before they appreciate in price.
YOU SAID THE PORTFOLIO WAS ECLECTIC. WERE THERE ANY UNIFYING THEMES OR IDEAS?
Yes, there were a few. We found earnings growth in technology,
communications, business services, and medical and drug companies.
Three of the new top ten holdings are in the medical and drug area. CONMED
manufactures and markets medical products. PathoGenesis is a biotech company
with a promising new drug to treat cystic fibrosis. Barr Labs develops,
manufactures, and markets a broad-based portfolio of generic and proprietary
prescription drugs.
As for business services, many companies continue to look for outside help
in solving problems beyond their core business, and we don't believe that trend
is going to change any time soon. Using outside vendors allows companies to
focus on what they do best; it provides scalability--projects can be expanded or
reined in quickly. It also enhances flexibility; resources can be deployed or
reallocated more efficiently.
Technology and communications are now virtually the lifeblood of many
businesses. They allow operations to run more efficiently, at significantly
lower cost. The same trend we see in our home computers--more and cheaper
processing and power leading to expanding applications--applies to commercial
technology.
WHICH STOCKS CONTRIBUTED TO RETURNS THIS YEAR?
They were a diverse group, and many were among our larger positions.
Roberts Pharmaceutical and Pinnacle Systems were top contributors. Pinnacle
develops video editing systems that allow special computerized effects to be
inserted into video streams. New products, markets, and applications helped
drive earnings. Roberts Pharmaceutical has done a good job of building its
product pipeline by developing its own drugs and by acquiring existing drugs for
its sales force to market. Other positive performers include Agribiotech, which
researches and genetically breeds lawn turf and grass seeds, and Spine-Tech, a
manufacturer of spinal cages--metal columns that are inserted between vertebrae
when a disc is removed. Vitesse Semiconductor also performed well. Vitesse
produces specialized computer chips for the industrial, automotive, and
telecommunications markets. The stock bounced back after declining in the wake
of the Asian crisis.
WHICH THEMES DIDN'T WORK OUT AS YOU EXPECTED?
Energy, restaurants, healthcare, and food gave us problems. Oil prices--and
commodities in general--were hurt by the Asian economic slowdown, which dried up
demand. Trico Energy Services, an oil service company that does business in the
Gulf of Mexico, the North Sea, and Brazil, was a victim of falling prices.
Rainforest Cafe, a chain of theme restaurants abruptly lowered sales estimates.
Concentra Managed Care, which was building share in the workmen's compensation
market by
[right margin]
TOP TEN HOLDINGS
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
PINNACLE
SYSTEMS, INC. 4.7% 3.6%
CONMED CORP. 2.4% 1.6%
HELEN OF TROY LTD. 2.4% 3.0%
HA-LO INDUSTRIES,
INC. 2.4% 1.4%
KRONOS INC. 2.2% 1.9%
PATHOGENESIS CORP. 2.2% 1.3%
ROBERTS
PHARMACEUTICAL
CORP. 2.0% 2.3%
AMERICAN ITALIAN
PASTA CO. CL A 1.9% 2.6%
SUPERIOR CONSULTANT
HOLDINGS CORP. 1.9% 1.9%
BARR LABORATORIES,
INC. 1.8% 1.3%
TOP FIVE INDUSTRIES
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
BUSINESS SERVICES
& SUPPLIES 17.7% 10.2%
COMPUTER SOFTWARE
& SERVICES 8.3% 8.7%
ELECTRICAL &
ELECTRONIC
COMPONENTS 7.5% 5.7%
CONSUMER PRODUCTS 5.5% 6.7%
RETAIL (SPECIALTY) 5.2% 3.5%
www.americancentury.com 7
New Opportunities--Q&A
- --------------------------------------------------------------------------------
(Continued)
acquiring physicians' groups, had trouble finalizing acquisitions of some of its
targeted clinics. Among our food holdings, Fine Host and Suiza were
disappointments. Fine Host provides food and beverage concessions and catering
to large customers, such as recreational and healthcare facilities and
convention centers. The Securities and Exchange Commission discovered
discrepancies in Fine Host's historical financial statements. Suiza markets milk
and dairy products; its stock suffered when butterfat prices spiked higher in
September, putting pressure on profit margins.
Other companies that proved to be disappointments were Applied Graphics, a
provider of computerized formatting for the publishing industry, and Kos
Pharmaceuticals, a biotech company that has developed a cholesterol-lowering
drug with fewer side effects than the competition. However, Kos's drug, Niaspan,
generated lower sales than anticipated and Applied Graphics stumbled when
management's attention was diverted from its core operations to focus on
integrating an acquisition. Finally, NBTY, a manufacturer and marketer of
nutritional supplements, ran into increased competition and the stock sold off.
WHAT IS YOUR OUTLOOK HEADING INTO FISCAL 1999?
Until October, small stocks had taken a drubbing. Many small and midsized
companies were selling at valuations not seen in more than a decade. We think
this sector will bounce back, and we are continuing to build positions in
companies with sustainable revenue and earnings acceleration. Such companies
should fare well when smaller stocks return to favor.
[LEFT MARGIN]
"WE THINK THIS SECTOR (SMALL STOCKS) WILL BOUNCE BACK, AND WE ARE CONTINUING TO
BUILD POSITIONS IN COMPANIES WITH SUSTAINABLE REVENUE AND EARNINGS
ACCELERATION."
[pie charts - data below]
TYPES OF INVESTMENTS IN THE PORTFOLIO
AS OF OCTOBER 31, 1998
Temporary Cash Investments 7%
Common Stocks 93%
AS OF APRIL 30, 1998
Temporary Cash Invetments 1%
Common Stocks 99%
8 1-800-345-2021
New Opportunities--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 92.9%
AEROSPACE & DEFENSE--3.8%
7,800 Alliant Techsystems Inc.(1) $ 546
53,700 Aviation Sales Co.(1) 1,786
18,000 General Dynamics Corp. 1,065
8,100 Litton Industries, Inc.(1) 528
20,200 Newport News Shipbuilding Inc. 531
89,600 Nichols Research Corp.(1) 1,798
9,500 Raytheon Co. Cl B 552
39,000 Triumph Group, Inc.(1) 1,263
-----------
8,069
-----------
AIRLINES--0.5%
81,700 Midway Airlines Corp.(1) 1,082
-----------
AUTOMOBILES & AUTO PARTS--3.2%
110,200 Coachmen Industries, Inc. 2,548
82,400 Dura Automotive Systems, Inc.(1) 1,962
99,200 Tower Automotive, Inc.(1) 2,207
-----------
6,717
-----------
BIOTECHNOLOGY--3.0%
60,000 IDEC Pharmaceuticals Corp.(1) 1,796
115,000 PathoGenesis Corp.(1) 4,614
-----------
6,410
-----------
BUSINESS SERVICES & SUPPLIES--17.7%
101,200 Acxiom Corp.(1) 2,549
105,900 Administaff, Inc.(1) 3,475
63,500 CSG Systems International, Inc.(1) 3,465
177,900 HA-LO Industries, Inc.(1) 5,026
156,900 International Telecommunication
Data Systems, Inc.(1) 3,751
43,500 Kendle International Inc.(1) 1,144
130,000 Kroll-O'Gara Company(1) 3,193
113,595 Nova Corp.(1) 3,280
72,300 PAREXEL International Corp.(1) 1,597
105,100 Professional Detailing, Inc.(1) 2,496
102,700 Steven Myers & Associates, Inc.(1) 1,451
105,500 Superior Consultant Holdings
Corp.(1) 3,930
104,400 Sykes Enterprises, Inc.(1) 2,039
-----------
37,396
-----------
COMMUNICATIONS EQUIPMENT--4.9%
67,000 Gilat Satellite Networks Ltd.(1) 3,115
16,800 Plantronics, Inc.(1) 956
192,000 Polycom, Inc.(1) 2,508
25,000 Superior TeleCom Inc. 1,075
117,100 Tekelec(1) 2,097
57,500 Terayon Communication Systems,
Inc.(1) 694
-----------
10,445
-----------
COMMUNICATIONS SERVICES--2.9%
64,000 American Tower Corp. Cl A(1) 1,400
131,300 Crown Castle International Corp.(1) 1,686
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------
17,500 Exodus Communications, Inc.(1) $ 554
43,900 Gemstar International Group Ltd.(1) 2,404
---------
6,044
---------
COMPUTER PERIPHERALS--0.6%
79,400 Proxim, Inc.(1) 1,186
---------
COMPUTER SOFTWARE & SERVICES--8.3%
41,700 Advantage Learning Systems, Inc.(1) 1,905
65,000 AnswerThink Consulting Group,
Inc.(1) 1,259
60,000 BEA Systems, Inc.(1) 1,176
30,000 Concord Communications, Inc.(1) 1,110
60,100 Deltek Systems, Inc.(1) 1,059
103,000 New Dimension Software Ltd.(1) 2,942
102,000 Project Software & Development,
Inc.(1) 1,810
62,000 QuadraMed Corp.(1) 1,285
55,300 Rational Software Corp.(1) 1,222
27,400 Sapient Corp.(1) 1,235
46,400 Software AG Systems, Inc.(1) 696
40,700 Wind River Systems, Inc.(1) 1,795
---------
17,494
---------
CONSUMER PRODUCTS--5.5%
36,000 Chattem, Inc.(1) 996
344,300 Helen of Troy Ltd.(1) 5,100
280,400 NBTY, Inc.(1) 2,234
161,600 Rayovac Corporation(1) 3,283
---------
11,613
---------
CONTROL & MEASUREMENT--0.8%
48,000 Elsag Bailey Process Automation
N.V. ADR(1) 1,758
---------
ELECTRICAL & ELECTRONIC
COMPONENTS--7.5%
12,000 Aeroflex Inc.(1) 135
85,800 DII Group, Inc.(1) 1,260
291,400 Pinnacle Systems, Inc.(1) 9,853
22,000 Uniphase Corp.(1) 1,088
106,400 Vitesse Semiconductor Corp.(1) 3,438
---------
15,774
---------
FOOD & BEVERAGE--4.4%
177,500 American Italian Pasta Co. Cl A(1) 4,083
128,400 Hain Food Group, Inc. (The)(1) 2,576
47,300 Northland Cranberries, Inc. 507
25,700 Performance Food Group Co.(1) 614
46,100 Suiza Foods Corp.(1) 1,504
---------
9,284
---------
FURNITURE & FURNISHINGS--1.4%
107,000 CompX International Inc.(1) 2,060
80,400 O'Sullivan Industries
Holdings, Inc.(1) 879
---------
2,939
---------
HEALTHCARE--2.1%
41,600 AmeriPath Inc.(1) 538
39,900 Chronimed, Inc.(1) 367
137,500 Province Healthcare Co.(1) 3,596
---------
4,501
---------
See Notes to Financial Statements
www.americancentury.com 9
New Opportunities--Schedule of Investments
- -----------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Shares ($ in Thousands) Value
- ----------------------------------------------------------------------------
INSURANCE--0.7%
28,300 LandAmerica Financial Group, Inc. $ 1,470
-----------
LEISURE--1.4%
117,000 Imax Corporation(1) 3,005
-----------
MACHINERY & EQUIPMENT--0.5%
40,000 Applied Power Inc. 1,103
-----------
MEDICAL EQUIPMENT & SUPPLIES--4.6%
20,000 ADAC Laboratories(1) 590
192,900 CONMED Corp.(1) 5,124
52,900 Haemonetics Corp.(1) 1,141
21,000 ResMed Inc.(1) 1,074
46,600 Schein (Henry), Inc.(1) 1,803
-----------
9,732
-----------
OFFICE EQUIPMENT & SUPPLIES--2.4%
27,800 Daisytek International Corp.(1) 417
131,000 Kronos Inc.(1) 4,634
-----------
5,051
-----------
PHARMACEUTICALS--3.8%
111,200 Barr Laboratories, Inc.(1) 3,802
188,000 Roberts Pharmaceutical Corp.(1) 4,183
-----------
7,985
-----------
PRINTING & PUBLISHING--1.7%
103,200 Mail-Well, Inc.(1) 1,348
84,000 Petersen Companies, Inc. (The)
Cl A(1) 2,231
-----------
3,579
-----------
RESTAURANTS--0.8%
98,600 PJ America, Inc.(1) 1,762
-----------
RETAIL (APPAREL)--1.4%
85,200 Chico's FAS, Inc.(1) 1,326
145,700 DM Management Co.(1) 1,594
-----------
2,920
-----------
RETAIL (FOOD & DRUG)--0.6%
60,000 Ruddick Corp. 1,166
-----------
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)--2.7%
253,300 Fred's, Inc. $ 3,309
85,000 ITI Technologies, Inc.(1) 2,460
-----------
5,769
-----------
RETAIL (SPECIALTY)--5.2%
54,800 Action Performance Cos. Inc.(1) 1,617
115,000 CSK Auto Corp.(1) 2,997
101,000 Tractor Supply Co.(1) 2,509
154,500 Wilmar Industries, Inc.(1) 3,746
-----------
10,869
-----------
TEXTILES & APPAREL--0.5%
54,000 Quiksilver, Inc.(1) 1,117
-----------
TOTAL COMMON STOCKS 196,240
-----------
(Cost $182,330)
TEMPORARY CASH INVESTMENTS -- 7.1%
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.42%, dated 10/30/98,
due 11/2/98 (Delivery value $10,605) 10,600
Repurchase Agreement, State Street Boston
Corp., (U.S. Treasury obligations), in a joint
trading account at 5.35%, dated 10/30/98,
due 11/2/98 (Delivery value $4,502) 4,500
-----------
TOTAL TEMPORARY CASH INVESTMENTS 15,100
-----------
(Cost $15,100)
TOTAL INVESTMENT SECURITIES--100.0% $ 211,340
==============
(Cost $197,430)
FUTURES CONTRACTS ($ in Thousands)
Underlying
Expiration Face Amount Unrealized
Purchased Date at Value Gain
- ------------------------------------------------------------
18 S&P 500 December
Futures 1998 $4,973 $463
==============================
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
(1) Non-income producing.
- ----------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments your fund owned on the last day of the reporting period.
The schedule includes:
o a list of each investment
o the number of shares of each stock
o the market value of each investment
o the percentage of total investments in each industry o the percent and dollar
breakdown of each investment category
See Notes to Financial Statements
10 1-800-345-2021
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
ASSETS (In Thousands Except Per-Share Amounts)
Investment securities, at value
(identified cost of $197,430) (Note 3) ......................... $ 211,340
Cash ........................................................... 370
Receivable for investments sold ................................ 6,432
Receivable for variation margin on futures contracts ........... 39
Dividends and interest receivable .............................. 11
---------
218,192
---------
LIABILITIES
Disbursements in excess of demand deposit cash ................. 190
Payable for investments purchased .............................. 4,245
Payable for capital shares redeemed ............................ 12
Accrued management fees (Note 2) ............................... 254
---------
4,701
---------
NET ASSETS ..................................................... $ 213,491
=========
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ..................................................... 100,000
=========
Outstanding .................................................... 44,797
=========
NET ASSETS VALUE PER SHARE ..................................... $ 4.77
=========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ........................ $ 212,826
Accumulated realized loss from investment transactions ......... (13,708)
Net unrealized appreciation on investments (Note 3) ............ 14,373
---------
$ 213,491
=========
- ----------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF ASSETS AND LIABILITIES--This statement details
what the Fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken down by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments but not yet paid to shareholders or net losses on
investments (known as realized gains or losses); and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakdown tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
See Notes to Financial Statements
www.americancentury.com 11
Statement of Operations
- ----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
INVESTMENT LOSS (In Thousands)
INCOME:
Interest ....................................................... $ 579
Dividends (net of foreign taxes withheld of $4) ................ 249
--------
828
--------
EXPENSES (Note 2):
Management fees ................................................ 3,606
Directors' fees and expenses ................................... 2
--------
3,608
--------
NET INVESTMENT LOSS ............................................ (2,780)
--------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3)
Net realized loss on investments ............................... (9,957)
Change in net unrealized appreciation on investments ........... (12,322)
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ................ (22,279)
--------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $(25,059)
========
- ----------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
o income earned by investments (dividends and interest)
o management fees and other expenses
o gains or losses from selling investments (known as realized gains or losses)
o gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
12 1-800-345-2021
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 AND PERIOD
DECEMBER 26, 1996 (INCEPTION) THROUGH OCTOBER 31, 1997
Increase (Decrease) in Net Assets
1998 1997
OPERATIONS (In Thousands)
Net investment loss ............................ $ (2,780) $ (1,568)
Net realized loss on investments ............... (9,957) (3,751)
Change in net unrealized appreciation
on investments ................................. (12,322) 26,695
--------- ---------
Net increase (decrease)
in net assets resulting from operations ........ (25,059) 21,376
--------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ...................... 45,749 220,830
Payments for shares redeemed ................... (38,465) (10,940)
--------- ---------
Net increase in net assets
from capital share transactions ................ 7,284 209,890
--------- ---------
NET INCREASE (DECREASE) IN NET ASSETS .......... (17,775) 231,266
NET ASSETS
Beginning of year .............................. 231,266 --
--------- ---------
End of year .................................... $ 213,491 $ 231,266
========= =========
TRANSACTIONS IN SHARES OF THE FUND
Sold ........................................... 8,852 45,726
Redeemed ....................................... (7,584) (2,197)
--------- ---------
Net increase ................................... 1,268 43,529
========= =========
- -----------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--These statements show how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous page
for the most recent period
o distributions--income and gains distributed to shareholders
o capital share transactions--shareholders' purchases, reinvestments, and
redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 13
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century New
Opportunities Fund (the Fund) is one of the twelve series of funds issued by the
Corporation. The Fund's investment objective is to seek capital growth by
investing primarily in common stocks that are considered by management to have
better-than-average prospects for appreciation. The following significant
accounting policies are in accordance with generally accepted accounting
principles.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS-- Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
FUTURES CONTRACTS--The Fund may enter into stock index futures contracts in
order to manage the Fund's exposure to changes in market conditions. One of the
risks of entering into futures contracts includes the possibility that the
change in value of the contract may not correlate with the changes in value of
the underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as unrealized gains and losses. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure that the value, including accrued interest, of
the securities under each repurchase agreement is equal to or greater than
amounts owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and realized gains to shareholders and to otherwise qualify as a
regulated investment company under provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
At October 31, 1998, accumulated net realized capital loss carryovers of
$12,821,908 (expiring 2005 through 2006) may be used to offset future taxable
gains.
14 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
ADDITIONAL INFORMATION--Funds Distributor, Inc. (FDI) is the Corporation's
distributor. Certain officers of FDI are also officers of the Corporation.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee. The Agreement provides that all expenses
of the Fund, except brokerage commissions, taxes, interest, expenses of those
directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's average daily closing net assets during the previous month. The
annual management fee is 1.50%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term
investments, totaled $336,829,705 and $337,060,753, respectively.
As of October 31, 1998, accumulated net unrealized appreciation was
$13,949,880, based on the aggregate cost of investments for federal income tax
purposes of $202,363,725, which consisted of unrealized appreciation of
$25,576,119, and unrealized depreciation of $11,626,239.
www.americancentury.com 15
New Opportunities--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ........ $ 5.31 $ 5.00
----------- -----------
Income From Investment Operations
Net Investment Loss ....................... (0.06) (0.04)
Net Realized and Unrealized Gain (Loss)
on Investment Transactions .............. (0.48) 0.35
----------- -----------
Total From Investment Operations .......... (0.54) 0.31
----------- -----------
Net Asset Value, End of Period .............. $ 4.77 $ 5.31
=========== ===========
TOTAL RETURN(2) ........................... (10.17)% 6.20%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 1.50% 1.49%(3)
Ratio of Net Investment Loss
to Average Net Assets ..................... (1.16)% (1.09)%(3)
Portfolio Turnover Rate ..................... 147% 118%
Net Assets, End of Period (in thousands) .... $ 213,491 $ 231,266
(1) December 26, 1996 (inception) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- ----------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o investment income and capital gains or losses
o income and capital gains distributions paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
o expense ratio--operating expenses, expressed as a percentage of average net
assets
o net income ratio--investment income as a percentage of average net assets
o portfolio turnover--the percentage of the portfolio that was replaced during
the period
See Notes to Financial Statements
16 1-800-345-2021
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century - Twentieth Century
New Opportunities Fund (the "Fund"), one of the funds comprising American
Century Mutual Funds, Inc., as of October 31, 1998, and the related statements
of operations for the year then ended and changes in net assets for the year
then ended and for the period December 26, 1996 (inception) through October 31,
1997, and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Twentieth Century New Opportunities Fund as of October 31, 1998, the results of
its operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
www.americancentury.com 17
Retirement Account Information
- --------------------------------------------------------------------------------
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
18 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the
stocks of growing companies, both domestically and internationally. The
philosophy behind these growth funds focuses on three important principles.
First, the funds seek to invest in successful companies, which we define as
those with growing earnings and revenues. Second, we attempt to keep the funds
fully invested, regardless of short-term market activity. Experience has shown
that market gains can occur in unpredictable spurts and that missing those
opportunities can significantly limit the potential for gain. Third, the funds
are managed by teams rather than by one "star." We believe this allows us to
make better, more consistent management decisions.
In addition to these principles, each fund has its own investment policies.
TWENTIETH CENTURY NEW OPPORTUNITIES generally invests in the securities of
small companies that exhibit accelerating growth. Historically, small-cap stocks
have been more volatile than the stock of larger, more-established companies.
Therefore, the fund is subject to significant price volatility, but offers
long-term growth potential.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
THE S&P 500 is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
dominant industries. Created by Standard & Poor's Corporation, it is considered
to be a broad measure of U.S. stock market performance.
THE S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
THE RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest publicly
traded U.S. companies based on total market capitalization. The Russell 2000
represents approximately 10% of the total market capitalization of the top 3,000
companies. The index is further broken down into two mutually exclusive value
and growth indices. The RUSSELL 2000 GROWTH INDEX, used in this report, measures
the performance of those Russell 2000 companies with higher price-to-book ratios
and higher forecasted growth rates.
[right margin]
PORTFOLIO MANAGERS
NEW OPPORTUNITIES
CHRIS BOYD, CFA
JOHN SEITZER, CFA
www.americancentury.com 19
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on pages 16.
INVESTMENT TERMS
* EXPENSE RATIO-- the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
* MEDIAN MARKET CAPITALIZATION-- Market capitalization (market cap) is the total
value of a company's stock and is calculated by multiplying the number of
outstanding common shares by the current share price. The company whose market
cap is in the middle of the portfolio is the median market cap. Half the
companies in the portfolio have values greater than the median, and half have
values that are less. If there is an even number of companies, then the median
is the average of the two companies in the middle.
* NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
* PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
* PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
* PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
TYPES OF STOCKS
* BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
* GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples companies.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS--generally considered to be stocks of
companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P 400.
* SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Growth Index.
* VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
20 1-800-345-2021
[inside back cover]
AMERICAN CENTURY FUNDS
- -------------------------------------------------------------------------------
BENHAM GROUP(reg.sm)
TAXABLE BOND FUNDS
U.S. TREASURY & GOVERNMENT
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
CORPORATE & DIVERSIFIED
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
INTERNATIONAL
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
MULTIPLE-STATE
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
SINGLE-STATE
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
TAXABLE
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
TAX-FREE & MUNICIPAL
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY(reg.sm) GROUP
ASSET ALLOCATION
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
BALANCED
Balanced
CONSERVATIVE EQUITY
Income and Growth
Equity Income
Value
Equity Growth
SPECIALTY
Utilities
Real Estate
Global Natural Resources
Global Gold
SMALL CAP
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
GROWTH
Select
Heritage
Growth
Ultra
AGGRESSIVE GROWTH
Vista
Giftrust
New Opportunities
INTERNATIONAL GROWTH
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
P.O. BOX 419200 Please call for a prospectus or profile on any American Century
fund. These documents contain KANSAS CITY, MISSOURI 64141-6200
[right margin]
[american century logo(reg.sm)]
American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES: 1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE: 1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
FUNDS DISTRIBUTOR, INC.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 Funds distributor, Inc.
SH-BKT-14475 (c)1998 American Century Services Corporation
<PAGE>
[front cover] OCTOBER 31, 1998
ANNUAL REPORT
- ----------------
AMERICAN CENTURY
[graphic of stairs]
BENHAM GROUP
- ------------------------------------
HIGH-YIELD
[american century logo(reg.sm)]
American
Century
[inside front cover]
AMERICAN CENTURY BROKERAGE
- --------------------------------------------------------------------------------
We're pleased to introduce American Century's new brokerage service, which
offers a wide range of investment options and features:
* FundChoice Service--Invest in over 8,000 no-load and load mutual funds
from hundreds of different fund companies, many with no transaction fees
* Buy individual stocks and bonds
* 24-hour Internet and automated phone trades are just $24.95 for up to
1,000 shares of stock, and 2 cents per share thereafter
* Strong research capability
* Build and track model portfolios
* Get news, quotes and charts
* Check free Standard & Poor's stock reports
* Access Wall Street on Demand(tm), a research service with over
500,000 reports on industry trends, corporate earnings, and mutual
fund analysis
* Track your brokerage account on one easy-to-read statement
* Unlimited check writing and a Gold MasterCard(reg.tm) ATM/debit card
with an American Century Brokerage Access AccountSM (minimum $10,000)
To talk with a Brokerage Associate, call 1-888-345-2071.
WHAT'S NEW . . .
We now have FOUR-PAGE PROFILES of many of our funds. The profiles follow a
standard SEC format and allow investors to compare funds easily. You can request
a profile or the full prospectus. Full prospectuses contain more detailed fund
information and you will continue to receive one after investing.
In 1999, we will roll out SIMPLIFIED PROSPECTUSES that highlight important
information about our funds, including fees and expenses. More technical data
will be in the Statement of Additional Information.
[left margin]
BENHAM GROUP
HIGH-YIELD
(ABHIX)
- ----------------------
Our Message to You
- --------------------------------------------------------------------------------
/photo of James E. Stowers III and James E. Stowers, Jr./
James E. Stowers III, seated, with James E. Stowers, Jr.
The year ended October 31, 1998, was an eventful one in global financial
markets. Weakening economic and financial conditions, brought on by problems in
Asia, Russia, and Latin America, led to significant stock market volatility and
a dramatic decline in U.S. interest rates.
The third quarter of 1998 served as a good example of the markets'
extremes. Several major U.S. stock indices hit record highs in mid-July before
plunging almost 20% in the following six weeks. In the bond market, heavy demand
for the safety of Treasury bonds pushed yields down to their lowest levels ever.
This volatile market environment illustrates the importance of a
diversified investment portfolio. As we saw in the summer and fall of 1998,
diversifying your assets among stocks, bonds, and money market funds can help
your portfolio weather changes in the economic or investment climate.
High-yield corporate bonds--which act like a mix of stocks and bonds and
tend to follow movements in small-cap stocks--were hit by the same factors that
weighed on equities. Those difficult few months led high-yield bonds to produce
mildly negative returns for the year.
However, high-yield bonds generally held up better than the stocks of small
companies who issue them. For example, during the stock market's decline between
July and October, the American Century-Benham High-Yield Fund fell only about
half as far as the Russell 2000 index, a popular measure of small-stock
performance.
On the corporate front, we have a substantial effort underway to prepare
American Century's computer systems for the year 2000. Throughout 1999, our team
of technology professionals will be extensively testing our systems, including
those involved with dividend payments.
As we celebrate our 40th anniversary, we wish to thank you for your
investment with American Century.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
[right margin]
Table of Contents
Report Highlights ...................................................... 2
Market Perspective ..................................................... 3
Credit Review .......................................................... 5
HIGH-YIELD
Performance Information ................................................ 6
Management Q&A ......................................................... 7
Schedule of Investments ................................................ 10
FINANCIAL STATEMENTS
Statement of Assets and
Liabilities ............................................................ 13
Statement of Operations ................................................ 14
Statements of Changes
in Net Assets .......................................................... 15
Notes to Financial
Statements ............................................................. 16
Financial Highlights ................................................... 18
Independent Auditors'
Report ................................................................. 19
OTHER INFORMATION
Retirement Account
Information ............................................................ 20
Background Information
Investment Philosophy
and Policies ........................................................ 21
Comparative Indices ................................................. 21
Lipper Rankings ..................................................... 21
Credit Rating
Guidelines .......................................................... 21
Investment Team
Leaders ............................................................. 21
Glossary ............................................................... 22
www.americancentury.com 1
Report Highlights
- --------------------------------------------------------------------------------
MARKET PERSPECTIVE
* High-yield corporate bonds produced negative returns for the year ended
October 31, 1998. Global economic turmoil, steep losses in the stock market,
and a flight of capital out of risky investments caused the losses
* As a result of market declines, investment banks and brokers refused to
build bond inventories. This reduced liquidity (made buying and selling
high-yield bonds much more costly), contributing to even steeper losses.
* The difference in yield between Treasurys and high-yield bonds widened from
historical lows to levels not seen since the recession of the late '80s and
early '90s, making high-yield securities attractive buys in late October.
CREDIT REVIEW
* Losses in the high-yield market weren't caused by a decline in credit
quality--the default rate remained below 3% despite the lack of liquidity in
the market.
* The low default rate reflects the general health of the U.S. economy, which
grew at a 3.9% annual rate during the third quarter.
* Default rates were also kept low by easy access to capital from the
high-yield market and commercial banks through the first half of 1998;
however, capital grew harder to come by in the third quarter as high-yield
issuance dried up and banks tightened their underwriting standards.
* American Century's corporate credit research team plays a vital part in the
management of the High-Yield fund. Their careful credit analysis paid off
over the last year--none of the bonds in the portfolio defaulted.
MANAGEMENT Q&A
* The High-Yield fund had a negative return for the fiscal year ended October
31, 1998, reflecting the difficult investment environment between August and
October.
* The fund underperfomed its Lipper category average and benchmark because of
overweightings in finance and telecommunications bonds, two hard-hit sectors
of the market.
* Finance bonds suffered price declines because investors worried that a few
high-profile bankruptcies in the sector might translate into widespread
defaults.
* Telecommunications bond prices fell along with stocks--lower stock prices
reflect investor concerns about slower corporate profit growth, which could
get in the way of a company's ability to make interest and principal
payments on its bonds.
* The third-quarter selloff was painful in the short run, but it may prove a
blessing in disguise. The downturn will likely restore some discipline to
the market.
* We have a generally positive outlook for the market--credit quality remains
good, while yields have soared.
* Going forward, we'll continue to use a credit-intensive approach to security
selection, looking for the best relative values in the market. Despite their
underperformance, we think it makes sense to continue to hold our finance
and telecommunications bonds.
[left margin]
"THE DIFFERENCE IN YIELD BETWEEN TREASURYS AND HIGH-YIELD BONDS WIDENED FROM
HISTORICAL LOWS TO LEVELS NOT SEEN SINCE THE RECESSION OF THE LATE '80S AND
EARLY '90S, MAKING HIGH-YIELD SECURITIES ATTRACTIVE BUYS IN LATE OCTOBER."
HIGH-YIELD
(ABHIX)
TOTAL RETURNS: AS OF 10/31/98
6 Months -10.90%*
1 Year -4.09%
NET ASSETS: $32.2 million
30-DAY SEC YIELD: 10.36%
INCEPTION DATE: 9/30/97
* Not annualized.
See Total Returns on page 6.
Investment terms are defined in the Glossary on page 22.
2 1-800-345-2021
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
/photo of Randall W. Merk/
Randall W. Merk, director of fixed-income investing at American Century
HIGH-YIELD BOND PRICES FALL
High-yield bonds suffered through a difficult period in the year ended
October 31, 1998, when the DLJ High-Yield Index fell 2.65%. Prices on high-yield
bonds declined even though interest rates hit record lows. Turmoil in foreign
economies and financial markets, a threatened credit crunch, and a rapid
downdraft in the stock market hurt high-yield corporate bonds, which act like a
mix of stocks and bonds.
GLOBAL ECONOMIC TURMOIL
A series of financial crises around the world threatened to apply the
brakes to global economic growth. Financial and economic problems that first
surfaced in Asia in late 1997 mushroomed in 1998. By mid-1998, the "Asian
contagion" had spread to Russia, which devalued its currency and defaulted on
government debt. In Latin America, Venezuela and Brazil tried to fend off their
own currency devaluations.
Global economic problems wreaked havoc on stock and bond markets worldwide.
Investors grew concerned about the outlook for the U.S. economy and for
corporate profits. As a result, the U.S. stock market fell sharply between
mid-July and early October--several major stock indices declined 20% or more.
FALLING INTEREST RATES
The biggest beneficiary of this turmoil was the U.S. Treasury market. Faced
with uncertain financial markets, investors abandoned all but the safest and
most liquid investments--U.S. Treasury securities.
In addition, many international bond traders and hedge funds began buying
back Treasurys in August to unwind "short" positions. These investors had
profited from owning emerging-market and high-yield U.S. corporate debt
securities and hedging those investments with Treasury bonds.
But those trades fell apart in the third quarter of 1998, when
emerging-market and high-yield bond prices plummeted while Treasury prices rose
sharply. Hedge funds were forced to sell their high-yield debt at any price and
buy back Treasurys. As demand for Treasurys surged, the yield on the 30-year
Treasury bond fell below 5% for the first time ever, ultimately reaching a
record low of 4.71% in early October (see the graph at right).
THREATENED CREDIT CRUNCH
At the same time hedge funds were liquidating their high-yield bond
positions, investment banks and brokers pulled in their capital lines. Brokers
typically help provide market liquidity by taking positions in securities and
selling bonds out of inventory. But when faced with mounting losses, they
wouldn't build bond inventories. That made it more difficult to buy and sell
high-yield bonds, contributing to even steeper losses in the high-yield market.
[right margin]
"TURMOIL IN FOREIGN ECONOMIES AND FINANCIAL MARKETS, A THREATENED CREDIT CRUNCH,
AND A RAPID DOWNDRAFT IN THE STOCK MARKET HURT HIGH-YIELD CORPORATE BONDS,
WHICH ACT LIKE A MIX OF STOCKS AND BONDS."
[line chart - data below]
TREASURY YIELD CURVE
Years to Maturity 10/31/97 4/30/98 10/31/98
1 5.340% 5.370% 4.170%
2 5.600% 5.560% 4.110%
3 5.681% 5.600% 4.350%
4 5.740% 5.660% 4.380%
5 5.710% 5.630% 4.220%
6 5.775% 5.680% 4.365%
7 5.840% 5.730% 4.510%
8 5.837% 5.710% 4.540%
9 5.833% 5.690% 4.570%
10 5.830% 5.670% 4.600%
11 5.867% 5.705% 4.673%
12 5.904% 5.740% 4.746%
13 5.941% 5.775% 4.819%
14 5.978% 5.810% 4.892%
15 6.015% 5.845% 4.965%
16 6.052% 5.880% 5.038%
17 6.089% 5.915% 5.111%
18 6.126% 5.950% 5.184%
19 6.163% 5.985% 5.257%
20 6.200% 6.020% 5.330%
21 6.195% 6.013% 5.312%
22 6.190% 6.006% 5.294%
23 6.185% 5.998% 5.276%
24 6.180% 5.991% 5.258%
25 6.175% 5.984% 5.240%
26 6.170% 5.977% 5.222%
27 6.165% 5.970% 5.204%
28 6.160% 5.964% 5.186%
29 6.155% 5.957% 5.168%
30 6.150% 5.950% 5.150%
Source: Bloomberg Financial Markets
www.americancentury.com 3
Market Perspective from Randall W. Merk
- --------------------------------------------------------------------------------
(Continued)
These factors raised the possibility of a "credit crunch"--when the cost of
borrowing increases dramatically and banks and bond buyers tighten their lending
criteria. Tighter credit is bad for high-yield bond issuers, many of which must
borrow periodically to help finance operations. In a severe credit crunch, these
companies would have had trouble borrowing at any rate.
With global capital markets at a standstill and a full-blown credit crunch
looming, the Federal Reserve lowered short-term interest rates three times in
seven weeks beginning in late September--its first rate cuts in nearly three
years. The rate cuts helped boost investor confidence and ease the crisis by
lowering borrowing costs.
YIELD SPREADS WIDEN
As Treasury bond prices rose and high-yield prices plummeted, the yield
difference--or spread--between Treasurys and high-yield bonds widened
dramatically (see the graph at left). The spread is important: it measures the
risk premium between Treasurys, the safest investments, and high-yield bonds.
The high-yield/Treasury spread was as narrow as 350 basis points (a basis
point equals 0.01%, so 350 basis points equals 3.50%) in July. But spreads
widened sharply beginning in August, shooting out to as wide as 735 basis points
(7.35%) in October. That's the widest yield spread since the recession of the
late '80s and early '90s. That widening spread made high-yield bonds good buys
in late October.
SUPPLY AND DEMAND
Demand for high-yield bonds was strong through the first half of 1998.
Supply also surged, thanks to falling interest rates and healthy demand. In just
the first seven months of 1998, about $120 billion in new high-yield bonds came
to market, shattering the previous record of $100 billion for all of 1997.
That situation reversed dramatically in late July as investors fled risky
investments and new debt issuance ground to a halt. New issuance resurfaced in
late October, after the Fed's rate cuts helped ease fears of widespread defaults
and investors were drawn back to the market by attractive yields.
[left margin]
"AS TREASURY BOND PRICES ROSE AND HIGH-YIELD PRICES PLUMMETED, THE YIELD
DIFFERENCE--OR SPREAD--BETWEEN TREASURYS AND HIGH-YIELD BONDS WIDENED
DRAMATICALLY."
[line chart - data below]
HIGH-YIELD/TREASURY YIELD SPREAD
in basis points
(a basis point equals 0.01%)
'92 490
'93 405
'94 420
'95 477
'96 342
'97 359
1/98 366
2/98 349
3/98 345
4/98 357
5/98 384
6/98 409
7/98 400
8/98 617
9/98 687
10/98 735
This chart shows the yield difference, or spread, between the bonds in the DLJ
High Yield Index and 10-year Treasury securities.
Source: Donaldson, Lufkin & Jenrette
4 1-800-345-2021
Credit Review
- --------------------------------------------------------------------------------
HEALTHY CREDIT CONDITIONS...
FOR NOW
Even though the high-yield market slumped from August to October, credit
quality remained surprisingly positive. Instead, it was a lack of liquidity that
hurt high-yield bonds. Investors worried that tighter credit would spark a
series of defaults, but through October, the mass defaults investors feared did
not materialize.
Even as the market hit its lows in October, the default rate on high-yield
bonds remained below 3%. That compares with a default rate of nearly 10% at the
height of the recession in the early 1990s.
The current low default rate reflects the fact that the U.S. economy
remains quite healthy despite turmoil in the global economy. The U.S. economy
expanded at a very solid 3.9% annual rate during the third quarter of 1998. That
compares with a 5.6% annual pace in the first quarter and a 1.8% rate in the
second quarter. Strong growth is good for credit quality because it keeps
corporate earnings high, increasing companies' ability to service their debts.
Healthy growth in the U.S. economy also led to further credit upgrades
during the year. However, upgrades tapered off somewhat in the third quarter as
global economic growth began to slow.
As discussed in the previous report six months ago, default rates were kept
low in part by issuers' easy access to capital from commercial banks and the
high-yield bond market. Through mid-July, even companies that failed to meet
their projected budgets were able to go back to the market or to commercial
banks for additional financing. That situation reversed in the third quarter.
New high-yield issuance came to a halt as investment capital was pulled out of
riskier bonds.
However, the Federal Reserve avoided a full-blown credit crunch by cutting
short-term interest rates and urging banks to continue lending. So while credit
remains tighter than in the first half of 1998, solid high-yield companies can
easily borrow funds.
HIGH-YIELD CREDIT RESEARCH TEAM
Credit analysis plays a vital part in the management of the High-Yield
fund--the corporate credit research team carefully evaluates every security
considered for the portfolio. To strengthen that credit-intensive approach,
American Century expanded the corporate credit research team over the past year,
bringing the total number of analysts to ten. Careful credit research has paid
off--none of the portfolio holdings have defaulted, despite the extreme lack of
liquidity in the market.
[right margin]
"DESPITE THE SLUMP IN HIGH-YIELD BOND PRICES FROM AUGUST TO OCTOBER, CREDIT
QUALITY REMAINED SURPRISINGLY POSITIVE."
CORPORATE CREDIT RESEARCH TEAM
DIRECTOR:
GREG AFIESH
HIGH-YIELD ANALYSTS:
MICHAEL DIFLEY
TANYA FLEISCHER
CORPORATE CREDIT ANALYSTS:
DANIEL BAKER
KALPESH DADBHAWALA
ED GRANT
KRISTINE IWAFUCHI
LYNDA LOWRY
SUDHA MANI
GINA SANCHEZ
TOM VAIANA
www.americancentury.com 5
High-Yield--Performance
- --------------------------------------------------------------------------------
<TABLE>
TOTAL RETURNS AS OF OCTOBER 31, 1998
INVESTOR CLASS (INCEPTION 9/30/97)
DLJ HIGH YIELD HIGH CURRENT YIELD FUNDS(2)
HIGH-YIELD INDEX AVERAGE RETURN FUND'S RANKING
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6 MONTHS(1) -10.90% -8.05% -9.09% --
1 YEAR -4.09% -2.65% -3.35% 152 OUT OF 235
- ----------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
LIFE OF FUND -4.10% -2.77% -3.51% 144 OUT OF 230
(1) Returns for periods less than one year are not annualized.
(2) According to Lipper Inc., an independent mutual fund ranking service.
</TABLE>
See pages 21-22 for more information about returns, the comparative index, and
Lipper fund rankings.
[mountain chart - data below]
PERFORMANCE OF $10,000 OVER LIFE OF FUND
Value on 10/31/98
DLJ High Yield Index $9,722
High-Yield $9,556
High-Yield DLJ High Yield Index
DATE VALUE VALUE
9/30/97 $10,000 $10,000
10/31/97 $9,963 $9,987
11/30/97 $10,044 $10,072
12/31/97 $10,174 $10,172
1/31/98 $10,437 $10,329
2/28/98 $10,491 $10,412
3/31/98 $10,667 $10,529
4/30/98 $10,718 $10,574
5/31/98 $10,729 $10,582
6/30/98 $10,717 $10,595
7/31/98 $10,781 $10,678
8/31/98 $10,097 $9,953
9/30/98 $9,947 $9,929
10/31/98 $9,556 $9,722
$10,000 investment made 9/30/97
The chart at left shows the performance of a $10,000 investment over the life of
the fund. The DLJ High Yield Index is provided for comparison. High-Yield's
total return includes operating expenses (such as transaction costs and
management fees) that reduce returns, while the total return of the index does
not. Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
6 1-800-345-2021
High-Yield--Q&A
- --------------------------------------------------------------------------------
/photo of Theresa Fennell/
An interview with Theresa Fennell, a portfolio manager on the High-Yield
fund investment team.
HOW DID HIGH-YIELD PERFORM DURING THE FISCAL YEAR ENDED OCTOBER 31, 1998?
The fund's return reflected the difficult investment environment for
high-yield bonds, particularly in the third quarter of 1998. For the year,
High-Yield returned -4.09%. The fund's losses occurred between August and
October. By comparison, the 235 "High Current Yield Funds" tracked by Lipper
Inc. produced a -3.35% average return for the one-year period. The DLJ High
Yield Index returned -2.65% for the same period. (See the Total Returns table on
the previous page for additional fund performance comparisons.)
WHY DID THE FUND UNDERPERFORM?
High-Yield underperformed its Lipper category average and benchmark for the
year because the portfolio was overweighted in finance and telecommunications
bonds, two of the hardest-hit sectors of the market. Virtually all of the
underperformance happened in the last few months, when these two sectors fell
sharply.
For comparison, if you look at the portfolio's relative performance through
July, when the market peaked, you get a different picture--from its inception on
September 30, 1997, to the end of July, High-Yield's total return was 7.89%,
compared with a return of 6.46% for the Lipper category average.
LET'S START WITH FINANCE. WHY DID THAT SECTOR UNDERPERFORM?
Some of the hardest-hit companies in the finance industry were commercial
mortgage lenders. These companies take commercial mortgage loans, bundle them
together into bonds, and issue them as high-yield commercial mortgage-backed
securities (CMBS). As part of their business, they "short" Treasury bonds to
hedge their exposure to high-yield CMBS. That was a very difficult position to
be in over the last few months, when the difference in yield between Treasurys
and high-yield CMBS widened dramatically (see the Market Perspective on pages 3
and 4).
Tighter lending standards caused a few high-profile mortgage lenders to go
bankrupt, scaring investors away from the entire high-yield finance sector. As a
result, several of the finance-related securities in the portfolio suffered
steep price declines despite the fact that none of them went bankrupt--banks and
all types of finance companies suffered unfairly from guilt by association.
We think the losses in this sector were a result of investor overreaction.
The price declines these bonds suffered ignore the fundamentals of the
commercial mortgage-lending market, where default rates on loans are low and
building occupancy rates are high. What's more, the Federal Reserve (the U.S.
central bank) began lowering rates in September specifically to head off a
credit crunch. By directly addressing the lack of liquidity in the market, the
Fed helped ease the pressure on these finance companies.
[right margin]
"THE FUND'S RETURN REFLECTED THE DIFFICULT INVESTMENT ENVIRONMENT FOR
HIGH-YIELD BONDS, PARTICULARLY IN THE THIRD QUARTER OF 1998."
PORTFOLIO AT A GLANCE
10/31/98 10/31/97
NUMBER OF SECURITIES 65 32
WEIGHTED AVERAGE
MATURITY 7.0 YRS 6.9 YRS
AVERAGE DURATION 5.5 YRS 5.0 YRS
EXPENSE RATIO 0.90% 0.90%*
* Annualized.
YIELD AS OF OCTOBER 31, 1998
30-DAY SEC YIELD 10.36%
Investment terms are defined in the Glossary on page 22.
www.americancentury.com 7
High-Yield--Q&A
- --------------------------------------------------------------------------------
(Continued)
WHY WERE TELECOMMUNICATIONS BONDS SO HARD HIT?
Keep in mind that high-yield securities act like a mix between stocks and
bonds. Telecommunications company stock prices fell sharply in recent months.
Falling stock prices reflect concerns about a company's profitability or
earnings growth. Slower-than-expected earnings growth could impair a company's
ability to make interest and principal payments on its bonds.
Telecommunications bonds were also affected by lower stock prices because
building and maintaining a communication network is very capital intensive. One
way companies finance their business development plans is by issuing stock.
Lower prices make that option much more expensive or even impossible.
In addition, many high-yield telecomunications bonds are issued as
zero-coupon bonds for a number of years. Zeros tend to be more volatile than
interest-bearing bonds. (Telecommunications bonds are often issued as zeros for
their first few years because these companies are young and lack regular
revenues, so they can't yet make large interest payments.)
DID THE LACK OF MARKET LIQUIDITY HAVE AN EFFECT ON TELECOMMUNICATIONS BONDS?
Yes. The high-yield market saw virtually no new issuance from August to
about mid-October. Many telecommunications companies are in their infancy and
need access to the high-yield market to successfully execute their business
plans. But with the global economy in turmoil, stock prices falling, and the
high-yield market effectively shuttered, the outlook for the telecommunications
sector was far from certain. That contributed to price declines for high-yield
telecommunications bonds.
YOU KEPT A PORTION OF ASSETS IN BONDS ISSUED BY ENERGY AND PAPER COMPANIES (SEE
THE TOP FIVE INDUSTRIES TABLE AT LEFT). WHAT'S THE ATTRACTION?
We view our commodity holdings as a value play, and with the global economy
in turmoil and oil prices hitting 12-year lows, this sector looks relatively
cheap right now. When we see better global growth, we could get stronger demand
for basic materials and energy products. That scenario would benefit these
bonds. However, we don't expect an immediate rebound in commodity prices.
We think taking a position in commodities now makes sense because price
movements in this sector tend to be rapid, making it difficult to get in once a
rebound in prices starts. Instead, we're buying these bonds at attractive
prices, holding names we think can weather this low-price environment. In the
meantime, we're content to hold these bonds and collect their interest coupons,
many of which are in excess of 10%.
HOW DOES THE PORTFOLIO'S YIELD COMPARE?
The fund delivered a better-than-average yield. As of October 31,
High-Yield's 30-day SEC yield was 10.36%. That compares favorably with the 9.55%
average yield of the funds in Lipper's high-yield category. Of course, the yield
will fluctuate as interest rates, fund holdings, and share price change.
[left margin]
"FALLING STOCK PRICES ARE BAD FOR HIGH-YIELD BONDS BECAUSE LOWER STOCK PRICES
REFLECT CONCERNS ABOUT A COMPANY'S PROFITABILITY OR EARNINGS GROWTH."
TOP FIVE INDUSTRIES (AS OF 10/31/98)
% OF FUND INVESTMENTS
TELEPHONE COMMUNICATIONS 11.5%
WIRELESS COMMUNICATIONS 8.8%
ENERGY (PRODUCTION &
MARKETING) 8.2%
MACHINERY & EQUIPMENT 6.8%
PAPER & FOREST PRODUCTS 6.2%
TOP FIVE INDUSTRIES (AS OF 4/30/98)
% OF FUND INVESTMENTS
PAPER & FOREST PRODUCTS 9.8%
TELEPHONE COMMUNICATIONS 8.1%
WIRELESS COMMUNICATIONS 6.8%
ENERGY (PRODUCTION &
MARKETING) 6.1%
BUSINESS SERVICES & SUPPLIES 6.0%
8 1-800-345-2021
High-Yield--Q&A
- --------------------------------------------------------------------------------
(Continued)
DID YOU MAKE ANY CHANGES TO THE PORTFOLIO'S DURATION?
Not really. We kept the duration--a measure of the portfolio's sensitivity
to interest rate changes--steady at 5.5 years over the last six months. Rather
than make big bets on the direction of interest rates, we try to add value
through careful credit analysis and security selection.
HIGH-YIELD BONDS ENDURED A VERY DIFFICULT FEW MONTHS. DID ANY POSITIVES COME OUT
OF THAT EXPERIENCE?
Though it was painful in the short run, the sell-off may prove to be a
blessing in disguise--it's likely to wring some of the excesses from the market.
We've discussed in past reports our concern that investors were being too lax
about credit standards and were accepting speculative bond offerings. This
downturn should restore some discipline to the market. Also, we're unlikely to
see hedge funds make such aggressive bets on risky high-yield and
emerging-market bonds in the future. That could make for less-dramatic price
swings during market declines.
WHAT'S YOUR OUTLOOK FOR THE MARKET?
We're generally positive on the market. The high-yield sector's recent
decline was caused more by technical market factors than by economic
fundamentals. As a result, we think high-yield bonds represent very good values
right now. Yields are much higher today than they were six months ago with about
the same credit risk--the default rate remains below 3%, while bond yields are
now up around 10%. Those attractive values have already started to lure
investors back to the market--in early November alone, mutual fund investors put
$3.6 billion to work in high-yield bonds, according to AMG Services.
Another way to look at the relative values in high-yield bonds is to
compare their yields with those of 10-year Treasury bonds. The flight from risk
and to quality caused spreads to widen dramatically (see the Market Perspective
on pages 3 and 4). If spreads return to more normal levels, high-yield bonds
could perform very well.
WITH THAT OUTLOOK IN MIND, WHAT'S YOUR STRATEGY GOING FORWARD?
It's a steady-at-the-helm approach--we're going to continue to keep the
duration steady while we use careful credit analysis and security selection to
find what we think are the best bonds in the market. That's the same strategy
that helped the fund to solid performance from its inception through the market
peak in July. This orientation means we're likely to hang on to our finance and
telecommunications bonds, despite recent difficulties.
[right margin]
"WE THINK HIGH-YIELD BONDS REPRESENT VERY GOOD VALUES RIGHT NOW."
PORTFOLIO COMPOSITION BY CREDIT RATING
% OF FUND INVESTMENTS
AS OF AS OF
10/31/98 4/30/98
AAA 8% 6%
BB 13% 6%
B 67% 74%
CCC 1% 2%
UNRATED 11% 12%
Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 21
for more information.
"WE'RE LIKELY TO HANG ON TO OUR FINANCE AND TELECOMMUNICATIONS BONDS, DESPITE
RECENT DIFFICULTIES."
www.americancentury.com 9
High-Yield--Schedule of Investments
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
CORPORATE BONDS--91.2%
AUTOMOBILES & AUTO PARTS--3.0%
$1,000,000 Stanadyne Automotive Corp.,
Series B, 10.25%, 12/15/07
(Acquired 12/4/97-7/21/98,
Cost $1,016,875)(1) $947,500
--------------
BANKING--4.8%
1,000,000 Bay View Capital Corp., 9.125%,
8/15/02 882,496
790,000 Ocwen Capital Trust I, 10.875%,
8/1/27 608,300
--------------
1,490,796
--------------
BROADCASTING & MEDIA--3.1%
500,000 Chancellor Media Corp., 9.00%,
10/1/08 (Acquired 9/25/98,
Cost $500,000)(1) 502,500
500,000 Fox Family Worldwide Inc., 9.25%,
11/1/07 470,000
--------------
972,500
--------------
BUSINESS SERVICES & SUPPLIES--5.1%
500,000 Donnelley (R.H.) Corp., 9.125%,
6/1/08 (Acquired 6/2/98,
Cost $500,000)(1) 500,000
250,000 Elgar Holdings Inc., 9.875%,
2/1/08 217,500
500,000 Intertek Finance PLC, Series B,
10.25%, 11/1/06 448,125
500,000 Unicco Service/Finance, Series B,
9.875%, 10/15/07 (Acquired
10/14/97, Cost $497,650)(1) 440,000
--------------
1,605,625
--------------
COMMUNICATIONS EQUIPMENT--0.9%
500,000 Telehub Communications Corp.,
12.43%, 7/31/05 (Acquired
7/28/98, Cost $334,215)(1)(2) 267,500
--------------
COMMUNICATIONS SERVICES--5.2%
750,000 21st Century Telecom Group,
11.04%, 2/15/08(2) 310,313
500,000 Intermedia Capital Partners,
11.25%, 8/1/06 543,125
500,000 Intl. Cabletel Inc., 9.11%, 2/1/06(2) 386,875
750,000 RCN Corp., 10.08%, 10/15/07(2) 390,000
--------------
1,630,313
--------------
COMPUTER SOFTWARE & SERVICES--3.1%
1,000,000 ICG Services Inc., 9.14%,
2/15/08(2) 461,250
500,000 PSINet Inc., Series B, 10.00%,
2/15/05 (Acquired 4/7/98,
Cost $500,000)(1) 490,000
--------------
951,250
--------------
Principal Amount Value
- --------------------------------------------------------------------------------
ELECTRICAL & ELECTRONIC
COMPONENTS--3.9%
$ 250,000 International Utility Structures Inc.,
10.75%, 2/1/08 $216,250
500,000 MCMS, Inc., Series B, 9.75%,
3/1/08 320,625
750,000 Trench Electric & Trench Inc.,
10.25%, 12/15/07 690,000
--------------
1,226,875
--------------
ENERGY (PRODUCTION & MARKETING)--8.2%
250,000 Belco Oil & Gas Corp., Series B,
10.50%, 4/1/06 235,000
525,000 Cross Timbers Oil Co., Series B,
9.25%, 4/1/07 (Acquired
3/30/98-4/30/98,
Cost $551,344)(1) 483,000
750,000 Kelley Oil & Gas Corp., 10.375%,
10/15/06 600,938
500,000 Ocean Energy, Inc., Series B,
8.875%, 7/15/07 497,500
250,000 Octel Developments plc, 10.00%,
5/1/06 (Acquired 5/1/98,
Cost $250,000)(1) 243,438
500,000 Snyder Oil Corp., 8.75%, 6/15/07 493,750
--------------
2,553,626
--------------
ENERGY (SERVICES)--1.6%
250,000 Trico Marine Services, Inc.,
Series F, 8.50%, 8/1/05
(Acquired 12/18/97,
Cost $250,625)(1) 210,000
500,000 Universal Compression Inc.,
9.02%, 2/15/08 (Acquired
2/13/98, Cost $309,200)(1)(2) 290,000
--------------
500,000
--------------
ENVIRONMENTAL SERVICES--2.8%
1,000,000 Envirosource, Inc., 9.75%,
6/15/03 871,250
--------------
FINANCIAL SERVICES--2.9%
750,000 AMRESCO, INC., Series 1998 A,
9.875%, 3/15/05 450,000
500,000 Metris Companies Inc., 10.00%,
11/1/04 455,625
--------------
905,625
--------------
HEALTHCARE--0.7%
250,000 Magellan Health Services, Inc.,
9.00%, 2/15/08 (Acquired
2/5/98, Cost $250,000)(1) 213,125
--------------
MACHINERY & EQUIPMENT--6.8%
750,000 Goss Graphic Systems Inc.,
12.00%, 10/15/06 667,500
500,000 Key Components, Inc., 10.50%,
6/1/08 (Acquired 5/21/98,
Cost $500,000)(1) 480,625
See Notes to Financial Statements
10 1-800-345-2021
High-Yield--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
$1,000,000 United Rentals, Inc., 9.50%,
6/1/08 (Acquired
5/21/98-7/7/98,
Cost $1,007,813)(1) $985,000
--------------
2,133,125
--------------
PAPER & FOREST PRODUCTS--6.2%
750,000 Ainsworth Lumber Co. Ltd., PIK,
12.50%, 7/15/07 668,438
500,000 Gaylord Container Corp., Series B,
9.75%, 6/15/07 (Acquired
9/30/97-1/15/98,
Cost $499,063)(1) 381,250
500,000 Grupo Industrial Durango, S.A. de
C.V., 12.625%, 8/1/03 378,750
355,000 Printpack Inc., 10.625%,
8/15/06 351,894
250,000 Repap New Brunswick, 10.625%,
4/15/05 165,000
--------------
1,945,332
--------------
RETAIL (SPECIALTY)--2.8%
250,000 Diamond Triumph Auto, 9.25%,
4/1/08 (Acquired 3/25/98,
Cost $250,000)(1) 243,750
750,000 Sonic Automotive, Inc., 11.00%,
8/1/08 (Acquired 7/28/98,
Cost $744,375)(1) 630,000
--------------
873,750
--------------
RUBBER & PLASTICS--3.2%
750,000 Day International Group Inc.,
9.50%, 3/15/08 679,688
500,000 Graham Packaging Co., Series B,
9.46%, 1/15/09(2) 315,000
--------------
994,688
--------------
STEEL--3.5%
750,000 GS Technologies, 12.25%,
10/1/05 645,938
500,000 Keystone Consolidated Industries,
Inc., 9.625%, 8/1/07 (Acquired
9/30/97-10/1/97,
Cost $514,063)(1) 450,625
--------------
1,096,563
--------------
TELEPHONE COMMUNICATIONS--11.5%
1,000,000 Allegiance Telecom Inc., Series B,
10.64%, 2/15/08(2) 410,000
1,000,000 DTI Holdings Inc., Series B,
11.25%, 3/1/08(2) 327,500
500,000 Global Crossing Holdings Ltd.,
9.625%, 5/15/08 (Acquired
5/13/98, Cost $496,075)(1) 490,000
1,000,000 GST USA, Inc., 9.63%,
12/15/05(2) 655,000
750,000 IDT Corp., 8.75%, 2/15/06 661,875
Principal Amount/Shares Value
- --------------------------------------------------------------------------------
$ 250,000 Intermedia Communications Inc.,
8.97%, 7/15/02(2) $168,750
500,000 Qwest Communications
International Inc., 7.50%,
11/1/08 (Acquired 10/28/98,
Cost $496,620)(1) 508,750
500,000 Qwest Communications
International Inc., Series B,
6.99%, 2/1/03 (Acquired
7/9/98, Cost $366,875)(1)(2) 367,500
--------------
3,589,375
--------------
TRANSPORTATION--3.1%
750,000 Atlas Air, Inc., 10.75%, 8/1/05 738,750
250,000 Kitty Hawk, Inc., 9.95%,
11/15/04 240,000
--------------
978,750
--------------
WIRELESS COMMUNICATIONS--8.8%
500,000 Centennial Cellular Corp., 8.875%,
11/1/01 503,125
250,000 Metrocall, Inc., 10.375%,
10/1/07 233,750
250,000 Microcell Telecommunications Inc.,
11.36%, 6/1/06(2) 164,063
500,000 NEXTEL Communications, Inc.,
8.47%, 8/15/04(2) 468,750
750,000 Orange plc, 8.00%, 8/1/08 738,750
500,000 Paging Network, Inc., 10.00%,
10/15/08 486,250
500,000 Telesystem International Wireless
Inc., Series C, 9.56%, 11/1/07
(Acquired 10/22/97,
Cost $299,575)(1)(2) 160,000
--------------
2,754,688
--------------
TOTAL CORPORATE BONDS 28,502,256
--------------
(Cost $33,244,631)
PREFERRED STOCKS & WARRANTS--0.7%
COMPUTER SOFTWARE & SERVICES--0.7%
257 Concentric Network Corp. 193,393
--------------
TELEPHONE COMMUNICATIONS(3)
1,000 Allegiance Telecom Inc. Warrants 2,125
5,000 DTI Holdings Inc. Warrants 5,625
--------------
7,750
--------------
TOTAL PREFERRED STOCKS & WARRANTS 201,143
--------------
(Cost $250,000)
See Notes to Financial Statements
www.americancentury.com 11
High-Yield--Schedule of Investments
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--8.1%
$2,540,000 FHLMC Discount Notes, 5.42%,
11/2/98(4) $2,540,000
--------------
(Cost $2,539,618)
TOTAL INVESTMENT SECURITIES--100.0% $31,243,399
==============
(Cost $36,034,249)
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = Federal Home Loan Mortgage Corporation
PIK = Payment in Kind. Coupon payments may be in the form of additional bonds.
(1) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at October 31, 1998, was
$9,284,563, which represented 28.8% of net assets. None of these securities
are considered to be illiquid.
(2) Step-coupon security. Yield to maturity at purchase is indicated. These
securities become interest bearing at a predetermined rate and future date
and are purchased at a substantial discount from their value at maturity.
(3) Industry is less than 0.05% of total investment securities.
(4) Rate disclosed is the yield to maturity at purchase.
- --------------------------------------------------------------------------------
UNDERSTANDING THE SCHEDULE OF INVESTMENTS--This schedule tells you which
investments the fund owned on the last day of the reporting period.
The schedule includes:
* a list of each investment
* the principal (dollar) amount of each bond or the number of shares of each
stock
* the market value of each investment
* the percentage of total investments in each industry
* the percent and dollar breakdown of each investment category
See Notes to Financial Statements
12 1-800-345-2021
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
ASSETS
Investment securities, at value
(identified cost of $36,034,249) (Note 3) .............. $ 31,243,399
Cash ..................................................... 380,312
Receivable for investments sold .......................... 505,000
Interest receivable ...................................... 683,539
-------------
32,812,250
-------------
LIABILITIES
Disbursements in excess
of demand deposit cash ................................. 19,615
Payable for investments purchased ........................ 496,620
Payable for capital shares redeemed ...................... 30,429
Accrued management fees (Note 2) ......................... 23,367
Dividends payable ........................................ 13,286
-------------
583,317
-------------
Net Assets ............................................... $ 32,228,933
=============
CAPITAL SHARES, $0.01 PAR VALUE
Authorized ............................................... 200,000,000
=============
Outstanding .............................................. 3,692,330
=============
Net Asset Value Per Share ................................ $ 8.73
=============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) .................. $ 36,989,804
Accumulated undistributed net realized
gain from investment transactions ...................... 29,979
Net unrealized depreciation
on investments (Note 3) ................................ (4,790,850)
-------------
$ 32,228,933
=============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF ASSETS AND LIABILITIES--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
NET ASSETS are also broken out by capital (money invested by shareholders); net
gains earned but not yet paid out to shareholders or net losses on investment
activity (known as realized gains or losses); and gains or losses on securities
still owned by the fund (known as unrealized appreciation or depreciation). This
breakout tells you the value of net assets that are performance-related, such as
investment gains or losses, and the value of net assets that are not related to
performance, such as shareholder investments and redemptions.
See Notes to Financial Statements
www.americancentury.com 13
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
INVESTMENT INCOME
Income:
Interest ................................................ $ 2,536,595
-----------
Expenses (Note 2):
Management fees ......................................... 245,103
Directors' fees and expenses ............................ 231
-----------
245,334
-----------
Net investment income ................................... 2,291,261
-----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
(NOTE 3)
Net realized gain on investments ........................ 29,979
Change in net unrealized
depreciation on investments ........................... (4,679,178)
-----------
Net realized and unrealized
loss on investments ................................... (4,649,199)
-----------
Net Decrease in Net Assets
Resulting from Operations ............................. $(2,357,938)
===========
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENT OF OPERATIONS--This statement breaks down how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund OPERATIONS include:
* interest income earned from investments
* management fees and other expenses
* gains or losses from selling investments (known as realized gains or losses)
* gains or losses on current fund holdings (known as unrealized appreciation or
depreciation)
See Notes to Financial Statements
14 1-800-345-2021
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 AND PERIOD SEPTEMBER 30, 1997 (INCEPTION) THROUGH
OCTOBER 31, 1997
Increase in Net Assets: 1998 1997
OPERATIONS
Net investment income .................... $ 2,291,261 $ 69,472
Net realized gain on investments ......... 29,979 --
Change in net unrealized
depreciation on investments ............ (4,679,178) (111,672)
------------ ------------
Net decrease in net assets
resulting from operations .............. (2,357,938) (42,200)
------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income ............... (2,291,261) (69,472)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ................ 59,205,875 11,671,040
Proceeds from reinvestment
of distributions ....................... 1,965,445 65,996
Payments for shares redeemed ............. (35,365,180) (553,372)
------------ ------------
Net increase in net assets
from capital share transactions ........ 25,806,140 11,183,664
------------ ------------
Net increase in net assets ............... 21,156,941 11,071,992
NET ASSETS
Beginning of period ...................... 11,071,992 --
------------ ------------
End of period ............................ $ 32,228,933 $ 11,071,992
============ ============
TRANSACTIONS IN
SHARES OF THE FUND
Sold ..................................... 5,938,245 1,166,684
Issued in reinvestment
of distributions ....................... 200,982 6,666
Redeemed ................................. (3,564,707) (55,540)
------------ ------------
Net increase ............................. 2,574,520 1,117,810
============ ============
- --------------------------------------------------------------------------------
UNDERSTANDING THE STATEMENTS OF CHANGES IN NET ASSETS--This statement shows how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
* operations--a summary of the Statement of Operations from the previous page
for the most recent period
* distributions--income and gains distributed to shareholders
* share transactions--shareholders' purchases, reinvestments, and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See Notes to Financial Statements
www.americancentury.com 15
Notes to Financial Statements
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham High-Yield Fund (the
Fund) is one of the twelve series of funds issued by the Corporation. The Fund's
investment objective is to seek high current income by investing in a
diversified portfolio of high-yielding corporate bonds, debentures and notes.
The Fund invests primarily in lower-rated debt securities, which are subject to
greater credit risk and consequently offer higher yield. Securities of this type
are subject to substantial risks including price volatility, liquidity risk and
default risk. The Fund is authorized to issue two classes of shares: the
Investor Class and the Advisor Class. The two classes of shares differ
principally in their respective shareholder servicing and distribution expenses
and arrangements. All shares of the Fund represent an equal pro rata interest in
the assets of the class to which such shares belong, and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
for class specific expenses and exclusive rights to vote on matters affecting
only individual classes. Sale of the Advisor Class had not commenced as of the
report date. The following significant accounting policies are in accordance
with generally accepted accounting principles.
SECURITY VALUATIONS--Portfolio securities are valued through a commercial
pricing service or at the mean of the most recent bid and asked prices. When
valuations are not readily available, securities are valued at fair value as
determined in accordance with procedures adopted by the Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for as of the
trade date. Net realized gains and losses are determined on the identified cost
basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the collateral, represented by securities, received
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. ACIM monitors, on a daily basis, the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the Fund's policy to distribute all net investment
income and net realized gains to shareholders and to otherwise qualify as a
regulated investment company under the provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal or state income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net gains and losses for financial statement and tax
purposes and may result in reclassification among certain capital accounts.
ADDITIONAL INFORMATION--Funds Distributor, Inc. (FDI) is the Corporation's
distributor. Certain officers of FDI are also officers of the Corporation.
16 1-800-345-2021
Notes to Financial Statements
- --------------------------------------------------------------------------------
(Continued)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Fund, except brokerage commissions, taxes, interest, expenses of
those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will by paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's class average closing net assets during the previous month. The
annual management fee for the Investor Class is 0.90%.
The Board of Directors adopted the Advisor Class Master Distribution and
Shareholder Services Plan (the Plan), pursuant to Rule 12b-1 of the Investment
Company Act of 1940. The Plan provides that the Fund will pay ACIM an annual
distribution fee equal to 0.25% and service fee equal to 0.25%. The fees are
computed daily and paid monthly based on the Advisor Class's average daily
closing net assets during the previous month. The distribution fee provides
compensation for distribution expenses incurred by financial intermediaries in
connection with distributing shares of the Advisor Class including, but not
limited to, payments to brokers, dealers, and financial institutions that have
entered into sales agreements with respect to shares of the Fund. The service
fee provides compensation for shareholder and administrative services rendered
by ACIM, its affiliates or independent third party providers.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of securities, excluding short-term investments, were
$38,703,183 and $16,861,743, respectively.
As of October 31, 1998, accumulated net unrealized depreciation was
$4,796,775, based on the aggregate cost of investments for federal income tax
purposes of $36,040,174, which consisted of unrealized appreciation of $22,763
and unrealized depreciation of $4,819,538.
www.americancentury.com 17
High-Yield--Financial Highlights
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
1998 1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ...... $ 9.91 $ 10.00
---------- ----------
Income From Investment Operations
Net Investment Income ................... 0.83 0.06
Net Realized and Unrealized
Loss on Investment Transactions ......... (1.18) (0.09)
---------- ----------
Total From Investment Operations .......... (0.35) (0.03)
---------- ----------
Distributions
From Net Investment Income .............. (0.83) (0.06)
---------- ----------
Net Asset Value, End of Period ............ $ 8.73 $ 9.91
========== ==========
Total Return(2) ......................... (4.09)% (0.27)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..................... 0.90% 0.90%(3)
Ratio of Net Investment Income
to Average Net Assets ..................... 8.41% 7.39%(3)
Portfolio Turnover Rate ................... 85% --
Net Assets, End of Period
(in thousands) ............................ $ 32,229 $ 11,072
(1) September 30, 1997 (inception) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to shareholders
* share price at the end of the period
It also includes some key statistics for the period:
* total return--the overall percentage return of the fund, assuming reinvestment
of all distributions
* expense ratio--operating expenses as a percentage of average net assets
* net income ratio--net investment income as a percentage of average net assets
* portfolio turnover--the percentage of the portfolio that was replaced
See Notes to Financial Statements
18 1-800-345-2021
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of American Century - Benham High-Yield Fund (the
"Fund"), one of the funds comprising American Century Mutual Funds, Inc., as of
October 31, 1998, and the related statements of operations for the year then
ended and changes in net assets for the year then ended and for the period
September 30, 1997 (inception) through October 31, 1997, and the financial
highlights for the periods presented. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century -
Benham High Yield Fund as of October 31, 1998, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 8, 1998
www.americancentury.com 19
Retirement Account Information
- --------------------------------------------------------------------------------
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
20 1-800-345-2021
Background Information
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY AND POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
HIGH-YIELD seeks to provide a high level of interest income by investing in
a diversified portfolio of high-yielding fixed-income securities. As a secondary
objective, the fund seeks capital appreciation. The fund invests primarily in
lower-quality corporate bonds, with an emphasis on securities rated BB or B. The
fund has no average maturity limitations, but it typically invests in
intermediate- and long-term bonds.
Lower-rated bonds may be subject to greater default risk, liquidity risk,
and price volatility.
COMPARATIVE INDICES
The index listed below is used in the report for fund performance
comparisons. It is not an investment product available for purchase.
The DLJ HIGH YIELD INDEX is a broad index of corporate bonds with credit
ratings below investment grade. The index has an average maturity of 8 years and
an average credit rating of BB/B.
LIPPER RANKINGS
LIPPER INC. is an independent mutual fund ranking service that groups funds
according to their investment objectives. Rankings are based on average annual
returns for each fund in a given category for the periods indicated. Rankings
are not included for periods less than one year. The Lipper category for
High-Yield is:
HIGH CURRENT YIELD FUNDS--funds that aim at high current yield from
fixed-income securities. No quality or maturity restrictions; funds tend to
invest in lower-grade debt issues.
CREDIT RATING GUIDELINES
Credit ratings are issued by independent research companies such as
Standard & Poor's and Moody's. Ratings are based on an issuer's financial
strength and ability to pay interest and principal in a timely manner.
Securities rated AAA, AA, A, or BBB are considered "investment-grade"
securities, meaning they are relatively safe from default. The High-Yield fund
generally invests in securities that are below investment grade, including those
with the following credit ratings:
BB--securities that are less vulnerable to default than other lower-quality
issues but do not quite meet investment-grade standards.
B--securities that are more vulnerable to default than BB-rated securities
but whose issuers are currently able to meet their obligations.
CCC--securities that are currently vulnerable to default and are dependent
on favorable economic or business conditions for the issuers to meet their
obligations.
It's important to note that credit ratings are subjective, reflecting the
opinions of the rating agencies; they are not absolute standards of quality.
[right margin]
INVESTMENT TEAM LEADERS
PORTFOLIO MANAGER
THERESA FENNELL
HIGH-YIELD ANALYSTS
MICHAEL DIFLEY
TANYA FLEISCHER
www.americancentury.com 21
Glossary
- --------------------------------------------------------------------------------
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on page 18.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by the fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF FIXED-INCOME SECURITIES
* CORPORATE BONDS--debt securities or instruments issued by companies and
corporations. Short-term corporate securities are typically issued to raise cash
and cover current expenses in anticipation of future revenues; longer-term
corporate securities are issued to finance capital expenditures, such as new
plant construction or equipment purchases.
22 1-800-345-2021
Notes
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www.americancentury.com 23
Notes
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24 1-800-345-2021
[inside back cover]
American Century Funds
Benham Group(reg.sm)
TAXABLE BOND FUNDS
U.S. Treasury & Government
Short-Term Treasury
Short-Term Government
GNMA
Intermediate-Term Treasury
Long-Term Treasury
Inflation-Adjusted Treasury
Target Maturities Trust: 2000
Target Maturities Trust: 2005
Target Maturities Trust: 2010
Target Maturities Trust: 2015
Target Maturities Trust: 2020
Target Maturities Trust: 2025
Corporate & Diversified
Limited-Term Bond
Intermediate-Term Bond
Bond
Premium Bond
High-Yield Bond
International
International Bond
TAX-FREE & MUNICIPAL BOND FUNDS
Multiple-State
Limited-Term Tax-Free
Intermediate-Term Tax-Free
Long-Term Tax-Free
High-Yield Municipal
Single-State
Arizona Intermediate-Term Municipal
California High-Yield Municipal
California Insured Tax-Free
California Intermediate-Term Tax-Free
California Limited-Term Tax-Free
California Long-Term Tax-Free
Florida Intermediate-Term Municipal
MONEY MARKET FUNDS
Taxable
Capital Preservation
Government Agency Money Market
Premium Capital Reserve
Premium Government Reserve
Prime Money Market
Tax-Free & Municipal
California Municipal Money Market
California Tax-Free Money Market
Florida Municipal Money Market
Tax-Free Money Market
AMERICAN CENTURY[reg.sm] GROUP
Asset Allocation Funds
Strategic Allocation: Conservative
Strategic Allocation: Moderate
Strategic Allocation: Aggressive
Balanced Fund
Balanced
Conservative Equity Funds
Income and Growth
Equity Income
Value
Equity Growth
Specialty Funds
Utilities
Real Estate
Global Natural Resources
Global Gold
Small Cap Funds
Small Cap Quantitative
Small Cap Value
TWENTIETH CENTURY GROUP
Growth Funds
Select
Heritage
Growth
Ultra
Aggressive Growth Funds
Vista
Giftrust
New Opportunities
International Growth Funds
International Growth
International Discovery
Emerging Markets
GLOBAL
Global Growth
Please call for a prospectus or profile on any American Century fund. These
documents contain important information including charges and expenses, and you
should read them carefully before you invest or send money.
[right margin]
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American
Century
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
(c) 1998 AMERICAN CENTURY SERVICES CORPORATION
FUNDS DISTRIBUTOR, INC.
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[back cover]
American Century Investments BULK RATE
P.O. Box 419200 U.S. POSTAGE PAID
Kansas City, MO 64141-6200 AMERICAN CENTURY
www.americancentury.com COMPANIES
9812 (c)1998 American Century Services Corporation
SH-BKT-14772 Funds Distributor, Inc.
